Interim results to 31st August 2014

22nd October 2014

DEVELOPMENT SECURITIES PLC - INTERIM RESULTS

FOR THE SIX MONTHS ENDED 31st August 2014

High level of activity across portfolio generates strong gains, with further momentum established

Development Securities PLC ("Development Securities" or the "Company"), the leading property development and investment company today announces its interim results for the six months ended 31st August 2014.

Highlights

Financial

· Profit before tax and exceptional items* of £18.0 million (31st August 2013: £8.1 million)

· Basic NAV increased by £15.2 million (4.7 per cent increase) to £335.5 million, equivalent to 269 pence per share (28th February 2014: £320.3 million, 262 pence per share)

· £18.2 million of development and trading gains (31st August 2013: £13.3 million)

· £4.1 million (2.6 per cent) increase in value of investment portfolio (31st August 2013: £1.0 million decrease)

· Interim dividend of 2.4 pence per share declared (31st August 2013: 2.4 pence per share)

Corporate

· Acquisition of Cathedral Group:

o Brings additional expertise to the Group

o Adds 9 new projects to our pipeline

· Strong deal flow since 28th February 2014 to recycle capital into new projects:

o 11 disposals - £127.2 million

o 11 acquisitions - £179.4 million

Commenting on these results, Chief Executive Michael Marx said:

"We have maintained a remarkable level of activity since 28th February 2014 as we have continued to recycle cash realised from profitable disposals into new acquisitions in both our development and investment portfolios. We have an established and diversified pipeline of projects with good visibility on strong returns in the years ahead. The acquisition of Cathedral Group in May 2014 represents a significant step for your Company, adding to our portfolio and our capabilities in mixed-use regeneration projects in Greater London and the South East. This strategic acquisition will increase our capacity and potential to generate greater levels of profitability. Looking ahead, we are confident that the momentum we have established in our development and trading activity will deliver significant returns in the near- to medium-term."

Financial summary:

unaudited for the six months ended 31st August 2014

* Refer note 3

** Refer notes 12 and 20

*** Refer note 20

Chairman's statement

It is pleasing to report a profit before tax and exceptional items of £18.0 million for the six months to 31st August 2014 (31st August 2013: £8.1 million). Exceptional items, which totalled £10.6 million, relate to the termination of a cross currency interest rate swap and the costs relating to the acquisition of Cathedral Group. After payment of the 2014 final dividend of £4.0 million, net assets attributable to shareholders increased in the period by £15.2 million to £335.5 million, equivalent to 269 pence per share (28th February 2014: £320.3 million, 262 pence per share).

The increase in our underlying profitability and net assets has largely been driven by the continued strong delivery of development and trading profits from across our multi project portfolio which is largely concentrated in Greater London and the South East. Gains of £18.2 million were realised in the six month period (31st August 2013: £13.3 million). We remain confident that significant gains will continue to be generated in the second half of the financial year and beyond.

The Directors have declared an interim dividend of 2.4 pence per share, payable on 27th November 2014 to Shareholders on the register on 31st October 2014.

Market overview

The UK economy continues to strengthen with a consensus expectation that GDP growth this year will reach three per cent or more. As a consequence, investor confidence is growing to encompass regions outside of London, with business activity anticipated to improve across the country. London and the South East are showing significant employment growth which is expected to continue into the medium-term, but some regions are finding it difficult to balance out shrinking employment, predominantly in the public sector. It remains to be seen whether the UK's excellent recent economic growth can translate into improved productivity thus enabling a more sustained cyclical recovery.

Within the property sector, improved investor demand has continued to apply downward pressure on prime and now more noticeably on secondary investment property yields. It would seem that there is momentum for the yield differential between the two to narrow further as investor activity increases outside of London, attracted by the higher returns available in these markets. Your company is benefitting further from the strong economic growth apparent in our major markets within Greater London and the South East of England and it is pleasing to report a £5.3 million increase in the value of our investment portfolio, including our share of joint ventures, over the first six months of the year. We expect these gains to improve during the remainder of the financial year.

