27th Mar 2008 07:00
Embargoed Release: 07:00hrs Thursday 27 March 2008
CLS Holdings plc (`CLS', the `Company', or the `Group') Preliminary Financial Results for the year ended 31 December 2007
FINANCIAL HIGHLIGHTS
* Adjusted Net Asset Value per share* 764.2 pence, down 7.3 per cent from
824.4 pence at 31 December 2006 (Statutory NAV per share 595.1 pence, down
3.6 per cent) at 31 December 2006.
* Adjusted net assets compared to market capitalisation* ‚£517.6 million
compared to market capitalisation of ‚£224.4 million as at 26 March 2007, a
discount of 56.7 per cent. (Statutory NAV including deferred tax provision,
‚£403.1 million).
* Property portfolio (including Joint ventures) valued at ‚£1.175 billion, up
2.8 per cent from ‚£1.143 billion at December 2006 (including purchases of ‚£
29 million, refurbishments of ‚£23.1 million, revaluation loss of ‚£67.3
million and foreign exchange gain of ‚£47.0 million).
* Net rental income ‚£66.3 million, up 1.2 per cent from ‚£65.5 million for
year to 31 December 2006. * Year end cash ‚£122 million (December 2006: ‚£157.6 million). * Loss before tax ‚£72.6 million (December 2006: profit ‚£176.6 million).
* Loss after tax attributable to equity shareholders ‚£32.5 million (December
2006: profit ‚£153.8 million). * 2008: Sale of interest in London Bridge Quarter for ‚£30 million on 9 January 2008.
RESULTS AT A GLANCE
INCOME STATEMENT (non-statutory format) 31 Dec 31 Dec Up / 07 06 ‚£m ‚£m (Down) Net Rental Income 66.3 65.5 1.2% Other operating income and associate company 7.1 6.0 18.3%results (Losses) /gains on sale of investment (2.0) 1.0
(300.0%)
properties/subsidiaries/associates Overhead and Property Expenses (30.9) (21.0)
47.1%
Operating profit (excluding gains/losses on 40.5 51.5 (21.4%)investment properties) Net Finance cost (41.2) (37.0) 11.4%
Underlying (loss)/profit (excluding gains/ (0.7) 14.5 (104.8%) losses on investment properties)
Fair value (losses)/gains investment properties (68.1) 162.1 (142.0%)
Other fair value losses on financial (1.5) -
-instruments
Loss provisions on share sales (transferred (2.3) -
-from other reserves) (Loss)/profit before tax (72.6) 176.6 (141.1%) Tax - current (2.6) (1.2) 116.7% Tax - deferred 42.3 (19.1) (321.5%) Discontinued operations - (2.5) (100.0%) (Loss)/profit for the year (32.9) 153.8 (121.4%) Minority interest 0.4 - - (Loss)/profit for the year attributable to (32.5) 153.8 (121.1%)equity holders Adjusted earnings per share* 13.8 p 23.8 p Earnings per share (45.8) 196.7 p p Interest Cover (times) 1.3 1.8 BALANCE SHEET 31 Dec 31 Dec Up / 07 06 ‚£m ‚£m (Down) Property portfolio 1,175.3 1,143.5 2.8% Borrowings (798.7) (683.8) 16.8% Cash 122.0 157.6 (22.6%) Other (95.5) (169.2) (43.6%) Net asset value 403.1 448.1 (10.0%) Share Capital 18.7 20.0 (6.5%) Reserves 384.4 428.1 (10.2%) Shareholders' funds 403.1 448.1 (10.0%) Adjusted NAV per share * 764.2 p 824.4 p (7.3%) Statutory NAV per share * 595.1 p 617.3 p (3.6%) Distribution per share from tender offer 31.5 p 69.9 p (55.0%)buy-backs Adjusted gearing * 131.7 % 88.9% 42.8% Statutory gearing * 169.1 % 118.7% 50.4% Adjusted solidity * 37.5 % 44.3% (6.8%) Statutory solidity * 29.1 % 33.1% (4.0%) Shares in issue (000's) - excluding treasury 67,740 72,605 (6.7%)shares Adjusted Net Assets * 517.6m 598.6 m (13.5%) Statutory Net Assets* 403.1m 448.1 m (10.0%)
* see glossary of terms at end of document
CHAIRMANS STATEMENTSUMMARY OF MAIN POINTS
* During 2007 market anticipation of falling property values caused CLS
shares to fall from a high of 775p in January 2007 to 307p at 31 December
2007 giving a discount to adjusted NAV of 60.4 per cent.
* Falls in property values, particularly in the UK, triggered by the lending
crisis in August, caused a write down of the CLS property portfolio value
of ‚£68.1 million.
* The outcome has resulted in a reduction in the adjusted NAV from ‚£598.6
million at 31 December 2006 to ‚£517.6 million at 31 December 2007.
* The Board is considering a possible restructuring, potentially involving
the establishment of a new holding company in another European location and
a re-listing. * Buy-backs of 4.9 million of own shares during 2007, (6.7 per cent of opening shares in issue) for conversion to treasury shares or for cancellation.
* The majority of the unlisted equity investment portfolio was sold during
the year for proceeds of ‚£7 million.
* Increased stake in the AIM listed Bulgarian Land Development plc at a cost
of ‚£7.2 million and acquisition of 29.1 per cent of the share capital in
Catena AB, a Swedish property company, at a cost of ‚£27.9 million.
* Annualised contracted rental income stream of ‚£71.4 million, up from ‚£65.7
million in 2006 due to good demand and lower vacancy.
* Sale of our interest in London Bridge Quarter for ‚£30 million on 9 January
2008. INTRODUCTIONSince the turn of the millennium we have benefited from a strong investmentmarket, historically low interest rates, easily accessible loan capital andstrong demand for property assets. The second half of 2007 was a very differentstory and the trigger, was the crisis in the US sub-prime lending market. Theinitial impact was a paralysis in the lending environment, the effectiveclosure of the securitisation market and a marked increase in the cost ofborrowing.
As a result there has been a significant fall in commercial real estate values, a number of large investment transactions foundered and we have entered a period where many investors are watching and waiting for values to stabilise.
The effect of this on CLS has been twofold. Firstly, the property values in ourcore (non-joint venture) portfolio have fallen by ‚£29.7 million or 2.9 per centsince 31 December 2006. Secondly, in early January 2008, further todifficulties in obtaining development finance, we completed the sale of ourinterest in the London Bridge Quarter (`LBQ') project which crystallised thefall in value of our interest in its net assets by ‚£38.4 million. Both of thesedevaluations were fully reflected in the results for the year ended 31 December2007.
The reduction in property values at the year end caused cash calls or deposits to be made in respect of some UK loans although these did not exceed ‚£10 million.
The outcome has resulted in a reduction in our adjusted net asset value per share from 824.4 pence at 31 December 2006 to 764.2 pence per share at 31 December 2007, a fall of 60.2 pence or 7.3 per cent.
BUSINESS REVIEW 2007
In common with most other UK quoted commercial property investors, our sharesfell significantly since the beginning of the year, from 740 pence per share to331.25 pence currently, a reduction of 55 per cent. However, unlike many of ourcontemporaries, we not only hold assets in the UK but we are a pan-Europeaninvestor, with substantial assets in France, Germany and Sweden whose marketshave not as yet, been as badly affected as the UK.
The Group's position is set out below:
* Income stream of ‚£71.4 million per annum * Average lease lengths of 7.7 years * 34 per cent of rent generated from lettings to government * Overall vacancy rate of 4.3 per cent. * Cash balances of ‚£122 million. * Loans are borrowed from over 20 high quality banking institutions. * The bulk of CLS' assets consist of small and medium sized office
properties. The lending market in that area is more active than that for
larger properties, although it has been noted that some banks are not
taking business with new customers with whom they have no track record.
* The Group has borrowings of ‚£798.7 million of which 63 per cent are fixed
and 37 per cent are floating rates. Our fixed rate borrowings (including
margin) cost on average 6.18 per cent p.a. and variable rate borrowing
costs 5.84 per cent p.a. All of our net variable rate borrowings are capped
at an average rate of 4.8 per cent, excluding margin.
* Loans are secured on the properties to which they relate, are non-recourse
and there is minimal cross collateralisation within the portfolio.
