28th Jul 2005 07:01
Liberty International PLC28 July 2005 LIBERTY INTERNATIONAL PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2005 Attached is the full Interim Report for the six months ended 30 June 2005: HighlightsSummary of Investment and Development Property ValuationsChairman's StatementOperating and Financial ReviewInterim Results ENQUIRIES:Liberty International PLC:Sir Robert Finch Chairman +44 (0)20 7960 1207David Fischel Chief Executive +44 (0)20 7960 1207Aidan Smith Finance Director +44 (0)20 7960 1210Public relations:UK: Michael Sandler, Hudson Sandler +44 (0)20 7796 4133SA: Matthew Gregorowski, +44 (0)20 7457 2020 College Hill Associates Nicholas Williams, +27 (0)11 447 3030 College Hill Associates BACKGROUND ON LIBERTY INTERNATIONALLiberty International PLC is the UK's third largest listed property company anda constituent of the FTSE-100 Index of the UK's leading listed companies.Liberty International owns 100 per cent of Capital Shopping Centres ("CSC"), thepremier UK regional shopping centre business, and Capital & Counties, a retailand commercial property investment and development company concentrating inCentral London, non-shopping centre retail in the UK and California, USA. This announcement includes statements that are forward-looking in nature.Forward-looking statements involve known and unknown risks, uncertainties andother factors which may cause the actual results, performance or achievements ofLiberty International PLC to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements. Any information contained in this announcement on the price at whichshares or other securities in Liberty International PLC have been bought or soldin the past, or on the yield on such shares or other securities, should not berelied upon as a guide to future performance. LIBERTY INTERNATIONAL PLC INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2005 - HIGHLIGHTS Sir Robert Finch, Chairman of Liberty International, commented: "The interim results to 30 June 2005 show Liberty International to be in vibrantgood health with a portfolio of first class assets, the market leadership in theUK's regional shopping centre industry, a promising development programme and askilled and experienced management team at all levels. These are the first results we have produced under International FinancialReporting Standards ('IFRS') which change the presentation and format of theInterim Results; however they have no impact on the cash flows of the businessor its present strategic direction. Looking at the underlying picture, we haveextended our track record of consistent growth and, with a further positiverevaluation in the period, the aggregate value of our property investments hasincreased from £5.3 billion to £6.2 billion." 28 July 2005 DIVIDENDS The Directors of Liberty International PLC have announced an increased interimordinary dividend per share of 13.0p (2004 - 12.4p). The following are the salient dates for the payment of the interim dividend: Wednesday 3 August 2005 Sterling/Rand exchange rate struck. Monday 15 August 2005 Ordinary shares listed ex-dividend on the JSE, Johannesburg Wednesday 17 August 2005 Ordinary shares listed ex-dividend on the London Stock Exchange. Friday 19 August 2005 Record date for interim dividend in London and Johannesburg. Tuesday 6 September 2005 Dividend payment day for shareholders Note: Payment to ADR holders will be made on 16 September 2005). South African shareholders should note that, in accordance with the requirementsof STRATE, the last day to trade cum-dividend will be 12 August 2005 and that nodematerialisation or rematerialisation of shares will be possible from 15 Augustto 19 August 2005 inclusive.No transfers between the UK and South African registers may take place from 3August to 21 August 2005 inclusive. A presentation to analysts and investors will take place at 9.30 a.m. Thepresentation will also be available to international analysts and investorsthrough a live audio call. Slides to accompany the presentation will be available on the group's websitewww.liberty-international.co.uk. An audio replay of the presentation will also be available afterwards on thegroup's website. FINANCIAL HIGHLIGHTS FOR THE SIX MONTHS ENDED 30 JUNE 2005 • Investment and development properties increased from £5.3 billion to £6.2 billion with over £700 million of net additions in the six month period, particularly the £653 million acquisition of interests in Manchester Arndale and The Mall at Cribbs Causeway, Bristol. • Revaluation surplus of £196 million, with the market value of completed investment properties increasing by 3.2 per cent in the six month period - an underlying 5.1 per cent increase adjusted for the withdrawal in the period of disadvantaged area relief from stamp duty land tax. • Net assets (diluted, adjusted*) increased from £3.61 billion to £3.82 billion. Net assets (IFRS basis) increased from £2.53 billion to £2.59 billion. • Net assets per share (diluted, adjusted*) increased from 1025p to 1085p in the six month period, amounting to a 7.3 per cent total return. Adjusting for the £108.5 million (32p per Liberty International share) one-off impact of the withdrawal in the period of disadvantaged area relief from stamp duty land tax, the total return would have been 10.7 per cent for the six months. • Net rental income increased by £18.8 million from £125.0 million to £143.8 million, with £6.7 million of the increase (5.5 per cent) coming from underlying rental growth, particularly rent reviews at Braehead, Renfrew, and the balance from completed developments and acquisitions. • Underlying profit before tax excluding valuation items, exceptionals and trading profits increased by 6.3 per cent from £50.6 million to £53.8 million. • Profit before tax in IFRS Income Statement of £130.1 million (30 June 2004 - £277.3 million), reducing basic earnings per share from 62.4p to 28.8p, impacted by the £114.3 million decrease in fair value of derivative financial instruments (30 June 2004 - increase of £46.8 million). These movements result from Liberty International predominantly financing itself by floating rate debt with interest rate exposure reduced by interest rate swaps; substantially all interest payments on existing debt and in respect of committed capital expenditure are fixed for the next ten years. • Adjusted* earnings per share of 13.3p (30 June 2004 - 13.9p, year ended 31 December 2004 - 27.1p), reflecting lower trading profits in the first half of 2005 of £0.6 million (six months ended 30 June 2004 - £6.8 million). Further