Final Results
Derwent Valley Holdings PLC
15 March 2005
Derwent Valley Holdings plc
Preliminary results for the year ended 31st December 2004
Derwent Valley, a specialist investor and refurbisher of Central London
commercial property, announces its results for the year ended 31st December
2004.
Highlights
% Increase/
(decrease)
2004 2003
Adjusted net asset value per share (p) 1068 920 16.1
Net revenue from properties (£m) 44.8 41.5 8.0
Adjusted profit before tax (£m)* 16.4 16.2 1.2
FRS3 profit before tax (£m) 22.8 17.1 33.3
Adjusted earnings per share (p)* 23.51 26.62 (11.7)
Dividend per share (p) 12.50 11.40 9.6
Total return (%) 17.4 (5.2)
* Excludes the profit on the disposal of investment properties and, for 2003, the exceptional
cost of the possible offer for the group.
• Adjusted net asset value per share up 148p to 1068p reflecting the
strength of the Central London property market.
• Adjusted profit before tax rose £0.2m to £16.4m.
• FRS3 profit up by £5.7 million to £22.8 million, mainly due to a £6.4
million profit on the disposal of investment properties.
• Total dividend increased by 9.6% to 12.50p.
• Net revenue from properties increased by £3.3m as the momentum of our
letting programme was maintained.
• 21,300m2 of vacant space let during the year, at an annualised rental
income of £4.8 million.
• Acquisitions and capital expenditure totalled £88.6 million and £27.1
million respectively, while disposals realised £78.9 million.
John Ivey, Chairman, commented:
"Derwent Valley owns a portfolio with a pipeline of opportunities and this,
combined with financial strength and management that can convert potential into
performance, places your company in a strong position to build further on its
record of growth."
15th March 2005
For further information, contact:
Derwent Valley Holdings plc 020 7659 3000 - after 11:00 am
John Burns, Managing Director
www.derwentvalley.co.uk
College Hill 020 7457 2020
Gareth David Email: gareth.david@collegehill.com
Chairman's Statement
Valuation
During 2004, adjusted net assets increased by 16% to 1,068p per share, a result
that is comparable with the high levels of net asset growth per share that your
company consistently achieved between 1996 and 2001. The valuation surplus of
£69.5 million, before adjusting for UITF 28, was driven by both rental growth
and yield compression which illustrates the overall strength of the property
market in Central London, the group's chosen area of operations. An increase of
9.1% was achieved by those investment properties held throughout the year
compared to a decrease of 4.7% calculated on the same basis for 2003. At £924.8
million, the value of the portfolio excludes any gain from the £68.8 million of
development property which, in accordance with the group's accounting policies,
was not revalued.
Profits and dividend
Adjusted profit before tax increased to £16.4 million from £16.2 million in
2003. FRS3 profit before tax, which includes profit on disposal of investment
properties of £6.4 million, was £22.8 million, compared to £17.1 million last
year, an increase of £5.7 million. Taxation on ordinary activities rose to £4.8
million from £2.3 million in 2003 resulting in FRS3 profit after tax of £18.0
million (2003 - £14.8 million).
The directors propose a final dividend of 8.9p per share, which would give a
total for the year of 12.5p, an increase of 9.6% on last year's distribution.
The final dividend will be paid on 6th June 2005 to shareholders on the register
on 13th May 2005.
Review of the year
With the occupational market for Central London offices continuing to make
strides, the momentum of our own letting programme was maintained. New leases
were agreed across the spectrum of the portfolio with 21,300m2 of space being
let at an annualised rental income of £4.8 million. Whilst the West End offers
earlier and greater prospects for growth than the City, we have done
particularly well in the City borders where Oliver's Yard, EC2 is now 90% let,
and the Tea Building, Shoreditch, E1 is over 70% let. These successes reinforce
our view that attractively designed and appropriately priced space will secure
tenants. Rental growth has not been as pronounced as some predicted but it has
moved into positive territory and we remain confident that it will step up
further in 2005.
Our investment philosophy is to create shareholder value by identifying and
purchasing property in those dynamic London sub-markets that provide the
necessary environment for twenty-first century working and living. The group's
portfolio already contains opportunities in such locations from which future
performance will be generated. Our key priority is to keep replenishing this
pipeline. Consequently, we remain acquisitive when our investment criteria are
met. Acquisitions of £88.6 million were made during the year, principally
through the £76.7 million deal with Chelsfield in the first half. With an eye to
recycling capital into the next generation of schemes, £78.9 million of sales
were made into the strong investment market at £6.4 million above book value.
Capital expenditure during the year was £27.1 million and a further £34.6
million is budgeted for 2005. This includes our largest project to date, the
Johnson Building at Hatton Garden, EC1. Construction is underway on this
15,900m2 scheme which is due to be completed in Spring 2006. During the year,
settlement was reached with both tenant and insurers to enable a new, larger
property to be developed on the site of the fire damaged Telstar House,
Paddington, W2. Strategies for the implementation of the planning permission
for this site are being evaluated.
