Final Results part 1
Quintain Estates & Development PLC
13 June 2007
13 June 2007
QUINTAIN ESTATES AND DEVELOPMENT PLC
('QUINTAIN'/'COMPANY'/'GROUP')
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 MARCH 2007
QUINTAIN REPORTS AN OUTSTANDING YEAR WITH 29.9% TOTAL RETURN
Financial Highlights
• EPRA Net Asset Value (NAV) up 28.1% to 784p (2006: 612p)
• NAV per share up 25.5% to 660p (2006: 526p)
o NAV (diluted) up 26.9% to 655p (2006: 516p)
• Substantial capital value uplifts for Wembley and Greenwich Peninsula holdings
o Wembley up 25.4% to £524m
o Greenwich up 43.8% to £225m
• Total return* of 27.5%, or 29.9% on an EPRA basis
• Profit before tax down 20.5% to £51.6m (2006: £65.0m)
o Reflects lower valuation surpluses on investment properties held
directly and in joint ventures
• Adjusted profit+ up 25.8% to £20.0m (2006: £15.9m)
o Significantly increased contribution from Quintain Fund Management
• Gearing of 36% at the year end
o Provides the Group with substantial financial headroom
• Final dividend increased 1p to 8.25p
o Total dividend for the year 11.75p (2006: 10.50p)
Operational Highlights
• Wembley
o First residential building under construction
- All private units sold at higher than anticipated values
o Planning consents obtained for two further residential buildings
o Heads of terms agreed for student accommodation block with iQ fund
o Planning application made for 402 room hotel and 656 room student
accommodation block
• Greenwich
o New 50:50 joint venture holding company established
o First land sale with reserved matters consent granted
o College relocation to Greenwich agreed
• Fund Management
o Funds under management increased from £470m to £711m
o iQ student accommodation joint venture formed with The Wellcome Trust
o Quantum Fund signed development agreement for SPark science park at
Emersons Green, Bristol
• Property Disposals and Acquisitions
o £138.7m of proceeds from property disposals
o £92.4m of investment properties acquired
* as measured by the increase in net assets per share adding back the dividend
paid
+ as defined in the Operating and Financial Review
John Plender, Chairman of Quintain, commented:
'In my first statement as chairman of Quintain, I am delighted to be able to
report another outstanding year in which strong progress has been made across
our business. The most striking feature of the results is the substantial
capital uplift, driven largely by our large scale urban regeneration schemes at
Wembley and Greenwich.
'Quintain's diversified business model, with its balance of mixed-use urban
regeneration, investment property and fund management, has innate defensive
merits, while retaining a continuing impetus to embrace a variety of
opportunities for rapid growth. We believe that the Group is well positioned to
outperform in the years ahead, in terms of our core measure of total return,
regardless of market environment. That belief underpins our considerable
enthusiasm as we look to the future.'
For further information, please contact:
Quintain Estates and Development PLC
Rebecca Worthington
020 7495 8968
Financial Dynamics
Stephanie Highett/Dido Laurimore
020 7831 3113
FINANCIAL HIGHLIGHTS
31 March 31 March Change
2007 2006 %
BALANCE SHEET
Net asset value per share (pence) 660 526 + 25.5
Diluted net asset value per 655 516 + 26.9
share (pence)
EPRA net asset value per 784 612 + 28.1
share (pence)
Total return (%) 27.5 21.0 -
EPRA total return (%) 29.9 25.2 -
DIVIDENDS
Total dividend per share (pence) 11.75 10.50 + 11.9
Final dividend per share (pence) 8.25 7.25 + 13.8
INCOME STATEMENT
i. Continuing operations
Operating profit 5.1 4.1 + 23.7
Profit before tax (£m) 51.6 65.0 - 20.5
Earnings per share (pence)
Basic 35.0 46.1 - 24.1
Diluted 34.3 45.2 - 24.1
ii. Total operations
Operating profit 5.0 - -
Profit before tax (£m) 51.6 60.9 -15.3
Earnings per share (pence)
Basic 34.9 43.9 - 20.5
Diluted 34.3 43.0 - 20.2
Chairman's Statement
In my first statement as chairman of Quintain, I am delighted to be able to
report another outstanding year in which strong progress has been made across
our business. The most striking feature of the results is the substantial
capital uplift, driven largely by our big urban regeneration schemes at Wembley
and Greenwich. The valuation at Wembley this year has produced a 25.4% increase
to £524.0m, while Greenwich has seen a 43.8 % increase to £225.0m, with both
percentage increases measured after capital expenditure in the year. Much of
this enhancement in value stems from the buoyancy of the London residential
market, which has been reflected in the very successful outcome of recent sales
of residential units at Wembley. These are discussed in greater detail in the
Operating and Financial Review.
It is gratifying that Quintain's innovative, large-scale schemes, designed to
create sustainable communities, are delivering value on such a scale for
shareholders as well as other stakeholders. It is also pleasing that this
success, together with the impressive contribution of the rest of the business,
has been mirrored in an outstanding share price performance relative to the
market and the property sector. Over the past five years Quintain has delivered
a total shareholder return, based on the increase in share price adding back the
dividend paid, of 354.4%, compared with a return of 50.4% for the FTSE 350 Index
and 187.7% for the FTSE Real Estate Index. Over 10 years the Company is ranked
number two in the March universe of funds covered by the Investment Property
Databank ('IPD'), the industry benchmark. That is a tribute to the dynamism of
Quintain's entrepreneurial management team and to the robustness of its business
model.
During the year the business achieved a total return, as measured by the
increase in net assets per share adding back the dividend paid of 27.5% or 22.7%
net of Retail Price Index inflation. The total return on the measure recommended
by the European Public Real Estate Association (EPRA) and defined in the
Operating and Financial Review was 29.9%. Both measures are far above our
internal target of 10% total return net of RPI inflation, a target set at the
time of the Company's flotation in 1996. It has been exceeded in every year
since.
We have also, once again, significantly outperformed the property market as
measured by IPD. Our total ungeared return, as defined in the Operating and
Financial Review, for the year to 31 March 2007 was 26.6%, compared with IPD's
March Universe of 15.8%.
During the year the net asset value per share rose by 25.5% from 526p to 660p
and on a diluted basis by 26.9% from 516p to 655p. On an EPRA basis adjusted
diluted net asset value per share rose by 28.1% to 784p per share. As mentioned
earlier, the main driver of the uplift was the surplus on property revaluation.
A more detailed commentary on the valuations, together with a full review of our
operations, follows in the Operating and Financial Review.
Profit before tax fell 20.5% from £65.0m to £51.6m, while earnings per share
from continuing operations fell 24.1% on a diluted basis from 45.2p to 34.3p. As
investment property revaluation movements are required to be included in the
Income Statement, the pre-tax profit figure has inevitably become more volatile
and the decline here reflects lower valuation surpluses on investment properties
held directly and in joint ventures. However the adjusted profit as defined in
the Operating and Financial Review showed a 25.8% increase from £15.9m to
£20.0m, with Quintain's fund management business making a significantly
increased contribution.
Borrowings net of cash have increased from £245m to £303m, while gearing remains
at 36%, the same level as last year.
Dividend
As a result of the year's strong performance, the Board is recommending an
increase in the final dividend of 1p to 8.25p giving a total dividend for the
year of 11.75p (2006: 10.50p), representing an increase of 11.9%. The final
dividend will be paid on 7 September 2007 to shareholders on the register as at
27 July 2007. The Company's intention is to maintain a progressive dividend and
this policy will continue, subject to cash requirements.