UK - Last year, the UK market fell into two distinct periods. The first sixmonths saw high levels of demand for investment opportunities which slowedconsiderably following the collapse in the US sub-prime market in the secondhalf of the year. Yields moved out due to the lack of demand as a result ofinability to secure investment finance. The Investment Property Databank(`IPD') reported a fall of 8.7 per cent in the final quarter of the year, thelargest quarterly fall since records began and a reduction of 4.4 per cent forthe year as a whole. The volatility has continued into the New Year althoughborrowing restrictions have eased somewhat, particularly for transactions under‚£30 million.The lending crisis had a significant impact on the proposed development at LBQ.The joint venture companies were very close to securing full developmentfunding when the crisis broke. This effectively closed opportunities to funddevelopment of the project. We therefore entered negotiations to sell our onethird interest in the project to a substantial investing consortium. Despitethe volatile market we completed the corporate sale on 9 January 2008 at theagreed value for our share of ‚£30 million.Contrary to the state of the investment market, occupational demand hasremained strong during the entire year and in fact the vacant space in the UKportfolio reduced from 7.6 per cent at 31 December 2006 to 5.8 per cent at 31December 2007.In addition, our intensive asset management of the portfolio has resulted inthe extension of a number of leases to December 2016, including three Capgeminileases at Hoskyns House, Vauxhall.Three UK properties, Spring Gardens, Vauxhall; New Printing House Square; GraysInn Road and Brent House, Wembley are in the main, let to government tenantswith total value of ‚£217.2 million almost 36.3 per cent of the UK portfolio.The leases at Spring Gardens expire in 2026 and approximately half are indexlinked; the leases at New Printing House Square expire in 2025. The yield onthese properties is currently approximately 6 per cent, with a loan to valueratio of 71 per cent.FRANCE - The French division remains very profitable, comprising 40 propertiesvalued at just less than ‚£355.3 million which are mainly located in Paris. Thevalue of the French portfolio remained stable during 2007, with a small upliftof ‚£1.1 million and is valued on an average yield of 6.6 per cent with a loanto value ratio of 60 per cent.
The vacant space has remained low, at 4 per cent and rents are subject to indexation based on the cost of building index. The index has increased by 6.7 per cent during the year.
GERMANY - As in France, our German portfolio benefits from indexation of rents, although in general this works on a cumulative basis until a threshold is broken at which point the uplift in rent is recognised. During the year the index increased by 3.3 per cent.
The current vacant space in Germany, reduced from 8.9 per cent at June 2007 to2.4 per cent, following the letting of our property in Bochum. The 25,115 sq mbuilding had been purchased in March 2007 in which over 42 per cent of thespace had been vacant for a number of years. Our pro-active management approachhas resulted in all of this space being let on a 30 year index linked lease tothe local government. Before the income can be recognised, refurbishment worksare required, which are budgeted at an all in cost of ‚£14 million.SWEDEN - Following the sale of the Solna Business Park last year at a yield tothe purchaser of just under 6 per cent, the Swedish property assets are nowonly represented by Vƒ¤nerparken, 45,206 sq m of offices, health care andeducational facilities. Negotiations are at an advanced stage with the localauthority, to take up the majority of the 11,700 sq m being vacated by theuniversity in September 2008. The portfolio is valued at ‚£49.6 million, on ayield of 8.6 per cent.During the year the Swedish division also acquired 29.1 per cent of Catena AB(`Catena') at a cost of ‚£27.9 million. Due to the size of our holding andrepresentation on the Board, we have treated the company as an associate.Catena is a Nordic real estate group, quoted on the Stockholm stock exchange.It owns 30 properties valued at ‚£193.8 million located throughout Sweden,Denmark and Norway. Catena's main tenant is Bilia, a leading Scandinavian carsales and service company.EQUITY INVESTMENTS - During the year we sold a large proportion of the UKequity investment portfolio for proceeds of ‚£7 million, including ourinvestments in Keronite and Amino Holdings plc. The net loss to the Group ofthe sale of shares in 2007, over and above provisions previously made was ‚£0.3million. Additionally, mark-to-market provisions of ‚£2.4 million, made inprevious years against other reserves, have been recycled through the face ofthe income statement now that our interest in these assets has been sold.During the year the Group increased its stake in Bulgarian Land Development plc(`BLD') from 17 per cent to 28.7 per cent, at a cost of ‚£7.2 million. BLD ownsa number of sites, both on the Black Sea Coast and in Sofia, intended forresidential development, the first of which is a coastal resort complex of 202villas and apartments near Varna due to be completed in mid 2008. To date 127units (60 per cent) have been secured as forward sales. Due to the size of theholding and the significant influence exerted through Board representation, thecompany has been treated as an associate company investment with a carryingvalue of ‚£11.6 million.
Distributions
During 2007 we distributed ‚£22.6 million to shareholders by way of tender offer buy-backs of 3.3 million shares, equating to 31.5 pence per share.
Purchase of own shares
1.6 million of own shares were bought back from the market for either cancellation or holding as treasury shares at an average cost of 451 pence compared to a closing adjusted NAV per share of 764.2 pence.
THE FUTURE
During 2008 we intend to focus all of our energy and creativity on our core property operations. During the first half of 2008 it is our intention to sell some selected properties in the UK, France and Germany with a view to generating cash for potential purchasing opportunities in the future. Other primary objectives of the divisions are set out below:
* In the UK we are working hard to add value through the development of sites
we currently own and will concentrate on achieving their full design
potential in the coming year
* The French division will focus on maintaining its strong revenue and profit
flows from lettings and to minimise vacancies.
* Our German division will focus its attention on the efficient development
of Bochum, to programme and to budget and will continue to work closely
with our tenants and property managers to optimise lettings.
Proposed restructuring
The Board is considering a number of options to restructure the Group in orderto release distributable reserves for future distributions, align the structureto the Group's pan-European operational focus and to enable the Group tocompete more effectively with other UK property investors enjoying REIT status.As a part of this process, consideration is being given to the possibility ofmigrating to another established European location, in which case it is likelythat the Company would re-list, either in London or another mainstream Europeanstock market.
It may take several months before a firm proposal has been established, at which point a proposition will be formally put to shareholders.
It is not proposed to make a distribution until the restructuring of the Group has been undertaken and the appropriate distributable reserves have been realised.
CONCLUSION - 2007 has been a tough year, however, despite this we haveaccomplished a number of difficult objectives. We do not anticipate life willbecome much easier during 2008, and it is possible property values andconsequently our NAV will further reduce during the course of this year. We arehowever well placed to achieve our clearly defined goals for the year and totake advantage of opportunities as they arise.
This has also not been an easy year for our staff and I would like to thank them for their dedication, hard work, loyalty and enthusiasm during this period.
Property investment is a long-term, co-operative activity and I would therefore also like to thank our shareholders, our bankers and our tenants, for their continued involvement and support.
This is my last report as Chairman of CLS Holdings plc as Anders Bƒ¶ƒ¶s hasagreed to take over this position with effect from our next AGM in May 2008. Iwill continue as Vice Chairman. Tom Thomson will step down from this post butwill remain on the Board as a non-executive director.Sten MortstedtExecutive Chairman27 March 2008FINANCIAL REVIEWINTRODUCTIONDue to a significant downturn in the commercial property market in the secondhalf of 2007, the Group has sustained a loss before taxation of ‚£72.6 millionfor the year (31 December 2006: profit of ‚£176.6 million). Adjusted net assetsreduced from ‚£598.6 million at 31 December 2006 to ‚£517.6 million, a reductionof ‚£81 million or 13.5 per cent (net assets from ‚£448.1 million to ‚£403.1million).LOSS BEFORE TAX - The loss before tax of ‚£72.6 million was principally causedby a reduction in the valuation of the Group's property assets. The valuationof our wholly owned property assets reduced by ‚£29.7 million and, the value ofour one third share of Southwark Towers (The Shard site) and New London BridgeHouse comprising LBQ fell by ‚£38.4 million during the year. The sale of ourinterest in LBQ exchanged and completed on 9 January 2008.TAX - The charge for current tax was ‚£2.6 million, mainly incurred in respectof the French and Swedish divisions. The credit to deferred tax of ‚£42.3million reflected a reduction in property values and a revision of the methodof calculation in June 2007. The revision included an indexation allowancewithin the UK computation which resulted in a credit of ‚£31.4 million.NET ASSETS - Adjusted NAV of 764.2 pence per share (December 2006: 824.4pence), reduced by 60.2 pence per share or 7.3 per cent during 2007 (StatutoryNAV of 595.1 pence per share reduced by 22.2 pence per share or 3.6 per centover the same period).
