Final Results

Capital & Regional PLC 20 March 2001 PART 1 20th March 2001 2000 PRELIMINARY RESULTS Capital & Regional plc, the specialist retail and leisure property company, today announces its preliminary results for the year ended 25th December 2000. Highlights * Pre-tax profit up 5% to £13.4m (1999: £12.8m) * Net rental income up 25% to £57m (1999: £45.5m) * Earnings per share increased by 10% to 13.4p (1999: 12.2p) * Fully diluted net assets per share decreased by 4% to 360p (1999: 376p) * Dividends per share up 10% to 5.5p (1999: 5.0p) * Disposals to date of £246m * £62m of trading and investment assets during year, including CenterPoint shares (£25m). * £184m since year end including industrial portfolio (£89.6m), Westway Shopping Park (£43.1m), St Andrew House (£19.6m), Sauchiehall Centre (£ 31m). * Capital & Regional's management approach led to its shopping centre portfolio achieving 13.3% income and 5.2% rental value growth during year. * Retail park portfolio in transitional phase focused on creating significant 'destination' schemes of over 150,000 sq ft which attract Big Box anchor tenants requiring major units of up to 130,000 sq ft. Lettings of 750,000 sq ft, including 10 destination stores were agreed at year end. Commenting on the results, Martin Barber, Chief Executive of Capital & Regional said: 'Despite adverse sentiment towards the retail sector over the past fifteen months, Capital & Regional has demonstrated a strong income performance within our shopping centre portfolio. This has been driven forward by our management intensive approach and ability to generate market share for our retailers. Our retail park operations are transforming secondary schemes into prime destination parks anchored by 'Big Box' anchor retailers. This year's temporary reduction in value, should be seen as an investment in the substantial growth, which will be created over the next few years. The opening of our first Xscape in Milton Keynes has been extremely successful and we look forward to our future UK and European projects. We are confident of maintaining satisfactory and sustainable returns to shareholders over the years to come.' - ends - For further information please contact: Martin Barber, Chief Executive, Capital & Regional 020 7932 8000 Lynda Coral, Financial Director, Capital & Regional 020 7932 8000 Sarah Carrell, Corporate Communications, Capital & Regional 020 7932 8000 A copy of this statement and the analyst/institutional presentation will be available on our corporate website - www.capreg.com. CHAIRMAN'S AND CHIEF EXECUTIVE'S REVIEW Results and Dividend Profit before tax increased by 5% to £13.4m (1999: £12.8m). Fully diluted net assets per share decreased by 4% to 360p from 376p. Fully diluted net assets per share, after adjustments for deferred tax and debt valuation, are 323p against 330p last year. Earnings per share increased by 10% to 13.4p (1999: 12.2p). A final dividend of 3.25p is proposed, making a total for the year of 5.5p per share (1999: 5.0p), an increase of 10%. Over the past five years, Capital & Regional has achieved compound net asset value growth of 14% per annum. Overview Over the past fifteen months, we have completed the disposal of £246m of non-core assets. During the year, £62m of trading and investment assets were sold, including CenterPoint Trust shares and a further £184m of properties have been disposed of since the year end. This has almost completed our strategy to transform Capital & Regional from a generalist property company, to one which is entirely focused on the retail and leisure sectors, namely shopping centres, retail parks and Xscape. Capital & Regional owns properties, which attract consumer visits and spending. We are in the process of creating 'destinations', to become recognised brands and offer more than just shopping, but also leisure and entertainment; an 'experience' for the consumer. Our focus on the retail and leisure sectors capitalises on our specialist skills and strong relationships with our tenants. We understand their requirements and are working with them to maximise opportunities and profitability. Shopping Centres Within our shopping centre portfolio, we have achieved a 13.3% income growth and 5.2% growth in estimated rental value. The centres are benefiting from our management approach, which is to work in partnership with our retailers to generate increased footfall and sales. Our properties are of a substantial size and are covered to provide a controlled environment. They are either dominant in a good catchment, or a good second centre in a major metropolitan area. We are able to increase market share for our retailers through creative and innovative marketing and promotion. At our centres, vacancies are at an all time low. We are achieving good income and rental value growth and tenant demand is strong. It is therefore disappointing that valuation yields have moved up and adversely effected capital values this year. However, Capital & Regional strongly believes that the long-term benefits of investing in this sector outweigh the short-term fluctuations in the investment market. Retail Parks We have assembled a substantial portfolio of retail parks, originally developed when a more relaxed planning environment existed. Now, with strong tenant demand and a planning regime that restricts further out-of-town development, we are exploiting our parks' planning consents to provide the latest store formats required by retailers. The portfolio of approximately 1.4m sq ft is generating many opportunities for redevelopment to include Big Box formats, thereby creating significant destination parks. This redevelopment includes complex planning consents or amendments to planning, lease surrenders and land acquisition. This held back financial performance and adversely influenced values last year. On completion of this transitional phase, we envisage significant value creation over the next two years. Our experienced out-of-town management team is also proving successful, not only in achieving planning consent on our existing parks, but also identifying and obtaining control of sites where