Prospects
Your board believes that, during 2004, there has been a considerable change in
the property investment market with property enjoying a re-rating relative to
other asset classes. Attractive initial yields, against a background of
historically low interest rates, and prospects of rental growth offer more
compelling reasons than in previous cycles to hold property rather than to seek
alternative investments. Consequently, the demand for property continues from
all sectors of investors - UK, international, public and private. However, as
regulation from many sources multiplies, operating in such a buoyant market is
not all plain sailing. An increasingly prescriptive and protracted planning
process, that seeks to force residential accommodation into new office schemes,
may reduce returns and hence restrict regenerative development. There also
remains the possibility of government intervention in the established letting
and rent review system, which will interfere with the tried and tested free
market negotiation between landlord and tenant. The need for change was never
compelling, a view that has recently been supported by a report issued by
Reading University. Clearly, if implemented, changes to the existing system
could affect investment values. Additionally, the property industry awaits the
delayed rules for a UK real estate investment trust (REIT). Whilst it is the
board's role to manage these matters, and identify any opportunities that may be
presented, it is to be hoped that, together with the changes arising from the
introduction of International Financial Reporting Standards, they will not
increase bureaucracy to such a level that entrepreneurial skills are stifled.
The ownership and ongoing replenishment of a portfolio with a pipeline of
opportunities remains a prerequisite of achieving outperformance and staying in
the game as active investors. As one of the principal Central London property
companies, Derwent Valley owns such a portfolio and this, combined with
financial strength and management that can convert potential into performance,
places your company in a strong position to build further on its record of
growth.
J. C. Ivey
15th March 2005
Property Review
Overview
Good progress was made during the year in all areas of our business. With
conditions in the Central London office market improving, we increasingly
focused on evaluating the next generation of schemes so as to ensure an ongoing
supply of projects.
Key achievements included:
• £88.6 million of acquisitions with refurbishment and redevelopment
potential.
• 80 lettings, totalling 21,300m2 at an annualised rental of £4.8
million per annum.
• The level of space available for letting reduced from 9.9% to 5.9%.
• Start of construction on the 15,900m2 Johnson Building, Hatton
Garden.
• £27.1 million of project expenditure with £68.4 million budgeted over
the next two years.
• A 9,700m2 office planning consent obtained at Telstar House,
Eastbourne Terrace, Paddington.
• 14 planning studies ongoing in relation to 65,000m2 of property.
• 26 renewals concluded and 46 rent reviews settled.
• £78.9 million of disposals, achieving £6.4 million above book value.
Strategy and performance
Derwent Valley is a commercial property company focused entirely on Central
London, one of the world's most vibrant and economically important capital
cities. The emphasis is on the ownership of a portfolio that offers potential
for both rental income and capital growth. There are three elements to the
business strategy:
• Acquiring properties in improving locations, which are let on short
to medium term leases and characterised by low capital values and rental
levels.
• Adding value through lease management, planning enhancement and
refurbishment/redevelopment.
• Disposing of those properties where further opportunities for our
active management approach are limited.
Through a disciplined approach and the application of our considerable
commercial property experience, we have assembled a £925 million portfolio.
This comprises 254,400m2 of space and approaching 500 tenancies. We work to
enhance our assets through contemporary architecture to provide occupiers with
stylish and efficient offices. Capital will then be recycled, through
disposals, into properties with potential to become the future outperformers in
the portfolio. Over the last five years, sales have raised in excess of £320
million.
One of our strengths is our close working relationships with architects and
designers. In 2004, this resulted in the Royal Institute of British Architects
voting Derwent Valley as one of the top five clients with whom to work. We
seek to remain at the cutting edge of architectural procurement and
systematically identify talented young architectural practices, encouraging
their vision for the working spaces of the future.
Our close involvement and attention to detail in the refurbishment/redevelopment
process extends from evaluation to implementation and through to the finished
product. This produces a highly recognisable Derwent Valley brand, which
identifies the company and gives it a competitive advantage when seeking
tenants. Whilst our enthusiasm to regenerate our buildings flourishes, it is
set around an ever more challenging planning environment. Constraints include
the lengthy planning process and the need for the provision of residential space
in new commercial developments.
Valuation commentary
At 31st December 2004, the group's investment portfolio had a value of £924.8
million, before the UITF 28 adjustment of £8.2 million, and included £68.8
million of development properties which were not re-valued at the year end.
This revaluation generated a surplus of £69.5 million. For those investment
properties held throughout the year, there was an underlying valuation increase
of 9.1%, compared to a 4.7% decline in 2003.
The return to growth, which started in the second half of 2003, accelerated in
2004 and reflected the improving occupational market and the extremely strong
investment demand, which led to hardening yields. The group's West End
properties, which account for 73% of the portfolio, increased in value by 8.5%.
