Final Results

For immediate release 8 March 2007 RESULTS FOR THE YEAR TO 31 DECEMBER 2006 A STRONG PERFORMANCE FROM EUROPE'S LEADING PROVIDER OF FLEXIBLE BUSINESS SPACE "We entered 2006 in good shape and left it in even better shape." Ian Coull, Chief Executive Highlights 2006 2005 Change % Profit before tax (Â£m's) 690.1 582.3 18.5 Adjusted* profit before tax (Â£m's) 142.7 119.5 19.4 Basic EPS (p) 201.8 91.7 120.0 Adjusted* diluted EPS (p) 25.1 24.3 3.3 Total dividend for the year (p) 19.0 17.5 8.6 NAV per share (p) 718 579 24.0 Adjusted* diluted NAV per share (p) 775 680 14.0 - excluding REIT conversion charge (p) 792 680 16.5 Adjusted* gearing (debt to equity) (%) 61 62 - Total property portfolio (including joint ventures) (Â£m's) 6,013 5,138 17.0 *Note: for definitions of "adjusted" items, see footnotes on page 5 of full press release ANOTHER STRONG OPERATING PERFORMANCE IN 2006 * Adjusted profit before tax up 19% * Group lettings of 440,000 sq m. In addition, pre-lettings of 159,000 sq m * Continental European expansion going from strength to strength - 169,000 sqm of lettings * UK developments, acquisitions and core asset management skills driving robust Â£10m growth in UK gross property rental income FURTHER STRONG PORTFOLIO PERFORMANCE AND TOTAL RETURNS * Valuation surplus of 11%. (UK Industrial up 11.5%, ahead of IPD at 11.3%) * Portfolio growth of 17% to Â£6.0bn. Reported NAV up 24%, diluted adjusted NAV up 14% * Total return (increase in EPRA NAV plus dividends paid) 16.6% (19.2% excluding REIT conversion charge) WELL PLACED TO DELIVER SUPERIOR SHAREHOLDER RETURNS * REIT status in UK from 1 January 2007 * Future growth underpinned by strengthening development pipeline * Investment yields in Continental Europe continue to be attractive * US strategic review progressing well, no further announcement anticipated until 2nd quarter of 2007 NIGEL RICH, Chairman said: "In my first year as Chairman of Slough Estates, I have been impressed with the Group's financial and operational performance. The development pipeline in both the UK and Continental Europe is very strong and focused. The balance sheet provides opportunities for further investment and the portfolio is being actively managed. The Board is recommending a final dividend of 12.1p, making a total dividend of 19.0p, an overall increase of 8.6%. IAN COULL, Chief Executive said: "We entered 2006 in good shape and we left it in even better shape. With our clear strategic focus on Flexible Business Space, a highly motivated team and the right organisational structure, we have consolidated on the strengthened position of recent years. Given the scale of our expansion in Continental Europe I am particularly pleased to be able to report that the European business delivered an outstanding performance in 2006. The 19 per cent increase in underlying adjusted profit before tax highlights another strong operating performance in 2006. Group lettings in the year increased to 440,000 sq m, with a further 159,000 sq m in pre-lets for the future benefit of the business. Robust customer demand, our active management of assets and our sharpened focus on customer needs were the main factors behind this strong performance. Continental Europe alone delivered an excellent 169,000 sq m. Across the Group, we invested Â£243 million in developments and Â£216 million in acquisitions, with Â£173 million of disposals crystallising Â£43 million of gains in value from previous investment. In the UK we recycled over Â£170 million of capital but we were net sellers of assets. The Group valuation surplus was 11 per cent, with the major UK industrial element of our portfolio up 11.5 per cent ahead of the equivalent IPD industrial index which increased by 11.3 per cent. Even allowing for the non-cash effects of new shares issued for the preference share conversion and deferred tax charges, adjusted EPS growth was 3.3 per cent. IMPLEMENTATION OF STRATEGY During 2006 the UK team has concentrated on shaping the portfolio to produce stronger returns by four primary routes. We acquired estates or assembled a critical mass of properties in areas that enabled customers to expand their businesses within our holdings and for the most cost-effective provision of services. We disposed of underperforming or non-conforming assets where there was limited opportunity to add value - with Â£ 173 million of disposals. We aggressively pursued and delivered redevelopments that allowed us to effectively replace older buildings and recycle the portfolio whilst retaining key holdings. We also worked closely with our customers to provide a level of service that contrasts positively with other landlords. Opportunities in Continental Europe currently offer attractive yields, low borrowing costs and strong prospects for growth. Employing fundamentally the same model as in the UK, the strategy has been to identify the areas with the best growth potential in each country and then to assemble a critical mass or "cluster" of properties in these locations. We have already secured this critical mass in the northern sector of Paris, France, and in the DÃ¼sseldorf region, Germany, where SEI is now established as the leading provider of modern and flexible light industrial, office and logistics space. We are also already very well established in the vicinity of Brussels airport in Belgium and Schiphol airport in the Netherlands where further land and income-producing properties have been acquired in these important strategic areas. During 2006, SEI made some major and highly successful inroads into Central European locations providing a platform for future growth in that region. As our strategy evolves, we seek to acquire and develop industrial and logistics space, as well as land for development, in the growth zones of key markets across Continental Europe. A Â£70 million acquisition and leaseback agreement with Antalis, was largely complete by 31 December 2006. This agreement included properties in two new major target countries, Italy and Spain, and provides SEI with a platform in key locations, including potential to make further strategic acquisitions. In the USA, the business focuses on the implementation of the biotechnology strategy and on value-add opportunities in major biotechnology clusters in the San Francisco Bay Area and San Diego County. The business model concentrates on development, redevelopment, conversions and strategic acquisitions. In 2006 investment momentum accelerated in response to biotechnology industry activity during the year, buoyed by increased funding from the major pharmaceutical companies and the Venture Capital community. During the year, we have added several new clients to the portfolio: clients who have the potential to provide opportunities for future expansion. 2006 PERFORMANCE REVIEW UK. With most commentators forecasting the end of yield compression in the UK and in the context of the generally positive rental levels, the UK team is demonstrating the quality of its core property skills. In 2006 we recycled capital, completed the latest phase of the development programme and implemented our asset management strategy - successfully driving gross property rental income up by Â£10 million. UK underlying year on year vacancy levels by space remained unchanged at 8 per cent, but we generated an extra Â£4 million of rental income from space let over space returned. We achieved overall rental growth of 3.7 per cent on rent reviews, ahead of the IPD industrial figure of 1.4 per cent. Rental growth on new lettings was flat, consistent with the priority we give to generating cash from unoccupied space. As expected, the potential from development completions coming on stream and from vacancy actively acquired with major new properties resulted in headline vacancy in the UK increasing, from 10.9 per cent to 11.6 per cent. We selectively acquired Â£145 million of properties in the UK, in attractive locations. CONTINENTAL EUROPE. Having doubled in size and firmly established a presence in Central Europe at the start of the year, our Continental European business delivered an outstanding performance in 2006. Its excellent 169,000 sq m of lettings increased the rent roll by over Â£7 million pa and brought investment property vacancy levels down from 10.2 per cent to 8.7 per cent, with overall vacancy levels - including trading properties - down from 12.3 per cent to 7.5 per cent. 77 per cent of our pre-lettings were delivered in Continental Europe. USA. In the USA, the business had a good year with the Â£0.9 billion book valuation at the end of 2006 representing a 28 per cent increase on the end of 2005, reflecting development completions and yield compression in a market which is increasingly seeing biotech real estate as an attractive asset class. Gross rental income increased 25.3 per cent to Â£76 million, reflecting the full year effect of some strong lettings in 2005 and the benefit of development completions in 2006. Further progress was made with lettings and with new acquisitions for future developments, although the market in San Diego County, unlike the San Francisco peninsula, has remained somewhat subdued, leaving the USA vacancy high at 18.9 per cent. REIT CONVERSION. Slough Estates became a Real Estate Investment Trust (REIT) on 1 January 2007. We believe Slough is well placed to deliver superior shareholder returns as a REIT, with its strong development pipeline and pan-European business model. In addition to the UK tax advantages which REIT status provides for most eligible companies, the UK REIT legislation also enhances our ability to implement an efficient international tax structure - enabling us to take greater advantage of the already stronger yields and lower borrowing costs available in Continental Europe. The Board announced its new post REIT dividend policy in November 2006. In future the Board ordinarily expects total dividends to exceed the mandatory 90 per cent "Property Income Distribution" element, and to comprise between 85 per cent and 95 per cent of the aggregate of UK and overseas sourced recurring property rental earnings plus a proportion of trading property profits and other income from non-property activities. This new policy will take effect during 2007 and is not reflected in the proposed final dividend for 2006. DEVELOPMENT. Our Â£3 billion development pipeline, a key driver of our future returns, is building momentum. With 154,000 sq m of developments completed during 2006 and 338,000 sq m of construction in progress at the year end, the pipeline now stands at 2.4m sq m with Â£226 million of rental income potential. OUTLOOK. Market conditions are encouraging. In the UK, enquiry levels are in line with last year, with some areas seeing particular strength in rental levels - such as Bristol, Heathrow and the Thames Valley. Conditions are generally stronger across Continental Europe. Our Central European locations are seeing continuing strong demand across the board, there are also some specific areas of strength in Western Europe, such as in light industrial markets in France and in the logistics market in France and in Belgium. In the USA, demand for SEI's biotech' product remains strong in the San Francisco Bay area, but there has been little pick up as yet in San Diego. The momentum in the development pipeline continues to grow, with 338,000 sq m under construction at the end of 2006 and with 734,000 sq m of construction starts expected during 2007 - 515,000 sq m of it in Continental Europe alone - underpinned by the healthy occupier demand levels across the Group. The sale and leaseback agreement with Antalis in late 2006 moved us into a number of high growth European business centres - including key locations in two new countries, Italy and Spain - and gave us another important partnership relationship with a substantial corporate occupier, thereby enhancing our platform for growth. We continue to see a steady flow of attractive investment and acquisition opportunities. With our strategy and structure now firmly in place, we are meeting or beating our targets and our growth plans remain firmly on track." USA STRATEGIC REVIEW In November 2006 SEI announced that, consistent with its previously-stated strategy of focusing on the provision of Flexible Business Space in the UK and in Continental Europe, it was exploring the strategic options for its USA business. It was announced that the process involved consideration of a range of possible options, including an immediate or phased divestment and also joint venturing or merging SEI's USA business with a third party. In assessing the options the Board has regard to all relevant considerations including the current and potential future value of the business as well as the tax implications of the various options. The process is well underway and we anticipate making a further announcement during the second quarter of the year. Slough Estates plc The Maitland Consultancy Michael Waring Tel: 07775 788 628 Colin Browne Tel: 0207 379 5151 SLOUGH ESTATES PLC 2006 PRELIMINARY RESULTS DETAIL CONTENTS 1) SUMMARY DATA TABLES - Financial Highlights and the Property Portfolio - Summary Financial Data - The Investment Portfolio - Reversionary Potential - Lettings Analysis - Vacancy Analysis - Development Pipeline Summary 2) FINANCIAL REVIEW 3) OPERATING REVIEW BY GEOGRAPHY & HIGHLIGHTS OF THE YEAR 4) FINANCIAL STATEMENTS SUMMARY DATA TABLES - FINANCIAL HIGHLIGHTS & PROPERTY PORTFOLIO INCOME STATEMENT 2006 2005 Net rental income(1) (Â£m's) 247.2 223.9 Net interest costs (Â£m's) - excluding 2005 exceptional cost of 95.2 103.5 refinancing Realised gains on disposals of assets (Â£m's) 43.1 18.8 Revaluation gain (Â£m's) 532.2 409.1 Profit before taxation (Â£m's) 690.1 582.3 Adjusted profit before taxation(2) (Â£m's) 142.7 119.5 Basic earnings per share (p) 201.8 91.7 Adjusted diluted earnings per share(3) (p) 25.1 24.3 Total dividends declared for the year (p) 19.0 17.5 Dividends paid in the year (p) 17.9 16.35 Adjusted underlying tax rate(4) (%) 19 13 Property return(9) (ungeared) (%) 15.3 14.6 Total return(10) (%) 16.6 24.8 BALANCE SHEET 31 December 31 December 2006 2005 Total properties, including share of joint ventures' 6,013.1 5,137.8 properties (Â£m's) Net assets excluding minority interests (Â£m's) 3,372.7 2,440.4 Adjusted net assets(5) (Â£m's) 3,648.8 3,089.6 Net assets per share (p) 718 579 Adjusted diluted net assets per share(6) (p) 775 680 Group: Net debt (Â£m's) 2,223.4 2,092.3 Debt to equity(7) (%) 61 62 Loan to value(8) (%) 38 42 Including share of joint ventures: Net debt (Â£m's) 2,288.5 2,121.9 Loan to value (%) 38 41 1. Including rental income on trading properties but excluding exceptional surrender premiums received in 2005. 