Corporate Governance
Quintain takes its corporate governance responsibilities very seriously and is
compliant with the Combined Code except in relation to bonus arrangements, where
under exceptional circumstances there is no upper limit in the aggregate for
share awards. The Board's explanation for this will be given in the Corporate
Governance Report in the Annual Report and Accounts. Quintain also goes beyond
the requirements of the Combined Code in a number of areas, most notably in
putting the report of the Audit Committee to the vote at the Annual General
Meeting. In addition, both the Chairman of the Audit Committee and the
Remuneration Committee are appointed annually by shareholders.
People
Impressive as the financial numbers are, they say nothing about one of
Quintain's distinctive competitive advantages, which is its human capital. The
management team has demonstrated a capacity for constant innovation, putting the
Company at the forefront in creating sustainable communities, exploring
undervalued niche areas of the property market and making pioneering financial
moves such as our profitable venture into the property derivatives market. This
habit of constant self-renewal and innovation has been facilitated by a flat
management structure, together with an intense internal competition for capital
between the different parts of the business; likewise by the encouragement,
within a prudent control framework, of risk-taking where this will deliver
appropriate returns for shareholders. Despite the increasing size of the
business, Quintain's entrepreneurial culture, strong work ethic and emphasis on
risk management is very much alive and well, as the past year's performance
indicates. I would like to thank all the staff for their impressive contribution
and commitment to the Company during the year.
I should also like to pay tribute to my predecessor Nigel Ellis, who stepped
down from the chairman's role on 31 March. Since he joined the Board in 1995,
Nigel's leadership, wise counsel and long experience in property have been an
invaluable resource for a company experiencing very rapid growth and growing
risk exposure. Everyone at Quintain owes him a great debt. Nigel will remain as
a non-executive director until the Company's annual general meeting on 4
September 2007.
In the course of the year Tom Cross Brown resigned from the Board. I would like
to offer warm thanks for his contribution to Quintain.
Outlook
Since the start of the year conditions in the commercial property market have
become less buoyant.
However, Quintain's diversified business model, with its balance of mixed-use
urban regeneration, investment property and fund management, has innate
defensive merits in such circumstances, while retaining a continuing impetus to
embrace a variety of opportunities for rapid growth. Our gearing remains low. We
believe that the Group is well positioned to outperform in the years ahead, in
terms of our core measure of total return, regardless of market environment.
That belief underpins our considerable enthusiasm as we look to the future.
John Plender
Chairman
13 June 2007
Operating and Financial Review
The past year has been one of substantial progress for Quintain. We have moved
from the planning to the delivery phase in two of our major regeneration
projects, at Wembley and at Greenwich. We have added a new fund, iQ, to our Fund
Management division and we have continued to realise value from our Investment
Portfolio. The progress of our three divisions is detailed later in this review.
Our significant progress this year, however, marks only the start of a process.
With the inherent potential of our asset base, an exceptional skill set and a
strategy which is designed to produce superior returns, we anticipate further
substantial progress in the period ahead.
Strategy and Objectives
Quintain's strategy is to focus on the financial characteristics of properties
to identify assets and special situations where we can use our skills to create
value. We seek out opportunities and price anomalies in three areas:
- large scale urban regeneration
- specialist fund management
- the UK secondary property investment market across all sectors.
By following this strategy and managing the risk return matrix, we have produced
consistently high shareholder returns combined with low volatility. This is
demonstrated by our position in the Investment Property Databank (IPD) Index
over 10 years of first percentile performance and over three and five years of
third and second percentile performance respectively. Our objective, as well as
outperforming the IPD Index, is to deliver a minimum total return of 10% real.
We have achieved this every year since the Company's flotation in 1996 and on an
annualised basis, total return as measured on a 10-year UK GAAP basis is of the
order of 22%. We believe our strategy, which is designed to maximise returns
over the medium to long term, should endure successfully in both bull and bear
markets.
Transforming Strategy into Action
Our current structure - Special Projects, Fund Management and the Investment
Portfolio - reflects the way in which we believe we can best realise and deliver
our objectives. Unusually for a property company, we are not wedded to the
concept of the long term retention and development of assets. We simply believe
that, at this point in time, our current structure and asset base will produce
the best possible risk adjusted returns for our shareholders. Our combination of
specialised fund management, urban regeneration and the procurement of
non-rental revenue streams through estate management ('running towns and cities
as businesses') is conducive to higher returns and lower volatility.
Special Projects
In the case of our large scale urban regeneration projects, the Company's
intention is to be a long term owner of major estates, thus enabling us to
directly influence important policy issues, since the local community is
confident of our enduring commitment. By doing this we are also able to finance
and procure long term income streams from sources such as telecommunications,
power and branding. While we intend to retain the freehold or long leasehold of
these sites, capital will be recycled through the sale of leasehold interests,
as well as by bringing in joint venture partners.
During the course of 2006 we moved from the planning stage to the delivery stage
in both of our largest projects - the regeneration schemes at Wembley and
Greenwich. This development phase inevitably means we will need to commit more
capital to these projects, both from our own and third party resources.
Fund Management
Fund Management operates in areas with high barriers to entry and plays several
roles in our business. It produces high rates of return. It also creates revenue
streams, which, along with those from the Investment Portfolio, support
underlying earnings. It also reduces our risk profile through the utilisation of
third party balance sheets. In Quintain Fund Management ('QFM'), we are rapidly
building critical mass, including the formation this year of the iQ student
accommodation joint venture with The Wellcome Trust. In addition, QFM has an
important synergy with Special Projects. This is being exploited through
agreements such as that for student accommodation at Wembley. This synergy will
enable us to forward-fund certain elements of our regeneration schemes and will
allow us to recycle equity, whilst keeping a carried interest and increasing our
funds under management. In order to fulfil our ambitions in fund management, we
are prepared to consider portfolio acquisitions and corporate deals.
Investment Portfolio
Our Investment Portfolio is key to our strategy of making good returns through
stock picking. The Investment Portfolio comprises secondary property, which we
believe has upside potential. Tactically, over time the size of our investment
portfolio will expand or contract, depending on our assessment of prevailing
market trends and available opportunities. During the last few years, we have
been a net seller of commercial properties, reflecting our view of market
conditions and wish to take profits.
Over time, additional revenue streams deriving from our fund management and
urban regeneration businesses will make us less dependent on rental and other
income streams from our investment property portfolio and reduce still further
our exposure to a downturn in the investment property market.
The Market and Prospects
Quintain is well positioned to create shareholder value in most market
conditions.
The long run bull market in commercial property, which was driven primarily by
yield compression, is slowing. As anticipated last year, a changed outlook for
interest rates has been a major factor in a market correction, particularly in
the secondary investment market. Outstanding debt in the property market stands
at a record high and the highly leveraged borrower is potentially vulnerable. A
reverse yield gap has reappeared, with the 10 year gilt rate currently standing
at 5.25%, compared with the All Property initial yield of 4.6%. In many sectors
and locations there is also little prospect of significant rental growth, in
real terms. With no foreseeable positive indicators, yields seem set to rise in
some sectors and at best drift sideways in others.
The outlook for total property returns over the next few years is therefore a
major issue for most market participants, with the majority of forecasts
indicating single figure total returns in the short to medium term.
Not all elements of the commercial market are negative, however, with a notable
exception being the market for offices in the City and West End. Institutional
and overseas demand remains strong and banks appear better positioned to manage
bad debt risk. The London residential market also remains robust.
Quintain's strategy will enable us to take advantage of these market conditions.