planning can be gained. Examples of these are at Oldbury and Auchinlea in Glasgow, where major development schemes are being progressed. Xscape The opening of Xscape at Milton Keynes was one of the highlights of the Company's year. Around an exciting 'real snow' ski slope, a vibrant retail and leisure offer has been built, including a 16 screen multiplex cinema, family entertainment centre, ten-pin bowling, climbing walls and a mix of restaurants and bars. Initial trading from our tenants has been most encouraging and we are pursuing three further projects in the UK and Continental Europe. Capital Strategy The disposal programme already outlined has also allowed us to reduce our level of gearing on a fully diluted basis from 134% at 25th December 1999 (159% at December 2000) to 110%, even after purchasing 10% of the Company's issued share capital, representing 9,541,500 ordinary shares. We continue to note the disparity between the valuation on our shares and the market value of the underlying assets. Therefore, at an Extraordinary General Meeting on 15th March 2001, shareholder approval was granted to purchase, for cancellation, a further 13,221,458 ordinary shares, representing 14.9% of the outstanding share capital. The Board will continue to review the Company's share purchases in light of the share price and level of gearing for the long-term interests of shareholders. We are convinced that joint ownership is attractive for investors and Capital & Regional. Investor partners can harness our skills in these management-intensive sectors of the property investment and development market. Using this approach, Capital & Regional leverages its equity and management to produce higher returns for shareholders. Over the years, Capital & Regional has had highly successful partnerships. We still believe there is a strong rationale for a specialist UK shopping centre operator of scale, working closely with occupiers to create exciting and lively places to visit, shop and be entertained. The Company will continue to explore opportunities to establish partnerships in this area. Our Xscape scheme in Milton Keynes is a joint venture project and we are pursuing partnership opportunities for the further schemes anticipated. Three joint venture partnerships for single properties have been entered into recently. We have acquired, in equal partnership with Hermes Property Unit Trust, the Maybird Centre Retail Park and adjoining Regal Road Industrial Estate in Stratford-upon-Avon. The Company has also entered into a 50:50 joint venture with Stannifer, the investment and development group, to re-develop the Sauchiehall Centre in Glasgow. In addition, we have entered into an exclusivity agreement to form a 50:50 joint partnership with Capital Shopping Centres, the leading regional shopping centre business, to fund and develop the Xscape concept at Braehead, Glasgow, subject to the fulfilment of a number of conditions, including planning. Management Capital & Regional has created strength and depth within its operating teams. Our people come from asset management, construction, development, marketing and retail backgrounds. They are using their expertise to drive the long term value of our properties forward in a dynamic and innovative way, treating the constant changes in the market as opportunities to enhance the quality and rental income from our assets. On behalf of the Board and all our shareholders, we would like to express our sincere thanks to all our management and staff for their excellent contribution to the Company during this year. Outlook Capital & Regional is confident that our concentration on re-shaping and re-positioning our properties, and following that process with intensive business management to attract consumers and operators, is building significant value. With both private buyers and institutional investors beginning to show interest again in shopping centre investments, we would not expect yields this coming year to move out any further. We anticipate further rental growth within our portfolio with positive value increases. As far as our retail park portfolio is concerned, the temporary reduction in values is largely of a transitional nature and we expect significant value creation over the next two years. Viscount Chandos Martin Barber Chairman Chief Executive OPERATING REVIEW Our Market The year 2000 has been a year of mixed fortunes. During the first half of the year, the market experienced virtual hysteria about internet retail and its impact on the traditional retail environment. By the year end, sentiment had reversed due to the well publicised e-tailer failures. Simultaneously during the period, many established retail groups had difficulties. The combination of these factors caused nervousness amongst investors resulting in an adverse yield shift across the High Street and shopping centre investment market. Within our shopping centre portfolio, revenues rose significantly, with underlying rental values increasing by over 5%. This demonstrates Capital & Regional's ability to drive forward growth for the retailers in our well-managed centres, through taking market share from the High Street and surrounding properties. On the retail parks, values have polarised between the smaller parks and the larger destination parks where there is greater potential for rental growth. Many of our existing properties have the potential to fulfill tenant requirements for larger stores. These parks should not be judged on one year's financial performance as they are in a transitional phase of achieving possession, planning and land assembly. We have contracts and options on sites where we are actively progressing town planning, with significant success already achieved. These have not been re-valued for balance sheet purposes and have considerable latent value. Our Xscape scheme in Milton Keynes is proving a tremendous success with the public and leisure and specialist lifestyle retailers. This unique and exciting destination can be replicated to our mutual benefit. We have identified other locations in the UK and Continental Europe, where we believe there