GEARING AND INTEREST COVER - Adjusted gearing at the year end was 131.7 per cent (December 2006: 88.9 per cent) (statutory gearing was 169.1 per cent - December 2006: 118.7 per cent).
Had the sale of LBQ on 9 January 2008 taken place just prior to the year end,the effect would have been to decrease adjusted gearing to 113.1 per cent andstatutory gearing to 145.2 per cent at the date.
Recurring net interest payments and financial charges (excluding LBQ) were covered by operating profit (excluding fair value adjustments) by 1.3 times (2006: 1.8 times).
DISTRIBUTIONS - During the year the Company distributed ‚£22.6 million toshareholders by way of tender offer buy-backs (31.5 pence per share). Thiscompares to distributions of ‚£52.5 million for the year to 31 December 2006(66.9 pence per share) including a special distribution subsequent to the saleof Solna Business Park. The number of shares purchased through the two tenderoffer buy-backs amounted to 3.3 million shares representing 4.6 per cent ofshares in issue on 1 January 2007.CASH - The Group held ‚£122 million cash as at 31 December 2007 (December 2006:‚£157.6 million). REVIEW OF THE INCOME STATEMENT
FINANCIAL RESULTS BY LOCATION - The results of the Group analysed by location and main business activity are set out below:
Total LBQ UK France Germany Sweden Lunar- Equity 2006 Inv works ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Net rental 66.3 2.0 28.6 22.2 9.5 4.0 - - 65.5income Other income 7.1 - 1.0 0.1 - 0.6 5.7 (0.3) 6.0(incl associates) 73.4 2.0 29.6 22.3 9.5 4.6 5.7 (0.3) 71.5 Operating (30.9) (8.8) (5.1) (3.7) (3.2) (2.0) (6.5) (1.6) (21.0)expenses Net finance (41.2) (5.5) (23.2) (3.4) (8.6) 1.2 0.1 (1.8) (37.0)expense Loss on sale - - - - - - - - (1.0)of investment properties (Loss)/ gain (2.0) - - - - (2.0) - - 1.9on sale of subsidiaries/ associates Underlying (0.7) (12.3) 1.3 15.2 (2.3) 1.8 (0.7) (3.7) 14.4(loss)/profit Fair value (68.1) (38.4) (24.6) 1.1 (3.9) (2.3) - - 162.1(losses)/gains on investment properties Other fair (1.5) - (2.0) 0.4 0.1 - - - 0.1value (losses) /gains Loss (2.3) - - - - - - (2.3) 0.0provisions on share sales (transferred from other reserves) (Loss)/profit (72.6) (50.7) (25.3) 16.7 (6.1) (0.5) (0.7) (6.0) 176.6before tax Tax - current (2.6) 0.2 (0.1) (1.5) (0.1) (0.9) (0.2) - (1.2) Tax - deferred 42.3 6.2 41.3 (6.5) 1.1 0.2 - - (19.1) Loss on - - - - - - - - (2.5)discontinued operations (Loss) /profit (32.9) (44.3) 15.9 8.7 (5.1) (1.2) (0.9) (6.0) 153.8before minority interest Minority 0.4 - - - - - 0.1 0.3 -interest (Loss)/profit (32.5) (44.3) 15.9 8.7 (5.1) (1.2) (0.8) (5.7) 153.8for the year attributable to equity holders NET RENTAL INCOME - of ‚£66.3 million increased by 1.2 per cent (December 2006 :‚£65.5 million) primarily due to increased rentals of ‚£1 million in the UKprincipally at Spring Gardens, Great West House and One Leicester Square.French rentals increased by ‚£1.9 million reflecting increased indexation,higher occupation and property acquisitions. German acquisitions in 2006resulted in additional rent of ‚£4.9 million in 2007. These increases wereoffset by reduced rental in Sweden of ‚£7 million principally due to the sale ofSolna Business Park, Stockholm in August 2006.OTHER INCOME - amounted to ‚£7.1 million (December 2006: ‚£6 million) andincluded a ‚£5.7 million contribution to profit from Lunarworks, a contributionof ‚£0.6 million from our associate, Catena and a loss of ‚£0.1 million from ourassociate BLD. A net loss of ‚£0.3 million arose on the disposal of shares inrespect of the disposal of the majority of our UK share portfolio and Swedishfinancial institutions. Property management fees amounted to ‚£0.6 million.OPERATING EXPENSES - Operating expenses set out in the financial results tableabove, comprised administrative expenditure of ‚£27.7 million (December 2006 : ‚£17.5 million) and net property expenses of ‚£3.2 million (December 2006 : ‚£3.5million)ADMINISTRATIVE EXPENDITURE - amounted to ‚£27.7 million (December 2006: ‚£17.5million): 2007 2006 Difference ‚£m ‚£m ‚£m Core property group 12.5 11.8 0.7 LBQ 8.7 1.4 7.3 Lunarworks 6.5 4.3 2.2 Total 27.7 17.5 10.2
LBQ overhead costs incurred during the year were ‚£8.7 million as a result ofthe increased activity in developing and preparing the project for sale. Mainitems of expenditure were legal fees and related costs amounting to ‚£5.4million and management costs of ‚£1.7 million. Goodwill of ‚£1.3 million relatingto the project was written off during the year.
Lunarworks expenditure of ‚£6.5 million was included for a full year in 2007 compared to eight months in the previous year.
NET PROPERTY EXPENSES - of ‚£3.2 million (December 2006: ‚£3.5 million) includedadvertising and marketing costs of ‚£0.1 million, legal, letting and other feesof ‚£0.7 million and void costs of ‚£0.4 million (mainly at Great West House,Brentford, and Vista Centre, Hounslow). Repair and maintenance costs were ‚£0.4million, depreciation amounted to ‚£ 0.2 million and bad debts were ‚£0.4million.
NET FINANCE EXPENSES - amounted to ‚£41.2 million (December 2006: ‚£31.6 million - excluding exceptional interest of ‚£5.4 million)
Finance costs of ‚£47.8 million increased by ‚£7.9 million compared to the previous year of ‚£39.9 million.
During the latter part of 2007, short-term money markets rates on which our floating borrowing rates are based increased significantly:
* Average GBP 3 months Libor for 2006 was 4.9% and 6.2% in 2007 * Average EUR 3 Months Euribor for 2006 was 3.1% and 4.25% for 2007 * Average SEK 3 Months STIBOR was 2.6% in 2006 and 4.1% in 2007 Based on the gross floating rate debt outstanding at the beginning of the yearof ‚£277.3 million the assessed impact of the above interest rate increases is ‚£3.3 million.
Other significant factors influencing the increase in finance costs were:
UK
* The refinancing of Spring Gardens accounted for an increase of ‚£0.8 million
in interest expense.
* Refinancings in late 2006 and 2007 contributed to increased interest of ‚£
0.3 million in relation to Cambridge House and Ingram House, ‚£0.3 million
at Chancel House and ‚£0.1 million for Dukes Road.
* Write off of arrangement fees ‚£0.4 million.
LBQ
* Our share of interest relating to the development loan at LBQ amounted to ‚£
5.6 million, showing an increase over the previous year of ‚£2.6 million due
to increased development financing and ‚£0.4 million in write off of
arrangement fees.
Germany
* Increased loans due to financing the expanded portfolio for a full year in
2007, was the main contributing factor to the additional interest payable
of ‚£3.1 million. Sweden
* Interest payable reduced by ‚£3.4 million, principally due to the sale of
Solna Business Park in August 2006.
Interest receivable: of ‚£6.6 million was earned from average cash reserves held by the Group during the year of ‚£140 million.