Given the size of the geographical area and the relatively high number of opportunities available to us, we remain able to acquire assets on advantageous terms and reposition them into strengthening markets, thus realising significant value.

Major developments

We continue to focus on development opportunities on the edge of Central London which have benefitted from rental pricing pressure pushing out from London's traditional core business districts, as occupier and investment markets in Central London continue to strengthen. We were pleased to fully let 10 Hammersmith Grove, a 110,000 sq. ft. prime office development, during the period, just over a year since practical completion was achieved. Taking into account yield shifts and achieved rental values, the capital value per sq. ft. at 10 Hammersmith Grove is 39.0 per cent ahead of our pro- forma expectations. We are confident that the improving market will similarly reflect itself at 12 Hammersmith Grove, where we are under construction having secured £92.0 million of funding from SWIP Property Trust in April this year. The second phase of our development, which will provide a further 167,000 sq. ft. of grade A office space, is due for practical completion in Q1 2016.

At Harwell, alongside our joint venture partner Prorsus and two Government-backed research agencies, we are progressing the masterplan for the 700 acre site. This will significantly expand the international science campus, providing state of the art buildings for commercial science organisations and research bodies for whom proximity to the 'Big Science' at Harwell offers competitive advantage. These facilities will be contained within a new mixed-use community to include several hundred dwellings.

At Algarve House, a derelict office building adjacent to Southwark underground station, we are currently progressing the masterplan for a mixed-use development having secured an option on the site last year. We are close to signing an agreement with an adjoining land owner to include their site in a co-ordinated planning application totalling circa 225,000 sq. ft.

Development and trading portfolio

Disposals

In October, we completed the sale of the fourth asset within the portfolio of five North London office buildings which was acquired for £17.5 million in February 2014, thus realising a profit to date of £6.2 million. The strength of demand for these properties far exceeded our original expectations.

In October, we sold the majority of our mixed-use development in Romford to Henderson Global Investors for £12.3 million at a 7.0 per cent yield. The entire mixed-use development was acquired for £8.3 million from administrators acting on behalf of Lloyds Banking Group in July 2013. The remaining building within the development, Tollgate House, comprising 10,600 sq. ft. of office and retail space, is currently being marketed for sale.

New opportunities

In April, Development Securities formed a partnership with Deeley Freed, a leading Bristol-based developer, providing medium-term finance of £8.5 million to enable our partner to bring forward the delivery of its existing pipeline of development projects. Good progress has been made to date on this portfolio of projects which embrace both residential and retail product. It is anticipated that Deeley Freed will secure an exit from these pipeline projects within the next three years, with gains set to be realised from the end of 2014.

Funding

During the period, we secured institutional funding to bring forward the development of two significant mixed-use regeneration projects. In March, we secured £44.1 million of funding from Pramerica Real Estate Investors for the first phase of development at Shepherd's Bush Market, a significant mixed-use regeneration scheme in West London. We are now on site undertaking the renovation of the market which will significantly improve its physical quality, infrastructure and retail offer. In October, the Compulsory Purchase Order in respect of a number of retail units and service roads that occupy part of the site, was confirmed by the Secretary of State. This positive outcome will allow us to now progress with the works to the market and the development of up to 211 residential units. We anticipate starting on site with the first phase of residential development in Q1 2015.

In April, we signed a £14.8 million agreement with CBRE Global Investors to fund the development of The Square, Hale Barns, a foodstore-anchored mixed-use retail and residential project in an affluent Manchester suburb. The 24 apartments within the scheme were launched for sale at the end of September, with strong interest to date and six apartments now under offer or exchanged. Construction of the entire scheme is anticipated to complete by the end of 2014.

Investment portfolio

Disposals

With demand for good quality, regional secondary assets strengthening, we have continued to dispose of investment assets within our portfolio where our business plan is now complete. In March, we sold a Waitrose-anchored retail scheme in Winchester for £23.3 million. In April, we completed the sale of a portfolio of four investment assets for £21.0 million. We have been seeking to carefully reinvest the proceeds of these disposals, with a focus on foodstore-anchored retail schemes and alternative investment assets which offer stable income streams and the potential for asset enhancement or redevelopment in order to drive additional value.

