15th Mar 2005 07:00
Derwent Valley Holdings PLC15 March 2005 Derwent Valley Holdings plc Preliminary results for the year ended 31st December 2004 Derwent Valley, a specialist investor and refurbisher of Central Londoncommercial property, announces its results for the year ended 31st December2004. Highlights % Increase/ (decrease) 2004 2003 Adjusted net asset value per share (p) 1068 920 16.1 Net revenue from properties (£m) 44.8 41.5 8.0 Adjusted profit before tax (£m)* 16.4 16.2 1.2 FRS3 profit before tax (£m) 22.8 17.1 33.3 Adjusted earnings per share (p)* 23.51 26.62 (11.7) Dividend per share (p) 12.50 11.40 9.6 Total return (%) 17.4 (5.2) * Excludes the profit on the disposal of investment properties and, for 2003, the exceptional cost of the possible offer for the group. • Adjusted net asset value per share up 148p to 1068p reflecting the strength of the Central London property market. • Adjusted profit before tax rose £0.2m to £16.4m. • FRS3 profit up by £5.7 million to £22.8 million, mainly due to a £6.4 million profit on the disposal of investment properties. • Total dividend increased by 9.6% to 12.50p. • Net revenue from properties increased by £3.3m as the momentum of our letting programme was maintained. • 21,300m2 of vacant space let during the year, at an annualised rental income of £4.8 million. • Acquisitions and capital expenditure totalled £88.6 million and £27.1 million respectively, while disposals realised £78.9 million. John Ivey, Chairman, commented: "Derwent Valley owns a portfolio with a pipeline of opportunities and this,combined with financial strength and management that can convert potential intoperformance, places your company in a strong position to build further on itsrecord of growth." 15th March 2005 For further information, contact: Derwent Valley Holdings plc 020 7659 3000 - after 11:00 am John Burns, Managing Directorwww.derwentvalley.co.uk College Hill 020 7457 2020Gareth David Email: [email protected] Chairman's Statement Valuation During 2004, adjusted net assets increased by 16% to 1,068p per share, a resultthat is comparable with the high levels of net asset growth per share that yourcompany consistently achieved between 1996 and 2001. The valuation surplus of£69.5 million, before adjusting for UITF 28, was driven by both rental growthand yield compression which illustrates the overall strength of the propertymarket in Central London, the group's chosen area of operations. An increase of9.1% was achieved by those investment properties held throughout the yearcompared to a decrease of 4.7% calculated on the same basis for 2003. At £924.8million, the value of the portfolio excludes any gain from the £68.8 million ofdevelopment property which, in accordance with the group's accounting policies,was not revalued. Profits and dividend Adjusted profit before tax increased to £16.4 million from £16.2 million in2003. FRS3 profit before tax, which includes profit on disposal of investmentproperties of £6.4 million, was £22.8 million, compared to £17.1 million lastyear, an increase of £5.7 million. Taxation on ordinary activities rose to £4.8million from £2.3 million in 2003 resulting in FRS3 profit after tax of £18.0million (2003 - £14.8 million).The directors propose a final dividend of 8.9p per share, which would give atotal for the year of 12.5p, an increase of 9.6% on last year's distribution.The final dividend will be paid on 6th June 2005 to shareholders on the registeron 13th May 2005. Review of the year With the occupational market for Central London offices continuing to makestrides, the momentum of our own letting programme was maintained. New leaseswere agreed across the spectrum of the portfolio with 21,300m2 of space beinglet at an annualised rental income of £4.8 million. Whilst the West End offersearlier and greater prospects for growth than the City, we have doneparticularly well in the City borders where Oliver's Yard, EC2 is now 90% let,and the Tea Building, Shoreditch, E1 is over 70% let. These successes reinforceour view that attractively designed and appropriately priced space will securetenants. Rental growth has not been as pronounced as some predicted but it hasmoved into positive territory and we remain confident that it will step upfurther in 2005. Our investment philosophy is to create shareholder value by identifying andpurchasing property in those dynamic London sub-markets that provide thenecessary environment for twenty-first century working and living. The group'sportfolio already contains opportunities in such locations from which futureperformance will be generated. Our key priority is to keep replenishing thispipeline. Consequently, we remain acquisitive when our investment criteria aremet. Acquisitions of £88.6 million were made during the year, principallythrough the £76.7 million deal with Chelsfield in the first half. With an eye torecycling capital into the next generation of schemes, £78.9 million of saleswere made into the strong investment market at £6.4 million above book value.Capital expenditure during the year was £27.1 million and a further £34.6million is budgeted for 2005. This includes our largest project to date, theJohnson Building at Hatton Garden, EC1. Construction is underway on this15,900m2 scheme which is due to be completed in Spring 2006. During the year,settlement was reached with both tenant and insurers to enable a new, largerproperty to be developed on the site of the fire damaged Telstar House,Paddington, W2. Strategies for the implementation of the planning permissionfor this site are being evaluated. Prospects Your board