trading profits are anticipated in the second half of 2005. * Net assets and net assets per share adjusted according to UK property industrypractice to exclude deferred tax relating to revaluation of investmentproperties and capital allowances, and fair value of derivative financialinstruments net of attributable taxation. Earnings per share adjusted accordingto UK property industry practice to exclude exceptional items, gain onrevaluation and sale of investment properties, change in fair value ofderivative financial instruments, all net of attributable taxation, and deferredtax relating to capital allowances. Unless otherwise stated, references to netassets per share are to net assets per share (diluted, adjusted) and referencesto earnings per share are to adjusted earnings per share. Details of theadjustments made are set out in the Financial Review, for net assets and netassets per share, and in note 13 to the Interim Results for earnings per share. REVALUATION SURPLUS ON COMPLETED INVESTMENT PROPERTIES FOR THE SIX MONTHS ENDED30 JUNE 2005 Market value Revaluation Revaluation Like-for-like as at 30 June Surplus Surplus Revaluation 2005 Unaudited Surplus * Unaudited £m £mUK regionalshopping centres 5,143 158 3.2% 5.2%US regionalshopping centresand other retail 220 10 5.1% 5.1%Central London 367 11 3.1% 4.2%(6.9%)Retail outsideLondon 189 3 1.5% 3.6%(7.0%)Business spaceoutside London 181 8 4.6% 5.2% US other commercial 54 3 5.6% 5.6% --------- -------- -------- --------Completed investmentproperties 6,154 193 3.2% 5.1% ======== ======== ========Developments 57 --------- 6,211 ========= * Revaluation surplus adjusted for the impact of the loss of disadvantaged area relief. The percentages in brackets show the underlying percentage excluding impending redevelopments by Capital & Counties which had a market value of £122 million at 30 June 2005 • Investment properties are valued after deducting notional purchasers' costs including stamp duty land tax amounting to £272 million, equivalent to 77p per Liberty International share, on the theoretical assumption that assets are sold individually on the open market, without taking account of the structures through which assets are held. • Regional shopping centres amount to 86 per cent of aggregate investment properties and retail overall amounts to 93 per cent. DEVELOPMENT PROGRAMME • 530,000 sq.ft. Chapelfield, Norwich, development scheduled for September 2005 opening with lettings agreed or solicitors instructed for 91 per cent of anticipated income. • Manchester Arndale Northern Extension, increasing the size of the centre from 850,000 sq.ft. to 1.4 million sq.ft., due to open in phases from October 2005 to Autumn 2006. CSC has no financial obligations for these development costs. Lettings agreed or solicitors instructed for over 50 per cent of anticipated income. On completion, Manchester Arndale will be the UK's largest city centre regional shopping centre. • Aggregate development expenditure programme of £1.4 billion, of which £350 million is committed, divided between regional shopping centres (£1.2 billion) and other retail and commercial (£200 million) • The programme includes CSC's major new regional shopping centre developments in Norwich, Cardiff and Oxford, together with Braehead (Phase 2) and substantial extensions to and additional investment in Eldon Square, Newcastle; The Harlequin, Watford; and other existing centres • Capital & Counties' retail and commercial development programme has increased in the period from £150 million to £200 million and includes King's Reach, Southwark; 190 Strand, London and The Headrow, Leeds. FINANCIAL STRENGTH • Debt to assets ratio increased from 36 per cent to 43 per cent with aggregate net borrowings of £2.69 billion (31 December 2004 - £1.94 billion) • Weighted average maturity of debt of nine years with no significant repayments expected until 2011. Weighted average interest cost of 6.3 per cent (5.7 per cent excluding £230 million first mortgage debentures 2021 and 2027 and amortisation element of £240 million 3.95 per cent convertible bond 2010). • Cash balances of £163 million and committed facilities of £495 million, representing £658 million of available financial resources, substantially in excess of committed projects at 30 June 2005. SUMMARY OF INVESTMENT AND DEVELOPMENT PROPERTY VALUATIONS 30 June 2005 31 December 2004 --------------------------------------------------------- ---------------- True Revaluation surplus True equivalent Market ------------------- Market equivalent yield(1) value DAR (2) DAR(2) Value yield ------------ ------------------- % % £m £m £m % % £m % Lakeside,Thurrock 5.30 (5.54) 1,094.4 (43.2) 16.0 1.5 (5.5) 1,075.2 5.37%MetroCentre,Gateshead 5.32 (5.58) 895.2 - 16.5 1.9 (1.9) 875.0 5.43%Braehead,Renfrew,Glasgow 5.47 (5.72) 621.8 (23.5) 38.0 6.5 (10.5) 580.6 5.68%Other M25Centres 5.48 (5.73) 952.5 - 52.5 5.8 (5.8) 899.3 5.57%Other Centres 5.83 (6.13) 812.9 (16.8) 32.1 4.1 (6.3) 774.9 6.03%ManchesterArndale andCribbsCauseway,Bristol 5.54 (5.84) 658.0 (16.0) 1.9 - (2.7) -Otherproperties 6.83 (7.23) 108.1 (0.3) 1.1 1.0 (1.3) 105.2 6.95% ------------------------ ------ UK regionalshoppingcentres 5.50 (5.77) 5,142.9 (99.8) 158.1 3.2 (5.2) 4,310.2 5.62% US regionalshoppingcentresand otherretail 219.9 - 10.6 5.1 (5.1) 194.9 UK othercommercialproperties:Central London 6.67 (7.02) 367.1 (3.8) 11.0 3.1 (4.2) 354.8 6.94%Retail outsideLondon 5.84 (6.09) 188.9 (4.0) 2.7 1.5 (3.6) 184.4 6.60%Business spaceoutside London 7.08 (7.50) 180.8 (0.9) 7.6 4.6 (5.2) 170.2 7.40%US othercommercialproperties 54.6 - 2.9 5.6 (5.6) 48.0 --------------------------- --------- 6,154.2 (108.5) 192.9 3.2 (5.1) 5,262.5Developments 56.7 1.2 47.2 -------- ------ ---------Total investment anddevelopment properties (3) 6,210.9 194.1 5,309.7/ surplus (4) -------- ------ --------- (1) Yield to a purchaser of the assets individually at Market Value after taking account of notional acquisition costs. The figure in brackets represents the yield earned by Liberty International on the asset at Market Value. (2) Disadvantaged Area Relief (DAR) from Stamp Duty Land Tax was withdrawn in March 2005. Percentage valuation increases after adjusting for the effect of DAR on opening values are shown in brackets where applicable. (3) Reconciliation of investment and development property valuation to Balance Sheet carrying value of property: 30 June 31 December 2005 2004 £m £m Investment and development property at market value as determined by external valuers 6,210.9 5,309.7 Add back minimum payment