2. Profit before tax excluding exceptional gains and losses, property revaluation surpluses and the gains and losses on derivative instruments. Lease surrender premiums which are exceptional by virtue of their size are excluded from adjusted profit before tax. 3. Earnings per share based on adjusted profit before tax, and reflecting the dilutive effects of preference shares and shares held by the ESOP trust properties. 4. Tax charge, excluding deferred tax on valuation surpluses, as a percentage of adjusted profit before tax. 5. Net assets adjusted to add back deferred tax associated with investment properties. 6. NAV per share adjusted to add back deferred tax associated with investment properties and to reflect the dilution caused by preference Shares and shares held in the ESOP. 7. Net debt as a percentage of shareholders' funds adjusted to add back deferred tax associated with investment properties and treating Preference shares as equity. 8. Net debt as a percentage of the total property portfolio excluding joint ventures. 9. Increase in the capital value of properties plus net rental income and gain/ loss on disposals. 10. Adjusted NAV growth plus dividends paid in the period. THE INVESTMENT PORTFOLIO Completed Investment Properties Rental Data* Properties Lettable % of Total Passing rent Market rental Gross rental Net rental space at 31.12.06 value (ERV) income for 2006 income for at 31.12.06 2006 (sq m) (Â£m) (Â£m) (Â£m) (Â£m) UK- by asset type Industrial 2,312,525 62 143.7 169.9 154.5 129.7 Offices 177,506 5 28.4 31.5 30.0 23.8 Retail 64,532 1 12.6 13.5 13.8 11.5 Total UK 2,554,563 68 184.7 214.9 198.3 165.0 Continental Europe - by asset type Industrial 652,900 18 19.8 23.5 18.4 15.7 Offices 85,684 2 10.3 10.7 8.9 7.6 Total Continental Europe 738.584 20 30.1 34.2 27.3 23.3 USA - Biotech / Office 453,317 12 60.0 70.5 78.6 60.4 Group Totals Industrial 2,965,425 80 163.5 193.4 172.9 145.4 Offices 263,190 7 38.7 42.2 38.9 31.4 Retail 64,532 1 12.6 13.5 13.8 11.5 Biotech / Office (USA) 453,317 12 60.0 70.5 78.6 60.4 Group Total 3,746,464 100 274.8 319.6 304.2 248.7 Lettable Passing rent Market rental Gross rental Net rental space at Value (ERV) at income for the year income for 31.12.06 31.12.06 the year (sq. m.) (Â£m) (Â£m) (Â£m) (Â£m) Continental Europe - by country France 354,325 10 10.9 12.9 11.1 10.1 Germany 193,781 5 5.0 6.1 3.6 3.2 Belgium 138,734 4 12.4 13.2 12.1 10.7 Netherlands 8,733 - 0.6 0.8 0.1 -0.3 Central Europe 43,011 1 1.2 1.2 0.4 -0.4 Total 738,584 20 30.1 34.2 27.3 23.3 Vacancy Valuation Data* Rate by Valuation Valuation Valuation Valuation Initial Reversionary Space 31.12.06 % of total surplus Surplus yield yield % (Â£m) (Â£m) % % % UK - by asset type Industrial 11.3 2,941.5 59 302.4 11.5 4.9 5.8 Offices 21.3 494.7 10 27.4 5.9 5.7 6.4 Retail 0.1 262.4 5 24.2 10.2 4.8 5.1 Total UK 11.6 3,698.6 74 354.0 10.6 5.0 5.8 Continental Europe - by asset type Industrial 9.1 267.0 5 16.6 6.6 7.4 8.8 Offices 8.0 143.9 3 8.6 6.4 7.1 7.4 Total Continental Europe 8.7 410.9 8 25.2 6.5 7.3 8.3 USA - Biotech / Office 18.9 902.6 18 118.8 15.2 6.6 7.8 Group Totals Industrial 10.8 3,208.5 64 319.0 11.0 5.1 6.0 Offices 16.7 638.6 13 36.0 6.0 6.1 6.6 Retail 0.1 262.4 5 24.2 10.2 4.8 5.1 Biotech / Office (USA) 18.9 902.6 18 118.8 15.2 6.6 7.8 Group Total 11.9 5,012.1 100 498.0 11.0 5.5 6.4 * Including the Groupâ€™s share of joint venturesâ€™ properties. Excluding land held for investment and properties in the course of construction. Valuation Valuation % Valuation Valuation Initial yield Reversionary at 31.12.06 of total surplus surplus yield (Â£m) (Â£m) % % % Continental Europe - by country France 149.6 3 14.5 10.7 7.3 8.6 Germany 73.2 2 4.7 6.9 6.8 8.2 Belgium 166.4 3 3.3 2.0 7.4 7.9 Netherlands 6.9 - - - 8.7 11.1 Central Europe 14.8 - 2.7 22.3 8.4 8.4 Total - including share of JVs 410.9 8 25.2 6.5 7.3 8.3 REVERSIONARY POTENTIAL as at 31.12.06 Reversion to ERV ERV of vacant properties on occupied properties Â£m Â£m UK - Industrial 8.3 17.9 - Offices (2.6) 5.8 - Retail 0.9 0.0 Continental Europe 0.2 4.0 USA 2.2 8.3 Total 9.0 36.0 LETTINGS ANALYSIS By area 000's sq m By rent(1) pa (Â£m) Lettings Space Returned Lettings Space Returned 2006 2005 2006 2005 2006 2006 UK - Lettings of new developments 38 42 4.0 UK - Existing vacant 129 147 9.9 UK- Licenses 17 35 0.3 Total UK 184 224 169 198 14.2 10.7 Continental Europe 169 107 86 40 7.0 3.2 North America 87 33 39 25 10.8 3.8 Total Group 440 364 294 263 32.0 17.7 (1)Rent passing VACANCY ANALYSIS Headline (excludes trading properties) 31.12.06 31.12.05 % % UK 11.6 10.9 Continental Europe 8.7 10.2 North America 18.9 19.5 Group Total 11.9 11.8 Analysis of Underlying UK Vacancy Recent acquisitions 2.5 2.3 Completed development sites (less than 18 months) 1.1 0.5 Underlying UK vacancy 8.0 8.1 Total UK 11.6 10.9 DEVELOPMENT PIPELINE SUMMARY Construction Potential Potential Total In Progress Development Developments Programme Starts in 2007 2008 & Beyond Land area ha 55 151 264 470 Space: Industrial sq m 197,510 619,511 735,404 1,552,425 Offices sq m 71,841 80,287 515,636 667,764 Retail sq m 0 6,065 1,858 7,923 Research & Development sq m 68,951 27,870 87,812 184,633 Total sq m 338,302 733,733 1,340,710 2,412,745 Investment properties % 76 74 77 76 Trading properties % 24 26 23 24 Pre-Let % 57 4 1 10 Planning status - fully approved % 100 20 5 26 - zoned/outline approval % 0 58 55 48 Rental value when completed Â£m 42.3 56.8 138.7 237.9 Current book value - at valuation Â£m 359.9 235.9 507.8 1,103.6 Forecast future costs to completion Â£m 251.4 501.7 1,249.3 2,002.4 Further details of the investment portfolio and the development pipeline will be published on the Investor Relations pages of the website: www.sloughestates.com/SEI/InvestorRelations All amounts are indicative only and are liable to change. Certain properties included above are currently income producing and are expected to be redeveloped; such properties have a current book value of Â£288 million and produce current rental income of approximately Â£12 million per annum. 2) FINANCIAL REVIEW REIT conversion and dividend policy A major event in the year was the EGM on 14 December 2006 which approved the Group's election to become a REIT. This took effect from 1 January 2007 after many months of hard work and careful preparation. In financial terms, the one-off conversion charge amounts to approximately Â£82 million and this will be paid in four quarterly instalments commencing July 2007. REIT conversion means that income and capital gains from the Group's eligible UK investment activities will be tax exempt. This includes development gains provided that the properties are retained for at least three years following completion. Accordingly, whilst the 2006 accounts include provision for the conversion charge, they also include the release of Â£416 million of previously provided deferred tax which is no longer payable. Following its December 2005 listing on Euronext, the Group also intends to elect into France's tax exempt regime for real estate companies - to become a "SIIC" - with similar benefits to REIT status in the UK. This should be with retrospective effect from 1 January 2007. With REIT status in the UK, SIIC status in France and prudent tax planning in respect of other taxable activities, we believe we will be able to operate a very efficient international structure with a low overall tax charge. Operating as a REIT will require us to distribute, in the form of dividends, at least 90 per cent of the eligible UK property rental profits, after certain deductions. However, the Board has taken the opportunity to review its overall dividend policy, recognising that the Group is now operating in a market in which there is global competition for capital. The Board's aim will be to achieve a sustainable, progressive policy which satisfies shareholders' expectations of a relatively high pay-out of recurring property rental income, whilst supporting the ongoing needs for capital. The precise proportion of recurring property rental income that the Slough Group distributes may vary between years and will be flexed as appropriate, according to the needs of the business. Ordinarily, however, the Board would expect the total dividend to exceed the mandatory 90% Property Income Distribution element, and to comprise between 85% and 95% of world-wide recurring property rental earnings plus a proportion of trading property profits and other income from non-property activities. Total return to Equity Shareholders A commonly used measure of total return is the increase in adjusted diluted net asset value per share plus dividends paid in the year. On this basis, Slough delivered a total return for the year of 16.6 per cent (112.9 pence per share), or 19.2 per cent (130.3 pence per share) before the REIT conversion charge. With similarly strong portfolio performance in each of the two previous years, the total return over the last three years has averaged 18.6 per cent per annum. 2006 2005 Increase NAV per share 718.0p 579.0p 24.0% Adjusted diluted NAV per share 775.0p 680.0p 14.0% Total dividend paid in the year 17.9p 16.35p 9.5% Total return per share 130.3p* 138.35p (5.8%) Total return 19.2%* 24.8% * After adding back the REIT conversion charge of Â£81.9m (17.4 pence per share). The principal driver of the total return was the increased adjusted diluted NAV per share which grew by 14.0 per cent, largely as a result of property valuation gains, which added Â£563.8 million or 119.7 pence on a diluted adjusted basis to NAV. Adjusted profits after tax added a further Â£114.9 million or 24.4 pence per share. The increased NAV is analysed further in the table below. Â£m Pence per share Adjusted diluted equity attributable to 3,197.3 680.4 shareholders at 31 December 2005 Dilution adjustment - (1.4) Property valuation gains 563.8 119.7 Adjusted profit after tax 114.9 24.4 REIT conversion charge (81.9) (17.4) Decrease in value of available-for-sale (1.7) (0.4) investments, net of tax Actuarial gain on pension scheme, net of tax 3.2 0.7 Currency translation differences (58.5) (12.4) Ordinary dividends paid (84.0) (17.8) Other items (4.3) (0.9) Adjusted diluted equity attributable to 3,648.8 774.9 shareholders at 31 December 2006 We have provided for the one-off REIT conversion charge of Â£81.9 million which has reduced NAV by 17.4 pence per share and this amount will be paid over four quarterly instalments commencing in July 2007. Currency translation differences on the conversion of foreign currency denominated assets reduced NAV by Â£58.5 million, or 12.4 pence per share - this mostly relates to US dollar differences arising in the first half of the year. We have subsequently increased our hedging such that as at 31.12.06 only 6% of the Group's adjusted NAV was exposed to foreign currency movements. Valuation movements Property gains, including the Group's share of joint ventures, amounted to Â£568.6 million (2005: Â£482.4 million), and were comprised of: 2006 2005 Property valuation gains Â£m Â£m Valuations gains in income statement 532.2 409.1 Valuation gains in recognised income and 22.3 48.4 expense Share of joint ventures' valuation gains 9.3 10.5 Total valuation gains 563.8 468.0 Profits from the sale of investment properties 4.8 14.4 Total property gains 568.6 482.4 The strongest valuation gains experienced were in the USA, Central Europe, the UK and France, in all cases driven mainly by further significant yield compression due to the weight of money being targeted at prime real estate assets in most sectors. Valuation uplifts - geographical analysis 2006 2005 % % UK- Industrial 11.5 10.8 UK - Offices 5.9 9.9 USA 15.2 13.8 France 10.7 6.5 Germany 6.8 - Belgium 2.0 0.9 Central Europe 22.3 - Group 11.0 10.9 Income statement The Income Statement appears on page 24 and analyses the results on an IFRS and "adjusted basis". The adjustments are made to exclude the effects of valuations, profits and losses on the sale of investment properties, as recommended by EPRA, and items deemed exceptional by virtue of their size of nature. The only exceptional item in 2006 was the REIT conversion charge (Â£ 81.9 million) whilst in 2005, exceptional items comprised a lease surrender premium of Â£36.4m, the gain of Â£16.1m on the disposal of Quail West, bond refinancing costs of Â£126.0 million and the gain on the disposal of Tipperary (Â£99.7 million). Full details of all the adjustments are provided in note 11 to the attached Financial Statements. Adjusted profit before tax Adjusted profit before tax increased by 19.4 per cent to Â£142.7 million (2005: Â£119.5 million) primarily due to an increase in adjusted net rental income of Â£ 23.3 million plus improved performance from Slough Heat & Power (and the elimination of losses following the sale of Tipperary Corporation in 2005), and increased gains from venture capital fund realisations (shown as "investment income"). These were partly offset by an increase in administration expenses. 