25th Aug 2005 07:01
Slough Estates PLC25 August 2005 25th August 2005For immediate release Slough Estates plc Interim Results 2005 Highlights • Diluted NAV per share up 2.4% to 472p (31 December 2004: 461p). Adjusted diluted NAV per share up 4.1% to 581p (31 December 2004: 558p). • Valuation of the investment portfolio up by 3.6% to £4.2 billion. • Profit before tax of £119.0 million (H1 2004: £173.6 million), reflecting cost of the bond exchange, revaluation surpluses and other exceptional profits/losses. Adjusted profit before tax of £90.6 million* (H1 2004 : £66.2 million) - up 37%. • Basic earnings per share 17.1p per share (H1 2004: 29.3p). Adjusted basic earnings per share up by 7.3% to 14.7p per share*. • Interim dividend of 6.5p, up 5.7%. • 67,480 sq.m. of space leased in UK, a group record for a six month period, but overall occupancy rates held back by space returned. • Sale of non-core assets in USA - Quail West (£32 million) and Tipperary (in July - £124 million). • Significant property purchases in the period in the UK (£28 million) and USA (£191 million) and an initial foothold established in the Netherlands. • In July, the further acquisition of holding entities owning two major UK industrial estates; Woodside in Dunstable and Heywood in Manchester, for £276 million. • Successful £322 million debt refinancing leading to future interest cost savings of £11m per annum. * Excludes exceptional loss on bond exchange, net valuation surpluses, gain ondisposal of Quail West and loss on sale of investment properties, but includesthe benefit of significant surrender premiums. See page 17 of Financial Reviewfor further detail. Chairman Paul Orchard-Lisle said: "We have had an extremely active half year andthe Board is very pleased at the progress that has been made by Management inre-focusing the business. The Group has disposed of its non-core properties inthe US at excellent prices and has purchased additional business space assets inthe UK, Continental Europe and the US in line with our strategic plan." Commenting on the results, Chief Executive Ian Coull, said: "NAV growth in allareas has been good. We have let an impressive volume of space reflecting thebenefits of restructuring the UK business into geographical areas, but overalloccupancy remains broadly unchanged as a result of space returned to us. Thebusiness is in good shape and there is continuing evidence that occupier demandis improving in the business space markets we are serving. Whilst theconsequence of the corporate activity undertaken over the last 12 months hasbeen to reduce core earnings this year, we are confident that our acquisitionand development programmes will bring growth from 2006 onwards. We have a strongbalance sheet and we believe that there will be further opportunities toincrease our exposure to flexible business space in the months ahead." Financial Highlights Half Year to 30 Change June£ millions Note 2005 2004 %--------------------------- ------- ----------- --------- --------- Net rental income 1 136.9 119.8 14.3Operating income 290.2 199.8 45.2 Profit before tax 119.0 173.6 (31.5)Adjusted profit before tax 2 90.6 66.2 36.9 Earnings per share 17.1p 29.3p (41.6)Adjusted earnings per share 2,3 14.7p 13.7p 7.3 Dividends per ordinary share 6.5p 6.15p 5.7 30 June 31 Dec Change£ millions Note 2005 2004 %--------------------------- ------- ----------- --------- ---------Net assets per share 501p 486p 3.1Adjusted net assets per share 623p 595p 4.7Diluted net assets per share 472p 461p 2.4Adjusted diluted net assets per share 3 581p 558p 4.1 Combined portfolio valuation 4 4,154.2 3,729.4 11.4Equity shareholders' funds 2,111.8 2,029.1 4.1Adjusted equity shareholders' funds 3 2,625.0 2,486.4 5.6 Net borrowings 1,787.4 1,325.3 34.9Gearing (net) 5 62% 51% (11.0)LTV (net) 6 40% 36% (4.0) Notes1. Includes a surrender premium of £36.6m (H1 2004 : £7.5m)2. Excludes exceptional cost of bond exchange, net valuation surpluses, gain on disposal of Quail West and loss on sale of investment properties, but includes the benefit of surrender premiums. See Financial Review for further detail.3. Adjusted to exclude deferred tax on investment properties and other properties.4. Includes investment properties, and properties under development and owner-occupied properties within property, plant and equipment.5. Net debt, excluding debt element of convertible preference shares from debt (£106.4 million), as a percentage of adjusted shareholders' funds.6. Net debt to combined portfolio valuation. For further information contact:------------------------------- ----------------------Slough Estates plc Shared Value LimitedIan Coull, Chief Executive / Andrew Best / Dick Kingston, Finance Director Emily BruningTel: 01753 537171 Tel: 020 7321 5022 / 5027 A meeting for analysts will be held at 9.30am on 25th August at The GreatEastern Hotel, Liverpool Street, London EC2 and will be audio streamed on SloughEstates' website: www.sloughestates.com. A conference call for international investors will be held at 16.30 (UK time) on25th August. The dial-in numbers are: +44 (0)20 7784 1004 / +1 718 354 1152 andparticipants should quote Slough Estates. A recording of the conference callwill be available for 7 days, accessible on +44 (0)207 784 1024 or +1 718 3541112, passcode 4659358# Overview In the first half of 2005, the Group has made important strides towards its goalof focusing its business on "edge of town" flexible business space. Since thebeginning of the year, we made two important disposals of non-core assets withan exceptional gain of £98 million (to be recorded in the second half of theyear) from the sale of Tipperary and a price of £32 million for Quail West whichwas substantially above the written down book value. These prices were achievedas a result of our decision to delay these disposals until maximum value couldbe extracted for shareholders. The Group has also been busy with core property transactions. In total, SloughEstates received £18.1 million from investment property disposals and acquired afurther £267.8 million of assets in the first half of the year. Since the end ofJune, the Group has also acquired holding entities owning two industrial estatesin the UK for £276 million. We have also taken the opportunity to restructureour debt which has provided us with less expensive long term funding. Finally,we have undertaken a major reorganisation of our UK business to create sixmarket facing, fully accountable business regions, to bring us closer to ourcustomers and to improve underlying performance. We have now virtually completed the reshaping our existing assets and we are nowwell positioned to