21st Mar 2006 07:02
Derwent Valley Holdings PLC21 March 2006 21 March 2006 DERWENT VALLEY HOLDINGS PLC ("Derwent Valley" / "Group" ) Preliminary results for the year ended 31st December 2005 Derwent Valley, a specialist investor and redeveloper of Central London propertyannounces its results for the year to 31st December 2005. • Adjusted net asset value+ per share rose 24.3% to 1,335p (31stDecember 2004: 1,074p; 30th June 2005: 1,176p) • Total dividend up 9.2% to 13.65p (2004: 12.50p) • Total return for the year of 25.5% (2004: 17.2%) • Revaluation gain of £124 million brought the value of the Group'sportfolio to over £1 billion for the first time • Property disposals realised £98 million and produced a profit of £9.6million • Net property income of £46.6 million (2004: £48.0 million) • Adjusted profit before tax* of £16.7 million (2004: £18.3 million) • Strong lettings progress during the year with 19,100 sq m of space letat an annualised rent of £4.5 million John Ivey, Chairman, commented: "Continued demand for the group's distinctive, design-led product resulted inanother highly successful year of letting space. However, such success does notmean that the tank is empty. We are fortunate that 50% of the space in our240,000 sq m portfolio still retains opportunities for refurbishment orredevelopment. We remain confident that this, and the scope to increase rentsfrom a low base, will enable us to make further strong progress." + Excludes the deferred tax on the revaluation surplus and capitalallowances as well as the post tax fair value of derivative financialinstruments. * Excludes the revaluation movement on investment properties and financialinstruments and the profit on disposal of investment properties For further information, please contact: Derwent Valley Financial DynamicsJohn Burns, Managing Director Stephanie Highett/Dido LaurimoreTel: 020 7659 3000 Tel: 020 7831 3113 CHAIRMAN'S STATEMENT Results A revaluation gain of £124 million brought the value of the group's portfolio toover £1 billion for the first time and took the adjusted net asset value pershare up to 1,335p, a rise of 24.3%. Properties held for the full yearincreased in value by 14.8% compared to 8.3% last year as investment demandstrengthened and exerted continued downward pressure on yields. Advantage was taken of the strong investment market with property disposals of£98 million, net of costs, which realised a profit of £9.6 million against theirvalue at 31st December 2004. As a result of these sales and planned vacanciesas schemes moved into the development stage, net property income decreased by£1.4 million to £46.6 million. Adjusted profit before tax was also lower at£16.7 million, compared to £18.3 million in 2004. Dividend The directors are recommending a final dividend of 9.725p per share. Togetherwith the 3.925p per share paid in November, this amounts to 13.65p for the wholeyear and represents an uplift of 9.2% on last year. Shareholders on the registeron 12th May 2006 will be eligible for the dividend that will be paid on 5th June2006. Review of the year Within the global real estate sector, Central London offices continued to be oneof the most sought after investment classes for investors. Although yield shiftremained prominent, rental growth improved during the year and it has beenencouraging to see further upward momentum since the year end. Continued demand for the group's distinctive, design-led product resulted inanother highly successful year of letting space. During 2005, 19,100 sq m waslet at an annualised rent of £4.5 million. The portfolio now contains only 9,500sq m of space that is available for immediate occupation. However, such successdoes not mean that the tank is empty; we have a pipeline of future schemes, someof which are already under construction and others which are progressing throughthe planning process. Capital expenditure throughout the year totalled £26.5 million, the majority ofwhich was committed to the Johnson Building. With practical completion recentlyachieved, we are talking to a number of potential tenants. Capital expenditureof £39 million is planned for this year, the principal schemes being at GresseStreet, W1, Portobello Dock, W10, and Horseferry Road, SW1. This last property,a 13,900 sq m office building in Victoria, was acquired during the year for£32.4 million. Architectural studies have already been completed and acomprehensive refurbishment is planned to commence later this year at a cost ofapproximately £17 million. Telstar House, W2 is our first externally fundedtransaction. Here, we are now acting as development managers for Prudential inconstructing a new, 9,750 sq m, office building. A right to share in thescheme's profit has been retained. The board has a strategy of recycling resources and therefore looks to sellproperties where its rental aspirations have been reached. As a consequence, theaverage rents within our portfolio remain low at £250 per sq m. From thislevel, we can generate rental growth through refurbishment and asset management. Whilst residential development is unlikely to become a mainstream activity forthe group, it is inevitable that, with today's rigid planning regulations whichenforce mixed use development, we will have a level of involvement. Ourinitial scheme provided 14 apartments at the rear of the Johnson Building wherewe applied our design brand to create light and spacious living accommodation.This approach has paid off with 12 of the units sold and the other two underoffer. Further residential schemes may be undertaken, particularly in theIslington portfolio, where designating some properties for residentialdevelopment is likely to provide the key to unlock the potential at other sites. Real Estate Investment Trusts (REITs) The proposed introduction of REITs is eagerly awaited. However, some of therules ascribed to date by the Treasury are generally perceived as disappointingin their present form, and are unlikely to be widely attractive to the quotedproperty sector. Many interested parties have lobbied the Treasury to stressthat the proposed model is too restrictive