Preliminary Results
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 GLANCE
INCOME 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 HIGHLIGHTS
Property 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 Lövgärdet 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 Défense, Paris for £15.3 million (€22.3 million). CLS
had purchased the building in 1998 for £7.4 million (€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 Sjöberg 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 STATEMENT
INTRODUCTION
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 in
real estate values in each of our operating regions during 2006, and it is
worth noting that this is the eleventh consecutive year that our NAV per share
has increased. During that period it has shown an average growth rate of 18.2
per 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 £176.6
million including a fair value increase in property assets of £162.1 million,
approximately one third of which related to our joint venture interests in the
London Bridge Quarter.
PERFORMANCE FOR INVESTORS 2006
Total return to shareholders
One of the primary indicators we use to measure performance is the total return
to shareholders, which measures the growth in NAV per share and distributions
made 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 offer
buy-backs, equating to 66.9 pence per share. Included within this amount was a
special 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 prime
London yields falling to around 4 per cent, driven by continued investor demand
for property as an asset class, relatively low interest rates and growing
occupier demand for good quality space. Increased interest rates towards the
end of 2006 may alleviate further significant compression and we therefore
anticipate yields remaining relatively stable over the coming year.
Given the current investing environment, we have concentrated on adding value
to the assets we own rather than acquiring new, highly priced stock. During the
year we completed the major refurbishment of Great West House, Brentford and
are in the process of letting vacant floors in that building. We are also on
programme and budget to complete the £10 million refurbishment programme at
Spring Gardens in the second quarter of 2007. When it is complete, the property
will have been extended by a further 2,503 sq m (27,000 sq ft) to just under
18,580 sq m (200,000 sq ft) and let for 20 years to the Home Office at an
average rent of £31.50 per sq ft.
We have made significant further progress at the Shard, London Bridge in which
we 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 the
proposed new building is now pre-let. The arrangement of interim development
funding and agreement with PricewaterhouseCoopers for vacant possession of
Southwark Towers, which currently occupies the site, will enable demolition
works to commence towards the end of 2007.
The resolution to grant planning permission for a fine new Renzo Piano designed
39,950 sq m (430,000 sq ft) office building adjacent to the Shard was passed
earlier in the year, which paves the way for further redevelopment of the
London Bridge Quarter.
FRANCE - The French property investment market has also seen major yield
compression in 2006 with prime yields in central Paris falling to approximately
4.25 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 flows
from domestic, US and German investors. The letting market saw significant
activity with approximately 2.9 million sq m (31.2 million sq ft) of space
taken-up in the Paris region, an increase of 30 per cent over the previous
year.
Set against this backdrop we have found it difficult to purchase new properties
without compromising our investment criteria. We did however take advantage of
the active investment market to sell the vacant building, Le 41, in La Défense,
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 2006
generated £12.1 million profit from operations and £35.3 million from increased
valuations. Active asset management and close relationships with tenants have
resulted in a year end vacancy rate of just 2.1 per cent by area, compared to
6.2 per cent the previous year.
GERMANY - At the beginning of the year we set ourselves a target of building a
portfolio of £200 million of high-yielding, good quality office buildings. We
are well on the way to achieving that goal and by 31 December 2006 owned 14
properties valued at £135.2 million. Since the year end we have acquired two
further properties at a cost of £34.2 million. As we have seen elsewhere, the
investing market has become very competitive and yields have been driven down.
We have not compromised our purchasing strategy and have not bought properties
where we regard prices to be unviable. The rate of acquisition has therefore
slowed, however we are still very active in this area and will continue to
build 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 1,280
apartments and 42,608 sq m (458,644 sq ft) of commercial and retail space
located at Lövgärdet, near Gothenburg. We sold the portfolio to a major local
landlord specialising in local residential estates. During our four year period
of ownership their value had increased by £10.5 million against a cost of £29.4
million, of which the initial equity investment was £3.0 million.