In our view, our large scale urban regeneration schemes are conservatively
valued, with delivery programmes that can be amended to suit market conditions.
The housing shortfall and favourable demographics in London provide positive
indicators for our regeneration projects at Wembley and Greenwich.
One of our core skills is that we are good opportunistic stock pickers and a
'shake out' in the secondary market should enable us to compete even more
efficiently, mainly through the activities of our Investment Portfolio division.
Our Fund Management division also has defensive qualities. Demography and
social policy favour significant growth opportunities for our Quercus
(healthcare) and iQ (student accommodation) funds. Both offer sustainable real
rates of return through the linkage of rents to the Retail Price Index.
The Chairman of the Board
Nigel Ellis, who has served as a non-executive director of Quintain since 1995
and as Chairman since 1996, stepped down from his role as Chair on 31 March this
year. He will continue to serve as a non-executive director until our AGM in
September. Although our new Chairman, John Plender, has already paid tribute to
Nigel, I would like to add my own, personal, tribute to him. Nigel's
contribution to the development of Quintain has been immense. He has acted as a
long-term friend, confidant and mentor and a great deal of Quintain's success
today is, I believe, due to his wise counsel.
John Plender has been a non-executive director of Quintain since 2002 and his
extensive experience of investment and corporate governance issues has already
proved invaluable. I anticipate that his well-structured views and his wisdom
will stand us in good stead in the years ahead.
Our People
It is only through harnessing the skills and the vision of our employees that we
can achieve our objectives and realise our strategy. In terms of people numbers,
we are still a relatively small organisation. Our progress is in great measure
due to this dedicated and talented band of people. We strive to attract and
retain individuals of the highest calibre and have designed development
programmes and employment packages to ensure their continued enthusiasm and
pride in the organisation for which we all work. My thanks to them all.
Operating Review: Special Projects
Our Special Projects division focuses on capital growth, in particular deriving
upside from planning gain and development. The largest component is the urban
regeneration programme, which is typified by the schemes at Wembley and
Greenwich.
Special Projects - Main Project Valuations
Valuations as at
31 March 2007
£m
Wembley Complex including Palace of Industry 524
Greenwich Peninsula 195
Emersons Green, Bristol 29
Docklands Depot, Silvertown 18
Other special projects 24
Total direct property 790
Investment in joint ventures
Greenwich, investment in MDL 31
Other joint ventures 12
43
Our Development Programme is shown in the table below:
Development Programme
Project Sector Share Area GDV £m Planning Timing
(1)
Wembley Mixed use 100% 6.17m sq 2,300 Outline Now-2017
Complex ft
Greenwich Mixed use 50% 13.2m sq 5,000 Outline Now-2023
Peninsula (2) ft
Bristol and Bath Science 50% 829,000 203 Outline 2008-2018
Science Park (2) Park sq ft
City Park Gate Mixed use 50% 1.0m sq ft 200 Resolution 2008-2018
Birmingham (2) to grant
Middlehaven, Mixed use 50% 1.0m sq ft 187 Outline 2007-
Phase 1 (2) 2014
Arrow Valley Distribution 100% 140,000 13 Detailed 2007-
Redditch sq ft consent 2008
Emersons Mixed use 65 2,650 units - Submitted 2008
Green acres of 275 Residential + 40 onwards
Bristol acre site acres
employment
50,000 sq ft retail
New England Residential 25% 122,00 33 Detailed 2007-
Quarter sq ft consent 2009
Brighton
Dorset House, Student 100% 82,000 sq Being 2008-
Oxford accommodation ft prepared 2010
Palace of Industry Mixed use 100% 13 acres - Zoned for 2010
Wembley mixed use onwards
Docklands Depot Mixed use 66.7% 12.6 acres - 2012
Silvertown onwards
Gallion's Park Residential 25% 3 acres - 2008-
2010
(1) GDV is gross development value. This is only shown where planning has been received.
(2) These properties are subject to a development agreement.
Performance
This has been a year of substantial progress for Special Projects. Highlights
have included the start of construction for, and sale 'off-plan' of, all
privately-owned apartments in our first residential development at Wembley and
the opening of the refurbished Arena and Arena Square (now known as 'The Square
of Fame'). We have announced the acquisition of the Stadium Retail Park, have
received planning consent for the blocks known as W03 and W04 and anticipate
signing heads of terms for a retail joint venture within the next few weeks.
At Greenwich Peninsula, we achieved the sale of the first land plot to
residential developers Bellway Homes and have recently announced the receipt of
reserved matters planning consent for this site. In May 2007 we announced the
restructuring of our agreement with Lend Lease, as a result of which Quintain
now has a 50% share of the new joint venture. A chief executive with a strong
house building background has also been appointed for the 3,000 residential unit
Peninsula Quays development.
BioRegional Quintain has also had a year of notable progress, with the signing
of a development agreement for a 40 acre site at Middlehaven in November 2006,
followed by the submission in May this year of detailed plans for the first two
buildings. In February 2007, BioRegional Quintain was named as the developer of
a zero carbon exemplar scheme in London, in partnership with Crest Nicholson
while, also in partnership with Crest Nicholson, planning permission was granted
in early 2007 for a sustainable community in Brighton.
Wembley
Construction began in the early part of the year on our first residential
development, W01. W01 is a mixed use development with residential accommodation
located on the first floor and above.. All of the 145 private apartments were
sold 'off-plan'. In addition to the private apartments, W01 will include 86
shared ownership and 55 socially rented apartments. A joint venture was signed
with the Genesis and Family Housing Associations during 2006 in relation to this
block.
Following our successful receipt of reserved matters consent for the blocks
known as W03 and W04, we made an application to Brent Council for an 'enhanced'
scheme in March 2007 which included a further 67 apartments for W03, bringing
the total to 403. Significantly, in terms of realisable values, the existing
planning permission has established the principle that the units in W03 are to
be entirely privately-owned.
Early indications are highly positive for our second development, W04 or 'The
Quadrant', marketing for which began in May 2007. All those apartments which
have been released for sale were sold 'off-plan'. These latest sales achieved an
average price per square foot of £527 and a top price per square foot of £630,
in a block where 70% of the apartments are affordable. We intend to be on site
for W04 in late 2007.
A reserved matters application has been made for a 402 room 4-star Hilton Hotel
and adjoining 656 unit student accommodation block. The student accommodation
element of the scheme will be forward-funded by our iQ fund, illustrating the
synergistic benefits of our business model.
During the course of 2006, demolition work began to clear the western side of
the Wembley site, including the demolition of the 157,000 sq ft Elvin House
office block and the Conference Centre and Exhibition Halls. It is anticipated
that this demolition work will be complete by autumn 2007.
Masterplanning has begun for the Palace of Arts and Industry site and it is
anticipated that a planning application will be made for 2.2m sq ft of mixed use
space in early 2008.
We further consolidated our landholding at Wembley with the acquisition of the
2.7 acre Stadium Retail Park for £21.7m. This is a strategic site which adjoins
our existing site and fronts Olympic Way. The acquisition brings with it 37,000
sq ft of open A1 planning consent and will allow us to optimise the development,
advertising and branding value of the access to Wembley Stadium from Wembley
Park Station.
Wembley Arena, which opened to the public in April 2006 following a £36m
refurbishment, is operated by Live Nation under a 15 year agreement. The Arena
is performing well and has recently won two major entertainment industry awards,
the Pollstar Award for Best Venue and the ILMC 'First Venue to Come In to Your
Head' Award. With over 170 performances and attendance numbers of approximately
1.4m, the Arena has had an excellent first year of operation following the
refurbishment. The Wembley Plaza Hotel, which was acquired in August 2006 for
£11.0m, has been trading ahead of expectations. An ongoing refurbishment
programme and the charging of premium rates for Arena nights have resulted in an
increase in chargeable room rates.
