8th Mar 2007 07:00
Embargoed: 0700 hrs, 8 March 2007
CLS Holdings plc ("CLS" of the "Company") Preliminary Financial Results for the Year Ended 31 December 2006
FINANCIAL HIGHLIGHTS
* Profit before tax ‚£176.6 million,up 108.5 per cent, including ‚£162.1 million of fair value gains on property * Profit after tax ‚£153.8 million, up 178.1 per cent
* Added value to shareholders41.2 per cent based on increase in adjusted* NAV
per share and distributions in the year (47.1 per cent based on statutory
NAV)
* Adjusted Net Asset Value per share 824.4 pence, up 35.8 per cent (Statutory
NAV per share 617.3 pence, up 39.7 per cent)
* Adjusted Net Asset Value ‚£598.6 million compared to market capitalisation
of ‚£516.9 million as at 07 March 2007, a discount of 13.6 per cent.
(Statutory NAV including deferred tax provision, ‚£448.1 million)
* Intended distribution by way of a tender offer buy-back of 1 in 41 shares
at 750 pence, being 18.3 pence per share making a total distribution to shareholders of 69.9 pence per share for the year, up 194.9 per cent * Property portfolio valued at ‚£1.14 billion, up 4.3 per cent (After
disposals in the year of ‚£300 million, and acquisitions of ‚£130 million)
* Net rental income ‚£65.5 million, down 5.5 per cent * Year end cash ‚£157.6 million up 33.3 per cent (December 2005 : ‚£118.2 million) RESULTS AT A GLANCEINCOME STATEMENT 2006 2005 Up / ‚£m ‚£m (Down) Net Rental Income 65.5 69.3 (5.5)% Other operating income and associate 9.7 2.2 340.9% company results (Losses) /gains on sale of investment (1.0) 0.7 (142.9)% properties Overhead and Property Expenses (21.0) (18.4)
14.1%
Operating profit (excluding gains/losses 53.2 53.8 (0.1)% on investment properties) Net Finance cost (31.6) (36.3) (12.9)% Underlying profit (excluding gains/ 21.6 17.5 23.4% losses on investment properties) Fair value gains on ongoing investment 151.1 55.7 171.3% properties Sale of Solna including uplift in 6.7 11.5 (41.7)% property value less costs of corporate
sale
Exceptional finance costs (2.8) -
- Profit before tax 176.6 84.7 108.5% Tax - current (1.2) (1.3) (7.7)% Tax - deferred (19.1) (21.9) (12.8)% Discontinued operations (2.5) (6.2) (59.7)% Profit for the year 153.8 55.3 178.1% Adjusted earnings per share on 23.8 p 19.7 p 20.8% continuing operations * Earnings per share 196.7 p 67.5 p 191.5% Interest Cover 1.7 times 1.5 times BALANCE SHEET 31 Dec 2006 31 Dec 2005 Up / ‚£m ‚£m (Down) Property portfolio 1,143.5 1,096.4 4.3 % Borrowings (683.8) (719.9) (5.0) % Cash 157.6 118.2 33.3 % Other (169.2) (140.9) 20.1 % Net asset value 448.1 353.8 26.6 % Share Capital 20.0 21.4 (6.5) % Reserves 428.1 332.4 28.8 % Shareholders' funds 448.1 353.8 26.6 % Adjusted NAV per share* 824.4 p 606.9 p 35.8 % Statutory NAV per share 617.3 p 441.9 p 39.7 % Distribution per share from tender offer 69.9 p 23.7 p 194.9 %buy-backs Adjusted gearing* 88.9 % 125.2 % (36.3) % Statutory gearing 118.7 % 171.9 % (53.5) % Adjusted solidity* 44.3 % 38.7 % 5.6 % Statutory solidity 33.1 % 27.9 % 5.2 % Shares in issue (000's) - excluding 72,605 80,058 (9.2) %treasury shares IAS 32 fair value adjustment after tax (21.6) p (34.6) p (37.6) % Adjusted Net Assets ‚£598.6m ‚£485.9m 23.2 % Statutory Net Assets ‚£448.1m ‚£353.8m 26.7 % BUSINESS HIGHLIGHTSProperty disposals
* Sale of Solna Business Park, Stockholm for ‚£267.0 million (SEK3,575
million) generating an uplift in net asset value of ‚£7.5 million (9.5 pence
per share) and a cash surplus of ‚£113.5 million.
* Sale of a mixed residential and commercial complex at Lƒ¶vgƒ¤rdet near
Gothenburg for a total price of ‚£40.5 million (SEK547 million), having been
purchased in 2002 for ‚£29.4 million (SEK440 million).
* Sale of Le 41 in La Dƒ©fense, Paris for ‚£15.3 million (¢â€š¬22.3 million). CLS
had purchased the building in 1998 for ‚£7.4 million (¢â€š¬11.7 million).
Property Acquisitions
* During 2006 CLS purchased 11 German commercial properties at a cost of ‚£
116.6 million - these properties are located in Berlin, Hamburg, Munich,
and Stuttgart. The properties have a combined lettable space of 88,780 sq m
(955,645 sq ft) and currently generate ‚£8.0 million net rental income. The
properties were purchased at an average initial yield of 6.9 per cent.
* Two further acquisitions have been made in France at a cost of ‚£9.0 million
- these office properties are located in Paris with a combined lettable
space of 4,066 sq m (43,767 sq ft) and generate ‚£0.6 million net rental
income. The properties were purchased on an average initial yield of 6.7
per cent. Property Development
* Planning permission was secured to redevelop New London Bridge House -
owned by the same consortium as The Shard. The new scheme replaces a 1960's
office tower with a spectacular office and retail building designed by
Renzo Piano offering net internal space of 39,950 sq m (430,000 sq ft).
* Completion of an interim financing facility of ‚£196 million for the London
Bridge Quarter incorporating The Shard - this facility has been provided to
obtain vacant possession of the existing building on the site, to repay
existing finance, and to provide working capital for the current stage of
the project.
* Further pre-let at The Shard - 17,651 sq m (190,000 sq ft) of office space
on the lower floors to TfL (Transport for London), on a 30 year lease with
rent rising with RPI. Equity Investments
* Acquired 17 per cent of the share capital of Bulgarian Land Development plc
(BLD) - an AIM listed residential and commercial property developer at a
cost of ‚£4.3 million. This investment establishes a foothold for CLS in the
fast growing Bulgarian property sector. In February 2007 we agreed to
increase our stake to 29 percent as part of a recent fundraising, on
condition that Per SjĦberg takes the role of non-executive chairman of BLD
* Acquired the remaining shares not already under its ownership in the youth
community website, Lunarworks - at a cost of ‚£14.5 million, valuing the
business at approximately SEK 372 million (‚£28 million). The cost of the
entire investment for CLS is ‚£17.0 million. We see significant value creation opportunities as the business expands internationally. * Disposed of the majority of our investment in Keronite - representing a
profit in the year of ‚£3.7 million. CLS retains a 6.5 per cent holding of
the shares in the company, on a fully diluted basis.
CHAIRMAN'S STATEMENTINTRODUCTION
Once again I can report that the Company has performed well during the year producing strong growth in shareholder value.
The main driver for this has been the increase in net asset values. Our adjusted net asset value per share has increased from 606.9 pence by 35.8 per cent to 824.4 pence.
The generally buoyant European property market has contributed to the growth inreal estate values in each of our operating regions during 2006, and it isworth noting that this is the eleventh consecutive year that our NAV per sharehas increased. During that period it has shown an average growth rate of 18.2per cent compound per annum.
Statutory NAV per share, including full provision for deferred tax of ‚£150.4 million, increased from 441.9 pence by 39.7 per cent to 617.3 pence.
Profit before taxation increased from ‚£84.7 million by 108.5 per cent to ‚£176.6million including a fair value increase in property assets of ‚£162.1 million,approximately one third of which related to our joint venture interests in theLondon Bridge Quarter.
PERFORMANCE FOR INVESTORS 2006
Total return to shareholders
One of the primary indicators we use to measure performance is the total returnto shareholders, which measures the growth in NAV per share and distributionsmade per share.
The total return to CLS investors in 2006 was 46.9 per cent and the average over the last five years was 23.3 per cent.
Since flotation the group has comfortably outperformed both the FTSE all share and FTSE real estate indices.
Distributions
During 2006 we distributed ‚£52.5 million to shareholders by way of tender offerbuy-backs, equating to 66.9 pence per share. Included within this amount was aspecial distribution following the sale of our interest in Solna Business Park.
