23rd Mar 2005 07:01
Slough Estates PLC23 March 2005 23rd March 2005 SLOUGH ESTATES plc PRELIMINARY RESULTS FOR THE YEAR ENDED 31st DECEMBER 2004 Highlights • Underlying 4.8% rise in pre-tax profits+ • Diluted NAV per share of 564p, up 11.7%+ • Dividend up 6.7%: 5 year compound growth of 7.4% p.a. • £386m assets bought during the year and proceeds of £558m from sales Year to 31 DecemberResults restated % change 2004 2003 ______________________________ £m £m Property investment income* 247.3 238.2 + 3.8Profit before tax and exceptional items 146.8 140.1 + 4.8Profit before tax after exceptional items 209.1 103.8 + 101.4 Adjusted basic earnings per share+ 29.0p 27.6p + 5.1Basic earnings per share 37.8p 19.6p + 92.9Final ordinary dividend 9.85p 9.2p + 7.1Total ordinary dividend 16.0p 15.0p + 6.7Basic net assets per share+ 601p 536p +12.1 Adjusted diluted net assets per share increased by 11.7% to 564p in 2004 ++ * Property investment income comprises investment and joint venture property income.+ Adjusted to exclude exceptional items and FRS19 deferred tax.++ Exceptional items are profits/ (losses) on the sale of investment properties and the provision for Quail West in 2003. Commenting on the results, Chairman, Sir Nigel Mobbs, said: "The Group hasdelivered a good set of results for the year. It has been a very busy year inwhich the company has completed purchases and sales of over £900 million invalue. The effective driver of this activity is our increased focus on flexiblebusiness space, at a time when we expect to see a cyclical upturn in thissegment of the property market. Key economic indicators are showing encouraginglevels of growth and, with an increasing number of enquiries, we expect to seeimproving demand for our core business space portfolio in 2005 and beyond. A keydriver to future earnings growth is that our strong balance sheet will enablethe company to develop out our extensive strategic landbank over the next fewyears." Throughout this announcement adjusted net assets per share and adjusted earningsper share measures are adjusted to exclude exceptional items and FRS19 deferredtax. For further information contact:Slough Estates plc Shared Value LimitedIan Coull, Chief Executive Andrew BestDick Kingston, Finance Director Emily BruningTel: 01753 537171 Tel: 020 7321 5022 / 5027 A meeting for analysts will be held at 9.30am on 23rd March at The Great EasternHotel, 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) on23rd March. The dial-in numbers are: +44 (0)207 784 1018 or +1 718 354 1171 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 6806646# Preliminary Statement 2004 2004 has been a successful and active year for Slough Estates and we have madesubstantial property purchases and sales within the portfolio, including thefurther disposal of non-core assets. As a result of these acquisitions anddisposals, Slough Estates is achieving a greater focus on its core business,which is the provision of "edge of town" flexible business space to companies inthe UK, Europe and California. In total, the Group received proceeds of £557.7mfrom investment property disposals and acquired a further £385.6m whichrepresents a high turnover when compared to the year end property portfoliovaluation of £3,887.9m. During 2004, while delivering these changes, adjusted diluted net assets pershare have increased from 505p to 564p, a rise of 11.7%, and profit before taxgrew by 101.4% to £209.1m. Diluted net assets per share increased from 464p to521p. We are proposing a final dividend of 9.85p per share, up 7.1%, while thetotal distribution for the year of 16.0p rises by 6.7%. The dividend continuesto grow at a rate considerably in excess of inflation and, over five years, hasgrown at a compound growth of 7.4% per annum. The final ordinary dividend, ifapproved, will be payable on 20th May 2005 and the record date is 22nd April2005. Despite the good overall financial performance of the Group, the returns fromthe core UK property business were slightly disappointing. Overall propertyinvestment income was up by 3.8% at £247.3m including joint ventures. Propertyrevenue benefited from additional lease surrender premiums of £6.1m, but wasimpacted by the expensing of £8.2m of interest on development projects in 2004.However, with increased development activity, particularly the re-start ofdevelopment at Farnborough where interest is again being capitalised in thenormal way, the overall net interest burden will be lower in 2005. Slough Estates' total return for 2004 was 14.9% on a diluted and adjusted basis,and on a five year basis we have produced a compound total return of 7.1% perannum. The total return for 2004 was 15.7% on an unadjusted diluted basis. Thesereturns illustrate the long term attractions of developing and managing "edge oftown" flexible business space for a diverse customer base. It is an excellentbusiness to be in, but one that is changing rapidly, and in today's markets weneed to be more tightly focused in terms of property types and geography. Weneed to deliver a very flexible but generic product across all our markets sothat we can adapt quickly to the requirements of the global companies that weserve. Last week we announced a new regional structure for the UK business which willnow operate in six independent regions, each with its own management reportingto John Heawood, Head of UK Property. You will find the breakdown of theseregions in our operating review with the key facts and recent developments foreach region. Our objective is to provide more customer focus and marketfamiliarity to our property management and development, in order to make ourbusiness more responsive to client needs so that we can achieve greateroccupancy and identify more opportunities. Our businesses in Europe and NorthAmerica already have devolved management. Major Property purchases and sales There were a number of major purchases and sales within the portfolio over theyear. In the UK, the Group has sold the majority of its retail assets inexchange for business space properties. Slough Estates USA is now primarilyfocused on its health science real estate portfolio and has largely exited fromits other North American property interests. Major purchases and sales in 2004: • Purchase of Land Securities' industrial portfolio for £340.4m. Slough Estates secured an