2006 Reconciliation of adjusted profit before tax Â£m Adjusted profit before tax - 2005 119.5 Increase in net rental income 23.3 Improved performance from Slough Heat & Power/Tipperary 3.0 Increased investment income 3.0 Reduced finance costs 1.3 Increased administration expenses (8.2) Other changes 0.8 Adjusted profit before tax - 2006 142.7 Rental income Gross rental income, excluding exceptional surrender premiums of Â£36.4 million in 2005, increased by Â£35.2 million (13.1 per cent) to Â£304.8 million for the year and net rental income, on the same basis, increased by 10.4 per cent to Â£ 247.2 million. The key drivers of the increase in net rental income are set out in the table below: Â£m Net rental income 2005 (excluding 223.9 exceptional surrender premium) Acquisitions 20.7 Disposals (11.1) New developments, relettings & rent 36.5 reviews Space returned (12.2) Increase in property operating expenses, (7.5) net of recoveries Other (3.1) Net rental income 2006 247.2 Acquisition led growth arises principally from the full year effect of acquisitions made in 2005, specifically KarstadtQuelle AG in Germany (Â£3.6 million) and Heywood and Woodside (Â£9.2 million), plus the 2006 acquisition of Treforest (Â£2.1 million) in the UK. This was offset by reduced rental during the year from strategic disposals, including Â£7.9 million in the UK. Record lettings, particularly of new developments in all locations (Â£10.2 million) and strong relettings in the UK (Â£5.6 million), contributed significantly to the growth in net rental income. The effects of rent averaging increased the net rental income for the year by Â£12.2 million, of which Â£10.1 million arose in the USA. The increase in property operating expenses, arises mainly due to acquisitions (Â£7.2 million) - Karstadt, Grontmij and Mainland in Continental Europe in 2005. The increased costs arising from acquisitions are partly recovered from tenants and are included in rental income. Other income and expenses Profit on sale of trading properties was Â£6.1 million (2005 excluding exceptional gains on Quail West of Â£16.1 million: Â£7.0 million), with the gains mainly arising on the sale of trading property in Germany (Â£4.7 million). The Group's share of adjusted profits from joint ventures and associate after tax increased by Â£1.7 million to Â£7.0 million (2005: Â£5.3 million) due to higher profits on the sale of trading properties (Â£6.5 million compared to Â£0.8 million in 2005), offset by reduced rental income, higher finance costs and tax. The higher trading property profits in joint ventures was mainly attributable to the Group's UK logistics venture, HelioSlough (Â£5.1 million). The Group's share of gains, net of tax, have been excluded from the adjusted profits before tax, in accordance with EPRA guidelines. The performance of Slough Heat & Power continues to improve, returning an operating profit of Â£2.1 million for 2006, an increase of 75 per cent from Â£1.2 million in 2005. The total improvement in net income from utilities and gas of Â£3.0 million, from a loss of Â£0.9 million in 2005, also reflects the disposal of the Tipperary group at the beginning of the second half of 2005. Other investment income, which represents the Group's share of realisations from available-for-sale private equity investments, increased by Â£3.0 million to Â£8.5 million in the year. At 31 December 2006 the Group had available-for-sale investments held at fair value of Â£44.1 million (2005: Â£54.7 million) and a remaining commitment to invest further funds of Â£9.0 million (2005: Â£11.7 million). Administration costs increased by Â£8.2 million to Â£28.9 million (2005: Â£20.7 million). The increase primarily is attributable to a number of one-off costs including professional advice in connection with REIT conversion and the USA strategic review (Â£2.6 million), higher IFRS charges in relation to share based incentive payments (Â£1.8 million) and staff costs and other increases due to the expansion of the Group's activities, particularly in Continental Europe. Net finance costs Adjusted net finance costs for the year are classified as follows: 2006 2005 Â£m Â£m Interest on overdrafts & loans 131.2 116.9 Interest on convertible preference shares 4.1 13.2 Interest receivable (10.1) (9.9) Other net income (2.4) (0.5) Net finance costs before capitalisation 122.8 119.7 Less amounts capitalised in respect of (23.5) (19.1) development activities Adjusted net finance costs 99.3 100.6 Adjusted net finance costs were broadly unchanged. The convertible preference shares were converted into equity during the year and the resulting reduction in interest on these preference shares was offset by increased interest on overdrafts and loans related to the Group's capital expenditure programme. Tax The tax charge for the year can be analysed as follows: 2006 2005 Â£m % Â£m % Underlying tax charge on adjusted profit - current 18.2 13 15.6 13 - deferred 9.6 6 0.4 - Total 27.8 19 16.0 13 REIT conversion charge 81.9 - - - Deferred tax reversal (416.1) - - - Tax relating to exceptional items & EPRA adjustments 77.4 14 178.2 39 Total Group tax (credit)/charge (229.0) (33) 194.2 33 The tax credit for the year arises due to the reversal of the deferred tax provision of Â£416.1 million relating to investment properties, which will no longer be payable under the REIT regime. This has been partly offset with a provision for the REIT conversion charge of Â£81.9 million. The underlying tax charge on the adjusted profit before tax was 19 per cent (2005:13 per cent) with the increase primarily due to adjustments in respect of previous years. Earnings per share and dividend Diluted adjusted earnings per share increased to 25.1 pence (2005: 24.3 pence) and basic earnings per share increased 120 per cent to 201.8 pence (2005: 91.7 pence). The 3.3 % increase in diluted adjusted earnings per share is lower than the increase in adjusted profit before tax mainly due to the increased deferred tax charges in 2006 and the effects of new equity shares issued upon conversion of the convertible redeemable preference shares. The directors have proposed a final dividend of 12.1 pence per share, taking the total dividend for the year to 19.0 pence per share, an increase of 8.6 per cent from 2005. Dividends The key dates for dividend payments are as follows: - ex-dividend date 18 April 2007 - record date 20 April 2007 - dividend payment date 25 May 2007 Cash flow and net debt A summary of the cash flow for the year is set out in the table below: 2006 2005 Â£m Â£m Cash flow from operations 137.6 237.3 Finance costs (net) (122.8) (116.4) Dividends received 35.7 0.1 Tax paid (net) (11.6) (91.8) Additional pension scheme contributions - (16.2) Free cash flow 38.9 13.0 Capital expenditure (451.9) (738.9) Property sales (including joint ventures) 164.1 147.0 Sale of Tipperary - 110.5 Cash cost of bond exchange - (40.8) Ordinary dividends (84.0) (69.0) Other items (3.6) 0.8 Net funds flow (336.5) (577.4) Investments in term deposits - 185.6 Net increase in borrowings 321.4 340.0 Net cash outflow (15.1) (51.8) Opening cash and cash equivalents 166.9 218.1 Exchange rate changes (0.8) 0.6 Closing cash and cash equivalents 151.0 166.9 Cash flows generated from operations for the year were Â£137.6 million, a decrease of 42% from 2005 as a result of the exceptional surrender premium and significant trading property proceeds in 2005. Dividends received from joint ventures and associates are Â£35.6 million higher than 2005 mainly due to higher distributions from HelioSlough and a one-off dividend from the Group's joint venture with Tesco. Finance costs of Â£122.8 million, net of interest income, were higher by Â£6.4 million due to property acquisitions in 2005 and 2006, partly offset by the lower interest paid on the preference shares which were converted into ordinary shares during the year. Tax paid during the year of Â£ 11.6 million was significantly lower than 2005 (Â£91.8 million) mainly due to taxes paid in 2005 relating to the Pfizer campus sale and other US taxes. Additional pension contributions in 2005 comprised a one-off payment of Â£15 million. After payment of the dividend, there was a net funds outflow of Â£336.5 million (2005 Â£577.4 million). Allowing for the movement in borrowings, the net cash outflow for the year was Â£15.1 million (2005 Â£51.8 million). Capital expenditure of Â£451.9 million (2005: Â£738.9 million) included development expenditure of Â£236 million (2005: Â£142 million) and acquisitions of Â£216 million (2005: Â£589.6 million). Provided market conditions remain favourable, we expect to maintain the high rate of expenditure with Â£350 million to Â£400 million being planned for both 2007 and 2008. Major Disposals and Acquisitions - Investment Properties Disposals Price Gain/(loss) over book value Â£m % Cambridge Research Park(part) 26.3 (2) Kingswood, Ascot 35.4 (2) Deva, Retail Park, Chester 34.8 1 Victoria Road Retail Park, Ruislip 38.3 9 Centennial Park, Elstree , (Phase 300) 19.9 16 Eddison Road, Basingstoke 10.5 (5) Since 31 December 2006 Juniper 1&2, Basildon 30.8 3 Acquisitions Price (inc costs) Â£m Group Share % Treforest Industrial Estate, Cardiff 62.3 100 Sunbury International Estate 27.3 100 Manasty Road Industrial Estate, Peterborough 18.4 100 Pucklechurch, Bristol 17.0 100 Logistics Centre, Colnbrook (Partnership with BAA plc and Morley) 16.9 50 Plenty Site, Newbury 10.7 100 Ligand Pharma', San Diego 26.1 100 KarstadtQuelle, Germany (residual element) 12.3 100 Kimbal, USA 14.9 100 Anatalis Portfolio* 69.9 100 * Currently classified as trading properties Financing At 31 December 2006, the Group's borrowings totalled Â£2,384.8 million. Cash balances totalled Â£161.4 million resulting in reported net debt amounting to Â£ 2,223.4 million (2005: Â£2,092.3 million). The weighted average maturity of the debt portfolio was 10.5 years. On 22 March 2006 the Company had the opportunity to issue a redemption notice in respect of the 8.25 pence convertible redeemable preference shares 2006-2011. Such a notice was indeed served and, as anticipated, virtually all holders instead exercised their conversion options at 37.0793 new ordinary shares for each 100 preference shares. After enforcing conversion on those holders that did not specifically request redemption, 99.9 per cent of the preference shares were converted to 47,053,908 new 25 pence ordinary shares. As a result of this conversion Group net debt was reduced by Â£107.7 million compared to year end 2005. Unsecured borrowings represent 97 per cent of gross debt at the year end. Secured debt totalled Â£77.1 million representing some historical mortgage debt domiciled in the Group's overseas operations. Â£1,471.8 million of debt domiciled in the UK is unsecured and is issued by the Parent Company direct without any supporting up-stream guarantees. Â£835.9 million of unsecured debt is issued by subsidiary companies located overseas. Reported financial gearing was 66 per cent (2005: 86 per cent) or 61 per cent (2005: 62 per cent) after adding back deferred tax of Â£276.1 million (2005: Â£ 649.2 million). The reduction in deferred tax is significant due to the release of the provision in respect of the UK property rental business following the adoption of REIT status. The loan to value ratio (net debt divided by property assets) at 31 December 2006 was 38 per cent (2005:42 per cent). Interest cover based upon adjusted profit before interest and tax and adjusted net finance costs was 2.4 times (2005: 2.2 times), or 1.94 times (2005: 2.0 times) if capitalised interest is included. The market value of borrowings at the end of December 2006 was Â£83.7 million higher than the book value. Funds availability at year end 2006 totalled Â£671.3 million, comprised of Â£ 161.4 million of cash deposits and Â£509.9 million of undrawn bank facilitates. Only Â£25 million of this total is uncommitted overdraft lines with the balance of undrawn facilities being fully committed and with Â£461.7 million remaining available to 2010/11. In April a new EUR200 million five year committed revolving credit facility was closed on behalf of Slough Commercial Properties GmbH to refinance the acquisition cost of the KarstadtQuelle portfolio in Germany and to provide some additional finance for development purposes. In July a new EUR100 million five-year committed revolving credit facility was closed on behalf of Slough BV and its subsidiaries to provide finance for the Group's new operations in Central Europe following the takeover of Grontmij Real Estate International at the end of 2005. This EUR100 million facility has subsequently been increased to EUR225 million. Hedging Policies The Group has set policies on interest rate and foreign currency translation exposures, liquidity and funding. These policies state that around 85 per cent (increased from 70 per cent effective January 2006) of the Group's debt portfolio should attract a fixed or capped rate of interest and that between 75 per cent - 90 per cent of foreign currency assets should be matched with liabilities of the same currency. Interest rate exposure As at 31 December 2006, 83 per cent (2005: 87 per cent) of the debt portfolio attracted a fixed or capped rate of interest at a weighted average rate of 6.03 per cent (2005: 6.19 per cent). Much of this debt is in the form of fixed rate debt issues raised through Sterling Eurobonds and US dollar private placements. Such fixed-rate debt issues are held in the balance sheet at amortised cost. Interest rate swaps, caps, collars and forward rate agreements are also used to convert variable rate bank debt to fixed rate. The 17 per cent of debt remaining at a variable rate of interest brought the overall weighted average cost of debt down to 5.84 per cent (2005 5.81 per cent). The Group has decided not to elect to hedge account its interest rate derivatives portfolio. Therefore movements in the fair value are taken to the Income Statement but, in accordance with EPRA recommendations, these gains and losses are eliminated from adjusted profit before tax and adjusted EPS. Foreign currency translation exposure Due to the nature of the Group's business it has no cross-border trading transactions and therefore, foreign exchange transaction exposure is negligible. However, it does have operations located overseas which transact business in the domestic currency of the country in which the business is located - mostly in US dollars and Euros. The Group's main currency exposure therefore is the translation risk associated with converting net currency assets back into sterling in the Group consolidated accounts at each balance sheet date. As mentioned above the policy is that between 75 per cent - 90 per cent of currency denominated assets must be matched with liabilities of the same currency. At 31 December 2006, Â£223.5 million or 14 per cent of currency denominated net assets were exposed to exchange movements. A 10 per cent movement in the value of sterling against all currencies in which the Group operates would therefore change net assets by Â£22.3 million and net assets per share by 5 pence or 0.6 per cent. Financial Ratios and Credit Rating The Group follows an unsecured funding model which relies upon maintaining a strong investment grade credit rating. The Board believes it is appropriate to adapt gearing levels according to its assessment of prevailing property market conditions and the stage in the economic cycle. Accordingly, whilst current Group policy is to maintain a long term financial gearing level below 80 per cent (net debt to equity) and interest cover in excess of 1.8 times, (adjusted profit before tax divided by net interest before capitalisation) the Group retains flexibility to temporarily exceed these thresholds should particular circumstances warrant it. The Group is currently rated A- (long term) F2 (short term) with a stable outlook, by the credit rating agency FITCH. Liquidity and funding The policy on liquidity risk is that at any given time forecasts should demonstrate that there is headroom of at least Â£200 million against immediately available cash and/or committed bank facilities for two years projected forward. As property investment is a long term business the Group aims to raise funding on a long term basis through a mix of equity, long term debt issues and committed medium term revolving credit facilities as well as recycling capital generated from property sales. Typically developments are funded through cash resources or drawing down committed bank lines whilst the investment portfolio is funded through unsecured long term debt issues of similar weighted average life to that of the unexpired remaining term of the lease portfolio. 