and needs amending. We await theoutcome of this and also details of a final crucial component, the conversioncharge, which will be levied on companies that convert to REIT status. Theimminent budget statement should enable us to have a much clearer view as to thebenefits for the group. The board Ivan Yeatman, who has been a non-executive director for 10 years, will bestanding down at the conclusion of the annual general meeting in May. Ivan hasmade an excellent and wide ranging contribution to the development andmanagement of the business. We will greatly miss his common sense approach andwould like to take this opportunity to thank him for his valuable input andadvice. We are pleased to welcome Stuart Corbyn who will join the board afterthe AGM. Stuart is chief executive of the Cadogan Estate, one of the principalprivate estates in London, and a former President of the British PropertyFederation. Like Ivan, he has a wealth of experience across the whole propertyspectrum and I am sure he will make a valuable contribution. Simon Silver has been awarded an Honorary Fellowship of the Royal Institute ofBritish Architects in recognition of his contribution to architecture anddesign. Simon has been the catalyst in evolving the group's innovative approachto creating exciting buildings and we congratulate him on this achievement. Prospects With investment demand continuing to be strong, and yields currently showingmore signs of contraction than expansion, new acquisitions where value can beadded, are likely to remain scarce. We are fortunate that, through ourdiscerning acquisition and stringent sales policies, 50% of the space in our240,000 sq m portfolio still retains opportunities for management to use itsfull complement of skills to enhance value. We remain confident that thisfeature of our portfolio, and the scope to increase rents from a low base, willenable us to make further strong progress. J C Ivey 21st March 2006 OPERATING REVIEW Strategy and performance Derwent Valley is a commercial property company committed to the ownership of aCentral London office portfolio. It operates in a market place that employsover 4 million people, 15% of the UK total, and which accounts for about 18% ofthe country's GDP. London is one of the most dynamic cities in the world - aplace for business. Its economic outlook, which is principally service sectordriven, is positive with favourable employment trends predicted. Our strategy, which includes risk management at both property and corporatelevel, is to produce high total returns from a combination of income and capitalgrowth. To achieve this, we create interesting working environments through thefollowing framework of objectives: 1. Ownership of a portfolio with significant opportunities forvalue enhancement through refurbishment or redevelopment. 2. Active lease management to improve rental income. 3. To maintain a pipeline of projects that can be deliveredaccording to market conditions. 4. Deliver and let projects on time and on cost. 5. Apply and promote contemporary architecture andforward-thinking techniques through the Derwent Valley design brand. 6. Recycle capital for reinvestment when potential ismaximised. Set against these objectives, 2005 was an excellent year. We achieved a totalproperty return of 20.1%, progressed planning applications and projectopportunities and made selective acquisitions and disposals. Valuation commentary At 31st December 2005, the investment portfolio was valued at just over £1.0billion. The valuation surplus for the year was £126.1 million, beforededucting the lease incentive adjustment of £2.0 million. The strong investmentmarket experienced further yield compression and this contributed £72.0 millionof the surplus, with an additional £44.6 million coming from lease activity andimproving rental values. The revaluation of development properties, previouslynot recognised under UKGAAP, added £8.7 million and the £0.8 million balancecame from acquisitions. The underlying valuation increase was 14.8%, comparedto 8.3% last year. West End properties, which represent 74% of the portfolio, increased in value by14.6% with all the component villages performing well. The Soho/Covent Gardenholdings, 20% of the portfolio, produced a 15.9% uplift. Here, a number ofprime properties, including the Covent Garden Estate, Tower House, DavidsonBuilding and Charing Cross Road, all benefited from strong yield compression andrental value improvement. The Noho properties, which comprise 17% of theportfolio, saw an uplift of 11.9%, which was driven by pre-lettings of ourHolden House project. The Belgravia, Victoria and Paddington propertiesincreased by 15.9%, 13.4% and 7.6% respectively. In Mayfair, the value of oursole property, 25 Savile Row, increased 37.9% following tenure improvement. The remaining 26% of the group's holdings are in the City borders, in areas suchas Holborn, Clerkenwell and Shoreditch. Here, the valuation uplift was 15.2% asthe benefits of recent refurbishments and strong letting activity at Oliver'sYard and the Tea Building materialised. Portfolio management The portfolio comprises over 240,000 sq m of floor space, approaching 500tenancies, and has an average lease length of 8.0 years. During the year, therewere 29 rent reviews settled at an overall uplift of 17%, and 34 lease renewals/regears on 5,900 sq m of space. In conjunction with this, we have a strategyfor each property focused on scheme progression aligned with income managementto maximise returns. As an example, last year we retained close to 90% of theincome that was subject to lease breaks, without compromising future schemeopportunities. The company is a partner in New London Architecture, and held exhibitions andpresentations during the year to promote London and our projects. The space wecreate ranges from studio offices (Tea Building and Morelands) to large scaledevelopments (Johnson Building). In each instance, we strive to produceinnovative space for the London environment at competitive terms. The emphasisis on contemporary design, offering uncluttered accommodation that can beoccupied