20th Sep 2006 07:04
Capital & Regional plc20 September 2006 20 September 2006 CAPITAL & REGIONAL PLC INTERIM RESULTS FOR THE SIX MONTHS TO 30 JUNE 2006 Capital & Regional plc, the co-investing property asset manager, today announcesits unaudited interim results, compiled for the first time under InternationalFinancial Reporting Standards, for the six months ended 30 June 2006. Highlights1 • Adjusted fully diluted Net Asset Value per share increased by 19% to £11.84. • Recurring pre-tax profit2 up 26% to £15.0m. • Interim dividend increased by 29% to 9p (June 2005: 7p). • Profit after tax of £135.9m (June 2005: £60.8m). • Property under management approaching £6 billion. • Sale of Morfa Retail Park, Swansea to the Junction Fund for £105m. Commenting on the results, Martin Barber, Chief Executive said: "I am delighted to report that our market leading performance that we saw in2004 and 2005 is continuing into 2006". For further information:Martin Barber, Chief Executive Tel: 020 7932 8000William Sunnucks, Group Finance Director Tel: 020 7932 8000Michael Sandler, Hudson Sandler Ltd Tel: 020 7796 4133 1 For definition of terms, refer to "Glossary of terms" on page 35 2 See Note 2 Chief Executive's statement Results I am pleased to report that the outstanding performance we saw in 2004 and 2005is continuing into 2006. Our profit of £135m has led to a total return of 19.4%made up as follows: Income statement 6 months to 6 months to 30-Jun 30-Jun 2006 2005 £m £m Net Rents 38.2 26.6Interest (28.2) (19.7)Contribution 10.0 6.9 Management fees 13.5 11.0Snozone operating profit 1.2 1.0Management expenses (9.7) (7.0)Recurring pre tax profit 15.0 11.9 Performance fees 24.4 17.4Cost of performance fees (8.1) (6.1)Variable overhead (5.1) (6.5)Revaluation gains 98.0 42.8Gain on interest rate swaps 18.7 (10.2)Other non-recurring items (0.4) (4.1)Profit on disposal 4.7 5.3Pre tax profits 147.2 50.5 Tax (11.3) 10.3Profit after tax 135.9 60.8 Return on equity 19.4% 12.5% Our recurring pre-tax profits have risen by 26% during the first half to £15.0m. This income is mostly long term in nature - rent under long leases and assetmanagement fees under long term management contracts. All one off profits,revaluation surpluses and performance fees are excluded along with associatedcosts. This gives us confidence to increase the interim dividend by 29% to 9pper share. Our NAV per share has risen by 19% to £11.84 on a fully diluted basis. Thisreflects the strong investment market for retail property as well as our activemanagement of the portfolio. Positioning for future growth: Over recent years the Group has built up three specialised and largelyindependent management teams, focussed on managing funds with outside investors. These teams have significant opportunities for generating rental growth fromdevelopments, reconfigurations and refurbishments as well as from reversions. The Group is now building up two further specialised teams focussed aroundportfolios where active management can add value - the Fix trade centreportfolio and the German big box retail portfolio. These could become funds ifand when the equity requirement exceeds C&R's own appetite. Snozone is now a well established and highly profitable business with goodgrowth prospects and very little need for equity. It is of particular value tothe Group when seeking locations for new Xscape developments. Over the years we have developed a corporate culture which allows thesebusinesses to adapt and grow. We have used some of the performance fees earnedto incentivise the management teams and promote continuity. We believe thatthese factors position our business well for sustained above average futuregrowth. Changing capital markets We recognise the importance of finding the right capital to finance our propertyactivities, and we monitor developments in the capital markets closely. Atpresent the major issue is the UK REIT structure which will be available to UKproperty investment companies from January 2007. The REIT legislation ascurrently drafted does not suit C&R, and we have no plans to convert in thefirst wave. We are watching developments closely and expect that there will be discussionswith the Government to improve the flexibility of the regime. This may open upfurther possibilities in the future. We support attempts to build up new sourcesof equity for property, and to deliver strong returns to investors. We are planning to remain as a co-investing asset manager, and believe thatthere are signs that the benefits of this business model are being betterunderstood in the investment community. Property portfolio We monitor our exposure to different property sectors on a "see through" basis,taking our share of the various portfolios, including committed sales andpurchases since the valuation date. On this basis we have a portfolio of£1,916m split as follows: Property exposure, including commitments £mShopping Centres 39% 747Retail Parks 22% 422Leisure 17% 331Trade Centres 5% 87German big box retail 17% 329 100% 1,916 66% of the portfolio is held through our three specialist funds - Mall, Junctionand X-Leisure. The remainder comes from joint ventures or properties whollyowned by the Group. Fund performance Both the Mall and X-Leisure funds outperformed their benchmarks during the firsthalf. In the period, the Junction concentrated on repositioning its portfoliotowards open A1 and on generating future rental income and capital growththrough development activity. Fund performance1 6 months Full year Full year Full year to 30 JuneThe Mall 2003 2004 2005 2006Property level returns 21.7% 19.6% 16.5% 12.2%Geared returns 33.5% 26.0% 22.8% 18.7%IPD benchmark 15.2% 17.1% 16.3% 8.9% The JunctionProperty level returns 17.7% 24.0% 23.3% 5.4%Geared returns 28.2% 35.6% 34.1% 6.0%IPD benchmark 16.6% 23.5% 22.1% 8.7% X-LeisureProperty level returns - 11.4%* 15.3% 10.6%Geared returns - 18.0%* 28.3% 17.1%Fund hurdle return rate - 9.4%* 12.0% 6.0%* 9 months only 1 UK GAAP based results. Shopping centres - the Mall Fund: Our biggest single capital investment is our share of the Mall Fund. Since June2006 our share has decreased from 26.1% to 24.2% following the sale of £30munits at a 2.5% premium. The Mall has an actively managed portfolio of 23shopping centres spread throughout England and Scotland. It is the largestindirect investment vehicle for shopping centres in the UK. The Mall outperformed in the half year, as it has done in every accountingperiod since its formation in 2002. Its total property level return was 12.2%against the IPD shopping centre index of 8.9%. At fund level, taking intoaccount gearing and performance fees, the return was 18.7%. The high returns were driven both by strong investor demand for income producingassets and through the benefits of active shopping centre management. Theportfolio has a net initial yield of 4.49% rising to 5.37% as rent reviews falldue over the next five years. The equivalent yield is now 5.29%. This time last year we heard some gloomy forecasts about tenant demand forretail space and we were anticipating some problems. However UK retail salesduring the first half were 2.6% higher, on a like for like basis, than the sameperiod last year and the market has generally held up well. We recognise thatretail margins are under pressure from increasing costs, but good retailerscontinue to prosper and demand new space. Our focus is to operate shopping centres in a cost efficient manner, with arelatively high spend on marketing to help boost retailer profitability. Ourinternally commissioned research on our portfolio suggests the number ofshopping visits is marginally down, but that dwell time is up by 4% and spendper visit is up by 11% on 2005. The Mall has significant opportunities for generating further rental growththrough asset management initiatives. The Fund's detailed property by propertybusiness plan identifies opportunities for significant refurbishments,reconfigurations or substantial extensions at almost every centre. These wouldrequire capital expenditure of some £240m over the next four years - low riskbut profitable investment based upon pre-lets and strictly controlled throughprocedures agreed with Morley, the fund manager. The initiatives should driverental growth in excess of levels which would be expected from macro-economicanalysis. The plan shows that after this capital expenditure the value of theportfolio, without further yield shift may rise some £900m. Retail parks: Our exposure to retail parks comes through our 27.3% share of the Junction Fund,and through our interests in Swansea, Glasgow and Cardiff. The Junction Fund repositioned itself during the first half, securing thedisposal of four bulky goods parks for £160m at 5.9% equivalent yield. 