BUSINESS REVIEW 2006
UK - The last year has seen a continuing compression of yields with primeLondon yields falling to around 4 per cent, driven by continued investor demandfor property as an asset class, relatively low interest rates and growingoccupier demand for good quality space. Increased interest rates towards theend of 2006 may alleviate further significant compression and we thereforeanticipate yields remaining relatively stable over the coming year.Given the current investing environment, we have concentrated on adding valueto the assets we own rather than acquiring new, highly priced stock. During theyear we completed the major refurbishment of Great West House, Brentford andare in the process of letting vacant floors in that building. We are also onprogramme and budget to complete the ‚£10 million refurbishment programme atSpring Gardens in the second quarter of 2007. When it is complete, the propertywill have been extended by a further 2,503 sq m (27,000 sq ft) to just under18,580 sq m (200,000 sq ft) and let for 20 years to the Home Office at anaverage rent of ‚£31.50 per sq ft.We have made significant further progress at the Shard, London Bridge in whichwe have a one third interest. Having signed a pre-letting of 17,651 sq m(190,000 sq ft) with TfL (Transport for London), nearly 50 per cent of theproposed new building is now pre-let. The arrangement of interim developmentfunding and agreement with PricewaterhouseCoopers for vacant possession ofSouthwark Towers, which currently occupies the site, will enable demolitionworks to commence towards the end of 2007.The resolution to grant planning permission for a fine new Renzo Piano designed39,950 sq m (430,000 sq ft) office building adjacent to the Shard was passedearlier in the year, which paves the way for further redevelopment of theLondon Bridge Quarter.FRANCE - The French property investment market has also seen major yieldcompression in 2006 with prime yields in central Paris falling to approximately4.25 per cent with the same basic fundamentals driving the market as in the UK.The record demand for property investment is fuelled by significant money flowsfrom domestic, US and German investors. The letting market saw significantactivity with approximately 2.9 million sq m (31.2 million sq ft) of spacetaken-up in the Paris region, an increase of 30 per cent over the previousyear.Set against this backdrop we have found it difficult to purchase new propertieswithout compromising our investment criteria. We did however take advantage ofthe active investment market to sell the vacant building, Le 41, in La Dƒ©fense,Paris for ‚£15.3 million having purchased it in 1998 for ‚£7.4 million.Our French portfolio has performed extremely well over the years and in 2006generated ‚£12.1 million profit from operations and ‚£35.3 million from increasedvaluations. Active asset management and close relationships with tenants haveresulted in a year end vacancy rate of just 2.1 per cent by area, compared to6.2 per cent the previous year.GERMANY - At the beginning of the year we set ourselves a target of building aportfolio of ‚£200 million of high-yielding, good quality office buildings. Weare well on the way to achieving that goal and by 31 December 2006 owned 14properties valued at ‚£135.2 million. Since the year end we have acquired twofurther properties at a cost of ‚£34.2 million. As we have seen elsewhere, theinvesting market has become very competitive and yields have been driven down.We have not compromised our purchasing strategy and have not bought propertieswhere we regard prices to be unviable. The rate of acquisition has thereforeslowed, however we are still very active in this area and will continue tobuild the portfolio where we determine value can be accrued.
We have also established an office in Hamburg from which our local professional team operates to manage our assets and build the portfolio.
SWEDEN - We sold two major Swedish property portfolios during the year, taking advantage of the high demand for property.
The first sale took place in February 2006 comprising a portfolio of 1,280apartments and 42,608 sq m (458,644 sq ft) of commercial and retail spacelocated at Lƒ¶vgƒ¤rdet, near Gothenburg. We sold the portfolio to a major locallandlord specialising in local residential estates. During our four year periodof ownership their value had increased by ‚£10.5 million against a cost of ‚£29.4million, of which the initial equity investment was ‚£3.0 million.In August 2006, we completed the corporate sale of our six properties at SolnaBusiness Park, Stockholm which valued the properties at ‚£267 million. This wasthe successful culmination of a seven year project to create a vibrant office,hotel and retail business park from a tired and run-down industrial estate. Thedevelopment, which won both environmental and design awards, has generatedadded value in excess of ‚£65 million after taking account of original purchaseand refurbishment costs.EQUITY INVESTMENTS - We completed two sales during the year. In January 2006 wesold the assets and business of the second of our two cable investments,WightCable North Limited at a loss of ‚£2.1 million and in August 2006 we soldthe majority of our stake in Keronite PLC, which booked a profit of ‚£3.7million.
In April 2006 we purchased the balance of shares in Lunarworks AB, a very successful Swedish youth community website. Our entire investment cost ‚£17.0 million and I am pleased to note that in the seven months we have owned the company it has contributed a profit to the Group of ‚£0.6 million.
We also purchased a 17 per cent stake in the AIM listed Bulgarian LandDevelopment PLC for ‚£4.3 million in March 2006 and we are pleased to note thatit has made good progress during its first nine months. The company developsresidential and commercial property opportunities in Bulgaria which joined theEU in January 2007. Construction of its first residential project of 199 villasand apartments on the Black Sea coast commenced in February 2007 and is alreadyover 35 per cent pre-sold. We have conditionally agreed to increase our staketo 29 percent on a new fundraising by the company.
PROSPECTS - We are well placed to continue building our European portfolio through the acquisition of new assets and enhancement of the existing portfolio.
In the UK we are actively assessing the potential added value in redeveloping a number of sites that we currently own and will be focusing hard on ensuring that the development of the London Bridge Quarter proceeds in line with the programme and the budget.
Our German investment programme will continue with a view to investing a further ‚£80 million to ‚£100 million as long as we can find appropriately priced good quality assets.
We will continue to buy further office properties in France and throughout theGroup we will work closely with current and potential tenants to maintain lowlevels of vacant space in each of our operating areas.
We will continue to look at East European markets for opportunities for potential value. Such investments are currently likely to be on the basis of holding indirect interests in commercial property through participation in property funds or listed companies with high calibre management.
ENVIRONMENTAL INITIATIVES - We see the development of environmentally safe and energy efficient buildings as not only socially responsible but also commercially beneficial.
We have continued to incorporate environmentally effective features in ourbuildings. Our development at Solna Business Park incorporated a geothermalheating and cooling system for one of the buildings, cutting its heating andcooling costs by 30 per cent. We were also accredited the P-Mark buildingspecification (equivalent to BREEM in the UK) , which focuses on the workingenvironment, fresh air circulation and quality, sound proofing andillumination. We are also incorporating a raft of energy saving designs intoThe Shard and New London Bridge House.
These features give us an advantage in letting, as tenants will benefit from higher quality properties, lower occupational running costs, and their employees will have a healthier, improved workplace.
We have raised awareness within the company and have applied to Westminster Council to utilise our low energy screen at One Leicester Square to make the public more aware of environmental issues.
These initiatives are a small beginning, however we are committed to contributing time and resources to reduce the `carbon footprint' of our business.
TENDER OFFER - We have substantial cash reserves and have demonstratedconsistently strong performance over the years. As there is still a 13.6 percent discount between NAV per share and share price, we therefore propose torecommend a tender offer buy-back of 1 in 41 shares at 750 pence per share.This, together with the interim tender offer special distribution, will resultin a total distribution for the year of 69.9 pence per share, an increase of194.9 per cent over the previous year.CONCLUSION - After an exceptionally good year we are well aware of thechallenges ahead of us. In particular, seeing such large developments as theShard and New London Bridge House through to a successful commercial conclusionwill be a high priority.
We look to profitably expand our operations in our current markets and explore new opportunities where we see the potential for added value.
The ongoing enthusiasm, dedication and commitment of our staff have been keycomponents in our success and on behalf of the Board I would like to thank themfor their commitment.
Finally I would also like to thank our shareholders, our bankers and our tenants, for their continued involvement and support.
Sten MortstedtExecutive Chairman08 March 2007FINANCIAL REVIEWINTRODUCTIONThe Group has returned strong results for the year, generating a profit beforetax of ‚£176.6 million and increasing its adjusted net assets from ‚£485.9million to ‚£598.6 million, an uplift of 23.2 per cent (Statutory net assetsfrom ‚£353.8 million to ‚£448.1 million). This increase in net assets was afterhaving also distributed ‚£52.5 million to shareholders during the year.PROFIT BEFORE TAX - Profit before tax increased to ‚£176.6 million from ‚£84.7million, an increase of 108.5 per cent. The main contribution to profit wasmade by fair value gains on investment properties amounting to ‚£162.1 million(2005: ‚£67.2 million), which included proportionate revaluation gains inrespect of our joint venture interests in the London Bridge Quarter which isvalued on a residual value basis rather than a current use investment basis,reflecting the development progress which has been made during the past year.TAX - The charge for current tax was ‚£1.2 million being mainly incurred withinthe French division. The charge to deferred tax of ‚£19.1 million has beenmitigated during the year by the release of a deferred tax provision of ‚£27.9million, which resulted principally from the sale of the corporate structureowning Solna Business Park. Accordingly profit after tax increased to ‚£153.8million from ‚£55.3 million, an increase of 178.1 per cent.