Acquisitions

In June, together with our partner Proprium Capital Partners, we acquired the long leasehold interest in a 146,000 sq. ft. office building in Waterloo for £87.0 million, at a 5.1 per cent net initial yield. The property has a twelve year unexpired lease to Ernst & Young, in turn assigned to Canary Wharf Group, representing a significant investment proposition with a number of redevelopment options in the medium-term.

Enhancing our portfolio of foodstore-anchored retail schemes, we acquired The Mall Shopping Centre in Armagh, Northern Ireland for £7.4 million at a net initial yield of 9.4 per cent. This covered shopping mall is anchored by a 49,000 sq. ft. Sainsbury's foodstore with an additional 12,000 sq. ft. of retail space let to local and national retailers. Vacancy rates are low at 4.4 per cent and the shopping centre offers asset enhancement opportunities with the potential for further development on site.

In August, in Chippenham, an affluent market town 30 miles from Bristol, we acquired a popular local shopping centre anchored by Waitrose and New Look for £16.3 million at a 7.0 per cent yield. The 82,000 sq. ft. shopping centre is fully let to a range of national multiples including Waterstones, Argos and Café Nero.

In Sidcup, South East of London, we acquired the 82-year leasehold interest in a 22-acre site for £2.2 million at a 7.3 per cent yield. The site is occupied by World of Golf, a golf driving range operator, on a twenty-year lease and presents several redevelopment options in the medium to long-term.

Whilst we seek to acquire further investment assets, we are pleased with the progress we have made to strengthen the quality of our investment portfolio whilst at the same time acquiring assets which offer some upside added value potential through active asset management.

Cathedral Group

In May, we completed the acquisition of Cathedral Group, a leading UK mixed-use regeneration developer, for £22.9 million. The acquisition has added nine projects in Greater London and the South East to our portfolio, representing over five million sq. ft. of residential-led mixed-use development. The 27-strong Cathedral Group team, brings with it considerable development expertise notably in the Public Private Partnership (PPP) and residential sectors and broadens our capacity to deliver existing and new projects. PPP projects provide a niche area of development activity in partnership with local authorities, with low land and acquisition costs and significant upside potential. The market has not insignificant barriers to entry and is strengthening given current political pressure to increase employment and provide housing through the development and sale of public land. Cathedral's pipeline of suburban London and regional South East PPP projects extends to in excess of £400 million of development activity. The residential expertise contained within Cathedral also gives us greater optionality with respect to unlocking further profit potential from our pre-existing residential land bank of circa 10,000 residential units within our various mixed-use projects. These projects deliver residential product in the mid-market pricing range of £350-£800 per sq. ft. and so respond to significant consumer demand.

Even in the short period since May, Cathedral has achieved a number of significant milestones within its portfolio. At Preston Barracks, contracts have been exchanged with Brighton and Hove Council and the University of Brighton to bring forward a £150 million mixed-use regeneration scheme on a 2.2 hectare site. In September, also in Brighton, Cathedral obtained Resolution to Grant planning for a £100 million mixed-use regeneration scheme, Circus Street. Construction on the site is anticipated to commence in Q2 2015.

In August, at The Old Vinyl Factory, formerly a joint venture project between ourselves and Cathedral Group, we sold two of the residential sites for £7.9 million which together have planning consent for 213 homes. These disposals unlock the next phase of development at this 17-acre, £250 million regeneration site in close proximity to the Crossrail station at Hayes and Hillingdon.

Dublin

Our activities in Dublin have expanded during the period and we have now secured a number of both commercial and residential opportunities where we can apply our development expertise. We feel that the timing of our entry into this market is good, building on our significant investment in both time and effort to raise our profile and contact base in Dublin over recent years.