believes that, during 2004, there has been a considerable change inthe property investment market with property enjoying a re-rating relative toother asset classes. Attractive initial yields, against a background ofhistorically low interest rates, and prospects of rental growth offer morecompelling reasons than in previous cycles to hold property rather than to seekalternative investments. Consequently, the demand for property continues fromall sectors of investors - UK, international, public and private. However, asregulation from many sources multiplies, operating in such a buoyant market isnot all plain sailing. An increasingly prescriptive and protracted planningprocess, that seeks to force residential accommodation into new office schemes,may reduce returns and hence restrict regenerative development. There alsoremains the possibility of government intervention in the established lettingand rent review system, which will interfere with the tried and tested freemarket negotiation between landlord and tenant. The need for change was nevercompelling, a view that has recently been supported by a report issued byReading University. Clearly, if implemented, changes to the existing systemcould affect investment values. Additionally, the property industry awaits thedelayed rules for a UK real estate investment trust (REIT). Whilst it is theboard's role to manage these matters, and identify any opportunities that may bepresented, it is to be hoped that, together with the changes arising from theintroduction of International Financial Reporting Standards, they will notincrease bureaucracy to such a level that entrepreneurial skills are stifled. The ownership and ongoing replenishment of a portfolio with a pipeline ofopportunities remains a prerequisite of achieving outperformance and staying inthe game as active investors. As one of the principal Central London propertycompanies, Derwent Valley owns such a portfolio and this, combined withfinancial strength and management that can convert potential into performance,places your company in a strong position to build further on its record ofgrowth. J. C. Ivey15th March 2005 Property Review Overview Good progress was made during the year in all areas of our business. Withconditions in the Central London office market improving, we increasinglyfocused on evaluating the next generation of schemes so as to ensure an ongoingsupply of projects. Key achievements included: • £88.6 million of acquisitions with refurbishment and redevelopment potential. • 80 lettings, totalling 21,300m2 at an annualised rental of £4.8 million per annum. • The level of space available for letting reduced from 9.9% to 5.9%. • Start of construction on the 15,900m2 Johnson Building, Hatton Garden. • £27.1 million of project expenditure with £68.4 million budgeted over the next two years. • A 9,700m2 office planning consent obtained at Telstar House, Eastbourne Terrace, Paddington. • 14 planning studies ongoing in relation to 65,000m2 of property. • 26 renewals concluded and 46 rent reviews settled. • £78.9 million of disposals, achieving £6.4 million above book value. Strategy and performance Derwent Valley is a commercial property company focused entirely on CentralLondon, one of the world's most vibrant and economically important capitalcities. The emphasis is on the ownership of a portfolio that offers potentialfor both rental income and capital growth. There are three elements to thebusiness strategy: • Acquiring properties in improving locations, which are let on short to medium term leases and characterised by low capital values and rental levels. • Adding value through lease management, planning enhancement and refurbishment/redevelopment. • Disposing of those properties where further opportunities for our active management approach are limited. Through a disciplined approach and the application of our considerablecommercial property experience, we have assembled a £925 million portfolio.This comprises 254,400m2 of space and approaching 500 tenancies. We work toenhance our assets through contemporary architecture to provide occupiers withstylish and efficient offices. Capital will then be recycled, throughdisposals, into properties with potential to become the future outperformers inthe portfolio. Over the last five years, sales have raised in excess of £320million. One of our strengths is our close working relationships with architects anddesigners. In 2004, this resulted in the Royal Institute of British Architectsvoting Derwent Valley as one of the top five clients with whom to work. Weseek to remain at the cutting edge of architectural procurement andsystematically identify talented young architectural practices, encouragingtheir vision for the working spaces of the future. Our close involvement and attention to detail in the refurbishment/redevelopmentprocess extends from evaluation to implementation and through to the finishedproduct. This produces a highly recognisable Derwent Valley brand, whichidentifies the company and gives it a competitive advantage when seekingtenants. Whilst our enthusiasm to regenerate our buildings flourishes, it isset around an ever more challenging planning environment. Constraints includethe lengthy planning process and the need for the provision of residential spacein new commercial developments. Valuation commentary At 31st December 2004, the group's investment portfolio had a value of £924.8million, before the UITF 28 adjustment of £8.2 million, and included £68.8million of development properties which were not re-valued at the year end.This revaluation generated a