is a substantial market for this concept. Our Portfolio At 20th March 2001, Capital & Regional's wholly owned investment portfolio of £738m, plus its half share of properties in joint ventures of £74m totalled approximately £812m. This comprises ten shopping centres (60%), twelve retail parks (27%) Xscape, Milton Keynes (5%), industrial and other (8%), totalling over four million sq ft with approximately three million sq ft of future developments. The following reviews for shopping centres, retail parks and Xscape outline in detail the progress in these three business areas. OPERATING REVIEW SHOPPING CENTRES Overview The year 2000 saw further positive results from our revenue growth strategies applied across our shopping centre portfolio. Net income increased by 13.3% over the year by £4.6m to £39.2m, producing a net income return of 6.3%. Capital expenditure for the year was £17.5m. Estimated rental value increased by a further 5.2% to almost £47m. Adverse market sentiment to retail property portfolios resulted in a shift in valuation yields producing a negative capital return of 3.4%. The year was very active, with Capital & Regional's management team working closely with retailers to provide solutions to their requirements in the ever changing retail environment, to maximise mutual profitability. Excluding rent reviews, there were 176 transactions, representing £8.77m of annual income across the portfolio of 497 units. Of this, approximately £4.27m were new lettings or renewals, £2.88m vacations, and £1.62m reconfigurations. The void level fell by 1.4% to 3.8% of estimated rental value. This level of activity is bringing us ever closer to our retailer base, assisting us in the understanding of both their problems and opportunities. We intend to build on this mutual understanding to further develop both the effectiveness of our management franchise and revenue streams. Ancillary income grew by 20.7% in 2000, representing approximately 4% of net rent level. Our average weekly footfalls increased by 2%, (up by 50,000 visits) to 2.4 million visits per week, despite major re-development at Shopping City, Wood Green and the demolition of the Bull Ring adjacent to our Pallasades Shopping Centre in Birmingham which has temporarily depressed footfall. We are committed to a 'fully serviced' offer for both retailers and shoppers. We are able to produce clean, secure, lively shopping environments at competitive costs. Our average budgeted 2001 service charge per square foot is 20% less than the relevant JLL Oscar benchmark, excluding marketing where we plan to spend some 19% more than this peer group. In this way, we hope to continue to grow relevant footfall within our malls, giving our retailers increasing profit opportunity at cost effective, value for money, occupational costs. Our five year Environmental Statement for the centres, targets energy consumption savings of 15% over the period to 2004. During 2000, consumption reductions of 8% and 21% were made on electricity and gas respectively. Our average Zone A rents across the portfolio remain at discounts to the principal competition. This combined with our business management and partnership approach to our assets augers well for continued revenue growth. Last year saw our Community Mall concept taking shape, both locally and nationally. Portfolio-wide initiatives like supporting Breast Cancer Awareness Month, raised £20,000 in the malls and The Giving Tree at Christmas providing 4,950 toys for local needy children. These were complemented by scores of projects to benefit local community groups such as schools and charitable organisations. These efforts are enthusiastically supported by both our retailers and shoppers alike, and when aligned to an attractive, accessible and vibrant retail experience, place our malls at the heart of their local communities. Our recently announced agreement with NTL to enable unhindered mobile telephone use within the centres and our planned mall based website programme are designed to reinforce this position. Portfolio Review The Pallasades, Birmingham The Pallasades continues to perform well, given its increasing position as a pivotal 'gateway' to New Street Station and central Birmingham. Negotiations with Railtrack for the major refurbishment and integration of the retail and station facilities have not yet progressed to conclusion. We are therefore continuing to both actively manage the existing centre, whilst re-designing our proposals to accommodate a first-phase retail development. Shopping City, Wood Green The opening of the 12 screen CineWorld multiplex cinema with associated restaurants and mall improvements have confirmed Shopping City as a major shopping and leisure destination in its catchment. Next, HMV, TK Maxx, Peacocks, Woolworths and MFI, together with several local independent retailers, have all been attracted during 2000. Works are scheduled to complete in Easter 2001, with further restaurants opening by the Summer. The Ashley Centre, Epsom At The Ashley Centre, Epsom, a number of strategic surrenders have been negotiated. In the main, the units have been re-let to Starbucks, Body Shop, Phones 4 U and the dominant local photographic retailer, Epsom Photographic. Works have also started on a pre-let, two-level catering area introducing McDonald's to the scheme together with an expansion of local coffee shop operator, Cafe la Mocha. Pre-let discussions continue with both existing and new retailers for a refurbishment and extension to West Square. Sunday trading has continued post Christmas and is increasing in popularity. The Howgate Centre, Falkirk The improvements completed in late 1999 to revitalise the Marks & Spencer atrium, resulted in the desired letting activity to MVC, First Sport, Cardwarehouse and the Bank of Scotland. We have progressed both dwell time and rent by approximately 40%, in what was previously a quieter area of the Centre. Initial curiosity visits to the newly opened competition at Stirling and Livingstone appear to be stabilising and we continue to work to satisfy demand from major retail groups. Net car park income increased by 