efficiently. Our attention to detail and hands-on style is respectedamongst our professional teams. This focused culture has been at the forefrontof the evolution of a Derwent Valley brand of accommodation, which has beenadvanced by employing emerging architectural practices to promote freshoccupational ideas. A strict environmental policy has been adopted whichexerts control over materials and construction methods. Tied in with this, weseek to minimise building running costs which improves the appeal and theefficiency of the space. Our efforts translate directly into letting activity. Last year, 19,100 sq m ofspace was let in 75 units at a rental of £4.5 million per annum. This was asimilar level to the previous year and took our five-year letting total to over87,000 sq m in 300 transactions. Last year included the pre-letting of 2,300 sqm at Holden House, Noho at rents of £410 per sq m compared to the originalappraisal levels of £350 per sq m. This latest phase completed thetransformation of the property. At the Tea Building, there were 27 lettings,totalling 8,460 sq m, including 2,700 sq m taken by Soho House, theinternational private members club. The entire project has been successful inestablishing a vibrant complex on the edge of the City of London, specialisingin media and creative businesses. In addition, rents have improvedsignificantly from £108 per sq m to £156 per sq m over the last two years.Overall, our letting activity reduced the level of space available at the yearend to 9,500 sq m, down from 16,900 sq m the previous year. This represents avacancy level of 2.7% of the portfolio's rental value, compared to 5.9% at thelast year end. The investment portfolio's annualised contracted rental income, net of groundrent, was £49.3 million at the year end, with a potential rental value of £66.6million. This £17.3 million reversion is derived from £9.6 million of vacantaccommodation and £7.7 million of rent review and lease reversions. Theportfolio yield profile on this income stream is initially 4.9% rising to 6.5%at the full estimated rental value. During the year, competition for space intensified and rents moved forward. Theportfolio's underlying rental value increase was 5.4% compared to 2.8% lastyear. This reflects our strategy of retaining those properties in locationswith rental growth potential. The average passing rental level for theportfolio was low at £250 per sq m, with £281 per sq m for the West Endproperties. We believe these levels offer a good platform for further growth. Vacant space, either under refurbishment or identified for refurbishment at theyear end, was 28,600 sq m. This included the 15,900 sq m Johnson Building,Hatton Garden, where practical completion has recently been achieved. At the4,600 sq m Portobello Dock, Ladbroke Grove, vacant possession has been obtainedand this project is expected to commence in summer 2006. A number of smallerrefurbishment projects are proposed which include 1,500 sq m at St Cross Street,adjacent to the Johnson Building, and 1,200 sq m at 35 Kentish Town Road,Camden. Refurbishment and redevelopment The outlook is optimistic for the Central London office sector with increasingenquiries, improving take-up levels, and limited development completions overthe next few years. We intend taking advantage of these conditions bycompleting schemes and implementing the next generation of projects. Deliveryof this pipeline is important to the group's future performance and we haveidentified over 50% of the portfolio floor area for eventual refurbishment orredevelopment. Last year, capital expenditure was £26.5 million and a further £9.3 million iscommitted to complete current schemes. Expenditure was incurred at over half ofour properties, which illustrates our strategy of continued portfolioimprovement. The principal project was the 15,900 sq m Johnson Building, HattonGarden. This £36 million development, of which £18 million was spent in theyear, is a combination of new and refurbished offices around an impressivecentral atrium. Letting interest is already encouraging. As a planningrequirement, 14 residential units were included in the scheme and 12 have nowbeen sold. Elsewhere, capital expenditure included £2.7 million on the finalphase at Holden House and £1.4 million at the Tea Building. At Telstar House, we departed from our normal practice of financing schemes fromour own resources and entered into a funding agreement. Following receipt ofplanning permission for a 9,750 sq m development, we sold the site toPrudential, yet retained the role of development manager and a profitparticipation. Completion is anticipated in autumn 2007, which will make thisPaddington's next new office building. We also acquired from Prudential thefreehold of 25 Savile Row, Mayfair for £5.0 million plus costs. On the planning front, a number of important permissions have been obtained andthese will form the basis for this year's schemes. At 16-19 Gresse Street,after lengthy negotiations, permission for a 4,500 sq m office development wasgranted. This project will replace the 2,900 sq m existing building, achievinga substantial floor area increase. We propose locating the residential part ofthe scheme, again a planning requirement, off-site at the adjacent 7-8 RathbonePlace, thereby making the office permission more valuable. At Portobello Dock,planning permission has been obtained to extend this 4,600 sq m property andcreate a mixed use development. This canal side project will provide 4,700 sq mof offices and 1,700 sq m of residential. At Rosebery Avenue, Clerkenwell we have combined four properties and obtainedpermission for their refurbishment and the addition of a new penthouse officefloor. This 3,100 sq m project illustrates our philosophy of buying early intoimproving locations. Other forthcoming projects are progressing. As described in more detail below,at the recently acquired 13,900 sq m Horseferry House, Victoria, design detailsare being finalised for a comprehensive refurbishment. At Leonard Street, onthe City borders, we are in detailed discussions with the planners for a