surplus of £69.5 million. For those investmentproperties held throughout the year, there was an underlying valuation increaseof 9.1%, compared to a 4.7% decline in 2003. The return to growth, which started in the second half of 2003, accelerated in2004 and reflected the improving occupational market and the extremely stronginvestment demand, which led to hardening yields. The group's West Endproperties, which account for 73% of the portfolio, increased in value by 8.5%. The best performing sub-sector was Soho/Covent Garden (18% of the portfolio),which rose by 14.3% during the year. Here, letting progress on recent schemesat Charing Cross Road and the Davidson Building, coupled with yield movement onthese assets, drove values forward. At our North of Oxford Street and Belgraviaproperties, the valuation performance was lower at 4.6% and 3.9% respectively,due to the fact that the properties are mainly fully let. The City borders andsurrounding areas, taking in Holborn, Clerkenwell and Shoreditch, comprise thebalance of the portfolio. This location saw an 11.0% valuation increase, with 1Oliver's Yard, one of our larger properties, a significant contributor to theuplift. Here, lettings at increased rents were achieved during the year. Portfolio management Our focus on active management continued, with the completion of 80 lettings,totalling 21,300m2 at a rental of £4.8 million per annum. This followed theletting of 29,800m2 of vacant space last year. The increased level of interestbeing shown for space is encouraging, with incentives reducing and rental growthcoming through. Lettings included four floors at the Davidson Building, withthe final floor let since year end. In addition, activity at the Tea Buildingwas brisk with 23 lettings, totalling 4,800m2. This building has evolved into adynamic complex, in an improving City border location, and this transformationhas encouraged us to assess further refurbishment phases. Total available space at year end was 16,900m2, a 32% reduction on last year's24,900m2. This level reflects a vacancy rate of 6.6% of portfolio floor area or5.9% of the estimated rental value. Since the year end, lettings have beenconcluded or terms agreed on 9,900m2 of the available space, which reduces thevacancy rate to 2.2% of rental value. Space still available includes floors atthe recently refurbished Berkshire House and The College, Gresse Street. Vacant space, either under refurbishment or identified for refurbishment at theyear end, stood at 36,800m2, in addition to the development sites of EastbourneTerrace and Leonard Street. Included in this, is the 15,900m2 Johnson Building,Hatton Garden, our largest project to date, and further phases at Holden House(2,500m2) and the Tea Building (5,100m2). Our increased project programme, upfrom 23,000m2 a year ago, demonstrates our commitment to deliver space into theimproving market. The annualised contracted rental income of the investment portfolio at the yearend, net of ground rents, was £48.4 million. The estimated rental value of theportfolio was £67.6 million. This £19.2 million reversion represents £13million of potential income through letting of vacant space and £6.2 million ofrent review and lease reversions. Based on this reversion, the portfolio'sinitial yield was 5.4%, rising to 7.4%. Last year the yield profile was 6.0%,rising to 7.7%, and the change reflects general tightening of valuation yieldsduring the year. There was an underlying increase in rental values of 2.8%, which reduced thelimited amount of over-renting in the portfolio from £2.6 million last year to£1.9 million at year end. This, coupled with the portfolio's low averagepassing rent, will enable it to benefit from the rental improvement now comingthrough. Overall, the average rent was £249 per m2, with £277 per m2 for theWest End properties. In addition to letting space and managing schemes, 46 rent reviews were settled,achieving an 8% overall increase in annual income to £6.4 million. By the natureof the type of properties held, the majority of the space that reverts to thegroup due to lease expiries and break options is earmarked for improvement.However, 26 renewals were agreed on 3,600m2 of space where it was appropriate tomaintain income. Only 9 of the potential 45 tenant lease breaks were exercised. As a consequence of letting activity, disposal of short term income andacquisitions, especially the longevity of income at Henry Wood House, theaverage lease length increased from 7.7 years to 8.2 years. Development and refurbishment Derwent Valley retains a number of properties designated for development. Atthe year end, these, which were the Johnson Building and the sites atEastbourne Terrace and Leonard Street, totalled £68.8 million, or 7% of theportfolio, as compared to £4.2 million at last year end. This increase reflectsthe current emphasis on projects. We started construction of the Johnson Building in April 2004. This property,acquired in 2000, was income producing until the start on site and is now thesubject of a £34 million capital expenditure programme. The design iscontemporary, yet in keeping with its local environment. We are developing13,800m2 of offices, 400m2 of workshop space and a self-contained 1,700m2residential building. The core of the original building has been removed andthe floors opened up around a new atrium, which will link to the new space. Theproject offers large floor plates, which can be subdivided for maximumflexibility. Completion is scheduled for early 2006. In March 2004, planning permission was obtained for a 9,700m2 office developmentat Telstar