The Square of Fame is building critical mass as a tourist site, with 10 plaques
showing the hands of iconic entertainers already in place and more planned. We
have also recently implemented a public arts policy. Through an agreement with
the Cass Foundation, we will feature the works of major British sculptors in the
Square on a rotating basis.
Sustainability is a key element of our delivery strategy at Wembley and during
the course of the year it was, for example, agreed that we should install the
Envac waste disposal system at the site. This system cuts down on road transport
of waste, improves hygiene and reduces odours.
Opportunities to capitalise on income streams from running the Wembley site as a
business are progressing. Media advertising for the day of the Cup Final alone
realised over £75,000 and it is anticipated that the development of the site and
the installation of media cubes will substantially increase opportunities for
sponsorship and advertising as well as community messaging. We anticipate the
signing of an agreement with a retail partner and the signing of heads of terms
with a telecommunications partner. Negotiations are also well advanced for an
agreement with commercial partners on infrastructure and media content.
Wembley Gross Development Value ('GDV') and construction detail by plot
Building GDV Construction Cost Construction Construction
£m £m Start End
E01 169 97 Sep 09 Sep 12
W01 67 52 Aug 06 Sep 08
W03 176 97 Mar 08 Mar 11
W04 79 60 Nov 07 Mar 10
W05 203 152 Feb 08 Sep 10
W06 84 49 Oct 08 Sep 10
W07 118 72 Jul 08 Sep10
W08 118 74 Feb 09 Sep 11
Other Retail & Parking 136 79 May 08 Aug 10
Notes: GDV's and Costs are as at 31 March 2007 and ignore cost and value
inflation
Construction costs include professional fees but exclude finance costs
Greenwich Peninsula
In partnership with Lend Lease and working in agreement with English
Partnerships, we are regenerating a 194 acre site at Greenwich Peninsula. It was
announced in September 2006 that Bellway Homes, one of the UK's top five
housebuilders, has been selected as the first residential developer to build
apartments at Greenwich Peninsula. Bellway will deliver a high quality urban
block of 229 riverside apartments on the southern part of the site. A reserved
matters application has been consented and it is anticipated that work will
start on the development in late 2007, with the apartments ready for occupation
in 2009.
In keeping with our strong sustainability agenda at Greenwich, all of the homes
will have, at the very least, an EcoHomes 'Excellent' rating. Opportunities for
renewable energy initiatives are also being investigated.
Peninsula Square, which provides access to the O2 entertainment venue and which
will form a focal point for the new business district at Greenwich, has been
completed and will open to the public in summer 2007.
In May 2007, a revised structure was announced for the joint development at
Greenwich Peninsula with Lend Lease. A new 50:50 joint venture holding company,
Greenwich Peninsula Regeneration Limited (GPRL), has been established which
directly owns Peninsula Quays Limited, the vehicle that will carry out the
proposed development of 3,000 homes on a 22 acre site in the north west of the
Peninsula. We believe this site, which overlooks Canary Wharf, will achieve
premium residential prices per square foot and so offers the greatest upside for
development. A chief executive has been appointed for Peninsula Quays and the
first plot at Peninsula Quays is currently being designed. We anticipate a
submission for reserved matters consent will be made in respect of the first
block in September with a target of being on site by early 2008.
The revised structure for the joint development is part of an acceleration of
our delivery of the emerging new community at Greenwich Peninsula and will allow
Quintain and Lend Lease to carry out joint management of the ongoing
development.
Also in May 2007, it was announced that Ravensbourne College for Design and
Communications will relocate to Greenwich Peninsula. A planning application has
been submitted and it is anticipated that the relocation will be complete by
2010.
At the southern end of the site we are currently in negotiations with a group of
housing associations to form a joint venture to develop a block with a high
affordable housing content. It is anticipated that submission of the planning
application for this block will take place in September.
Under the First Time Buyers Initiative, we have received an allocation from
English Partnerships. Subject to final legal agreement, design work will begin
shortly on this plot.
Greenwich GDV and construction detail by plot
Plot Land Owner GDV Construction Construction Construction
Reference £m Cost Start End
£m
M0116 EP 29 21 Jul 08 Dec 09
M0114 EP 58 34 Jul 08 Dec 09
N0602 QED 180 107 Jul 08 Mar 11
N0203 EP 113 73 Jan 08 Jun 10
N0206 EP 98 61 Oct 08 Jun 10
N0607 QED 122 87 Jun 09 Jun 12
N0204 EP 146 96 Jan 08 Mar 09
N0205 EP 68 49 Apr 09 Mar 11
N0603 QED & EP 162 101 Oct 10 Sep 13
N0502 EP 40 19 Feb 11 Mar 13
Notes: GDVs and costs are as at 31 March 2007 and ignore cost and value
inflation
Construction costs include professional fees but exclude finance costs
EP = English Partnerships
QED = Quintain Estates and Development PLC
City Park Gate, Birmingham
Development of this 5.1 acre site, which is immediately to the east of Moor
Street Station, is currently being undertaken in partnership with Countryside
Properties plc. Following submission of a reserved matters application in late
2006, resolution to grant was received from Birmingham City Council in May 2007
and it has now been confirmed that this application will not be 'called in'.
Designs are now being advanced for a mixed use scheme which will include 825
residential units (575,000 sq ft), 230,000 sq ft of office space and 70,000 sq
ft of retail space. This revised plan will, we believe, improve density, mass
and costings and will enhance returns.
BioRegional Quintain
Our 50:50 joint venture with BioRegional Properties Limited continues to make
good progress. A development agreement was signed in November 2006 for a 40
acre, £200 million development at Middlehaven, Middlesbrough. It is anticipated
that on completion this will be the largest zero carbon development in the UK.
Treasury grant funding is in place for this scheme and detailed plans were
submitted in May 2007 for the first two buildings on the site, which comprise
150 residential units and 14,000 sq ft of commercial space. Heads of Terms have
also been signed with Hilton Hotels for a 150 bed Garden Inn hotel and the
opening, in 2008, of Middlesbrough College will bring animation to this site at
an early stage of its development.
In partnership with Crest Nicholson, BioRegional Quintain was named as the
developer of 'One Gallions' in February 2007. One Gallions is an exemplar zero
carbon residential scheme at Gallion's Park, Beckton, London. Working alongside
housing association partner Southern Housing Group, the scheme will deliver a
wide range of affordable homes. One Gallions was awarded the accolade of
Residential Project of the Year at the British Housing Awards for 2007.
In early 2007 planning permission was granted to joint developers Crest
Nicholson and BioRegional Quintain for a sustainable community in Brighton.
Designed to be the most environmentally advanced development in the UK,
construction of the 172 apartments and 24,000 sq ft of commercial space is
expected to begin in August 2007, with the first properties going on sale in
late 2007.
BioRegional Quintain Gross Development Value and Construction Detail by Site
GDV Construction Costs Construction Construction
Start End
Brighton £33.8m £21.7m Aug 07 Aug 09
Middlehaven £21.8m £17.8m Nov 07 May 09
Phase 1
Gallion's Park £52.5m £34.4m May 08 May 10
Note: Brighton and Gallion's Park are 50:50 joint ventures between
BioRegional Quintain and Crest Nicholson
Quintain City Partnerships Limited
In February 2007, Quintain announced the formation of a 50:50 joint venture with
Lace Market Properties Limited, a Nottingham based developer. Known as Quintain
City Partnerships Limited, the joint venture has been created to undertake
mainly residential property development schemes, in areas where Lace Market has
local expertise or knowledge.