In August 2006, we completed the corporate sale of our six properties at Solna
Business Park, Stockholm which valued the properties at £267 million. This was
the 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. The
development, which won both environmental and design awards, has generated
added value in excess of £65 million after taking account of original purchase
and refurbishment costs.
EQUITY INVESTMENTS - We completed two sales during the year. In January 2006 we
sold 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 sold
the majority of our stake in Keronite PLC, which booked a profit of £3.7
million.
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 Land
Development PLC for £4.3 million in March 2006 and we are pleased to note that
it has made good progress during its first nine months. The company develops
residential and commercial property opportunities in Bulgaria which joined the
EU in January 2007. Construction of its first residential project of 199 villas
and apartments on the Black Sea coast commenced in February 2007 and is already
over 35 per cent pre-sold. We have conditionally agreed to increase our stake
to 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 the
Group we will work closely with current and potential tenants to maintain low
levels 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 our
buildings. Our development at Solna Business Park incorporated a geothermal
heating and cooling system for one of the buildings, cutting its heating and
cooling costs by 30 per cent. We were also accredited the P-Mark building
specification (equivalent to BREEM in the UK) , which focuses on the working
environment, fresh air circulation and quality, sound proofing and
illumination. We are also incorporating a raft of energy saving designs into
The 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 demonstrated
consistently strong performance over the years. As there is still a 13.6 per
cent discount between NAV per share and share price, we therefore propose to
recommend 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 result
in a total distribution for the year of 69.9 pence per share, an increase of
194.9 per cent over the previous year.
CONCLUSION - After an exceptionally good year we are well aware of the
challenges ahead of us. In particular, seeing such large developments as the
Shard and New London Bridge House through to a successful commercial conclusion
will 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 key
components in our success and on behalf of the Board I would like to thank them
for their commitment.
Finally I would also like to thank our shareholders, our bankers and our
tenants, for their continued involvement and support.
Sten Mortstedt
Executive Chairman
08 March 2007
FINANCIAL REVIEW
INTRODUCTION
The Group has returned strong results for the year, generating a profit before
tax of £176.6 million and increasing its adjusted net assets from £485.9
million to £598.6 million, an uplift of 23.2 per cent (Statutory net assets
from £353.8 million to £448.1 million). This increase in net assets was after
having also distributed £52.5 million to shareholders during the year.
PROFIT BEFORE TAX - Profit before tax increased to £176.6 million from £84.7
million, an increase of 108.5 per cent. The main contribution to profit was
made by fair value gains on investment properties amounting to £162.1 million
(2005: £67.2 million), which included proportionate revaluation gains in
respect of our joint venture interests in the London Bridge Quarter which is
valued 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 within
the French division. The charge to deferred tax of £19.1 million has been
mitigated during the year by the release of a deferred tax provision of £27.9
million, which resulted principally from the sale of the corporate structure
owning Solna Business Park. Accordingly profit after tax increased to £153.8
million 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 per
cent or 17.7 per cent compound per annum (Statutory NAV has shown a similar
growth throughout that period). The organic growth in adjusted net asset value
per share over the period (taking into account the effect of tender offer
buy-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 statutory
comparative 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 restating
fixed interest loans to fair value, amounted to a reduction of 21.6 pence per
share (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 88.9
per 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 (66.9
pence per share, December 2005: 20.3 pence per share distributed) to
shareholders by way of tender offer buy-backs, including a special distribution
following the sale of Solna, at an average price per share of 714 pence. The
number of shares purchased through the two tender offer buy-backs amounted to
7.4 million shares representing 9.2 per cent of shares in issue on 1 January
2006.