under head leases separately included as a creditor in the balance sheet (see note 14) 56.4 31.9 Deduct accrued rent free periods separately included as a debtor in the balance sheet (see note 14) (43.5) (44.0) -------- -------- Balance Sheet carrying value of investment and 6,223.8 5,297.6 development property -------- -------- (4) Reconciliation of investment and development property revaluation surplus to Income Statement gain on revaluation of investment properties: 30 June 2005 £m Investment and development property revaluation surplus as 194.1 determined by external valuers Add valuation movement in respect of rent free periods 2.5 Less valuation movement in respect of head lease payments (0.2) -------- Total gain on revaluation of investment and development 196.4 properties Less development property revaluation recognised in equity (1.2) rather than the Income Statement -------- Income Statement gain on revaluation of investment properties 195.2 -------- SUMMARY OF CAPITAL & COUNTIES INVESTMENT AND DEVELOPMENT PROPERTY VALUATIONS Six months ended Year ended 30 June 2005 31 December 2004 -------------------------------------------------------------- Number Net Market Revaluation Net Market of property value surplus property value properties income income ------------- £m £m £m % £m £m Central London 21 12.2 367.1 11.0 3.1 26.5 354.8Retail outside London 7 5.0 188.9 2.7 1.5 10.4 184.4Business space outside London 16 5.4 180.8 7.6 4.6 13.1 170.2 ---------------------------------- ---------------- Total UnitedKingdom investment properties 44 22.6 736.8 21.3 3.0 50.0 709.4 United States 11 8.6 274.5 13.5 5.2 14.9 242.9 ------- ------- ------ ------- -------- ------ Total investment properties 55 31.2 1,011.3 34.8 3.6 64.9 952.3 ------- ------- ------ ------- -------- ------ Properties by use: 30 June 2005 31 December 2004 -------------------------------------------------------- Retail Offices Total Retail Offices Total £m £m £m £m £m £m Central London 162.5 204.6 367.1 152.9 201.9 354.8Retail outside London 188.9 - 188.9 184.4 - 184.4Business space outsideLondon - 180.8 180.8 - 170.2 170.2 ------------------------------------------------------ Total United Kingdominvestment properties 351.4 385.4 736.8 337.3 372.1 709.4 United States 219.9 54.6 274.5 194.9 48.0 242.9 ------------------------------------------------------ Total properties 571.3 440.0 1,011.3 532.2 420.1 952.3 ------------------------------------------------------ ANALYSIS OF NET RENTAL INCOME FROM INVESTMENT AND TRADING PROPERTIES For the six months ended 30 June 2005 Shopping Other Total Centres Commercial ------- -------- ---------------- UK USA £m £m £m £m Net rental income six months ended 30June 2004 125.0 91.2 25.7 8.1Foreign Exchange (0.2) - - (0.2)Sold properties (3.2) - (1.9) (1.3)Developments, major capex and acquisitions (0.4) - (0.4) - ------- -------- ------- -------- Adjusted to 30 June 2004 121.2 91.2 23.4 6.6Like for like growth 6.7 5.5 0.4 0.8 ------- -------- ------- -------- Adjusted to 30 June 2005 127.9 96.7 23.8 7.4 Sold properties (0.1) - (0.1) -Developments, major capex and acquisitions 16.0 13.8 0.5 1.7 ------- -------- ------- -------- Net rental income six months ended 30June 2005 143.8 110.5 24.2 9.1 ------- -------- ------- --------Like for like growth 5.5% 6.0% 1.7% 12.1% ------- -------- ------- -------- CHAIRMAN'S STATEMENT June 2005 marked both the 25th anniversary of the formation of LibertyInternational and the retirement of Sir Donald Gordon as its Chairman - bothmilestones in the history of this company. It is a signal honour that the Boardhas asked me to become its Chairman. I shall strive, as I am sure will all mycolleagues, to continue the extraordinary record which Sir Donald hasestablished. I am delighted that Sir Donald has accepted the position of President for Lifeand that his wise counsel and huge knowledge of the industry and the financialmarkets will continue to be available to me and the company as a consultant;this too will allow us to remain in touch with Sir Donald's family - our largestshareholder. The interim results to 30 June 2005 show Liberty International to be in vibrantgood health with a portfolio of first class assets, the market leadership in theUK's regional shopping centre industry, a promising development programme and askilled and experienced management team at all levels. The challenge goingforward will be to continue to find the right mix of investment properties anddevelopment proposals which add to the critical mass of the business in its coreareas. Manchester Arndale and Cribbs Causeway, Bristol The most important transaction in the period was the £653 million acquisitionfrom Prudential PLC of a joint interest with them in two flagship shoppingcentres, Manchester Arndale and The Mall at Cribbs Causeway, Bristol andassociated properties. This acquisition was in line with CSC's strategy to focuson large scale assets of the highest quality which have both scarcity value inthe restrictive UK planning environment and provide active managementopportunities. The transaction increases to 11 the number of major completed UKshopping centres in which CSC has an interest, of which 9 are in the top 25centres in the UK; in addition, CSC has three further centres, Norwich, Cardiffand Oxford, in the development phase. Manchester Arndale is at an exciting stage with the Northern Extension openingin phases between October 2005 and Autumn 2006, increasing the size of thecentre by 550,000 sq.ft. to 1.4 million sq.ft. where it will rank as the UK'slargest city centre shopping centre. Cribbs Causeway, Bristol, is one of thelimited number of out-of-town regional shopping centres in the UK, trades verysuccessfully and is fully let with substantial unsatisfied demand from retailersfor new or additional space. We look forward to working with Prudential on thesetwo centres and potentially other projects. Results for the six months ended 30 June 2005 under International FinancialReporting Standards ('IFRS') We have recently released a document entitled "Adoption of InternationalFinancial Reporting Standards - Restatement of the 2004 Income Statement andBalance Sheet", reconciling the differences between IFRS and the accountingpolicies previously adopted by Liberty International. The 2005 interim results are the first we have produced in accordance with IFRSand are fully described in the attached Operating and Financial Review. Whilethe format may be unfamiliar, the changes in presentation have no impact on thecash flows of the business or its present strategic