43% ofthe Junction portfolio now has open A1 planning permission, which allows accessto a wider range of tenants. The remaining bulky goods space is well locatedwith little vacancy - 3.7%. The portfolio is now highly reversionary, with market rents some 17.25% over thecurrent passing rents. ERV growth on our bulky goods parks was 1.20% during thefirst half, and we consider this level of underlying rental growth will bemaintained. The team is working on significant development and reconfiguration opportunitieswith major initiatives at Thurrock and Oldbury. A number of smalleropportunities at Hull, Bristol, Maidstone, Oxford and Portsmouth are likely toadd value. The first half of 2006 saw completion of a further 85,000 sq ft ofreconfiguration at our retail park in Wembley and continued refurbishment workat Portsmouth, Oxford and Maidstone. Morfa Retail Park in Swansea. On 19 September 2006 the Group exchangedconditional contracts for the sale of Morfa Retail Park to the Junction Fund for£105m. This price, which is receivable in cash after the transfer of bank debt,represents an initial yield of 3.57% and an equivalent yield of 4.65%, andcrystallises a gain on the total project development costs of £42m. Theproperty was included in the December 2005 balance sheet at £99m and the June2006 balance sheet at £105m. As a result of the disposal, the Group's gearing as at 30 June 2006 will fall by13%. The net proceeds will be used, for the time being, to pay down debt. In Cardiff we are making good progress on a 375,000 sq ft development adjoiningthe proposed new football stadium, with pre-lets in place to Costco and aconditional land sale exchanged with Asda. Our development partner is PMGLeckwith Limited, an established Welsh developer. Leisure: Our leisure portfolio includes our investments in (i) the X-Leisure fund, (ii)the Xscape joint ventures, (iii) two wholly owned properties at Hemel Hemsteadand Great Northern and (iv) our newly committed interest in Manchester Arena.We also own Snozone Holdings, now a separately managed earnings businessgenerating substantial profits but not valued in our balance sheet. The X-Leisure Fund delivered an excellent six month return of 17.1% and was thethird strongest performer in the second quarter out of 55 funds in the HSBCSpecialist Fund Index. This was achieved through a positive yield shiftvalidating leisure as an attractive but undervalued asset class, managementinitiatives throughout the portfolio and rental growth, particularly across theA3 sector. Vacancies remain very low at 2.9% Despite the positive yield shift seen in the first 6 months of the year, leisureyields still appear to offer good value when compared to the other propertysectors. This relatively high yield, coupled with increased investor awarenessof the attractive key fundamentals that the leisure sector offers, long leasesand fixed or minimum rental uplifts, has led to increased competition forleisure assets. This demand is driving leisure yields down reducing the yieldgap with other property sectors. The Xscape Partnerships have also seen positive capital performance,particularly Xscape Milton Keynes where the first round of rent reviews hasresulted in an increase in passing rent of 25.8%. Footfall continues to growyear on year at both Milton Keynes and Castleford and underlying tradeparticularly in the bars and restaurants is good. The new Xscape at Braeheadnear Glasgow was opened in April this year 85% prelet. There has been a delayin opening the Odeon cinema, but we expect business to build fast this autumn asseasonal interest in the snow offer takes off. London Clubs International took possession of its 45,000 sq ft casino in theGreat Northern Warehouse in Manchester, and commenced its £1.5m fit out. Thecasino, to be called Manchester 235, is due to open at the end of October 2006. Since the half year, C&R has agreed to acquire a 30% stake in the ManchesterArena alongside GE Real Estate. This highly successful venue for music,sporting and comedy events offers a number of asset management opportunitieswhich the two parties, C&R and GE Real Estate, are well placed to manage. For C&R it is a new opportunity to use its leisure and joint venturing expertisealongside a major player. Trade Centres - Fix UK Our trade centres business has developed substantially during the first half.Trade centres are geared to the needs of plumbers, electricians, builders andother tradesmen. They normally have an industrial planning consent, with scopefor limited sales to retail customers. We are now building up a separate management team, which is developing its ownapproach to branding and tenant relationships. The team has encountered strongdemand from operators: several core occupiers have store requirements of inexcess of 20 units. Historically landlord / tenant relationships have been poorand there is tremendous scope for co-operation and improvement. The portfolio has grown from £68m at the beginning of the year to £87m in Juneand £102m in August 2006. The lot sizes are small, and although we haveidentified a large number of suitable properties, the acquisition processrequires care and is time consuming. We have already seen the market develop,with rental values rising and yields falling reflecting the potential for thesector. As a result our portfolio has shown a total return of 23.5% over thesix months. German big box retail portfolio Including committed purchases our German portfolio has now reached €479m, 17% ofour total portfolio. We are building up a specialist German retail management team based in Londonresponsible for all aspects of the portfolio other than day to day management.We greatly value the input from the Hahn team, and Hahn is continuing to take a10% stake in the properties we are planning to hold long term. Since we made our first German acquisitions in mid 2005, the German retailwarehouse market has been attracting increasing attention from other overseasinvestors. The market has become more liquid and yields have tightened. Thereis increasing recognition of the attractions of this type of investment andthese trends may continue with development of a German REIT. During the half year the portfolio produced a net income return of 7%. Inaddition we benefited from a revaluation surplus giving us a return on equityfor the 6 month period of 18%. We are not anticipating significant rentalgrowth in Germany in the short term, but the existing profits are attractive andstable. The earnings businesses Property Management: we have further built the infrastructure of CRPM, ourproperty management business, with specialist teams being started for Fix UK andour German portfolio, and the existing shopping centre team being furtherstrengthened. The market for specialist skills is becoming more competitive,and we have reacted and used our long term incentive schemes to promotecontinuity. Profit from property management business 6 months to 6 months to June 2006 June 2005 £m £mRegular fee income 13.5 10.9Fixed management expense* (7.7) (5.5) 5.8 5.4 Performance fees 24.4 17.4Variable management expense (5.1) (6.5) Profit before tax 25.1 16.3 *21% of management expense relates to property investment business, 79% to propertymanagement Snozone has had an excellent half year, and the trading results from Castlefordin particular have exceeded all expectations. Demand for the ski experienceappears to be diverse and not price sensitive. Snozone Braehead opened in April. It had a slow summer but we are confident that it will prove a popular venueas the ski season approaches. International Financial Reporting Standards Our new accounting policies make little difference to our balance sheet, buthave a major impact on our profits, mainly because profit now includesrevaluation gains or losses - see note 17. Other significant changesimplemented for the first time are: • Tenants' incentives and rent free periods are now amortised over thelength of the lease, rather than the shorter period to the first rent review.This increases our recurring profits by £2.4m in the half year. • Our interest rate swaps are valued or "marked to market" and themovement is shown in the segmental analysis note 2a, below the recurring line. • Tax on unrealised capital gains is now provided in the balance sheetbut added back in the calculation of NAV per share. This is a smaller figurefor us than for most other property companies as most of our assets are owned byJersey resident