3) OPERATING REVIEW BY GEOGRAPHY REVIEW OF THE UK "Record levels of take up over the last two years encouraged us to significantly increase the volume of development being delivered to the market in 2006. The UK development programme is now at a record level with 802,000 sq m in the pipeline. In 2006, 13 development projects were completed, delivering 61,388 sq m of new space, 30 per cent of which has been let. A further 12 projects are underway with 46 per cent pre-let." Profile The UK business serves 1,478 customers, has 84 property holdings, a current rent roll of Â£184.7 million and includes Â£4.2 billion of property (including land and trading properties), representing 70 per cent of the Group by value. The business focus covers the full range of Flexible Business Space products although 'big-box' warehouses are generally developed with our joint venture HelioSlough. The UK properties are located mainly in the south of England; they are concentrated in outer London but extend out as far as Cardiff in the west and Chelmsford in the east; there is also an important base in the Midlands which manages our holdings north of Birmingham. There are six regions employing less than two hundred people directly; functions not core to the property skill base are outsourced - construction having been re-organised along these lines during the first half of 2006. More detailed information on the UK business, its assets and its development pipeline will be published on the investor relations section of our corporate website. Our Strategy Our strategy is to provide Flexible Business Space to the widest range of potential occupiers. During 2006 the teams priorities centered on shaping the portfolio to produce stronger returns: by acquiring larger estates or assembling a critical mass of properties within an area that enables customers to expand their businesses within our holdings and for the most cost-effective provision of services; by disposing of underperforming or non-conforming assets where there are limited opportunities to add value - with Â£166 million of acquisitions (including investment in a new joint venture) and Â£173 million of disposal - we were net sellers; by aggressively pursuing and delivering redevelopments that allow us to effectively replace older buildings and recycle the portfolio whilst retaining key ownerships; by working closely with our customers to provide a level of service that contrasts positively with other landlords - customer satisfaction is regularly measured and the most recent independent survey highlighted that 73 per cent of our customers rated their satisfaction as good or excellent and that an increasing number see business benefits from being our customers The regional structure introduced in 2005 is embedded as a way of working that gives the six multi-disciplined teams the opportunity to maximise returns from their individual portfolios by concentrating on the highest value-added local issues. The previous structure was based on functional disciplines; by contrast the regional structure gives full project life cycle responsibility to individual managers and this has been a key factor in the improved operational performance which has been delivered since its introduction. A lean central team is responsible for ensuring that best practice is shared across the business as well as supporting the Regional teams and managing large acquisitions across the UK. Performance Summary The UK market defied most commentators by producing a further year of strong returns with the widely-predicted slowdown in yield compression only becoming evident in the final quarter of the year. Over the full year the value of our UK portfolio increased from Â£3.6 billion to Â£4.2 billion. This increase was the result of capital growth, but importantly also from the successful conclusion of major development projects. The total net valuation surplus is Â£354 million (10.6 per cent). The uplift, excluding land held for future development and acquisitions made during the year, is 11.2 per cent while the surplus for our core industrial property is 11.5 per cent, ahead of the IPD Index of Industrial Property. The market for all types of commercial property remains positive but there are signs of purchasers becoming increasingly selective. Against this background, we continued to recycle capital by selling underperforming and low-yielding properties with few untapped opportunities to add value. These sales generated Â£173 million (including Phase 300 Centennial Park where the sale was contracted in 2006 and completed in 2007). We secured Â£166 million of property acquisitions - opportunities which were mainly generated off market. The purchases will help to fuel our future growth and also help with our medium term site assembly plans. These acquisitions delivered a year-end surplus of Â£8.8 million (a 5.4 per cent surplus net of all costs). In 2006 184,000 sq m of new and existing buildings were let. This secured rent, including licence fees, of Â£14.2 million pa. This was an excellent achievement and above our internal targets for the year. 45 per cent (by rent) of the lettings were to existing occupiers underlining the benefits of long-standing relationships and highlighting the success of our major programme of customer initiatives. Rent review and lease renewals in respect of leases with passing rents of Â£21.9 million produced an uplift of Â£1.3 million pa. The rental growth demonstrated by 2006 rent reviews was 3.7 per cent, significantly ahead of the IPD Industrial figure of 1.4 per cent. As expected, the level of buildings returned during 2006 was again high at 169,000 sq m (with Â£10.7 million of related rental income) although considerably lower than the lettings achieved and the team managed to bring this in below the levels it had forecast at the start of the year. The level of returns is high partly as a result of our flexible approach - which is valued by our customers and consistently leads to higher levels of repeat business. Of the property returned or vacated during 2006, 40 per cent will eventually be incorporated in redevelopment plans. Of the remainder, 36 per cent has been re-let. The underlying vacancy rate held firm at 8 per cent, which as we have indicated previously is approaching an acceptable level given the need for some capacity in which to decant occupiers to facilitate development. As expected, the headline vacancy rate at the year end had risen to 11.6 per cent, reflecting the opportunity to increase revenue from acquisitions and completed developments coming on stream. The net benefit of the intense application of our core asset management skills, plus the effects of development completions and acquisitions, helped to drive an overall Â£9.6m uplift in gross property rental income. Acquisitions The strong competition for commercial property has reduced yields to new historic lows. Against this background it has become increasingly challenging to identify opportunities that will deliver a significant contribution to future profitability. We successfully acquired Â£166 million of properties that meet our financial and strategic targets - by complementing existing holdings or by enabling us to gain a major presence in areas that are anticipated to benefit from economic growth. The acquisitions provide opportunities to add value by redeveloping or refurbishing parts of the sites, and the regional teams are actively pursuing a programme to positively integrate our new customers. These acquisitions, several of which were in the second half of 2006, already show a 5.4 per cent surplus when comparing the year-end valuation with the purchase price (including costs). Treforest in Wales was the location of one of our major acquisitions in 2006, and SEI's first move into Wales. Purchased at a price of Â£62.3 million (including costs), its year-end valuation was Â£70 million, representing a surplus of Â£6.1 million or 9.5 per cent. The holding entity owning this 53 hectares industrial estate was acquired in April 2006. It is in a prime growth location just north of Cardiff, close to the M4 and has been an established trading estate since 1936. Existing customers include the BBC, GE, Honeywell, WH Smith, Barclays and Lloyds TSB. In addition to providing over 94,000 sq m of space, the site includes 4.4 hectares of development land. One of the attractions of the site was the opportunity represented by its high 23 per cent vacancy levels and the fact that occupier relationships had been under-managed. Since acquisition the SEI team has launched a range of new customer initiatives and is working closely with the existing customer base to deliver new buildings to suit their particular requirements. The team has also been successful in securing planning consent for a new 1,800 sq m trade counter scheme with construction anticipated to start shortly. Other key acquisitions during the year included the Â£16.9 million (inclusive of costs) acquisition of a 50 per cent share of the Logistics Centre in Colnbrook, a 20.3 hectare site acquired in partnership with The Airport Property Partnership (a specialist joint venture between BAA plc and Morley) and located immediately adjacent to the M25 and to Terminal 5 at Heathrow airport. The majority of the site is leased to Heathrow Airport Limited who occupy a 14,000 sq m facility and will be paying a rent of Â£2.6 million pa. The strategic location of the site, adjacent to Heathrow and the motorway network, makes it a natural fit for SEI's portfolio. SEI already owns 87 hectares of land in the west London and Heathrow area, with 356,665 sq m of business space. Also very near Heathrow on a 1.26 hectare site, is the 4,400 sq m former Japanese Airline's facility in Poyle. This redevelopment opportunity was acquired off market in a transaction that involved relocating an existing SEI customer - Air Fayre - to refurbished accommodation in nearby Heston. Several other major acquisitions were agreed at the end of 2006 including the Â£ 27.3 million (including costs) acquisition of Sunbury International Estate, representing an initial yield of 6.7 per cent. It is a multi-let estate comprising 16,000 sq m of industrial units, data centre and offices immediately adjacent to Junction 1 of the M3. Acquired in December 2006, this property provides a mix of secure income and also opportunities to add value through using the Company's leasing, marketing and refurbishment skills. It produces Â£ 1.5 million of income and adds to our critical mass of property within close proximity of Heathrow Airport - theLHR.com - that now includes 17 estates in 11 locations. Also at the end of the year, we acquired the Manasty Road Industrial Estate in Peterborough for Â£18.4m (including costs). This multi-let industrial estate, strategically located adjacent to Junction 17 of the A1(M), extends to 7.8 hectares and provides 30,000 sq m of business space in 45 units, used mainly for warehousing and light industrial purposes. The passing rent is Â£867,000 per year and major tenants include the Inland Revenue and ChoicesUK, the home entertainment company. The acquisition extends the portfolio into a new geographic location that presents good potential for growth. The 26,000 sq m Pucklechurch Industrial Estate, which increases our holdings in the strong letting market of North Bristol, was also acquired in December, for Â£17 million (including costs). There is scope to improve the current (Â£1 million pa) income through active management and letting of vacant space. The estate extends to 8 hectares and includes 26,000 sq m of buildings. Disposals During the year we actively recycled capital and took the opportunity to realise value created by selling over Â£173 million of property. Sales receipts exceeded book value by over 4.8 per cent Several of these disposals were completed in August including the largest individual assets sold - the Deva Retail Centre, Chester, together with a retail warehouse and industrial premises at South Ruislip, in a combined transaction to CMG/Insight for Â£73.1 million. CMG/Insight already owned neighbouring property. Together, these two assets total 18,437 sq m and the disposals represented an attractive overall exit yield of 4.22 per cent (4.42 per cent on Chester and 3.75 per cent on Ruislip) and were sold at Â£4 million above the book value. The disposals also further advanced the final stages of the strategic realignment of SEI's property portfolio, moving away from remote offices and stand-alone retail warehousing and focusing on Flexible Business Space. Reinforcing the more active asset management approach of recent years, land sales have also been undertaken where this has resulted in more attractive, enhanced facilities for the benefit of estate occupiers generally. These include two agreements at Farnborough Business Park. One was a conditional Â£5.3 million sale agreement with De Vere and with Quadrant Estates to respectively provide a 130 bedroom hotel (with restaurant and gym) and a new children's nursery. The Farnborough team also conditionally sold a 4.85 hectare site subject to planning consent for Â£21 million (precise realisation dependent upon planning conditions) to Redrow Homes. These will all enhance the estate and complement the existing business activities. Development Record levels of take up over the last two years encouraged us to significantly increase the volume of development being delivered to the market in 2006. The UK development programme is now at a record level with 802,000 sq m in the pipeline. In 2006, 13 development projects were completed, delivering 61,388 sq m of new space, 30 per cent of which has been let. A further 12 projects are under way with 46 per cent pre-let. Pre-lets remove the letting risk associated with speculative development and enable our customers to enjoy a bespoke facility designed to suit their particular requirements. However, many occupiers