mainlyresidential scheme of 47 units. Subject to satisfactory planning andpossession, a start this year is anticipated at both of these projects. For the longer term, our largest project is the redevelopment of 55-65 NorthWharf Road, Paddington. Here, the planning progress is slow but we anticipatefinalising the scope of the development later this year. The existing 7,800 sqm low-rise building occupies a prime under-utilised site, and we have recentlycompleted an occupational lease re-structure, which enables us to takepossession for redevelopment from 2009. Other on-going studies, where there isthe potential to substantially increase the floor area, include Wedge House,Southbank, 40-43 Chancery Lane, Holborn and Riverwalk House, Victoria. Thisevaluation process lays the foundation for future projects. Acquisitions and disposals The strong appetite for stock led to Central London investment transactionsreaching a record high in 2005, which inevitably made it difficult to sourceacquisitions. However, we made two classic Derwent Valley style purchases.Both acquisitions are in improving locations, off low capital values, and offersignificant refurbishment potential. Firstly, Horseferry House, Victoria wasacquired in July for £32.4 million plus costs. This 13,900 sq m office buildingoccupies a large island site and is ideal for the Derwent Valley refurbishmenttreatment, which will change the building's identity, with new entrances and theintroduction of ground floor retail. The property is leased short-term to aGovernment department at £2.0 million per annum and vacant possession isanticipated later this year. We are finalising our refurbishment proposals andstudies indicate that, by relocating the core into the existing lightwells, thefloor area can be increased by up to 10%. Secondly, on the City borders,following exchange of contracts last year, we have recently completed theacquisition of 186-188 City Road. The 3,600 sq m building is likely to berefurbished to improve the rental potential. In total, there were 13 disposals in 2005 which realised £97.8 million andproduced a surplus of £9.6 million after costs. The largest sale was BerkshireHouse, Holborn, which had been subject to a rolling refurbishment and lettingprogramme. In addition, 19-29 Woburn Place, Bloomsbury was sold, having beenacquired in 2004 as part of the Chelsfield portfolio. The College, aneducational building where we had recently completed a comprehensiverefurbishment, was acquired by an owner-occupier. We continued to work throughthe Islington portfolio. After another seven disposals in 2005, which raised£8.6 million, 19 properties are left with interesting opportunities to exploit. This activity continues our strategy of disposing of those investment propertieswhere we perceive limited growth, and takes sales over the last five years to inexcess of £370 million. FINANCIAL REVIEW Basis of accounting These are the first results reported by the group in full compliance withInternational Financial Reporting Standards (IFRS), adoption of which becamecompulsory for companies listed on a regulated market with effect from 1stJanuary 2005. However, the changed format of these accounts and the newdefinitions for key figures, such as profits and net assets, should be nosurprise. The 2005 interim results, published last September, were prepared onthis basis and, at that time, a full explanation of the differences between theIFRS figures and those prepared under the previous accounting rules (UKGAAP) wasmade available. As a foretaste of these accounts, the 2004 Report and Accountsalso showed the 2004 results on both an IFRS and UKGAAP basis. Results commentary Profit before tax As in previous years, profit before tax has been adjusted to show a figure whichbetter reflects the underlying business trend. This adjusted profit of £16.7million was lower than the IFRS restated figure for 2004 of £18.3 million. Thekey influences on the adjusted profit are discussed below. Year on year, gross property income (GPI) fell from a restated £52.1 million to£49.5 million. As in prior years, the level of this important figure is,firstly, the result of a balance between growth from lettings and rent reviews,and income forgone from properties under refurbishment or redevelopment. In amarket that is currently favourable, and is expected to be so for the immediatefuture, the board has pressed on with a number of value adding schemes, forwhich planning consent had been achieved. Consequently, income was £3.2 millionlower in 2005 compared with 2004. This reduction was exceeded marginally byincome from lettings and rent reviews, at £3.2 million and £0.3 millionrespectively. A second balance that affects GPI is that between acquisitionsand disposals of properties. It is not surprising that, in a year in whichproperty values have risen strongly, income from properties sold of £5.2 millionexceeded that acquired of £2.8 million. The net reduction in GPI, including other minor factors, was £2.6 million.However, lower property expenditure meant that, at the net property incomelevel, the decline was only £1.4 million to £46.6 million, compared with therestated £48.0 million of 2004. This was a result of lettings achieved in 2004and 2005 which, in addition to generating GPI, also had the effect of reducingthe group's void costs. These fell £0.6 million year on year. Additionally,due to the timing of scheme completions in 2005, there was less vacant space tolet and transaction costs, mainly legal and letting fees, were consequentlyreduced by £0.2 million. Administrative expenses rose £1.7 million, entirely due to increased employmentcosts. While all categories of these costs rose, the two largest increases,both of £0.7 million, related to incentive schemes run by the group. Thelong-term incentive plan, which has an in-built three-year cycle, was onlyintroduced two years ago. Therefore, 2005 bore the cost of two years' worth ofshare allocations compared with one year in 2004. A further rise in the chargefor this scheme will occur in 2006, after which the annual cost shouldstabilise. Additionally, the strong