House, Eastbourne Terrace, Paddington. Acquired in 2000 as a fullylet investment, the building was extensively fire damaged in 2003. Followingnegotiations with the insurers we received an £18.7 million settlement andobtained vacant possession in November 2004, which will allow redevelopment tocommence this year. The scheme is for a lower rise building, only seven storeysrather than the original thirteen, with larger floor plates more suited to themodern user. This location, in the heart of Paddington, is within aregeneration area where there is a concentration of new development andinfrastructure improvements. At Leonard Street, we have planning permission for a 4,500m2 office development.However, we are considering alternative uses, including residential space, inconjunction with the development of other nearby ownerships, which were acquiredas part of the Islington portfolio. Where development is not appropriate, schemes are often undertaken on a rollingbasis, thereby preserving some income. During 2004, we completed phases and letspace at the Tea Building, The Courtyard, Berkshire House and Morley House. Inaddition, we also completed a 4,400m2 upgrade of The College, an educationalbuilding in Noho. At 50 Rathbone Place, Noho, we have started the 2,500m2, second phase of ourHolden House refurbishment. This follows our initial re-branding of thebuilding, which involved re-siting the entrance and remodelling some of theoffice space. Now further innovative space is being formed by opening up thelightwells and adding glazed roofs. This project, aimed at the creative sector,is generating letting interest at an early stage. Looking forward, our project teams are working on the next generation ofschemes. In the West End at 16-19 Gresse Street, planning permission isexpected this year for a 4,600m2 office building. In the meantime, we havestructured the occupational leases with breaks to allow a 2006 start, ifappropriate. At 55-65 North Wharf Road, Paddington we have an important redevelopmentopportunity. Negotiations are gradually progressing with the City ofWestminster's planners on the scale and mix of the office and residential space.This project is for the medium term and the building remains fully incomeproducing in the interim. Further west, at Portobello Dock, which we acquiredlast year, an initial 3,700m2 planning application is looking positive and asecond application is to be submitted on another part of the ownership. Here,offices and residential space, overlooking the canal, are proposed forcommencement in 2006, when possession will have been obtained. We continue to work through the Islington portfolio, acquired in 2003, with 13of the original 39 properties now sold. During the year, we were able to swaptwo of the smaller properties as consideration for a lease surrender at 37-42Compton Street, thereby gaining control of the building to enable an earlyrefurbishment opportunity. We increased our holding at Balmoral Grove and,elsewhere, planning improvement was achieved through two retail permissions. Weare progressing seven feasibility studies, for which planning applications willbe submitted later this year. Acquisitions and disposals In a competitive investment market our ability to move swiftly is paramount.This, combined with our market knowledge on a street to street, building tobuilding basis, has enabled us to assemble a portfolio with significantopportunities. Whilst the investment market in 2004 was one of the mostcompetitive seen for a decade, with a shortage of stock and an abundance ofbuyers, we were still able to make nearly £90 million of acquisitions. The principal acquisition was in May, when we bought three substantial officeproperties from Chelsfield for £76.7 million. All are located in our coreoperating area and offer potential for enhancement either through leasemanagement or refurbishment/redevelopment. In the heart of the West End is the7,400m2 Henry Wood House. Here, the majority of the space, which is let to theBritish Broadcasting Corporation on a long lease at a low office rental of £145per m2, has the opportunity for significant reversion at the next rent review in2006. There is also the potential for the creation of additional space and wehave initiated studies to investigate this. At Riverwalk House, Victoria, whichoccupies an impressive Thames side location, the building density could beconsiderably improved through redevelopment. In the interim, the 6,900m2 officebuilding is let to the Secretary of State for the Environment until 2011. Thereis a more immediate office refurbishment opportunity at the third property,19-29 Woburn Place, Bloomsbury, which will become vacant this year. We areevaluating our options for this 9,400m2 building. As part of a site assembly, we acquired 1-9 Market Road for £2.8 million. Thiswarehouse is located adjacent to our Balmoral Grove holding, which was acquiredas part of the Islington portfolio. Initial architectural studies indicate thatthese predominantly low rise industrial buildings of 4,900m2 could accommodate amixed-use development of approaching 13,900m2. Our other purchase during the year, The Turnmill, was acquired for £9.1 million.This prominent corner building, at the gateway to Clerkenwell, provides4,100m2 of interesting office space. It is multi-let and offers the option of arolling refurbishment or redevelopment. Initial studies are underway. We continued our policy of recycling capital with eight disposals, realising£78.9 million net of costs, a similar level to last year. The largest disposalswere Heron House (£29.2 million) and Harcourt