NET ASSETS - Adjusted NAV of 824.4 pence per share (December 2005 : 606.9 pence), grew by 35.8 per cent during 2006 (Statutory NAV of 617.3 pence per share grew by 39.7 per cent over the same period).
In the last five years the adjusted net asset value per share grew by 125.9 percent or 17.7 per cent compound per annum (Statutory NAV has shown a similargrowth throughout that period). The organic growth in adjusted net asset valueper share over the period (taking into account the effect of tender offerbuy-backs, but excluding growth attributable to the market purchase of shares)has been 102.9 per cent or 15.3 per cent compound per annum (the statutorycomparative has shown similar growth throughout that period).
The dilutive effect if all share options were to be exercised, would be 3.5 pence
At the year end the post-tax IAS 32 disclosure, showing the effect of restatingfixed interest loans to fair value, amounted to a reduction of 21.6 pence pershare (December 2005 : 34.6 pence).
Adjusted net assets grew by ‚£112.7 million to ‚£598.6 million in the year after distributions to shareholders of ‚£52.5 million
GEARING AND INTEREST COVER - Adjusted gearing at the year end decreased to 88.9per cent (December 2005 : 125.2 per cent, Statutory gearing was 118.7 per cent- December 2005 : 171.9 per cent) following the sale of Solna Business Park.
Net interest payments and financial charges were covered by operating profit (excluding fair value adjustments) by 1.7 times (2005: 1.5 times).
DISTRIBUTIONS -During the year the Company distributed ‚£52.5 million (66.9pence per share, December 2005: 20.3 pence per share distributed) toshareholders by way of tender offer buy-backs, including a special distributionfollowing the sale of Solna, at an average price per share of 714 pence. Thenumber of shares purchased through the two tender offer buy-backs amounted to7.4 million shares representing 9.2 per cent of shares in issue on 1 January2006.
CASH - The Group held ‚£157.6 million cash as at 31 December 2006 (December 2005 : ‚£118.2 million), the movement in the year being:
2006 2005 ‚£m ‚£m Cash inflow from property rental activities 61.6 51.8
Increase in equity investments held in current assets (6.7) (3.5)
Cash inflow from operations 54.9 48.3 Net interest and other finance costs (36.6) (33.4) Taxation (2.2) (0.3) Properties purchased and enhanced (172.7) (67.3) Properties sold 3.6 45.1 Net proceeds on corporate sales (mainly Solna and 121.2 -Lƒ¶vgƒ¤rdet) New loans 218.5 148.6 Loans repaid (81.1) (57.8) Tender offer payment to shareholders (52.5) (16.8) Market purchase of shares for cancellation (1.7) (2.0) Purchase of Lunarworks (12.1) - Other 0.1 (3.6) Net cash inflow 39.4 60.8The underlying elements of the growth in net assets are set out in the tablebelow. It is not expected that deferred taxation provided in respect ofproperty revaluation gains would become payable in full if the properties weresold. It is currently anticipated that the property assets may be sold withincorporate entities. Equity Group UK France Germany Sweden Investments ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Opening net assets 353.8 160.0 100.3 - 75.7 17.8 Movement in 2006 Underlying profit before tax 21.6 6.8 12.1 (0.3) 2.0 1.0 Fair value gains on 151.1 106.0 35.8 7.0 2.3 -investment property Sale of Solna 6.7 - - - 6.7 -
Exceptional finance costs - (2.7) (2.7) - - -
-JV investments Taxation - current (1.2) 0.2 (1.2) - - (0.2) Taxation - deferred (19.1) (28.4) (13.8) (2.5) 25.6 - Discontinued operations (2.5) - - - - (2.5) Increase in equity due to 153.8 81.9 32.9 4.2 36.6 (1.7)direct investment Other Equity movements Shares issued 0.3 0.3 - - - - Shares purchased and (54.2) (54.2) - - - -associated costs
Foreign exchange and other (2.5) - (2.5) (0.7) 0.7
-movements
Change in fair value of (4.9) - - - - (4.9) listed investments net of
tax Change in fair value of 1.8 1.8 - - - -derivative instruments Transfer of equity - 96.0 (61.1) 34.4 (93.1) 23.8 Net assets at 31 December 448.1 285.8 69.6 37.9 19.9 35.02006 REVIEW OF THE INCOME STATEMENT
FINANCIAL RESULTS BY LOCATION - The results of the Group analysed by location and main business activity are set out below:
2006 UK France Germany Sweden Equity 2005 Total investments Total ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Net rental income 65.5 29.6 20.3 4.6 11.0 - 69.3 Other operating gains 7.2 1.5 0.7 - 0.3 4.7 3.3 Operating expenses (21.0) (9.1) (2.6) (2.1) (2.6) (4.6) (18.4) Operating profit 51.7 22.0 18.4 2.5 8.7 0.1 54.2before gains on investment properties Net finance expense (31.6) (15.8) (5.4) (2.8) (6.8) (0.8) (36.3) Profit/(loss) on 3.7 - - - - 3.7 (1.1)disposal of associate / part share JV (Loss)/gain from sale (1.0) - (1.0) - - - 1.9of investment properties Associates' operating (1.2) - - - - (1.2) (1.2)loss Underlying profit 21.6 6.2 12.0 (0.3) 1.9 1.8 17.5before tax Fair value gains on 162.1 106.0 35.8 7.0 13.3 - 67.2investment properties Loss on sale of (1.8) - - - (1.8) - -subsidiaries
Exceptional finance (5.3) (2.7) - - (2.6) -
-expense Profit on continuing 176.6 109.6 47.8 6.7 10.8 1.8 84.7activities before tax Tax - ordinary (1.2) 0.2 (1.2) - - (0.2) (1.3) Tax - deferred (19.1) (28.4) (13.8) (2.5) 25.6 - (21.9) Loss on discontinued (2.5) - - - - (2.5) (6.2)operations
Profit for the year 153.8 81.4 32.7 4.2 36.4 (0.9) 55.3
NET RENTAL INCOME - of ‚£65.5 million has decreased by 5.5 per cent (December2005 : ‚£69.3 million) primarily due to the sale of Solna Business Park, Swedenin August. The reduced income of ‚£6.2 million in the year due to thattransaction was largely offset by income from acquisitions in Germany thatcontributed an additional ‚£4.5 million. UK net rental income was down by ‚£2.3million mainly due to the sale of the Carlow House and Drury Lane properties atthe end of 2005. The income lost from French property sales was offset byrental increases due to indexation.
OTHER OPERATING GAINS - amounted to ‚£7.2million (December 2005 : ‚£3.3 million) and included a ‚£4.5 million contribution to profit from our subsidiary, Lunarworks, the Swedish youth community website that was fully consolidated from 1 May 2006. Dilapidations and lease surrender income amounted to ‚£0.8 million for the year and the remainder was generated from insurance commissions, management fees on development projects and profits on share transactions.
OPERATING EXPENSES - Operating expenses as set out in the summary table abovecomprised administrative expenditure of ‚£17.5 million (December 2005 : ‚£14.9million) and net property expenses of ‚£3.5 million (December 2005 : ‚£3.5million).ADMINISTRATIVE EXPENDITURE - of ‚£17.5 million increased by ‚£2.6 million overthe ‚£14.9 million incurred in the year to December 2005. The major contributorto this increase was the inclusion for the first time of the operatingexpenditure of our Lunarworks subsidiary of ‚£4.3 million.Overhead expenditure relating to the core ongoing property business amountingto ‚£12.2 million decreased by ‚£1.4 million from the comparative figure for theprevious year, reflecting lower legal and professional fees of ‚£4.6 millioncompared to ‚£5.4 million expensed in 2005. The sale of our Solna and Lƒ¶vgƒ¤rdetsubsidiaries during the year further reduced overhead by ‚£0.6 million.NET PROPERTY EXPENSES - of ‚£3.5 million (December 2005 : ‚£3.5 million) includedadvertising and marketing costs of ‚£0.9 million, letting fees of ‚£0.4 millionincurred to reduce vacant space within the UK and French portfolios and voidcosts of ‚£0.8 million (mainly at Great West House, Brentford, and Vista Centre,Hounslow). Repair and maintenance costs were ‚£0.4 million for minor works inParis and the UK, depreciation amounted to ‚£0.2 million and bad debts were ‚£0.1million. The remainder comprised mainly staff costs of ‚£0.7 million.