rise in the company's share price duringthe year has required further national insurance provisions to be made inrespect of share-based remuneration. The group also operates a benchmarked bonus scheme for staff and directors, thelevel of awards from which can only be determined after the group has announcedits results. This led to an over accrual in 2003 which lowered the 2004 chargeby £0.2 million and an under accrual of £0.2 million in 2004 which has beencharged in 2005 while the 2005 provision has been increased. Finally, net finance costs were down £1.6 million due mainly to borrowingsrepaid by disposal proceeds. The net effect of these movements accounts for the £1.6 million reduction inadjusted profit before tax. To arrive at the profit before tax of £150.4million, reported in the group income statement, two other figures need to beconsidered. The largest item in the income statement is the £124.1 millionsurplus on revaluation of the group's properties. This is £77.7 million up onlast year and a discussion of this can be found in the operating review. UnderUKGAAP, this figure would have been shown as a reserve movement. It is not arealised profit and is not taken into account when setting the dividend. Thesecond item is the profit on disposal of investment properties. This was £9.6million in 2005, compared with £24.9 million in 2004, which included theinsurance receipt of £18.5 million in respect of a fire damaged building. Thescale of the above figures, together with the movement in the fair value ofinterest rate derivatives, which in these accounts was not a factor year onyear, shows how volatile profit before tax may be under IFRS and why the groupcontinues to report an adjusted profit before tax to best reflect underlyingtrends. Tax expense Full details of the £33.7 million tax expense can be found in the tax note. Thelargest item is the £29.1 million deferred tax charge. The cash flow shows thatthe actual tax paid in the year was only £4.2 million. Dividend The dividend is now reported on a paid and not payable basis as previously underUKGAAP. It is also no longer shown in the group income statement as adistribution of the year's earnings but as a deduction from reserves. Net assets Net assets rose £110.7 million to £606.2 million at 31st December 2005, mainlydue to the surplus arising from the year end property revaluation noted above. As with UKGAAP, an adjusted net asset value per share is reported. This figurerose to 1,335p per share in 2005, an increase of 24.3% from last year's restated1,074p. Total return The growth in net asset value is reflected in the total return for the year of25.5% (2004: 17.2%). Cash flow The group had a cash inflow for the year, after the payment of dividends, of£34.5 million, compared with an outflow in 2004 of £17.9 million. In a yearwhen value adding acquisitions were difficult to secure, and demand for propertyfrom all sectors of the market was high, advantage was taken of the latter, suchthat proceeds from the disposal of investment properties (£97.8 million)exceeded acquisitions (£40.3 million) and capital expenditure (£26.7 million) by£30.8 million. In 2004, the reverse was true in that disposals only partfinanced investment outflows. Cash generated from the underlying businessbefore tax was £14.7 million. After payment of tax and distributions toshareholders, this was reduced to £3.7 million, an insignificant amount when setagainst capital expenditure demands. This demonstrates the importance ofmaintaining committed bank facilities. Financing Sources of finance In addition to its share capital, the group is financed by a series ofbi-lateral, medium term, revolving credit facilities from a number of banks withwhom the group has long-term relationships. Outside of its existing lenders,close relationships are maintained with a second tier of banks to satisfy futuredebt requirements. Sources of finance, which would provide an alternative tobank debt, are also reviewed and considered. While the group expects to borrowcompetitively in line with its credit standing, the margin is only onenegotiable element in a financing arrangement and other items, such as covenantsand flexibility, are equally important. The group continues to borrow on asecured basis with only loan to value and interest to rent covenants. There areno corporate covenants given to support its borrowing. During the year, the bank facility that was due to expire in April 2006 wasrenegotiated on improved terms. Amongst other matters which were reviewed, theterm of the loan was extended for seven years, such that the loan now matures in2013. There is now no loan due for renegotiation until late 2008. At the yearend, total group bank facilities were £430 million, of which £264 million hadbeen drawn down. Therefore, the group has sufficient facilities to fund itsnext two year's capital expenditure, estimated to be about £70 million, whileallowing it to move quickly when prospective acquisitions are identified. Thegroup also has a £35 million listed debenture which is due for repayment in2019. Debt and gearing With a cash inflow of £34.5 million, net debt fell year on year from £341.5million to £303.9 million. In addition to the debenture and bank loans, thesefigures include the leasehold liabilities that are treated as debt under IFRS.In terms of managing the group's debt liabilities, these are irrelevant andconsidered a property matter as they are derived from ground rent payable. The decrease in debt levels and the growth in property values had reducedbalance sheet gearing to 50% from 69% at the December 2004 year end. However,profit and loss gearing for the year was effectively unchanged from 2004 at1.84. This demonstrates why it is the more important figure for the board tomanage when it is reviewing the group's risk profile, particularly in respect ofthe ongoing refurbishment and redevelopment programme and the average leaselength profile. Liability risk management The group uses derivatives to protect itself from adverse interest ratemovements. Board policy is that sufficient hedging should be entered into suchthat