direction. After extracting revaluations of investment properties, the change in fair valueof derivative financial instruments and exceptional items from the IncomeStatement, our underlying revenue profit showed a 6 per cent increase from £50.6million to £53.8 million. Trading profits only amounted to £0.6 million in theperiod compared with £6.8 million in the first half of 2004, but we doanticipate additional trading profits in the second half of 2005. The IFRS treatment we have adopted for changes in fair value of derivativefinancial instruments has introduced a particularly volatile component to theIncome Statement. We predominantly finance the group through floating rate debtand reduce interest rate exposure by interest rate swaps as this combinationgives the group the desired certainty over future cash flows without necessarilyincurring the significant penalties associated with early repayment of fixedrate debt. However, changes in fair value of the derivative financialinstruments are, under IFRS, included by us in the Income Statement, unlikefixed rate debt where changes in fair value are disclosed by way of note to theInterim Results. The yield on the reference 10 year sterling interest rate swap, a reasonablebenchmark for our substantial book of interest rate swaps, reduced in the periodfrom 4.86 per cent to 4.47 per cent, thereby creating a notional valuationdeficit in the first half year of £114.3 million. A substantial proportion ofthis deficit has already been reversed as 30 June 2005 may have marked somethingof a low point in the UK interest rate cycle for longer maturities. The aggregate market value of our investment properties increased significantlyfrom £5.3 billion to £6.2 billion, reflecting the £653 million acquisition ofinterests in Manchester Arndale and the Mall at Cribbs Causeway, Bristol, andthe revaluation of the portfolio in the period. As the acquisitions werefinanced by increased borrowings, our debt to assets ratio increased from 36 percent to 43 per cent, a level which still provides ample scope to pursue thegroup's development programme. Adjusted net asset value per share increased from 1025p to 1085p, producing atotal return in the six month period, taking dividends into account, of 7.3 percent. Total return was 10.7 per cent, adjusting for the withdrawal ofdisadvantaged area relief from stamp duty land tax. The net asset value per share number would be further increased by 77p at 30June 2005 if purchasers' costs, primarily stamp duty land tax, were not deductedfrom the valuations as required by the RICS Appraisal and Valuation Standards.In our view, this deduction is inappropriate in respect of assets we have nointention of selling. Valuations The valuations of completed investment properties at 30 June 2005 show a furtherstrong appreciation of £193 million (3.2 per cent) in the six months, with theuplift presented under IFRS as part of the Income Statement for the period. Theunderlying increase in the period was however reduced by a one-off adjustment of£108 million (1.9 per cent) as disadvantaged area relief from stamp duty landtax was quite unexpectedly withdrawn in the period. The Capital Shopping Centres' uplift was £158 million (3.2 per cent equivalentto 5.2 per cent on a like-for-like basis). Encouragingly, increases in estimatedrental values at the majority of CSC's key shopping centres produced some 55 percent of the overall increase. The balance of the uplift reflects the strong UKproperty investment market which saw the weighted average yield applied by thevaluers to CSC's completed shopping centre portfolio reduced in the six monthsfrom 5.62 per cent to 5.50 per cent. The table set out below, based on figures supplied by one of our valuers, CBRichard Ellis, illustrates representative yields for the different retail assetclasses at 30 June 2005 compared with 31 December 2004 and 2003. The table showsa further 25 basis points yield reduction across the retail sector in the halfyear ended 30 June 2005 following the substantial reductions in 2004: Nominal Equivalent yield ------------------------------------------------ 30 June 2005 31 December 31 December 2004 2003 % % %Prime High Street Shops 4.25 4.50 5.00Prime Retail Warehouses 4.75 5.00 5.75Prime Shopping Centres 5.25 5.50 5.75Secondary ShoppingCentres 6.00 6.25 7.00 (Source: CB Richard Ellis) This table also illustrates that prime shopping centres, which have in our viewsuperior rental income growth prospects, a much wider spread of tenants and ahigher degree of stability, anomalously yield more than prime high street shopsand retail warehouses. Secondary shopping centres, which carry much greaterrisks and volatility, yield only 0.75 per cent more than prime shopping centres,a margin which has narrowed significantly in recent years. The retail and commercial assets of Capital & Counties overall contributed £35million to the group's £193 million valuation surplus with investment propertiesincreasing from £952 million to £1,011 million. Capital & Counties' investment property values in the UK rose to £737 million,an increase of 3.0 per cent. That overall increase was adversely affected byperformance at investments where development is imminent or vacancies have beentaken to create opportunity, namely King's Reach, Southwark; 190 Strand;Commonwealth House, Hammersmith; and The Headrow, Leeds. Excluding thoseproperties, the remainder of the portfolio increased in value by 5.8 per centover the half year, despite the loss in some cases of disadvantaged area stampduty relief. The investment market in California remained strong in the period and the marketvalue of Capital & Counties' US investment properties rose in the half year by5.2 per cent to $492 million (£274 million). Dividends The directors have approved an interim ordinary dividend of 13.0p per share(2004 - 12.4p per share) payable on 6 September 2005. The increase of 4.8 percent is in line with our policy of progressive dividend growth and an interimdividend amounting to approximately half the previous year's annual dividend, inthis case 26.5p per share in 2004. The adoption of IFRS is not anticipated tohave any impact on the group's dividend policy which has consistently involveddistributing substantially all of the group's underlying income stream. Inaccordance with IFRS, the interim results contain no provision for dividendsdeclared after the end of the accounting period. Trading conditions UK investment property continues to attract a considerable inflow of capital onthe grounds of yield and stability of returns compared with other asset classes.As measured by the representative benchmark, the IPD UK monthly index, UKproperty delivered a total return of 7.3 per cent for the first six months of2005, with the compound total return for the last five years amounting to 11.9per cent per annum. The noticeable slowdown in UK retail sales which became apparent in the secondhalf of 2004 has continued into the first half of 2005, particularly in thesecond quarter, with UK non-food retail sales growth* for the last twelve monthsnow standing at 1.6 per cent year on year. However, comparison goods, which arepredominantly the product mix within our centres, have generally fared betterthan household goods which have been more severely impacted by the anticipateddownturn in the UK housing market.