Emersons Green, Bristol
Key principles of cost sharing between adjoining landholders have been broadly
agreed, and a revised masterplan was submitted in July 2006 for a mixed use
development of 2,650 dwellings, employment, retail and supporting facilities. It
is expected that this will be considered by the local authority in late 2007.
Quintain owns 65 acres of the 275 acre site.
Silvertown
Following expiry of the Carlsberg Tetley lease on this 12 acre site, which is
owned in joint venture with the London Development Agency, proposals are now
being drawn up for this site. In order to maximise income whilst these plans are
being progressed, we have made a medium term letting of 98,000 sq ft.
Synergy with Fund Management
Special Projects has an important synergy with our fund management business
which is being exploited, for example, in relation to the student accommodation
at our Wembley site. This will enable us to forward-fund these elements of our
regeneration schemes and allow us to recycle equity, whilst keeping a carried
interest and increasing our funds under management.
In addition, Special Projects' local knowledge and contacts have afforded useful
synergies with the selection, for example, of Quantum (our 50:50 specialist
science park partnership with Morley Fund Management) by the South West of
England Regional Development Agency as the preferred development and funding
partner to create a new science and technology park at Emersons Green. The
science park site adjoins Quintain's own landholding at Emersons Green.
Operating Review: Quintain Fund Management
Quintain Fund Management: Funds under Management
2004 2005 2006 2007
£m £m £m £m
Position as at 245 296 470 711
31 March
Quintain Fund Management plays several roles within the business. It creates
revenue streams, which, alongside rental income from our investment portfolio,
provide some of the income necessary to run the business. In its own right it
delivers high rates of return and also provides us with the opportunity to
retain a long term strategic interest in some of the assets we develop in
Special Projects by selling them down into our funds. We are unlikely to achieve
our ambitions in fund management through organic growth alone and we therefore
review opportunities for portfolio acquisitions and corporate deals on an
ongoing basis.
Performance
This has been a year of substantial growth for Fund Management. Funds under
management have grown from £470m to £711m and our pipeline is strong, with, for
example, £137m of student accommodation contracted for delivery over the coming
three years and heads of terms agreed for a further £227m. Rental income and
fees generated through our fund management activities grew 41% to £17.6m (2006:
£12.5m) and we recognised a total revaluation uplift of £27.9m. In December 2006
we signed the first development agreement for Quantum, our science park fund,
and in March 2007, we announced the introduction of The Wellcome Trust as a
partner in iQ, our student accommodation fund.
Quercus
Quercus, our healthcare fund, which is partnered with Morley Fund Management,
grew funds under management by 37% to £648.1m (2006: £470.3m) and delivered a
fund level return for the 12 months of 26.2% (2006: 49.7%).
During the course of the year Quercus continued to expand its asset base, with
acquisitions totalling £100.3m at an average net initial yield of 7.25%. Major
acquisitions included the purchase in October 2006 of seven care homes for the
elderly in the north east of England for a purchase price of £47.3m. In early
March 2007, five elderly care homes in the West Midlands and Doncaster areas
were acquired for £15.6m. Following the year end, five elderly care homes and
two units specialising in the care of clients with learning disabilities and
challenging behaviour have been acquired in the West Midlands and Kent for
£20.0m along with four elderly care homes in the Stockport area for £11.5m.
The healthcare market remains robust for operators and, with rising interest
rates, the merits of sale and leaseback are more evident. Accordingly, we expect
to be able to continue to build the fund in line with our business plan over the
coming year. Investment yields in healthcare remain firm and we expect this
combination of firm yields and RPI linked income to continue to deliver
investment outperformance over the coming year.
At the year end the fund comprised a total of 221 properties let to 36 tenants
operating nursing and residential care homes for the elderly, learning
disability and specialist care facilities and private hospitals.
At the year end, Quintain held a 28% interest in the fund. Asset management fees
received during the year were £3.0m net, including performance fees.
iQ
In March 2007 we announced we had entered into a 50:50 joint venture with The
Wellcome Trust to establish the iQ Property Partnership Fund. iQ has been
created to acquire, fund and develop student accommodation which will be
retained and managed on a long term basis. Quintain and Wellcome have each
committed up to £100.0m of equity to the joint venture, which includes assets
already contributed by Quintain. iQ's minimum duration is five years and it has
an initial target size of £600.0m.
The first two iQ schemes, in Sheffield and Nottingham, are complete, with both
properties delivered on time and well received by their occupants and the
universities. Further schemes, in Birmingham, Salford, Kingston, Bristol,
Preston, Edinburgh and Sheffield are under construction. Birmingham and Salford
are expected to be completed in late summer 2007 and the others are expected to
be completed in the late summers of 2008 and 2009. These, together with the
completed schemes, will have a combined value of more than £200m. Terms have
been agreed for a further £227m of schemes for delivery over the next three
years. In particular, heads of terms have been agreed between Quintain and iQ
for the sale and forward funding of 656 rooms of student accommodation at
Wembley for £56.1m. The transaction is subject to final planning consent with
the scheme expected to open in September 2010.
All of iQ's current schemes involve the forward funding of development partners,
but in future iQ will also consider the acquisition of sites for its own direct
development.
The student accommodation market continues to offer opportunity for investment.
Applications to UK universities for 2007 have risen 5.0% despite higher tuition
fees and another 50,000 student places are being made available via increased
funding. Deal flow is strong and the market is competitive, but we believe our
combination of specialist operational and investment skills gives us a market
advantage. A strong pipeline of further opportunities has been identified.
Quantum
Quantum, a 50:50 joint venture with Morley Fund Management, is a specialist
science park fund. In December 2006, Quantum signed a development agreement with
the South West of England Regional Development Agency to create a new science
and technology park, SPark, at Emerson's Green, Bristol. Quantum will fund and
procure primary infrastructure and associated servicing for the first 55 acre
phase of SPark. This will include building a 35,000 sq ft innovation centre
which will act as the hub building on the park and an initial 'grow on' centre
which will provide additional space for companies as they expand. Further
development will be market led over the ten year duration of the agreement, with
Quantum retaining and managing a critical mass of accommodation on the park on a
long term basis. When fully built out, the first phase is estimated to have a
gross development value of approximately £200m. Quantum's initial investment is
estimated to be £26m. Subject to the clearance of reserved matters, it is
anticipated that work will begin on site in early 2008. We are actively
pursuing several other opportunities in the science park sector.
Operating Review: Investment Portfolio
Our Investment Portfolio predominantly comprises secondary commercial assets,
situated throughout the UK, which require active management. The portfolio is
currently split as follows: 69% offices, 17% industrial, 10% retail and 4%
other. The income flow generated by the Investment Portfolio is used to support
the Company's other activities.
Performance
During the year we continued to be a net seller of property, with market
conditions making it difficult to find value. In line with our strategy of
exiting areas where we do not see significant further asset value upside or
potential market contraction, we have sold a number of properties. Significant
sales included the Whitehall Industrial Estate, Colchester and Chateau Rouge,
Lille. The total value of sales within this portfolio during the year was
£38.3m at a net initial yield of 5.4%. Conditional sales made since 1 April 2007
total £6.5m and reduce the net initial yield to 4.9% on all disposals to date.