The best performing sub-sector was Soho/Covent Garden (18% of the portfolio),
which rose by 14.3% during the year. Here, letting progress on recent schemes
at Charing Cross Road and the Davidson Building, coupled with yield movement on
these assets, drove values forward. At our North of Oxford Street and Belgravia
properties, the valuation performance was lower at 4.6% and 3.9% respectively,
due to the fact that the properties are mainly fully let. The City borders and
surrounding areas, taking in Holborn, Clerkenwell and Shoreditch, comprise the
balance of the portfolio. This location saw an 11.0% valuation increase, with 1
Oliver's Yard, one of our larger properties, a significant contributor to the
uplift. Here, lettings at increased rents were achieved during the year.
Portfolio management
Our focus on active management continued, with the completion of 80 lettings,
totalling 21,300m2 at a rental of £4.8 million per annum. This followed the
letting of 29,800m2 of vacant space last year. The increased level of interest
being shown for space is encouraging, with incentives reducing and rental growth
coming through. Lettings included four floors at the Davidson Building, with
the final floor let since year end. In addition, activity at the Tea Building
was brisk with 23 lettings, totalling 4,800m2. This building has evolved into a
dynamic complex, in an improving City border location, and this transformation
has encouraged us to assess further refurbishment phases.
Total available space at year end was 16,900m2, a 32% reduction on last year's
24,900m2. This level reflects a vacancy rate of 6.6% of portfolio floor area or
5.9% of the estimated rental value. Since the year end, lettings have been
concluded or terms agreed on 9,900m2 of the available space, which reduces the
vacancy rate to 2.2% of rental value. Space still available includes floors at
the recently refurbished Berkshire House and The College, Gresse Street.
Vacant space, either under refurbishment or identified for refurbishment at the
year end, stood at 36,800m2, in addition to the development sites of Eastbourne
Terrace and Leonard Street. Included in this, is the 15,900m2 Johnson Building,
Hatton Garden, our largest project to date, and further phases at Holden House
(2,500m2) and the Tea Building (5,100m2). Our increased project programme, up
from 23,000m2 a year ago, demonstrates our commitment to deliver space into the
improving market.
The annualised contracted rental income of the investment portfolio at the year
end, net of ground rents, was £48.4 million. The estimated rental value of the
portfolio was £67.6 million. This £19.2 million reversion represents £13
million of potential income through letting of vacant space and £6.2 million of
rent review and lease reversions. Based on this reversion, the portfolio's
initial yield was 5.4%, rising to 7.4%. Last year the yield profile was 6.0%,
rising to 7.7%, and the change reflects general tightening of valuation yields
during the year.
There was an underlying increase in rental values of 2.8%, which reduced the
limited amount of over-renting in the portfolio from £2.6 million last year to
£1.9 million at year end. This, coupled with the portfolio's low average
passing rent, will enable it to benefit from the rental improvement now coming
through. Overall, the average rent was £249 per m2, with £277 per m2 for the
West End properties.
In addition to letting space and managing schemes, 46 rent reviews were settled,
achieving an 8% overall increase in annual income to £6.4 million. By the nature
of the type of properties held, the majority of the space that reverts to the
group due to lease expiries and break options is earmarked for improvement.
However, 26 renewals were agreed on 3,600m2 of space where it was appropriate to
maintain income. Only 9 of the potential 45 tenant lease breaks were exercised.
As a consequence of letting activity, disposal of short term income and
acquisitions, especially the longevity of income at Henry Wood House, the
average lease length increased from 7.7 years to 8.2 years.
Development and refurbishment
Derwent Valley retains a number of properties designated for development. At
the year end, these, which were the Johnson Building and the sites at
Eastbourne Terrace and Leonard Street, totalled £68.8 million, or 7% of the
portfolio, as compared to £4.2 million at last year end. This increase reflects
the current emphasis on projects.
We started construction of the Johnson Building in April 2004. This property,
acquired in 2000, was income producing until the start on site and is now the
subject of a £34 million capital expenditure programme. The design is
contemporary, yet in keeping with its local environment. We are developing
13,800m2 of offices, 400m2 of workshop space and a self-contained 1,700m2
residential building. The core of the original building has been removed and
the floors opened up around a new atrium, which will link to the new space. The
project offers large floor plates, which can be subdivided for maximum
flexibility. Completion is scheduled for early 2006.
In March 2004, planning permission was obtained for a 9,700m2 office development
at Telstar House, Eastbourne Terrace, Paddington. Acquired in 2000 as a fully
let investment, the building was extensively fire damaged in 2003. Following
negotiations with the insurers we received an £18.7 million settlement and
obtained vacant possession in November 2004, which will allow redevelopment to
commence this year. The scheme is for a lower rise building, only seven storeys
rather than the original thirteen, with larger floor plates more suited to the
modern user. This location, in the heart of Paddington, is within a
regeneration area where there is a concentration of new development and
infrastructure improvements.
At Leonard Street, we have planning permission for a 4,500m2 office development.
However, we are considering alternative uses, including residential space, in
conjunction with the development of other nearby ownerships, which were acquired
as part of the Islington portfolio.
Where development is not appropriate, schemes are often undertaken on a rolling
basis, thereby preserving some income. During 2004, we completed phases and let
space at the Tea Building, The Courtyard, Berkshire House and Morley House. In
addition, we also completed a 4,400m2 upgrade of The College, an educational
building in Noho.