Exceptional interest expense: there was no exceptional interest in the year, in2006 there were break costs in respect of financings at Solna Business Park of‚£2.7 million and LBQ of ‚£2.7 million.Analysis of net finance expense 2007 2006 Difference
‚£m ‚£m ‚£m Interest receivable 5.9 5.1 0.8 Foreign exchange 0.7 3.2 (2.5)
Interest receivable and similar income 6.6 8.3 (1.7) Interest payable and similar charges (47.8) (39.9) (7.9) Exceptional interest expense - (5.4) 5.4 Net finance expense (41.2) (37.0) (4.2)The average cost of borrowing for the Group at 31 December 2007, is set outbelow: UK France Germany Sweden Total December 2007 Average interest rate on 6.8% 4.6% 5.1% 5.4% 6.2%fixed rate debt Average interest rate on 7.2% 5.4% 5.5% 5.7% 5.8% variable rate debt Overall weighted average 7.0% 5.2% 5.2% 5.6% 6.1% interest rate December 2006 Average interest rate on 7.3% 4.6% 5.0% 5.5% 6.4%fixed rate debt Average interest rate on 6.4% 4.3% 4.5% 3.9% 5.1% variable rate debt Overall weighted average 7.0% 4.4% 4.8% 5.4% 5.9% interest rate
Financial hedging instruments: The adverse impact of fair value movements in interest rate hedging instruments was ‚£1.5 million.
LOSS ON SALE OF SUBSIDIARIES AND ASSOCIATES
The expenditure of ‚£ 2 million related to the discharge of obligations in respect of the sale of Solna in 2006.
TAXATION
Current tax - In 2007 the Group's current taxation charge has benefited fromthe utilisation of losses and significant capital allowances and amortisationdeductions. Outside the UK these factors will have less effect in the future ascorporation tax losses are used against expected profits and as amortisationdeductions decrease in existing subsidiaries. In the UK, losses being carriedforward are expected to be available to offset income profits for 2008.
Deferred tax - The results of the Group include full provision for deferred taxation relating to potential gains on the sale of property at current valuation, as required by IAS 12. The amount provided represents the maximum potential tax liability on gains from property disposals.
The method of calculation for the estimate of deferred tax has been revised toinclude the effect of indexation allowance available if a property in the UKwas to be sold. The change in estimate has resulted in a credit to the incomestatement in the period of ‚£31.4 million.For the year ended 31 December 2007 the IAS 12 deferred tax credit included inthe profit and loss account was ‚£42.3 million and the provision for deferredtax reduced net assets by ‚£114.6 million (31 December 2006: charge to tax of ‚£19.1 million and reduction in net assets of ‚£150.4 million respectively).We consider it is unlikely that this full liability will crystallise because ittakes no account of the way in which the Group would realise these gains. Inparticular the deferred tax provision takes no account of the way in whichproperties are expected to be sold or of elections available to ensure thatdeductions claimed previously for capital allowances are not reversed. REVIEW OF THE BALANCE SHEET INVESTMENT PROPERTIES - The Group's property portfolio amounted to ‚£1,175.3million, showing a net increase of ‚£31.8 million over its value at 31 December2006 of ‚£1,143.5 million. The movement in the portfolio is set out below:
Group UK France Germany Sweden ‚£m ‚£m ‚£m ‚£m ‚£m Opening assets 1,143.5 640.4 318.3 135.1 49.7 Purchases 29.0 - 3.6 25.4 - Refurbishment 23.1 20.8 1.8 0.4 0.1 Disposals - - - - - Revaluation (67.3) (62.7) 1.1 (3.4) (2.3) Foreign exchange 47.0 - 30.5 14.3 2.2 Closing assets 1,175.3 598.5 355.3 171.8 49.7
PURCHASES - Four property investments were made during the year, three in Germany and one in France.
The three German properties purchased were Bochum, a predominantly officeproperty of 25,171 sq m near Dusseldorf, the cost of which was ‚£12.8 million;Fangdiekstrasse, an office property of 12,968 sq m in Hamburg the cost of whichwas ‚£11.2 million; and Suederhastedt, a property let as a nursing home, waspurchased for a cost of ‚£1.4 million.
The French property purchase was a 2,572 sq m office property situated in Neuilly Plaisance, Paris, the cost of which was ‚£3.6 million.
REFURBISHMENT - In the UK, expenditure on refurbishments amounted to ‚£20.8million, of which ‚£11.9 million related to CLS' share of developmentexpenditure at LBQ. Additionally ‚£5 million was expended on refurbishment worksat Spring Gardens, ‚£2.6 million to complete the works at Great West House and ‚£1.2 million relating to refurbishment at Cambridge House.
In France, refurbishment works were expended amounting to ‚£1.8 million in respect of various properties. Other expenditure amounted to ‚£0.4 million, principally in Germany.
There were no disposals during the year.
FOREIGN EXCHANGE - The gross foreign exchange translation gain on propertieswas ‚£47 million, of which ‚£30.5 million related to France, ‚£14.3 million was inrespect of Germany and ‚£2.2 million arose in Sweden. Taking into account theeffect of foreign exchange translation on loans to finance these assets, thenet effect was a gain of ‚£16.9 million.
Based on the valuations at 31 December 2007 and annualised contracted rent receivable at that date of ‚£71.4 million, the portfolio shows a yield of 6.5 per cent. This excludes LBQ which was sold on 9 January 2008.
An analysis of the location of investment property assets and related loans isset out below: Total UK % France % Germany % Sweden % Equity % Invest'ts ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Investment 1,175.3 598.5 51.0% 355.3 30.2% 171.8 14.6% 49.7 4.2% Properties
Property (765.7) (406.0) 53.0% (211.4) 27.6% (118.3) 15.5% (30.0) 3.9%
loans* Equity in 409.6 192.5 47.0% 143.9 35.1% 53.5 13.1% 19.7 4.8% Property Assets Other 108.0 35.0 32.4% 10.2 9.5% 2.9 2.7% 21.0 19.4% 38.9 36.0% Net 517.6 227.5 44.0% 154.1 29.8% 56.4 10.8% 40.7 7.9% 38.9 7.5%Adjusted Equity Equity in 34.9% 32.2% 40.5% 31.1% 39.6% Property as a percentage of Investment ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Opening 598.6 367.1 130.2 40.7 25.7 34.9 Adjusted Equity
Increase/ (81.0) (139.6) 23.9 15.7 15.0 4.0 (decrease) Closing 517.6 227.5 154.1 56.4 40.7 38.9 Adjusted Equity *Non-property loans relating to the financing of our investment in Catena ABand other non-property assets were included within "other" and amounted to ‚£33.1 million.
# The following exchange rates were used to translate assets and liabilities at the year end; Euro/GBP 1.3571 SEK/GBP 12.7896
DEBT STRUCTURE - Borrowings are raised by the Group to finance holdings of investment properties. These are secured, in the main, on the individual properties to which they relate. All borrowings are taken up in the local currencies from specialist property lending institutions.
Financial instruments are held by the Group to manage interest and foreignexchange rate risk. Hedging instruments such as interest rate caps and swapshave been taken out with prime banks. The Group has hedged all of its interestrate exposure and a significant proportion of its foreign exchange rateexposure.Net Interest Bearing Debt Total UK* France Germany Sweden Equity investments ‚£m % ‚£m % ‚£m % ‚£m % ‚£m % ‚£m % 2007 Fixed (501.2) 62.8 (328.6) 80.9 (73.2) 34.6 (78.7) 66.5 (20.7) 39.2 - -Rate Loans Floating (297.5) 37.2 (77.4) 19.1 (138.1) 65.4 (39.6) 33.5 (32.1) 60.8 (10.3) 100.0Rate Loans (798.7) 100.0 (406.0) 100.0 (211.3) 100.0 (118.3) 100.0 (52.8) 100.0 (10.3) 100.0 Bank and 122.0 67.6 16.4 4.5 22.9 10.6 cash Net (676.7) 100.0 (338.4) 50.0 (194.9) 28.8 (113.8) 16.8 (29.9) 4.4 0.3 -Interest Bearing Debt 2006 (526.2) 100.0 (247.7) 47.1 (180.7) 34.3 (92.0) 17.5 (7.9) 1.5 2.1 (0.4)Non interest bearing debt, represented by short-term creditors, amounted to ‚£59.7 million (December 2006: ‚£66.9 million). Borrowings, gross of arrangementfees, amounted to ‚£803.7 million (December 2006: ‚£689.7 million.Interest rate caps Total UK France Germany Sweden % % % % % 2007 Percentage of net floating rate 100.0 100.0 100.0 100.0 100.0loans capped Average base interest rate at 4.8 5.5 4.8 4.6 4.5which loans are capped Average tenure 3.3 2.0 years 3.3 3.4 0.8 years years years years 2006 Percentage of net floating rate 100.0 100.0 100.0 100.0 100.0loans capped Average base interest rate at 4.9 5.6 4.6 4.6 4.5which loans are capped Average tenure 3.8 3.0 years 4.1 4.4 1.8 years years years yearsAt the end of 2007, 62.8 per cent of gross debt was fixed (December 2006: 59.9per cent). This increase in fixed rate funding is mainly due to there-financing of UK properties, the majority of it being agreed at or swappedinto fixed rate.