excellent industrial portfolio in exchange for the major part of our retail portfolio. This transaction was a one-off opportunity to acquire a high quality south eastern England portfolio that had been built up over a number of years by Land Securities. • Sale of shopping centres in UK to Land Securities for £332.8m. In the UK, the ground breaking £673m property swap with Land Securities has enabled Slough to exit from the majority of its shopping centre portfolio. Slough Estates' retail portfolio was too small to be an effective hedge for the overall portfolio so there was a choice; either to grow this portfolio substantially, or to exit. We plan to exit our remaining shopping centre investments in due course. • Sale of 34,051 sq.m. of light industrial/warehouse space at Neuss, Germany for £21.4m. Part of Slough's holding at Neuss was sold to IVG for £21.4m in December 2004. • Sale of Pfizer Center in San Diego for £190.7m. The sale of the 71,709 sq.m. Pfizer Campus in San Diego is the first major disposal from the Slough Estates health science portfolio in the US. The development cost for the campus was £91.1m and the campus had been valued at £143.2m at the half year, which shows that Slough Estates has achieved an excellent price, and supports our positive view for the entire Slough health science portfolio. It is our intention to continue to recycle assets within the Californian portfolio so that Slough USA operates on a stand alone basis. • Acquisition of 32.5 hectares of land at Parkway Business Centre, Poway, San Diego for £24.6m. 14,492 sq.m. of space is currently under construction on a 19.5 hectare plot, which was acquired in the first half of 2004. A further 13.0 hectare plot was acquired in the second half. • Disposal of Willingdon Park, Vancouver for £33.4m. A quality 71,117 sq.m office development, well placed for Vancouver's city center, was sold to our partner Hospitals of Ontario Pension Plan. Willingdon Park had been developed over 15 years and had a rental income of £2.6m. The exit from Vancouver completes Slough Estates' withdrawal from the Canadian market. • Sale of Quail West for net £30.0m. Conditional contracts were exchanged for the sale of the leisure complex at Quail West in December 2004. The net book value of this project at the end of 2004 was £7.4m after deducting the provision against future costs, which was established in 2003 in reaction to the poor sales that were being achieved at that time. However, in 2004 the market for high-end leisure properties improved and we are very pleased to have agreed a price considerably over the written down value, receivable by instalments over four years. None of the gain has been recognised in 2004. Joint Venture - HelioSlough In April 2004 we announced a new joint venture with Helios Properties. Theventure, called HelioSlough Ltd., is a 50/50 joint venture, which has the aim ofdeveloping a network of strategic distribution parks throughout the UK. Slough Estates has been very successful in developing distribution parks inFrance and Belgium but has not had a significant presence in the UK. We believethat, with the continuing changes in supply chain management in the UK, themarket for distribution facilities will remain strong for the foreseeablefuture. The joint venture is a £150m project in the initial stages with joint equity,with Helios Properties injecting development land for some five million squarefeet of logistics space and Slough Estates arranging loan finance. By the yearend there was one scheme under construction in Doncaster and infrastructure workhad commenced at Thorne, South Yorkshire. Leasing A key objective in 2004 was to reduce the void space in our portfolio, with aparticular emphasis on the UK business space sector. We have been successful inleasing 102,821 sq.m. of space in the year in the UK, up from 83,836 sq.m. in2003, which is a very impressive result given the market conditions and close toour record level. However, a general improvement in occupancy remains elusiveand, not withstanding our success in leasing a large amount of space, we alsohad 143,467 sq.m. of space returned to us in the UK, mainly as a result ofcorporate relocations and rationalisations, bringing UK occupancy at theyear-end to 90.6%. However of the space returned, 35,997 sq.m. is deemedredundant space and the land is available for redevelopment. For occupancy data,vacant units which have the benefit of a rental guarantee, are consideredoccupied. The mix of occupancy has also changed as a result of the property swapwith Land Securities where we exchanged nearly fully let shopping centres for UKindustrial property with lower levels of occupancy. In cycles of strongeroccupancy demand, the level of space surrendered could be regarded as asignificant opportunity for redevelopment and portfolio modernization. Steps arebeing taken across the portfolio to upgrade customer retention and the marketingof space and improvements to individual estate environments. In Europe and in the US we have continued with our successful leasing programmebut occupancy fell to 87.9% and 86.2% in Europe and the US respectively, due toconstruction completions, disposals of fully let space and space being returned.Of the space returned in Europe and the US, 13,652 sq.m. is deemed redundant. Group occupancy marginally improved to 89.6%. Leasing of space vs. space returned Slough Trading Other UK Europe US Estate sq.m. sq.m. sq.m. sq.m. Lettings 43,082 59,739 49,465 25,347Pre-lets 1,444 7,644 31,601 72,464New space completed and unlet 0 1,868 35,331 0Space Returned 51,645 91,822 31,653 36,595 Major lettings have included: UK • Letting of 2,827 sq.m. new office building at 240 Bath Road, Slough to Fiat UK Limited at £269.10 per sq.m. • Letting of 1,444 sq.m. at 275 Leigh Road, Slough to Ferrari Maserati UK at £123.69 per sq.m. • Letting of two units of 1,247 sq.m. and 1,595 sq.m. at Southern Cross, Southampton at rents of £72.66 per sq.m. and £72.74 per sq.m. respectively, making Phase 100 fully let. • In early 2005, a letting of 11,189 sq.m. of existing business space on the Slough Trading Estate to a major financial institution for an IT backup centre, at a rent of £91.49 per sq.m. Europe • A total of 16,048 sq.m. was let at Pegasus Park. • 12,861 sq.m. let at Cergy-Pontoise in France. • Pre-let of 18,327sq.m. or 