At 50 Rathbone Place, Noho, we have started the 2,500m2, second phase of our
Holden House refurbishment. This follows our initial re-branding of the
building, which involved re-siting the entrance and remodelling some of the
office space. Now further innovative space is being formed by opening up the
lightwells and adding glazed roofs. This project, aimed at the creative sector,
is generating letting interest at an early stage.
Looking forward, our project teams are working on the next generation of
schemes. In the West End at 16-19 Gresse Street, planning permission is
expected this year for a 4,600m2 office building. In the meantime, we have
structured the occupational leases with breaks to allow a 2006 start, if
appropriate.
At 55-65 North Wharf Road, Paddington we have an important redevelopment
opportunity. Negotiations are gradually progressing with the City of
Westminster's planners on the scale and mix of the office and residential space.
This project is for the medium term and the building remains fully income
producing in the interim. Further west, at Portobello Dock, which we acquired
last year, an initial 3,700m2 planning application is looking positive and a
second application is to be submitted on another part of the ownership. Here,
offices and residential space, overlooking the canal, are proposed for
commencement in 2006, when possession will have been obtained.
We continue to work through the Islington portfolio, acquired in 2003, with 13
of the original 39 properties now sold. During the year, we were able to swap
two of the smaller properties as consideration for a lease surrender at 37-42
Compton Street, thereby gaining control of the building to enable an early
refurbishment opportunity. We increased our holding at Balmoral Grove and,
elsewhere, planning improvement was achieved through two retail permissions. We
are progressing seven feasibility studies, for which planning applications will
be submitted later this year.
Acquisitions and disposals
In a competitive investment market our ability to move swiftly is paramount.
This, combined with our market knowledge on a street to street, building to
building basis, has enabled us to assemble a portfolio with significant
opportunities. Whilst the investment market in 2004 was one of the most
competitive seen for a decade, with a shortage of stock and an abundance of
buyers, we were still able to make nearly £90 million of acquisitions.
The principal acquisition was in May, when we bought three substantial office
properties from Chelsfield for £76.7 million. All are located in our core
operating area and offer potential for enhancement either through lease
management or refurbishment/redevelopment. In the heart of the West End is the
7,400m2 Henry Wood House. Here, the majority of the space, which is let to the
British Broadcasting Corporation on a long lease at a low office rental of £145
per m2, has the opportunity for significant reversion at the next rent review in
2006. There is also the potential for the creation of additional space and we
have initiated studies to investigate this. At Riverwalk House, Victoria, which
occupies an impressive Thames side location, the building density could be
considerably improved through redevelopment. In the interim, the 6,900m2 office
building is let to the Secretary of State for the Environment until 2011. There
is a more immediate office refurbishment opportunity at the third property,
19-29 Woburn Place, Bloomsbury, which will become vacant this year. We are
evaluating our options for this 9,400m2 building.
As part of a site assembly, we acquired 1-9 Market Road for £2.8 million. This
warehouse is located adjacent to our Balmoral Grove holding, which was acquired
as part of the Islington portfolio. Initial architectural studies indicate that
these predominantly low rise industrial buildings of 4,900m2 could accommodate a
mixed-use development of approaching 13,900m2.
Our other purchase during the year, The Turnmill, was acquired for £9.1 million.
This prominent corner building, at the gateway to Clerkenwell, provides
4,100m2 of interesting office space. It is multi-let and offers the option of a
rolling refurbishment or redevelopment. Initial studies are underway.
We continued our policy of recycling capital with eight disposals, realising
£78.9 million net of costs, a similar level to last year. The largest disposals
were Heron House (£29.2 million) and Harcourt House (£27.9 million) both of
which performed well during our ownership, producing average annual returns of
10% and 15% per annum respectively. They had undergone phased refurbishment
and, with the strong investment appetite and limited future potential for our
particular skills, disposal was appropriate. Other sales included 27-32 Old
Jewry, our last core city property, Fulcrum House in King's Cross and four of
the Islington properties.
J. D. Burns
15th March 2005
Financial review
Financial results
Gross rental income rose £2.0 million year on year to £49.9 million. It
benefited not only from lettings achieved in 2004 but also those made at the end
of 2003 which had little impact on that year, other than that it bore the cost
of such lettings. In total, lettings added £6.5 million to rental income.
However, £2.4 million should be netted off this in respect of the surrender
premium income from Oliver's Yard which was recognised as rental income in 2003.
Rent reviews added £1.7 million with the main increases arising from Premier
House (£0.7 million) and the Islington Estate (£0.3 million). However, rental
growth was kept in check as voids, mainly created by the group's refurbishment
and redevelopment programme, reduced rent by £5.6 million. The buildings where
rent was reduced noticeably were the Johnson Building (£2.3 million), 16-19
Gresse Street (£0.6 million) and The College (£0.5 million). Acquisitions added
£5.8 million to rental income of which £3.5 million came from the 3 buildings
purchased from Chelsfield in May 2004. Disposals, the main ones being Harcourt
House and Heron House, removed £4.0 million of rent from the profit and loss
account.