still require buildings to be available without delay - accordingly whilst several developments in 2006, as in previous years, were built speculatively, by year end 37 per cent of these buildings had been let, sold or were under offer. In a market showing modest levels of rental growth our ambitious development programme is making an increasingly important contribution to value and revenue enhancement. The UK represents 33 per cent of the total Group development pipeline by space to be built, with 158 hectares (802,000 sq m) in the land bank being scheduled for future development of built space at an estimated total spend of Â£1 billion. It's the nature of SEI's schemes that individually very few projects would ever represent more than ten per cent of the pipeline. Extensive information on these schemes can be found in the investor relations section of the corporate website. Lettings Major transactions include: Customer Building Type Location Annual Rent Â£ Existing customer (confidential) Offices Slough 900,000 Jacobs K Ltd * Offices Reading 560,593 Bibby Distribution Warehouse Manchester 500,000 AgustaWestland Offices Farnborough 402,560 Agilent Warehouse Reading 330,000 Next Retail Warehouse Slough 315,000 Skan Dansk Warehouse Basildon 303,372 Modular Heating Warehouse Basildon 266,869 Twinmar Warehouse Dunstable 249,790 Aristocrat Warehouse Uxbridge 239,253 Business Post Warehouse Fareham 230,319 Safestore Warehouse Slough 219,991 Pre-lettings agreed during 2006 IX Europe Data Centre Slough 847,333 Agilent Offices Reading 463,581 Direct UK Warehouse Manchester 190,000 Safestore Warehouse Hayes 186,993 * Serviced office - inclusive rent HelioSlough Joint Venture HelioSlough is a 50:50 joint venture between Slough Estates plc and Helios Properties plc focused on the UK 'big box' logistics market. It is a trading company with the objective of maximising development profit distribution to the partners. The Company now has 10 schemes with a development pipeline (including land owned, development agreements and options) totalling approximately 560,000 sq m at various stages of development and a substantial land bank. HelioSlough secured a pre-construction sale worth Â£42 million to CBRE Investors for its 69,680 sq m distribution facility at Nimbus Park, Thorne, near Doncaster at the beginning of the year and achieved practical completion of the unit in December. Nimbus Park is well connected with the opportunity for a dedicated rail spur ultimately connecting to the East Coast Mainline to the south of Doncaster. The scheme has immediate access the M18, which provides an important route to the East Coast ports. HelioSlough expects to begin the second phase of 18,580 sq m at the 20 hectare park during 2007. Following the success of the Nimbus Park relationship, in December HelioSlough secured a further circa Â£100 million forward sale agreement with CBRE Investors for an additional six speculative distribution properties across the UK, totalling 145,860 sq m. Work has already commenced on the units, which will be completed in 2007. Each of the sites is in a prime location, with excellent access to the road networks. SIRFT, Sheffield also offers Â£3 million of new railfreight facilities, together with rail services provided by EWS. The growing demand for high quality B8 space in these locations coupled with increasing demand for rail connectivity was an important factor in securing this funding. The transaction has helped HelioSlough accelerate profits for these schemes, providing an excellent platform for future growth in 2007 and beyond. A major part of HelioSlough's activity in 2007 will be ensuring the successful completion of the substantial development programme outlined above. The joint venture will also continue its marketing and development contracts at these and other existing developments such as Wynyard 360 and Wynyard Park (both at Teeside) where it has a completed building ready for occupation of 27,870 sq m, a further consented 37,160 sq m and 49 hectares of development land. We will take forward planning consent discussions at our key strategic holdings at Stainforth, Doncaster, Rossington and Radlett. And there will be a major focus on our land acquisitions programme to drive our future growth plans. Outlook for the UK There has been a positive start to the new year with 29,230 sq m let to the end of February producing an additional Â£2.8 million of annualised income. With a consistent take-up of new space, we are planning to start development of up to 225,376 sq m in 2007 across all 6 regions of the UK. Since the year end our 41,000 sq m holding in Basildon has been sold for Â£30.8m which is in line with the 2006 year end book value. Looking ahead, total returns are expected to be lower in 2007 as five years of market driven yield compression generally continues to flatten or comes to an end. This will underline the importance of proactive asset management - attracting and retaining customers as a key driver of performance. We look forward to the challenge of working in partnership with new and existing customers to deliver the standards of accommodation, service and required level of service required in 2007 and beyond. REVIEW OF CONTINENTAL EUROPE "A record 169,000 sq m was leased up over the course of 2006, increasing the rent roll by Â£7m and reducing the overall vacancy across the portfolio to 7.5 per cent." Profile The Continental European business serves 221 customers, has 100 property holdings, generates a rent roll of Â£30 million per annum, includes Â£411 million of investment property and 522 hectares of land. The business focus covers the full range of flexible business space product and, unlike the UK, we will directly develop 'big-box' warehouses or 'sheds' which are a key part of our product offering, particularly in Central Europe. The Continental European business is based in key locations in nine countries, in specific areas with high economic growth potential at key transport infrastructure inter modal hubs - often close to airports or major road intersections. Following the December 2006 agreement of a major portfolio acquisition from Antalis, SEI now has additional presence in its key existing markets of France, Germany, Belgium, Central Europe and, for the first time, in Spain and Italy. More detailed information on the Continental European business, its assets and its development pipeline will be published in the investor relations section of our corporate website. Strategy Continental Europe currently offers attractive yields, low borrowing costs and strong prospects for growth- in the general economies in which we operate and particularly in the specific locations in which we have a presence. Employing fundamentally the same model as in the UK, the strategy has been to identify the areas with the best growth potential in each country and then to assemble a critical mass or "cluster" of properties in these locations. We have already secured this critical mass in the northern sector of Paris, France, and in the DÃ¼sseldorf region, Germany, where SEI is now established as the leading provider of modern and flexible light industrial, office and logistics space. We are also already very well established in the vicinity of Brussels airport in Belgium and Schiphol airport in the Netherlands where further land and income-producing properties have been acquired in these important strategic areas. During 2006, SEI made some highly-successful inroads into Central European locations providing a platform for future growth in that region. As our strategy evolves, we seek to acquire and develop industrial and logistics space, as well as land for development, in the growth zones of key markets across Continental Europe. Over the course of 2006, SEI centralised the individual country support functions into a single enhanced Continental European base in Paris to lead and support the Continental country offices, their major growth plans and the new wave of expansion in Europe. SEI now has 67 employees in Continental Europe. It successfully integrated the Central European property development operations of GREI (Grontmij Real Estate International), the property development arm of a Dutch consulting engineering firm, which was acquired for Â£13 million giving SEI an established presence in Poland, the Czech Republic and Hungary, with development teams already in place and further sites to develop. A Â£70 million acquisition and leaseback agreement with Antalis, the largest European distributor of communications support products (including packaging, paper, print and office materials), was largely completed by 31 December 2006. In addition to expansion in existing countries, this agreement enabled SEI to acquire properties in two new major target countries, Italy and Spain. This provides SEI with a platform in key locations, including potential to make further strategic acquisitions. 2006 Performance Including joint ventures and trading properties, 1.2 million sq m of space was under management by the end of 2006, representing a 7.2 per cent increase year on year. This followed the acquisition of 164,680 sq m of space and 116 hectares of land, the disposal of 45,160 sq m of non-core property and the demolition of a further 75,926 sq m of redundant buildings for redevelopment. Of the existing total stock, 169,239 sq m has been leased up over the course of the year, increasing the rent roll by Â£7.0 million pa and reducing the overall vacancy rate across the portfolio to its lowest ever level of 7.5 per cent overall. In addition to this, 105,213 sq m of space under development was pre-leased, including joint ventures on a 100 per cent basis, representing additional annual rent of Â£3.4 million pa when this comes on stream. Acquisitions and lettings helped to drive a Â£10.2 million or 40.5 per cent uplift in gross property rental income, translating into a Â£5.4 million or 23.7 per cent increase in net property rental income. The lower percentage increase at the net income level reflects increased operating costs as the operational infrastructure scales up to match the significantly increased size of the business. Over the year, due to the ongoing acquisition programme, rental growth and further yield compression, the value of the existing portfolio in Continental Europe has grown from Â£499 million to Â£690 million as at December 2006 representing an increase of 38 per cent. Acquisitions Although generally higher than in the UK, yields in Continental Europe have also been driven to historic lows. Partly in response to this, resources were targeted at identifying properties with further development potential in key strategic clusters in each country which will ultimately complement the performance of our existing holdings. Two strategically-important acquisitions were agreed and completed around the turn of the year from 2005 to 2006, the Â£13 million purchase of GREI, an existing corporate entity with property assets in Central Europe and with an established management team; also the Â£110 million acquisition from KarstadtQuelle AG (in a sale and leaseback transaction) of a substantial logistics and ancillary office portfolio in Germany, bringing an existing income stream from these investment assets along with a substantial development land bank. Then, as referred to above, in December 2006 for Â£70 million, we secured an acquisition and leaseback of a significant pan-European portfolio from Antalis. The core properties are in SEI's strategic growth markets. The buildings are a mixture of old and new properties in good locations, providing excellent future development potential underpinned by an income stream. Antalis is committed to the properties it occupies for an average of approximately 7.5 years. This transaction represented a post acquisition costs yield of 7.2 per cent. SEI and Antalis have also signed a partnership agreement, covering both the extension of existing properties and the potential development of new properties. This partnership agreement will also provide potential synergies in other markets as it covers the UK as well as Continental Europe. In Germany SEI agreed the acquisition of a 29 hectare future logistics site from ThyssenKrupp group, at a phased purchase price of Â£12.9 million. This prime site to the west of DÃ¼sseldorf, in close proximity to the airport, has direct access to the A44 motorway. The site will also be connected to the railway network and is one of the only viable sites for logistics development close to the city of DÃ¼sseldorf and its airport. SEI will develop 117,000 sq m of light industrial and logistics accommodation in a low density environmentally-sensitive scheme. The delivery of the first phase is anticipated for the end of 2007. We plan to continue this strategy of acquiring property in each strategic area across Europe over the course of 2007 via corporate acquisitions, large-scale sale and leasebacks and the purchase of investment portfolios where these have potential for growth through restructuring leases or redevelopment. Disposals Our strategy is to dispose of property that does not fall into one of the key regional clusters identified in each country as having growth potential and where there is no critical mass or where the asset is commercially mature with little scope to add further value. In 2006 SEI was successful in disposing of 45,160 sq m and 9.52 hectares of surplus or non-strategic property in Germany. In Neuss and Ratingen, we sold 33,000 sq m of logistics and Flexible Business Space at two sites, to Standard Life at a total sale price of Â£21.4 million. In a separate deal, at Ratingen, SEI sold units comprising 5,670 sq m on a site of 1.1 hectares to JEF Holdings BV, a subsidiary of the Dubai Islamic Bank. Both for Â£4.2 million and in a further deal in Neuss we sold a scheme to IVG for Â£4 million. All four sales transactions were at initial yields better than our normal target levels. Sales over the course of the year have generated cash of Â£29.6 million and net gains of Â£5.2 million. Development At the year end SEI had 161,000 sq m under construction across Continental Europe with plans to develop a further 515,000 sq m in 2007. Of this 161,000 sq m under construction, 50 per cent has been pre-let. An important driver in the development program has been the acquisition of GREI which initially brought 79 hectares of land and a further 17 hectares under short-term options. Following further acquisitions, the logistics sites include 61 hectares at Strykow near Lodz, a strategic location in central Poland, 22 