87% of a 21,000 sq.m. warehouse development, at Neuss, Germany to ASICS for delivery in October 2005. USA • Genentech agreed to lease 72,464 sq.m. (780,000 sq.ft.) of office and laboratory space in eight new buildings on Slough's Britannia East Grand site in South San Francisco in December 2004. This is one of the largest single projects undertaken by the company. This is a four year project, with the first phase of 41,805 sq.m currently under construction. It is estimated to cost over £169m and will be funded from the proceeds of selective asset sales by Slough Estates USA, which is now well established as a market leader in the provision of generic health science real estate in California. Development In 2004, we have continued to hold back on development activity, waiting untilwe were more certain of better occupier demand. In the second half of the year,with more encouraging levels of enquiries, we have increased the number ofstarts on site but we are still developing with caution. However, it isimportant that we continue to ensure that we have sufficient business space tomeet the growth in demand in 2005 and beyond, and as at the year end we had167,964 sq.m. under construction, of which 43% is pre-leased. During 2004, wecompleted 77,713 sq.m., of which 52% is now let. In what have been quieter markets we have continued to work hard in obtainingthe requisite consents and to put in the necessary infrastructure on ourstrategic landbank so we are now ready to start developments quickly as themarket strengthens. We are encouraged by the continued resilience of theflexible business space market and highlight in particular the strongcontribution of the Californian portfolio, which has been so successful insupplying generic laboratory space to the health science sector. CURRENT DEVELOPMENTS sq.m. Spend Estimated AnticipatedSeven Major Schemes to date development completion date £m cost to come £m______________________________________________________________________________Farnborough 153,000 109 267 2013Cambridge 40,000 35 55 2014Pegasus Park, Brussels 170,000 29 147 2010333 Oyster Point, SanFrancisco 29,000 8 52 2010East Grand, San Francisco 73,000 40 129 2007Poway, San Diego 78,000 27 101 2011Thorne, nr. Doncaster (50% JV HelioSlough) 79,000 8 36 2007______________________________________________________________________________Excludes buildings already completed Valuation The year end valuation of all the Group's investment properties was undertakenas at 31st December by external valuers, apart from the properties acquired fromLand Securities which are included at fair value. The valuation of £3,795.6mresulted in a surplus of £186.6m. This represented an increase of 5.2% or 5.7%excluding the ex-Land Securities' properties. With a UK revaluation surplus of£118.9m, we are encouraged that the prospects for UK business space areimproving. Revaluation Movements December 2004 % Change from £m Dec 2003 UK Industrial 109.8 6.4 Office 13.0 3.1 Retail 17.3 10.1 Land (21.2) (11.9) __________________________________________________ Total UK 118.9 4.7 __________________________________________________ Overseas USA 60.5 12.4 Europe 7.2 2.4 __________________________________________________ Total Overseas 67.7 8.7 __________________________________________________ Total 186.6 5.2______________________________________________________________________________Joint ventures / Associate 14.5 14.1 Other activities We have made good progress in the sale of our non-core activities. Agreement hasbeen reached to sell Quail West. We have settled the outstanding litigation withregard to Tipperary Oil & Gas, which means that we expect to be able to exitthis trade investment successfully at our own timing. We reduced our holding inTipperary Oil & Gas to 54% in 2004. Slough Heat & Power has continued to improveits operating performance over the past six months. Major post year end event In the US, Slough USA has taken back surplus space from Pfizer in South SanFrancisco following the successful sale of its Torrey Pines Campus to Pfizer inSan Diego for £190.7m. This termination resulted in a premium of £35.1 millionfor Slough Estates which will benefit 2005. The San Francisco campus consists ofthree modern buildings and of the total space of 20,665 sq.m. vacated by Pfizer,6,287 sq.m. has already been let to Exelixis. Tax Transparent Property Trusts (REITs) We were very pleased that the Government decided last week to move forward withthe introduction of UK REITs into the UK in 2006. The discussion paper isindicating a preference for a flexible format which has been strongly favouredby ourselves and virtually all of the UK real estate industry. There are stillunresolved issues particularly in relation to the conversion charge and gearing.We will continue to cooperate with the UK industry groups during theconsultation process and we are satisfied that our corporate structure meansthat we could convert if the overall legislative proposals and terms arefavourable. Outlook There is increasing evidence from the market that occupier demand is continuingto improve although the pace of change has been slower than had generally beenanticipated a year ago. The Group has made excellent progress in furtherfocusing our activities on flexible business space at what is an early stage inthe business cycle, and this will benefit shareholders in the medium and longerterm. It is for this reason that the Board is confident in recommending anincrease of 7.1% in the final dividend. The overall property market is in a robust state and 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 a stronginvestor demand for well-located and well-let property business space. Theinvestment case is underpinned by low inflation, affordable interest rates and alack of funding to support speculative development excesses. The yield compression of the last two years looks set to continue in the firsthalf of 2005. This structural change in yield reflects the changing sentimenttowards real estate as an asset class, together with the current lowinflationary environment. The weight of money seeking real estate is continuingthe downward pressure on yields, but we do not believe that such downwardpressure can continue into the second half of the year. • In the UK, Slough Estates' focus will be on flexible business space. Our