At the net rental income level, which rose 8% or £3.3 million to £44.8 million,
growth was even greater than with gross rents. This was due to lettings in 2003
and 2004 eliminating £1.1 million of service charge voids from the portfolio
while, with less vacant space to let in 2004 than in the prior year, transaction
costs, predominantly letting fees and the related legal costs, were down £0.7
million. With two of the properties purchased from Chelsfield being leaseholds,
ground rent rose £0.4 million year on year and therefore reduced the above
savings.
While employment costs rose £0.8 million, including a first time charge for the
long-term incentive plan of £0.2 million, a reduction in other overheads,
notably bank charges and the absence of a charge for the onerous lease, left
administrative costs up by only £0.1 million. With increases in both interest
rates and borrowings, £3.1 million was added to the interest bill to leave
adjusted profit before tax up £0.2 million to £16.4 million, an increase of
1.2%.
Profit realised on the disposal of investment properties was £6.4 million, most
of which came from the sales of Heron House (£3.9 million), Old Jewry (£1.5
million) and Killick Street (£1.0 million). This, together with the absence of
bid defence costs incurred in 2003, increased FRS3 profit before tax by 33% to
£22.8 million.
After taxation and a dividend increased by 9.6% to 12.5p per share, which
absorbed £6.7 million of distributable profit, retained earnings of £11.3
million contributed 21p of the growth in net asset value per share.
Net assets rose £77.1 million to £554.7 million at 31st December 2004. The
surplus arising from the year end property revaluation, net of the UITF 28
adjustment, was £66.9 million, equivalent to 126p per share. Development
properties with a book value of £68.8 million were not revalued at the year end
in accordance with group accounting policies. After adding back the deferred
taxation provision of £14.4 million, adjusted net asset value per share was
1068p compared with that at the previous year end of 920p, an increase of 16%.
The total return for the year - increase in adjusted net asset value per share
plus dividends payable - was 17.4%. The group's five year annualised total
return was 9.2 %.
Taxation
The total tax charge was £8.1 million compared with £5.8 million in 2003. The
profit and loss account bore £4.8 million of the tax charge while the balance -
capital gains tax on prior year revaluation surpluses - was passed through the
statement of total recognised gains and losses. A further £2.9 million of
deferred taxation has been provided in accordance with FRS19, bringing the total
to £14.4 million. Nearly all of this provision relates to tax deferred through
capital allowance claims and, consequently, it is considered unlikely that this
tax will ever become payable.
Cashflow
The group's cash outflow for the year was £17.9 million. After interest
payments, the group generated cash of £12.9 million out of which corporation tax
of £5.3 million was paid to leave a net inflow of £7.6 million. As ever,
capital transactions dominated the cash flow. In 2004, the group spent £88.7
million on acquiring new properties and £26.1 million on refurbishments and
redevelopments, the total of which was partly covered by property disposals of
£76.9 million to leave a net investment in the business of £37.9 million. This,
net of the aforementioned inflow and dividends paid to shareholders in 2004,
which amounted to £6.2 million, resulted in a cash outflow of £36.6 million.
This was reduced by insurance proceeds of £18.7 million received in November in
respect of the 2003 fire damage at Telstar House.
Finance
The cash outflow resulted in an increase in the group's net debt to £319.3
million from £301.8 million at the 2003 year end. Despite the increase in debt,
balance sheet gearing fell from 63% to 58% due to the growth in net assets.
However, profit and loss gearing, which the company considers to be the more
important, fell marginally from 1.87 to 1.76 in 2004 but even at this lower
level it remains more than comfortable. As noted last year, these may appear
conservative ratios, but they need to be managed in the context of the group's
lease term profile and the ongoing refurbishment and redevelopment programme.
During the year, there has been little change in the group's bank facilities,
the first of which is not due for renegotiation until 2006. The group prefers
to borrow on a secured basis from a limited number of banks with whom, it
believes, it has first class relationships. It has no corporate covenants, and
prefers the flexibility of its two property covenants of loan to value and rent
to interest. Such borrowing also has the benefit of lower margins compared
with unsecured loans. At the year end, total group facilities were £465 million
of which £324 million had been drawn down.
The group uses derivatives to protect itself from adverse interest rate
movements. Board policy is that sufficient interest rate derivatives should be
entered into so that the total of fixed rate debt and that fixed using such
instruments moves within a range of 40% to 75% of total debt, dependent on the
perceived risk to the group. At the beginning of March 2005, this percentage
was 71, and the all in weighted average cost of debt was 6.6%.
The fair value adjustment figure, arising from the valuation of fixed rate debt
and derivatives in accordance with FRS13, was a negative £14.8 million (31st
December 2003 : negative £13.8 million) which is equivalent to a reduction in
net asset value per share after tax of 19p (31st December 2003 : 18p). The
debenture accounts for 15p of this amount and the derivatives a further 4p.