companies. Outlook The Company, with its five areas of operation, now enjoys a good balance ofmanagement focus, scale and diversification. The active management anddevelopment programmes applied to our activities have enabled us to outperformthrough a period of pronounced yield compression. Comparison of property values and yields with other financial instruments andasset classes does not suggest any fundamental overvaluation; there may indeedbe scope for further improvement. The retail and leisure markets in which ourtenants operate remain competitive, with winners and losers both between andwithin specific sectors. We believe that this environment provides us withcontinuing opportunities to provide better locations and higher levels of salesfor our tenants; hence the prospect of increasing rental income. This combination of robust financial fundamentals, our value adding managementskills and the benefits of the property asset management business model shouldenable us to deliver further superior returns to our shareholders. Martin Barber Chief Executive INDEPENDENT REVIEW REPORT TO CAPITAL & REGIONAL PLC Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2006 which comprises the consolidated incomestatement, the consolidated statement of recognised income and expense, thereconciliation of movements in equity shareholders' funds, the consolidatedbalance sheet, the consolidated cash flow statement and related notes 1 to 19.We have read the other information contained in the interim report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other thanthe company, for our review work, for this report, or for the conclusions wehave formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Adoption of International Financial Reporting Standards As disclosed in note 17, the next annual financial statements of the group willbe prepared in accordance with International Financial Reporting Standards asadopted for use in the EU. Accordingly, the interim report has been prepared inaccordance with the recognition and measurement criteria of IFRS and thedisclosure requirements of the Listing Rules. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. Deloitte & Touche LLPChartered AccountantsLondon 19 September 2006 Consolidated Income Statement (Unaudited) *(Unaudited) *(Unaudited) 6 months to 6 months to Year to 30 June 30 June 30 December 2006 2005 2005 Notes £m £m £m Revenue 2c 57.4 35.1 94.2 Cost of sales (7.3) (3.8) (10.7)Gross profit 50.1 31.3 83.5 Profit on sale of trading and development properties 0.4 3.1 2.4 Administrative costs (14.8) (13.4) (34.5) Share of profit in joint ventures and associates 9a 105.4 31.1 129.3 Gain on revaluation of investment properties 8a 15.4 7.5 21.3 Elimination of negative goodwill - - 10.6 Profit on sale of investment properties and investments 0.4 0.2 4.3 Profit on ordinary activities before financing 156.9 59.8 216.9 Finance income 3 1.0 0.4 0.8Finance costs 4 (10.7) (9.7) (17.7) Profit before taxation 147.2 50.5 200.0 Current tax 5 (4.6) (1.0) (1.4) Deferred tax 5 (6.7) 11.3 6.5 Tax (charge)/credit (11.3) 10.3 5.1 Profit for the period 135.9 60.8 205.1 Attributable to:Equity shareholders 135.0 60.8 203.8Minority interests 0.9 - 1.3 135.9 60.8 205.1 Basic earnings per share 7 190p 90p 295p Diluted earnings per share 7 183p 87p 285p * Unaudited and restated under IFRS (see note 17) Consolidated Statement of Recognised Income and Expense (Unaudited) *(Unaudited) *Unaudited) 6 months to 6 months to Year to 30 June 30 June 30 December 2006 2005 2005 £m £m £m Foreign exchange translation differences 0.2 - - LTIP credit in respect of LTIP charge 1.0 1.0 1.9 Revaluation gains on owner occupied property 0.8 - 0.4 Net gain recognised directly in equity 2.0 1.0 2.3 Profit for the period 135.9 60.8 205.1Total recognised income and expenses 137.9 61.8 207.4Attributable to: Equity shareholders 137.0 61.8 206.1 Minority shareholders 0.9 - 1.3 Reconciliation of Movements in Equity Shareholders' Funds (Unaudited) *(Unaudited) *(Unaudited) 6 months to 6 months to Year to 30 June 30 June 30 December 2006 2005 2005 £m £m £m Opening equity shareholders' funds as restated including 707.7 501.2 501.2CULS equity reserve Issue of shares - 49.6 50.3Arising on repurchase on CULS - (47.4) (48.7)Acquisition of own shares (3.4) - -Other 1.5 - -Reserve arising on acquisition - - 9.5 705.8 503.4 512.3Total recognised income and expense 137.0 61.8 206.1 842.8 565.2 718.4Dividends paid (7.6) (5.9) (10.7)Closing equity shareholders' funds including CULS equity 835.2 559.3 707.7reserve * Unaudited and restated under IFRS (see note 17) Consolidated Balance Sheet (Unaudited) *(Unaudited) *(Unaudited) As at As at As at 30 June 30 June 30 December 2006 2005 2005 Notes £m £m £m Non-current assets Investment property 8a 371.2 114.3 318.3Interest in long leasehold property 8a 14.5 12.4 13.8Goodwill 12.2 12.2 12.2Fixtures, fittings, motor vehicles and investments 1.2 0.6 0.7Receivables - amounts falling due after more than one year 28.4 21.2 3.8 Investment in joint ventures 9c 59.0 48.5 49.8 Investment in associates 9b 669.6 498.4 583.7 Total non-current assets 1,156.1 707.6 982.3 Current assets Property assets 8a 94.3 - 93.7Receivables - amounts falling due within one year 72.4 57.6 74.5 Cash 38.3 5.5 40.1 Total current assets 205.0 63.1 208.3 Total assets 1,361.1 770.7 1,190.6 Current liabilities Trade and other payables (41.8) (27.2) (42.7) Tax liabilities (17.4) (12.3) (13.7) Short term bank loans (0.2) (0.2) (0.2) (59.4) (39.7) (56.6) Non-current liabilities Bank loans (432.4) (147.9) (395.7)Convertible subordinated unsecured loan stock 10 (2.9) (3.3) (3.0)Other non-current liabilities (17.4) (13.9) (21.8) Deferred tax (8.5) (5.6) (1.8) Total non-current liabilities (461.2) (170.7) (422.3) Total liabilities (520.6) (210.4) (478.8) Net assets 840.5 560.3 711.8 Equity Called up share capital 7.1 7.1 7.1 Share premium account 13 216.9 216.2 216.9 Revaluation reserve 13 1.2 - 0.4 Other reserves 13 10.8 2.2 12.7 Retained earnings 13 597.8 332.2 469.2 Equity shareholders' funds 833.8 557.7 706.3 CULS equity reserve 10 1.4 1.6 1.4 Equity minority interests 5.3 1.0 4.1 Total equity 840.5 560.3 711.8 Diluted net assets per share 11 £11.63 £7.76 £9.80 EPRA diluted net assets per share 11 £11.84 £7.70 £9.96 * Unaudited and restated under IFRS (see note 17) Consolidated summary cash flow statement (Unaudited) *(Unaudited) *(Unaudited) 6 months to 6 months to Year to 30 June 30 June 30 December 2006 2005 2005 Notes £m £m £mOperating activities Cash generated from operations 15 6.1 5.8 46.7Distributions received from joint ventures and associates 12.7 5.9 6.7Interest paid (10.0) (4.5) (16.6)Interest received 1.0 - 0.7Tax paid (0.2) - (0.4)Cash flows from operating activities 3.5 1.4 (9.6)Investing activitiesPurchase of property (37.2) (13.4) (141.9)Sale of property 1.1 - 58.8Loans to Joint ventures (0.7) - (0.2)Acquisitions and disposals (0.2) (3.5) (18.0)Cash flows from investing activities (37.0) (16.9) (101.3)Financing activitiesIssue of ordinary share capital 0.1 49.5 49.6Purchase of own shares (3.4) - -Repurchase of CULS - (62.8) (62.8)Increase in medium and long term borrowings 36.8 30.0 123.9Dividends paid to minority interests (0.3) - -Equity dividends paid (7.6) (5.9) (10.8)Cash flows from financing activities 25.6 10.8 99.9Net (decrease)/increase in cash and deposits (1.8) 1.1 35.7Opening cash 40.1 4.4 4.4Closing cash 38.3 5.5 40.1 * Unaudited and restated under IFRS (see note 17). Notes to the interim results 1. Accounting policies The interim financial information has been prepared using the accountingpolicies set out in note 19 to this report. The comparative figures represent the Group's results and cash flows for theperiod from 31 December 2004 to 30 June 2005 and for the period from 31 December2004 to 30 December 2005, as restated under the recognition and measurementprinciples of IFRS. The Group's financial performance does not suffer materially from seasonalfluctuations. It should be noted that performance fees are based on an estimatefor the half year. There have been no changes in amounts reported in the priorperiods which have a material impact on the current interim period. There havebeen no material changes in reportable contingent liabilities since 30 December2005. The comparative figures for the year ended 30 December 2005 do not constitutethe company's statutory accounts for that period as defined in section 240 ofthe Companies Act 1985. The IFRS financial information for the year ended 30December 2005 was derived by the restatement of information extracted from theannual report and accounts for that period, which was prepared under UK GAAP andwhich has been filed with the UK Registrar of Companies. The auditors havereported on those UK GAAP accounts, their report was unqualified and did notcontain statements under sections 237(2) or (3) of the Companies Act 1985. Thefinancial information prepared in accordance with IFRS for the year ended 30December 2005 is unaudited. 