New Printing House Square was financed in 1992 through a securitisation of itsrental income by way of a fully amortising bond. This bond has a currentoutstanding balance of ‚£36.7 million (December 2006: ‚£37.4 million) at aninterest rate of 10.7 per cent with a maturity date of 2025; and a zero couponbond, with a current outstanding balance of ‚£6.9 million (December 2006: ‚£6.2million), with matching interest rate and maturity date. This debt instrumenthas a significant adverse effect on the average interest rate. The net borrowings of the Group at 31 December 2007 were ‚£676.8 million(December 2006: ‚£526.2 million), the increase being influenced by refurbishmentand acquisition expenditure of ‚£69.0 million, distributions of ‚£22.6 millionmarket purchase of own shares of ‚£7.3 million and investment in BLD and Catenaof ‚£35.2 million. There was also an adverse translation effect in respect ofloans held in Euros and SEK of ‚£31.2 million. The contracted future cash flows from the properties securing the loanscontinue to cover all interest and ongoing loan repayment obligations. Of theGroup's total bank debt of ‚£798.7 million, ‚£103.0 million (12.9 per cent) isrepayable within the next 12 months (including ‚£66.2 million in respect of LBQwhich was sold on 9 January 2008), with ‚£340.8 million (42.7 per cent) maturingafter more than five years.
The Group continues to monitor covenant compliance with its lenders and is satisfied that there is sufficient headroom within its cash resources to rectify any potential covenant breaches that could occur even when tested under assumptions of significant declines in property values and rental streams.
EQUITY INVESTMENTS - Existing equity investments held amounted to ‚£8.4 million(December 2006: ‚£16.2 million). The majority by value are listed investments,which are carried at market value, and represent 0.06 per cent of the grossassets of the Group.
INVESTMENT IN ASSOCIATE COMPANIES - The Group holds investments in two associate companies the value of which is carried in our books at ‚£42.3 million.
The Group holds 28.65 per cent of BLD, carried at ‚£11.6 million after our shareof its losses in the year which amounted to ‚£0.1 million. During the first halfof the year, the Group invested ‚£27.9 million to purchase 29 per cent in Catenawhich made a positive contribution to the Group results of ‚£2.8 millionincluding positive foreign exchange movement of ‚£2.1 million.SHARE CAPITAL - The share capital of the Company amounted to ‚£18.7 million at31 December 2007, represented by 74,849,736 ordinary shares of 25 pence each,of which 7,109,279 shares were held as Treasury shares following the tenderoffer buy-backs and market purchases made during the year. At 31 December 2007there were therefore 67,740,457 shares quoted on the main market of the LondonStock Exchange.
The Treasury shares are not included for the purposes of any proposed tender offer buy-backs or for calculating earnings and NAV per share.
A capital distribution payment by way of tender offer buy-back was made both inMay and November of 2007 resulting in the purchase and cancellation of3,318,960 shares. The two tender offer buy-backs distributed ‚£22.6 million toshareholders.
Market purchases during 2007 totalled 1,575,251 shares at an average price of 451 pence per share.
The weighted average number of shares in issue during the year was 71,091,071 (December 2006: 78,192,301).
An analysis of share movements during the year is set out below:
No of No of shares shares Million Million 2006 2007
Opening shares for NAV purposes 72.6 80.1
Tender offer buy-back (3.3) (7.4) Buy-backs in the market (1.6) (0.3)
Shares issued for the exercise of options - 0.2 Closing shares for NAV purposes 67.7 72.6 Shares held in Treasury by the Company 7.1 7.5 Closing shares in issue 74.8 80.1
An analysis of the ownership structure is set out below:
Number of Percentage shares of shares Institutions 27.5 40.6% Private investors 1.1 1.6%
The Mortstedt family directors 35.5 52.5%
Other 3.6 5.3% 67.7 100.0%
Shares held in Treasury by the Company 7.1
74.8 Total
At 31 December 2007 there were 405,000 options in existence with an average exercise price of 261.6 pence.
PROPERTY REVIEW
INTRODUCTION
We continue to focus on building a portfolio of low risk, high return properties and to actively manage our buildings to maximise long-term capital returns. Our core areas of operation are the UK, France, Germany and Sweden.
At 31 December 2007, the Group owned 104 properties with a total lettable areaof 480,684 sq m (5,174,042 sq ft) (excluding LBQ which was sold on 9 January2008) of which 42 properties were in the UK, 40 in France, 17 in Germany, 4 inSweden and 1 in Luxembourg. We had 529 commercial tenants and 17 residentialtenants.
An analysis of contracted rent, book value and yields is set out below:
Contracted Net Book Yield Yield Rent rent Value on when net rent fully let ‚£m % ‚£m % ‚£m % % % UK London South Bank 10.7 15.0 10.7 15.5 186.7 17.5 5.7 London Mid town 7.0 9.8 7.0 10.1 100.9 9.5 6.9 London West 5.3 7.4 4.5 6.5 79.8 7.5 5.6 London West End 3.7 5.2 3.6 5.2 66.0 6.2 5.5 London South Bank 0.2 0.3 0.2 0.3 2.9 0.3 - ¢â‚¬ - JVs London North West 2.1 2.9 1.9 2.8 27.0 2.5 6.9 London South West 1.6 2.2 1.6 2.3 21.0 2.0 7.6 Outside London 0.2 0.3 0.2 0.3 1.5 0.1 16.3 London City 0.2 0.3 0.2 0.3 2.9 0.3 7.4 Fringes Total UK 31.0 43.4 29.9 43.3 488.7 45.9 6.1 6.6 France Paris 18.9 26.5 18.8 27.3 283.4 26.6 6.6 France Lyon 3.0 4.2 3.0 4.3 45.2 4.3 6.6 France Lille 0.6 0.8 0.6 0.9 8.9 0.8 6.3 France Antibes 0.5 0.7 0.5 0.8 7.2 0.7 7.2 Total France 23.0 32.2 22.9 33.3 344.7 32.4 6.6 7.0 Luxembourg 0.9 1.3 0.9 1.3 10.6 1.0 8.5 Total Luxembourg 0.9 1.3 0.9 1.3 10.6 1.0 8.5 8.5 Germany Munich 4.7 6.6 4.7 6.8 67.7 6.4 6.9 Germany Hamburg 2.6 3.7 2.6 3.8 38.9 3.6 6.7 Germany Berlin 2.5 3.5 2.2 3.2 40.2 3.8 5.6 Germany Bochum 0.8 1.1 0.6 0.9 14.1 1.3 4.2 Germany Stuttgart 0.6 0.8 0.6 0.9 8.5 0.8 6.9 Germany 0.2 0.3 0.2 0.3 2.1 0.2 12.0 Dƒ¼sseldorf Total Germany 11.4 16.0 10.9 15.9 171.5 16.1 6.4 6.7 * Sweden Vanersborg 5.1 7.1 4.3 6.2 49.6 4.6 8.6 Total Sweden 5.1 7.1 4.3 6.2 49.6 4.6 8.6 8.7 Group Total 71.4 100.0 68.9 100.0 1,065.1 100.0 6.5 6.8 Group Total as 71.4 68.9 1,065.1 above Share of LBQ JV 1.1 1.1 110.2 Group Total inc 72.5 70.0 1,175.3 share of JVs Conversion rates: Euro/GBP 1.3571 SEK/GBP 12.7896. * Yields on receivable rentsand potential rents have been calculated on the assumption that book values at31 December 2007 will increase by refurbishment expenditure of approximately ‚£12.8 million in respect of the Bochum property in Germany.RENT ANALYSED BY LENGTH OF LEASE AND LOCATION - The table below shows rentalincome by category and the future potential income available from new lettingsand refurbishments. Space under Contracted Contracted Unlet Refurbishment Total Total Aggregate but not Space or with Rental income at planning ERV producing consent Sq. m Sq.ft ‚£m ‚£m ‚£m ‚£m ‚£m % (000) (000)
UK >10 yrs 63.3 681.8 14.9 14.9
45.1%
UK 5-10 yrs 38.1 409.7 8.1 8.1
24.7%
UK < 5 yrs 35.1 377.2 8.0 8.0
24.1%