There is no obligation or present intention to reduce the fixed rate debt or any
of the hedging instruments other than at normal maturity. Therefore, this
amount is unlikely to be realised. However, this is one of the areas which will
change as a result of the introduction of International Financial Reporting
Standards. Under this convention, the amount of the fair value adjustment
relating to the interest rate derivatives (but not the debenture) may be
reported in the income statement and not just as a note to the accounts.
International Financial Reporting Standards (IFRS)
As noted above, the group, along with all listed companies, will have to report
its results under a new accounting convention from 1st January 2005 with
comparative figures for the 2004 prior year. It must be stressed that this new
convention will not affect the economic value of the business but it will lead
to an enormous difference and future volatility in the level of profits and net
assets reported. There have been long arguments over a number of the new
standards and not all users of accounts, or indeed accountants, agree with all
of them but the group has no option but to adopt them in their entirety. While
they are intended to make comparisons between companies worldwide easier,
whether a set of accounts is any more transparent and understandable is
debateable. Despite the fact that the balance sheet will show a figure closer
to the triple net asset value used by financial analysts, already it is apparent
that they, and other users of annual reports, are looking to make adjustments to
accounts prepared under IFRS to obtain the figures they believe are more
relevant. To help users of Derwent Valley's accounts understand the impact of
IFRS, a reconciliation has been produced between the 2004 figures, as audited,
and those based on IFRS. This can be found towards the end of the annual
report. The main items to look out for are:
• the valuation surplus or deficit on investment properties now
reported in the income statement rather than as a movement in the revaluation
reserve.
• the capital gains tax that would be payable if the investment
properties were sold at their current balance sheet valuation now included in
the balance sheet as a deferred tax liability. Previously, this was disclosed
only as a note to the accounts.
• the grossing up of leasehold property for head lease payments
and the establishment of a corresponding financial liability, increasing
balance sheet gearing.
• the lease incentives granted to tenants now amortised over the
longer period to lease expiry, rather than generally to the next rent review.
• the one off adjustment to net asset value equivalent to the
final dividend, because IFRS only permit declared dividends to be included in
the accounts and not those proposed as under UK reporting standards. Under
the restatement, the 2004 proposed final dividend is excluded.
• the movement in the fair value of derivatives, as noted above,
reported in the income statement, if hedge accounting is not applied.
The IFRS reconciliation has been reviewed by our auditors and they have
confirmed that they are not aware of any material modifications that are
required to this. Whilst it is believed these figures will be our comparative
results for 2005, the interpretation of IFRS continues to evolve and this may
lead to changes when the 2004 figures are published next year.
Finally, a caveat. The relevant bodies have stated their intention to review
and possibly redraft some of these new IFRS. It is to be hoped that at the end
of this process, indeed if there is an end, users of accounts will still be able
to interpret them and agree on which profits and assets show "a true and fair
view".
Group profit and loss account
2004 2003
Note £m £m
Gross rental income
Group and share of joint ventures 50.3 48.2
Less share of joint ventures (0.4) (0.3)
Group gross rental income 49.9 47.9
Property outgoings net of recoveries 2 (5.1) (6.4)
Net revenue from properties 44.8 41.5
Administrative costs
Recurring administrative costs (7.0) (6.9)
Exceptional cost of possible offer for the group - (0.7)
Operating profit 37.8 33.9
Share of operating results of joint ventures 0.4 0.3
Profit on disposal of investment properties 3 6.4 1.6
44.6 35.8
Interest receivable 0.3 0.3
Interest payable 4 (22.1) (19.0)
Profit on ordinary activities before taxation 22.8 17.1
Taxation on profit on ordinary activities 5 (4.8) (2.3)
Profit on ordinary activities after taxation 18.0 14.8
Dividend 7 (6.7) (6.1)
Retained profit 13 11.3 8.7
All amounts relate to continuing activities.