House (£27.9 million) both ofwhich performed well during our ownership, producing average annual returns of10% and 15% per annum respectively. They had undergone phased refurbishmentand, with the strong investment appetite and limited future potential for ourparticular skills, disposal was appropriate. Other sales included 27-32 OldJewry, our last core city property, Fulcrum House in King's Cross and four ofthe Islington properties. J. D. Burns 15th March 2005 Financial review Financial results Gross rental income rose £2.0 million year on year to £49.9 million. Itbenefited not only from lettings achieved in 2004 but also those made at the endof 2003 which had little impact on that year, other than that it bore the costof such lettings. In total, lettings added £6.5 million to rental income.However, £2.4 million should be netted off this in respect of the surrenderpremium income from Oliver's Yard which was recognised as rental income in 2003.Rent reviews added £1.7 million with the main increases arising from PremierHouse (£0.7 million) and the Islington Estate (£0.3 million). However, rentalgrowth was kept in check as voids, mainly created by the group's refurbishmentand redevelopment programme, reduced rent by £5.6 million. The buildings whererent was reduced noticeably were the Johnson Building (£2.3 million), 16-19Gresse Street (£0.6 million) and The College (£0.5 million). Acquisitions added£5.8 million to rental income of which £3.5 million came from the 3 buildingspurchased from Chelsfield in May 2004. Disposals, the main ones being HarcourtHouse and Heron House, removed £4.0 million of rent from the profit and lossaccount. At the net rental income level, which rose 8% or £3.3 million to £44.8 million,growth was even greater than with gross rents. This was due to lettings in 2003and 2004 eliminating £1.1 million of service charge voids from the portfoliowhile, with less vacant space to let in 2004 than in the prior year, transactioncosts, predominantly letting fees and the related legal costs, were down £0.7million. With two of the properties purchased from Chelsfield being leaseholds,ground rent rose £0.4 million year on year and therefore reduced the abovesavings. While employment costs rose £0.8 million, including a first time charge for thelong-term incentive plan of £0.2 million, a reduction in other overheads,notably bank charges and the absence of a charge for the onerous lease, leftadministrative costs up by only £0.1 million. With increases in both interestrates and borrowings, £3.1 million was added to the interest bill to leaveadjusted profit before tax up £0.2 million to £16.4 million, an increase of1.2%. Profit realised on the disposal of investment properties was £6.4 million, mostof which came from the sales of Heron House (£3.9 million), Old Jewry (£1.5million) and Killick Street (£1.0 million). This, together with the absence ofbid defence costs incurred in 2003, increased FRS3 profit before tax by 33% to£22.8 million. After taxation and a dividend increased by 9.6% to 12.5p per share, whichabsorbed £6.7 million of distributable profit, retained earnings of £11.3million contributed 21p of the growth in net asset value per share. Net assets rose £77.1 million to £554.7 million at 31st December 2004. Thesurplus arising from the year end property revaluation, net of the UITF 28adjustment, was £66.9 million, equivalent to 126p per share. Developmentproperties with a book value of £68.8 million were not revalued at the year endin accordance with group accounting policies. After adding back the deferredtaxation provision of £14.4 million, adjusted net asset value per share was1068p compared with that at the previous year end of 920p, an increase of 16%.The total return for the year - increase in adjusted net asset value per shareplus dividends payable - was 17.4%. The group's five year annualised totalreturn was 9.2 %. Taxation The total tax charge was £8.1 million compared with £5.8 million in 2003. Theprofit and loss account bore £4.8 million of the tax charge while the balance -capital gains tax on prior year revaluation surpluses - was passed through thestatement of total recognised gains and losses. A further £2.9 million ofdeferred taxation has been provided in accordance with FRS19, bringing the totalto £14.4 million. Nearly all of this provision relates to tax deferred throughcapital allowance claims and, consequently, it is considered unlikely that thistax will ever become payable. Cashflow The group's cash outflow for the year was £17.9 million. After interestpayments, the group generated cash of £12.9 million out of which corporation taxof £5.3 million was paid to leave a net inflow of £7.6 million. As ever,capital transactions dominated the cash flow. In 2004, the group spent £88.7million on acquiring new properties and £26.1 million on refurbishments andredevelopments, the total of which was partly covered by property disposals of£76.9 million to leave a net investment in the business of £37.9 million. This,net of the aforementioned inflow and dividends paid to shareholders in 2004,which amounted to £6.2 million, resulted in a cash outflow of £36.6 million.This was reduced by insurance proceeds of £18.7 million received in November inrespect of the 2003 fire damage at Telstar House. Finance The cash outflow resulted in an increase in the group's net debt to £319.3million from £301.8 million at the 2003 year end. Despite the increase in debt,balance sheet gearing fell from 63% to 58% due to the growth in net assets.However, profit and loss gearing, which the company considers to be the