* as measured by the Office for National Statistics non-food index The year has seen some high profile retail failures, such as Allders, althoughin reality the level of failures has not diverged markedly from a typical retailyear. Very often, these failures represent an opportunity for the moresuccessful retailers or for landlords, such as ourselves, in what continues tobe a dynamic and competitive retail marketplace. In the case of Allders, forexample, we took back their 81,500 sq.ft. store at Lakeside, which has now beensubdivided. The majority of the space has been relet to Primark and theremainder is under offer. A significantly enhanced overall rental level will beachieved. Furthermore, the sizeable Allders store at The Headrow, Leeds, hasbecome a major redevelopment opportunity for Capital & Counties following thesurrender of the lease. Vacancy levels at our regional shopping centres remain very low at 25 units,some 1.4 per cent of CSC's rent roll, and we continue to see steady demand fromretailers for extra space at our centres. CSC's like-for-like income growth inthe six month period amounted to 6 per cent, benefiting from the positiveoutcome of the first rent review cycle at Braehead, Renfrew, Glasgow. The group's experience from previous downturns in retailing is that establishedprime regional shopping centres with the best retailers trading from flagshipstores are exceedingly resilient. Our net property income progression is morecorrelated with the rent review cycle at each centre than short-termfluctuations in retail sales. We would expect CSC's prime shopping centres toperform substantially better in more difficult market conditions than assets oflower quality. Recent tragic events in London are a further clear reminder of the importance ofsecurity issues for the owners of real estate, and particularly for the ownersof large shopping centres. We have always placed great emphasis on effectivesecurity at our centres. We are in constant liaison with the police bothon-site, locally and nationally and receive regular input from specialistsecurity advisers. We have in recent weeks again reviewed our securityarrangements and increased the presence and visibility of security staff whereconsidered appropriate. Development programme Our overall development expenditure programme now stands at a substantial £1.4billion of which £350 million is committed, and £1,050 million is at thepre-development stage. Chapelfield, Norwich, which is due to open on time laterthis year, is a large part of the committed element. The potential shoppingcentre programme includes the major city centre projects at Cardiff and Oxfordtogether with extensions of Eldon Square, Newcastle, The Harlequin, Watford andother existing centres. The overall risk profile of the programme remainsattractive as the bulk of CSC's expenditure involves extending what are alreadyprime retail pitches within well-established locations. In the case of Capital &Counties, the development element has been growing rapidly and amounts to £200million of the £1.4 billion. Our current plans are to finance the development programme from within ourexisting capital resources. The programme will when completed substantiallyincrease our market presence in the UK's top shopping centres and represents anintegral part of our goal of delivering superior long-term returns toshareholders. Directorate John Abel, Managing Director of CSC, steps down from his position as ManagingDirector of CSC on 30 September 2005 after 33 years of continuous service. Hiscontribution to our leading position in the UK shopping centre industry has beenimmense. We are delighted that his great experience will continue to beavailable to the group as a non-executive director of Liberty International andhe will continue to assist us on major projects. Kay Chaldecott will become the Managing Director of CSC. Richard Cable remainsas CSC Development Director. Kay and Richard are already Liberty Internationalexecutive directors and respectively have 20 and 17 years experience with thegroup. Prospects Liberty International is extremely active on a number of fronts both at CSC andCapital & Counties as fully described in the attached Operating and FinancialReview. Our underlying income stream is set to benefit from importantforthcoming rent review cycles, including Lakeside, Thurrock in the last quarterof 2005 and the first round of rent reviews at The Chimes, Uxbridge, in 2006. Wehave demonstrated through the Manchester Arndale and Cribbs Causeway, Bristoltransactions in the first quarter of 2005 that we remain alert to suitableacquisition opportunities where these meet our stringent investment criteria.Furthermore, we have a wide range of promising development projects which willensure the continued steady expansion of the group's activities. We particularlylook forward to the opening, in September, of the 530,000 sq.ft. regionalshopping centre, Chapelfield, Norwich, and, in October, of the first phase ofthe Manchester Arndale Northern Extension. I have been privileged to take over the Chairmanship when Liberty Internationalcan look forward with great confidence - strong core businesses, prospects forlong-term growth from an excellent property portfolio and an enviable trackrecord. July 2005 finds the company in fine health. Sir Robert FinchChairman28 July 2005 OPERATING AND FINANCIAL REVIEW FOR THE SIX MONTHS ENDED 30 JUNE 2005 OPERATING REVIEW CAPITAL SHOPPING CENTRES ('CSC') Market Background CSC's completed shopping centres have many attractive investmentcharacteristics, including a high degree of stability, a profile of steadyincome growth and considerable reversionary income potential reflecting the lagfactor embedded within the five year rent review cycle contained in most of ourleases. The quality of CSC's