portfolio has been enhanced by the newly acquired industrial properties and today 86% of our UK industrial portfolio is in the South East of England. We will continue to look to strengthen this position, both by acquisition and the development of our two major sites at Farnborough and Cambridge. • We plan to grow our established position in Continental Europe, where we see good opportunities for expanding our base in the industrial, logistics and suburban office markets. To this end, we have brought our Continental European operations together under a single management structure, based in Paris. • In North America, our health science property portfolio is developing extremely well and the prospects for the current pipeline are excellent. Slough Estates has built up a leading position in the provision of space to the health science community which means that we can expect to see a very positive contribution towards Group earnings from both our completed laboratory space and from our strong development pipeline. The US business is self-financing and capital will be recycled selectively to exploit future development opportunities. The Board believes that Slough Estates is today well positioned to takeadvantage of the opportunities in the marketplace as the Group has excellentproperties and substantial land holdings with planning consents for development,located in many of the prime international business centres. This will enable usto start to build into the recovery in occupier demand and, having successfullyput in the infrastructure for these new schemes in 2005, it will be possible toaccelerate this development pipeline as demand requires. Ian CoullChief Executive Slough Estates is a leading provider of flexible business space in businessparks in Western Europe and North America, with over 1500 customers occupying2,996,967 square metres of business space, with a total value of £3.9 billion.Slough Estates' properties are in suburban locations in close proximity to themain business centres, where there is long term demand for businessaccommodation to serve these key economic regions. The company's main activitiesare currently based around London, Brussels, Paris, Dusseldorf, San Franciscoand San Diego and the company continues to develop new business parks with thelong term objective of building shareholder value and enhancing its reputationfor quality buildings offering excellent value to customers. www.sloughestates.com Operating Review Slough Trading Estate • Value £1.2bn • 673,000 sq.m. (7.2m sq. ft.) business space and 33,737 sq.m. (0.4m sq.ft.) retail space • 200 hectare (500 acre) site • 394 customers • Approximately 20,000 employees based on the Trading Estate • Website: www.sloughte.com • Customers include: Allied Carpets, B&Q, Black & Decker, Celltech R&D, Comet Group, Equant, Furniture Village, Ferrari Maserati UK, Fiat Auto (UK), Ipsen, John Menzies, Kingston Communications, L G Electronics UK, Lonza Biologics, Mars, NEC (UK), O2, Polycom (UK), Sun Chemical, Unatrac Limited, Xenova • 100% owned • Rent passing £69.0m pa • Average passing rent: Business space: - industrial £98.54 per sq.m - office £247.70 per sq.m Retail: £192.71 per sq.m • 2,394 sq.m. under construction • 89% occupancy by area The Slough Trading Estate is the largest business park in Europe and has beenSlough Estates' core property asset since the company 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. In 2004 the levels of customer enquiries, viewings and proposals on the SloughTrading Estate made in the UK have all increased from the levels recorded in2003 and lettings completed in 2004 totalled 51,645 sq.m., a 110% increase over2003. We are confident that this increased activity points to an improving businessenvironment but at present the market for offices in Slough continues to beweak, which is reflected by some downward pressure on rental levels for offices.Our occupancy is 89%, compared with 88% at December 2003. • Letting of 2,827 sq.m. new office building at 240 Bath Road, to Fiat UK Limited at £269.10 per sq.m. • Letting of 61 Whitby Road (WH Smith), and of 275 Leigh Road (Ferrari). • 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 and giving encouragement for 2005. Heathrow and West London • Value £489m • 332,712 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 • 82 hectares (203 acres) in total • 240 customers • Website: www.thelhr.com • Customers include: DFS Furniture Company, Federal Express Europe, Fujitsu, National Express Operations, Scottish & Newcastle, Thorn, TNT, Tristar Cars, VG Systems • 100% owned • Rent passing £29.1m pa • Average passing rent: £86.29 per sq.m. • 14,276 sq.m. under construction at West Drayton and Hounslow, 20% preleased • 92% occupancy by area 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 12,322 sq.m. of space let in 2004. • Letting of 1,010 sq.m. at Park Royal, NW10 at a rent of £99.02 per sq.m. • Purchase of 0.47 hectares of land and 3,422 sq.m. of space at Hounslow, adjacent to an existing holding. South London and Southern England • Value £336m • 269,545 sq.m. (2.9m sq.ft.) business space in: Basingstoke, Portsmouth, Camberley, Southampton, Epsom, Leatherhead, Farnborough, Coulsdon, Croydon, Fareham, Frimley, Guildford, SW19, Swanley, Crawley • 115 hectares (284 acres) in total • 129 customers • Customers include: Agustawestland International, Autodesk, Carlsberg UK, Siemens Real Estate, Thales Properties, The Big Yellow Self Storage Company, Oddbins, Pinnacle Entertainment, Volkswagen Group UK • 100% owned • Rent passing £13.8m pa • Average passing rent: £51.28 per sq.m • 5,434 sq.m. under construction at Camberley and Portsmouth, 46% presold or prelet • 82% occupancy by area, excl. rental guarantee. 