NET FINANCE EXPENSES - amounted to ‚£31.6 million (December 2005 : ‚£36.3 million) and showed a decrease of ‚£4.7 million from net expenditure in 2005.
Interest payable of ‚£39.9 million increased by ‚£2.2 million over the previous year of ‚£37.7 million. The main factors influencing the increase were:
UK
* The refinancing of Spring Gardens which accounted for an increase of ‚£0.6
million, * Our share of interest relating to draw-downs of development loans in respect of joint ventures at The Shard and New London Bridge House amounting to additional interest of ‚£0.4 million.
France
* Interest payable increased in France by ‚£1.6 million due to the refinancing
of the French portfolio in December 2005 and January 2006.
Germany
* Increased loans due to financing the expanded portfolio contributed an
additional ‚£2.2 million to interest payable.
Sweden
* The sale of Solna Business Park and Lƒ¶vgƒ¤rdet contributed to decrease
interest charges by ‚£2.6 million.
Included within interest payable are positive fair value movements on interestrate caps amounting to ‚£0.2 million (December 2005 : cost of ‚£0.1 million) andamortisation of issue costs of loans amounting to ‚£1.1 million (December 2005 :‚£1.4 million).
The Group's policy is to expense all interest payable to the Income Statement, including interest incurred in the funding of refurbishment and development projects, which amounted to ‚£1.6 million in 2006 for Great West House, Brentford.
Interest receivable of ‚£8.3 million benefited from the significant increase inour cash reserves due to the sales of the two Swedish portfolios mentionedabove and the re-financings that took place in France in the first quarter ofthe year. The positive foreign exchange gains of ‚£3.2 million resulted mainlyfrom foreign exchange contracts following the sale of the Solna portfolio.
PROFIT/(LOSS) ON DISPOSAL OF ASSOCIATE - of ‚£3.7 million was the profit on disposal of the majority of our investment in Keronite plc, completed in August 2006.
EXCEPTIONAL FINANCE EXPENSE - amounted to ‚£5.3 million (December 2005 : nil).In September 2006 the Southwark Towers and New London Bridge House companieswere re-financed to provide working capital for the next development stage ofboth projects. This resulted in break costs of the existing financing of ‚£8.0million, the CLS share of which was ‚£2.7 million. Additionally break costsassociated with redemption of loans on the sale of Solna Business Park amountedto ‚£2.6 million.Analysis of net finance expense 2006 2005 Difference ‚£m ‚£m ‚£m Interest receivable 5.1 1.4 3.7 Foreign exchange 3.2 - 3.2
Interest receivable and similar income 8.3 1.4
6.9
Interest payable and similar charges (39.9) (37.7) (2.2) Net finance expense (31.6) (36.3) 4.7The average cost of borrowing for the Group at 31 December 2006, which includesan estimate of the fair value adjustment in respect of interest rate caps,
isset out below: UK France Germany Sweden Total December 2006 Average interest rate on fixed 7.3% 4.6% 5.0% 5.5% 6.4%rate debt Average interest rate on variable 6.4% 4.3% 4.5% 3.9% 5.1%rate debt Overall weighted average interest 7.0% 4.4% 4.8% 5.4% 5.9%rate December 2005 Average interest rate on fixed 7.2% 4.6% - 5.6% 6.1%rate debt Average interest rate on variable 6.1% 3.5% - 3.2% 4.2%rate debt
Overall weighted average interest 6.9% 4.2% - 4.5% 5.4% rate
TAXATION - In 2006 the Group's taxation charges have benefited from the tax treatment of selling property investment companies. For current tax, disposals of corporates have not resulted in a tax charge on the gains realised. For deferred tax, previous provisions have been released so that the additional provision required in 2006 has been reduced. The overall benefit of these factors is ‚£28 million which particularly relates to the disposal of the companies which own the Solna properties.
Current tax - In addition to the effect of corporate sales mentioned above, the use of brought forward tax losses, UK capital allowances and amortisation deductions in other operating countries have significantly reduced the tax charge. These factors are expected to have less impact in future years as losses are used up and the benefit of deductions decrease in existing subsidiaries.
Deferred tax - The Group's deferred tax calculation has been prepared on a fullprovision basis as required by IAS 12. We consider it is unlikely that thistheoretical liability will crystallise in full because it takes no account ofthe way in which the Group realises gains. In particular, as for disposals in2006, when companies rather than individual properties are sold, previouslyprovided deferred tax provisions do not result in actual liabilities. For UKproperty disposals, indexation allowance is available when calculating taxablecapital gains and elections are available to ensure that deductions claimedpreviously for capital allowances are not reversed.At 31 December 2006, the IAS 12 deferred tax charge included in the IncomeStatement was ‚£19.1 million and the cumulative reduction to net assets was ‚£150.4 million (31 December 2005: charge to tax of ‚£21.9 million and reductionin net assets of ‚£132.1 million respectively).LOSS FROM DISCONTINUED OPERATIONS - The Group completed the disposal of thebusiness and the assets of WightCable in December 2005 and of WightCable Northin January 2006. The operating results of these two businesses have beenclassified under IFRS 5 as discontinued operations. In early January 2006 costsrelating to the disposal of WightCable North were incurred, amounting to ‚£2.1million.REVIEW OF THE BALANCE SHEETINVESTMENT PROPERTIES - The Group's property portfolio amounted to ‚£1,143.5million, showing a net increase of ‚£47.1 million over its value at 31 December2005 of ‚£1,096.4 million. The movement in the portfolio is set out below :
Total UK France Germany Sweden ‚£m ‚£m ‚£m ‚£m ‚£m Opening assets 1,096.4 481.3 301.4 12.8 300.9 Purchases 129.6 4.0 9.0 116.6 - Refurbishment 59.3 50.1 2.1 - 7.1 Disposals (299.5) - (23.8) - (275.7) Revaluation 162.1 106.0 35.8 7.0 13.3 Foreign exchange (5.2) - (6.8) (1.9) 3.5 Other 0.8 (1.0) 0.6 0.6 0.6 Closing assets 1,143.5 640.4 318.3 135.1 49.7
PURCHASES - The main focus of our acquisition programme has been in Germany where we purchased eleven properties for a total consideration of ‚£116.6 million Six of these properties were located in Munich, two in Berlin, two in Hamburg and one in Stuttgart.
Two French properties were purchased in Paris for ‚£9.0 million.
In the UK, we acquired a one third share of a further small property in the London Bridge Quarter and made two small strategic acquisitions in the Vauxhall area, the total of which amounted to expenditure of ‚£4.0 million.
REFURBISHMENT - Expenditure on refurbishments of ‚£59.3 million included ‚£25.5million expended at Southwark Towers, being our share of the ongoingdevelopment costs as the site progresses. As our investments in the LondonBridge Quarter are now valued on a residual value basis rather than an existinguse investment basis, we have shown our share of the work in progress of ‚£14.0million as property additions, rather than as work in progress, within which ‚£6.6 million of expenditure was classified in the December 2005 balance sheet.Other capital expenditure in the year of ‚£4.5 million related to Great WestHouse, for completion of the extensive refurbishment commenced in 2005; ‚£4.3million at Spring Gardens, for completion of the in-fills for the Home Officeand ‚£6.9 million at Solna Business Park for fit-out costs which were mainly inconnection with Frƒ¤saren 12, for the tenant, ICA.DISPOSALS - The sale of Solna Business Park was completed on 21 August 2006, ata gross valuation of ‚£267.0 million compared to its carrying value in the Groupaccounts of ‚£235.5 million. Our investment at Lƒ¶vgƒ¤rdet was sold in January2006 for ‚£40.5 million, the carrying value of which was ‚£40.2 million.Disposals in France related to our property `Le 41'located in Paris the bookvalue of which was ‚£14.7 million; Paul Doumer, also in Paris, the book value ofwhich was ‚£5.8 million, and the converted residential flats at Avenue Foch,Paris that were carried at a cost of ‚£3.3 million. These properties were soldat ‚£1.3 million above book value.FOREIGN EXCHANGE - Foreign exchange translation losses on our French and Germanproperty holdings amounted to ‚£8.7 million in the year. The Swedish Kronorstrengthened against Sterling during the year, resulting in an increase in theSterling equivalent of those assets of ‚£3.5 million. After taking into accountthe effect of foreign exchange translation on loans to finance these assets,the net effect was a loss of ‚£2.5 million.