14.5%, as a result of the installation of a pay-on-foot management system. Selborne Walk, Walthamstow At Selborne Walk, new lettings to Boots, Timpson's and Blue Inc have been concluded, with Thomas Cook in solicitor's hands. Occupier pre-let discussions continue for a planned retail and leisure extension. The Trinity Centre, Aberdeen The Trinity Centre remained fully let throughout 2000, which has held back performance. We are in negotiations with adjacent owners to expand the Centre. Sauchiehall Centre, Glasgow Capital & Regional has entered into a 50:50 joint venture with Stannifer to re-develop the Sauchiehall Centre and increase the retail space by 10% to 200,000 sq ft, in large unit format. The majority of the newly created space will be taken by Primark and will be the fashion retailer's first store in Glasgow City centre. Existing tenants, TK Maxx, Superdrug and WH Smith will be extending their units. Liberty 2, Romford The town's retail attraction is to be boosted by the imminent opening of the Brewery retail and leisure scheme and Hammerson's refurbishment proposals for the adjacent Liberty 1. Our contribution to this renaissance is the acquisition of the adjacent ' Dolphin' site and the associated planning application for a mixed-use scheme comprising residential, hotel and 60,000 sq ft of retail. The Alhambra Centre, Barnsley The acquisition of the former Co-op 'Living' Department store and its subsequent conversion for major occupiers Primark and TK Maxx, materially boosted the Centre's local popularity and has proved the catalyst for further letting interest. Government funding was secured to contribute to the cost of car park refurbishment. RETAIL PARKS Strategic Objectives Our strategic objectives should be considered against the background of the current structural changes taking place in the evolving retail warehouse market. The Evolution of Retail Parks Since the origins of the retail warehouse market in the early 1980s, we have seen a number of changes. The converted warehouse on an industrial estate, the purpose built retail warehouse unit and eventually the retail park. The boom of the late 1980s led to a considerable number of retail parks being developed in an ad-hoc fashion all over the country. This was largely as a result of the government's laissez-faire planning attitude and the consumers' positive response to car-borne shopping. The last two years have seen a period of intense consolidation amongst the retail warehouse operators. The advent of Big Box destination stores, has led to a small number of retailers dominating sub-sectors of the market. B&Q and Homebase dominate the DIY market, with units of between 80,000 and 130,000 sq ft. B&Q alone require a further one hundred stores in this size range. Comet and Dixons, through their Currys and PC World brands, dominate the electrical market in units of between 20,000 and 45,000 sq ft. Comet requires a further 20 units per annum in this size range over the next five to ten years. The furniture market is dominated by Ikea, MFI and DFS. Ikea has recently announced an aggressive expansion campaign, and DFS remain as expansive as ever. The discount clothing market is dominated by Matalan. They are actively seeking units from between 30,000-45,000 sq ft. A new general merchandise category has emerged with the entry of Woolworths through their Big W format and anticipated Asda Wal-Mart, retailing from units of between 90,000 and 100,000 sq ft. Big W has stated that they require at least 60 stores within the next five years. Sports retail is dominated by JJB Sports and Sports Soccer in units of between 10,000 and 15,000 sq ft. The above retailers spend considerable amounts on advertising and publicity, either through TV and press campaigns and/or through catalogues. Smaller complementary retailers in each of the subsections are attracted to the destination retailer and are prepared to pay significant rents to be represented alongside them. The above factors have led to the advent of the destination retail park. The Destination Retail Park A destination park can be defined as a retail park of over 150,000 sq ft, located in a town with a population of in excess of 50,000. It is our belief that where a town currently has two, three or more retail parks of between 70,000 and 120,000 sq ft, these will be replaced by one or two parks of between 150,000 and 250,000 sq ft. These will accommodate destination Big Box retailers with complementary retailers being 'forced' to relocate alongside. Our future success will be derived from fulfilling the requirements of these destination Big Box retailers, either by transforming our existing portfolio or through new development to create retail parks in excess of 150,000 sq ft. According to Verdict Research, 'where the Big Box retailers come together, they will create 'power nodes' on the retail landscape that act as a regional draw for consumers. The impact of these 'power nodes' will be as significant on existing retail parks out-of-town, as it has been in the high street.' Existing Portfolio Our existing retail park portfolio currently comprises of 1.4m sq ft. During the year and to date, we sold two retail parks, which did not fulfil our destination park criteria and will continue to review our portfolio to ensure its meets our criteria. The existing retail park portfolio comprises the following: Existing Sq Ft Proposed Sq Ft Aylesbury 95,000 200,000 Beckton 140,000 190,000 Hull 180,000 255,000 Renfrew 230,000 250,000 Stratford 155,000 230,000 Swansea 80,000 160,000 Wembley 230,000 230,000 Other (smaller parks) 330,000 330,000 Total 1,440,000 1,845,000 To date, agreements to lease have been concluded for 620,000 sq ft of retail floor space, including nine destination stores. £7.0m per annum of rent has been committed, of which £3.3m has been committed unconditionally. Planning consents have been obtained for 200,000 sq ft of the 405,000 sq ft required. We are close to completing the successful transition of three of our existing larger retail parks into destination parks at Beckton, Hull and Swansea, with the dominant anchors being B&Q or Big W and