In June, together with two local partners, we acquired a 1.7 acre development site for €40.5million on Burlington Road, a prime office location in Dublin city centre. The site has planning permission for 160,000 sq. ft. of office accommodation. The development at Burlington Road will build on our track record as an experienced commercial office developer and allow us to further strengthen our presence within Dublin by delivering grade A space into a market with limited supply and strong demand.

In July, we acquired the freehold interest in 85 residential units and a 9-acre residential development site in Malahide, near Dublin for €36.0 million. The 85 units are currently 98 per cent let on assured shorthold tenancies, generating a net yield of 5.5 per cent and offer opportunities for further asset management and enhancement in order to add value. The 9-acre development site benefits from an existing planning consent for 154 residential units.

Finance

In March, we restructured our €47.0 million floating rate loan notes and associated hedging and cash collateralisation arrangements, shortening the maturity of the loan from 13 to seven years. This has reduced our combined interest, hedging and transaction costs by £0.8 million per annum. The restructure will be finance cost neutral in the year to February 2015 as previously capitalised costs have been written off, with annual savings of £0.8 million delivered thereafter. The loan restructure released cash collateral of £9.5 million. The renegotiation of the terms of these loan notes has helped to increase the efficiency of our Balance Sheet and reduce our overall finance costs as well as releasing capital to reinvest into further opportunities.

Board

Following the acquisition of Cathedral Group, in May we were very pleased to welcome to our Board Richard Upton as an Executive Director and Barry Bennett as a Non-Executive Director. Both were previously Directors of Cathedral Group and are property developers with considerable experience, especially in the sectors of Public Private Partnership and house building.

Outlook

The UK economy has gathered quite some speed over the last twelve months or so and has accelerated past its historic trend rate of GDP growth. We believe there is sufficient momentum in the underlying fundamentals supporting the London and South East economy to justify our optimism that the strategy we are pursuing will create further considerable value in the near- and medium-term for your Company. In addition, the acquisition of Cathedral Group has broadened our skill set to exploit the opportunities that will inevitably arise given the strength of the UK economy.

The work involved in managing our diversified portfolio of over 50 projects is significant, and I am indebted to our executive and management teams for their continuing professionalism and expertise.

D S Jenkins

Chairman

Financial review

Profit before tax and exceptional items for the six months to 31st August 2014 was £18.0 million (31st August 2013: £8.1 million) reflecting the continued improvement in the underlying financial performance of the business. Exceptional items for the period comprise the costs associated with the acquisition of Cathedral Group of £2.7 million and the termination costs of the cross currency interest rate swap, totalling £7.9 million, relating to the Euro denominated loan notes that we restructured in March 2014. In addition to this exceptional charge, it should be noted that the unwinding of this swap also generated a credit of £7.6 million in Other comprehensive income resulting in the overall impact being broadly neutral to net asset value at 31st August 2014.

Net assets attributable to shareholders increased by £15.2 million to £335.5 million (28th February 2014: £320.3 million). This increase reflects our total comprehensive income for the period of £13.2 million, the proceeds from the issue of new shares of £6.0 million as part of the Cathedral Group acquisition and the payment of the final dividend from the previous financial year of £4.0 million.

The successful restructure of the Euro denominated loan notes and related hedging arrangements mean that the Group no longer has any material mark-to-mark deficits on interest rate swaps. As a consequence there is no longer a significant difference between net assets attributable to shareholders and EPRA adjusted net assets. In calculating EPRA adjusted triple net assets, no estimate has been included of the fair value of the development and trading portfolio given the uncertainty of the timing and the amount related to future sales of these assets. Gains are thus only recognised through the income statement as they become contractually certain. Gains from development and trading operations were £18.2 million as realisations continued in line with our strategy (31st August 2013: £13.3 million). These were generated both from direct real estate holdings, amounting to £16.7 million recognised within gross profit, and also from indirect holdings.

Net revaluation of our investment assets, including those within our share of joint ventures, was an increase of £5.3 million. This comprised: increased revaluations in our directly held property portfolio of £4.2 million (31st August 2013: £1.0 million loss); and a revaluation uplift of £1.1 million in respect of our assets held in joint venture (31st August 2013: £1.5 million).