Based on the valuations at 31 December 2006 and annualised contracted rent receivable at that date of ‚£65.7 million (December 2005 : ‚£76.4 million), the portfolio shows a yield of 6.2 per cent (December 2005 : 6.3 per cent).
An analysis of the location of investment property assets and related loans isset out below: Total UK* France Germany Sweden Equity investments ‚£m % ‚£m % ‚£m % ‚£m % ‚£m % ‚£m % Investment 1,143.5 100.0 640.4 56.0 318.3 27.8 135.1 11.8 49.7 4.3 - -Properties
Loans (683.8) 100.0 (355.1) 51.9 (192.6) 28.2 (95.9) 14.0 (30.7) 4.5
(9.5) 1.4 Equity in 459.7 100.0 285.3 62.1 125.7 27.3 39.2 8.5 19.0 4.1 (9.5) (2.1)Property Assets Other net 138.9 100.0 81.8 58.9 4.5 3.2 1.5 1.1 6.7 4.8 44 32.2assets Net 598.6 100.0 367.1 61.3 130.2 21.8 40.7 6.8 25.7 4.3 35 5.9Adjusted Equity Equity in 40.2% 44.6% 39.5% 29.1% 38.2% - Property as a Percentage of Investment Opening 485.9 213.2 148.5 - 106.8 17.4 Equity Increase/ 112.7 153.9 (18.3) 40.7 (81.1) 17 (decrease) Closing 598.6 367.1 130.2 40.7 25.7 35 Equity
The following exchange rates were used to translate assets and liabilities at the year end ; Euro/GBP 1.485 SEK/GBP 13.393
* Net assets were reduced by payments for tender offer distributions totalling‚£52.5 million, and market purchases totalling ‚£1.4 million which are includedwithin the results of the UK.
DEBT STRUCTURE - Borrowings are raised by the Group to finance holdings of investment properties. These are secured, in the main, on the individual properties to which they relate. All borrowings are taken up in the local currencies from specialist property lending institutions.
Financial instruments are held by the Group to manage interest and foreignexchange rate risk. Hedging instruments such as interest rate caps and swapsare acquired from prime banks. The Group has thereby hedged all of its interestrate exposure and a significant proportion of its foreign exchange rateexposure.Net Interest Bearing Debt Total UK France Germany Sweden Equity Investments ‚£m % ‚£m % ‚£m % ‚£m % ‚£m % ‚£m % 2006 Fixed (409.8) 59.9 (254.8) 71.7 (62.6) 32.5 (63.5) 66.2 (28.9) 94.1 - -Rate Loans Floating (274.0) 40.1 (100.3) 28.3 (130.0) 67.5 (32.4) 33.8 (1.8) 5.9 (9.5) 100.0Rate Loans (683.8) 100.0 (355.1) 100.0 (192.6) 100.0 (95.9) 100.0 (30.7) 100.0 (9.5) 100.0 Bank and 157.6 107.4 11.9 3.9 22.8 11.6 cash Net (526.2) 100.0 (247.7) 47.1 (180.7) 34.3 (92.0) 17.5 (7.9) 1.5 2.1 (0.4)Interest Bearing Debt 2005 (601.7) 100.0 (262.5) 43.7 (176.5) 29.3 - - (162.1) 26.9 (0.6) 0.1
Non interest bearing debt, represented by short-term creditors, amounted to ‚£ 66.9 million (December 2005 : ‚£45.4 million)
Interest rate caps Total UK France Germany Sweden % % % % % 2006 Percentage of net floating rate 100.0 100.0 100.0 100.0 100.0loans capped Average base interest rate at 4.9 5.6 4.6 4.6 4.5which loans are capped Average tenure 3.8 3.0 years 4.1 4.4 1.8 years years years years 2005 Percentage of net floating rate 100.0 100.0 100.0 - 100.0loans capped Average base interest rate at 5.2 5.8 5.0 - 4.9which loans are capped Average tenure 2.8 2.4 years 3.1 - 2.7 years years years
At the end of 2006, 59.9 per cent of the Group Gross Debt bears interest at fixed rate (December 2005 : 54.1 per cent). This increase in fixed rate funding is due to:
* the re-financing of the joint venture properties at London Bridge Quarter,
the majority of it being agreed at fixed rate,
* the funding of the investment programme in Germany that added ‚£63.5 million
of fixed rate debt offset by ;
* the sale of Solna and Lƒ¶vgƒ¤rdet that resulted in the redemption of ‚£59.5
million of fixed rate loans.
Other re-financings, most of which were completed in early 2006, were mainly for the French portfolio at floating rate hedged by interest rate caps.
New Printing House Square was financed in 1992 through a securitisation of itsrental income by way of a fully amortising bond. This bond has a currentoutstanding balance of ‚£37.4 million (December 2005 : ‚£38.0 million) at aninterest rate of 10.7 per cent with a maturity date of 2025; and a zero couponbond, with a current outstanding balance of ‚£6.2 million (December 2005 : ‚£5.5million), with matching interest rate and maturity date. This debt instrumenthas a significant adverse effect on the average interest rate and the IAS 32adjustment.The net borrowings of the Group at 31 December 2006 of ‚£526.2 million showed adecrease of ‚£75.5 million over 2005, reflecting both our increasing investmentprogramme in Germany, which added loans of ‚£88.5 million, and our sales ofSolna and Lƒ¶vgƒ¤rdet, which resulted in the redemption of loans of ‚£160.6million. The joint venture properties at London Bridge Quarter were re-financedduring the year, in order to release capital to progress both developments,which added a net ‚£34.5 million to our share of the loan balances, afterrepayment of the existing facilities. We refinanced some of our assets in theFrench portfolio in early 2006, releasing ‚£20.3 million of available cash. Inaddition in France, the sale of two properties and the acquisition of onebuilding during the year contributed ‚£11.0 million to debt redemption. For theUK portfolio, outside of our joint venture properties, re-financings raised ‚£7.9 million during the year. Net foreign exchange translation gains on French,German and Swedish loans reduced the liability by ‚£3.9 million during the year.Under the requirements of IAS 32, which addresses disclosure in relation toderivatives and other financial instruments, if our loans were held at fairvalue, the Group's fixed rate debt at the year end would be in excess of bookvalue by ‚£22.4 million (December 2005 : ‚£39.5 million) which net of tax at 30per cent equates to ‚£15.7 million (December 2005 : ‚£27.8 million). The fall isdue to the repayment of the Swedish fixed rate loans for Solna and Lƒ¶vgƒ¤rdet,coupled with the increase in UK base rates during the year.The contracted future cash flows from the properties securing the loans arecurrently well in excess of all interest and ongoing loan repaymentobligations. Only ‚£26.3 million (3.8 per cent) of the Group's total bank debtof ‚£683.8 million is repayable within the next 12 months, with ‚£307.0 million(44.9 per cent) maturing after more than five years.EQUITY INVESTMENTS - Existing equity investments held amounted to ‚£16.2 million(December 2005 : ‚£13.7 million). The majority by value are listed investments,which are carried at market value, and represent only 1.2 per cent of the grossassets of the Group.
Additionally, the assets and liabilities of Lunarworks are consolidated within the Group results. The carrying value of the consolidated net assets of the company including goodwill and intangible assets is ‚£19.0 million.
SHARE CAPITAL - The issued share capital of the Company amounted to ‚£20.0million at 31 December 2006, represented by 80,081,836 ordinary shares of 25pence each, of which 7,477,168 shares are held as Treasury shares following thetender offer buy-backs and market purchases made during the year. At 31December 2006 there were therefore 72,604,668 shares with voting rights quotedon the main market of the London Stock Exchange.
The Treasury shares are not included for the purposes of the proposed tender offer buy-back or for calculating earnings and NAV per share.
A capital distribution payment by way of tender offer buy-back was made both inMay and November of 2006 resulting in the purchase of 7,350,815 shares of which1,905,474 were held as Treasury shares and the balance of 5,445,341 shares werecancelled. The two tender offer buy-backs distributed ‚£52.5 million toshareholders.
Market purchases during 2006 totalled 262,204 shares at an average price of 538 pence per share.
The weighted average number of shares in issue during the year was 78,192,301 (December 2005 : 82,316,545).
The average mid-market price of the shares traded in the market during the yearended 31 December 2006 was 591 pence with a high of 750 pence in December 2006and a low of 487 pence in January 2006.