will shortly commence the transition of Wembley with a new 100,000 sq ft Homebase. Portfolio Review Aylesbury We have now entered into conditional contracts to acquire the majority of the land required to undertake this 200,000 sq ft redevelopment. We are currently negotiating for our anchor DIY pre-lets, and intend submitting a planning application during the second quarter. The site has already been allocated and adopted by the local planning authority for retail warehouse use. Beckton This 190,000 sq ft scheme is now completely pre-let to retailers including Big W and Matalan and the necessary vacant possession has been achieved. A technical amendment to a planning consent is required, before development can commence, which we envisage will be in the second quarter of the year. Hull Construction of a 130,000 sq ft B&Q and garden centre has commenced. Further pre-lets to destination furniture and electrical stores, DFS and Comet have also been achieved. A small revision to the existing planning consent is anticipated during the second quarter, and the refurbishment of the balance of the existing retail park should then commence. Further phases of retail and leisure on this 50 acre site are proposed. Renfrew, Glasgow We anticipate submitting a planning application during the first half of the year for an extension to our existing 224,000 sq ft retail park of a further 26,000 sq ft of retail and leisure space. We also intend to refurbish a further 45,000 sq ft. Stratford-upon-Avon Our joint ownership of this 155,000 sq ft park with Hermes Property Unit Trust has commenced well. This scheme is capable of an extension of up to 230,000 sq ft. Terms have been agreed with Matalan to extend their existing 30,000 sq ft store to 42,000 sq ft and further lettings are under negotiation. Swansea Pre-lets for 137,000 sq ft of our proposed 160,000 sq ft scheme have been achieved with our destination retailer being Big W. Planning consent has also been achieved. Upon completion of further legal agreements, redevelopment is planned to commence during the second quarter. New Developments Despite the Government's clampdown on out-of-town retail schemes, over the last two years, we have successfully assembled a development portfolio comprising approximately one million sq ft, which we believe to be unequalled in this sector in the UK. The availability of an undeveloped large site with planning consents for a destination retail park is extremely difficult to achieve. In order to be in a position to carry out the development at Oldbury, we have been involved in a complicated procedure of land assembly, involving 22 separate legal interests. We have obtained planning consent for 250,000 sq ft of retail and leisure space, with proposals for a further 140,000 sq ft. At Auchinlea, Glasgow, we have worked closely with both the Glasgow City Council and the Scottish Executive in devising an urban regeneration scheme, which has helped us successfully obtain the planning consent for 600,000 sq ft of retail and leisure floor space. We also have proposals for a further 140,000 sq ft. Auchinlea/Junction 10, Glasgow Our aim is to create Scotland's premier destination retail and leisure park. Initial response from occupiers to our proposed scheme involving 300,000 sq ft of A1 non-food, 130,000 sq ft food store, 170,000 sq ft of leisure including bars, a restaurant and hotel, has been encouraging. Oldbury A detailed planning consent has been obtained for 250,000 sq ft of retail and leisure. A pre-let has been exchanged with Homebase for 130,000 sq ft. We now propose to develop this site in two phases, and remain hopeful of obtaining the balance of the planning consent during the second half of the year. Overview Our retail park investments are currently in the process of transition from a diverse secondary portfolio into a focused, prime destination parks. Whilst in this transitional phase, during December 2000, the capital value of our retail park investment properties decreased by 5.5%. A number of factors led to what we believe to be this temporary fall in value. Strategic vacancies of £2.7m per annum have significantly contributed to our high level of voids, currently 23% of estimated rental value. The equivalent yield on our existing portfolio at the year end was 7.1%, with an adverse yield shift on our smaller parks of 0.6%. There have been delays in obtaining new or revised planning consents at Swansea and Beckton. Since the year end, we have obtained an open non-food planning consent at Swansea, and anticipate obtaining consent at Beckton during the second quarter of 2001. Our aim is to create destination parks where retailers 'have to be there'. This will lead to significant future rental growth. Also, the ever increasing restriction in obtaining further planning consents will improve the value of the major parks. Upon completion of our programme of extensive refurbishment, extensions and new development, we estimate receiving additional income in the region of £23m per annum, following anticipated capital expenditure of approximately £239m. Capital & Regional believes that there are in excess of a hundred towns and/or cities in the UK which satisfy the criteria for a destination retail park, and it is our aim to obtain as many opportunities as possible. We are of the opinion that the acquisition and funding of further investments and developments capable of being transformed into a destination park, can also be achieved through joint ownership. Many pension funds and institutions, who already own the properties could benefit from our specialised management capabilities. We announced our first joint ownership, with Hermes Property Unit Trust for a park at Stratford-upon-Avon. We also believe that additional non-property income value can be obtained through the branding of destination parks. We have been researching this for some eighteen months, and will shortly announce our proposals in respect of our destination parks. Capital & Regional has the specialist expertise and entrepreneurial management skills at the forefront of this sector and are well placed to maximise on the