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 -
Lövgärdet)
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 60.8
The underlying elements of the growth in net assets are set out in the table
below. It is not expected that deferred taxation provided in respect of
property revaluation gains would become payable in full if the properties were
sold. It is currently anticipated that the property assets may be sold within
corporate 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 35.0
2006
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 54.2
before 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) - - - 1.9
of 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 17.5
before tax
Fair value gains on 162.1 106.0 35.8 7.0 13.3 - 67.2
investment 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 84.7
activities 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 (December
2005 : £69.3 million) primarily due to the sale of Solna Business Park, Sweden
in August. The reduced income of £6.2 million in the year due to that
transaction was largely offset by income from acquisitions in Germany that
contributed an additional £4.5 million. UK net rental income was down by £2.3
million mainly due to the sale of the Carlow House and Drury Lane properties at
the end of 2005. The income lost from French property sales was offset by
rental 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 above
comprised administrative expenditure of £17.5 million (December 2005 : £14.9
million) and net property expenses of £3.5 million (December 2005 : £3.5
million).
ADMINISTRATIVE EXPENDITURE - of £17.5 million increased by £2.6 million over
the £14.9 million incurred in the year to December 2005. The major contributor
to this increase was the inclusion for the first time of the operating
expenditure of our Lunarworks subsidiary of £4.3 million.
Overhead expenditure relating to the core ongoing property business amounting
to £12.2 million decreased by £1.4 million from the comparative figure for the
previous year, reflecting lower legal and professional fees of £4.6 million
compared to £5.4 million expensed in 2005. The sale of our Solna and Lövgärdet
subsidiaries during the year further reduced overhead by £0.6 million.
NET PROPERTY EXPENSES - of £3.5 million (December 2005 : £3.5 million) included
advertising and marketing costs of £0.9 million, letting fees of £0.4 million
incurred to reduce vacant space within the UK and French portfolios and void
costs 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 in
Paris and the UK, depreciation amounted to £0.2 million and bad debts were £0.1
million. 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 Lövgärdet contributed to decrease
interest charges by £2.6 million.
Included within interest payable are positive fair value movements on interest
rate caps amounting to £0.2 million (December 2005 : cost of £0.1 million) and
amortisation 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 in
our cash reserves due to the sales of the two Swedish portfolios mentioned
above and the re-financings that took place in France in the first quarter of
the year. The positive foreign exchange gains of £3.2 million resulted mainly
from 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 companies
were re-financed to provide working capital for the next development stage of
both projects. This resulted in break costs of the existing financing of £8.0
million, the CLS share of which was £2.7 million. Additionally break costs
associated with redemption of loans on the sale of Solna Business Park amounted
to £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) 4.7
The average cost of borrowing for the Group at 31 December 2006, which includes
an estimate of the fair value adjustment in respect of interest rate caps, is
set 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 full
provision basis as required by IAS 12. We consider it is unlikely that this
theoretical liability will crystallise in full because it takes no account of
the way in which the Group realises gains. In particular, as for disposals in
2006, when companies rather than individual properties are sold, previously
provided deferred tax provisions do not result in actual liabilities. For UK
property disposals, indexation allowance is available when calculating taxable
capital gains and elections are available to ensure that deductions claimed
previously for capital allowances are not reversed.
At 31 December 2006, the IAS 12 deferred tax charge included in the Income
Statement 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 reduction
in net assets of £132.1 million respectively).
LOSS FROM DISCONTINUED OPERATIONS - The Group completed the disposal of the
business and the assets of WightCable in December 2005 and of WightCable North
in January 2006. The operating results of these two businesses have been
classified under IFRS 5 as discontinued operations. In early January 2006 costs
relating to the disposal of WightCable North were incurred, amounting to £2.1
million.
REVIEW OF THE BALANCE SHEET
INVESTMENT PROPERTIES - The Group's property portfolio amounted to £1,143.5
million, showing a net increase of £47.1 million over its value at 31 December
2005 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 £25.5
million expended at Southwark Towers, being our share of the ongoing
development costs as the site progresses. As our investments in the London
Bridge Quarter are now valued on a residual value basis rather than an existing
use investment basis, we have shown our share of the work in progress of £14.0
million 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 West
House, for completion of the extensive refurbishment commenced in 2005; £4.3
million at Spring Gardens, for completion of the in-fills for the Home Office
and £6.9 million at Solna Business Park for fit-out costs which were mainly in
connection with Fräsaren 12, for the tenant, ICA.