2. Segmental analysis 2a. Business segments The Group operates in two main business segments, an assets business and anearnings business. The assets business consists of property investmentactivities and the earnings business consists of property management activitiesand the ski slope business of Snozone. These businesses are the basis on whichthe Group reports its primary business segments. 6 months to 6 months to 30 June 2006 30 June 2005 Property Property Total Total Investment management Snozone £m £m Note £m £m £m Net rents 2b 38.2 38.2 26.6Net interest 2b (28.2) (28.2) (19.7)Contribution 2b 10.0 10.0 6.9Management fees 13.5 13.5 11.0Snozone income 6.1 6.1 4.7Snozone expenses (4.9) (4.9) (3.7)Management expenses (2.0) (7.7) (9.7) (7.0)Recurring pre-tax profit 8.0 5.8 1.2 15.0 11.9 Performance fees 9d 24.4 24.4 17.4Cost of Performance fees 9b (8.1) (8.1) (6.1)Variable overhead (5.1) (5.1) (6.5)Gain on investment properties 98.0 98.0 42.8Profit on disposals 4.7 4.7 5.3Gain/(loss) on interest rate 18.7 18.7 (10.2)swapsOther non-recurring items (0.4) (0.4) (4.1) Profit before tax 121.3 25.1 0.8 147.2 50.5Tax (11.3) 10.3Profit after tax 135.9 60.8 Assets 1,252.1 100.1 2.2 1,354.4 770.3Liabilities (476.8) (40.3) (3.5) (520.6) (212.6)Net assets at 30 June 2006 775.3 59.8 (1.3) 833.8 557.7 2b. Contribution Contribution Contribution 6 months to 6 months to Net Rent Net interest 30 June 2006 30 June 2005 Note £m £m £m £m Mall (C&R share) 9b 16.6 (9.1) 7.5 7.1Junction (C&R share) 9b 5.8 (4.7) 1.1 1.3X-Leisure (C&R share) 9b 1.8 (1.2) 0.6 0.4Xscapes (C&R share) 9c 2.2 (2.1) 0.1 (0.5)Great Northern 1 1.9 (1.8) 0.1 0.1Other UK 2 5.1 (5.9) (0.8) (1.6)Germany 4.8 (3.4) 1.4 0.1 Total 38.2 (28.2) 10.0 6.9 1. At 30 June 2005 Great Northern was a 50% joint venture. In the period to30 June 2006 Great Northern is fully consolidated as a 100% subsidiary. The£0.1m contribution for the six months to June 2005 reflects the Group's 50%share 2. Net assets includes the Group's share of the joint venture at Glasgow Fortof £6.2m 2c. Revenue (Unaudited) (Unaudited) (Unaudited) 6 months to 6 months to Year to 30 June 30 June 30 December 2006 2005 2005Turnover (statutory definition) £m £m £m Property investment 13.4 2.1 11.1Property management 37.9 28.3 73.8Snozone 6.1 4.7 9.3Total 57.4 35.1 94.2 CRPM earns performance fees on the outperformance of the Funds. The performancefees accrued in the period to 30 June 2006, are £24.4m (30 June 2005: £17.4m). 2d. Geographic segment Included within property investment is £25.4m of net assets (30 June 2005:£6.8m) net rents of £4.8m (30 June 2005: £nil) and £1.4m of profit before tax(30 June 2005: £0.1m) arising from operations in Germany. The remainder of theGroup's operations are in the UK. 3. Finance income (Unaudited) (Unaudited) (Unaudited) 6 months to 6 months to Year to 30 June 30 June 30 December 2006 2005 2005 £m £m £m Interest receivable 0.9 0.4 0.7Other income 0.1 - 0.1 1.0 0.4 0.8 4. Finance costs (Unaudited) (Unaudited) (Unaudited) 6 months to 6 months to Year to 30 June 30 June 30 December 2006 2005 2005 £m £m £m Interest on bank loans and overdrafts 11.4 4.0 11.6Interest receivable on swaps (0.4) (0.3) (0.4)Interest on other loans 0.1 0.6 1.0 Interest payable 11.1 4.3 12.2Amortisation of loan issue costs 0.4 0.2 0.7Unwinding of discounting 0.7 - -Exceptional charge on buy back of CULS - 4.2 4.2Change in fair value of interest rate swaps (1.5) 1.0 0.6Finance costs 10.7 9.7 17.7 5. Taxation The taxation charge for the period is based on an estimate of the likelyeffective tax rate for the current year. (a) Tax charge/(credit) (Unaudited) (Unaudited) (Unaudited) 6 months to 6 months to Year to 30 June 30 June 30 December 2006 2005 2005 £m £m £m Current tax charge/(credit)UK corporation tax 4.6 0.6 0.9Adjustments in respect of prior years - 0.4 0.5Total current tax 4.6 1.0 1.4Deferred taxOn net income before revaluations and disposals 5.1 (14.6) (6.1)On revaluations and disposals 1.6 3.3 (0.4)Total deferred tax 6.7 (11.3) (6.5) Total taxation 11.3 (10.3) (5.1) (b) Deferred tax movements Capital gains net of capital Capital Other timing losses allowances differences Total £m £m £m £m As at 30 December 2005 3.8 6.8 (8.8) 1.8Recognised in income - 0.9 5.8 6.7As at 30 June 2006 3.8 7.7 (3.0) 8.5 In prior periods a significant part of the Group's property interests wastransferred offshore, the Auchinlea Partnership sold its interest in GlasgowFort and the Swansea Retail Park investment was restructured. The Group hasbeen advised that no capital gains tax liability arises on these transactions,although the relevant computations have yet to be agreed. 6. Interim dividend The proposed interim dividend of 9p per share (30 June 2005: 7p per share) wasapproved by the Board on 18 September 2006 and is payable on 13 October 2006 toshareholders on the register at close of business on 29 September 2006. As required by IFRS, the dividend has not been included as a liability as at 30June 2006, as it had not been approved at 30 June 2006. 7. Earnings/(loss) per share The European Public Real Estate Association ('EPRA') has issued recommendedbases for the calculation of certain earnings per share information and theseare shown in the following tables. Six months to 30 June 2006 (Unaudited) Earnings Number of Pence £m Shares per shareBasic 135.0 71.0 190Dilutive share options - 0.6Conversion of Convertible Unsecured Loan Stock 0.1 2.1Diluted 135.1 73.7 183Revaluation movements on investment properties (98.0) (133)Profit on disposal of investment properties (4.4) (6)Movement in fair value of interest rate swaps (18.8) (25)Deferred tax charge 6.8 9EPRA diluted 20.7 28 Six months to 30 June 2005 (Unaudited) Earnings Number of Pence £m shares per shareBasic 60.8 67.2 90Dilutive share options - 0.7Conversion of Convertible Unsecured Loan Stock 0.4 2.4Diluted 61.2 70.3 87Revaluation movements on investment properties (42.8) (60)Profit on disposal of investment properties (2.2) (3)Movement in fair value of interest rate swaps (10.1) (14)Deferred tax charge (11.3) (16)EPRA diluted (5.2) (6) Year to 30 December 2005 (Unaudited) Earnings Number of Pence £m shares per shareBasic 203.8 69.0 295Dilutive share options - 0.7Conversion of Convertible Unsecured Loan Stock 1.1 2.1Diluted 204.9 71.8 285Revaluation movements on investment properties (153.9) (215)Profit on disposal of investment properties (6.9) (10)Movement in fair value of interest rate swaps (7.2) (10)Deferred tax charge (6.5) (9)EPRA diluted 30.4 42 The calculation includes the full conversion of the Convertible Unsecured LoanStock where the effect on earnings per share is dilutive. Own shares held areexcluded from the weighted average number of shares. The Convertible Unsecured Loan Stock charge added back to give the dilutedearnings figures is net of tax at the effective tax rate for the year. 8a. Wholly-owned property assets Investment Long Trading Total property Leasehold property property assets property assets assets £m £m £m £m Cost or valuationAs at 31 December 2005 318.3 13.8 93.7 425.8Additions 1.4 - 0.6 2.0Exchange adjustment (0.2) (0.2)Depreciation - (0.1) (0.1)Acquisitions 37.4 - - 37.4Disposals (1.1) - - (1.1) Revaluation 15.4 0.8 - 16.2As at 30 June 2006 371.2 14.5 94.3 480.0 8b. Investment property assets value at 30 June 2006 Valuer Basis of £m valuation Note Group properties DTZ Debenham Tie Leung Market value 164.1 CB Richard Ellis Limited Market value 87.2 Directors' valuations Market value 0.2 King Sturge Market value 122.7 374.2Less: unamortised tenant incentives (3.0)Total fixed property assets (as per balance sheet) 8a 371.2Other fixed assets DTZ Debenham Tie Leung Existing use 8a 14.5Total property assets 385.7 Properties held by joint venturesXscape Milton Keynes Partnership DTZ Debenham Tie Leung Market value 105.4Xscape Castleford Partnership DTZ Debenham Tie Leung Market value 73.5Xscape Braehead Partnership DTZ Debenham Tie Leung Market value 76.5 255.4Less: unamortised tenant incentives (11.1)Total investment properties 9c 244.3 Properties held by associatesThe Mall Limited Partnership DTZ Debenham Tie Leung Market value 2,987.8The Junction Limited Partnership King Sturge Market value 1,439.5X-Leisure Limited Partnership Jones Lang LaSalle Market value 761.1 5,188.4Plus: Head leases treated as finance leases 83.8Less: unamortised tenant incentives (25.4)Total investment properties 9b 5,246.8 The independent property valuations as at 30 June 2006, were performed byqualified professional valuers working for DTZ Debenham Tie Leung, CharteredSurveyors, CB Richard Ellis Limited, Chartered Surveyors, Jones Lang LaSalle,Chartered Surveyors and King Sturge, Chartered Surveyors. The properties were valued on the basis of market value, with the exception of10 Lower Grosvenor Place, London SW1, which was appraised on the basis ofexisting use value. All valuations were carried out in accordance with theRoyal Institute of Chartered Surveyors Appraisal and Valuation standards. 