Acquisitions within this division during the year totalled £24.1m at an overall
net initial yield of 8.3%. Principal acquisitions included Hudson House, York
for £12.0m.. Voids across the Investment Portfolio totalled £4.8m, with
significant additional post year end lettings or sales reducing the voids to
£4m. Over £2m of leasing or void sales have been completed throughout the year.
Planned refurbishments completed include the Royal Exchange, Manchester and St
Peter's House and Belgrave House, Sheffield.
Peter Doyle was appointed to head Quintain's Investment Portfolio in September
2006.
Other Activities
Our commitment to sustainable development includes supporting the development of
products that are more environmentally friendly than traditional alternatives.
Serrastone is a company, based in France, which owns the exploitation licence
for a technology to produce low carbon, non-toxic blocks with the potential to
recycle rubble from demolished buildings and quarry waste. An investment of
£2.9m relating to Serrastone SA is included in our balance sheet.
The £15.0m property derivative contract, which was a swap between the IPD All
Property Index and LIBOR plus a margin, expired on 31 December 2006. The profit
for the year was £1.2m and the profit for the 16 month period of the contract
was £2.8m. Whilst we have taken out no further positions, as liquidity increases
we see the derivatives market for both commercial and residential property as
offering opportunities to hedge exposure or, in the case of options, underwrite
positions.
Outlook
During the year we have made substantial progress in turning some of our
potential into solid realisable value, for example through the progress made
with our residential developments at Wembley and the formation, with our
partners Wellcome, of the iQ fund. Some of this activity is reflected in the
increased independent valuations. Despite increases in interest rates, we are
confident the upward trend in our activity levels will accelerate throughout the
current financial year, creating further substantial shareholder value.
Adrian Wyatt
Chief Executive
13 June 2007
Financial Review
Headline Results
The basic net asset value per share at 31 March 2007 was 660p, an uplift of
25.5% from 526p in the prior year. On a diluted basis, the net asset value per
share rose 26.9% from 516p to 655p. Adjusted diluted net asset value per share,
the measure recommended by The European Public Real Estate Association (EPRA),
rose by 28.1% to 784p per share (2006: 612p).
31 March 2007 31 March 2006 % increase
NAV per 660p 526p 25.5%
share basic
NAV per 655p 516p 26.9%
share diluted
NAV per 784p 612p 28.1%
share
EPRA(1)
Dividend 11.75p 10.5p 11.9%
per share
Total return 27.5% 21.0%
per share(2)
Total return 29.9% 25.2%
per share
EPRA(3)
(1)The EPRA NAV per share excludes the fair value adjustments for debt and
related derivatives and deferred taxation on revaluations and is calculated on a
fully diluted basis as set out in the table below.
(2)The total return is calculated by the increase in net assets per the
consolidated balance sheet adding back the dividend paid.
(3)This uses the net assets per EPRA as shown in the table below.
The table below reconciles net assets as shown in the consolidated accounts to
the definition of net assets set out by EPRA.
31 March 31 March
2007 2006
£m £m
Balance sheet net assets 846.1 676.7
Deferred tax arising on revaluation movements,
capital allowances and derivatives
Group 151.0 108.0
Joint ventures 14.1 5.7
Associates 0.4 0.6
Fair value adjustment on interest rate swaps
Group 4.4 12.9
Joint ventures (0.6) 0.2
1,015.4 804.1
Dilutive effect of options 9.6 9.8
Dilutive effect of convertible - 2.9
EPRA net assets 1,025.0 816.8
Operating Performance
Adjusted profit for the year was £20.0m (2006: £15.9m). The table below shows
the reconciliation from IFRS profit before tax to adjusted profit.
31 March 31 March
2007 2006
£m £m
IFRS profit before tax 51.6 65.0
Revaluation movements
Gain on revaluation of investment properties (12.2) (23.9)
Deficit on revaluation of investment properties 0.9 1.8
Deficit on revaluation of development properties 0.2 1.8
Reversal of deficit on revaluation of development properties (1.2) (3.6)
Gain on revaluation of properties held in joint ventures (27.9) (29.4)
Deficit (gain) on revaluation of properties held in associates 0.6 (0.4)
Tax charge on profits in joint ventures 9.7 1.6
Tax (credit) charge on (loss) profit in associates (0.2) -
Change in fair value of derivative financial instruments (1.5) 3.0
Adjusted profit 20.0 15.9
As explained within the Chief Executive's Review our investment portfolio is
strategic.. However under current market conditions, tactically we have been net
sellers. This net selling has reduced rental income by £4.2m. Voids have further
reduced it by £1.8m. An additional contribution of £5.6m has arisen from the
Arena being included in rental income following the 15 year agreement with Live
Nation. Overall rental income from directly owned properties fell by 0.7% to
£29.7m. Rental income arising from our equity ownership within funds that we
manage has increased by 36.5% to £10.7m, reflecting our strategic ambition of
growing funds under management.
31 March 2007 31 March 2006
£m £m
Directly Within Total Directly Within Total
owned joint owned joint
properties ventures properties ventures
Gross 29.7 10.7 40.4 29.9 7.8 37.7
rental
income
Contracted 21.0 13.4 34.4 23.7 9.7 33.4
annualised
rent
ERV* 27.4 13.7 41.1 35.4 10.1 45.5
*ERV is the estimated rental value
During the year the level of voids has fallen by £1.6m to £6.4m. As a
proportion of ERV, voids have remained at 23.4%. Of these only a small amount
remains intentional (£0.6m) and mainly relate to sites at the Greenwich
Peninsula which are being vacated for redevelopment. Those properties where
short term lettings are being sought pre-development or where further
refurbishment is being considered have been included within unintended voids and
make up approximately 45% of the total. A table of voids is set out below:
£m
Royal Exchange, Manchester 1.0
The Synergy Building, Sheffield 1.0
Docklands Depot, Silvertown, EC3 0.9
Greenwich Peninsula, SE10 0.6
The Forum, Exeter 0.5
First National House, Harrow 0.5
Smallbrook, Queensway, Birmingham 0.4
Kansas Building, Liverpool 0.3
Other 1.2
Total 6.4
The average unexpired lease term across the portfolio was 16 years (2006: 14
years). The increase is due to the larger weighting of nursing home properties,
in turn reflecting our increased equity in the Quercus fund. These properties
are typically on 35 year leases.
The table below sets out the lease expiries by contracted annualised rent
including our share of joint ventures across the Group:
£m
Less than 1 year 5.5
1 to 2 years 3.7
2 to 5 years 4.6
5 to 15 years 3.2
Greater than 15 years 17.4
Total 34.4
Quintain aims to create a diverse tenant base in order to manage risk. Our
tenant covenant strength has been measured by IPD using Experian and shows 65.6%
of our rent roll is delivered from negligible, low and low/medium risk
covenants. Live Nation is by far the largest tenant, comprising 10.9% of
contracted annualised rent. The risk of this exposure is reduced by the fact
that receipts equating to approximately two thirds of the rent are received in
Quintain controlled bank accounts before being passed on and also by the strong
underlying business. The next largest tenant is an exposure of 3.0% and the top
10 tenants represent 29.7% of contracted annualised rent.
This year saw operating income from hotels for the first time with the
acquisition of the Plaza Hotel at Wembley in August 2006. Turnover for the seven
months was £3.4m with a gross profit of £1.4m. This acquisition is strategic to
our land holding at Wembley as we intend to replace the hotel in time with a 402
bed 4 star Hilton hotel, for which we have a development agreement, and use the
existing land for residential development.