moreimportant, fell marginally from 1.87 to 1.76 in 2004 but even at this lowerlevel it remains more than comfortable. As noted last year, these may appearconservative ratios, but they need to be managed in the context of the group'slease term profile and the ongoing refurbishment and redevelopment programme. During the year, there has been little change in the group's bank facilities,the first of which is not due for renegotiation until 2006. The group prefersto borrow on a secured basis from a limited number of banks with whom, itbelieves, it has first class relationships. It has no corporate covenants, andprefers the flexibility of its two property covenants of loan to value and rentto interest. Such borrowing also has the benefit of lower margins comparedwith unsecured loans. At the year end, total group facilities were £465 millionof which £324 million had been drawn down. The group uses derivatives to protect itself from adverse interest ratemovements. Board policy is that sufficient interest rate derivatives should beentered into so that the total of fixed rate debt and that fixed using suchinstruments moves within a range of 40% to 75% of total debt, dependent on theperceived risk to the group. At the beginning of March 2005, this percentagewas 71, and the all in weighted average cost of debt was 6.6%. The fair value adjustment figure, arising from the valuation of fixed rate debtand derivatives in accordance with FRS13, was a negative £14.8 million (31stDecember 2003 : negative £13.8 million) which is equivalent to a reduction innet asset value per share after tax of 19p (31st December 2003 : 18p). Thedebenture accounts for 15p of this amount and the derivatives a further 4p. There is no obligation or present intention to reduce the fixed rate debt or anyof the hedging instruments other than at normal maturity. Therefore, thisamount is unlikely to be realised. However, this is one of the areas which willchange as a result of the introduction of International Financial ReportingStandards. Under this convention, the amount of the fair value adjustmentrelating to the interest rate derivatives (but not the debenture) may bereported in the income statement and not just as a note to the accounts. International Financial Reporting Standards (IFRS) As noted above, the group, along with all listed companies, will have to reportits results under a new accounting convention from 1st January 2005 withcomparative figures for the 2004 prior year. It must be stressed that this newconvention will not affect the economic value of the business but it will leadto an enormous difference and future volatility in the level of profits and netassets reported. There have been long arguments over a number of the newstandards and not all users of accounts, or indeed accountants, agree with allof them but the group has no option but to adopt them in their entirety. Whilethey are intended to make comparisons between companies worldwide easier,whether a set of accounts is any more transparent and understandable isdebateable. Despite the fact that the balance sheet will show a figure closerto the triple net asset value used by financial analysts, already it is apparentthat they, and other users of annual reports, are looking to make adjustments toaccounts prepared under IFRS to obtain the figures they believe are morerelevant. To help users of Derwent Valley's accounts understand the impact ofIFRS, a reconciliation has been produced between the 2004 figures, as audited,and those based on IFRS. This can be found towards the end of the annualreport. The main items to look out for are: • the valuation surplus or deficit on investment properties now reported in the income statement rather than as a movement in the revaluation reserve. • the capital gains tax that would be payable if the investment properties were sold at their current balance sheet valuation now included in the balance sheet as a deferred tax liability. Previously, this was disclosed only as a note to the accounts. • the grossing up of leasehold property for head lease payments and the establishment of a corresponding financial liability, increasing balance sheet gearing. • the lease incentives granted to tenants now amortised over the longer period to lease expiry, rather than generally to the next rent review. • the one off adjustment to net asset value equivalent to the final dividend, because IFRS only permit declared dividends to be included in the accounts and not those proposed as under UK reporting standards. Under the restatement, the 2004 proposed final dividend is excluded. • the movement in the fair value of derivatives, as noted above, reported in the income statement, if hedge accounting is not applied. The IFRS reconciliation has been reviewed by our auditors and they haveconfirmed that they are not aware of any material modifications that arerequired to this. Whilst it is believed these figures will be our comparativeresults for 2005, the interpretation of IFRS continues to evolve and this maylead to changes when the 2004 figures are published next year. Finally, a caveat. The relevant bodies have stated their intention to reviewand possibly redraft some of these new IFRS. It is to be hoped that at the endof this process, indeed if there is an end, users of accounts will still be ableto interpret them and agree on which profits and assets show "a true and fairview". Group profit and loss account 2004 2003 Note £m £m Gross rental incomeGroup and share of joint ventures 50.3 48.2Less share of joint ventures (0.4) (0.3) Group gross rental income 49.9 47.9Property outgoings