95% occupancy incl. rental guarantee South London and Southern England is a newly designated region which coverssouth London, primarily between the M23 and the M3 motorways down to the southcoast. It covers the counties of Surrey, Sussex, Kent and Hampshire which areaffluent commuting areas. Slough Estates' holdings in this region have been substantially strengthened in2004 by the acquisition of an industrial portfolio from Land Securities withassets in Coulsdon, Croydon, Fareham, Frimley, Guildford, London SW19 andSwanley • A total of 6,622 sq.m. let in 2004 • Letting of two units of 1,247 sq.m. and 1,595 sq.m. at Southern Cross, Southampton at rents of £72.66 per sq.m. and £72.74 per sq.m. respectively, making Phase 100 fully let. North London and East of England • Value £346m • 292,920 sq.m. (3.2m sq.ft.) business space in: Elstree, Welwyn Garden City, Chelmsford, Radlett, Luton, Basildon, Hatfield, Thurrock, Barking, Huntingdon, Cambridge • 124 hectares (309 acres) in total • 166 customers • Customers include: Blue Star Engineering, Ford Motor Company, NTL, Starbucks Coffee Company, Sheffield Insulations, Tibbett & Britten, Tesco, WH Smith • 100% owned • Rent passing £17.6m pa • Average passing rent: £59.90 per sq.m. • 9,454 sq.m. under construction at Radlett • 83% occupancy by area, excl. rental guarantee 88% occupancy incl. rental guarantee North London and East of England is a newly designated region which covers anarea north of London but to the east of the M1 motorway and reaches out as faras Cambridge and along the M11 motorway. The Cambridge area has been identifiedby the Government as a major growth area for development and is the main home tothe UK's biotech industry. • A total of 15,278 sq.m. let in 2004. • Letting of 1,575 sq.m. at Radlett to Phoenix Healthcare Distribution Ltd at a rent of £79.65 per sq.m. • Agreement to lease 2,152 sq.m at Waterhouse Lane in Chelmsford. Thames Valley and West of England • Value £410m • 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 hectares (242 acres) in total • 173 customers • Customers include: Agere Systems, Agilent Technologies UK, Business Express Network, Fujitsu, Intel Corporation, Knorr-Bremse, Mars, NTL, Rusch Manufacturing, Solaglas, The Post Office • 100% owned • Rent passing £25.5m pa • Average passing rent: £87.82 per sq.m. • 88% occupancy by area, excl. rental guarantee 92% occupancy, incl. rental guarantee This newly designated region (which excludes Slough and LHR) covers the areaadjacent to the M4 motorway between London and Bristol in the west. The M4Corridor has been the most successful business area in the south east of Englandin recent years and Slough has leading Business Parks across the region. • A total of 14,386 sq.m. let in 2004. • Letting of 1,712 sq.m. at Beeches Industrial Estate, Yate, at a rent of £51.13 per sq.m. • Letting of 1,577 sq.m. at Faraday Road, Swindon at £69.97 per sq.m. • Acquisition from Royal Mail Group plc of remaining 2.86 hectares of land at Winnersh Triangle, not already owned by Slough. • Completion of new 3,372 sq.m. warehouse facility at Emerald Park, Bristol, pre-leased to Knorr-Bremse at £72.70 per sq.m. This deal, plus an additional letting of 704 sq.m., represented the final lettings in the 22,044 sq.m. built scheme. Midlands • Value £186m • 168,371 sq.m. (1.8m sq.ft.) business space and 16,733 sq.m. (180,000 sq. ft.) of retail space in: Birmingham, Huddersfield, Chester, Derby, Northampton, Runcorn, Warrington, Oldbury • 54.0 hectares (133.5 acres) in total • 154 customers • Customers include: Aggregate Industries Management, British Midland, DSG, Newey & Eyre, Reid Furniture, Sec. of State for the Environment, Tesco, Wolseley UK • 100% owned • Rent passing £11.6m pa • Average passing rent: £62.80 per sq.m. • 89% occupancy by area 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 businesspark to the south of Birmingham. There are also a few properties in the North. • A total of 9,644 sq.m. let in 2004. • Letting of 2,157 sq.m. at Kings Norton Business Centre, at a rent of £60.74 per sq.m. • Letting of 1,861 sq. m. at Derby at an average rent of £43.07 per sq.m. over 5 years. Joint Ventures - HelioSlough • Trading book value £10m • 26.5 hectares (65.4 acres) owned in total • 50/50 JV with Helios Properties Formation of a new joint venture company, HelioSlough, with Helios Properties.The 50/50 JV, which has £150 million of funding available, aims to develop anetwork of large scale strategic distribution parks throughout the UK. • 11,148 sq.m. under construction at Trax Park, Doncaster. • Infrastructure work at Thorne, comprising formation of a new entrance roundabout, some off-site road realignment and new services. Belgium • Investment property value £189.1m Trading book value £11.5m • 177,955 sq.m. (1.9m sq.ft.) business/office space and 2,797 sq.m. (30,100 sq.ft.) of retail in: Brussels Pegasus Park (81,679 sq.m.), Woluwe, Relegem, Bornem, Nivelles, Zaventem, Horizon, Diegem, Rumst, Zellik, Sirius, Kortenberg • 67 hectares (168 acres) in total • 87 customers • Customers include: Cisco, Johnson Controls, Regus, DHL, Bornem, UPS, Telenet, Sungard, Emerson, Agilent, Ecolab (Henkel), Synstar • Rent passing £14.4m pa • Average passing rent: £80.71 per sq.m. • 85% occupancy by area 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. The Company is also a leading provider of distributionspace within "the golden triangle" between Brussels, Ghent and Antwerp. • A total of 20,348 sq.m. let in 2004. • Lettings of 5,917 sq.m. at Pegasus Park, bringing vacancy down to under 6% (surrounding market vacancy is close to 20%). • Start on site of construction of 6,360 sq.m. speculative office building at Pegasus Park (start: June 2004, delivery: July 2005). • Sale of 3,382 sq.m. at Kortijk and 2,302 sq.m. at Kortenberg. France • Investment property value £108.2m Trading book value £28.5m • 239,996 sq.m. (2.6m sq.ft.) business space and 17,812 sq.m. (190,000 sq.ft.) of retail in: Marly la Ville, Cergy Pontoise, Evry, Bures Orsay, Colombes, Le Blanc Mesnil, Aulnay sous Bois, Nanterre and Paris • 56 hectares (138 acres) in total • 20 customers • Customers include: Geodis, Daher, Deluxe, Staci, Conforama, Stockalliance, Gefco, Mory Team, Guilbert, UPS Patisfrance • Rent passing £10.3m pa • Average passing rent: £43.00 per sq.m. • 9,858 sq.m. under construction at Le Blanc Mesnil, 33% preleased • 96% occupancy by area 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 20,160 sq.m. let in 2004. • Delivery of 1st phase of 7,472 sq.m. of light industrial units at Le Blanc Mesnil, close to Le Bourget (48% leased on delivery). Germany • Trading book value £52.8m • 60,224 sq.m. (650,000 sq.ft.) business space in: Neuss, Hamburg, Ratingen, Monchengladbach, Frankfurt, Kapellen, Krefeld • 27 hectares (67 acres) in total • 57 customers • Customers include: CC Bank, Qits, SATO, Listan, Phonet, Flashpoint, Spacelabs, ADCO, Bernd John, Junkers, Tholstrup, Robin (Europe) • 100% owned • Rent passing £2.5m pa • Average passing rent: £40.93 per sq.m. 