take the business forward with a focus on flexible businessspace in three geographic regions - the UK, Continental Europe and the USA. Financial results Our results for the period are presented in accordance with InternationalFinancial Reporting Standards ('IFRS') for the first time and all comparativefigures for 2004 have also been restated accordingly. The aggregate market value of our investment portfolio increased during theperiod from £3.7 billion to £4.2 billion. This increase reflects acquisitionsand development expenditure of £267.8 million and a revaluation surplus of£145.1 million. Profit before tax amounted to £119.0 million (2004: £173.6 million) includingrevaluation gains, the book loss arising on the bond exchange transaction andall other exceptional items. The adjusted profit before tax stated before theseitems increased by 37% to £90.6 million. This amount was, to some extent,enhanced by an unusually large surrender premium of £36.6 million (2004: £7.5million), but it was negatively impacted by the short term loss of rental incomeassociated with these surrenders and the sale of the Pfizer campus in the secondhalf of last year. It should also be noted that no income has been recognised inrespect of the rental guarantees on vacant properties acquired from LandSecurities as these have to be accounted for as a deduction from the cost ofacquisition under IFRS. Net debt at 30 June 2005 stood at £1,787 million, compared with £1,325 millionas at 31 December 2004 and gearing increased by 11% to 62% as at 30 June 2005.This was a result of the substantial property acquisitions in the period and thereclassification of convertible preference shares as borrowings. Gearing islikely to rise further by the year end due to the further acquisitions completedpost 30 June 2005, details of which have already been announced. The adjusted diluted net assets per share have increased since December 2004,from 558p to 581p, a rise of 4.1%, whilst the unadjusted and undiluted netassets per share were 501p (31 December 2004: 486p). We are paying an interimdividend of 6.5p per share, up 5.7%. Dividend growth continues to be at a rateconsiderably in excess of inflation and, over five years, has grown at acompound growth of 7.3% per annum. The interim ordinary dividend will be paid on7 October 2005 to shareholders on the register on 9 September 2005. To create greater dynamism in the business we have put in place a new regionalstructure for the UK business, which now operates in six regional teamsreporting to John Heawood, our Group Director responsible for UK Property. Thisnew structure is working well and is providing the customer focus that we needin today's market, so that our property management and development teams workmore closely with our customers at a local level and provide a more seamlessservice for all of their needs. It is a structure that has worked well for ourbusinesses in Europe and North America and, in the UK, it will help us toincrease occupancy, both by attracting new customers and, just as importantly,by retaining existing customers through greater responsiveness to their needs. In Continental Europe we created a new management structure last October, headedby Walter Hens who is based in Paris. We have now filled the roles of CountryHeads in Belgium and France and we have also acquired, through Mainland BV, anexcellent team in the Netherlands. Our Continental European activities havetaken a significant step forward in the last few months and, in the comingmonths, we expect to announce a number of exciting opportunities to grow ourbusiness. Major Property purchases and sales The high level of property purchases and sales within the portfolio that wasseen in 2004 continued through the first half of 2005. In the US, the Groupcompleted the sale of its non-core assets, achieving returns well in excess ofbook value and cash was recycled through purchases of new development sites. Inthe UK, after the property swap with Land Securities in 2004, we have continuedto see a high level of activity and since the half year we have completed thepurchase of holding entities owning two major industrial estates. Major purchases and sales in the first six months of 2005: • Sale of Quail West for a net £32 million. The leisure and residentialcomplex in Naples, Florida was sold to Ginn-LA for a net £32 million. The firstinstalment of £9 million has been received and this will be followed by fourfurther annual payments. The sale price of £32 million exceeds the written downnet book value of £9.6 million and reflects the improvement in the market forsuch high end residential developments over the last two years. • Purchases of land in San Diego for £20 million. Slough acquired a 16.5ha site at Carlsbad which will accommodate approximately 58,000 sq.m. oftwo-storey office and R&D product, suitable for marketing to health sciencecompanies. • Purchases in San Francisco for £171 million. In the San Francisco BayArea, Slough has acquired the 67,493 sq.m. Shoreline Technology Center with netrental income of £4.8 million per annum and the 57,860 sq.m. Seaport Center withnet rental income of £4.2m per annum from Equity Office Properties. These sitesare attractive to Slough Estates as they are high specification offices which,unusually, can be converted to health science use and there are significantopportunities to add value to both investments. • Purchase of 3.4 ha LSG Sky Chefs site at Heathrow. This site providesthe potential to develop a 9,290 sq.m. warehouse scheme with a completed valueof some £20 million. • Purchase of 13 ha Blueprint site in Portsmouth. With potential for upto 49,239 sq.m., Voyager Park is one of the largest industrial sites in theSouth East and, when fully developed, will have a value in excess of £40million. • Purchase of 2.1 ha income producing property at Edmonton, northLondon, for £9 million. The site comprises an existing warehouse complex of16,836 sq.m., with land for redevelopment. • Sale of Navigator Park, Heston, West London for £9.2 million. Theestate extends to 6,290 sq.m. and was sold to a recovery fund. • Sale of Avenue Kleber in Paris. This 3,221 sq.m. central districtoffice building has been sold for £21 million to Fonciere des Regions generatingprofit of £4.5 million. This building was one of the Group's largest sevenvacancies by rental value. • Purchase of Mainland BV. Slough Estates has entered the Dutch marketby acquiring a 60% stake in Mainland for £1.7 million. Mainland BV is adeveloper in the Schiphol area outside Amsterdam and has a strong management andtrack record. The company owns 130,000 sq.m. of new development sites in theSchiphol