Net finance costs, before exceptional items, are £2.7 million (31st August 2013: £5.1 million) which equates to £3.6 million after allowing for the £0.9 million return on one of our development and trading projects where we have invested by way of loan notes and the return is included in interest income. Interest income also includes a foreign exchange gain of £1.4 million relating to our restructured Euro denominated loan notes, where we have benefited from a fall in the value of the Euro during the period. In addition, the re-structured loan notes have an effective cost of 4.9 per cent per annum and a seven year maturity, reducing finance costs annually by £0.8 million.

During the period we have secured new bank finance of £57.0 million from Royal Bank of Scotland Plc in respect of the acquisition of Becket House in joint venture with Proprium Capital Partners. Additionally we have entered into a €24.3 million facility with Allied Irish Bank for the acquisition of our site at Malahide. We continue to actively manage our relationships with our key funding partners as well as seeking new sources of debt to manage our exposure to any particular funder.

Net debt as at 31st August was £150.7 million, representing gearing of 44.9 per cent (28th February 2014: £153.8 million and 48.0 per cent). In addition our share of net debt in joint ventures increased to £42.4 million, increasing our effective gearing to 57.5 per cent (28th February 2014: 56.8 per cent). The weighted average maturity of our debt is 5.7 years, with a weighted average interest rate of 5.1 per cent. The proportion of our portfolio which is subject to fixed interest rates has reduced to 60.0 per cent, principally as a result of restructuring the Euro denominated loan notes. If our share of debt in joint ventures is included, weighted average maturity is 5.4 years, the average interest rate is 5.4 per cent, and the proportion of fixed rate debt is 57.3 per cent.

Our Annual Report to 28th February 2014 describes our risk profile and our approach to managing our principal risks. These principal risks remain unchanged as at 31st August 2014. With regard to the second half of the year, whilst acknowledging the continuing economic recovery, the Board remains cautious in its view of UK macro-economic prospects, as set out in the Chairman's Statement. We maintain a strong focus on potential tenant defaults and other counterparty risks.

Portfolio analysis

Income generating properties as at 31st August 2014

Investment property - key statistics

* Based on the core investment property assets only.

Consolidated statement of comprehensive income

unaudited for the six months ended 31st August 2014

Notes 1 to 20 form an integral part of these condensed Consolidated set of financial statements

Consolidated balance sheet

unaudited as at 31st August 2014 

Notes 1 to 20 form an integral part of these condensed Consolidated set of financial statements.

Consolidated statement of changes in equity

unaudited as at 31st August 2014

Notes 1 to 20 form an integral part of these condensed Consolidated set of financial statements.

Consolidated cash flow statement

unaudited for the six months ended 31st August 2014

Notes 1 to 20 form an integral part of these condensed Consolidated set of financial statements.

Notes to the interim financial information

unaudited for the six months ended 31st August 2014

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES

a) General information

The principal activity of Development Securities PLC and its subsidiaries is property investment and development.

The condensed Consolidated financial statements for the six months ended 31st August 2014 comprise the results of the Company and its subsidiaries and were authorised by the Board for issue on 21st October 2014.

The Company is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the UK. The address of its registered office is Portland House, Bressenden Place, London, SW1E 5DS.

The condensed Consolidated financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 28th February 2014, which were prepared in accordance with International Financial Reporting Standards ("IFRS"), as endorsed by the European Union, were approved by the board of directors on 30th April 2014 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

These condensed Consolidated financial statements have been reviewed, not audited.

b) Basis of preparation of half-year report

These condensed Consolidated financial statements for the six months ended 31st August 2014 have been prepared in accordance with IAS 34, 'Interim financial reporting'. The condensed Consolidated financial statements should be read in conjunction with the Group's financial statements for the year ended 28th February 2014, which have been prepared in accordance with IFRS, as endorsed by the European Union.