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 8,957 sq.m. let in 2004. • Pre-let of 87% of a 21,000 sq.m. warehouse at Neuss, to ASICS for delivery in October 2005. • Pre-let of 3,000 sq.m. unit at Krefeld. • Sale of 34,051 sq.m at Neuss. • 46,704 sq.m. under construction at Neuss, Kapellen and Krefeld, 46% preleased. California • Investment property £541.4m • 343,431 sq.m. (3.7m sq.ft.) business space in: San Francisco, San Diego • 129 hectares (319 acres) in total • 50 customers • Customers include: Amgen, Exelixis, Pfizer, Rigel, Robert Half International, FibroGen, Raven, SkyePharma, Aradigm, Millenium Pharmaceuticals, Syrrx, ProBusiness Services • Rent passing £45.0m pa • Average passing rent: £131.17 per sq.m. • 62,336 sq.m. under construction at South San Francisco and Poway, 67% preleased 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. Occupancy has fallen to 86% at year end from 87% in 2003 but this reflects majorsales within the portfolio as 25,347 sq.m. were let in 2004. • Genentech, Inc. agreed to terms to lease approx. 72,464 sq.m (780,000 sq.ft.) of office and laboratory space in eight new buildings on the Britannia East Grand site, South San Francisco. Construction will take place in two phases over 4 years and is estimated to cost over £169 million. • Acquisition of 32.5 ha of land at Parkway Business Centre, Poway, San Diego. • Purchase of 3 ha site in San Francisco containing a 15,128 sq.m. redundant building which will be redeveloped. • Completion and letting of last two buildings (approximately 18,821 sq.m.) of the Pfizer Global Research and Development Center in Torrey Pines Science Center (totalling 71,709 sq.m.). • Sale of Pfizer Center in San Diego for £190.7 million. Financial Highlights Profit and Loss Account Year ended Year ended 31 Dec 2004 31 Dec 2003______________________________________________________________________________Rental income (UK) £174.4m £167.3mRental income (Group) £252.1m £240.8mNet interest payable £94.7m £88.5mProfit / (loss) on property trading and £68.9m (£29.0m)disposal of fixed assetsUnderlying profit before taxation* £140.2m £132.8mProfit before taxation £209.1m £103.8mTax charge £41.7m £12.4mAdjusted diluted earnings per share 28.2p 27.6pDiluted earnings per share 36.0p 19.6pOrdinary dividend per share 16.0p 15.0p______________________________________________________________________________ * profit before taxation less profit on property trading and disposal of fixed assets Balance Sheet 31 Dec 2004 31 Dec 2003______________________________________________________________________________Total properties £3,795.6 £3,563.9Adjusted net assets £2,647.1 £2,369.2Net assets £2,446.2 £2,176.1Adjusted diluted net asset value per share 564p 505pDiluted net asset value per share 521p 464p Adjusted debt / equity ratio 50% 64%______________________________________________________________________________ Total Return (adjusted diluted net asset value per share growth plus dividend)for the year 14.9%. Financing statistics (Group) 31 Dec 2004 31 Dec 2003______________________________________________________________________________Net debt £1,325.3m £1,507.8mWeighted average debt maturity 9.7 years 10.8 yearsWeighted average interest rate 6.41% 6.68%% of net debt at fixed / capped interest rates 105% 95%Interest cover (net rents / net interest) 2.2 times 2.0 timesCash and available committed facilities £720.6m £523.5m Financial Review •Dividend up 6.7 per cent in 2004 and up 7.4% compound over five years. •Property investment income including joint ventures and associate up 3.8 per cent. •Diluted adjusted net assets per share up 11.7 per cent. Results Pre-tax profit, excluding exceptional items, rose by £6.7 million or 4.8 percent in 2004 from £140.1 million to £146.8 million. Earnings per share, adjustedon a similar basis, and excluding the effects of FRS19 deferred tax, were up by5.1 per cent to 29.0 pence. Year end exchange rates reduced profit before tax,excluding exceptional items, by £2.2 million. Including the substantial effects of investment property sales and the 2003£37.9 million Quail West write-down/provision, profit before tax of £209.1million was 101 per cent ahead of 2003's £103.8 million. Property activities Investment properties Rental income excluding recharges rose by £11.3 million or 4.7 per cent from£240.8 million in 2003 to £252.1 million. The main factors behind this increaseare as set out below: £m 2004 2003___ ______ _____Properties owned throughout 231.4 224.2Acquisitions 1.9 0.2Developments 13.9 18.4Properties sold (2.9) (3.9)Surrender premiums 11.7 5.6Exchange translation (3.9) (3.7) ______ _____ 252.1 240.8 ______ _____ Rent lost from vacated properties exceeded rent gained from re-lets by £6.7million during 2004. On a like-for-like basis, rental income increased by £3.1million or 1.2 per cent, 1.4 per cent in the UK and 0.7 per cent overseas. Afteraccounting for £13.1 million (2003 £15.8 million) of tenant recharges, propertycosts of £34.3 million (2003 £33.5 million) and our profit share of £16.4million (2003 £15.1 million) from property investment joint ventures and anassociate, property investment income was up by 3.8 per cent from £238.2 millionto £247.3 million. As far as the future is concerned additional year on year rental income of £20.5million has already been secured on recent project completions or propertiescurrently under development, £1.8 million of which will fall into 2005. The UKportfolio of occupied space was 1.4 per cent reversionary at the end of 2004,which equates to £2.1 million of potential future rental income as rents arereviewed or properties re-let. The estimated rental value of vacant space at theyear end was £32. 