Airport area. Since 30 June 2005, we have completed the following major transactions: • Sale of stake in Tipperary Corporation for £124 million. The grossproceeds of £124 million included £13.1 million in debt due to Slough, giving anexceptional profit of some £98 million. The sale was in line with the Group'sstrategy to exit non-core assets and this oil and gas company had no long termplace in Slough Estates' asset portfolio. • Purchase of holding entities owning two major multi-let estates;Woodside Industrial Estate in Dunstable and Heywood Distribution Park inManchester, for £276 million in cash. Woodside and Heywood are two of thelargest industrial parks in the UK. Together the two sites contain 371,000 sq.m.of prime industrial property, providing combined income of approximately £16million per annum, and over 11.3 ha of further development land. Joint Venture - HelioSlough In April 2004 we established a joint venture with Helios Properties calledHelioSlough Ltd. It is a 50/50 joint venture which has £150 million of fundingavailable, focused on developing a network of strategic distribution parksthroughout the UK. This is a sector which Slough Estates had not previouslyexploited in the UK, although we had successfully developed a number ofdistribution parks around Paris and Brussels. The changes in supply chainmanagement mean that the UK will be an attractive market for distributionfacilities in the coming years. The joint venture is progressing well and we now have a number of sites ready toenter the construction phase, at Nimbus near Thorne, Doncaster, at SheffieldInternational Railfreight Terminal, at Wynard One, Tees Valley and at CardiffRail Freight Terminal. At Trax Park, Doncaster, a 11,148 sq.m. speculative unitwas completed at the end of May 2005 and a number of viewings have taken place.The joint venture also has a number of strategic holdings at Radlett inHertfordshire, where we have a development agreement on approximately 121 ha ofgreenbelt land to promote up to 278,700 sq.m. of rail connected development, andat Rossington and Stainforth on the M18 in Yorkshire. HelioSlough's capital expenditure to date amounts to £14.2 million. Futureplanned development expenditure amounts to approximately £140 million. The joint venture is expected to break even in 2005 and to make a positivecontribution to earnings in 2006, as further schemes are completed. Leasing A key objective for us in the last two years has been to increase occupancythroughout the Group. In the first six months of 2005 we leased 104,559 sq.m. of space, much of whichwas in our higher value properties. Of the seven largest vacant properties atthe end of 2004, we have let one, totalling 11,189 sq.m and sold one, AvenueKleber, Paris. We took back 124,542 sq.m. over the period, of which 25,291sq.m., or 20%, was either demolished or redundant space, presenting asubstantial opportunity for redevelopment. Of this space taken back fromcustomers, the largest amount, some 31,757 sq.m., was in the Heathrow and WestLondon region. The space returned to us in the first half represented 54% oflease expiries and 21% of break options. Increasing occupancy has been a particular challenge in the UK as a result ofthe property swap with Land Securities in which we exchanged nearly fully letshopping centres for UK industrial property with lower levels of occupancy. Inparticular, seven of the estates bought from Land Securities, at Basildon,Croydon, Fareham, Guildford and Oxford, had 45.3% vacancy but with the benefitof an 18 month rental guarantee. However, some 19% of the total Land Securities'December vacancy, 68,276 sq.m, has now been let or sold and another 51.5% is atvarious stages of negotiation. We believe that we are on track to lease themajority of these properties by the time the rental guarantees come to an end in2006. It should be noted that the rental guarantees cannot be treated asproperty income under accounting rules and so have no positive impact on ourearnings line. In today's tougher leasing environment, the importance of customer retentionincreases. This is a key reason why the reorganisation of the UK business is soimportant to our future as it will enable us to build closer relationships withour customers. The market conditions in Europe and the U.S. are also demanding but we have hadconsiderable success in most areas of our operations and in particular inGermany, where we have prelet three buildings totalling 27,675 sq.m. and this ina market where preletting is rare. In the U.S. we have received a surrenderpremium of £36.6 million from Pfizer following their take-over of Sugen. Allthree buildings in the Pointe Grande Estate campus are now fully leased but willnot start to generate revenue until the end of this year. Group occupancy at the half year remained broadly unchanged from 31 December2004, at 87.2% and the overall break down is as follows:- ---------------------- ------------------ ------------------Occupancy rates 30 June 31 December 2005 2004 % % ---------------------- ------------------ ------------------Group 89.2 89.6- treating rental guarantees as vacant 87.5 87.7UK 91.1 90.6- treating rental guarantees as vacant 87.5 87.9U.S. 87.1 86.3Europe 87.8 87.9---------------------- ------------------ ------------------ The overall change in space is as follows:-------------------- ----------- ---------- ----------- ----------Leasing of space vs. space Slough Trading Other UK Europe UStaken back Estate sq.m. sq.m. sq.m. sq.m.------------------- ----------- ----------- ----------- ----------Lettings 32,849 34,631 10,607 26,472Pre-lets 0 8,727 6,327 0New space completed and unlet 2,394 20,824 1,800 0Space taken back 23,972 74,880 9,565 16,125------------------- ----------- ----------- ----------- ---------- Major lettings have included: UK • Letting of 11,189 sq.m of IT backup space at Dundee Road on the Slough Trading Estate to a major financial institution at £91.49 per sq.m. • Letting of 2,805 sq.m. office development at 252 Bath Road, Slough to LG Electronics at £217 per sq.m. • Letting of two units totalling 4,013 sq.m. to Manpower at Riverside Estate, Uxbridge at £110 sq.m. • Pre-let of 6,968 sq.m. Phase 300 at Parkbury, Radlett, to Viglen Ltd. The lease is for 15 years at an annual rent of £610,500, making it the largest pre-let deal in South Hertfordshire for over ten years. • Pre-let of 2,950 sq.m. car showroom complex at the Portsmouth Motor Park to Pentagon Ltd Europe • In Germany in the first half there has been one pre-let of 6,327 sq.m. at Dormagen, in addition to the 18,327 sq.m pre-let at Neuss and the 3,021 sq.m. pre-let at Krefeld started in the second half of 2004. USA • On the Pointe Grande Estate (South San Francisco) Slough Estates received a termination premium of £36.6 million. The facility forms part of the20,624 sq.m. campus formerly occupied by Sugen, a subsidiary of Pfizer. Thefirst two buildings in the campus have been let to Exelixis and we have recentlycompleted the letting of 9,848 sq.m. to Rinat Neuroscience. • Genentech agreed to lease 72,464 sq.m. (780,000 sq.ft.) of office andlaboratory space in eight new buildings on Slough's Britannia East Grand site inSouth San Francisco in late 2004. This is a four year project, with the firstphase of 41,805 sq.m currently under construction. Development In the first half of 2005 we have pushed ahead with more development throughoutthe portfolio in anticipation of improving occupier demand. The level ofenquiries increased by around 40% on a year on year basis in the first half of2005, although the second quarter of the year was somewhat slower than thefirst. The enquiries are converting into more viewings but there is littlecompetitive pressure on occupiers to proceed quickly and as a resultnegotiations are taking longer than has historically been the case. The level ofincreased activity however gives us cause for some optimism and accordingly, weare continuing to develop prudently so that we have sufficient business space tomeet the growth in demand. In 2005, we are expecting to spend some £200 millionon developments and by the end of June £125 million had been incurred. Also atthe end of the half year we had 170,032 sq.m. under construction, of which 48%is pre-leased. We have continued to prepare our development sites, obtaining planning consentsand putting in place the key infrastructure so that we are in a position toagree pre-lets and, where appropriate, to start on limited speculativedevelopment. -------------------- ------- -------- -------- ---------- ----------Current sq.m. Spend Committed Estimated AnticipatedDevelopments to date spend development completion date- Major Schemes £m £m cost to come £m-------------------- ------- -------- -------- ---------- ----------Farnborough 153,000 118 41 257 2013Cambridge 35,000 35 0 66 2014Voyager Park,Portsmouth 48,000 8 0.3 40 2008Pegasus Park,Brussels 170,000 28 0.9 141 2010East Grand,San Francisco 73,000 55 123.3 108 2008Poway, SanDiego 78,000 37 44.7 67 2011------------------- ------- -------- -------- ---------- ---------- Excludes buildings already completed Valuation The half year valuation of all the Group's investment properties was undertakenas at 30th June by external valuers. Revaluation Movements June 2005 % change from £m December 2004 UK Industrial 93.7 4.5 Office 25.0 5.4 Retail 12.8 6.8 UK excluding land 131.5 5.1 Land (8.4) (3.3) Total UK 123.1 4.2 -------- ------ ------ Overseas USA 17.5 2.4 Europe 4.5 1.6 Total Overseas 22.0 2.2 -------- ------ ------ Total 145.1 3.6 -------- ------ ------Joint ventures / Associate 2.4 2.0 Debt Exchange Offers In June we completed a bond exchange in which we exchanged £322 million of highcoupon debt for long dated new debt at lower interest rates. This has led to aone-off cost in this year's accounts of £125.6 million but will reduce our debtcost on an annual basis by around £11 million and has reduced our average costof debt from 6.5% to 5.8%. Slough Estates now has the lowest coupon and longest dated unsecured public debtissues in the UK property sector and the Group's future earnings will benefitdirectly as a result. Other activities Since the end of last year we have completed the sale of our non-core activitiesin the US. Quail West was sold in May for £32 million, a sum substantially abovebook value, and there was an exceptional gain of £98 million on the sale ofTipperary Oil & Gas in July which illustrates the wisdom in taking time to exitthese investments in order to maximise shareholder value. Slough Heat & Power (SH&P) has continued to improve its operating performanceover the past six months, recording £0.8 million profit for the first halfcompared to a loss of £3.0 million for the first half of 2004. We expect SH&P tobreak even for the year as a whole. Board Matters Following the recent announcement about Sir Nigel Mobbs' illness the board hasagreed that Paul Orchard-Lisle will take on responsibility as Chairman. On 23rd May we were pleased to welcome Thom Wernink onto the Board as anon-executive director. Thom, who is a Dutch citizen, is a well known figure inthe Continental European property market and his experience will be of greatbenefit to Slough Estates in growing our European business. He was, until April2005, Chairman of the European Public Real Estate Association and was a formerChairman of Corio NV. Outlook There is continuing evidence that occupier demand is improving in the businessspace markets we are serving and in the first half of the year we have managedto lease a large volume of space across the portfolio. In the UK this amountedto some 67,480 sq.m. which shows an encouraging increase in the level ofactivity and the success of our leasing teams. However, the Group also took backa similar amount of space and so occupancy levels have remained broadlyunchanged. The Group has made further progress in focusing its activities onflexible business space and is therefore well positioned for growth. The overall property market is in a robust state. There has been a revival ininvestment in property as there is a recognition of the attractions of propertyas a key component in investment portfolios. Though offices in the UK, and inparticular in the Thames Valley, still face some shortage in occupier demand andindustrial growth continues to be slower than expected, there is today stronginvestor demand for well-located and well-let property. The investment case isunderpinned by low inflation, affordable interest rates and a lack of funding tosupport speculative development excesses. It seems that the yield compression of the last two years looks set to continueinto the second half of 2005. We have seen a structural change in yields whichreflects the changing sentiment towards real estate as an asset class, and thelow inflationary environment that we are now experiencing makes real estate moreattractive. Although we believe that we have seen most of the downward pressureon yields, and expect some stabilisation in the coming months, it is too earlyto call an end to yield compression. • In the UK, Slough Estates' focus will increasingly be on flexiblebusiness space. This focus has been increased by the swap with Land Securitieslast year and the addition in July of Woodside and Heywood, so that today SloughEstates owns five of the largest industrial estates in