Development 2.0 21.9 0.1 0.1 0.3%Stock Vacant 9.9 106.7 1.9 1.9 5.8% Total UK 148.4 1,597.3 31.0 - 2.0 - 33.0 100.0% France > 10 2.8 30.1 0.5 0.5 2.1%yrs France 5-10 71.8 773.0 12.4 12.4 51.8%yrs France < 5 63.7 685.9 10.1 10.1 42.1%yrs Vacant 6.2 66.8 1.0 1.0 4.0% Total 144.5 1,555.8 23.0 - 1.0 - 24.0 100.0%France Luxembourg 3.7 39.8 0.9 0.9 100.0%< 5 yrs Total 3.7 39.8 0.9 - - - 0.9 100.0%Luxembourg Germany > 22.4 241.2 1.9 1.9 14.5%10 yrs Germany 39.2 421.6 3.7 3.7 28.9%5-10 yrs Germany < 5 59.3 638.5 5.8 5.8 45.5%yrs Development 14.6 156.7 1.1 1.1 8.7%Stock Vacant 3.4 36.5 0.3 0.3 2.4% Total 138.9 1,494.5 11.4 - 0.3 1.1 12.8 100.0%Germany Sweden > 10 - - - - 0.0%yrs Sweden 5-10 29.4 316.2 3.8 3.8 74.4%yrs Sweden < 5 15.0 161.4 1.3 1.3 24.8%yrs Vacant 0.8 9.0 0.1 0.1 0.8% Total 45.2 486.6 5.1 - 0.1 - 5.2 100.0%Sweden Group > 10 88.5 953.1 17.3 17.3 22.7%yrs
Group 5-10 178.5 1,920.5 28.0 28.0
37.0%yrs
Group < 5 176.8 1,902.8 26.1 26.1
34.4%yrs Development 16.6 178.6 0.1 1.1 1.2 1.6%Stock Vacant 20.3 219.0 3.3 3.3 4.3% Group Total 480.7 5,174.0 71.4 - 3.4 1.1 75.9
100.0%
Group Total 480.7 5,174.0 71.4 - 3.4 1.1 75.9
as above Share of 10.4 112.2 1.1 - 0.9 - 2.0 LBQ JV
Group Total 491.1 5,286.2 72.5 - 4.3 1.1 77.9
incl share of JVs We estimate that open market rents are approximately 0.5 per cent lower thancurrent contracted rents receivable, which represents a potential reduction of‚£0.2 million. An analysis of the net increase is set out below: Contracted Estimated Reversionary Rent Rental Value Element ‚£ Million ‚£ Million ‚£ Million UK 31.0 31.7 0.7 France and Luxembourg 24.0 24.0 - Germany 11.4 12.0 0.6 Sweden 5.0 3.5 (1.5) Total 71.4 71.2 (0.2)
The total potential gross rental income (comprising contracted rentals, and estimated rental value of un-let space) of the portfolio is ‚£75.9 million p.a.
UK PORTFOLIO
Over the course of the year, the value of the UK portfolio fell by 6.5 per cent(‚£41.9 million) from ‚£640.4 million to ‚£598.5 million (including the LondonBridge Quarter project (LBQ) joint venture). The value of the core portfoliofell by 3 per cent (‚£15.3 million) and the value of the joint ventures by 19.4per cent (‚£26.6 million).Since 30 June 2007 the value of the UK portfolio fell by 8.3 per cent (‚£53.9million) from ‚£652.4 million. Of this, the core portfolio fell by 6.3 per cent(‚£32.7 million) and LBQ fell by 16.1 per cent (‚£21.1 million) related to thecore portfolio and 3.73 per cent (‚£24.33 million) to the joint ventures. The year started strongly with stable yields and increasing office rents. Thehigh level of investment activity during the first half of the year slowedconsiderably in the summer as the markets assessed the impact of the USsub-prime crisis and the resultant `credit crunch'. Finance for propertyinvestment became increasingly hard to find and the few investment transactionstaking place confirmed a correction in investment yields across all sectors
wasunderway.
2007 was still a busy year across the UK portfolio with a number of significant new lettings, lease re-gearings and improvement works adding value.
At Spring Gardens, Vauxhall, we completed the construction of the two remaininginfill blocks adding 2,448 sq m (26,384 sq ft) of new offices increasing theentire estate to 18,475 sq m (198,865 sq ft). A final reversionary lease forUnit 2 completed in December and Spring Gardens is now fully let to theGovernment until February 2026 at a rent of ‚£6.5 million per annum. 45 per centof the income is subject to annual RPIX rent reviews, whilst the remaining 55per cent is subject to open market reviews until June 2015 when it also revertsto annual RPIX linked increases. Following the completion of the refurbishment of Great West House in Brentford,British Sky Broadcasting has taken leases on 3,382 sq m (36,400 sq ft) over 7floors and a further 4,200 sq ft has been let to Global Refund Limited. TheBusiness Centre operated by our subsidiary Instant Office has successfullytraded from 10,400 sq ft on the lower floors and at the end of the year hadachieved close to 80 per cent occupancy.The other major occupier of Great West House, Allianz Insurance plc agreed tomove its break option from September 2008 to September 2011 in respect of 2,973sq m (32,004 sq ft) in GW2. The vacancy rate at Great West House is now downfrom 47 per cent at the beginning of the year to 27 per cent or 3,952 sq m(42,540 sq ft). Plans to submit a planning application for our 2.5 acre Hoskyns House siteadjacent to Vauxhall underground and mainline station were re-assessed in thesummer when the principal tenant, Capgemini sought to renew their leases beyondthe March 2009 expiry. Capgemini currently occupy 10,427 sq m (112,235 sq ft) of offices and warehouseaccommodation in three buildings at ‚£1,736,000 p.a. We have signed newreversionary leases on all three buildings from March 2009, expiring inDecember 2016 at a rent of ‚£1,886,000 p.a., representing an increase of ‚£150,000 p.a. The new leases include the ability for us to break in December2014, giving us the option to implement a comprehensive re-development at thattime. Another important transaction progressed during 2007 was the sale of ourinterests in the London Bridge Quarter project to Zijaj Limited. The outlineterms of the sale were agreed in October 2007 and involved the sale of ourinterests in both Southwark Towers (The Shard) and New London Bridge House. Thesale exchanged and completed in early January 2008 at a price of ‚£30m cash. Weare very proud of our involvement in this landmark London development and welook forward to its completion ahead of the Olympics in 2012. The sale of Vista Centre, Heathrow to Vista Property Investments Limited wascompleted on 2 February 2008. Vista Centre provides 9,508 sq m (102,345 sq ft)of multi-let offices together with a restaurant, gymnasium and swimming pool.CLS acquired the property in 1995 for ‚£10.8 million and in 1999 received ‚£8million from the tenant for a surrender of their lease. The building wassubsequently refurbished and the leisure facilities added.
The sale was completed on 1st February 2008 at a price of ‚£12.8 million, representing a 5.3 per cent discount to the June 2007 valuation. Tenants included the Metropolitan Police and Airline Business. Approximately 36 per cent of the building was vacant.
At Chancel House we achieved a noteworthy increase in the December 2006 rentreview with Trillium who have a lease over 4,366 sq m (46,996 sq ft) or 63 percent of the entire building . The review was index based and resulted in anincrease of 15.8 per cent from ‚£430,740 to ‚£498,796 pa. The next review is inDecember 2011 and the lease expires in March 2018. New lettings were secured at Cambridge House in Hammersmith totalling 1,211 sqm (13,035 sq ft). The Prostate Cancer Charity acquired 586 sq m (6,308 sq ft);Open Society Foundation 325 sq m (3,498 sq ft) and Control Risks ScreeningLimited 300 sq m (3,230 sq ft). Further lettings were completed during the yearat Quayside in Fulham, CI Tower, New Malden and Ingram House, John Adam Street,Covent Garden.
At the end of 2007 our vacancy rate stood at 5.8 per cent, down from 7.6 per cent in December 2006.