the total of fixed rate debt, and that fixed using derivative instruments,is within a range of 40% to 75% of total debt. The actual percentage isdependent on the perceived risk to the group. At the year end, 67% of debt wascovered, which gave a weighted average cost of debt of 6.4%. Under IFRS, the difference between the year end valuations of the interest ratederivatives is included in the group income statement as part of the interestcharge and the valuation itself shown in the balance sheet. Although theinterim results showed a charge of £1.4 million in respect of this, thevaluation had fallen back to its 31st December 2004 figure of £3.1 million bythe 2005 year end. At both December 2004 and 2005 this is equivalent to 4p pershare after tax. The fair value of the debenture continues to be shown in anote to the financial statements as the company is carrying it at amortised costin accordance with its accounting policies, and has no obligation or presentintention to redeem the debenture other than at normal maturity. The fair valueadjustment figure for the debenture was a negative £14.1 million compared with anegative £11.7 million at the 2004 year end. This is equivalent to 18p pershare after tax (2004: 15p per share). Outlook In considering the current financial year (2006), the movement in net propertyincome will continue to be a balance between the letting of completed schemesand voids caused by the group's refurbishment and redevelopment programme. Thegroup's major expense is employment costs. Salaries will rise as the groupneeds to attract and retain the best staff to grow its business, while incentivepayments are dependent on the group's relative performance against its peers andvarious indices. Any change in interest rates will have only a modest impact onprofits due to the group's hedging policy. In terms of net asset growth,although rental levels are moving upwards, the factor which will determine theyear's outturn is likely to be the direction which property yields take duringthe year. As stated at the beginning, these are the first full set of financial statementsto be prepared under IFRS. Accounts already published under this basis havebeen found useful by some, but they have not been met with universal acclaim.Certainly, most commentators in the real estate sector are adjusting bothprofits and net assets to provide something they find more useful and,consequently, these financial statements show these figures for those who wishto use them. This may indicate that, despite all the work that went in toproducing IFRS, the right answer may not have been found yet. However, it is early days with IFRS. It will take time before users of thefinancial statements become familiar with the new format and definitions,although the length and complexity will deter some. Further immediate changesto the standards, or technicians reading into them unintended consequences,should be avoided. Compliance with IFRS has been costly and time consuming forcompanies and a period of reflection would be beneficial, not least because anymore changes to definitions of key figures would strain credibility as to whichare the correct or "true and fair" ones. Group INCOME STATEMENT Note 2005 2004 Restated £m £m Gross property income 49.5 52.1Property outgoings 2 (2.9) (4.1) _______ _______Net property income 46.6 48.0Administrative expenses (8.8) (7.1)Revaluation surplus 124.1 46.4Profit on disposal of investment properties 3 9.6 24.9 _______ _______Profit from operations 171.5 112.2Finance income 0.4 0.3Finance costs 4 (21.5) (23.0)Share of results of joint ventures 5 - 1.6 _______ _______ 150.4 91.1Tax expense 6 (33.7) (18.5) _______ _______Profit for the year 116.7 72.6 _______ _______ All amounts are attributable to the equity holders ofthe parent company. Basic earnings per share 7 218.63p 136.64p _______ _______ Diluted earnings per share 7 216.81p 135.76p _______ _______ Group balance sheet Note 2005 2004 Restated £m £mNon-current assetsInvestment property 8 1,015.6 915.6Property, plant and equipment 9 0.4 0.6Investment in joint ventures 1.8 1.8Other receivables 13.3 11.0 _______ _______ 1,031.1 929.0 _______ _______Current assetsTrade and other receivables 12.3 12.9Cash and cash equivalents 14.7 4.5 _______ _______ 27.0 17.4 _______ _______ Total assets 1,058.1 946.4 Current liabilitiesBank overdraft (2.0) (1.3)Trade and other payables (20.7) (22.9)Corporation tax liability (3.0) (2.6)Provisions (0.1) (0.1) _______ _______ (25.8) (26.9) _______ _______Non-current liabilitiesBank loans (262.0) (288.0)10 1/8% First Mortgage Debenture Stock 2019 (34.5) (34.5)Leasehold liability (20.1) (22.2)Derivative financial instruments (3.1) -Provisions (1.2) (0.9)Deferred tax liability 10 (105.2) (78.4) _______ _______ (426.1) (424.0) _______ _______ Total liabilities (451.9) (450.9) _______ _______Total net assets 606.2 495.5 _______ _______ Equity - attributable to equity holders of the parentcompany. 11Share capital 2.6 2.6Share premium 155.1 154.1Other reserves 2.3 0.3Retained earnings 446.2 338.5 _______ _______Total equity 606.2 495.5 _______ _______ Adjusted net asset value per share 13 1,335p 1,074p _______ _______ Net asset value per share 13 1,134p 930p _______ _______ GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE 2005 2004 Restated £m £m Profit for the year 116.7 72.6Recognition of financial instruments at 1st January 2005at fair value under IFRS1 transitional rule (2.2) - ______ _____Total recognised income and expense relating to the year 114.5 72.6 ______ _____ 2005 2004 Restated £m £m Change in shareholders' equity Total recognised income and expense relating to the year 114.5 72.6Equity dividends paid (6.8) (6.2)Share-based payment transferred to reserves 0.6 0.3Deferred tax asset in respect of share-based payments 1.4 -Premium on issue of shares 1.0 0.5 _______ _______ 110.7 67.2 Equity at 1st January 495.5 428.3 _______ _______Equity at 31st December 602.2 495.5 _______ _______ All amounts are attributable to the equity holders of theparent company. Group cash flow statement 2005 2004 Restated £m £m Operating activitiesCash