structural changes taking place. XSCAPE Overview The year 2000 saw the successful opening of our first Xscape at Milton Keynes. This unique entertainment centre was developed jointly with funds managed by PRICOA Property Investment Management. The scheme is now 97% let. Xscape has proven very popular with the consumer, with over three million visitors already enjoying this unique mix of snow centre, multi-screen cinema, family entertainment centre, indoor rock climbing, numerous restaurants, bars and urban lifestyle retailing. The committed income at December 2000 was £3.8m with £5.5m expected by December 2001. The estimated income value is £6.6m. As a result of the success of Milton Keynes, we are actively seeking to selectively roll-out the concept both in the UK and Continental Europe. Significant progress has already been made on the development programme. Development Programme Castleford At Castleford, on the M62 adjacent to the Freeport factory outlet centre, we have the benefit of an option to acquire 22 acres of land with planning consent for a 330,000 net sq ft Xscape. Cine-UK has already exchanged Agreements to Lease for the anchor multiplex cinema and terms agreed with occupiers for a further 30% of the floor space. We hope to commence construction of this second Xscape during the second half of 2001. Braehead Since the year end, Capital & Regional has announced that it has entered into an exclusivity agreement with Capital Shopping Centres, to form a 50:50 joint partnership to fund and develop the Xscape concept at Braehead, Glasgow, subject to the fulfilment of a number of conditions, including planning. The scheme will comprise of approximately 400,000 net sq ft and is situated adjacent to their existing and successful regional shopping centre. A number of operators at Milton Keynes have confirmed their intention to locate with us in Braehead. We are excited at the prospect of working with Capital Shopping Centres, in order to create what will be our third Xscape project in the UK. Castrop-Rauxel (the Ruhr), Germany At our first continental Europe scheme at Castrop-Rauxel, significant progress has been made in our endeavours to obtain planning consent for a scheme comprising of up to 1,000,000 net sq ft on a site of 35 acres. We anticipate receiving planning zoning approval during the Summer, with a view to detailed planning consent being granted during early 2002. Although we have yet to market the scheme, preliminary interest from a number of anchor tenants to operate the snow, family entertainment centre and major sports facilities has been strong. Pathe has formally agreed to lease a 120,000 sq ft, 5,000 seat mulitplex cinema which will be the largest in Germany. Summary These opportunities that exist in our portfolio and in the market as a whole offer us tremendous scope for the future. We will continue to work with our tenancy base to explore opportunities for them to trade profitably in our shopping centres, retail parks and Xscapes. Looking at the current year, we are optimistic that good tenant demand will remain for our properties. In addition, investor sentiment should have steadied as a consequence of improved retailer performance, a more reasoned approach to e-commerce, reduced medium to long-term interest rates and alternative investment markets looking fragile. At re-adjusted yield levels, retail and leisure properties are attractive investments. Private buyers and institutional investors are showing an increasing interest, attracted by the strong cash flows and the ability to drive income upwards. Xavier Pullen Andrew Lewis-Pratt Kenneth Ford Deputy Chief Executive Managing Director Managing Director Retail Parks and Xscape Shopping Centres FINANCIAL REVIEW FINANCIAL STATEMENTS Profit and Loss Account Results for the year Profit before tax has increased to £13.4m (1999: £12.8m) which includes gains of £4.1m (£1999: £2.1m) on investment sales. Profit in the second half of the year is £3.4m compared to £10.0m in the first half, which included all of the investment gains and trading property profits of £1.0m. In addition, following the sale of the Group's shareholding in CenterPoint in the first half, income from listed investments of £0.7m did not arise in the last six months. Rental Income Group rental income increased by 24% to £66.7m as shown in the table below. Also shown is the effect of the changes during 2000 on gross passing rent to arrive at £53.4m after disposals since the year end. 2000 2000 Group Gross Rental Passing Income Rent £m £m Year ended 25th December 1999 53.6 62.3 Full year effect of acquisitions and disposals in 1999 6.5 -- Properties acquired in 2000 0.6 1.1 Properties sold in 2000 (0.8) (1.9) Net new lettings 3.1 7.4 Leases surrendered (0.2) (3.5) Surrender premiums 2.4 -- Rent increases including reviews 1.5 2.4 Year ended 25th December 2000 66.7 67.8 Disposals since the year end (14.4) 53.4 The gross passing rent at the end of 2000 does not include £6.5m (1999: £5.4m) of rent under agreements for lease executed on the investment portfolio. Including the effect of disposals since the year end, the current level of rents net of property costs is approximately £50m. Costs and expenses Net property costs have increased by £1.6m compared to the previous year primarily due to the full year effect of acquisitions made in 1999 and bad debts of £0.8m that have offset the reduction in void costs. Performance related bonus payments to employees totalled £0.8m (1999 £1.7m). There are no bonuses for executive directors this year. Profits on sale of assets An accounting profit of £4.4m is recognised in the profit and loss account on disposals whereas, including further sales since the year end, realisations in the last 15 months have produced profits on a historical cost basis of over £ 47m as shown below. Net sale Book Profit on Revaluation Historical Proceeds Value Sale Surplus Cost Profit Trading properties 35.4 35.1 0.3 -- 0.3 Investment properties 1.6 1.4 0.2 0.1 0.3 CenterPoint 25.0 21.1 3.9 18.1 22.0 Year ended 25th December 62.0 57.6 4.4 18.2 22.6 Post year end sales 183.9 183.9 -- 24.6 24.6 245.9 241.5 4.4 42.8 