An analysis of share movements during the year is set out below:
No of shares No of shares Million Million 2006 2005 Opening shares for NAV purposes 80.1 83.9 Tender offer buy-back (7.4) (3.4) Buy-backs in the market (0.3) (0.4)
Shares issued for the exercise of options 0.2
-
Closing shares for NAV purposes 72.6
80.1
Shares held in Treasury by the Company 7.5
5.4 Closing shares in issue 80.1 85.5
A total volume of 34 million shares were traded in the market during 2006.
An analysis of the ownership structure is set out below:
Number of Percentage shares of shares millions Institutions 29.8 41.1 Private investors 2.0 2.8 The Mortstedt family 37.3 51.3 Other 3.5 4.8 72.6 100.0
Shares held in Treasury by the Company 7.5
Total 80.1
Should the proposed tender offer buy-back be fully taken up, the number of shares in issue would be reduced by 1,770,846 to 70,833,822 (excluding shares held in treasury).
At 31 December 2006 there were 435,000 options in existence with an average exercise price of 253 pence.
DISTRIBUTION - As the current share price remains at a considerable discount tonet asset value, your Board is intending to propose a further tender offerbuy-back of shares in lieu of paying a cash dividend, on the basis of 1 in 41shares at a price of 750 pence per share. This will enhance net asset value pershare and is equivalent in cash terms to a final dividend per share of 18.3pence, yielding a total distribution in cash terms of 69.9 pence per share forthe year (December 2005 : 23.7 pence).
PROPERTY REVIEW
INTRODUCTION
We continue to focus on building a portfolio of low risk high return propertiesand to actively manage our buildings to maximise long-term capital returns. Ourcore areas of operation are the UK, France, Germany and Sweden.The Group owns 102 properties with a total lettable area of 447,812 sq m(4,820,209 sq ft), of which 44 properties are in the UK, 39 in France, 14 inGermany, 4 in Sweden and 1 in Luxembourg. We have 486 commercial tenants and 10residential tenants.
An analysis of contracted rent, book value and yields is set out below:
Contracted Net Rent Book Value Yield Yield Rent on net when rent fully let ‚£m % ‚£m % ‚£m % % % London South 10.6 16.2 10.6 16.5 178.6 15.6 5.9 Bank London 7.0 10.6 7.0 10.9 111.3 9.7 6.3 Mid-town London West 4.6 7.0 3.9 6.1 84.2 7.4 4.7 London West 3.0 4.5 2.9 4.6 67.9 5.9 4.3 End London South 2.2 3.3 2.2 3.4 139.4 12.2 - Bank -JVs London North 2.1 3.1 2.0 3.2 31.0 2.7 6.6 West London South 1.6 2.4 1.5 2.4 23.0 2.0 6.6 West London City 0.2 0.3 0.2 0.3 3.1 0.3 7.0 Fringes Outside 0.2 0.4 0.2 0.4 1.9 0.2 12.7 London Total UK 31.5 47.8 30.5 47.8 640.4 56.0 5.7 6.6 France Paris 16.4 24.9 16.4 25.7 258.8 22.6 6.3 France Lyon 2.7 4.1 2.7 4.2 37.4 3.3 7.2 France Lille 0.6 0.9 0.6 0.9 7.3 0.6 7.7 France 0.4 0.7 0.4 0.7 5.3 0.5 8.4 Antibes Total France 20.0 30.5 20.0 31.3 308.7 27.0 6.5 6.7 Luxembourg 0.8 1.2 0.8 1.3 9.6 0.8 8.5 Total 0.8 1.2 0.8 1.3 9.6 0.8 8.5 8.5Luxembourg Germany 4.2 6.4 4.1 6.4 65.4 5.7 6.3 Munich Germany 2.3 3.4 2.2 3.4 36.7 3.2 6.0 Berlin Germany 1.5 2.2 1.4 2.2 22.5 2.0 6.4 Hamburg Germany 0.5 0.8 0.5 0.8 8.5 0.7 6.1 Stuttgart Germany 0.2 0.2 0.2 0.3 2.0 0.2 10.5 Dƒ¼sseldorf Total 8.7 13.2 8.4 13.2 135.1 11.8 6.3 6.4Germany Sweden 4.7 7.2 4.1 6.4 49.7 4.3 8.2 Vƒ¤nersborg Total Sweden 4.7 7.2 4.1 6.4 49.7 4.3 8.2 8.3 Group Total 65.7 100.0 64.0 100.0 1,143.5 100.0 6.2 6.7
Conversion rates : Euro/GBP 1.485 SEK/GBP 13.393
RENT ANALYSED BY LENGTH OF LEASE AND LOCATION - The table below shows rentalincome by category and the future potential income available from new lettingsand refurbishments. Sq m Sq ft Contracted Contracted Unlet Space Total Total (000) (000) Aggregate but not Space under Rental income at ERV Refurb producing or with planning consent ‚£m ‚£m ‚£m ‚£m ‚£m %
UK >10 yrs 64.7 696.5 14.4 0.8 - - 15.2
44.%
UK 5-10 yrs 23.9 257.6 5.0 - - - 5.0
14.7%
UK < 5 yrs 54.7 589.3 11.2 - - - 11.2
33.0%
Development 1.2 12.7 - - - - -
-%Stock Vacant 13.5 145.0 - - 2.6 - 2.6 7.6% Total UK 158.0 1,701.0 30.6 0.8 2.6 - 34.0 100.0% France >10 2.8 30.1 0.4 - - - 0.4 2.0%yrs France 5-10 75.9 816.8 11.4 - - - 11.4 55.4%yrs France < 5 59.7 642.1 8.2 - - - 8.2 40.0%yrs Vacant 3.0 32.6 - - 0.5 - 0.5 2.5% Total 141.4 1,521.7 20.0 - 0.5 - 20.5 100.0%France Luxembourg 3.7 39.8 0.8 - - - 0.8 100.0%< 5 yrs Total 3.7 39.8 0.8 - - - 0.8 100.0%Luxembourg Germany > 35.4 380.5 2.8 - - - 2.8 31.9%10 yrs Germany 32.1 345.2 3.0 - - - 3.0 33.8%5-10 yrs Germany < 5 30.3 325.7 2.9 - - - 2.9 32.3%yrs Vacant 1.8 19.8 - - 0.2 - 0.2 2.0% Total 99.5 1,071.3 8.7 - 0.2 - 8.9 100.0%Germany Sweden > 10 - - - - - - - -%yrs Sweden 5-10 29.4 316.2 3.5 - - - 3.5 74.0%yrs Sweden < 5 14.8 159.6 1.2 - - - 1.2 24.9%yrs Vacant 1.0 10.6 - - 0.1 - 0.1 1.1% Total 45.2 486.5 4.7 - 0.1 - 4.8 100.0%Sweden
Group > 10 102.9 1,107.1 17.6 0.8 - - 18.4
26.7%yrs
Group 5-10 161.3 1,735.8 22.9 - - - 22.9
33.2%yrs
Group < 5 163.2 1,756.6 24.3 - - - 24.3
35.2%yrs Development 1.2 12.7 - - - - - -%Stock Vacant 19.3 208.0 - - 3.4 - 3.4 48.0%
Group Total 447.8 4,820.2 64.8 0.8 3.4 - 69.0 100.0%
We estimate that open market rents are approximately 2.0 per cent higher thancurrent contracted rents receivable, which represents a potential increase of ‚£2.0 million. An analysis of the net increase is set out below: Contracted Rent Estimated Reversionary Rental Value Element ‚£ Million ‚£ Million % UK 31.5 33.9 7.6 France and Luxembourg 20.8 21.1 1.0 Germany 8.7 8.8 1.1 Sweden 4.7 3.9 (17.0) Total 65.7 67.7 2.0
The total potential gross rental income (comprising contracted rentals, and estimated rental value of un-let space) of the portfolio is ‚£69.1 million p.a.
UK PORTFOLIO
During the year, the value of the UK portfolio increased from ‚£481.3 million to‚£640.4 million at 31 December 2006 representing an increase of ‚£159.1 millionor 33.1 per cent. Of this increase, ‚£53.5 million (11.1per cent) isattributable to the increase in the value of the core UK portfolio; ‚£102.3million (21.3 per cent) to the increase in value of the joint ventureproperties and ‚£3.4 million (0.6 per cent) to new acquisitions. There were nosales during the year.
Following the resolution to grant planning consent at New London Bridge House and the serving of the notice on the existing tenant PricewaterhouseCoopers vacate Southwark Towers (the site of The Shard) in September, both these properties have now been valued on a residual value basis.