hectares in Poznan, Western Poland, 31 hectares adjacent to Prague airport and 9 hectares near the M1 motorway running west out of Budapest. Also included is a site for a 16,000 sq m suburban office development in the Mokotow district of Warsaw. Further extensive information on these can be found in the investor relations section of the corporate website. Lettings - A Record Year 2006 was a record year for SEI In Continental Europe with 169,000 sq m being taken up across all countries through 55 separate transactions which have increased the customer base to a total of 221 occupiers. The market has been relatively buoyant in all countries with demand coming from both local and international end users for good quality well-located light industrial, office and logistics product in key strategic areas. SEI has also been able to benefit from synergies with its existing customer base to generate new business across the different countries, for example the 17,081 sq m office pre-let to Ernst and Young in Brussels and a 42,433 sq m logistics pre-let in Rumst, Belgium to Exel were both achieved through existing relationships with corporate customers. Net absorption of the overall portfolio has been 7.5 per cent and the average vacancy rate has fallen to 7.5 per cent (including trading properties), a 40 per cent decrease since 2005. We believe that this strong take-up will continue throughout 2007 with a general shortage of good quality product in many of SEI's key European markets, most notably in Central Europe. Outlook During 2006, 169,000 sq m of space has been leased producing an additional Â£7.0 million pa of rental income. The level of take up of core product - evidenced by the number of transactions and the levels of rent secured - has encouraged us to plan for a significant increase in development starts to over 515,000 sq m (including 100 per cent of joint ventures) in 2007. In addition to this, we will be expanding the portfolio both organically and through external acquisitions and aim to build upon our existing strong base to become the leading provider of flexible business space in all key markets. REVIEW OF USA "Our Â£0.9 billion portfolio at the end of 2006 represents a 28 per cent increase on the end of 2005, reflecting our development completions and increased market demand for life sciences real estate assets." Profile The USA business serves 61 customers, has 77 buildings, generates a rent roll of Â£60 million per annum, including 453,000 sq m of property and 171 hectares of land, representing 12 per cent of the Group in terms of built space. The business model is based on Flexible Business Space products but - unlike the European business - it is concentrated primarily on research and development facilities serving the biotechnology industry. Its clients include some of the largest biotechnology companies in the world including Amgen and Genentech and SEI's relationship with many of its biotech clients dates back to when they were small business start ups. The business is based in two main locations in California, in San Francisco Bay Area and in San Diego County. We focus on the mission-critical core property skills with most other functions being outsourced - consequently it only requires nine direct employees to manage the business. Extensive information on the North American business, its assets and its development pipeline will be published in the investor relations section of our corporate website. Strategy The business focuses on the implementation of the North American biotechnology strategy and on value-adding opportunities in major life sciences clusters in the San Francisco Bay Area and San Diego County. The business model concentrates on development, redevelopment, conversions and strategic acquisitions. In 2006 investment momentum accelerated in response to life sciences industry activity during the year, buoyed by increased funding from the major pharmaceutical companies and the Venture Capital community. During the year, we have added several new clients to the portfolio, including OncoMed, Cordis, Portola, Alexza, Covalent and Ligand, who have the potential to provide opportunities for future expansion. In November 2006 SEI announced that, consistent with its previously-stated strategy of focusing on the provision of Flexible Business Space in the UK and in Continental Europe, it was exploring the strategic options for its USA business. It was announced that the process involved consideration of a range of possible options, including an immediate or phased divestment and also joint venturing or merging SEI's US business with a third party. In assessing the options the Board has regard to all relevant considerations including the current and potential future value of the business as well as the tax implications of the various options. The process is well underway and we anticipate making a further announcement during the second quarter of the year. 2006 Performance The general US economy slowed during the year in response to volatile and uncertain energy prices, slowdown in housing market and interest rate increases. Despite the economic slowdown during the latter part of the year, real estate markets experienced further yield compression and steady improvements in occupancy and rental rates. Against this general backcloth, the life sciences industry experienced a resurgence in activity, with demand accelerating for our product and increased supply of funding to the sector, mainly through the major pharmaceutical companies. In 2006 our USA business (SEUSA) maintained it focus on core life sciences portfolio, expanding and consolidating in existing locations through prudent acquisition and assembly of buildings with redevelopment potential; marketing/ leasing existing vacant space aggressively; and executing major life sciences campus construction programmes for Genentech and Amgen. Our Â£902.6m investment portfolio valuation (excluding developments) at the year end showed a 15.2 per cent valuation surplus. This, and the year on year increase, reflects development completions and increased demand for life sciences assets as a real estate investment class. During the year, SEUSA added $250 million of fixed assets to the balance sheet. Gross property rental income - excluding exceptionals - increased by Â£15.4m to Â£76.2m. This 25.3 per cent increase reflected both the 2006 resurgence in activity in our life sciences' markets and the full year benefit of some key lettings and acquisitions in 2005. In 2006 we secured 86,000 sq m in leasing, with a year end vacancy of 18.9 per cent or 88,000 sq m - a similar position to the 19.5 per cent at the end of 2005. Market performance was mixed, with buoyant levels of activity in the San Francisco Bay Area offset to some extent by softer conditions in San Diego County. In the Bay Area we have experienced relatively high levels of enquiries and made solid progress in leasing vacant space, including several vacant units which are currently under negotiation. The San Diego life sciences market suffered from the downsizing of several pharmaceutical companies and is gradually recovering. However, the real estate fundamentals of this market are attractive, featuring relatively low availability of vacant land entitled for development. We acquired approximately 57 hectares of land in Central and Northern San Diego County over the past two years to exploit the value creation opportunity afforded by the increasing scarcity of sites against the backcloth of the continued expansion of the life sciences industry. We are confident that our patience will be rewarded. Key 2006 transactions included; further expansion/consolidation in existing life sciences clusters with acquisitions of several buildings to create over 37,000 sq m of development and redevelopment potential in the Bay Area and San Diego; major leasing transaction with Amgen to consolidate their campus life sciences development in South San Francisco, adding four buildings (over 37,000 sq m) to their existing 31,000 sq m; important leasing transactions with several new life sciences clients to add to our pipeline of future expansion opportunities; continuing high levels of development with 69,000 sq m of buildings currently under construction and a 48,000 sq m of completions in the year. Acquisitions and Disposals Our strategy of securing sites for future development, redevelopment or conversion, was progressed with the assembly of several existing industrial facilities in the Bay Area which will form the platform for the third phase of our Britannia Modular Labs concept as well as a 21,368 sq m, three-building, life sciences campus. In San Diego, we acquired the Ligand Pharmaceutical facility for $47.6 million, in an attractive sale and leaseback transaction that featured additional land for two future life sciences buildings (7,700 sq m). We evaluated several other opportunities during the year and will continue to acquire sites and product wherever appropriate to expand our market position. At the same time, we will maintain our strict investment criteria and disciplines to ensure that we focus on value creation opportunities and do not over-invest in inventory in anticipation of demand. At the end of January 2007, we acquired for $37 million the Sierra Point site in Brisbane, CA., to the immediate north of our Oyster Point projects in South San Francisco, CA. The nine hectare parcel will feature a five-building, 50,168 sq m, state-of-the-art, Silver LEED standard, life sciences project. It is hoped this project will receive planning consent during the first half of 2007. Development The construction of the Genentech campus is more than half completed following the completion and leasing of the Phase I element comprising four buildings totalling 42,000 sq m. Phase II is well underway with the delivery of four buildings (31,000 sq m) scheduled during 2007 and 2008. We are also making excellent progress with the Amgen campus at Oyster Point, with the delivery of two buildings (17,000 sq m) and commencement of construction on Britannia Oyster Point II, a three-building, 29,000 sq m campus adjacent to BOP I, of which two buildings are pre-leased to Amgen (22,000 sq m). Following the completion of our Britannia Modular Labs II facility during the year, we have entered into discussions with a major life sciences company to lease the entire building. We have several enquiries and proposals outstanding for Phase I of this exciting new life sciences product concept and anticipate that it will be leased during the coming year. With the completion of the assembly of three nearby industrial buildings, SEUSA has embarked on the necessary planning consents for a Phase III, 8,361 sq m, two-building, modular labs development. Another four building assembly in south San Francisco will provide a 21,400 sq m life sciences redevelopment opportunity in due course. This site expands and consolidates our premier position in this critical life sciences market and we are optimistic about the prospects for demand. Another component of the life sciences strategy is the profitable redevelopment of some of our existing life sciences business parks. In this respect, we are in the process of securing consent for the redevelopment of the original, four-building, 16,258 sq m core element of our Pointe Grand estate into a four-building, 44,594 sq m, modern life sciences campus complex. We are also reviewing various options to add density through the redevelopment of part of our Gateway life sciences campus in south San Francisco. We should also receive planning consent during the first quarter of 2007 for the development of a two-building, 28,000 sq m life sciences project on our Forbes site in South San Francisco. We are optimistic about pre-leasing at least part of this project, but under the right circumstances will also consider a speculative development. Lettings. Although we ended the year with an 18.9 per cent vacancy rate, this figure masks substantial leasing activity during the year. As part of our investment strategy, it is crucial to have available vacant space to accommodate the uncertain and volatile demand patterns that characterise the industry. There is no optimal inventory since demand can vary significantly over space and time. Of the 88,306 sq m of vacant space, 26,105 sq m is comprised of buildings in Poway and another 19,045 sq m in Torrey Pines, of which 12,077 sq m were buildings vacated in mid-2006. In the Bay Area, we are anticipating leasing transactions during the first part of 2007 that have the potential to largely eliminate the outstanding vacancies in our modular labs buildings and the Shoreline project. During the year, we agreed new leases on 86,000 sq m of new and existing space, and a pre-let of 22,000 sq m to Amgen. This was offset by vacancies of 39,000 sq m, resulting in net absorption of 47,000 sq m. We have also been the beneficiaries of increasing demand during the year which has delivered new lettings and a measurable improvement in the tone of our rental rates. We expect this trend to continue throughout 2007, especially as we anticipate that the inventory of appropriate life sciences product should be steadily absorbed. Outlook. The solid if not spectacular economy, together with continued rapid growth in the life sciences industry, fuels our optimism for development and leasing activities during 2007 and beyond. The wider real estate sector remains an investment commodity very much in demand and the highly-competitive demand for real estate product has driven up prices. In spite of this, the fundamentals of supply and demand are robust and we anticipate continued improvements in occupancy and rental rates. The life sciences industry activity is expected to further strengthen in response to increased funding from the pharmaceutical sector, but also due to more approvals of the many drugs, vaccines and devices that are in late stage clinical trials or under review with the FDA (Food & Drug Administration). Our strategy is firmly rooted in the development of critical mass in major life sciences clusters and, over the years, we have been rewarded for maintaining our value-focused investment philosophy. We have established a solid platform for the future expansion of our life sciences portfolio in California. Group income statement For the year ended 31 December 2006 2006 2005 Adjusted Adjust- IFRS Adjusted Adjust- IFRS Income ments Income Income ments Income (2) (2) & & & & Expense Expense Expense Expense (1) (1) Note Â£m Â£m Â£m Â£m Â£m Â£m Revenue 384.1 - 384.1 405.2 - 405.2 