regional shopping centre business has been demonstrated inthe first six months by further increases in market valuations, continuedretailer demand reflected in low vacancy levels and rising rental values.Through our active management approach to tenant mix, we have made 48 tenancychanges producing additional annual rental income of £2.5 million, and continuedto have a negligible level of voids (25 units out of a total of 1727 units) atthe end of the half year. Like-for-like net property income for this year and the next few years willbenefit from current and forthcoming rent review cycles. The first rent reviewssince Braehead, Renfrew, Glasgow opened in 1999 started in September last yearand have now largely been settled. Rent review cycles take place at Lakeside,Thurrock, this year and at MetroCentre, Gateshead and The Chimes, Uxbridge, in2006; in the latter case the reviews are the first to occur since the centreopened in March 2001. Total net property investment income for the first halfhas increased by £19.3 million to £110.5 million, with a like-for-like increaseof 6 per cent, primarily reflecting the positive outcome of our rent reviews atBraehead. For many retailers, the trading climate during the first half of this year,particularly the second quarter, has been more difficult. The Office forNational Statistics has reported year-on-year non-food sales growth for thetwelve months to the end of June reducing to 1.6 per cent from an equivalentyear on year growth rate at the end of December 2004 of just under 5 per cent.However, our net property income progression is more correlated with the rentreview cycle at each centre than short-term fluctuations in retail sales. Theseconditions make tenant mix management increasingly important. We aim constantlyto refresh our offer to the public by attracting retailers who best meetshoppers' needs and aspirations at any given time. Development activities in respect of completed shopping centres An important part of our asset management activities is to strengthen and extendour existing prime locations. At Lakeside, Thurrock, our successful major refurbishment and remodelling of thecentre completed last year has encouraged over 100 retailers to re-fit theirstores. The final phase of refurbishment of the centre, the remodelling andextension of the Pavilion, to improve the catering offer at Lakeside and provide42,000 sq.ft. of restaurants is programmed to start on site in January 2006 andcomplete in Spring 2007. At MetroCentre, Gateshead, we have embarked on a programme of refurbishment tocomplement the major extension which opened last October and has significantlyadded to the retail offer on both trading levels. At Braehead, Renfrew, Glasgow, the second phase of this development whichcomprises some 165 acres of land continues to be progressed. The construction ofthe 460,000 sq.ft. Xscape Leisure scheme, a joint venture with Capital &Regional Plc, which will include an indoor ski-slope, cinema, bowling,restaurants, cafes and speciality retailers, is on target to open in Spring2006. Lettings are progressing well and 70 per cent of the income is nowaccounted for by completed lettings or lettings where solicitors have beeninstructed. Sales of land for more residential and other uses continue to beprogressed. Conditional contracts have been entered into to sell a further 25acres for residential use and 4 acres for showroom use. At Eldon Square, Newcastle, preliminary works have now started on site for thefirst of the three projects to improve and expand the centre. This first projectwill involve the relocation of the bus station and the provision of 48,000sq.ft. of retail space which is programmed for completion during 2007 and 2008.The smaller second phase is the creation of 21,000 sq.ft. of new and remodelledspace and is programmed to start later this year and open in Autumn 2006. Thelargest of the three phases which will provide 410,000 sq.ft. of new retailspace including a 175,000 sq.ft. department store is due to start on site inAutumn 2006. When all three projects have been completed, Eldon Square willprovide 1.3 million sq.ft. of retail space, putting it amongst the UK's largestcity centre regional shopping centres. In Watford, the planning brief for our proposed mixed use scheme of up to600,000 sq.ft. on the site of Charter Place, an older style shopping centreowned by Watford Borough Council, constructed in the 1970s and adjoining ourcentre, The Harlequin, is being finalised. We have entered into a preliminaryagreement with the Council for the project which, when implemented, willsignificantly enhance the status of Watford in the regional retail hierarchy. At the Victoria Centre, Nottingham, the 40,000 sq.ft. remodelling project tocreate an additional 31,600 sq.ft. of prime space from available indoor marketspace has now been completed. The three new retailers, Top Shop, Republic andMonsoon, will commence trading in Autumn 2005. At The Glades, Bromley, where we purchased properties in the high streetadjoining the main entrance to the shopping centre, planning consent has nowbeen granted for our proposal to provide some 38,000 sq.ft. of new retail spaceand the project is due to start on site in 2006 for trading from the new unitsin early 2008. At Manchester Arndale, PruPIM, the property asset management division of ourpartners, Prudential, are making good progress with the Northern Extension whichwill add 550,000 sq.ft. of retail space and provide some 83 retail units. Thefirst phase which includes a major 150,000 sq.ft. Next store will open inOctober this year; the second phase is due to open in Spring 2006 and the thirdand fourth phases are due to complete in Autumn 2006. Whilst Prudential retainsthe financial obligation to complete the Northern Extension, letting risk isshared equally between the joint owners. Retailer interest is strong and totallettings have been completed or solicitors instructed for 72 per cent of thespace, representing over 50 per cent of the anticipated income. New Projects The development of the 530,000 sq.ft. shopping centre in Norwich, where CSC willbecome the owner on completion, is in the final stages of construction. LendLease have announced that the centre will open for trade on 21 September 2005.An excellent line-up of retailers has been secured anchored by a House of Fraserdepartment store. We expect the centre will be virtually fully let oncompletion. CSC's estimated cost of the centre, excluding the residentialelement, is around £260 million, as previously reported, of which around £220million