net of recoveries 2 (5.1) (6.4) Net revenue from properties 44.8 41.5Administrative costsRecurring administrative costs (7.0) (6.9)Exceptional cost of possible offer for the group - (0.7) Operating profit 37.8 33.9Share of operating results of joint ventures 0.4 0.3Profit on disposal of investment properties 3 6.4 1.6 44.6 35.8Interest receivable 0.3 0.3Interest payable 4 (22.1) (19.0) Profit on ordinary activities before taxation 22.8 17.1Taxation on profit on ordinary activities 5 (4.8) (2.3) Profit on ordinary activities after taxation 18.0 14.8Dividend 7 (6.7) (6.1) Retained profit 13 11.3 8.7 All amounts relate to continuing activities. Adjusted earnings per share 6 23.51p 26.62p Basic earnings per share 6 33.71p 27.69p Diluted earnings per share 6 33.50p 27.63p Dividend per share 7 12.50p 11.40p Total return 8 17.4% (5.2%) Group balance sheet 2004 2003 Note £m £m Fixed assetsTangible assets 10 917.2 807.1 Investments in joint venturesShare of gross assets 4.7 3.1Share of gross liabilities (2.9) (2.9) 1.8 0.2 919.0 807.3 Current assetsDebtors 19.2 15.8Cash and deposits 4.5 4.5 23.7 20.3Creditors falling due within one yearBank loans and overdrafts (1.3) (35.4)Other current liabilities (48.9) (29.9) Net current liabilities (26.5) (45.0) Total assets less current liabilities 892.5 762.3Creditors falling due after more than one yearBank loans (288.0) (236.5)10 1/8% First Mortgage Debenture Stock 2019 (34.5) (34.4)Other creditors - (1.2) Provisions for liabilities and chargesDeferred tax 11 (14.4) (11.5)Other provisions 12 (0.9) (1.1) 554.7 477.6 Capital and reserves - equity 13Called up share capital 2.6 2.6Share premium account 154.1 153.7Revaluation reserve 265.7 208.7Other reserves 0.2 -Profit and loss account 132.1 112.6 554.7 477.6 Adjusted net asset value per share 14 1068p 920p Net asset value per share 14 1041p 898p Group cash flow statement 2004 2003 Note £m £m Net cash inflow from operating activities 15 33.6 30.2Net cash outflow from return on investments andservicing of finance (20.7) (18.5)Corporation tax paid (5.3) (4.2)Net cash outflow from capital expenditure andfinancial investment (19.3) (6.8)Equity dividends paid (6.2) (5.7) Cash outflow before management of liquidresources and financing (17.9) (5.0) Management of liquid resources 16 - (4.5) FinancingMovement in bank loans 18.1 8.9Net proceeds of share issue 0.5 - Net cash inflow from financing 18.6 8.9 Increase/(decrease) in cash in the year 16 0.7 (0.6) Group statement of total recognised gains and losses 2004 2003 £m £m Profit for financial year 18.0 14.8Unrealised surplus/(deficit) on revaluation ofinvestment properties 66.9 (39.6)Unrealised surplus on revaluation of joint venture's investment property 1.5 -LTIP expense transferred to reserves 0.2 -Taxation on realisation of property revaluationgains of previous years (3.3) (3.5) Total recognised gains and losses relating to the year 83.3 (28.3) Notes 1. The results for the year ended 31st December 2004 include those for theholding company and all of its subsidiary undertakings together with the group'sshare of the results of its joint ventures. The results are prepared on thebasis of the accounting policies set out in the 2003 annual report and accounts. 2. Property outgoings net of recoveries 2004 2003 £m £m Ground rents 1.5 1.1Other property outgoings net of recoveries 3.6 5.3 5.1 6.4 3. Profit on disposal of investment properties 2004 2003 £m £m Disposal proceeds 78.9 76.1Cost/valuation (72.5) (74.5) 6.4 1.6 4. Interest payable 2004 2003 £m £m Group 21.8 18.7Share of joint ventures 0.3 0.3 22.1 19.05. Taxation on profit on ordinary activities 2004 2003 £m £mUK corporation tax on profit, adjusted for thedisposal of investment properties, at 30% (2003 - 30%) 4.9 4.6Capital allowances (2.8) (2.7)Tax on disposal of investment properties 4.2 3.9Other reconciling items - (0.9) Corporation tax payable on current year's profit 6.3 4.9 Less amount allocated to the group statement oftotal recognised gains and losses (3.3) (3.5) Corporation tax charge in respect of current year's profit 3.0 1.4Adjustments in respect of prior years' corporation tax (1.1) (0.4) Corporation tax charge 1.9 1.0Deferred tax charge 2.9 1.3 4.8 2.3 6. Earnings per share Profit Weighted 2004 Profit Weighted 2003 after average Earnings after average Earnings taxation shares per share taxation shares per share £m '000 p £m '000 p Adjusted 12.5 53,195 23.51 14.2 53,166 26.62 Adjustment for cost of possible offer for the group - - - (0.7) - (1.29) Adjustment for disposal of investment properties 5.5 - 10.20 1.3 - 2.36 Basic 18.0 53,195 33.71 14.8 53,166 27.69 Adjustment for dilutive share options and LTIP awards - 346 (0.21) - 104 (0.06) Diluted 18.0 53,541 33.50 14.8 53,270 27.63 7. Dividend 2004 2003 £m £m Ordinary shares of 5p eachPaid - interim dividend of 3.60p per share (2003 - 3.30p) 1.9 1.8Proposed - final dividend of 8.90p per share (2003 - 8.10p) 4.8 4.3 6.7 6.1 The final dividend will be paid on 6th June 2005 to those shareholders on theregister at the close of business on 13th May 2005. 8. Total return Total return is the movement in adjusted net asset value per share plus thedividend per share expressed as a percentage of the adjusted net asset value pershare at the beginning of the year. 9. Gearing Profit and loss gearing for 2004 is 1.76 (2003 - 1.87). This is defined as netrental income less administrative costs divided by group net interest payable.The administrative costs exclude the exceptional item in order to show only therecurring elements of the group's activity. Balance sheet gearing for 2004 is 57.6% (2003 - 63.2%). This is defined as netdebt divided by net assets. 