received from tenants 46.3 47.1Direct property expenses (3.0) (6.3)Cash paid to and on behalf of employees (4.5) (3.7)Other administrative expenses (2.8) (3.5)Interest received 0.4 0.2Interest paid (21.7) (20.9)Tax paid in respect of operating activities (1.0) (0.6) _______ _______Net cash from operating activities 13.7 12.3 _______ _______Investing activitiesAcquisition of investment properties (40.3) (88.7)Capital expenditure on investment properties (26.7) (26.1)Disposal of investment properties 97.8 76.9Capital insurance receipt - 18.7Purchase of property, plant and equipment - (0.1)Tax paid in respect of investing activities (3.2) (4.7) _______ _______Net cash from/(used in) investing activities 27.6 (24.0) _______ _______Financing activitiesMovement in bank loans (26.0) 18.1Net proceeds of share issues 1.0 0.5Dividends paid (6.8) (6.2) _______ _______Net cash (used in)/from financing activities (31.8) 12.4 _______ _______ Increase in cash and cash equivalents in the year 9.5 0.7 Cash and cash equivalents at the beginning of the 3.2 2.5year _______ _______ Cash and cash equivalents at the end of the year 12.7 3.2 _______ _______ Notes 1. Basis of preparation The results for the year ended 31st December 2005 include those for the holdingcompany and all of its subsidiary undertakings together with the group's shareof the results of its joint ventures. These financial statements have been prepared in accordance withInternational Financial Reporting Standards (IFRS) issued by the InternationalAccounting Standards Board as adopted by the European Union and with those partsof the Companies Act 1985 applicable to companies preparing their accounts underIFRS. This is the first time the group has prepared its financial statements inaccordance with IFRS, having previously prepared its financial statements inaccordance with UKGAAP. A detailed reconciliation of the 2004 financial position and performanceof the group, together with the accounting policies that have been applied andthe exemptions taken under IFRS1, First-Time Adoption of International FinancialReporting Standards, is included in "Derwent Valley Holdings plc - Conversionfrom UKGAAP to International Financial Reporting Standards", which is publishedon the company's website, www.derwentvalley.co.uk. Copies can also be obtainedfrom the Company Secretary, Derwent Valley Holdings plc, 25 Savile Row, London,W1S 2ER. The accounting policies and reconciliations will be included in the2005 Report and Accounts. 2. Property outgoings 2005 2004 Restated £m £m Ground rents 0.2 0.3Other property outgoings 2.7 3.8 _______ _______ 2.9 4.1 _______ _______ 3. Profit on disposal of investment properties 2005 2004 Restated £m £m Disposal proceeds 97.8 78.9Carrying value (90.1) (72.5)Leasehold liabilities 1.9 - _______ _______ 9.6 6.4Insurance receipt from fire damaged building - 18.5 _______ _______ 9.6 24.9 _______ _______ 4. Finance costs 2005 2004 Restated £m £m Finance costsBank loans and overdraft wholly repayable within five years 8.4 14.6Bank loans not wholly repayable within five years 8.2 3.6Debenture stock 3.6 3.6Finance leases 1.3 1.2 _______ _______ 21.5 23.0 _______ _______ 5. Share of results of joint ventures 2005 2004 Restated £m £m Profit from operations before revaluation surplus - 0.1Revaluation surplus - 1.5 _______ _______ - 1.6 _______ _______ 6. Tax expense 2005 2004 Restated £m £m Corporation tax expenseUK corporation tax and income tax on profits for the year 4.0 6.3Adjustment for under/(over) provision in prior years 0.6 (1.1) _______ _______ 4.6 5.2 _______ _______Deferred tax expenseOrigination and reversal of temporary differences 30.9 12.4Adjustment for (over)/under provision in prior years (1.8) 0.9 _______ _______ 29.1 13.3 _______ _______ _______ _______ 33.7 18.5 _______ _______ The tax for both 2005 and 2004 is lower than the standard rate of corporationtax in the UK. The differences are explained below: 2005 2004 Restated £m £m Profit before tax 150.4 91.1 _______ _______ Expected tax expense based on the standard rate of corporation tax in the UK of 30% (2004 - 30%) 45.1 27.3Indexation relief on investment properties (8.0) (10.4)Difference between tax and accounting profit on disposals (1.4) 2.2Other differences (0.8) (0.4) _______ _______Tax expense on current year's profit 34.9 18.7Adjustments in respect of prior years' tax (1.2) (0.2) _______ _______ 33.7 18.5 _______ _______ Tax charged directly to reservesDeferred tax on fair value of derivative financial instruments (0.9) -Deferred tax on share-based payments (1.4) - _______ _______ (2.3) - _______ _______ 7. Earnings per share Weighted average Profit for number of Earnings the year shares per share £m '000 pYear ended 31st December 2005Basic 116.7 53,378 218.63Adjustment for dilutive share-based payments - 447 (1.82) _______ _______ _______Diluted 116.7 53,825 216.81 _______ _______ _______Year ended 31st December 2004Basic 72.6 53,195 136.64Adjustment for dilutive share-based payments - 346 (0.88) _______ _______ _______Diluted 72.6 53,541 135.76 _______ _______ _______ Year ended 31st December 2005Basic 116.7 53,378 218.63Adjustment for deferred tax on capital allowances (0.8) - (1.50)Adjustment for disposal of investment properties (7.0) - (13.11)Adjustment for group revaluation surplus (94.9) - (177.79) _______ _______ _______Adjusted 14.0 53,378 26.23 _______ _______ _______Year ended 31st December 2004Basic 72.6 53,195 136.64Adjustment for deferred tax on capital allowances 2.2 - 4.13Adjustment for disposal of investment properties (20.7) - (38.89)Adjustment for group revaluation surplus (36.7) - (69.15)Adjustment for share of joint venture's revaluation (1.5) - (2.82)surplus _______ _______ _______Adjusted 15.9 53,195 29.91 _______ _______ _______ The adjusted earnings per share excludes the after tax effect of fair valueadjustments to the carrying value of assets and liabilities, together with theprofit or loss after tax arising from the disposal of investment properties.The adjusted earnings per share figure also excludes the deferred tax chargeprovided in respect of capital allowances claimed, on the basis that it isunlikely that a liability will ever crystallise. These adjustments are widelymade by analysts and investors. 