47.2 Net interest payable Net interest costs have increased by £9.5m during the year reflecting the financing of acquisitions, refurbishment and development expenditure by additional bank debt. Approximately £2.7m (1999: £2.0m) of interest has been capitalised during the year, principally in relation to Shopping City, Wood Green and Xscape, Milton Keynes. Taxation There is no taxation charge on profit due to the utilisation of capital allowances. Tax of £6.5m on realisation of gains on sales of investments and investment properties is recognised in reserves. The establishment of new claims on refurbishment and development expenditure has replaced allowances utilised of over £14m in the year. As a result the tax written down value of assets subject to capital allowance claims is unchanged at approximately £38m. Unutilised losses carried forward are £2.4m (1999: £228,000), providing additional tax shelter for the future. Earnings and dividends per share Profit attributable to shareholders increased from £12.0m in 1999 to £13.0m this year and earnings per share rose to 13.4p from 12.2p. The total dividend of 5.5p per share is more than twice covered by profit attributable to shareholders. Balance sheet Net Asset Value The table below analyses the movement in fully diluted shareholders funds and net asset value per share during the year. Pence per share £m At 25th December 1999 416.6 376.4 Revaluation (33.7) (33.4) Tax on disposals (6.5) (6.5) Retained profit 8.0 8.0 Share repurchases (20.7) 15.1 At 25th December 2000 363.7 359.6 As the significant level of disposals has crystallised tax on revaluation surpluses it is useful to review the movement in net asset value per share after contingent liabilities. The calculation of net asset value per share after contingent deferred tax on accumulated revaluation surpluses and fair value adjustment of fixed rate debt instruments to market value is set out below. 2000 1999 pence pence Diluted net assets per share 359.6 376.4 Deferred tax (34.4) (47.1) 325.2 329.3 Fair value adjustment on fixed rate debt (2.4) 0.9 322.8 330.2 Property assets The table below summaries the movement in the Company's total property portfolio during the year. Current Investment Properties under Head property properties construction office assets Total £m £m £m £m £m At 25th December 1999 903.6 29.5 13.1 34.7 980.9 Acquisitions 20.9 -- -- 4.7 25.6 Refurbishment and 25.0 17.3 0.1 14.0 56.4 development Disposals (2.0) -- -- (34.0) (36.0) Amortisation (0.2) -- -- -- (0.2) Reclassification 8.5 (47.0) -- -- (38.5) Revaluation (34.1) 0.2 0.5 -- (33.4) At 25th December 2000 921.7 -- 13.7 19.4 954.8 Disposals since year (183.9) -- -- --(183.9) end Pro-forma 737.8 -- 13.7 19.4 770.9 Joint ventures Following the reclassification of Xscape Milton Keynes Partnership the Group's total investment in joint ventures is shown in the table below: 2000 1999 Investment Debtors Total Total £m £m £m £m Xscape Milton Keynes Partnership 10.0 -- 10.0 -- Capital Hill Partnership 17.6 -- 17.6 -- Easter Holdings Limited 1.1 4.5 5.6 5.9 Other 1.0 0.4 1.4 1.1 Total 29.7 4.9 34.6 7.0 Investment in joint ventures includes £5.9m of revaluation surpluses. Minority interests Minority interests at the end of 2000 and the prior year represents the participation by Peter Taylor and his associates in Easter Capital Investment Holdings Limited. Accounting developments A number of proposals issued or in the pipeline will have an impact on the Group's future financial results. Financial Reporting Standard ('FRS') No.19 (Deferred Tax) requires full provision for contingent tax excluding revaluation adjustments and is effective from 2002. Abstract 28 (operating lease incentives) recently issued by the Urgent Issues Task Force is effective from 2001 and requires tenant incentives to be treated as a reduction of rental income by allocation of the cost in the profit and loss account over the period of the market rent. New projects on Financial Instruments, Leases and Reporting Financial Performance will result in significant changes to the content and presentation of financial statements and will be closely monitored for the effect on the Group. Xscape Milton Keynes Partnership has been re-classified as a joint venture. The gross equity method of accounting is therefore adopted at the year end rather than including the Group's proportion of assets, liabilities, income and expenditure. Joint venture accounting is also applicable to partnerships newly formed, namely Capital Hill Partnership and Sauchiehall Centre Limited. FINANCE Summary The Group's borrowings at 25th December 2000 were £615.6m (1999: £603.0m) including £24.6m (1999: £24.6m) of Convertible Subordinated Unsecured Loan Stock (CULS). Total borrowings by joint ventures were an additional £50.4m (1999: £5.3m). Net cash balances were £6.1m (1999: £7.4m) and the Group had approximately £10.3m (1999: £21.5m) of undrawn secured facilities that has increased to £51.5m as a result of sales since the year end. During the year borrowings increased by £35.2m to finance acquisitions, refurbishment and development net of funds raised from disposals. As a result of the reclassification of Xscape Milton Keynes Partnership as a joint venture, the Group's £22.6m share of related bank debt is no longer included in Group borrowings. As shown in the pro-forma balance sheet in Note 9, disposals completed since the year end have reduced net debt to £427.7m. The fully diluted level of gearing at 159% (1999: 134%) has been reduced substantially by disposals since the year end to 110%. The anticipated capital expenditure of £239m in respect of retail parks, which is projected to produce additional income of approximately £23m, will be financed through both existing banking relationships and project finance for the larger schemes. The value creation as a result of this expenditure should not have an adverse effect on the gearing of the Group. Financing Strategy The Group has a financing strategy with banks that, in the opinion of the Directors, have experienced property teams and long-term commitment to the UK property market. The Group's strategy