DISPOSALS - The sale of Solna Business Park was completed on 21 August 2006, at
a gross valuation of £267.0 million compared to its carrying value in the Group
accounts of £235.5 million. Our investment at Lövgärdet was sold in January
2006 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 book
value of which was £14.7 million; Paul Doumer, also in Paris, the book value of
which 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 sold
at £1.3 million above book value.
FOREIGN EXCHANGE - Foreign exchange translation losses on our French and German
property holdings amounted to £8.7 million in the year. The Swedish Kronor
strengthened against Sterling during the year, resulting in an increase in theSterling equivalent of those assets of £3.5 million. After taking into account
the 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 is
set 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 32.2
assets
Net 598.6 100.0 367.1 61.3 130.2 21.8 40.7 6.8 25.7 4.3 35 5.9
Adjusted
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 included
within 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 foreign
exchange rate risk. Hedging instruments such as interest rate caps and swaps
are acquired from prime banks. The Group has thereby hedged all of its interest
rate exposure and a significant proportion of its foreign exchange rate
exposure.
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) 100.0
Rate
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 100.0 100.0 100.0 100.0 100.0
loans capped
Average base interest rate at 4.9 5.6 4.6 4.6 4.5
which 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 - 100.0
loans capped
Average base interest rate at 5.2 5.8 5.0 - 4.9
which 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 Lövgärdet 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 its
rental income by way of a fully amortising bond. This bond has a current
outstanding balance of £37.4 million (December 2005 : £38.0 million) at an
interest rate of 10.7 per cent with a maturity date of 2025; and a zero coupon
bond, with a current outstanding balance of £6.2 million (December 2005 : £5.5
million), with matching interest rate and maturity date. This debt instrument
has a significant adverse effect on the average interest rate and the IAS 32
adjustment.
The net borrowings of the Group at 31 December 2006 of £526.2 million showed a
decrease of £75.5 million over 2005, reflecting both our increasing investment
programme in Germany, which added loans of £88.5 million, and our sales of
Solna and Lövgärdet, which resulted in the redemption of loans of £160.6
million. The joint venture properties at London Bridge Quarter were re-financed
during 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, after
repayment of the existing facilities. We refinanced some of our assets in the
French portfolio in early 2006, releasing £20.3 million of available cash. In
addition in France, the sale of two properties and the acquisition of one
building during the year contributed £11.0 million to debt redemption. For the
UK 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 to
derivatives and other financial instruments, if our loans were held at fair
value, the Group's fixed rate debt at the year end would be in excess of book
value by £22.4 million (December 2005 : £39.5 million) which net of tax at 30
per cent equates to £15.7 million (December 2005 : £27.8 million). The fall is
due to the repayment of the Swedish fixed rate loans for Solna and Lövgärdet,
coupled with the increase in UK base rates during the year.
The contracted future cash flows from the properties securing the loans are
currently well in excess of all interest and ongoing loan repayment
obligations. Only £26.3 million (3.8 per cent) of the Group's total bank debt
of £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 gross
assets 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 £20.0
million at 31 December 2006, represented by 80,081,836 ordinary shares of 25
pence each, of which 7,477,168 shares are held as Treasury shares following the
tender offer buy-backs and market purchases made during the year. At 31
December 2006 there were therefore 72,604,668 shares with voting rights quoted
on 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 in
May and November of 2006 resulting in the purchase of 7,350,815 shares of which
1,905,474 were held as Treasury shares and the balance of 5,445,341 shares were
cancelled. The two tender offer buy-backs distributed £52.5 million to
shareholders.
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 year
ended 31 December 2006 was 591 pence with a high of 750 pence in December 2006
and 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 to
net asset value, your Board is intending to propose a further tender offer
buy-back of shares in lieu of paying a cash dividend, on the basis of 1 in 41
shares at a price of 750 pence per share. This will enhance net asset value per
share and is equivalent in cash terms to a final dividend per share of 18.3
pence, yielding a total distribution in cash terms of 69.9 pence per share for
the year (December 2005 : 23.7 pence).