9. Associates and joint ventures 9a. Share of profit (Unaudited) (Unaudited) 6 months to 6 months to 30 June 30 June 2006 2005 £m £m Associates 96.3 25.9Joint ventures 9.1 5.2 105.4 31.1 9b. Associates The The (Unaudited) (Unaudited) Mall Junction X-Leisure* Total to 30 Total to 30 LP LP LP June 2006 June 2005 Note £m £m £m £m £m Income statement (100%)Revenue 89.7 27.6 22.8 140.1 112.5 Property expenses (14.5) (1.4) (3.0) (18.9) (15.8)Management expense (11.6) (5.0) (2.4) (19.0) (7.6)Net rents 63.6 21.2 17.4 102.2 89.1Net interest payable (34.8) (17.3) (11.6) (63.7) (53.9)Contribution 28.8 3.9 5.8 38.5 35.2Performance fees 9d (21.1) (8.0) (4.0) (33.1) (23.1)Gain on investment properties 230.5 44.3 49.4 324.2 129.3Profit on sale of investment properties 7.6 (2.8) 1.0 5.8 0.5Fair value of interest rate swaps 41.1 16.2 9.8 67.1 (36.9)Profit before and after tax (100%) 286.9 53.6 62.0 402.5 105.0 Balance sheet (100%)Investment property 8b 3,057.8 1,420.6 768.4 5,246.8 4,290.5Current assets 122.2 77.5 30.3 230.0 184.0Current liabilities (206.8) (64.1) (50.6) (321.5) (311.4)Non-current liabilities (1,405.2) (619.5) (395.3) (2,420.0) (2.145.0)Net assets (100%) 1,568.0 814.5 352.8 2,735.3 2,018 C&R interest at period end 26.12% 27.32% 10.59%Group share ofNet rents 2b 16.6 5.8 1.8 24.2 32.8Net interest payable 2b (9.1) (4.7) (1.2) (15.0) (24.0)Contribution 2b 7.5 1.1 0.6 9.2 8.8Performance fees 2a (5.5) (2.2) (0.4) (8.1) (6.1)Gain on investment properties 60.3 12.1 5.2 77.6 31.6Profit/(loss) on disposal of investment 2.1 (0.8) 0.1 1.4 0.2propertiesFair value of interest rate swaps 10.7 4.4 1.1 16.2 (8.6)Profit for the period 75.1 14.6 6.6 96.3 25.9 Investment property 798.7 388.1 81.4 1,268.2 1,042.1 Current assets 32.0 21.3 3.2 56.5 41.8 Current liabilities (53.8) (17.6) (5.4) (76.8) (74.2)Non-current liabilities (367.0) (169.2) (41.8) (578.0) (511.0)Associate net assets 409.9 222.6 37.4 669.9 498.7 Unrealised profit on sale of property to (0.3) (0.3) (0.3)associateGroup share of associate net assets 409.6 222.6 37.4 669.6 498.4 *X-Leisure LP is accounted for as an associate as Capital & Regional hassignificant influence arising from its membership of the General Partner Board. 9c. Joint ventures Xscape Unaudited Unaudited Milton Xscape 1 Xscape 30 June 30 June Keynes Castleford Braehead 2006 2005 Partnership Partnership Partnership Others2 Total Total Note £m £m £m £m £m £m Income statement (100%)Revenue 2.8 1.6 0.9 - 5.3 8.1 Property expenses (0.3) (0.6) (0.1) - (1.0) (2.0)Management expenses (0.1) (0.1) - - (0.2) (0.3)Net rent 2.4 0.9 0.8 - 4.1 5.8Net interest payable (1.4) (1.5) (0.8) - (3.7) (6.3)Contribution 1.0 (0.6) - - 0.4 (0.5)Gain on investment properties 7.7 0.5 2.2 - 10.4 8.5Profit on sale of investment - - - 5.5 5.5 3.7propertiesFair value of interest rate 0.2 0.4 1.3 - 1.9 (1.2)swapsProfit before and after tax 8.9 0.3 3.5 5.5 18.2 10.5(100%)Balance sheet (100%)Investment properties 8b 101.8 70.7 71.8 - 244.3 181.3Current property assets - - - - - 73.2Current assets 6.9 5.4 8.8 18.4 39.5 32.8Current liabilities (3.3) (3.1) (9.4) (4.9) (20.7) (52.1)Non-current liabilities (46.8) (50.7) (54.8) - (152.3) (145.7)Net assets (100%) 58.6 22.3 16.4 13.5 110.9 89.5 C&R interest at period end 50% 66.67% 50% 50%Group share ofRevenue 1.4 1.1 0.4 - 2.9 4.4Net rents 2b 1.2 0.6 0.4 - 2.2 2.7Net interest payable 2b (0.7) (1.0) (0.4) - (2.1) (3.1)Contribution 2b 0.5 (0.4) - - 0.1 (0.4)Gain on investment properties 3.8 0.3 1.1 - 5.2 4.6Profit on sale of investment - - - 2.8 2.8 1.7propertiesFair value of interest rate 0.1 0.3 0.6 - 1.0 (0.7)swapsProfit before and after tax 4.4 0.2 1.7 2.8 9.1 5.2 Investment properties 50.9 47.1 35.9 - 133.9 101.7 Current property assets - 36.6 Current assets 3.5 3.6 4.4 9.2 20.7 17.7 Current liabilities (1.7) (2.0) (4.7) (2.6) (11.0) (20.3) Non-current liabilities (23.4) (33.8) (27.4) - (84.6) (87.2)Group share of joint venture 29.3 14.9 8.2 6.6 59.0 48.5net assets 1. Capital & Regional plc has a 66.67% share in the Xscape CastlefordPartnership. The investment is accounted for as a joint venture, rather than asubsidiary, as a result of joint control and deadlock agreements that are inplace. 2. Principally the joint venture at Glasgow Fort with British Land plc(formerly Pillar Properties plc). 9d. Performance fees The The The Mall Junction X-Leisure 30 June 30 June LP LP LP 2006 2005 Note £m £m £m £m £m Property manager - payable to C&R 2a 15.2 6.0 3.2 24.4 17.4Fund manager - payable to others 5.9 2.0 0.8 8.7 5.7Total performance fees 9b 21.1 8.0 4.0 33.1 23.1 10. Convertible Subordinated Unsecured Loan Stock In 1996 the company issued £26 million of convertible unsecured loan stock(CULS). Under IFRS these are accounted for as part debt (£20m) and part equity(£6m). Interest is charged on the debt at an effective rate of 11.25% of which6.75% is paid as a coupon and the balance rolled up in to the value of the debt.The debt element is marked to market on the assumption that the debt remainsoutstanding until 2016 when it is repayable. Since 1996 the majority of the CULS have either been converted or bought back inthe market by the Group. At 30 June 2006 CULS with a nominal value of £4.1mremained. A further £2.4m were converted into shares in July 2006 and at thedate of this report there are CULS with a nominal value of £1.7m remaining. The balance sheet contains the following balances relating to CULS: (Unaudited) (Unaudited) (Unaudited) 30 June 30 June 30 December 2006 2005 2005 £m £m £m Nominal value of CULS 4.1 4.6 4.1Equity component (net of deferred tax) (1.0) (1.2) (1.0)Deferred tax liability (0.4) (0.4) (0.4) 2.7 3.0 2.7Net interest 0.2 0.3 0.3Liability component at balance sheet date 2.9 3.3 3.0 The CULS may be converted by the holders of the stock into 51.42 (2004: 51.42)ordinary shares per £100 nominal value CULS in any of the years 1997 to 2015inclusive, representing a conversion price of 194p (2005: 194p) per ordinaryshare. The Company has the right to redeem at par the CULS in any year from2006 to 2016. The CULS are unsecured and are subordinated to all other forms ofunsecured debt but rank in priority to the holders of the ordinary shares in theCompany. 11. Net assets per share The European Public Real Estate Association ('EPRA') has issued recommendedbases for the calculation of certain net asset per share information and this isshown in the following table. 30 30 June 30 June December 30 June 30 June 2006 2005 2005 2006 2006 Net Net Net Net assets Number of assets assets assets £m shares per share per share per share Basic 833.8 71.0 £11.74 £7.89 £9.95 Own shares held - (1.6)Conversion of CULS 3.0 2.1Dilutive share options 1.4 0.6Diluted net assets per share 838.2 72.1 £11.63 £7.76 £9.80Fair value of borrowings (net of tax) 2.2 -Deferred tax 13.0 -EPRA diluted 853.4 72.1 £11.84 £7.70 £9.96 12. Return on equity (Unaudited) (Unaudited) (Unaudited) 6 months to 6 months to Year to 30 June 30 June 30 December 2006 2005 2005 £m £m £m Total recognised income and expense attributable to equity 137.0 61.8 206.1shareholdersOpening equity shareholders' funds excluding CULS equity 706.3 494.0 494.0reserveReturn on equity 19.4% 12.5% 41.7% 13. Reserves Share Capital premium Revaluation redemption Own Other Retained reserves 1, 2 earnings account reserve reserve 1 Shares 1 Total £m £m £m £m £m £m £m As at 31 December 2005 216.9 0.4 4.3 (1.4) 9.8 469.2 699.2Exchange differences - - - - 0.2 - 0.2Revaluation of owner-occupied - 0.8 - - - - 0.8propertyPurchase of own shares - - - (3.4) - - (3.4)Credit in respect of LTIP - - - - - 1.0 1.0chargeAmortisation of cost of own - - - 1.3 - (1.3) -sharesOther adjustments - - - - - 1.5 1.5Dividend paid - - - - - (7.6) (7.6)Profit for the periodattributable to equity - - - - - 135.0 135.0shareholdersAs at 30 June 2006 216.9 1.2 4.3 (3.5) 10.0 597.8 826.7 1. Shown as other reserves on the face of the balance sheet 2. Other reserves include those arising on acquisition, the adoption of IFRS 1in respect of the market value of swaps and the translation of foreign currency. 