Adjusted earnings per share 6 23.51p 26.62p
Basic earnings per share 6 33.71p 27.69p
Diluted earnings per share 6 33.50p 27.63p
Dividend per share 7 12.50p 11.40p
Total return 8 17.4% (5.2%)
Group balance sheet
2004 2003
Note £m £m
Fixed assets
Tangible assets 10 917.2 807.1
Investments in joint ventures
Share of gross assets 4.7 3.1
Share of gross liabilities (2.9) (2.9)
1.8 0.2
919.0 807.3
Current assets
Debtors 19.2 15.8
Cash and deposits 4.5 4.5
23.7 20.3
Creditors falling due within one year
Bank loans and overdrafts (1.3) (35.4)
Other current liabilities (48.9) (29.9)
Net current liabilities (26.5) (45.0)
Total assets less current liabilities 892.5 762.3
Creditors falling due after more than one year
Bank loans (288.0) (236.5)
10 1/8% First Mortgage Debenture Stock 2019 (34.5) (34.4)
Other creditors - (1.2)
Provisions for liabilities and charges
Deferred tax 11 (14.4) (11.5)
Other provisions 12 (0.9) (1.1)
554.7 477.6
Capital and reserves - equity 13
Called up share capital 2.6 2.6
Share premium account 154.1 153.7
Revaluation reserve 265.7 208.7
Other reserves 0.2 -
Profit and loss account 132.1 112.6
554.7 477.6
Adjusted net asset value per share 14 1068p 920p
Net asset value per share 14 1041p 898p
Group cash flow statement
2004 2003
Note £m £m
Net cash inflow from operating activities 15 33.6 30.2
Net cash outflow from return on investments and
servicing of finance (20.7) (18.5)
Corporation tax paid (5.3) (4.2)
Net cash outflow from capital expenditure and
financial investment (19.3) (6.8)
Equity dividends paid (6.2) (5.7)
Cash outflow before management of liquid
resources and financing (17.9) (5.0)
Management of liquid resources 16 - (4.5)
Financing
Movement in bank loans 18.1 8.9
Net proceeds of share issue 0.5 -
Net cash inflow from financing 18.6 8.9
Increase/(decrease) in cash in the year 16 0.7 (0.6)
Group statement of total recognised gains and losses
2004 2003
£m £m
Profit for financial year 18.0 14.8
Unrealised surplus/(deficit) on revaluation of
investment properties 66.9 (39.6)
Unrealised surplus on revaluation of
joint venture's investment property 1.5 -
LTIP expense transferred to reserves 0.2 -
Taxation on realisation of property revaluation
gains of previous years (3.3) (3.5)
Total recognised gains and losses relating to the year 83.3 (28.3)
Notes
1. The results for the year ended 31st December 2004 include those for the
holding company and all of its subsidiary undertakings together with the group's
share of the results of its joint ventures. The results are prepared on the
basis of the accounting policies set out in the 2003 annual report and accounts.
2. Property outgoings net of recoveries
2004 2003
£m £m
Ground rents 1.5 1.1
Other property outgoings net of recoveries 3.6 5.3
5.1 6.4
3. Profit on disposal of investment properties
2004 2003
£m £m
Disposal proceeds 78.9 76.1
Cost/valuation (72.5) (74.5)
6.4 1.6
4. Interest payable
2004 2003
£m £m
Group 21.8 18.7
Share of joint ventures 0.3 0.3
22.1 19.0
5. Taxation on profit on ordinary activities
2004 2003
£m £m
UK corporation tax on profit, adjusted for the
disposal of investment properties, at 30% (2003 - 30%) 4.9 4.6
Capital allowances (2.8) (2.7)
Tax on disposal of investment properties 4.2 3.9
Other reconciling items - (0.9)
Corporation tax payable on current year's profit 6.3 4.9
Less amount allocated to the group statement of
total recognised gains and losses (3.3) (3.5)
Corporation tax charge in respect of current year's profit 3.0 1.4
Adjustments in respect of prior years' corporation tax (1.1) (0.4)
Corporation tax charge 1.9 1.0
Deferred tax charge 2.9 1.3
4.8 2.3
6. Earnings per share
Profit Weighted 2004 Profit Weighted 2003
after average Earnings after average Earnings
taxation shares per share taxation shares per share
£m '000 p £m '000 p
Adjusted 12.5 53,195 23.51 14.2 53,166 26.62
Adjustment for cost of
possible offer for the group - - - (0.7) - (1.29)
Adjustment for disposal of
investment properties 5.5 - 10.20 1.3 - 2.36
Basic 18.0 53,195 33.71 14.8 53,166 27.69
Adjustment for dilutive
share options and LTIP awards - 346 (0.21) - 104 (0.06)
Diluted 18.0 53,541 33.50 14.8 53,270 27.63
7. Dividend
2004 2003
£m £m
Ordinary shares of 5p each
Paid - interim dividend of 3.60p per share (2003 - 3.30p) 1.9 1.8
Proposed - final dividend of 8.90p per share (2003 - 8.10p) 4.8 4.3
6.7 6.1
The final dividend will be paid on 6th June 2005 to those shareholders on the
register at the close of business on 13th May 2005.
8. Total return
Total return is the movement in adjusted net asset value per share plus the
dividend per share expressed as a percentage of the adjusted net asset value per
share at the beginning of the year.
9. Gearing
Profit and loss gearing for 2004 is 1.76 (2003 - 1.87). This is defined as net
rental income less administrative costs divided by group net interest payable.
The administrative costs exclude the exceptional item in order to show only the
recurring elements of the group's activity.
Balance sheet gearing for 2004 is 57.6% (2003 - 63.2%). This is defined as net
debt divided by net assets.