3 million (excluding the portfolio acquired from LandSecurities which has rental guarantees), of which £21.8 million was in the UK. Sales of investment properties realised a surplus of £62.3 million over bookvalue in 2004, compared to £1.6 million in 2003. The main contributors were thePfizer campus (£52.1 million), the retail properties involved in the swap withLand Securities (£6.7 million), and Willingdon Park, Vancouver (£3.5 million). Property trading Property trading profits of £7.1 million were at the same level as those in2003. Several projects in Belgium contributed, as did the sale of Neuss phase 5in Germany. Net rental income from trading properties fell from £4.0 million in2003 to £3.2 million. The inclusion of £0.5 million of losses (2003 profit £0.2million) from property trading joint ventures brought the overall contributionfrom property trading in 2004 down to £6.6 million, against £7.3 million in2003. The 2004 losses arose mainly from the set up costs of the HelioSloughjoint venture. There are sufficient projects in the UK, Belgium, France andGermany to suggest a reasonable level of trading profits in 2005. The residential leisure development at Quail West in Florida had a much betteryear in 2004, with the sale of 11 lots. The net book value of this project atthe end of 2004 was £7.4 million after deducting the provision against futurecosts which was established in 2003. The sale of Quail West is expected tocomplete during the first half of 2005 for a net $57.5 million (£30.0 million)to be received over a four year period. Non-property activities The return from the Group's utilities, oil and gas and other activities improvedfrom a loss of £2.9 million in 2003 to a surplus of £2.8 million. Slough Heat & Power SH&P's losses of £4.1 million were only marginally lower than those of 2003(£4.2 million) due to continuing plant availability problems, particularly inthe first half of the year, and higher fuel costs. Greater plant reliabilitytowards the end of the year, which has been sustained so far in 2005, points toa significantly improved SH&P performance in 2005. Tipperary Losses on the Group's investment in Tipperary fell from £3.5 million in 2003 to£3.1 million. The cost of developing the coal seam gas reserves in Queenslandwill enhance the returns from the eventual sale of the Group's investment, whichhad a market value of £57.7 million against a net book value of £11.7 million atthe end of 2004. Other income The profit from other activities rose by £5.2 million to £10.0 million in 2004,thanks largely to a gain of £4.2 million on the sale of 1.5 million shares inTipperary Corporation, which reduced the Group's interest in that company from61 per cent to 54 per cent. The sale of warrants in Tularik, one of the Group'scustomers in California, generated a gain of £2.2 million. The contributionsfrom Candover and Charterhouse USA fell from £4.7 million to £3.5 million,although there was a net cash inflow of £5.6 million from those investments.With an investment of £38.3 million remaining in these funds and uncalledcommitments to them of £17.3 million, further profits can be expected in thefuture, although their timing and quantum are difficult to predict. The Groupdoes not intend to invest in new funds of this nature. Financing costs Net interest costs rose by £6.2 million during 2004 to £94.7 million. Netinterest payable (before capitalisation of interest) was unchanged at £111.6million. Capitalised interest fell by £6.2 million to £16.9 million, partly dueto the reduction in earlier years in the development programme, but also to theexpensing of an additional £1.8 million of interest in 2004 that had previouslybeen capitalised, mainly on projects such as Farnborough and Cambridge. Interestcapitalisation ceased on both of those projects in mid-2003 following extendedperiods of development inactivity at the two sites. Capitalisation restarted atFarnborough during the first half of 2004 with the resumption of developmentthere. Interest was expensed at Cambridge throughout 2004. Gross interest cover improved from 2.0 times in 2003 to 2.2 times in 2004,excluding exceptional items. Taxation The Group's effective current tax rate of 10.5 per cent excluding exceptionalitems was slightly lower than 2003's 11.1 per cent. This rate benefits from theeffect of capital allowances, a deduction for interest that is capitalised inthe profit and loss account, and the availability of capital losses to shelterlease surrender premiums. The effective current tax rate is expected to move upto circa 15 per cent in 2005. FRS19 deferred tax has had a considerable effecton earnings, with a charge of £5.6 million in 2004 compared to a credit of £3.0million in 2003. This was largely due to 2003 benefiting in deferred tax termsfrom the Quail West write down/provision. This is the main factor giving rise toa higher overall effective tax rate in 2004 of 19.9 per cent against 11.9 percent in 2003. The Group has an estimated potential capital gains tax liabilityof £176 million (2003 £129 million), assuming that all properties are sold attheir current balance sheet carrying values. Security of income The Group has excellent income security. 56 per cent of the current Groupannualised contracted rents of £245.7 million is secured on leases with at leastten years unexpired, or 46 per cent if all tenants exercise break clauses andvacate at the earliest opportunity. Over the last five years, 67 per cent ofcustomers with the option to break leases have not exercised those options. Theweighted average term of unexpired leases is 11.3 years excluding breaks or 9.8years assuming all breaks are exercised. The Group is not dependent on any one customer for its principal revenues as ithas over 1300 tenants in the UK and just under 1550 tenants in total worldwide.No tenant accounts for more than 4 per cent of Group rental income. Nor is theGroup reliant on any one business sector. Its worldwide portfolio (by rent) isoccupied by customers in manufacturing 18 per cent, logistics 10 per cent,health science research 29 per cent, TMT 22 per cent, service 14 per cent,retail 5 per cent and others 2 per cent. Dividend The Board has proposed a total dividend of 16.0 pence per share for 2004, anincrease of 6.7 per cent on 2003. Dividend cover of 1.8 times, adjusted toexclude exceptional items and FRS19 deferred tax, remained at the same level asthat of 2003. Cash Flow The net cash inflow from operations of £204.9 million was £9.4 million lowerthan in 2003, due largely to the proceeds of £20.5 million from a 2004 tradingproperty sale being received in 2005. Without this timing difference, 2004operating cash flow would have been £11.1 million higher than that of 2003.After the payment of all interest, dividends and tax, there was a free cashinflow of £17.3 million. Capital expenditure of £86.4 million on the