The valuation at 31 December represents a strong increase in both the core portfolio and the joint ventures.
Yield compression in the office sector in central London has continued during 2006 with the UK core portfolio now showing an average yield of 5.7 per cent.
During the year we have continued to make good progress with the extension andupgrading of Spring Gardens, Vauxhall, for our tenant the Home Office. In theSpring, work started on the two last infill blocks which will provide 2,503 sqm (27,000 sq ft) of new offices and will take the total square footage of theestate to approximately or 18,580 sq m (200,000 sq ft). When complete in thefirst quarter of 2007, the entire estate will be let to the Home Office for 20years at an average rent of ‚£31.50 per sq ft.In June we completed the refurbishment of Great West House, which sits at thejunction of the M4 and A4 in West London. This 13,935 sq m (150,000 sq ft)building has been completely transformed with new over cladding, roofdetailing, external landscaping, reception areas and refurbished offices. Inaddition we have provided new gymnasium facilities, a business centre and animproved staff restaurant.Since the launch, 1,386 sq m (14,600 sq ft) of the office space has been let toInstant Office Limited and Global Refund Limited. With comprehensive on-sitefacilities, a quality working environment and flexible leasing options we areconfident of being able to attract more new tenants to the remaining 6,782 sq m(73,000 sq ft) in 2007.The refurbishment of the vacant space and common parts at Chancel House inNeasden Lane, NW10 was completed in August and the vacant space in the upperhalf of the building let to the Brent Housing Partnership (BHP). Extending to2,646 sq m (28,483 sq ft) the BHP took a 10 year lease at a best rent of ‚£12.10psf. All the office space at Chancel House is now let to Brent HousingPartnership and Trillium.Another important letting achieved during the year was at One Leicester Square,WC1 where the 3rd, 4th and 5th floors measuring 1,090 sq m (11,733 sq ft) werelet to Sound Too Limited on a 25 year lease. This building is also now fullylet.
Reducing levels of supply and increasing rents in the core areas has driven demand to the more fringe locations meaning we have been able to conclude a number of other important lettings at CI Tower, New Malden, Cambridge House, Hammersmith and Quayside, Fulham.
There has been much activity with our joint venture properties during the year, where CLS owns a one third share.
In August we announced a further pre-letting at The Shard (London Bridge Tower) to Transport for London (TfL) who has taken 17,651 sq m (190,000 sq ft) of offices in the lower half of the building between levels 4 and 10. TfL have committed to a lease of 30 years without break.
This follows the earlier pre-letting of the hotel element of the scheme measuring some 18,580 sq m (200,000 sq ft) to the five star hotel group Shangri La, also for a 30 year term.
In September notice was served on PwC, the tenant of the existing building Southwark Towers, to vacate. This will allow demolition to start towards the end of 2007, on schedule for delivery of the Shard in 2011.
Directly opposite the Shard is New London Bridge House, where Southwark Councilhas resolved to grant planning permission for the Renzo Piano designed newoffice and retail development of 39,950 sq m (430,000 sq ft) net internalspace. This scheme delivers the much needed improvements to the bus andunderground services at London Bridge which when combined with the new railconcourse with the Shard, will completely transform this important transporthub. Completion of New London Bridge House is scheduled for 2011/2012.During 2006 we acquired two properties close to Spring Gardens, Vauxhall SE11for just under ‚£1 million. With our joint venture partners we also acquiredFielden House, 28-42 London Bridge Street, SE1; a 2,250 sq m (24,227 sq ft)office building immediately adjacent to Southwark Towers / Shard and New LondonBridge House. Ownership of this property will allow us to make a positivecontribution to the overall setting of The Shard and New London Bridge House.We are continuing to work up the development potential of our sites at TinworthStreet (opposite Spring Gardens) and Vauxhall Cross site adjacent to VauxhallMainline and Underground station. These are important projects that have theability to offer strong growth prospects for the future.Looking ahead to 2007, we aim to capitalise on the strengthening tenant market,particularly at Great West House and at Vista, which together represent 82.35per cent of our total vacant space. Reducing the vacancy rate, which at the endof 2006 stood at 8.2 per cent, remains a high priority.
FRENCH PORTFOLIO
During 2006 the French property market broke records both in terms of investments and lettings.
Over ¢â€š¬23.1 billion were invested in French commercial property. This represented an increase of approximately 47 per cent over the preceding year, compressing yields still further.
Almost 2.9 million sq m (31.2 million sq ft) of office space was let during2006 in the Paris region, exceeding activity in the previous year by more than30 per cent. Supply remains stable at approximately 3.6 million sq m (38.8million sq ft) and with expected take-up of 2.3 million sq m (24.8 million sqft).During the year we acquired two properties, the first of which was part of aco-ownership building in rue Goubet, Paris comprising 1,268 sq m (13,649 sq ft)and was purchased for ¢â€š¬3.2 million. The second was a ¢â€š¬9.5 million developmentscheme in Mantes-La-Jolie, Yvelines which is fifty kilometres west of Paris.Two properties were sold in the year, these being a 6,025 sq m (64,852 sq ft)property, Le 41 in la Dƒ©fense and Le Paul Doumer building in Rueil-Malmaisonwhich comprised 3,700 sq m (39,364 sq ft) that was purchased in 1999 for ¢â€š¬[4.4] million and was sold for ¢â€š¬8.5 million. We also completed the conversionof the office building Le Foch into 16 residential apartments all of which havebeen profitably sold.During 2006 new leases were completed over 8,240 sq m (88,694 sq ft) of spacerepresenting approximately 7 per cent of the portfolio. Additionally wenegotiated lease extensions and renewals over 22,374 sq m (240,831 sq ft)producing a revenue of ¢â€š¬6.5 million, including a new firm 9 year lease with theBanque de France over 1,800 sq m (19,375 sq ft) in Paris and a new 6/9 yearlease with BNP-Paribas over 10,000 sq m (107,639 sq ft) in Rueil-Malmaison,Paris.
The year end vacancy rate was 2.1 per cent by area, compared to a national rate of 5.2 per cent.
GERMAN PORTFOLIOThe German economy grew by 2.0 per cent in 2006 and GDP is expected to increaseby 2.3 per cent in 2007. Unemployment is still relatively high at 11.7 per centfor 2006 but is expected to decrease to about 10 per cent by the end of 2007.The commercial investment market activity grew by 109 per cent in 2006 with ¢â€š¬68.5 billion changing hands. Activity was boosted not only by an influx offoreign money but a rediscovered confidence from domestic investors. Take-up inthe letting market has increased by 17 per cent over 2005 and average rentshave edged up.The renewed interest in the German property investment market has pushed downyields particularly in the principal German cities. Consequently our rate ofacquisition of new properties has slowed. However we acquired 11 new propertiesat a cost of ‚£116.6 million in 2006 of which 7 were purchased in the secondhalf at a cost of ‚£76.2 million, bringing our total investment to 13 propertiesvalued at ‚£135.1 million. Furthermore we are very close to completing twofurther properties at a cost of ‚£20 million in the next few weeks.We are actively reviewing substantial further property acquisitions and workingclosely with our existing assets to ensure that the current vacancy rate of 2.0per cent is maintained or reduced.
SWEDISH PORTFOLIO
The strong demand in the investment market from both local and foreign investors has stimulated record investment activity of ‚£12.9 billion (SEK 175 billion) in 2006, against ‚£10.5 billion (SEK 142 billion) in 2005, putting yields under further downward pressure.
The Swedish economy has performed well with growth in GDP of 4.6 per cent in2006 and 3.8 per cent expected for 2007. The unemployment rate in 2006 was 5.4per cent and is set to fall slightly. Despite the strengthening economicsituation, letting market rents have remained stable, influenced by an averagevacancy rate in the Greater Stockholm area of over 15 per cent. While centralStockholm remains a stronger market with a vacancy rate of around 5 per cent itis expected that the letting environment in secondary areas will improve onlyvery slowly.We therefore took advantage of the very strong investment market to sell oursix buildings at Solna Business Park comprising 138,000 sq m (1,485,000 sq ft)of commercial space to Fabege AB, a well known real estate group listed on theStockholm Stock Exchange.The properties were originally acquired for ‚£43.2 million and having totallyrefurbished the properties at a cost of ‚£118.0 million we sold them via acorporate sale at a value of ‚£267.0 million. After provisions for discounts andrent guarantees on vacant space we have generated a surplus in excess of ‚£65million since acquisition in June 1999. Since completing on the sale in August2006 we have substantially reduced our rental guarantee liabilities by reducingvacant areas from 11,000 sq m (118,000 sq ft) to 5,600 sq m (60,000 sq ft) andhave now completed the majority of the tenant fit-out works.Our remaining Swedish property at Vƒ¤nerparken near Gothenburg currently has avacancy rate of 1 per cent. We are currently working on plans with the localauthority to fulfil their requirements after the university, occupying 11,783sq m (126,831 sq ft), vacates in July 2008.