14. Minority Interest The minority interest arises from the German portfolio, where the originalinvestors retain minority holdings, and the Hahn Group has investedapproximately 10%. 15. Reconciliation of net cash generated from operations (Unaudited) (Unaudited) (Unaudited) 6 months to 6 months to Year to 30 June 30 June 30 December 2006 2005 2005 £m £m £m Profit on ordinary activities before financing 156.9 59.8 216.9Less:Share of profit in joint ventures and associates (105.4) (31.1) (129.3)Gain on revaluation of investment properties (15.4) (7.5) (21.3)Negative goodwill released to income - - (10.6)Profit on sale of trading and development properties (0.4) (3.1) (2.4)Depreciation of other fixed assets 0.2 0.2 0.3Amortisation of short leasehold properties - - 0.1Amortisation of tenant incentives 0.1 0.4 -Profit on sale of investment properties (0.4) (0.2) (4.3)Profit on disposal of fixed assets - - 1.2(Increase) in trade debtors, other debtors and prepayments (24.1) (16.0) (23.8)Increase/(decrease) in trade creditors, other creditors,taxation and social security and (6.7) 2.2 17.7accruals 1.3 1.1 2.2Non cash movement relating to the LTIPCash generated from operations 6.1 5.8 46.7 16. Debt valuation The table below reflects the adjustment to the interim and full year results,required to adjust the carrying value of fixed rate debt to market value, afterthe impact of corporation tax. (Unaudited) (Unaudited) (Unaudited) As at As at As at 30 June 30 June 30 December 2006 2005 2005 £m £m £m Fixed rate loans - fair value adjustment 3.1 - 0.5 (Decrease)/increase in net assets net of tax at 30% (2005: 2.2 - 0.430%) 17. Transition to International Financial Reporting Standards ('IFRS') 2006 is the first year that the Group will present its financial statementsunder IFRS. The last financial statements presented under UK GAAP were for theyear ended 30 December 2005. As IFRS comparatives must be for the year ended 30December 2005, the date of transition was 31 December 2004. Reconciliations arepresented on the following pages to enable comparison of the 2006 publishedinterim figures with those published in the corresponding period in the previousfinancial year and those published for the year ended 30 December 2005. 17.1 Reconciliation of equity under UK GAAP to equity under IFRS The reconciliation of equity shareholders' funds and profit is based on UK GAAPapplying at the balance sheet dates, with the exception of the 30 June 2006which is based on UK GAAP as at 30 December 2005. (Unaudited) (Unaudited) (Unaudited) (Unaudited) 30 June 2006 30 June 30 December 30 December Note £m 2005 2005 2004 £m £m £m Equity shareholders' funds under UK GAAP 818.5 566.6 694.5 494.5 IFRS adjustments: Goodwill amortisation a 1.7 0.6 1.1 -Exclusion of negative goodwill b 10.6 - 10.6 -Exclusion of dividend c - 4.9 7.7 5.9Deferred tax d (12.3) (7.8) (3.5) (6.4)Convertible unsecured loan stock ('CULS') e 1.2 1.3 1.1 6.0CULS equity reserve e (1.4) (1.6) (1.4) (7.3)Fair value of interest rate swaps f 13.7 (7.6) (5.1) 0.3Amortisation of lease incentives and letting g 1.5 1.2 1.1 1.0costsShare based payment k 0.3 0.1 0.2 -Finance lease asset l 2.2 2.3 2.3 2.4Finance lease liability l (2.2) (2.3) (2.3) (2.4) Net IFRS adjustments 15.3 (8.9) 11.8 (0.5) Equity shareholders' funds under IFRS 833.8 557.7 706.3 494.0 17.2 Reconciliation of profit reported under UK GAAP to profit under IFRS (Unaudited) (Unaudited) (Unaudited) 30 June 2006 30 June 30 December Note £m 2005 2005 £m £m Profit/(loss) for the period under UK GAAP 24.6 (17.7) (3.0) IFRS adjustments:Goodwill amortisation a 0.6 0.6 1.2Exclusion of negative goodwill b - - 10.6Deferred tax d (8.6) (1.3) 2.9Convertible unsecured loan stock (CULS) e - (4.2) (4.2)Premium on repurchase of CULS - 46.9 46.9Fair value of interest rate swaps f 18.7 (7.9) (5.4)Amortisation of rent free periods, lease incentives and g,h,i 2.4 1.5 2.0letting costsRevaluation gains on investment properties j 98.0 42.8 153.9Share based payment k 0.2 0.1 0.2Net IFRS adjustments 111.3 78.5 208.1 Profit for the period under IFRS 135.9 60.8 205.1 IFRS 1'First-time Adoption of International Financial reporting Standards'requires an explanation of major adjustments to cash flows under IFRS. Whilstthe format of the cash flow statement is different under UK GAAP, there are nomaterial changes to cash flows from operations, investment or financing. Notes UK GAAP referred to in the table in notes 17.1 and 17.2 is that existing at 31December 2005. The principal reasons for the adjustments shown in the reconciliations betweenUK GAAP and IFRS are set out below: (a) Under UK GAAP goodwill is amortised over its expected useful economiclife. Under IFRS goodwill is carried at cost and an annual impairment reviewundertaken. (b) Under UK GAAP negative goodwill is carried in the balance sheet. UnderIFRS negative goodwill should be credited to the income statement. (c) Under UK GAAP proposed dividends are included in the profit and lossaccount and as a liability in the balance sheet. Under IFRS unapproved andunpaid dividends are not provided for. (d) Under IFRS deferred tax provisions are made for the tax that wouldpotentially be payable on the sale of investment or development properties andother assets, whereas UK GAAP requires that this potential liability isdisclosed as contingent tax but not provided for in the balance sheet. Deferredtax arising on valuation changes and other items are included in the incomestatement under IFRS. (e) Under IFRS the debt and equity components of convertible instruments areseparate, whereas under UK GAAP the nominal value of the CULS are held as aliability on the balance sheet net of issue costs. (f) The fair value of interest rate swaps is included in the balance sheetwith effect from 30 December 2004. (g) Under UK GAAP rent free periods are allocated over the period to thefirst rent review. Under IFRS rent free periods are allocated over the period tothe first break option, or if the probability that the break option will not beexercised is considered low, over the full lease term. (h) Under UK GAAP lease incentive such as cash inducements and contributionsto tenant fit out are either written off, capitalised or capitalised andamortised, depending upon their nature. Under IFRS all such costs arecapitalised and amortised over the period to the first break option or, if theprobability that the break option will be exercised is considered low, over thefull lease term. (i) Under UK GAAP letting costs are either capitalised on the firstletting of a unit or on subsequent lettings written off in the year they areincurred. Under IFRS all such costs are capitalised and amortised over theperiod to the first break, or if the probability that the break option will notbe exercised is considered low, over the full lease term (j) IFRS requires that valuation changes on investment properties areincluded in the income statement (k) In 2005 the vesting conditions for 50% of the LTIP were changed andlinked to the FTSE Real Estate Index. Under IFRS this constitutes a marketcondition and the fair value is assessed on the expected shares that will vestbased on Capital & Regionals relative position compared to the index. The fairvalue of the shares at the date of the award is charged over the vesting period. (l) IFRS requires that where a lease is treated as a finance lease the netpresent value of all payments under the lease are capitalised into the value ofthe investment property and an associated liability included on the balancesheet. 18. Copies of the Interim Report Copies of the Interim Report will be available from the Company's registeredoffice at 10 Lower Grosvenor Place, London, SW1W 0EN when they have beenprinted. This interim report was approved by the Board of Directors on 18 September 2006. 