is to enter into extendable secured revolving credit facilities with broadly similar terms and covenants. These facilities provide the group with the flexibility to draw down and repay borrowings within the covenant parameters, and provide a cost efficient structure which allows for the addition and disposal of properties as security. Project loan finance is separately arranged as required for specific developments and joint ventures. Interest Rate Hedging Strategy The Group's strategy is to enter into mainly five year interest rate swaps on a rolling basis, which provides for both protection against any sudden rise in interest rates and scope to take advantage of fluctuating rates on expiring swaps and unhedged borrowings. The balance between borrowing on floating and hedged interest rates is continually reviewed in the light of market conditions and business requirements. Fixed and swapped interest rates at 25th December 2000 applied to borrowings of £244.4m (1999: £272.4m) with the balance of £371.2m (1999: £330.6m) being at variable interest rates based on three month LIBOR. The weighted average interest rate cost for fixed and swapped borrowings at 25th December 2000, was 7.6% (1999: 7.8%) and for variable rates 6.9% (1999: 6.9%). The weighted average interest rate cost of total borrowings at the year end has reduced to 7.2% compared to 7.3% at the end of 1999. The weighted average period for which interest rates are fixed on Group bank borrowings is 1.88 years (1999: 2.64) and 3.22 years including CULS (1999: 3.89). Debt Valuation A valuation was carried out by J C Rathbone Associates Limited as at 25th December 2000 and 25th December 1999, to calculate the market value of fixed rate debt instruments on a replacement basis and the expiry profile of the resulting fair value adjustment. The following table shows the market value of fixed rate debt instruments, and reflects the difference between the interest rate yield curve as at 25th December 2000 and the rates historically committed; namely the fair value adjustment. Book Notional Market Fair Value Value Principal Value Fixed Rate Debt Instrument Adjustment 2000 1999 £ m £ m £ m £ m £ m CULS 24.6 n/a 24.6 -- -- Bank borrowings 15.3 n/a 15.6 (0.3) -- Interest rate swaps n/a 204.5 207.7 (3.2) 1.5 39.9 204.5 247.9 (3.5) 1.5 Minority Interests 0.1 -- Fair Value Adjustment (3.4) 1.5 Attributable to Group Net of tax at 30% (1999: 30%) (2.4) 1.1 The fair value adjustment at 25th December 2000 would have a negative effect on net asset value of £3.4m compared to a positive effect of £1.5m at 25th December 1999. The fair value adjustment for financial instruments in joint ventures total £ 195,000 (1999: £607,000 positive). The Group's share is not included in the table above. The expiry profile of the fair value adjustment is as follows:- 2000 1999 Fair Value Adjustment Fair Value Adjustment 2000 -- 1.4 2001 (1.7) 2.2 2002 (1.5) (1.2) 2003 (0.3) (0.9) Total (3.5) 1.5 The fair value adjustment represents approximately 0.57% (1999: 0.25%) of Group borrowings and has a notional adverse effect on net asset value per share of 2.4p at 25th December 2000 (1999: beneficial 1.0p) Debt Maturity The table below shows the maturity profile of Group borrowings and undrawn secured facilities at 25th December 2000. Over 86% (1999: 93%) of bank borrowings had the benefit of 'evergreen' arrangements which we expect will extend maturity dates beyond the earliest repayment date shown. The evergreen arrangements provide a minimum of two years' notice of repayment. Drawn Undrawn Repayment Earliest 'Evergreen' Earliest 'Evergreen' £m £m £m £m 2001 -- -- -- 2002 58.35 -- -- -- 2003 0.20 420.25 3.75 3.75 2004 420.45 90.00 6.50 6.50 2006 102.95 -- -- -- 2009 0.20 -- -- -- 8.80 Bank borrowings 590.95 510.25 10.25 10.25 2006/16 Convertible loan stock 24.64 -- -- -- 615.59 510.25 10.25 10.25 Gearing Net debt to capital employed has risen to 178% at the year end (1999: 149%) and reduces to 159% (1999: 134%) assuming the conversion of the loan stock to equity. Disposals since the year end have reduced gearing to 125% or 110% on a fully diluted basis. Rental income as a ratio to net interest payable including capitalised interest is 1.5 times for 2000 (1999: 1.6 times) times when calculated excluding non-recurring income. The margin by which rental income exceeds total net interest payable has increased to £23m (1999: £20m) for the year ended 25th December 2000. Following the disposals since the year end, the margin by which net rental income exceeds interest is approximately £19m. Lynda Coral Roger Boyland Financial Director Corporate Finance Director CONSOLIDATED PROFIT AND LOSS ACCOUNT For the year ended 25th December 2000 Unaudited Notes 2000 1999 £000 £000 Turnover: group rental income and share of joint 78,686 60,211 ventures' turnover Less: share of joint ventures' turnover 5 (11,982) (6,614) Group rental income 66,704 53,597 Net property costs (9,687) (8,085) Net rental income 1 57,017 45,512 Profit on the sale of trading and development properties 306 1,646 Administrative expenses 57,323 47,158 (7,955) (7,163) Other operating income 49,368 39,995 502 955 Group operating profit 5 49,870 40,950 Share of operating profit in joint ventures and 581 694 associates 50,451 41,644 Profit on sale of investment properties and investments 1 4,092 2,143 Profit on ordinary activities before interest 54,543 43,787 Income from listed investments 659 1,337 Interest receivable and similar income 2 824 719 Interest payable and similar charges (42,667)(33,005) Profit on ordinary activities before taxation 13,359 12,838 Taxation 59 (409) Profit on ordinary activities after taxation 13,418 12,429 Equity minority interests (391) (426) Profit attributable to the shareholders of the Company 13,027 12,003 Equity dividends paid and payable (5,070) (4,913) Profit retained in the year 7,957 7,090 Earnings per share 3 13.4p 12.2p Earnings per share - diluted 3 13.4p 12.2p The results of the Group for the year related entirely to continuing operations within the meaning of Financial Reporting Standard No. 3. 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