10. Tangible assets Freehold Other land and Leasehold fixed buildings property assets Total £m £m £m £m Cost or valuation: At 1st January 2004 580.6 225.9 1.3 807.8 Additions 53.2 62.5 0.1 115.8 Disposals (66.7) (5.8) - (72.5) Revaluation 51.0 15.9 - 66.9 At 31st December 2004 618.1 298.5 1.4 918.0 Amortisation and depreciation: At 1st January 2004 - - 0.7 0.7 Provision for year - - 0.1 0.1 At 31st December 2004 - - 0.8 0.8 Net book value: At 31st December 2004 618.1 298.5 0.6 917.2 At 31st December 2003 580.6 225.9 0.6 807.1 Assets stated at cost or valuation: 31st December 2004 valuation 556.2 299.8 - 856.0 Prior years' valuation plus subsequent costs 68.8 - - 68.8 Cost - - 0.6 0.6 625.0 299.8 0.6 925.4 Adjustment for UITF 28 - lease incentive debtors (6.9) (1.3) - (8.2) 618.1 298.5 0.6 917.2 Short leasehold property with a value of £40.7 million (2003 - £37.7 million) isincluded in leasehold property above. Investment property in the course ofdevelopment with a carrying value of £68.8 million (2003 - £4.2 million) isincluded in freehold land and buildings above. The freehold land and buildings and leasehold property, other than those in thecourse of development, were revalued at 31st December 2004 by either CB RichardEllis Limited or Keith Cardale Groves (Commercial) Limited, as external valuers,on the basis of market value as defined by the Appraisal and Valuation Manualpublished by the Royal Institution of Chartered Surveyors. At 31st December 2004, the historical cost of the freehold land and buildingsand leasehold property owned by the group was £652.3 million (2003 - £598.5million). 11. Deferred tax £m At 1st January 2004 11.5 Provided during the year 2.9 At 31st December 2004 14.4 The provision for deferred tax relates to timing differences on acceleratedcapital allowances and other reversing timing differences. A taxation liability of approximately £62.4 million (2003 - £52.7 million) wouldarise on the disposal of land and buildings at the valuation shown in thebalance sheet. This is equivalent to 117p per share (2003 - 99p). Inaccordance with FRS19, no provision has been made for this. 12. Other provisions £mAt 1st January 2004 1.1 Released during the year (0.2) At 31st December 2004 0.9 The provision relates to an onerous lease which expires in 2014 and reflects thediscounted present value of future net payments under that lease. 13. Capital and reserves Share Profit Share premium Revaluation Other and loss capital account reserve reserves account £m £m £m £m £m At 1st January 2004 2.6 153.7 208.7 - 112.6 Premium on issue of shares - 0.5 - - - Surplus on property revaluation - - 66.9 - - Surplus on joint venture's property revaluation - - 1.5 - - Profit realised on disposal of investment properties - - (11.4) - 11.4 Tax attributable to revaluation surplusrealised on disposal of investmentproperties - - - - (3.3) Amortisation of discount and costs on issue of debenture - (0.1) - - 0.1 LTIP expense transferred to reserves - - - 0.2 - Retained profit for year - - - - 11.3 At 31st December 2004 2.6 154.1 265.7 0.2 132.1 14. Net asset value per share 2004 2003 Net asset Net asset Net value Net value assets Shares per share assets Shares per share £m '000 p £m '000 £m Balance sheet 554.7 53,268 1,041 477.6 53,167 898 Adjustment for deferred tax 14.4 - 27 11.5 - 22 Adjusted 569.1 53,268 1,068 489.1 53,167 920 15. Reconciliation of operating profit to net cash inflow from operatingactivities 2004 2003 £m £m Operating profit 37.8 33.9LTIP expense transferred to reserves 0.2 -Depreciation charge 0.1 0.3Increase in debtors (3.4) (1.7)Increase/(decrease) in creditors 17.2 (3.1)Effect of other deferrals and accrualson operating activity cash flow (18.3) 0.8 Net cash inflow from operating activities 33.6 30.2 The increase in creditors includes £18.5 million of the £18.7 million receivedin respect of the insurance settlement for the fire damage at Telstar House.This has been carried forward in other creditors to be set-off against the costof the future redevelopment of the property. This is not an operating cash flowand, therefore, is adjusted within the £18.3 million effect of other deferralsand accruals on operating activity cash flow. 16. Reconciliation of net cash flow to movement in net debt 2004 2003 £m £m (Increase)/decrease in cash in the year (0.7) 0.6Increase in cash on deposit - (4.5)Cash inflow from movement in bank loans 18.1 8.9Amortisation of discount and costs on issue of debenture 0.1 - Movement in net debt in the year 17.5 5.0Opening net debt 301.8 296.8 Closing net debt 319.3 301.8 17. Post balance sheet event On 2nd March 2005, the group exchanged contracts for the acquisition ofa property. Completion will be within two years, but it is not expected to takeplace in 2005. Total consideration for the acquisition will be £6.8 millionexcluding costs. 18. The announcement set out above does not constitute statutory accountswithin the meaning of Section 240 of the Companies Act 1985, for the year ended31st December 2004. The auditors have reported on the statutory accounts forthe said year and have accompanied them with an unqualified report. Theaccounts have yet to be delivered to the Registrar of Companies. The annualreport and accounts will be posted to shareholders on 13th April 2005, and willalso be available on the company's website, www.derwentvalley.co.uk, from thatdate. The annual general meeting of the company will be held on 19th May 2005. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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