Net fees from fund management increased by 58% to £3.0m (2006: £1.8m). These
arose mainly from Quercus and reflect increasing funds under management and
performance fees of £0.6m (2006: £0.5m). We adopt a prudent policy in relation
to performance fees and do not recognise them until we have a high degree of
certainty that they cannot be clawed back.
Net revenue from other income rose by 32.2% to £3.7m. This includes income from
the property derivative contract which has now expired of £1.2m (2006: £1.6m),
surrender premiums of £1.5m (2006: £1.2m) and management fees and commissions of
£0.8m (2006: £0.6m). Within surrender premiums we received a premium of £1.7m in
relation to Smallbrook, Queensway of which £0.5m was provided for against
refurbishment costs.
Administrative expenses in relation to continuing operations were £25.8m (2006:
£22.7m). For discontinued operations they were £0.6m (2006: £3.2m) being costs
in relation to the Conference Centre and Exhibition Halls at Wembley which have
now been demolished. With the closure of these businesses, staff costs fell by
£0.8m to £18.4m, more than offsetting the overhead associated with running the
Plaza Hotel. In the running of the Plaza, 111 staff are currently employed, of
whom 97 work in an operational capacity and so their costs are charged to cost
of sales within gross profit. Further information is given in note 4 to the
accounts. Administrative expenses include £0.3m of audit fees paid to KPMG and
£0.08m for other services, the latter reflecting our policy of following best
practice in corporate governance which recommends that non-audit fees should not
be in excess of audit fees.
Sale of Non-Current Assets
The profit over valuation on the disposal of properties not held as current
assets was £18.6m (2006: £14.2m), with a profit on historic cost of £48.8m.
Sales proceeds Profit over valuation
£m £m
Ramada Hotel, Manchester 25.0 2.3
36-41 Gracechurch Street, EC3 24.8 3.4
Chateau Rouge, Lille 13.4 0.8
Tricare Nursing Homes 9.6 1.7
Acute Psychiatric Unit, Dartford 9.5 0.2
Pond Street, Sheffield 9.0 0.5
Other 25.3 3.0
Sale of subsidiaries:
iQ Trust - 50% of units 14.5 3.8
W01 - 50% land sale 7.6 2.9
Total 138.7 18.6
Revaluation Surpluses and Deficits
The net revaluation surplus arising from directly held investment properties was
£11.3m (2006: £22.1m). This reducing figure reflects our position as net sellers
in this area of the market as well as market conditions where yield compression
slowed and in some cases plateaued towards the end of the period. The
revaluation surplus on joint venture investments is incorporated within the
share of profit from joint ventures. Development property surpluses are credited
to equity except where deficits arise below cost in which case the charge and
any write back are included within the Income Statement. In the current year the
net surplus reflected in the Income Statement was £1.1m (2006: £1.8m). Surpluses
of £179.3m on development properties were reflected in equity.
Finance Expenses
Net finance expenses have fallen by 34.0% to £6.9m. Excluding the change in fair
value of interest rate swaps,which under IAS39 are classified as ineffective,
finance expenses have increased by 12.3% to £8.4m reflecting the higher level of
drawn debt. Of the interest capitalised in the year £5.8m relates to the Wembley
development, £1.8m to Greenwich and £0.8m to student accommodation sites where
development contracts were entered into.
31 March 2007 31 March 2006
£m £m
Interest payable 21.4 16.9
Interest capitalised (9.2) (7.8)
Interest receivable (3.8) (1.6)
Change in fair value of ineffective (1.5) 3.0
interest rate swaps
Total net interest payable 6.9 10.5
Profit from Joint Ventures
The profit from joint ventures in the year was £23.0m (2006: £32.9m). This
excludes net fees receivable of £3.0m for management, transactions and
performance which are shown within gross profit. The table below analyses the
components of profit. The increased rental income reflects a larger Quercus
portfolio. Next year's numbers will reflect a full year contribution from the iQ
fund. The tax charge was £9.7m (2006: £1.6m). The prior year was significantly
below the standard rate due to a one off tax credit.
£19.6m of the profit before tax came from our 28% ownership of Quercus. £4.3m
arose from our 50% share of the iQ fund. The majority of other joint ventures
relate to development opportunities that are in their early stages and so the
Income Statement mainly includes administration expenses. A detailed breakdown
of profit by joint venture is set out in note 12i to the accounts.
31 March 2007 31 March 2006
£m £m
Rent receivable 10.7 7.8
Trading profit - 1.3
Administration expenses (2.3) (1.5)
Revaluation surplus 27.9 29.4
Net finance costs (3.6) (2.5)
Profit before tax 32.7 34.5
Taxation (9.7) (1.6)
Profit after tax 23.0 32.9
Taxation and Tax Status
Since the introduction of REITS in the UK from 1 January 2007, Quintain has not
and does not intend to convert wholesale into a REIT as it is not consistent
with our strategy. For value creation we require the flexibility to develop out
elements of our large scale urban regeneration schemes and also to reinvest
income from investment properties into funding other elements of the business.
In not converting to a REIT we believe that the returns we make on a post tax
basis, without the confines of the existing rules, will be higher.
The effective corporation tax rate for the year in relation to income was 20.0%
(2006: 16.0%). The tax rate was below the standard rate of 30% because of the
availability of capital allowances, indexation relief and brought forward tax
losses. Over time we expect to move closer to the standard rate of tax as losses
are used up and because of changes in legislation relating to capital
allowances.
Balance Sheet
At 31 March 2007, the investment portfolio was valued at £288.9m including a net
revaluation surplus of £11.3m. The development portfolio surplus was £180.4m
giving a valuation of £769.3m. A table analysing activity is included within the
operating review.
Wembley
Of the development surplus, £106.0m related to Wembley, giving a year end value
of £524.0m, and was driven by the change in base price of residential
accommodation, substantiated by the recent sales of W01 and W04 and by
reflecting market expectations of sales price growth. Whilst the valuation is a
view of what the market may pay at any point in time, it is backed up by a
discounted cashflow model. This model is based on many assumptions and the table
below is included to afford the reader a better understanding of the dynamics
relating to some of these assumptions. The range set out does not necessarily
indicate the Company's view of what assumptions should be used.
Valuation £m Discount Rate
10% 9% 8% 7%
Increase in growth rate 0% 524 565 610 659
1% 567 611 659 713
3% 662 713 769 831
5% 771 831 897 970
Real growth rates currently shown in the model are 1.5% for the first two years,
followed by a one off 9% uplift as the regeneration effect takes place and then
a negative 1% for the remainder of the scheme, reflecting construction cost
inflation being ahead of sales price inflation. Savills, who have produced the
year end valuation, have used a discount rate of 10%. The Company believes there
is the opportunity for considerable upside to this valuation, given our view of
market conditions.
Our internal model reflects average starting prices for residential units at
£480 to £590 per square foot. Initial evidence on the lower quality blocks shows
that we are already ahead of these figures. If the starting price was £100 per
square foot higher the matrix set out above would then look as follows:
Valuation £m Discount Rate
10% 9% 8% 7%
Increase in growth rate 0% 633 679 728 785
1% 681 730 784 844
3% 784 841 904 973
5% 903 969 1,042 1,123
Greenwich
Our holdings at Greenwich contributed £69.8m to the revaluation surplus giving a
year end value of £225m. Progress on the site has given greater visibility to
the variables, particularly in relation to residential prices and growth, which
have led to an increase in the valuation. Real rates of growth currently shown
in the model are 1.5% to 2012, followed by a one off 9% uplift in 2013 as the
regeneration effect takes place and then a negative 1% for the remainder of the
scheme. Savills have used a discount rate of 12%. As for Wembley varying the
discount rate and growth rate gives the following sensitivities.