the UK, including theSlough Trading Estate, Winnersh and Kings Norton. We will continue to look foropportunities to strengthen this position, both by acquisition and throughdevelopment including our two major sites at Farnborough and Cambridge. • A key objective is to grow our established position in ContinentalEurope, where we see good opportunities for expanding our base in theindustrial, logistics and suburban office markets. We have recently re-organisedthe business under Walter Hens who is based in Paris. Yields in ContinentalEurope continue to be more attractive and we believe there is an opportunity tobuild a pan-European business. • In North America, we have raised substantial funds from the sale ofnon-core assets and the disposal of completed developments in the health scienceproperty portfolio. We will continue to exploit the opportunities in healthscience in California by reinvesting the proceeds of these and future disposalsin the most exciting development projects. Slough Estates has built up a leadingposition in the provision of space to the health science community which meansthat we can expect to see a very positive contribution towards Group earningsfrom both our completed laboratory space and from our strong developmentpipeline. Whilst the consequence of the corporate activity undertaken over the last 12months has been to reduce core earnings this year, we are confident that ouracquisition and development programmes will bring growth from 2006 onwards. TheBoard believes that Slough Estates is well positioned, with a tighter focus onflexible business space, to take advantage of the opportunities in its chosenmarkets. The strength of the current asset base, the growth opportunitiesoffered by the land bank and the understanding of the dynamics of themarketplace point towards excellent shareholder value as occupier demandimproves. Ian CoullChief Executive Operating Review Slough Trading Estate The Slough Trading Estate is the largest business park in Europe and has beenSlough Estates' core property asset since the Group was founded over 80 yearsago. Today the Estate is a modern business park in close proximity to London'sHeathrow airport, which is the world's busiest international airport, and it hasexcellent access to the M4 and M40 motorways. • Lettings completed in the first half of 2005 totalled 32,849 sq.m., a 57% increase over the first half of 2004. • We are confident that this increased activity points to an improving business environment but at present the market for offices in Slough continues to be weak, which is reflected by some downward pressure on rental levels for offices. Our occupancy is 91.4%, compared with 87.9% at June 2004. •In early 2005, a letting of 11,189 sq.m. of existing business space to a major financial institution for an IT backup centre, at a rent of £91.49 per sq.m. showing return of demand for large deals. • Letting of 2,805 sq.m. office development at 252 Bath Road, to LG Electronics at £217 per sq.m. The office scheme, designed by the in-house architectural team at Slough Estates has been recognised with an award by the British Council for Offices Value £1.2 billion---------------------------649,658 sq.m. (6.9m sq. ft.)business space and 33,737 sq.m. (363,142sq.ft.) retail space---------------------------196.61 hectare (485.83 acre) site---------------------------394 customers---------------------------Approximately 20,000 employees based on the Trading Estate---------------------------Website: www.sloughte.com---------------------------Customers include:Allied CarpetsB&QBlack & DeckerCelltech R&DComet GroupCredit Suisse First BostonEquantFerrari Maserati UKFiat Auto (UK)Fujitsu EuropeFullers LogisticsFurniture VillageHonda Motor EuropeIpsenJohn MenziesL G Electronics UKLonza BiologicsMarsO2Polycom (UK)Safeway PropertiesSun ChemicalUnatracWH Smith TradingXenova---------------------------100% owned---------------------------Rent passing £71.1 million pa---------------------------Average passing rentBusiness space:industrial £100.26 per sq.moffice £207.46 per sq.mRetail: £218.82 per sq.m---------------------------7,143 sq.m. under construction---------------------------91.39% occupancy by area--------------------------- Heathrow and West London This region includes Slough Estates' holdings in West London and thoseimmediately adjacent to London's Heathrow airport, (not including the SloughTrading Estate). The properties have been managed as one estate since 2003 andthis has brought great operating efficiencies in West London. The excellentcommunications to the West of London make this a premier location for businessin the UK. • A total of 12,875 sq.m. of space let in the first half of 2005. • Letting of two units, totalling 4,013 sq.m. to Manpower at Riverside Estate, Uxbridge at £110 per sq.m. • Purchase of 3.4 ha LSG Skychefs site at Heathrow, providing the potential to develop a 9,290 sq.m. warehouse scheme with a completed value of some £20 million. Value £504 million---------------------------334,446 sq.m. (3.6m sq.ft.)business space and 4,370 sq.m. (47,038 sq.ft.) retail in:Feltham, Hayes, Hounslow,Isleworth, Poyle, West Drayton, Park Royal, Uxbridge, Greenford, Ruislip,Heston---------------------------80.65 hectares (196.29 acres) in total---------------------------214 customers---------------------------Website: www.thelhr.com / www.A40.net---------------------------Customers include: AAH Pharmaceuticals, British Midland Airways, DFS FurnitureCompany, Federal Express Europe, Fujitsu, LSG Sky Chefs/GCC, Natwest CommercialServices, Scottish & Newcastle, Thorn, UPS (UK), Unigate Properties---------------------------100% owned---------------------------Rent passing £28.4 million pa---------------------------Average passing rent:£83.76 per sq.m.