investmentproperty portfolio was more than offset by proceeds of £228.4 million frominvestment property sales. Overall, there was a net cash inflow of £146.4million for the year. Balance Sheet and Capital Structure Shareholders' funds excluding FRS19 deferred tax rose by £277.9 million duringthe year to £2,647.1 million. There was consequently an 11.7 per cent increasein diluted net assets per share (NAPS) from 505 pence to 564 pence. The maininfluences behind these movements are shown on the table below: Net Diluted* Assets * NAPS £m Pence _______ _____2003 net asset value 2,369.2 505 Valuation surpluses/(deficits)- retail 55.6 12- industrial 109.7 23- office 14.1 3- development land 7.2 2- joint ventures 14.5 3 Retained earnings 96.4 21Exchange differences (12.1) (3)Others (7.5) (2) _______ _____2004 net asset value 2,647.1 564 _______ _____ * Excludes deferred tax The total deferred tax liability rose from £182.3 million to £192.1 millionduring 2004. Diluted NAPS including deferred tax increased from 464 pence in2003 to 521 pence. Year end net borrowings of £1,325.3 million fell by £182.5 million during theyear. Gearing (the ratio of net borrowings to shareholders' funds, excludingFRS19 deferred tax) dropped from 64 per cent in 2003 to 50 per cent at the endof 2004, mainly due to the effect of the revaluation surplus and the high levelof property sales. The exchange rate effect reduced net borrowings by £31.8million. The Group has very little off-balance sheet debt. In addition to the £1,325.3million of net borrowings disclosed as such in the balance sheet, £40.8 millionof joint venture debt is included in the balance sheet as part of the £46.4million "Investments in joint ventures-share of gross liabilities". Only £1.5million, relating to the Group's share of debt in a property backed associate,is not carried on balance sheet. Treasury Policies and Financial Risk Management The Group operates a UK based centralised treasury function. Its objectives areto meet the financing requirements of the Group on a cost effective basis,whilst maintaining a prudent financial position. It is not a profit centre andspeculative transactions are not permitted. Board policies are laid downcovering the parameters of the department's operations including the interestrate mix of borrowings, net assets exposed to exchange rate movements andaggregate exposure limits to individual financial institutions. Derivativeinstruments are used to hedge real underlying debt, cash or asset positions andto convert one currency to another. The main financial risks facing the Group are liquidity risk, interest rate riskand foreign exchange translation exposure. Regarding liquidity, as property investment is a long term business, the Group'spolicy is to finance it primarily with equity and medium and long termborrowings. The weighted average maturity of borrowings at the year end was 9.7years. £46.5 million of debt is due for repayment or rollover in 2005/2006.£1,202.5 million or 70 per cent of the Group's gross debt of £1,722.7 millionmatures in more than five years. At the year end, the Group had £397.4 million of cash balances on deposit and£323.2 million of undrawn bank facilities. This availability is more thanadequate to cover the Group's development plans over the next two years or so.Spend on the development programme is expected to amount to some £200 million in2005 and about £225 million in 2006. This will obviously depend on prevailingmarket conditions. Committed property expenditure amounted to £184.1 million atthe end of 2004, 70 per cent of which relates to pre-let opportunities. Thereare no restrictions on the transfer of funds between the parent and subsidiarycompanies. All covenants in bank or loan agreements restricting the extent towhich the Group may borrow leave substantial headroom for the Group to expandits operations. The Group's approach to interest rate risk is that a minimum of around 70 percent of the gross debt portfolio must attract a fixed rate of interest or bevariable rate debt hedged with a derivative instrument providing a maximuminterest rate payable. At the year end, 81 per cent of the debt portfolio was atfixed rate. The weighted average cost of fixed rate debt was 7.08 per cent whichfalls to 6.41 per cent when variable rate debt is included. A number of the Group's historic fundings are at fixed interest rates which arehigh compared with current rates, but which reflect market conditions at thetime they were completed. FRS 13 requires the disclosure of the "fair value" ofthese loans and derivatives. The fair value at 31 December 2004 of the Group'sborrowings was some £226.5 million higher than book value before tax or £158.5million after tax. The main currency risk is translation exposure, i.e. the exchange rate effect ofretranslating overseas currency denominated assets back into sterling at eachbalance sheet date. The Group's policy is that currency assets should besubstantially hedged by maintaining liabilities (normally debt or currencyswaps) in a similar currency. Net assets exposed to exchange rate fluctuationsamounted to £430 million. A 10 per cent movement in the value of sterlingagainst all currencies affects net assets per share by 9 pence or 1.6 per cent,although experience shows that sterling rarely moves in the same directionagainst the two main overseas currencies involved in the Group's operations. Accounting Policies The Group's two defined benefit pension schemes were actuarially valued as at 31March and 5 April 2004, resulting in an overall past service deficit of £30million. The company is currently in discussion with the trustees of the pensionschemes to determine how the deficits in both schemes will be financed. However,had FRS17 "Retirement Benefits" been adopted in full, net assets at 31 December2004 would have been reduced by £28.3 million (2003 £20.2 million) net ofdeferred tax to reflect the "Net pension liability" calculated as specified bythe standard. International Financial Reporting Standards ('IFRS') We will adopt IFRS, as required, with effect from 1 January 2005. Our firststatements under IFRS will be for the six months to 30 June 2005, when we willrestate the comparative figures for the corresponding period of 2004. IFRS will have a major impact on the Group's accounts, as they will on manyRelated Shares:
Segro