PROPERTY REVIEW
INTRODUCTION
We continue to focus on building a portfolio of low risk high return properties
and to actively manage our buildings to maximise long-term capital returns. Our
core 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 in
Germany, 4 in Sweden and 1 in Luxembourg. We have 486 commercial tenants and 10
residential 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 8.5
Luxembourg
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
Düsseldorf
Total 8.7 13.2 8.4 13.2 135.1 11.8 6.3 6.4
Germany
Sweden 4.7 7.2 4.1 6.4 49.7 4.3 8.2
Vänersborg
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 rental
income by category and the future potential income available from new lettings
and 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 than
current 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 million
or 33.1 per cent. Of this increase, £53.5 million (11.1per cent) is
attributable to the increase in the value of the core UK portfolio; £102.3
million (21.3 per cent) to the increase in value of the joint venture
properties and £3.4 million (0.6 per cent) to new acquisitions. There were no
sales 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 and
upgrading of Spring Gardens, Vauxhall, for our tenant the Home Office. In the
Spring, work started on the two last infill blocks which will provide 2,503 sq
m (27,000 sq ft) of new offices and will take the total square footage of the
estate to approximately or 18,580 sq m (200,000 sq ft). When complete in the
first quarter of 2007, the entire estate will be let to the Home Office for 20
years at an average rent of £31.50 per sq ft.
In June we completed the refurbishment of Great West House, which sits at the
junction 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, roof
detailing, external landscaping, reception areas and refurbished offices. In
addition we have provided new gymnasium facilities, a business centre and an
improved staff restaurant.
Since the launch, 1,386 sq m (14,600 sq ft) of the office space has been let to
Instant Office Limited and Global Refund Limited. With comprehensive on-site
facilities, a quality working environment and flexible leasing options we are
confident 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 in
Neasden Lane, NW10 was completed in August and the vacant space in the upper
half of the building let to the Brent Housing Partnership (BHP). Extending to
2,646 sq m (28,483 sq ft) the BHP took a 10 year lease at a best rent of £12.10
psf. All the office space at Chancel House is now let to Brent Housing
Partnership 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) were
let to Sound Too Limited on a 25 year lease. This building is also now fully
let.
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 Council
has resolved to grant planning permission for the Renzo Piano designed new
office and retail development of 39,950 sq m (430,000 sq ft) net internal
space. This scheme delivers the much needed improvements to the bus and
underground services at London Bridge which when combined with the new rail
concourse with the Shard, will completely transform this important transport
hub. Completion of New London Bridge House is scheduled for 2011/2012.
During 2006 we acquired two properties close to Spring Gardens, Vauxhall SE11
for just under £1 million. With our joint venture partners we also acquired
Fielden 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 London
Bridge House. Ownership of this property will allow us to make a positive
contribution 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 Tinworth
Street (opposite Spring Gardens) and Vauxhall Cross site adjacent to Vauxhall
Mainline and Underground station. These are important projects that have the
ability 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 82.35
per cent of our total vacant space. Reducing the vacancy rate, which at the end
of 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 €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 during
2006 in the Paris region, exceeding activity in the previous year by more than
30 per cent. Supply remains stable at approximately 3.6 million sq m (38.8
million sq ft) and with expected take-up of 2.3 million sq m (24.8 million sq
ft).
During the year we acquired two properties, the first of which was part of a
co-ownership building in rue Goubet, Paris comprising 1,268 sq m (13,649 sq ft)
and was purchased for €3.2 million. The second was a €9.5 million development
scheme 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 Défense and Le Paul Doumer building in Rueil-Malmaison
which comprised 3,700 sq m (39,364 sq ft) that was purchased in 1999 for €
[4.4] million and was sold for €8.5 million. We also completed the conversion
of the office building Le Foch into 16 residential apartments all of which have
been profitably sold.