Gross property rental income 304.8 - 304.8 269.6 36.4 306.0 Property operating expenses (57.6) - (57.6) (45.7) - (45.7) Net property rental income 2 247.2 - 247.2 223.9 36.4 260.3 Profit on sale of trading properties 2 6.1 - 6.1 7.0 16.1 23.1 Share of profits from property joint ventures and associates after tax 5 7.0 6.3 13.3 5.3 8.2 13.5 Net income from utilities and gas 2 2.1 - 2.1 (0.9) - (0.9) Other investment income 8.5 - 8.5 5.5 - 5.5 Administration expenses 3 (28.9) - (28.9) (20.7) - (20.7) Property gains 4 - 537.0 537.0 - 423.5 423.5 Gain on disposal of joint ventures - - - - 7.8 7.8 Gain from sale of gas interests - - - - 99.7 99.7 Operating profit 242.0 543.3 785.3 220.1 591.7 811.8 Finance income 6 31.1 4.7 35.8 19.9 1.5 21.4 Finance costs 7 (130.4) (0.6) (131.0) (120.5) (130.4) (250.9) Profit before tax 142.7 547.4 690.1 119.5 462.8 582.3 Tax (charge)/credit - current (18.2) (71.1) (89.3) (15.6) (28.8) (44.4) - deferred (9.6) 327.9 318.3 (0.4) (149.4) (149.8) Total tax 8 (27.8) 256.8 229.0 (16.0) (178.2) (194.2) Profit for the year 114.9 804.2 919.1 103.5 284.6 388.1 Attributable to equity shareholders 113.9 802.6 916.5 100.9 284.2 385.1 Attributable to minority interests 1.0 1.6 2.6 2.6 0.4 3.0 114.9 804.2 919.1 103.5 284.6 388.1 Basic earnings per share 10 201.8p 91.7p Diluted earnings per share 10 196.0p 85.0p Notes 'Adjusted Income & Expense' relates to the Group's income and expense after EPRA adjustments and excluding exceptional items. EPRA adjustments arise from adopting the recommendations of the Best Practices Committee of the European Public Real Estate Association ("EPRA") as appropriate. Exceptional items are disclosed separately due to their size or incidence to enable a better understanding of performance. Both these types of adjustments are described in Note 11. Group statement of recognisedincome and expense (SORIE) For the year ended 31 December 2006 2006 2005 Note Â£m Â£m Revaluation gains on properties in the course of development 4 22.3 48.4 Exchange movement arising on translation of international operations (34.3) 25.4 Actuarial gains/(losses) on defined benefit pension schemes 10.2 (4.0) Increase in value of available-for-sale investments 7.5 10.8 Tax on items taken directly to equity (10.9) (25.4) Net (loss)/gain recognised directly in equity (5.2) 55.2 Transfer to income statement on sale of available-for-sale investments (6.2) (1.1) Profit for the year 919.1 388.1 Total recognised income and expense for the year 907.7 442.2 Adoption of IAS 39 - (103.9) Total recognised income and expense for the year after restatement 907.7 338.3 Attributable to: - equity shareholders 905.8 334.8 - minority interests 1.9 3.5 907.7 338.3 Group balance sheet As at 31 December 2006 2006 2005 Note Â£m Â£m Assets Non-current assets Goodwill 0.7 0.7 Investment properties 12 5,090.0 4,440.1 Development and owner occupied properties 12 469.7 436.3 Plant and equipment 48.1 45.0 Investments in joint ventures and associates 84.5 100.1 Finance lease receivables 10.6 10.9 Available-for-sale investments 44.1 54.7 5,747.7 5,087.8 Current assets Trading properties 12 232.3 123.6 Trade and other receivables 185.7 162.8 Cash and cash equivalents 13 161.4 172.6 Current tax assets 5.1 8.1 Non-current assets classified as held for sale 12 56.6 - Finance leases receivables 0.2 0.1 Inventories 1.0 1.6 642.3 468.8 Total assets 6,390.0 5,556.6 Liabilities Non-current liabilities Borrowings 14 2,307.2 2,250.2 Deferred tax provision 15 298.5 635.9 Provisions for liabilities and charges 17.7 29.6 Trade and other payables 31.7 7.6 2,655.1 2,923.3 Current liabilities Borrowings 14 77.6 14.7 Tax liabilities 82.5 7.2 Trade and other payables 192.4 162.4 352.5 184.3 Total liabilities 3,007.6 3,107.6 Net assets 3,382.4 2,449.0 Equity Share capital 16 118.0 137.5 Share premium account 367.3 256.8 Own shares held (10.6) (6.9) Revaluation reserve 2,129.3 1,419.6 Other reserves 70.4 52.0 Retained earnings 698.3 581.4 Total shareholders' equity 17 3,372.7 2,440.4 Minority interests 9.7 8.6 Total equity 3,382.4 2,449.0 Net assets per ordinary share - basic 10 718p 579p - diluted 10 716p 542p Approved by the Board on 7 March 2007 Group cash flow statement For the year ended 31 December 2006 2006 2005 Note Â£m Â£m Cash inflow generated from operations 18(i) 137.6 237.3 Interest received on deposits and loans 13.1 10.3 Dividends received 36.5 4.3 Interest paid (130.7) (156.7) Dividends paid to preference shareholders (5.2) (10.8) Minority dividends paid (0.8) (4.2) Tax paid (11.6) (91.8) Additional pension scheme contributions - (16.2) Net cash inflow/(outflow) from operating activities 38.9 (27.8) Cash flows from investing activities Purchase of subsidiary undertakings - (9.3) Purchase and development of investment properties (262.6) (587.4) Sale of investment properties 158.3 118.6 Receipts on property swaps - 0.2 Purchase and development of property, plant and equipment (189.3) (142.4) Sale of property, plant and equipment 5.8 7.6 Purchase of available-for-sale investments (4.7) (11.9) Proceeds from disposal of available-for-sale investments 15.7 16.4 Proceeds from disposal of gas interests - 122.8 Investments and loans to joint ventures and associates (21.3) (16.5) Repayments of loans by joint ventures 9.2 - Proceeds from the disposal of investments in joint ventures - 20.8 Investment in term deposits - 185.6 Transfer to restricted deposit (3.9) - Net cash used in investing activities (292.8) (295.5) Cash flows from financing activities Dividends paid to ordinary shareholders (84.0) (69.0) Proceeds from new loans 66.9 644.7 Repayment of loans (10.1) (366.8) Net increase in other borrowings 264.6 62.1 Proceeds from the issue of ordinary shares 5.9 1.5 Purchase of own shares (4.5) (1.0) Net cash from financing activities 238.8 271.5 Net decrease in cash and cash equivalents (15.1) (51.8) Cash and cash equivalents at the beginning of the year 166.9 218.1 Effect of foreign exchange rate changes (0.8) 0.6 Cash and cash equivalents at the end of the year 13 151.0 166.9 Notes to the financial statements 1. Significant accounting policies Basis of preparation This preliminary report is audited. The financial information contained in this announcement does not constitute statutory accounts within the meaning of s240 of the Companies Act 1985. The statutory accounts for 2005, which were prepared under International Financial Reporting Standards (IFRS), have been delivered to the Registrar of Companies. The auditorsâ€™ opinion on these accounts was unqualified and did not contain a statement made under s237(2) or s237(3) of the Companies Act 1985. The financial information has been prepared in accordance with EU Endorsed International Financial Reporting Standards (IFRS), IFRIC Interpretations, and the Companies Act 1985 applicable to companies reporting under IFRS. In addition, the Group has also followed best practice recommendations issued by the European Public Real Estate Association (â€œEPRAâ€) as appropriate. Presentation of Group income statement The Group income statement has been presented by analysing the results into three columns; Adjusted Income and Expense, Adjustments and IFRS Income and Expense. In addition, the results of the property joint ventures and associates have been included immediately after net property rental income and profit on sale of trading properties. This has been adopted so as to explain more clearly the different aspects of the Group's financial performance. The adjustments column represents items of income and expense and related taxation and minority interest that have been recommended by the Best Practices Committee of EPRA as requiring adjustment in arriving at the EPRA adjusted measure of earnings per share, together with items classified as exceptional items. Exceptional items are significant items, separately disclosed for their size or incidence to enable a better understanding of performance, and primarily consist of significant premiums received on early surrender of leases, significant gains on the sale of assets and the UK Real Estate Investment Trust ("REIT") conversion charge. Details of amounts included within the adjustments column are set out in Note 11. Notes to the financial statements (continued) 2. Segmental analysis For management purposes the Group's primary reporting format is the geographic location of its properties as set out below. The secondary reporting format is by business sector. Continental Geographical segments UK Europe USA Group 2006 2005 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Segment revenue 237.7 222.8 70.0 55.3 76.4 127.1 384.1 405.2 Gross property rental income 193.2 183.6 35.4 25.2 76.2 97.2 304.8 306.0 Property operating expenses (32.6) (28.9) (7.2) (2.4) (17.8) (14.4) (57.6) (45.7) Net property rental income 160.6 154.7 28.2 22.8 58.4 82.8 247.2 260.3 Proceeds on sale of trading properties 1.2 1.1 34.6 30.1 0.2 26.1 36.0 57.3 Carrying value of trading properties sold (1.2) (0.5) (28.7) (23.7) - (10.0) (29.9) (34.2) Profit on sale of trading properties - 0.6 5.9 6.4 0.2 16.1 6.1 23.1 Share of profits/(losses) from property joint ventures and associates after tax 9.1 8.3 0.6 (0.2) 3.6 5.4 13.3 13.5 Revenue from sale of utilities and gas 43.3 38.1 - - - 3.8 43.3 41.9 Cost of sale of utilities and gas (41.2) (36.9) - - - (5.9) (41.2) (42.8) Net profit/(loss) from utilities and gas 2.1 1.2 - - - (2.1) 2.1 (0.9) Other investment income 5.0 4.0 - - 3.5 1.5 8.5 5.5 Administration expenses (20.7) (15.0) (4.6) (2.7) (3.6) (3.0) (28.9) (20.7) Property gains 374.9 312.1 22.6 8.1 139.5 103.3 537.0 423.5 Gain on disposal of joint ventures - - - - - 7.8 - 7.8 Gain from sale of gas interests - - - - - 99.7 - 99.7 Operating profit 531.0 465.9 52.7 34.4 201.6 311.5 785.3 811.8 Finance income 26.8 18.1 6.1 0.4 2.9 2.9 35.8 21.4 Finance costs (99.5) (225.2) (13.0) (6.6) (18.5) (19.1) (131.0) (250.9) Profit before tax 458.3 258.8 45.8 28.2 186.0 295.3 690.1 582.3 Taxation - current (79.0) 4.6 (2.6) (3.8) (7.7) (45.2) (89.3) (44.4) - deferred 399.5 (85.1) (11.1) (6.5) (70.1) (58.2) 318.3 (149.8) Net profit after tax 778.8 178.3 32.1 17.9 108.2 191.9 919.1 388.1 Adjusted profit before tax 78.4 66.8 19.9 20.9 44.4 31.8 142.7 119.5 Adjusted profit after tax 68.9 51.4 16.2 17.1 29.8 35.0 114.9 103.5 Property assets (1) 4,192.8 3,658.6 707.7 515.2 1,112.6 964.0 6,013.1 5,137.8 Other assets (excluding cash) 98.6 129.9 34.8 17.6 82.1 98.7 215.5 246.2 Segment assets 4,291.4 3,788.5 742.5 532.8 1,194.7 1,062.7 6,228.6 5,384.0 Deferred tax liability (7.1) (401.1) (70.8) (59.9) (220.6) (174.9) (298.5) (635.9) Other liabilities (excluding borrowings) (260.9) (158.8) (40.5) (25.2) (22.9) (22.8) (324.3) (206.8) Segment liabilities (268.0) (559.9) (111.3) (85.1) (243.5) (197.7) (622.8) (842.7) Net segment assets 4,023.4 3,228.6 631.2 447.7 951.2 865.0 5,605.8 4,541.3 Net external borrowings (1,350.3) (1,629.2) (366.0) (203.3) (507.1) (259.8) (2,223.4) (2,092.3) Net inter-segment borrowings 72.9 123.0 (57.6) (56.1) (15.3) (66.9) - - Net assets 2,746.0 1,722.4 207.6 188.3 428.8 538.3 3,382.4 2,449.0 Depreciation by segment 4.2 3.9 0.5 0.1 - 1.1 4.7 5.1 Capital expenditure in the year 300.2 406.9 202.7 136.9 128.0 258.1 630.9 801.9 1. The figure for property assets includes trading properties and the Group's share of joint ventures' properties. Notes to the financial statements (continued) 2. Segmental analysis (continued) Business segments Slough Property Trading Heat & Other investment property Power activities Group 2006 2005 2006 2005 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Segment revenue 296.4 302.7 44.4 60.6 43.3 38.1 - 3.8 384.1 405.2 Gross property rental income 296.4 302.7 8.4 3.3 - - - - 304.8 306.0 Property operating expenses (54.4) (45.1) (3.2) (0.6) - - - - (57.6) (45.7) Net property rental income 242.0 257.6 5.2 2.7 - - - - 247.2 260.3 Proceeds on sale of trading properties - - 36.0 57.3 - - - - 36.0 57.3 Carrying value of trading properties sold - - (29.9) (34.2) - - - - (29.9) (34.2) Share of profits from property joint ventures and associates after tax 9.5 13.0 3.8 0.5 - - - - 13.3 13.5 Revenue from sale of utilities and gas - - - - 43.3 38.1 - 3.8 43.3 41.9 Cost of sale of utilities and gas - - - - (41.2) (36.9) - (5.9) (41.2) (42.8) Other investment income - - - - - - 8.5 5.5 8.5 5.5 Administration expenses - - - - - - (28.9) (20.7) (28.9) (20.7) Property gains 537.0 423.5 - - - - - - 537.0 423.5 Gain on disposal of joint ventures - 7.8 - - - - - - - 7.8 Gain from sale of gas interests - - - - - - - 99.7 - 99.7 Operating profit 788.5 701.9 15.1 26.3 2.1 1.2 (20.4) 82.4 785.3 811.8 Finance income 35.8 21.4 35.8 21.4 Finance costs (131.0) (250.9) (131.0) (250.9) Profit/(loss) before tax 788.5 701.9 15.1 26.3 2.1 1.2 (115.6) (147.1) 690.1 582.3 Taxation 229.0 (194.2) 229.0 (194.2) Profit/(loss) for the year 788.5 701.9 15.1 26.3 2.1 1.2 113.4 (341.3) 919.1 388.1 Segment assets/(liabilities) 5,846.5 5,060.3 261.9 185.2 52.4 52.8 67.8 85.7 6,228.6 5,384.0 Segment liabilities (510.7) (757.8) (23.3) (10.2) (16.4) (11.4) (72.4) (63.3) (622.8) (842.7) Net segment assets 5,335.8 4,302.5 238.6 175.0 36.0 41.4 (4.6) 22.4 5,605.8 4,541.3 Net borrowings - - - - - - (2,223.4) (2,092.3) (2,223.4) (2,092.3) Net assets /(liabilities) 5,335.8 4,302.5 238.6 175.0 36.0 41.4 (2,228.0) (2,069.9) 3,382.4 2,449.0 Capital expenditure in the year 460.2 714.0 163.0 76.0 4.7 3.4 3.0 8.5 630.9 801.9 Slough Heat & Power supplies electricity, water and steam. There are no significant inter-segment trading activities. The total cost of sales amounts to Â£128.7 million (2005 Â£122.7 million) and comprises property operating expenses, the carrying value of trading properties sold and the cost of sale of utilities and gas. Notes to the financial statements (continued) 3. Administration expenses 2006 2005 Â£m Â£m Directors' remuneration 3.1 2.7 Compensation to director for loss of office 0.6 - Depreciation 1.2 0.9 Other administration expenses 24.0 17.1 Total administration expenses 28.9 20.7 4. Property gains The total property gains for the period are shown in the financial statements as follows: Â£m Â£m Income statement - valuation surpluses 532.2 409.1 - profits from the sale of investment properties 4.8 14.4 Total property gains per income statement 537.0 423.5 Statement of recognised income and expense - valuation surpluses 22.3 48.4 Total property gains 559.3 471.9 The valuation surpluses arise on the following properties: Investment properties 535.5 423.3 Development and owner occupied properties 19.0 34.2 554.5 457.5 Net valuation surpluses of joint ventures and associates included within share of joint ventures'and associates' profits on the face of the income statement 9.3 10.5 Total valuation surpluses 563.8 468.0 5. Share of profits from property joint ventures and associates Investment property Trading property Total 2006 2005 2006 2005 2006 2005 Â£m Â£m Â£m Â£m Â£m Â£m Revenue 7.8 9.5 37.2 7.6 45.0 17.1 Gross property rental income 7.8 9.5 0.8 0.4 8.6 9.9 Property operating expenses (1.0) (1.2) (1.0) (0.1) (2.0) (1.3) Proceeds on sale of trading properties - - 36.4 7.2 36.4 7.2 Carrying value of trading properties sold - - (29.9) (6.4) (29.9) (6.4) Finance costs (3.1) (2.7) (1.2) (0.5) (4.3) (3.2) 3.7 5.6 5.1 0.6 8.8 6.2 Valuation surpluses 9.3 10.5 - - 9.3 10.5 Profit before tax 13.0 16.1 5.1 0.6 18.1 16.7 Current tax (0.5) (0.9) (1.5) - (2.0) (0.9) Deferred tax (3.0) (2.2) 0.2 (0.1) (2.8) (2.3) Group share of profit after tax 9.5 13.0 3.8 0.5 13.3 13.5 Adjusted profit after tax (1) 3.2 4.8 3.8 0.5 7.0 5.3 1. Represents the Group's share of profit after tax and after EPRA adjustments. The total income and total expenses amount to Â£45.0 million (2005 Â£17.1 million) and Â£36.2 million (2005 Â£10.9 million) respectively. Notes to the financial statements (continued) 6. Finance income 2006 2005 Â£m Â£m Interest received on bank deposits 10.1 9.9 Fair value gains on interest rate swaps and other derivatives 4.7 1.5 Unwinding of discount on amounts receivable 0.9 1.4 Return on pension assets less unwinding of discount on pension liabilities 0.5 - Exchange differences 19.6 8.6 35.8 21.4 Fair value adjustments on derivatives equal Â£4.1 million income (Â£0.6 million finance costs, Â£4.7 million finance income). 