8. Investment property Freehold Leasehold Total £m £m £mCarrying valueAt 1st January 2005 595.4 320.2 915.6Transfer 23.2 (23.2) -Additions 64.6 1.4 66.0Disposals (55.4) (34.7) (90.1)Revaluation 96.4 27.7 124.1 _______ _______ _______At 31st December 2005 724.2 291.4 1,015.6 _______ _______ _______At 1st January 2005Fair value 606.4 299.8 906.2Adjustment for rents recognised in advance (11.0) (1.8) (12.8)Adjustment for grossing up of headlease liabilities - 22.2 22.2 _______ _______ _______Carrying value 595.4 320.2 915.6 _______ _______ _______ At 31st December 2005Fair value 737.5 272.3 1,009.8Adjustment for rents recognised in advance (13.3) (1.0) (14.3)Adjustment for grossing up of headlease liabilities - 20.1 20.1 _______ _______ _______Carrying value 724.2 291.4 1,015.6 _______ _______ _______ Investment property in the course of development with a carrying value of £75.0million (2004 - £50.3 million) is included in the carrying value of freeholdproperty above. The freehold land and buildings and leasehold property were revalued at 31stDecember 2005 by either CB Richard Ellis Limited or Keith Cardale Groves(Commercial) Limited, as external valuers, on the basis of market value asdefined by the Appraisal and Valuation Manual published by the Royal Institutionof Chartered Surveyors. At 31st December 2005, the historical cost of the freehold land and buildingsand leasehold property owned by the group was £635.6 million (2004 - £652.3million). 9. Property, plant and equipment 2005 2004 Restated £m £mNet book valueAt 1st January 0.6 0.6Additions - 0.1Disposals (0.1) -Depreciation (0.1) (0.1) _______ _______At 31st December 0.4 0.6 _______ _______At 31st DecemberCost 1.3 1.4Accumulated depreciation (0.9) (0.8) _______ _______Net book value 0.4 0.6 _______ _______ 10. Deferred tax liability Revaluation Capital surplus allowances Other Total £m £m £m £m At 1st January 2005 62.4 14.4 1.6 78.4Adjustment to reserves in respect ofdeferred tax on fair value of derivative financial instruments at 31st December 2004 - - (0.9) (0.9)Adjustment to reserves in respect ofdeferred tax on share-based payments - - (1.4) (1.4) Provided during the year 29.2 (0.8) 0.7 29.1 _______ _______ _______ _______At 31st December 2005 91.6 13.6 - 105.2 _______ _______ _______ _______ Deferred tax on the revaluation surplus is calculated on the basis of thechargeable gains that would crystallise on the sale of the investment propertyportfolio as at 31st December 2005. The calculation takes account of indexationon the historic cost of the properties and any available capital losses to theextent that these are deductible. 11. Equity Share Share Other Retained capital premium reserves earnings £m £m £m £m At 1st January 2005 2.6 154.1 0.3 338.5Fair value of derivative financialinstruments at 31st December 2004 - - - (3.1)Deferred tax asset in respect of the fairvalue of derivative financial instrumentsat 31st December 2004 - - - 0.9 Premium on issue of shares - 1.0 - -Share-based payments expense transferred to reserves - - 0.6 -Deferred tax asset in respect of share-based payments - - 1.4 -Profit for the year - - - 116.7Dividend - - - (6.8) _______ _______ _______ _______At 31st December 2005 2.6 155.1 2.3 446.2 _______ _______ _______ _______ 12. Dividend 2005 2004 Restated £m £m Final dividend of 8.90p (2004 - 8.10p) per ordinary share proposed andpaid during the year relating to the previous year's results 4.8 4.3 Interim dividend of 3.925p (2004 - 3.60p) per ordinary sharepaid during the year 2.0 1.9 _______ _______ 6.8 6.2 _______ _______ The directors are proposing a final dividend of 9.725p (2004 - 8.90p) per sharetotalling £5.2 million. This dividend has not been accrued at the balance sheetdate. 13. Net asset value per share Net asset Net Number of value per assets shares share £m '000 pAt 31st December 2005Basic 606.2 53,472 1,134Adjustment for deferred tax on capital allowances 13.6 - 26Adjustment for deferred tax on revaluation surplus 91.6 - 171Adjustment for post tax fair value of derivativefinancial instruments 2.2 - 4 _______ _______ _______Adjusted 713.6 53,472 1,335 _______ _______ _______At 31st December 2004Basic 495.5 53,268 930Adjustment for deferred tax on capital allowances 14.4 - 27Adjustment for deferred tax on revaluation surplus 62.4 - 117 _______ _______ _______Adjusted 572.3 53,268 1,074 _______ _______ _______ In order to provide a figure used by analysts and investors, adjustednet assets exclude the deferred tax provided in respect of capital allowancesclaimed on the basis that it is unlikely that this liability will evercrystallise. The deferred tax on the revaluation surplus and the post tax fairvalue of derivative financial instruments are also excluded, on the basis thatthese amounts are not relevant when considering the group as an ongoingbusiness. 14. Total return 2005 2004 Restated % % Total return 25.5 17.2 _______ _______ Total return is the movement in adjusted net asset value per share plus thedividend per share paid during the year expressed as a percentage of theadjusted net asset value per share at the beginning of the year. 15. Gearing Balance sheet gearing for 2005 is 50.1% (2004 - 68.9%). This is defined as netdebt divided by net assets. Profit and loss gearing for 2005 is 1.84 (2004 - 1.85). This is defined as netproperty income less administrative expenses divided by net interest payablehaving reversed the reallocation of ground rent payable on leasehold propertiesto interest payable of £1.3 million (2004 - £1.2 million). 16. Post balance sheet event On 27th February 2006, the group completed the purchase of an investment property for £6.8 million excluding costs. 17. 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 2005. 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 20th April 2006, 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 23rd May 2006. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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