---------------------------11,350 sq.m. under construction---------------------------88.5 occupancy by area--------------------------- South London and Southern England The South London and Southern England region covers South London, primarilybetween the M23 and the M3 motorways down to the South coast. It covers thecounties of Surrey, Sussex, Kent and Hampshire which are affluent commutingareas. •Slough Estates' holdings in this region were substantially strengthened in 2004 by the acquisition of an industrial portfolio from Land Securities with assets in Basingstoke, Coulsdon, Croydon, Fareham, Frimley, Guildford, London SW19 and Swanley. •A total of 188 sq.m. let in the first half of 2005. •Pre-let of 2,950 sq.m. car showroom complex at the Portsmouth Motor Park to Pentagon Ltd. •Purchase of 13 ha Blueprint site in Portsmouth, known as Voyager Park, one of the largest industrial sites in the South East. ---------------------------Value £368 million---------------------------248,921 sq.m. (2.7m sq.ft.)business space in: Basingstoke, Portsmouth, Camberley, Southampton, Epsom,Leatherhead, Farnborough, Coulsdon, Croydon, Fareham, Frimley, Guildford, SW19,Swanley, Crawley---------------------------126.94 hectares (313.68 acres) in total---------------------------118 customers---------------------------Customers include: Agustawestland International, Autodesk, Carlsberg UK,Honeywell Avionics Systems, Oddbins, Pinnacle Entertainment, Snows Motor Group,Thales Properties---------------------------100% owned---------------------------Rent passing £13.9 million pa---------------------------Average passing rent:£55.65 per sq.m---------------------------16,447 sq.m. under construction---------------------------81% occupancy by area, excl. rental guarantee.95% occupancy incl. rental guarantee--------------------------- North London and East of England The North London and East of England region covers an area north of London tothe east of the M1 motorway and reaches out as far as Cambridge and along theM11 motorway. The Cambridge area has been identified by the Government as amajor growth area for development and is the main home to the UK's biotechindustry. •A total of 8,505 sq.m. let in the first half of 2005. • Acquisition of £9 million warehouse complex of approx 16,836 sq.m on a site of 2.15 hectares fronting the North Circular road in Edmonton. •Pre-let of 6,968 sq.m. at Radlett to Viglen Ltd - the largest pre-let deal in South Herts for over 10 years. •Pre-let of 2,908 sq.m. building at Cambridge Research Park to the ODPM to serve as a new regional control centre for the Fire and Rescue Service, in August. •Addition of the 135,326 sq.m. Woodside Industrial Estate in Dunstable in July, with 3 ha of development land. Value £366 million---------------------------319,432sq.m. (3.4m sq.ft.)business space in: Elstree, Welwyn Garden City, Chelmsford, Radlett, Luton,Basildon, Hatfield, Thurrock, Barking, Huntingdon, Cambridge, Dunstable---------------------------127.48 hectares (315.01 acres) in total---------------------------150 customers---------------------------Customers include: Ford Motor Company, NTL Cambridge, Diomed, Starbucks CoffeeCompany, Sheffield Insulations, Tibbett & Britten, Tesco Distribution, VitecGroup Communications---------------------------100% owned---------------------------Rent passing £17.7 million pa---------------------------Average passing rent:£55.42 per sq.m.---------------------------6,968 sq.m. under construction at Radlett---------------------------82% occupancy incl. rental guarantee79% occupancy by area, excl. rental guarantee--------------------------- Thames Valley and West of England This region (which excludes Slough and LHR) covers the area adjacent to the M4motorway between London and Bristol in the West. The M4 Corridor has been themost successful business area in the south east of England in recent years andSlough has leading Business Parks across the region. •A total of 6,146 sq.m. let in the first half of 2005. • A pre-let of 1,579 sq.m. to Bradford & Sons in Weston Super Mare, due for completion in Q4 2005 Value £420 million---------------------------289,942 sq.m. (3.1m sq.ft.)business space in: High Wycombe, Yate, Weston Super Mare, Swindon, Bristol,Wokingham, Winnersh, Ascot, Bracknell, Oxford, Haresfield---------------------------98.34 hectares (243 acres) in total---------------------------170 customers---------------------------Customers include: Agere Systems, Agilent Technologies UK, Biffa Waste Services,Fujitsu, Intel Corporation, Kerry Foods, Mars, MDS Pharma Services GB, NTL, ThePost Office---------------------------100% owned---------------------------Rent passing £25.5 million pa---------------------------Average passing rent:£87.90 per sq.m.---------------------------92% occupancy, incl. rental guarantee88% occupancy by area, excl. rental guarantee--------------------------- Midlands The Midlands region is centred around Birmingham, the UK's second largest City, and its main industrial centre. The largest asset is the Kings Norton business park to the south of Birmingham. There are also a few propertiesin the North. • A total of 6,372 sq.m. let in the first half of 2005. • Addition of the 234,269 sq.m. Heywood Distribution Park in Manchester in July with 8.5 ha of development land. Value £191 million---------------------------168,371 sq.m. (1.8m sq.ft.)business space and 16,733 sq.m. (180,113 sq. ft.) of retail space in:Birmingham, Huddersfield, Chester, Derby, Northampton, Runcorn, Warrington,Oldbury, Manchester---------------------------54.04 hectares (133.54 acres) in total---------------------------157 customers---------------------------Customers include: Aggregate Industries Management, British Midland, DSG,Furniture Village, Lloyds TSB Bank, MFI Properties, Reid Furniture, Saint-GobainBuilding Distribution, Tesco Distribution---------------------------100% owned---------------------------Rent passing £11.87 million pa---------------------------Average passing rent:£64.13 per sq.m.---------------------------91% occupancy by area--------------------------- Joint Ventures - HelioSlough This 50/50 JV with Helios Properties, which has £150 million of fundingavailable, aims to develop a network of large scale strategic distribution parksthroughout the UK. • Six schemes at different stages of development which will produce approximately 418,064 sq.m. • Substantial strategic landbank of some 271 ha in three sites. • 11,148 sq.m. speculative unit completed at Trax Park, Doncaster in May 2005. Trading book value (100% basis) £14.2 million---------------------------11,148 sq.m. (0.12m sq.ft) business space---------------------------50/50 JV with Helios Properties--------------------------- --------------------------- Belgium Slough Estates has been operating in Belgium since 1963. Its Pegasus Parkdevelopment is the largest office park in Brussels and is adjacent to BrusselsInternational Airport. Slough Estates is also a leading provider of distributionspace within "the golden triangle" between Brussels, Ghent and Antwerp. •A total of 2,016 sq.m. let in first half of 2005. • Post half year end, completion of 6,360 sq.m. speculative office building at Pegasus Park ---------------------------Investment property value £183 millionTrading book value £11 million---------------------------178,005 sq.m. (1.9m sq.ft.)business/office space and 2,797 sq.m. (30,107 sq.ft.) of retail in:Brussels Pegasus Park (81,679 sq.m.),Woluwe, Relegem, Bornem,Nivelles, Zaventem, Horizon,Diegem, Rumst, Zellik, Sirius, Kortenberg---------------------------70.25 hectares (173.59 acres) in total---------------------------85 customers---------------------------Customers include: Cisco, Johnson Controls, Regus, DHL, Bornem, UPS, Telenet,Sungard, Emerson, Agilent, Ecolab (Henkel), Synstar---------------------------Rent passing £13.6 million pa---------------------------Average passing rent:£75.10 per sq.m.