Our priority for 2008 is to make sure we consolidate and strengthen our rentalincome and reduce the vacancy rate. In this regard it is worth mentioning thatin excess of 46 per cent of our UK rental income is derived from Government ortenants guaranteed by the Government. We will continue to consider selectivesales across the portfolio and look forward to sourcing new opportunities laterin the year.FRENCH PORTFOLIO
During 2007, the French economy grew by 1.9 per cent however it is predicted that growth in 2008 is unlikely to exceed 1.8 per cent.
2007 was a record year for investment, with ‚£18.5 billion invested in commercial real estate, 17 per cent over and above the ‚£15.8 billion invested in 2006.
The total volume of take-up in the Paris region for 2007 reached 2,713,100 sqm. The immediate supply of office space continued to fall gently to stand at2.4 million sq m, or 3 per cent lower than the previous year. The averagevacancy rate in the Paris region at the end of the year was 4.8 per cent.
In April, we acquired an office building known as Van Gogh, offering a floor area of 2,573 sq m located in the Eastern suburbs of Paris, in Neuilly Plaisance, the cost of which was ‚£3.7 million.
During 2007, new leases were completed in respect of 5,407 sq m of spacerepresenting approximately 3.7 per cent of the portfolio and revenue of ‚£0.9million. Additionally we negotiated lease extensions and renewals over 13,276sq m producing a revenue of ‚£2.1 million, including a new firm six year leasewith JET TOURS over 4,417 sq m in Ivry Sur Seine, a new firm four year leasewith SPICERS over 2,665 sq m in Villepinte, a 3/6/9 year lease with DATABASEover 1,193 sq m in La Garenne Colombes and a 3/6/69 year lease with STREAM over1,502sq m in Vƒ©lizy.We have also completed the full renovation of 6,340 sq m in our Forum buildingin Lyon. The work has included the installation of a brand new heating-coolingair system. Total cost was ‚£1.1 million. This renovation was in accordance withthe new 3/6/9 year lease completed for 4,248sq m with our main tenant AprilInsurance.
At the end of 2007 the vacancy rate was 4. per cent.
GERMAN PORTFOLIO
The German economy grew by 2.5 per cent in 2007 and GDP is expected to decreaseby 2. per cent in 2008, the unemployment rate decreased to 8.1 per cent in 2007and is expected to decrease further to 7.5 per cent by the end of 2008.The commercial investment market activity continued to grow, by 9 per cent in2007 with ¢â€š¬75 billion changing hands. Activity in the first half of the yearcontinued to be boosted once again by high leveraged foreign investors. Take upin the letting market increased by 15 per cent in 2007 over 2006 and averagerents edged up.
The credit crisis in the second half of 2007 slowed down German investment activities.
We acquired three new properties at a cost of ¢â€š¬36.6 million in 2007; all ofthem were purchased in the first half of the year. We succeeded in the lettingof 23.800 sq m in a 30-year-lease with the City of Bochum and have started therefurbishment of the former service and shopping centre Rathaus Center Bochumlocated in the city centre of Bochum. By taking into account the new Bochumlease and further leases of around 4,000 sq m the vacancy rate has dropped downto 2.4 per cent. Furthermore we have actively reviewed the cost structure inour properties and have exchanged certain property managers to enhance theservice level and to reduce costs.
SWEDISH PORTFOLIO
The strong demand in the investment market continued throughout the year. Thetotal investment amounted to ‚£10.6 billion (SEK 135 billion) against ‚£13.7billion (SEK 175 billion) for 2006. At the end of the year the market showed ayield increase of approximately 50 points. The current financial turmoil, whichbegan with the sub prime loans in the US, seems to have continued and is nowstarting to have an impact on the property market in Sweden.The Swedish economy has performed well during 2007 but slowed down during Q3and Q4 due to lower exports. The growth in GDP was 2.7 per cent in 2007compared to the forecasted 3.2 per cent and the expected growth for 2008 is 2.1per cent. The unemployment rate has fallen to 5.5 per cent and is expected tocontinue to fall marginally.
The letting market rents have been very stable with an increase of approximately 10 -15 per cent.
Our property portfolio Vƒ¤nerparken in Vƒ¤nersborg near Gothenburg consists ofapproximately 45,206 sq m and has a vacancy rate of 0.8 per cent. Around 90 percent of the area is let to Swedish Government related tenants who has takenoffice space at Vƒ¤nerparken and also offering services such as healthcare,education, a leisure water park and restaurant facilities.
The university, occupying 11,783 sq m, has decided to centralise their four current campus locations to a new site and will vacate their premises at Vƒ¤nerparken by the end of July 2008.
We are in the final stages of signing a new lease agreement for most of the vacated area with the local authority. We continue to monitor the market to assess investment opportunities where we can see future potential value.
UNAUDITED CONSOLIDATED INCOME STATEMENT
31 December 2007 Unaudited Audited Year ended 31 Year ended 31 December 2007 December 2006 ‚£000 ‚£000 Continuing operations: Revenue 87,992 86,097 Rental and similar revenue 70,042 69,804 Service charge and similar 12,260 11,828revenue Service charge expense and (16,007) (16,129)similar charges Net rental income 66,295 65,503 Net income from non-property 5,690 4,465activities Other operating (expense)/ (1,568) 2,718income Administrative expenses (27,724) (17,539) Net property expenses (3,161) (3,495) Operating profit before gains 39,532 51,652/ (losses) on investment properties Net (losses)/gains from fair (68,077) 162,060value adjustment on investment properties Profit on disposal of - 3,721associate/part share of joint venture Loss on disposal of (1,974) (1,797)subsidiaries Loss from sale of investment - (952)properties Operating (loss) /profit (30,519) 214,684 Finance income 6,557 8,335 Finance costs (49,218) (39,948) Exceptional finance costs - (5,251) Total finance costs (49,218) (45,199) Share of profit/ (loss) of 537 (1,206)associates after tax (Loss)/profit before tax (72,643) 176,614 Taxation - current (2,610) (1,225) Taxation - deferred 42,342 (19,058) Tax credit/ (charge) 39,732 (20,283) (Loss) /profit for the period (32,911) 156,331from continuing operations Discontinued operations: Loss for the period from - (2,538)discontinued operations after tax (Loss) /profit for the period (32,911) 153,793 Attributable to: Equity holders of the parent (32,549) 153,793 Minority interests (362) - (32,911) 153,793 Earnings per share for (loss) /profit attributable to the equity holders of the Company during the year (expressed in pence per share) - basic (45.8) 196.7 - diluted (45.8) 195.6 Earnings per share for (loss) /profit from continuing operations attributable to the equity holders of the Company during the year (expressed in pence per share) - basic (45.8) 199.9 - diluted (45.8) 198.8
UNAUDITED CONSOLIDATED BALANCE SHEET
31 December 2007 Unaudited Audited As at 31 December 2007 As at 31 December 2006 ‚£000 ‚£000 Non-current assets Investment properties 1,175,291 1,143,451 Property, plant and 1,832 1,995equipment Intangible assets 19,538 18,846 Investments in 42,305 -associates Other investments 8,424 16,193 Derivative financial 1,268 1,072instruments Deferred income tax 2,880 4,536 Trade and other 49 787receivables 1,251,587 1,186,880 Current assets Trade and other 9,070 9,204receivables Derivative financial 1,208 943instruments Cash and cash 122,030 157,571equivalents 132,308 167,718 Total assets 1,383,895 1,354,598 Non-current liabilities Deferred income tax 117,439 154,922 Borrowings, including 695,675 657,485finance leases 813,114 812,407 Current liabilities Trade and other 59,667 66,892payables Current income tax 2,690 818 Derivative financial 2,307 -instruments Borrowings, including 103,025 26,342finance leases 167,689 94,052 Total liabilities 980,803 906,459 Net assets 403,092 448,139 EQUITY Capital and reserves attributable to the Company's equity holders Share capital 18,712 20,021 Other reserves 131,022 112,174 Retained earnings 254,432 316,840 404,166 449,035 Minority interest (1,074) (896) Total equity 403,092 448,139
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