Going concern basis

The Group has considerable financial resources. Rental income continues to be robust, with the risk of significant default assessed by the Directors as low. Development and trading activities are well diversified across regions and sectors. Debt finance is secured for appropriate periods and the Group is comfortable with its covenant positions. As a result the Directors believe that the Group is well placed to manage its business risks successfully. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the interim financial statements.

c) Judgements and key sources of estimation uncertainty

The preparation of financial statements requires management to make judgements, assumptions and estimates that affect the application of accounting policies and reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing the condensed Consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the Consolidated financial statements for the year ended 28th February 2014.

d) Accounting policies

The accounting policies applied in these condensed Consolidated financial statements are consistent with those of the Group's financial statements for the year ended 28th February 2014, as described in those financial statements.

New and amended standards and interpretations need to be adopted in the first interim financial statements issued after their effective date (or date of early adoption). There are no additional standards or interpretations, other than those disclosed in the Group's financial statements for the year ended 28th February 2014, which are expected to have a material impact on the Group.

The accounting policies adopted are consistent with those of the previous financial year.

e) Financial risk management

Financial risk factors

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk.

The condensed Consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's financial statements as at 28th February 2014.

There have been no changes in risk management or in any risk management policies since the year end.

Fair value estimation

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

· Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

· Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

· Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

The following table presents the Group's assets and liabilities that are measured at fair value at 31st August 2014:

The following table presents the Group's assets and liabilities that are measured at fair value at 31st August 2013:

In March 2014, the Group re-negotiated the €47.0 million Euro-denominated loan notes and terminated the cross-currency interest rate swap. New hedging arrangements have been put in place which are classified at derivative financial instruments and are fair valued through profit and loss.

Derivative financial instruments at fair value through profit or loss of £0.5 million gain (31st August 2013: gain of £0.7 million and 28th February 2014: gain of £0.9 million) are recorded in Finance income or Finance costs as appropriate in the condensed Consolidated financial statements.

There have been no reclassifications of financial assets during the period.

Level 2 derivative financial instruments and the terminated cross-currency interest rate swap comprise of a number of interest rate swaps and caps and a forward foreign exchange contract. Previously the cross-currency interest rate swap was fair valued using forward exchange rates that were quoted in an active market. Interest rate swaps and caps are valued using forward interest rates extracted from observable yield curves taking account of the risk of default of either counterparty to the financial instrument. The effects of discounting are generally insignificant for level 2 derivatives.

Fair value measurement using significant unobservable inputs (level 3)

A review of the fair value of financial assets is performed at each reporting date with any significant changes in value reported to the Executive Board and Audit Committee. Level 3 assets consist of loans to associates or joint ventures. Each receivable is reviewed as to its recoverability. If recoverability is in doubt an appropriate provision for impairment would be made based on the best estimate of the loan recoverable. The Board have concluded that there are no financial assets recognised where the loan amount is not the best evidence of fair value.

Contingent consideration in a business combination

Details of the valuation and sensitivity of the contingent consideration are disclosed in note 15. The Group had no contingent consideration liabilities at 31st August 2014, 31st August 2013 or 28th February 2014 and there were no transactions in contingent consideration during the year ended 28th February 2014.

Group's valuation processes

The Group engages external, independent and qualified valuers to determine the fair value of Level 3 investment property assets. The valuers liaise with the Investment Team every six months, reviewing tenant information relating to covenant strength, lease period and rental terms. Valuers will also review comparable transactions in the market. The fair value of Level 3 assets is also determined by reviewing local sales data or, where the assets are held for the purpose of extending an existing retail asset, by reviewing appraisals relating to the proposed scheme.

The key unobservable assumptions used in the valuations are:

More information relating to valuation methodology is contained within the Group's financial statements as at 28th February 2014.

The fair value of the following financial assets and liabilities approximate to their fair value:

· Trade and other receivables

· Other current financial assets

· Cash and cash equivalents

· Trade and other payables

· Borrowing costs

2. SEGMENTAL ANALYSIS

For management purposes, the Group is organised into three operating divisions, whose principal activities are as follows:

These divisions are the basis on which the Group reports its primary segmental information. All operations occur and all assets are located in the United Kingdom. All revenue arises from continuing operations.