remains to be paid. In Cardiff, the St David's Partnership, our joint venture with Land SecuritiesGroup PLC, continues to progress the proposed 967,500 sq.ft. retail-ledmixed-use extension of the existing St David's shopping centre in the heart ofthe city. Terms have been agreed with the John Lewis Partnership to occupy amajor new department store. Construction under the main building contract is dueto commence on site in Spring 2006. In Oxford, following the finalisation of the master planning exercise, theWestgate Partnership, our joint venture with LaSalle Investment Management, isnow preparing a planning application for the retail-led mixed-use scheme whichwhen completed will increase the size of the existing Westgate shopping centrefrom 231,000 sq.ft. to 750,000 sq.ft. The proposals also include a majordepartment store for the John Lewis Partnership. Our experience in Norwich is a good example of CSC's philosophy towards shoppingcentre projects. First, establish critical mass in prime locations with goodtransport facilities; second, seek above average prospects for sustained incomegrowth from a quality tenant mix; and above all create the facilities which makethem a destination for the public. CAPITAL & COUNTIES UK The first half of 2005 was exceptionally busy as Capital & Counties prepared fora number of substantial refurbishment and redevelopment projects. In the immediate future, these include schemes at Commonwealth House,Hammersmith, London W6; Hagley Road, Birmingham; Wapping Wall, London E1 and theformer Allders store at The Headrow, Leeds. We have obtained vacant possessionof significant areas of these properties (totalling 743,000 sq.ft.) in order tocarry out the schemes, which has led to a temporary reduction in net propertyincome. In 2007 and 2008, redevelopments at 190 Strand, London WC1 and King'sReach, Southwark, London SE1 will follow. In addition, the income position has been impacted by our reluctance to reinvestinto the market the proceeds of the major sales conducted in 2004 sinceacquisitions with prospects for adding real value have not been identified. Central London offices and retail At 31 December 2004, Capital & Counties had over 25,000 sq.ft. of office spaceavailable to let or undergoing refurbishment. 13,000 sq.ft. of that has been letover the last six months with Mayfair and Piccadilly seeing more buoyant tenantdemand than some other Central London areas. This is reflected in two lettingswe have achieved in Jermyn Street at £50 per sq.ft. We have taken vacant possession of 70,000 sq.ft. (with an additional 23,000sq.ft. expected) in order to carry out a major refurbishment of our investmentat Commonwealth House adjacent to Hammersmith public transport interchange. We submitted, in April, a planning application for the redevelopment of ourinvestment at 190 Strand. This proposes the development of 190,000 sq.ft. of newoffice space, 11,700 sq.ft. of retail space and 44 residential units. Vacantpossession of the entire property is anticipated to be available from June 2007.Prudential own the freehold of the site and discussions are continuing with themover the terms of a joint venture to facilitate development. After the period end, the London Borough of Southwark resolved to grant consentto our planning application for the redevelopment and refurbishment of theKing's Reach complex on London's South Bank. The scheme proposes a total of350,000 sq.ft. of offices both within a refurbished tower and in adjoining andlinked office buildings to be developed around it. The proposed retail elementof 28,000 sq.ft. would flank a new public right-of-way linking Stamford Streetto the river via the Oxo Tower. Retail outside London Allders, the department store retailer, entered administration in January 2005;we secured a consequential surrender of the lease of their store in The Headrow,Leeds and took vacant possession in May. We are now preparing a planningapplication for a major refurbishment of the property for mixed use. Currentproposals envisage the creation of 4 retail units of between 19,000 and 36,000sq.ft. on the lower floors and the conversion of the upper floors into units ofhigh quality flexible office accommodation and residential penthouses. Althoughat an early stage, we have had positive interest shown in the retail space. Elsewhere, we are continuing with our asset management initiatives at the tworetail parks we own at Braintree, Essex, and Stafford, including the potentialsub-division and extension of space which B&Q intend to vacate at Queens RetailPark, Stafford, where interest from high street retailers is promising. Business space outside London The first half of 2005 saw the letting of the last 14,000 sq.ft. of offices atCapital Court, Uxbridge on a ten year lease without break at a rent rising to£23.75 per sq.ft. The remaining restaurant unit at the property is currentlyunder offer. At Capital Park in Cambridge, following letting of the three earlier phases, wehave commenced construction of a further office project of 39,000 sq.ft.signifying our confidence in this improving market. Completion is programmed forearly summer 2006. Trading A number of potential sales from the trading portfolio both in the UK and the USare currently in negotiation and we anticipate these should conclude in thesecond half year. Trading acquisitions continued with the purchase of a retail warehouse inRotherham, let to B&Q but with an open A1 consent and expansion potential. Meanwhile further major refurbishment schemes are being planned to enhance valueat two properties. At the 144,000 sq.ft. office building at 54 Hagley Road, Birmingham, 85,000sq.ft. has been vacated and we are planning major upgrading of office space andservices including a dramatic new entrance lobby, communal meeting rooms andincreased parking. A different style of scheme is being planned at Wapping, London E1 where theintention is to create a concept of atmospheric and spacious studios and mixeduse space at this 150,000 sq.ft. riverside building. USA Asset management and development activities have continued apace in the halfyear. We have progressed existing and new initiatives at the Serramonte Centerand The Willows, Concord to upgrade and extend various areas of each scheme, thepurpose of which is to improve tenant mix and enhance the attraction of eachscheme for shoppers. We also continue to make progress on realising value from the 42 acre siteacquired at Antioch in 2004. Here we are considering the sale of some 15 acresof the site to an owner-occupier retailer while drawing up plans for