10. Tangible assets
Freehold Other
land and Leasehold fixed
buildings property assets Total
£m £m £m £m
Cost or valuation:
At 1st January 2004 580.6 225.9 1.3 807.8
Additions 53.2 62.5 0.1 115.8
Disposals (66.7) (5.8) - (72.5)
Revaluation 51.0 15.9 - 66.9
At 31st December 2004 618.1 298.5 1.4 918.0
Amortisation and depreciation:
At 1st January 2004 - - 0.7 0.7
Provision for year - - 0.1 0.1
At 31st December 2004 - - 0.8 0.8
Net book value:
At 31st December 2004 618.1 298.5 0.6 917.2
At 31st December 2003 580.6 225.9 0.6 807.1
Assets stated at cost or valuation:
31st December 2004 valuation 556.2 299.8 - 856.0
Prior years' valuation plus subsequent costs 68.8 - - 68.8
Cost - - 0.6 0.6
625.0 299.8 0.6 925.4
Adjustment for UITF 28 - lease incentive
debtors (6.9) (1.3) - (8.2)
618.1 298.5 0.6 917.2
Short leasehold property with a value of £40.7 million (2003 - £37.7 million) is
included in leasehold property above. Investment property in the course of
development with a carrying value of £68.8 million (2003 - £4.2 million) is
included in freehold land and buildings above.
The freehold land and buildings and leasehold property, other than those in the
course of development, were revalued at 31st December 2004 by either CB Richard
Ellis Limited or Keith Cardale Groves (Commercial) Limited, as external valuers,
on the basis of market value as defined by the Appraisal and Valuation Manual
published by the Royal Institution of Chartered Surveyors.
At 31st December 2004, the historical cost of the freehold land and buildings
and leasehold property owned by the group was £652.3 million (2003 - £598.5
million).
11. Deferred tax
£m
At 1st January 2004 11.5
Provided during the year 2.9
At 31st December 2004 14.4
The provision for deferred tax relates to timing differences on accelerated
capital allowances and other reversing timing differences.
A taxation liability of approximately £62.4 million (2003 - £52.7 million) would
arise on the disposal of land and buildings at the valuation shown in the
balance sheet. This is equivalent to 117p per share (2003 - 99p). In
accordance with FRS19, no provision has been made for this.
12. Other provisions
£m
At 1st January 2004 1.1
Released during the year (0.2)
At 31st December 2004 0.9
The provision relates to an onerous lease which expires in 2014 and reflects the
discounted present value of future net payments under that lease.
13. Capital and reserves
Share Profit
Share premium Revaluation Other and loss
capital account reserve reserves account
£m £m £m £m £m
At 1st January 2004 2.6 153.7 208.7 - 112.6
Premium on issue of shares - 0.5 - - -
Surplus on property revaluation - - 66.9 - -
Surplus on joint venture's property
revaluation - - 1.5 - -
Profit realised on disposal of investment
properties - - (11.4) - 11.4
Tax attributable to revaluation surplus
realised on disposal of investment
properties - - - - (3.3)
Amortisation of discount and costs on
issue of debenture - (0.1) - - 0.1
LTIP expense transferred to reserves - - - 0.2 -
Retained profit for year - - - - 11.3
At 31st December 2004 2.6 154.1 265.7 0.2 132.1
14. Net asset value per share
2004 2003
Net asset Net asset
Net value Net value
assets Shares per share assets Shares per share
£m '000 p £m '000 £m
Balance sheet 554.7 53,268 1,041 477.6 53,167 898
Adjustment for deferred tax 14.4 - 27 11.5 - 22
Adjusted 569.1 53,268 1,068 489.1 53,167 920
15. Reconciliation of operating profit to net cash inflow from operating
activities
2004 2003
£m £m
Operating profit 37.8 33.9
LTIP expense transferred to reserves 0.2 -
Depreciation charge 0.1 0.3
Increase in debtors (3.4) (1.7)
Increase/(decrease) in creditors 17.2 (3.1)
Effect of other deferrals and accruals
on operating activity cash flow (18.3) 0.8
Net cash inflow from operating activities 33.6 30.2
The increase in creditors includes £18.5 million of the £18.7 million received
in respect of the insurance settlement for the fire damage at Telstar House.
This has been carried forward in other creditors to be set-off against the cost
of the future redevelopment of the property. This is not an operating cash flow
and, therefore, is adjusted within the £18.3 million effect of other deferrals
and accruals on operating activity cash flow.
16. Reconciliation of net cash flow to movement in net debt
2004 2003
£m £m
(Increase)/decrease in cash in the year (0.7) 0.6
Increase in cash on deposit - (4.5)
Cash inflow from movement in bank loans 18.1 8.9
Amortisation of discount and costs on issue of debenture 0.1 -
Movement in net debt in the year 17.5 5.0
Opening net debt 301.8 296.8
Closing net debt 319.3 301.8
17. Post balance sheet event
On 2nd March 2005, the group exchanged contracts for the acquisition of
a property. Completion will be within two years, but it is not expected to take
place in 2005. Total consideration for the acquisition will be £6.8 million
excluding costs.
18. The announcement set out above does not constitute statutory accounts
within the meaning of Section 240 of the Companies Act 1985, for the year ended
31st December 2004. The auditors have reported on the statutory accounts for
the said year and have accompanied them with an unqualified report. The
accounts have yet to be delivered to the Registrar of Companies. The annual
report and accounts will be posted to shareholders on 13th April 2005, and will
also be available on the company's website, www.derwentvalley.co.uk, from that
date. The annual general meeting of the company will be held on 19th May 2005.
This information is provided by RNS
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