19. Accounting policies These are the significant accounting policies expected to be adopted by theGroup at 30 December 2006. Statement of Compliance The interim report has been prepared using accounting policies consistent withIFRS and interpretations adopted for use in the European Union and issued by theInternational Accounting Standards Board (IASB). Basis of Preparation The interim report is prepared on the historical cost basis except thatinvestment and development properties, owner-occupied properties and derivativefinancial instruments are stated at fair value. The accounting policies havebeen applied consistently, to the results, other gains and losses, assets,liabilities and cash flows of entities included in interim report. The preparation of the interim report requires management to make judgments,estimates and assumptions that may affect the application of accounting policiesand the reported amounts of assets and liabilities, income and expenses.Management believes that the estimates and associated assumptions used in thepreparation of the interim report are reasonable. However, actual outcomes maydiffer from those anticipated. Revisions to accounting estimates are recognised in the period in which theestimate is revised if the revision affects only that period. If the revisionaffects both current and future periods, the change is recognised over thoseperiods. Basis of Consolidation The interim report incorporates the financial statements of Capital & Regionalplc and its consolidated entities, associated companies and joint ventures forthe period ended 30 June 2006. Where necessary, the financial statements ofassociated companies and joint ventures are adjusted to conform with the Group'saccounting policies. Subsidiaries have been consolidated under the acquisitionmethod of accounting and the results of companies acquired during the year areincluded from the date of acquisition. Goodwill Goodwill arising on acquisition is recognised as an asset and initially measuredat cost, being the excess of the cost of the acquired entity over the group'sinterest in the fair value of the assets, liabilities and contingent liabilitiesacquired. Where the fair value of the assets, liabilities and contingentliabilities acquired is greater than the cost, the excess, known as negativegoodwill, is recognised immediately in the income statement. Joint ventures and associates In accordance with IAS 28 "Investments in associates" and IAS 31, "Interests injoint ventures", associates and joint ventures are accounted for under theequity method, whereby the consolidated balance sheet and income statementincorporate the Group's share of the net assets and profit after tax. Theprofits include revaluation movements on investment properties. Tangible fixed assets Tangible fixed assets are stated at the lower of cost or valuation, net ofdepreciation and any provision for impairment. Depreciation is provided on all tangible fixed assets, other than investmentproperties and land, over their expected useful lives: • Long leasehold land and buildings - over fifty years, on a straight-line basis. • Fixtures and fittings - over three to five years, on a straight-line basis. • Motor vehicles - over four years, on a straight-line basis. Investment Properties Investment properties are stated at fair value, being market value determined byprofessionally qualified external valuers, with changes in fair value beingincluded in the income statement. In accordance with IAS 40 'InvestmentProperty', no depreciation is provided in respect of properties. Leasehold Properties Leasehold properties that are leased out to tenants under operating leases areclassified as investment properties or development properties, as appropriate,and included in the balance sheet at fair value. Owner-occupied long leasehold properties Owner-occupied long leasehold properties are included in the financialstatements stated at fair value with changes in fair value recognised directlyin equity. The cost of owner-occupied property is depreciated through the incomestatement over the period to the end of the lease on a straight-line basishaving due regard to its estimated residual value. Head leases Where an investment property is held by way of a head lease, the head lease istreated as a finance lease and the net present value of the future paymentsunder the head lease are capitalised and the associated liability carried on thebalance sheet. Properties under development Attributable internal and external costs incurred during the period ofdevelopment are capitalised. Interest is capitalised gross before deduction ofrelated tax relief. Interest is calculated on the development expenditure byreference to specific borrowings where relevant. A property ceases to betreated as being under development when substantially all activities that arenecessary to get the property ready for use are complete. Refurbishment expenditure Refurbishment expenditure in respect of major works is capitalised. Renovationand refurbishment expenditure of a revenue nature is expensed as incurred. Property transactions Acquisitions and disposals are accounted for at the date of legal completion.Properties are transferred between categories at the estimated market value onthe transfer date. Current property assets Properties held with the intention of disposal and properties held fordevelopment are valued at the lower of cost and net realisable value Foreign Currency Transactions Transactions in foreign currencies are translated into sterling at exchangerates approximating to the exchange rate ruling at the date of the transaction.Monetary assets and liabilities denominated in foreign currencies at the balancesheet date are translated to sterling at the exchange rate ruling at that dateand, unless they relate to the hedging of the net investment in foreignoperations, differences arising on translation are recognised in the incomestatement. Head leases Where an investment property is held under a head lease it is initiallyrecognised as an asset at the sum of the present value of the minimum leaseground rent payable. The corresponding rent liability to the leaseholder isincluded in the Balance Sheet as a finance lease obligation. Financial Statements of Foreign Operations The assets and liabilities of foreign operations, including goodwill and fairvalue adjustments arising on consolidation, are translated into sterling at theexchange rates ruling at the balance sheet date. The operating income andexpenses of foreign operations are translated into sterling at the averageexchange rates for the period. Significant transactions, such as property sales,are translated at the foreign exchange rate ruling at the average exchange ratesfor the period. Significant transactions, such as property sales, are translatedat the foreign exchange rate ruling at the date of each transaction. The principal exchange rate used to translate foreign currency denominatedamounts in the balance sheet is the rate at the end of the year, £1 = €1.447(2005: £1 = €1.457). The principal exchange rate used for the income statementis the average rate, £1 = €1.455- (2054: £1 = €1.457). Convertible Unsecured Loan Stock ('CULS') CULS are regarded as compound instruments, consisting of a liability componentand an equity component. At the date of issue, the fair value of the liabilitycomponent is estimated using the prevailing market interest rate for similarnon-convertible debt. The difference between the proceeds of issue of theconvertible loan notes and the fair value assigned to the liability component,representing the option to convert the liability into equity of the Group, isincluded in equity. The interest expense on the liability component is calculated by applying theprevailing market interest rate for similar non-convertible debt to theliability component of the instrument. The difference between this amount andthe interest paid is added to the carrying value of the CULS. Derivative financial instruments As defined by IAS 39 derivatives are carried at fair value in the balance sheet.The Group does not apply hedge accounting therefore the changes in the fairvalue of derivative financial instruments are recognised in the income statementas they arise. Loan arrangement costs Costs relating to the raising of general corporate loan facilities and loanstock are amortised over the estimated life of the loan and charged to theprofit and loss account as part of the interest expense. The bank loans and loanstock are disclosed net of unamortised loan issue costs. Tax Tax is included in the income statement except to the extent that it relates toitems recognised directly in equity, in which case the related tax is recognisedin equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates applicable at the balance sheet date, together with anyadjustment in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for tax purposes. Thefollowing temporary differences are not provided for: goodwill not deductiblefor tax purposes, the initial recognition of assets or liabilities that affectneither accounting nor taxable profit, and differences relating to investmentsin subsidiaries to the extent that they will probably not reverse in theforeseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assetsand liabilities, using tax rates applicable at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Operating leases Annual rentals under operating leases are charged to the profit and loss accountas incurred. Tenant leases and incentives Management has exercised judgement in considering the potential transfer ofrisks and rewards of ownership in accordance with IAS 17 'Leases' for allproperties leased to tenants and have determined that all such leases areoperating leases. Lease incentives which enhance the property are added to the cost of properties. Where a lease incentive does not enhance the property, it is amortised overthe period to the end of the lease term. On new leases with rent free periods,rental income is allocated evenly over the period from the date of the leasecommencement to the end of the lease term. Pension Costs Pension liabilities, all of which relate to defined contribution schemes, arecharged to the income statement as incurred. Long term incentive plan (LTIP) The Group has applied the requirements of IFRS 2 'Share based Payments'. Equitysettled share-based payments are measured at fair value at the date of grant.The fair value is expensed on a straight-line basis over the vesting period,based on the Group's estimate of shares that will eventually vest. Own shares Own shares held by the Group and shown as a deduction from shareholders' funds,and included in other reserves. The cost of own shares is transferred fromother reserves to the income statement systematically over the LTIP performanceperiod. The shares are held in an Employee Share Ownership Trust. Performance fees Performance fees are recognised inline with the property management contracts. IFRS 1 transitional arrangements When preparing the Group's IFRS balance sheet at 31 December 2004, the date oftransition, the following material optional exemptions from full retrospectiveapplication of IFRS accounting policies have been adopted: Business combinations - the provisions of IFRS 3 'Business Combinations' havebeen applied prospectively from 31 December 2004. The Group has chosen not torestate business combinations that fall before the date of transition. Financial instruments - the Group has applied IAS 32 'Financial Instruments:Disclosure and presentation' and IAS 39 'Financial Instruments: Recognition andMeasurement' for all periods presented and has therefore not taken advantage ofthe option that would enable the Group to only apply the standards from 30December 2005. Additional information (Neither audited nor reviewed) Property under management at valuation 30 June 2006 30 June 2005 £m £m Investment properties 372 117Trading properties 94 -Mall Fund 2,988 2,316Junction Fund 1,439 1,264Leisure Funds 761 634Other joint ventures 255 262Total 5,909 4,593 Properties under management above are shown at valuation and do not include theadjustments in respect of: 1. Accounting for head leases that are deemed to be finance leases. 2. The treatment required by IFRS of rent free periods, capital contributionsand leasing costs. Fund Portfolio information at Junction X-Leisure30 June 2006 Mall Fund Fund Fund Number of core properties 23 17 18Number of lettable units 2,375 236 284Square feet (000) 8,135 3,523 3,042Properties at market value £2,988m £1,439m £761mInitial yield 4.49% 3.71%2 5.31%Equivalent yield 5.29% 4.66%2 5.97%Vacancy rate 4.96% 5.06% 2.9%Net rental income (per annum) £143.0m £54.7m £42.7mEstimated rental income (per annum) £183.5m £70.5m £48.4mRental increase (ERV) 3.05% 1.39%2 1.67%Reversionary percentage 16.08% 17.25% 8.23%Loan to value ratio 47.3% 43.3% 52.4%Underlying valuation change since 30 December 2005 8.46% 3.50% 6.90%Property level return 12.22% 5.40% 10.60%Geared return 18.72% 5.96% 17.10%Unit price (£1.00 at inception) £2.3772 £2.5784 £1.62592C&R share 26.12% 27.32% 10.59% Note: 1. Properties under management include tenant incentives which aretransferred to current assets for accounting purposes. 2. Excluding development properties. Glossary of terms Capital allowances deferred tax provision In accordance Passing rent is the gross rent, less any ground rentwith IAS 12, full provision has been made for deferred tax payable under head leases.arising on the benefit of capital allowances claimed todate. In the Group's experience liabilities in respect ofcapital allowances provided are unlikely to crystallise inpractice and are therefore excluded when arriving at Return on equity is the total return, including revaluationadjusted fully diluted NAV per share. gains or losses, divided by opening equity plus time weighted additions to share capital, excluding share options exercised, less reductions in share capital. CRPM Capital & Regional Property Management Limited is asubsidiary company of Capital & Regional plc and earns themanagement and performance fees arising from Capital & Reversion is the estimated increase in rent at review whereRegional's interests in the Funds. the gross rent is below the estimated rental value. CULS is the Convertible Subordinated Unsecured Loan Stock. Reversionary percentage is the percentage by which the ERV exceeds the passing rent. Earnings per share (EPS) is the profit or loss attributableto equity holders of the parent entity after taxation Reversionary yield is the anticipated yield, which thedivided by the weighted average number of shares in issue initial yield will rise to once the rent reaches theduring the period excluding own shares held. estimated rental value. Estimated rental value (ERV) is the Group's external See through balance sheet is the pro forma proportionatelyvaluers' opinion as to the open market rent which, on the consolidated balance sheet of the Group, its associates anddate of valuation, could reasonably be expected to be joint ventures.obtained on a new letting or rent review of a property. See through income statement is the pro formaEquivalent yield is a weighted average of the initial yield proportionately consolidated income statement of the Group,and reversionary yield and represents the return a property its associates and joint ventures.will produce based upon the timing of the income received.In accordance with usual practice, the equivalent yields(as determined by the Group's external valuers) assume rentreceived annually in arrears and on gross values including Total return is the group's total recognised income for theprospective purchasers' cost. period as set out in the Consolidated Statement of Recognised Income and Expense ('SORIE') expressed as a percentage of opening equity shareholders' funds, excluding CULS reserve.EPRA is the European Public Real Estate Association Total shareholder return is the growth in price per shareGearing is the Group's net debt as a percentage of net plus dividends per share.assets, adjusted for the conversion of the CULS intoequity. See through gearing includes our share of nonrecourse net debt in the associates and joint ventures. Triple net, fully diluted NAV per share includes the effect of those shares potentially issuable under the CULS or employee share options.Initial yield is the annualised net rents generated by theportfolio expressed as a percentage of the portfoliovaluation, excluding development properties. SIC 15 "Operating lease - incentives" debtors Under accounting rules the balance sheet value of lease incentives given to tenants is deducted from propertyIPD is Investment Property Databank Ltd, a company that valuation and shown as a debtor. The incentive isproduces an independent benchmark of property returns. amortised through the income statement. Market value is an opinion of the best price at which the Vacancy rate is the estimated rental value of vacantsale of an interest in the property would complete properties expressed as a percentage of the total estimatedunconditionally for cash consideration on the date of rental value of the portfolio, excluding developmentvaluation (as determined by the Group's external valuers). properties.In accordance with usual practice, the Group's externalvaluers report valuations net, after the deduction of theprospective purchaser's costs, including stamp duty, agentand legal fees. Variable overhead Includes discretionary bonuses and the cost of awards to employees made under the LTIP and CAP and is spread overNet assets per share (NAV) are shareholders' funds divided the performance period.by the number of shares held by shareholders at the periodend, excluding own shares held. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Capital & Regional