thedevelopment of a 'lifestyle centre' on much of the remainder. FINANCIAL REVIEW ACCOUNTING ISSUES International Financial Reporting Standards ("IFRS") became mandatory for alllisted companies within the European Union from 1 January 2005 and the InterimReport for 2005 has been prepared in compliance with IFRS. The comparativefigures for 2004 have been restated accordingly and the notes to the InterimResults contain summary reconciliations to the previously reported figures. Amore extensive commentary and explanation of the changes brought about by thetransition to IFRS is contained in a separate document published on 26 July 2005which is available on the company's website (www.liberty-international.co.uk). INCOME STATEMENT Analysis of profit before tax------------------------------- Six months ended Year ended --------------------------------- ------------- 30 June 2005 30 June 2004 31 December 2004 £m £m £m Underlying profit before tax 53.8 50.6 100.8Trading profits 0.6 6.8 6.2 -------- ------- ---------Profit before tax, valuation andexceptional items 54.4 57.4 107.0 Revaluation gains on investmentproperties 195.2 171.2 357.3Movement in fair value of derivativefinancial instruments (114.3) 46.8 (41.4)Exceptional items (5.2) 1.9 32.2 -------- ------- ---------Profit before tax 130.1 277.3 455.1 -------- ------- --------- Underlying profit before tax increased by 6.3 per cent to £53.8 million from£50.6 million reflecting rent reviews and interest savings, offset in part bythe impact of active management and acquisitions all of which are discussed inmore detail below. Trading profits in the first half of 2005 were considerably lower at £0.6million than the £6.8 million recorded in the first half of 2004. Furthertrading profits are however expected in the second half of the year. As a resultof the impact of lower trading profits, overall profit before tax, valuation andexeptional items decreased from £57.4 million to £54.4 million. In addition to exceptional items, material items which need to be disclosed byvirtue of their size or incidence, profit before tax, under IFRS, includes otheritems which are unpredictable by their nature, such as revaluation gains oninvestment properties and the movement in fair value of derivative financialinstruments. These items can have a significant impact on the presentation andinterpretation of the revenue results. In order to compare one period withanother, the results have been analysed above to show the effect of these items. Under IFRS, the revaluation movements on investment properties, other than onfirst time developments, are presented in the Income Statement rather than inthe revaluation reserve. Commentary on this movement is dealt with below underthe section, investment properties. Also, under IFRS, the fair value ofderivative financial instruments is now included in the balance sheet and themovement in fair value of derivative financial instruments is included in theIncome Statement. This change creates considerable volatility in the IncomeStatement and has particular significance for Liberty International because ofour chosen method of financing. The group uses derivative financial instruments such as interest rate swaps toachieve fixed rate funding while retaining the flexibility afforded by borrowingon a floating rate basis. This combination gives the group the desired certaintyover future cash flows and the ability to repay debt without necessarilyincurring the significant penalties associated with the early repayment of fixedrate debt. For example, the separation of the fixed and floating elements inthis way enabled us to benefit from reduced margins, through the earlyrefinancing of non-recourse facilities secured on our major shopping centres, ina way which would not have been possible had the original financing been on afixed rate basis. The treatment we have adopted under IFRS is not to use hedge accounting but toaccount for derivative financial instruments at fair value and show themovements in fair value in the Income Statement. This differs from the treatmentof fixed rate debt where the movement in fair value does not impact the IncomeStatement even though the cash flows from both types of financing should bebroadly similar. Over the period to 30 June 2005, interest rates in general fell and inparticular the ten-year sterling interest rate swap, which represents a suitablebenchmark for the group's fixed rate obligations, decreased from 4.86 per centto 4.47 per cent. As a result the fair value of the group's derivative financialinstruments, which are outlined in more detail below under Maturity and InterestRate Profile of Debt, declined by £114.3 million and this movement has beenreported in the Income Statement. Since the period end the ten-year swap hadrisen to 4.61 per cent at 26 July 2005 reversing a considerable proportion ofthe movement in the first half year. The fair value of financial instruments is extremely sensitive to movements ininterest rates. An increase of around 0.75% in swap rates would be sufficient toeliminate the £247 million negative fair value shown in the balance sheet at 30June 2005 while such a rise in interest rates would have a minimal impact on thegroup's financing cash flows. Exceptional items in the period to 30 June 2005 primarily comprised theunamortised costs of the original MetroCentre and Braehead facilities which werewritten off when these facilities were repaid during the period. Furthercommentary on the impact of the financings is included below under the sectionnet interest payable. Profit before tax reduced to £130.1 million from £277.3 million, largely as aresult of the impact of movements in the fair value of derivative financialinstruments. Net rental income increased to £143.8 million from £125.0 million. The increasehas two components, like-for-like rental growth and acquisitions net ofdisposals. Overall the like-for-like rental growth amounted to £6.7 million (5.5per cent), with £5.5 million (6.0 per cent like-for-like) generated fromshopping centres primarily from the favourable rent reviews at Braehead. The UScontributed 12.1 per cent underlying growth with a much lower level of 1.7 percent from the UK properties largely reflecting management decisions to sacrificeshort-term revenue for medium and longer-term refurbishment or redevelopmentopportunities. Other income decreased to £1.3 million from £12.6 million reflecting the reducedlevel of investments as a result of our disposal of the interest in GreatRelated Shares:
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