31 December 2007 Attributable to the equity holders of the Company Share Other Retained Minority Total Capital Reserves Earnings Interest ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Balance at 1 January 21,382 116,042 217,252 (896) 353,7802006 Arising in the year:- Fair value losses: - available for sale - (4,871) - - (4,871)financial assets - cash flow hedges - 1808 - - 1808 Currency translation - (2,459) - - (2,459)differences on foreign currency net investments Purchase of own shares - - (307) - (307)expense Purchase of own shares (1,361) 1,361 (53,902) - (53,902) Employee share option - 293 4 - 297scheme Net income / (expense) (1,361) (3,868) (54,205) - (59,434)recognised directly in equity Profit/ (loss) for the - - 153,793 - 153,793year Total increase / (1,361) (3,868) 99,588 - 94,359(decrease) in equity for the year Balance at 31 December 20,021 112,174 316,840 (896) 448,1392006 - audited Arising in the year:- Fair value (losses) / gains: - available for sale - 1,716 - - 1,716financial assets - cash flow hedges - (1,207) - - (1,207) Currency translation - 16,918 - - 16,918differences on foreign currency net investments Purchase of own shares - - (190) - (190)expense Purchase of own shares (1,120) 1,120 (29,669) - (29,669) Employee share option - 112 - - 112scheme Treasury shares (189) 189 - - -cancellation Change in minority - - - 184 184interest Net income/(expense) (1,309) 18,848 (29,859) 184 (12,136)recognised directly in equity Profit/ (loss) for the - - (32,549) (362) (32,911)year Total increase/ (1,309) 18,848 (62, 408) (178) (45,047)(decrease) in equity for the year Balance at 31 December 18,712 131,022 254,432 (1,074) 403,0922007 - unaudited
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
31 December 2007 Unaudited Audited (re-stated)* Year ended 31 December 2007 Year ended 31 December 2006 ‚£000 ‚£000 Cash flows from operating activities Cash generated from operations 54,141 44,089 Interest paid (43,553) (41,641) Income tax paid (739) (2,206) Net cash inflow from operating 9,849 242activities Cash flows from investing activities Purchase of investment property (36,706) (123,533) Capital expenditure on investment (19,974) (49,128)property Proceeds from sale of investment - 3,608property Purchases of property, plant and (821) (1,029)equipment Proceeds from sale of property, 31 433plant and equipment Purchase of equity investments (9,738) (6,746) Disposal of equity investments 10,825 - (Purchase) /disposal of interests (35,150) 2,141in associate/joint venture Purchase of subsidiary - (12,082)undertaking net of cash acquired Disposal of subsidiary (12,305) 137,571undertakings net of cash sold Interest received 5,820 5,084 Net cash outflow from investing (98,018) (43,681)activities Cash flows from financing activities Issue of shares 112 293 Purchase of own shares (29,861) (54,209) New loans 120,675 218,503 Issue costs of new bank loans (1,416) (858) Purchase of financial instruments (410) (923) Repayment of loans (38,894) (81,088) Net cash inflow from financing 50,206 81,718activities Net (decrease) /increase in cash (37,963) 38,279and cash equivalents Foreign exchange gain 2,422 1,130 Cash and cash equivalents at the 157,571 118,162beginning of the year Cash and cash equivalents at the 122,030 157,571end of the year
* In the 2006 consolidated statement of cashflows, proceeds from the disposal of a subsidiary have been reclassified out of cashflows from operating activities into cashflows from investing activities.
Gains/losses on foreign exchange have also been reclassified in 2006 from cash flows from operating activities to the main body of the cashflow statement.
Basis of preparation
The financial information contained in this announcement does not constitute the Group's statutory accounts for the years ended 31 December 2006 or 2007.
The financial information for the year ended 31 December 2006 is derived fromthe statutory accounts for that year which have been delivered to the Registrarof Companies. The auditors reported on those accounts and their report wasunqualified and did not contain a statement under s.237 (2) or (3) of theCompanies Act 1985The audit of the statutory accounts for the year ended 31 December 2007 is notyet complete. These accounts will be finalised on the basis of the financialinformation presented by the directors in this preliminary announcement andwill be delivered to the Registrar of Companies following the Company's annualgeneral meeting.While the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The Group expects to publish full financial statements thatcomply with IFRSs by April 2008. The financial information included in thispreliminary announcement, has been prepared with consistent accounting policiesto those set out in the Group's 2006 published financial statements, with theexception of new and revised standards and interpretations adopted during 2007.GLOSSARY OF TERMSNet rent
Net rent is defined as contracted rent less net service charge costs
Yield
Yields on net rents have been calculated by dividing the net rent by the book value
Contracted rent
Contracted rent is defined as gross annualised rent supported by a signed contract
Estimated rental value (ERV)
The ERV of lettable space as determined biannually by the Company's valuers.
This may be different from the rent currently being paid.
Underlying profit
Underlying profit is the profit before tax excluding net gains/losses from fairvalue adjustments on investment properties, profit/loss on disposal of jointventures, subsidiaries, investment properties, and exceptional items.Adjusted net assets = Net assets excluding deferred tax liabilities and deferred tax assets Statutory net asset = Net assets/ Number of ordinary shares in free issuevalue (NAV) per share Adjusted NAV per share = Net assets + deferred tax liabilities - deferred tax assets/ Number of ordinary shares in free issue Statutory Gearing = Total gross borrowings - cash/ Net assets Adjusted Gearing = Total gross borrowings - cash/ Net assets + deferred tax liabilities - deferred tax assets Earnings per share = Profit after tax attributable to ordinary (EPS) shareholders/ Weighted average number of ordinary shares in free issue Adjusted EPS = Profit after tax attributable to ordinary shareholders excluding deferred tax and fair value gains on investment properties/ Weighted average number of ordinary shares in free issue Statutory Solidity = Total equity/ Total assets Adjusted Solidity = Total equity+ deferred tax liabilities - deferred tax assets/ Total assets - deferred tax assets Annualised added value = Pro-rated Movement in adjusted NAV + Distributions/to shareholders Opening adjusted NAV Underlying profit = Profit before tax before fair value gains on investment properties and non-recurring finance costs Recurring interest = *Profit before tax - *net gains from fair value cover* adjustment on investment properties/ *Net interest payable - change in fair value of interest rate swap * excluding results of London Bridge Quarter as shown below: Dec Dec 2007 2006 ‚£m ‚£m Net interest excluding fair value 41.2 31.6adjustment Net interest relating to LBQ (5.5) (5.6) Ongoing interest 35.7 26.0 Operating profit 40.0 48.9 Adjust for impact of LBQ: - add back operating profit 6.8 (1.8) - less recurring expense (1.7) - 5.1 (1.8) Ongoing operating profit 45.1 47.1 Recurring interest cover 1.3 1.8Other operating income and associate company results of ‚£7.1 million (2006: ‚£6.0 million) comprises: 2007 2006 ‚£m ‚£m Net income from non property 5.7 4.5activities Other operating income 0.8* 2.7
Share of profit/(loss) on associate 0.6 (1.2)
7.1 6.0 2007 2006 ‚£m ‚£m
Other operating (expense)/income (1.6) 2.7
Recycled losses on available for 2.4 -sale investments Other operating income 0.8* 2.7
DIRECTORS, OFFICES AND ADVISERS
Directors Clearing Bank Sten A Mortstedt (Executive Chairman) Royal Bank of Scotland Plc Per H SjĦberg (Chief Executive Officer) 24 Grosvenor Place Steven F Board FCCA (Chief Operating London SW1X 7HP
Officer)
Thomas J Thomson BA (Non-executive Vice
Chairman)
Anders BĦĦs (Non-executive director) Financial Advisers & Stockbrokers
Malcolm Cooper * (Non-executive NCB Corporate Finance
director)
James F Dean FRICS ¢â„¢¦* * (Non-executive 51 Moorgate
Director)
H O Thomas Lundqvist * * Bengt F Mortstedt Juris Cand EC2R 6BH (Non-Executive Director)
* = member of Remuneration Committee
*= member of Audit Committee
¢â„¢¦= senior independent director CLS Holdings plc on line:
www.clsholdings.com Company Secretary e-mail: Steven F Board FCCA [email protected] Registered Office 26th Floor, Portland House Bressenden Place London SW1E 5BG Registered Number 2714781 Registered Auditors Deloitte & Touche LLP Chartered Accountants
Hill House, 1 Little New Street
London EC4A 3TR
Registrars and Transfer Office Computershare Investor Services Plc
P O Box 82 The Pavilions Bridgwater Road Bristol BS99 7NH
Shareholder helpline : 0870 889 3286
END
CLS HOLDINGS PLCRelated Shares:
CLS Holdings