We will continue to assess investment opportunities in Sweden where we see potential for added value.
UNAUDITED CONSOLIDATED INCOME STATEMENT
31 December 2006 Year ended 31 Year ended 31 December 2006 December 2005 ‚£000 ‚£000 Continuing operations: Revenue 81,048 85,039 Rental and similar revenue 69,804 77,678 Service charge and similar revenue 6,779 7,361
Service charge expense and similar (11,080) (15,777) charges
Net rental income 65,503 69,262 Net income from non-property 4,465 -activities Other operating income 2,718 3,360 Administrative expenses (17,539) (14,910) Net property expenses (3,495) (3,532) Operating profit before gains / 51,652 54,180(losses) on investment properties
Net gains from fair value adjustment 162,060 67,173 on investment properties
Profit/(loss) on disposal of 3,721 (1,106)associate/part share of joint venture Loss on disposal of subsidiary (1,797) -companies (Loss)/profit from sale of (952) 1,855investment properties Operating profit 214,684 122,102 Finance income 8,335 1,425 Finance costs (39,948) (37,654) Exceptional finance costs (5,251) - Total finance costs (45,199) (37,654) Share of loss of associates after (1,206) (1,216)tax Profit before tax 176,614 84,657 Taxation - current (1,225) (1,304) Taxation - deferred (19,058) (21,856) Tax charge on profit (20,283) (23,160) Profit for the year from continuing 156,331 61,497operations Discontinued operations: Loss for the period from (2,538) (6,192)discontinued operations after tax Profit for the year 153,793 55,305 Attributable to: Equity holders of the parent 153,793 55,537 Minority interest - (232) 153,793 55,305 Earnings per share for profit attributable to the equity holders of the Company during the year (expressed in pence per share) - basic 196.7 67.5 - diluted 195.6 67.0 Earnings per share for profit from continuing operations attributable to the equity holders of the Company during the year (expressed in pence per share) - basic 199.9 75.0 - diluted 198.8 74.5
UNAUDITED CONSOLIDATED BALANCE SHEET
31 December 2006 As at 31 December 2006 As at 31 December 2005 ‚£000 ‚£000 Non-current assets Investment properties 1,143,451 1,096,361 Property, plant and 1,995 8,119equipment Intangible assets 18,846 3,698 Investments in associates - 3,526 Available-for-sale 16,193 13,918financial assets Derivative financial 1,072 353instruments Deferred income tax 4,536 14,025 Trade and other 787 1,265receivables 1,186,880 1,141,265 Current assets Trade and other 9,204 8,395receivables Derivative financial 943 457instruments Cash and cash equivalents 157,571 118,162 167,718 127,014 Total assets 1,354,598 1,268,279 Non-current liabilities Trade and other payables - - Deferred income tax 154,922 146,109 Borrowings, including 657,485 694,591finance leases Derivative financial - 982instruments 812,407 841,682 Current liabilities Trade and other payables 66,892 45,394 Current income tax 818 1,799 Derivative financial - 285instruments Borrowings, including 26,342 25,339finance leases 94,052 72,817 Total liabilities 906,459 914,499 Net assets 448,139 353,780 EQUITY Capital and reserves attributable to the Company's equity holders Share capital 20,021 21,382 Other reserves 112,174 116,042 Retained earnings 316,840 217,252 449,035 354,676 Minority interest (896) (896) Total equity 448,139 353,780
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
31 December 2006 Attributable to equity holders Minority Total of the Company Interest Share Other Retained capital reserves earnings ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Balance at 1 January 2005 21,374 131,844 180,688 (1,978) 331,928 Arising in the year:- Fair value losses - available for sale financial - (7,481) - - (7,481)assets - cash flow hedges - (799) - - (799) Currency translation - (7,663) - - (7,663)
differences on foreign currency
net investments Share issue / purchase of own - - (115) - (115)shares expense Purchase of own shares - - (18,858) - (18,858)
Employee share option scheme 8 141 - -
149
Reduction in minority interest - - - 1,314 1,314
Net income/(expense) recognised 8 (15,802) (18,973 1,314 (33,453)directly in equity Profit for the year - - 55,537 (232) 55,305 Total increase / (decrease) in 8 (15,802) 36,564 1,082 21,852equity for the year Balance at 31 December 2005 21,382 116,042 217,252 (896) 353,780 Arising in the year:- Fair value (losses)/gains - available for sale financial - (4,871) - - (4,871)assets - cash flow hedges - 1,808 - - 1,808 Currency translation - (2,459) - - (2,459)differences on foreign currency net investments Share issue / purchase of own - - (307) - (307)shares expense Purchase of own shares (1,361) 1,361 (53,902) - (53,902)
Employee share option scheme - 293 4 -
297
Net income/(expense) recognised (1,361) (3,868) (54,205) (59,434)directly in equity Profit for the year - - 153,793 - 153,793 Total increase / (decrease) in (1,361) (3,868) 99,588 - 94,359equity for the year Balance at 31 December 2006 20,021 112,174 316,840 (896) 448,139
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
31 December 2006 Year ended 31 Year ended 31 December December 2006 2005 ‚£000 ‚£000 Cash flows from operating activities Cash generated from 61,572 52,226operations Interest paid (41,641) (34,857) Income tax paid (2,206) (407) Net cash inflow from 17,725 16,962operating activities Cash flows from investing activities Purchase of investment (123,533) (22,386)property Capital expenditure on (49,128) (44,934)investment property Proceeds from sale of 3,608 45,056investment property Purchases of property, (1,029) (1,853)plant and equipment Proceeds from sale of 433 2,401property, plant and equipment Purchase of (6,746) (3,532)available-for-sale financial assets Disposal/(purchase) of 2,141 (798)interests in associate/ joint venture Purchase of subsidiary (12,082) (1,427)undertaking net of cash acquired Sale of subsidiary 121,218 -undertakings net of cash sold Interest received 5,084 1,472 Net cash outflow from (60,034) (26,001)investing activities Cash flows from financing activities Issue of shares 293 144 Purchase of own shares (54,209) (18,974) New loans 218,503 148,571 Issue costs of new (858) (2,234)loans Interest rate caps (923) 100purchased Repayment of loans (81,170) (57,777) Net cash inflow from 81,718 69,830financing activities Net increase in cash 39,409 60,791and cash equivalents Cash and cash 118,162 57,371equivalents at the beginning of the year Cash and cash 157,571 118,162equivalents at the end of the year
DIRECTORS, OFFICERS AND ADVISERS
Directors Clearing Bank Sten A Mortstedt (Executive Chairman) Royal Bank of Scotland Plc Per H Sjƒ¶berg (Chief Executive Officer) 24 Grosvenor Place Dan M Bƒ¤verstam (Chief Financial Officer) London SW1X 7HP Steven F Board FCCA (Chief Operating
Officer)
Thomas J Thomson BA (Non-executive Vice Financial Advisers
Chairman)
James F Dean FRICS * ** (Non-executive NCB Corporate Finance
Director)
Keith R Harris PhD * ** ***(Non-executive 51 Moorgate
Director)
H O Thomas Lundqvist ** Bengt F Mortstedt Juris Cand (Non-executive Director)
* = member of Remuneration Committee Joint Stockbrokers
**= member of Audit Committee NCB Corporate Finance
***= senior independent director 51 Moorgate
London EC2R 6BH Company Secretary Steven F Board FCCA KBC Peel Hunt Registered Office 111 Old Broad Street 26th Floor, Portland House London EC2N 1PH Bressenden Place London CLS Holdings plc on line: SW1E 5BG www.clsholdings.com e-mail: Registered Number [email protected] 2714781 Registered Auditors Financial Public Relations PricewaterhouseCoopers LLP Hansard Group Chartered Accountants 0207 245 1100 1 Embankment Place London WC2N 6RH
Registrars and Transfer Office Computershare Investor Services Plc
P O Box 82 The Pavilions Bridgwater Road Bristol BS99 7NH
Shareholder helpline : 0870 889 3286
END
CLS HOLDINGS PLCRelated Shares:
CLS Holdings