---------------------------83% occupancy by area--------------------------- France Slough Estates has been operating in France since 1972. The business is centredon Paris. The main developments have been around Paris' orbital motorway, LaFrancilienne, where a number of distribution facilities have been developed.More recently there has been greater emphasis on business space at such sites asLe Blanc Mesnil. • A total of 3,709 sq.m. let in the first half of 2005. • Sale of 3,221 sq.m. office scheme in Avenue Kleber, Paris for £21 million. ---------------------------Investment property value £107 millionTrading book value £12.5 million---------------------------242,284 sq.m. (2.6m sq.ft.)business space and 17,812 sq.m. (191,727 sq.ft.) of retail in:Marly la Ville, Cergy Pontoise, Evry, Bures Orsay, Colombes, Le Blanc Mesnil,Aulnay sous Bois, Nanterre and Paris---------------------------56.19 hectares (138.85 acres) in total---------------------------21 customers---------------------------Customers include: Geodis, Daher, Deluxe, Staci, Conforama, Stockalliance,Gefco, Mory Team, Guilbert, UPS Patisfrance---------------------------Rent passing £10.45 million pa---------------------------Average passing rent:£40.20 per sq.m.---------------------------4,638 sq.m. under construction---------------------------96% occupancy by area--------------------------- Germany Slough Estates has been operating in Germany since 1974. The business is centredon the Ruhr which is the industrial heartland of western Germany. The businessis focused on developing small industrial parks and then selling thesedevelopments to German institutions. • A total of 4,882 sq.m. let in the first half of 2005. • Pre-let of 6,327 sq.m. at Dormagen, in addition to the 18,327 sq.m. pre-let at Neuss and the 3,021 sq.m. pre-let at Krefeld, started in the second half of 2004. Trading book value £74 million---------------------------60,224 sq.m. (648,246 sq.ft.)business space in:Neuss, Hamburg, Ratingen, Monchengladbach, Frankfurt, Kapellen, Krefeld---------------------------28.50 hectares (70.43 acres) in total---------------------------62 customers---------------------------Customers include:CC Bank, Qits, SATO, Listan, Phonet, Flashpoint, Spacelabs, ADCO, Bernd John,Junkers, Tholstrup, Robin (Europe)---------------------------x% owned---------------------------Rent passing £2.6 million pa---------------------------Average passing rent:£43.59 per sq.m.---------------------------68% occupancy by area--------------------------- California Slough Estates has been operating in North America since 1951 but today itsoperations are centred in the Bay Area of San Francisco and San Diego inCalifornia. In terms of product the business is focused on providing buildingsto the healthscience industry. • Letting of 9,848 sq.m. building on the Pointe Grande Estate, South San Francisco to Rinat Neuroscience. The facility forms part of the 20,624 sq.m. campus formerly occupied by Sugen, a subsidiary of Pfizer. The two other buildings in the campus have been let to Exelixis. • Acquisition of the 67,493 sq.m. Shoreline Technology Center and the 57,860 sq.m. Seaport Center in the San Francisco Bay Area. • Acquisition of 16.5 ha development site at Bressi Ranch, Carlsbad, San Diego. • 26,472 sq.m. let in first half. Investment property £787 million---------------------------480,397 sq.m. (5.1 million sq.ft.)business space in: San Francisco, San Diego---------------------------183.21 hectares (452.72 acres) in total---------------------------72 customers---------------------------Customers include:Actel, Amgen, Boston Scientific, Exelixis, Pfizer, Rigel, Robert HalfInternational, FibroGen, Raven, SkyePharma, Aradigm, Millenium Pharmaceuticals,Syrrx, Perlegen Sciences, ProBusiness Services---------------------------Rent passing £61.9 million pa---------------------------Average passing rent:£128.97 per sq.m.---------------------------62,336 sq.m. under construction---------------------------86.7% occupancy by area--------------------------- Financial Review International Financial Reporting Standards The Interim Report 2005 has been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS"). The comparative figures for 2004 havebeen restated accordingly. The notes to the interim financial statements containreconciliations of these restatements. Income Statement Adjusted profit before taxReported profit before tax within the Income Statement includes the revaluationsurplus on investment properties and a number of exceptional gains and losses.The directors consider that adjusted profit before tax provides a moremeaningful measure of the underlying performance of the group's ongoingactivities as it eliminates the distorting effects of such items. Adjustedprofit before tax is determined as follows. Six Months Ended Year Ended ------------------ ------------ 30 June 2005 30 June 2004 31 December 2004 £m £m £m ---------- ---------- ------------- Profit before tax, asreported 119.0 173.6 388.0 Revaluation gains oninvestment properties(including associate andjoint ventures) (140.0) (101.7) (182.1)Loss/(profit) on sale ofnon-current assets 3.0 (0.1) (64.7)Profit on sale of QuailWest (17.0) - -Loss on bond exchange 125.6 - -Notional adjustment inrespect of preferenceshare financing charge - (5.6) (11.2) ---------- ---------- -------------Adjusted profit beforetax(1) 90.6 66.2 130.0 ---------- ---------- ------------- (1) Includes the benefit of Pfizer lease surrender premium of £36.6m. In both the six months ended 30 June 2004 and for the year ended 31 December 2004 a premium of £7.5 million was received in connection with 252 Bath Road, Slough. Under IFRS, revaluation gains on investment properties are included within theIncome Statement and the equivalent items in respect of our associate and jointventure companies are included within the group's share of results of suchentities. Our presentation of adjusted earnings excludes such valuation gains asthey do not relate to the operating performance of the business. Similarly, the gain or loss on the sale of investment properties is excludedfrom adjusted earnings, as is the gain on disposal of the group's residentialleisure development at Quail West, Florida. Whilst the latter property wasclassified as