2005 was Â£1.0 million expense (Â£ 2.5 million expense, Â£1.5 million income). 7. Finance costs 2006 2005 Â£m Â£m Interest on overdrafts and loans 131.2 116.9 Interest on convertible redeemable preference shares 4.1 13.2 Unwinding of discount on the pension liabilities less return of assets 0.2 0.5 Unwinding of discount on other provisions - 0.2 Total borrowing costs 135.5 130.8 Less amounts capitalised on the development of - trading properties (1.6) (0.7) - investment and development properties (21.9) (17.9) - other assets - (0.5) Net borrowing costs 112.0 111.7 Fair value losses on interest rate swaps and other derivatives 0.6 0.2 Swaption close out cost - 2.3 Borrowing close out cost relating to property disposals - 1.9 Exchange differences 18.4 8.8 Total finance costs before exceptional expense 131.0 124.9 Exceptional cost of refinancing - 126.0 Total finance costs 131.0 250.9 Notes to the financial statements (continued) 8. Tax charge/(credit) 2006 2005 Â£m Â£m Current tax United Kingdom Corporation tax charged at 30 per cent (2005 30 per cent) - - REIT conversion charge 81.9 - Over provision in earlier years (2.9) (4.6) 79.0 (4.6) International Current tax charge 11.9 15.4 Over provision in earlier years (1.6) (2.3) Tax charge on sale of gas interests (Tipperary) - 34.0 Tax charge on sale of investment properties - 1.9 10.3 49.0 Total current tax 89.3 44.4 Deferred tax Release on conversion to REIT (416.1) - Origination and reversal of timing differences 7.7 19.1 (Released)/charged in respect of property disposals in the year (0.4) 11.5 On valuation surpluses 65.5 130.5 Total deferred tax in respect of investment properties (343.3) 161.1 Released in respect of Quail West - 10.6 Other deferred tax 25.0 (21.9) Total deferred tax (318.3) 149.8 Total tax (credit)/charge on profit on ordinary activities (229.0) 194.2 9. Dividends 2006 2005 Â£m Â£m Ordinary dividends paid Interim dividend for the year ended 31 December 2006 @ 6.9 pence per share 32.4 - Final dividend for the year ended 31 December 2005 @ 11.0 pence per share 51.6 - Interim dividend for the year ended 31 December 2005 @ 6.5 pence per share - 27.4 Final dividend for the year ended 31 December 2004 @ 9.85 pence per share - 41.6 84.0 69.0 In respect of the current year, the directors propose that a dividend of 12.1 pence per ordinary share, amounting to Â£57.1 million will be paid to shareholders on 25 May 2007. This dividend is subject to approval by the shareholders at the Annual General Meeting (AGM). As required by IFRS this final dividend is not recognised in the financial statements. Preference dividends paid during 2006 of Â£5.2 million (2005 Â£10.8 million) are included within finance costs. Notes to the financial statements (continued) 10. Earnings and net assets per ordinary share Basic Diluted 10(i) - Earnings per ordinary share 2006 2005 2006 2005 pence pence pence pence Earnings per ordinary share e/a, f/c 201.8 91.7 196.0 85.0 Adjusted earnings per ordinary share g/a, h/c 25.1 24.0 25.1 24.3 10(ii) - Number of shares Weighted average In issue in year at year end The number of shares used in calculating earnings and net assets per share is : 2006 2005 2006 2005 millions millions millions millions Shares in issue 456.4 421.8 472.0 423.0 Less shares held by the ESOP (2.2) (1.7) (2.2) (1.7) Basic number of shares a, b 454.2 420.1 469.8 421.3 17. Statement of changes in equity Balance Restate Exchange Retained Other Shares Other Dividend Reserve Preference Balance 1 Jan for movement profit items issued paid Transfers share 31 Dec IAS 39 for in Conversions 2006 year SORIE (1) Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Revaluation reserve (2) 1,419.6 - (24.1) - 21.4 - (0.3) - 712.7 - 2,129.3 Share based payments reserve 2.9 - - - - - 2.1 - (0.5) - 4.5 Fair value reserve for AFS (3) 10.2 - (0.7) - (1.7) - - - (0.4) - 7.4 Translation and other reserves 38.9 - - - 20.3 - - - (0.7) - 58.5 Total revaluation and other reserves 1,471.6 - (24.8) - 40.0 - 1.8 - 711.1 - 2,199.7 Retained earnings 581.4 - (29.1) 916.5 3.2 - - (84.0) (711.1) 21.4 698.3 Ordinary share Capital 105.7 - - - - 0.5 - - - 11.8 118.0 Preference shares 31.8 - - - - - - - - (31.8) - Share premium 256.8 - - - - 5.4 - - - 105.1 367.3 Own shares held (6.9) - - - - - (3.7) - - - (10.6) Total equity attributable to equity shareholders 2,440.4 - (53.9) 916.5 43.2 5.9 (1.9) (84.0) - 106.5 3,372.7 Minority interests 8.6 - (0.7) 2.6 - - - (0.8) - - 9.7 Total equity 2,449.0 - (54.6) 919.1 43.2 5.9 (1.9) (84.8) - 106.5 3,382.4 2005 Revaluation reserve (2) 1,090.8 - 9.3 - 29.6 - - - 289.9 - 1,419.6 Share based payments reserve 0.3 - - - - - 2.6 - - - 2.9 Fair value reserve for AFS (3) - 4.1 0.7 - 6.5 - - - (1.1) - 10.2 Translation and other reserves 36.1 2.0 (0.2) - (0.1) - - - 1.1 - 38.9 Total revaluation and other reserves 1,127.2 6.1 9.8 - 36.0 - 2.6 - 289.9 - 1,471.6 Retained earnings 565.2 (18.7) 15.3 385.1 (7.8) - - (69.0) (289.9) 1.2 581.4 Ordinary share Capital 104.8 - - - - 0.1 - - - 0.8 105.7 Preference shares 34.0 - - - - - - - - (2.2) 31.8 Share premium 339.1 (91.0) - - - 1.4 - - - 7.3 256.8 Own shares held (5.2) - - - - - (1.7) - - - (6.9) Total equity attributable to equity shareholders 2,165.1 (103.6) 25.1 385.1 28.2 1.5 0.9 (69.0) - 7.1 2,440.4 Minority interests 19.4 (0.3) 0.8 3.0 - - (9.9) (4.4) - - 8.6 Total equity 2,184.5 (103.9) 25.9 388.1 28.2 1.5 (9.0) (73.4) - 7.1 2,449.0 1. SORIE is the term used for the "Statement of recognised income and expense". Items in the SORIE column are net of tax. 2. The revaluation reserve is shown net of deferred tax. 3. AFS is the term used for "Available-for-sale investments" and is shown net of deferred tax. Notes to the financial statements (continued) 18(i) Reconciliation of cash generated from operations 2006 2005 Â£m Â£m Operating profit 785.3 811.8 Less gain from sale of gas interests separately disclosed - (99.7) Adjustments for: Depreciation of property, plant and equipment 4.7 5.1 Share of profits from joint ventures and associates (13.3) (13.5) Profit on sale of properties (4.8) (14.0) Profit on disposal of property, plant and equipment - (0.4) Profit on disposal of joint ventures - (7.8) Revaluation surplus on investment properties (532.2) (409.1) Other income reallocated (8.5) (5.5) Other provisions (1.1) (17.8) 230.1 249.1 Changes in working capital: (Increase)/decrease in trading properties (108.8) 14.3 Decrease in inventories 0.6 0.3 Increase in debtors (13.9) (21.6) Increase/(decrease) in creditors 29.6 (4.8) Net cash inflow generated from operations 137.6 237.3 At 1 Cash Non-cash Net debt Exchange At 31 18(ii) - Analysis of net January flow adjustment * disposed of movement December debt 2006 2006 Note Â£m Â£m Â£m Â£m Â£m Â£m Bank loans and loan capital (2,259.2) (321.4) (1.2) 106.5 97.0 (2,378.3) Bank overdrafts (5.7) (0.9) - - 0.1 (6.5) Total borrowings 14 (2,264.9) (322.3) (1.2) 106.5 97.1 (2,384.8) Cash in hand and at bank 13 172.6 (10.3) - - (0.9) 161.4 Net debt (2,092.3) (332.6) (1.2) 106.5 96.2 (2,223.4) * The non-cash adjustment relates to the amortisation of issue costs offset against borrowings. GLOSSARY OF TERMS Adjusted earnings per share EPS based on adjusted profit before tax and excluding deferred tax on investment properties. Adjusted net asset value per share NAV per share adjusted to add back deferred tax associated with investment properties, as recommended by EPRA. Adjusted profit before tax Reported profit before tax, after reflecting EPRA adjustments and excluding items which are exceptional by virtue of their size or incidence. Book value The amount at which assets and liabilities are reported in the accounts. Combined portfolio The investment, development and trading properties of the Group, including the relevant share of joint ventures' properties. Development pipeline The Group's current programme of developments authorised or in the course of construction at the balance sheet date, together with potential schemes not yet commenced on land owned or controlled by the Group or its joint ventures. Diluted figures Reported amounts adjusted to reflect the dilutive effects of convertible preference shares and of shares held by the employee share ownership plan trusts. Dividend cover Adjusted earnings per share divided by the ordinary dividend per share. Earnings per share (EPS) Profit after taxation attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue during the year. EPRA adjustments Adjustments to income statement and balance sheet amounts reported under IAS arising from adopting the recommendations of the Best Practices Committee of the European Real Estate Association ("EPRA"). The adjustments to income statement amounts principally relate to the exclusion of valuation gains and losses, whilst the balance sheet adjustments relate to the exclusion of deferred tax on investment properties. Equivalent yield The internal rate of return from an investment property, based on the value of the property assuming the current passing rent reverts to ERV and assuming the property becomes fully occupied over time. Estimated rental value (ERV) The estimated annual market rental value of lettable space as determined biannually by the Company's valuers. This will normally be different from the rent being paid. Estimate to complete (ETC) Costs still to be expended on a development or redevelopment to practical completion (not to complete lettings), including attributable interest. Finance lease A lease that transfers substantially all the risks and rewards of ownership from the lessor to the lessee. Gearing (net) Total borrowings, including bank overdrafts, less short-term deposits, corporate bonds and cash, at book value, plus non-equity shareholders' funds as a percentage of equity shareholders' funds. Gross rental income Contracted rental income recognised in the period, including surrender premiums, interest receivable on finance leases and service charge income. Lease incentives, initial costs and any contracted future rental increases are amortised on a straight line basis over the lease term Hectares (ha) The area of land measurement used in this report. The conversion factor used, where appropriate, is 1 hectare = 2.471 acres. Initial yield Annualised current passing rent expressed as a percentage of the property valuation. IPD Investment Property Databank. Joint venture An entity in which the Group holds an interest and which is jointly controlled by the Group and one or more partners under a contractual arrangement whereby decisions on financial and operating policies essential to the operation, performance and financial position of the venture require each partner's consent Net asset value (NAV) per share Equity shareholders' funds divided by the number of ordinary shares in issue at the period end. Net rental income Gross rental income less ground rents paid, service charge expenses and property operating expenses Over-rented Space that is let at a rent above its current ERV. Passing rent The annual rental income currently receivable on a property as at the balance sheet date (which may be more or less than the ERV - see over-rented and reversionary). Pre-let A lease signed with an occupier prior to completion of a development. REIT A qualifying entity which has elected to be treated as a Real Estate Investment Trust for tax purposes. In the UK, such entities must be listed on a recognised stock exchange, must be predominantly engaged in property investment activities and must meet certain ongoing qualifications. Slough Estates plc and its UK subsidiaries have elected for REIT status from 1 January 2007. Reversionary or under-rented Space where the passing rent is below the ERV. Reversionary yield The ERV of a property, expressed as a percentage of the property's valuation. In the case of portfolio data, the reversionary yield assumes all properties are fully occupied. Square metres (sq m) The area of buildings measurements used in this report. The conversion factor used, where appropriate, is 1 square metre = 10.639 square feet. Total development cost All capital expenditure on a project including the opening book value of the property on commencement of development, together with all finance costs capitalised during the development. Total property return The valuation surplus, profit/(loss) on sale of investment properties and net rental income in respect of investment properties, expressed as a percentage of the closing book value of the investment property portfolio. Total return Dividends per share plus annual growth in diluted adjusted net asset value per share, expressed as a percentage of the opening diluted adjusted net asset value per share. Trading properties Properties held for trading purposes and shown as current assets in the Balance Sheet. Voids The area in a property or portfolio, excluding developments, which is currently available for letting

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