During 2006 new leases were completed over 8,240 sq m (88,694 sq ft) of space
representing approximately 7 per cent of the portfolio. Additionally we
negotiated lease extensions and renewals over 22,374 sq m (240,831 sq ft)
producing a revenue of €6.5 million, including a new firm 9 year lease with the
Banque de France over 1,800 sq m (19,375 sq ft) in Paris and a new 6/9 year
lease 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 PORTFOLIO
The German economy grew by 2.0 per cent in 2006 and GDP is expected to increase
by 2.3 per cent in 2007. Unemployment is still relatively high at 11.7 per cent
for 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 €
68.5 billion changing hands. Activity was boosted not only by an influx of
foreign money but a rediscovered confidence from domestic investors. Take-up in
the letting market has increased by 17 per cent over 2005 and average rents
have edged up.
The renewed interest in the German property investment market has pushed down
yields particularly in the principal German cities. Consequently our rate of
acquisition of new properties has slowed. However we acquired 11 new properties
at a cost of £116.6 million in 2006 of which 7 were purchased in the second
half at a cost of £76.2 million, bringing our total investment to 13 properties
valued at £135.1 million. Furthermore we are very close to completing two
further properties at a cost of £20 million in the next few weeks.
We are actively reviewing substantial further property acquisitions and working
closely with our existing assets to ensure that the current vacancy rate of 2.0
per 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 in
2006 and 3.8 per cent expected for 2007. The unemployment rate in 2006 was 5.4
per cent and is set to fall slightly. Despite the strengthening economic
situation, letting market rents have remained stable, influenced by an average
vacancy rate in the Greater Stockholm area of over 15 per cent. While central
Stockholm remains a stronger market with a vacancy rate of around 5 per cent it
is expected that the letting environment in secondary areas will improve only
very slowly.
We therefore took advantage of the very strong investment market to sell our
six 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 the
Stockholm Stock Exchange.
The properties were originally acquired for £43.2 million and having totally
refurbished the properties at a cost of £118.0 million we sold them via a
corporate sale at a value of £267.0 million. After provisions for discounts and
rent guarantees on vacant space we have generated a surplus in excess of £65
million since acquisition in June 1999. Since completing on the sale in August
2006 we have substantially reduced our rental guarantee liabilities by reducing
vacant areas from 11,000 sq m (118,000 sq ft) to 5,600 sq m (60,000 sq ft) and
have now completed the majority of the tenant fit-out works.
Our remaining Swedish property at Vänerparken near Gothenburg currently has a
vacancy rate of 1 per cent. We are currently working on plans with the local
authority to fulfil their requirements after the university, occupying 11,783
sq 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) 1,855
investment 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 61,497
operations
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 8,119
equipment
Intangible assets 18,846 3,698
Investments in associates - 3,526
Available-for-sale 16,193 13,918
financial assets
Derivative financial 1,072 353
instruments
Deferred income tax 4,536 14,025
Trade and other 787 1,265
receivables
1,186,880 1,141,265
Current assets
Trade and other 9,204 8,395
receivables
Derivative financial 943 457
instruments
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 657,485 694,591
finance leases
Derivative financial - 982
instruments
812,407 841,682
Current liabilities
Trade and other payables 66,892 45,394
Current income tax 818 1,799
Derivative financial - 285
instruments
Borrowings, including 26,342 25,339
finance 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 21,852
equity 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 - 94,359
equity 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 52,226
operations
Interest paid (41,641) (34,857)
Income tax paid (2,206) (407)
Net cash inflow from 17,725 16,962
operating 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 45,056
investment property
Purchases of property, (1,029) (1,853)
plant and equipment
Proceeds from sale of 433 2,401
property, 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) 100
purchased
Repayment of loans (81,170) (57,777)
Net cash inflow from 81,718 69,830
financing activities
Net increase in cash 39,409 60,791
and cash equivalents
Cash and cash 118,162 57,371
equivalents at the
beginning of the year
Cash and cash 157,571 118,162
equivalents 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 Sjöberg (Chief Executive Officer) 24 Grosvenor Place
Dan M Bäverstam (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 ** (Non-executive London EC2R 6BH
Director)
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 enquiries@clsholdings.com
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
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