a trading property, it was not part of the core business and,accordingly, the profit upon disposal of that asset is excluded from ourunderlying performance measures. On 21st June 2005, the group completed a bond exchange programme wherebyapproximately £322 million of bonds with interest rates ranging from 10% to12.375% and maturity profiles of between 2007 and 2019 were effectivelyexchanged for £300 million of new bonds with interest rates between 5.5% and5.75% and with maturities ranging from 2018 to 2035, and £146 million of shortterm borrowings. Our intention is to refinance the short term borrowings in thecoming months. The bond exchange exercise gave rise to a one-off charge of£125.6 million, but will reduce ongoing interest costs by approximately £11.0million per annum. In accordance with IAS 32 and IAS 39, with effect from 1 January 2005, thegroup's convertible preference shares are classified as borrowings andpreference dividends are replaced by a financing charge recorded before 'profitbefore tax'. In order to aid comparison between 2004 and 2005, the adjustedprofit before tax in respect of the six months ended 30 June 2004 and the yearended 31 December 2004 have been reduced by £5.6 million and £11.2 million,respectively, being the dividends payable on the convertible redeemablepreference shares. The actual financing charge in respect of convertiblepreference shares for the six months ended 30 June 2005 is £6.6 million. Income Statement - restatedThe following table is a summary of the Income Statement after removing theeffects of items excluded from adjusted profit before tax. Six Months Ended Year Ended ------------------ ------------ 30 June 2005 30 June 2004 31 December 2004 £m £m £m Net rental income 136.9 119.8 232.5Net income from tradingproperties 7.1 3.9 6.8Net profit (loss) fromutilities 0.8 (3.0) (4.1)Net loss from oil & gas (1.8) (1.9) (3.3)Other investment income 3.3 3.2 10.5Administration expenses (7.7) (6.3) (14.7) ---------- ---------- -------------Operating income 138.6 115.7 227.7Net finance costs (50.6) (52.6) (106.4)Share of profit ofassociate and jointventures after tax 2.6 3.1 8.7 ---------- ---------- -------------Adjusted profit before tax 90.6 66.2 130.0 ---------- ---------- ------------- Adjusted profit before tax increased by 37% to £90.6 million, including thebenefit of an unusually large lease surrender premium amounting to £36.6 millionin respect of a building returned to us by Pfizer early in the year. A similarevent in the UK resulted in a premium of £7.5 million in the first half of 2004.Excluding these items, "underlying" profits before taxation would show a halfyear-on-half year reduction of £4.7 million which reflects the loss of some £8.4million of rental income associated with the Pfizer space surrendered and thesale of the Pfizer Center in San Diego in the second half of 2004, partly offsetby interest of approximately £4 million earned on the net proceeds. Net rental income for the period was £136.9 million compared with £119.8 millionfor the equivalent period last year. Adjusting for the above-mentioned factors,net rental income was broadly flat on a like for like basis, with new lettingsand rental increases contributing £4.2 million of income against a loss ofrental income of £4.5 million attributable to space returned (excluding thereturned Pfizer space). Net rental income excludes the cash receivable from LandSecurities under rental guarantees agreed as part of last year's asset swap.Under the accounting rules, rental guarantees are treated as a reduction in thecost of the assets rather than as income. The estimated rental value of vacant space at 30 June 2005 was £40 million, ofwhich £25.6 million was in the UK. Net income from trading properties, excluding the £17.0 million gain on sale ofthe Group's former residential leisure development at Quail West in Florida,increased by £3.2 million to £7.1 million, mainly as a result of the sale of aproperty at Avenue Kleber, Paris. The net profit from utilities represents the results of Slough Heat & Power("SHP"). SHP showed a significant improvement in its performance compared withlast year as a result of plant operating improvements and increased marketprices for electricity and carbon trading. We are optimistic that the trend ofimproving operational and financial performance seen in the first half will besustained into the second half of the year, enabling the business to make apositive contribution to full year earnings for the first time in 7 years. Losses from the Group's oil and gas investment in Tipperary were broadlyunchanged compared with the first half of 2004. On 1 July the Group announcedthat it had agreed to sell its interests in Tipperary for a consideration of£124 million which will give rise to a gain on disposal of approximately £98million in the second half of the year. The transaction was completed on 13 July2005. Adjusted net financing costs for the period, excluding the loss arising on thebond exchange, reduced by £2.0 million. Interest capitalised amounted to £9.4million against £7.6 million for the same period last year and reflects theincreased level of development activity in progress through 2005. There was nosignificant interest cost reduction from the bond exchange in the first of theyear, but the second half financing costs will benefit by approximately £5million as a result of the transaction. TaxationThe tax charge for the period can be analysed as follows:------------------------- -------------- -------------- Six months Six months ended 30 June ended 30 June 2005 2004------------------------- -------------- -------------- £m % £m %Tax charge on:Adjusted profit before tax 26.9 30 9.6 15Adjusting items 18.7 66 37.1 35Reported profit before tax 45.6 38 46.7 27 The effective rate of tax on adjusted profit before tax was 30% (H1 2004 : 15%).2004 benefited from the utilisation of the tax losses brought forward fromearlier years, principally in the USA. Such losses have now been fully utilisedand, accordingly, the effective current tax rate on adjusted profit before taxhas increased. Earnings and dividend per share Adjusted earnings per share increased by 7.3% from 13.7p to 14.7p. However,basic earnings per share decreased from 29.3p to 17.1p as a result of thefactors described above. The interim dividend per ordinary share has increasedby 5.7% from 6.15p to 6.5p, reflecting the Board's intention of maintaining aprogressive dividend policy underpinned by adjusted earnings per share. Balance Sheet Under IFRS, the Group is required to provide for deferred tax on investmentRelated Shares:
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