Valuation £m Discount Rate
12% 11% 10% 9%
Increase in growth rate 0% 225 245 267 291
1% 268 292 317 345
3% 364 395 430 467
5% 475 516 561 610
Our internal model has an average starting residential price of £515 per square
foot with a range of £400 to £628 per square foot. If the starting price was
£100 per square foot higher the matrix set out above would then look as follows:
Valuation £m Discount Rate
12% 11% 10% 9%
Increase in growth rate 0% 334 361 391 423
1% 83 415 449 486
3% 494 535 579 627
5% 627 678 734 797
The table below sets out capital commitments including our share of any
commitments within joint ventures. The £51.5m commitment to the iQ fund is our
share of forward funding agreements in relation to development pipelines.
31 March 2007
£m
Wembley - directly owned 12.2
Wembley - W01 19.8
Claybrook Drive, Redditch 2.1
iQ student accommodation fund 51.5
Quercus 6.8
Quantum science park fund 1.9
Meridian Delta Limited 1.1
Other 1.7
97.1
During the year, The Quintain Group Employee Benefit Trust purchased 500,000
shares at an average price of £5.90 per share to cover allocations under the
Executive Directors' Performance Share Plan. Quintain also bought 500,000 of
shares held in treasury for an average price of £6.07 of which 232,360 were
released to satisfy commitments under the Deferred Bonus Plan.
Joint Ventures
At 31 March 2007, Quintain had net investment in joint ventures totalling
£170.1m. A breakdown of this is included in the table below and more detail is
available in note 12i to the accounts.
Joint venture Share of equity Net investment £m
Quercus 28% 112.6
Meridian Delta 49% 31.1
iQ 50% 14.7
Quintessential Homes 50% 5.6
Quintain Birmingham 50% 1.9
Bioregional Quintain 50% 1.5
Other joint ventures N/A 2.7
170.1
Financing Strategy and Capital Structure
Our financial strategy in the medium term is to manage a level of debt that
balances the risks to the business with the higher returns on equity achieved
through gearing. The gearing levels will vary depending on the profile of
operational risks and the capital that is currently committed or expected to be
committed in the future. Despite increasing our net debt by 23.4% to £302.8m,
excluding unamortised finance costs, this was offset by increases in net asset
value, resulting in our gearing being unchanged at 36%. This is below our long
run expected level due to significant anticipated expenditure.
The financing structure we adopt needs to be flexible and cost effective. We
have achieved this through funding at the corporate level, which allows us the
scope to efficiently fund areas of the portfolio which otherwise may be more
challenging, such as infrastructure works at Wembley and Greenwich. It also
provides us with liquidity and operational flexibility, enabling us to move
quickly when bidding for deals.
In May 2007, we agreed a one year extension to our £475m corporate loan to
reinstate its five year maturity. During the year we also made some amendments
to the terms in order to reflect the requirements of the business over the
period of the loan. We removed the covenant that required the loan to be 100%
covered by investment properties and reduced the gearing level to 110% of net
assets excluding equity in separately financed joint ventures. This was
important as we enter the delivery phase of our major urban regeneration
projects at a time when tactically our holding in investment properties is
decreasing. We now have complete flexibility as to how we invest the debt but,
given the higher risk profile associated with development, we reduced our
gearing limit as described above.
Another major covenant is an interest cover requirement of 1.25 times earnings
before interest and tax, plus surplus or deficits over cost on the disposal of
properties. This again reflects the reality of our business which will include
recycling capital, and whilst this element of profit is accounted for through
reserves, it represents crystallisation of a cash surplus and so should be
recognised. In addition to this there is an upper limit of net worth that can be
invested in separately financed joint ventures of 50%.
As well as the £475m facility we have a £20m bilateral facility that provides us
with flexibility on a day-to-day basis. This has the same terms and covenants as
the main facility.
The weighted average rate of interest of the Group's debt at the year end was
6.6% (2006: 6.6%). In measuring the cost effectiveness criteria, whilst this
rate is slightly ahead of the market, we believe this is a price worth paying
for the flexibility we now have in our financing structure, particularly given
the nature of our assets.
31 March 2007 31 March 2006
Net borrowings £302.8m £245.3m
Gearing 36% 36%
Gearing including share of joint ventures' debt 45% 43%
Weighted average debt maturity 5 years 5 years
% of net debt hedged 55% 70%
Interest cover 1.6 1.2
Interest cover - banking covenants 3.4 2.7
Undrawn committed facilities £164m £254m
Interest cover is defined as profit before tax, net finance expenses and
revaluation surpluses divided by net interest payable.
Interest cover for the year ended 31 March 2007 was 1.6 times (2006: 1.2 times).
After adding back realised revaluation reserves to calculate the banking
covenant definition, interest cover was 3.4 times (2006: 2.7 times).
Hedging
As at 31 March 2007, Quintain's interest rate risk was 55% hedged with swaps
(2006: 70%). The fair value deficit on interest rate hedging instruments was
£4.4m (2006: £12.9m). Of the movement during the year, £1.5m was credited to the
Income Statement, being the element relating to the ineffective swaps and £7.0m
directly to equity.
As part of our continuing review of funding, after the year end we altered our
hedging strategy to better manage the financial risks to the business. We
cancelled all our swaps and replaced them with £225m of caps at 6.5%. As the
majority of our income is no longer fixed on long term leases, but is due to
arise through realising development surpluses, we have removed the fixing of our
interest cost and instead capped our cost, so limiting the cost implications
from a rise in rates but allowing us to take full advantage of falls in interest
rates. As at close of business on 11 June 2007, 72.9% of our outstanding debt
was capped.
Cashflow
Net cashflow from operating activities was an outflow of £11.5m, compared with
an inflow of £0.2m for the prior year. The major differences arose because of a
net decrease in trade and other payables of £7.5m and the decrease in trade and
other receivables being £6.0m lower.
The cash outflow from investing activities was £57.9m. Purchases and capital
expenditure on properties of £133.1m offset the proceeds received in the period
from sales of investments of £117.6m and sales of shares in subsidiaries of
£20.5m. Investment in joint ventures net of distributions was £11.5m and
acquisition of other investments totalled a net £47.1m.
Key Performance Indicators
We measure our performance both financially and in terms of the service we
provide to our stakeholders.
In keeping with our business strategy, which is to leverage the strength of our
Balance Sheet and the other assets under our control to produce superior
returns, we have one key financial performance indicator only - which is total
return. We measure and monitor total return at both an individual asset level
and at a corporate level.
We also recognise the impact of our activities on our stakeholders. On a
consistent basis we monitor our health and safety record and the satisfaction of
our employees.
Business Risks
In addition to those general economic, security and regulatory risks which are
faced by a wide range of companies and which are part of the general commercial
environment, we consider there are a number of specific risks which are faced by
our Company. In delivering high long run returns to shareholders, the
identification and monitoring of risk is crucial. A detailed risk register is
updated regularly and all those with responsibility for managing areas of risk
are required to report on those on a quarterly basis. Our internal audit
function reviews the risk register for completeness and accuracy. In addition to
this the risk register is considered by the Audit Committee. The Risk Committee
debates key risks and mitigation on a regular basis. Those risks which are
judged to be critical to the business, as shown by the risk scores attributed by
a combination of likelihood and impact, are set out below:
Development Risk
Development exposure, such as that undertaken at Wembley and Greenwich, offers
the prospect of good returns but brings with it certain risks, both market
related and internally controlled, such as time and cost overruns. The latter
are managed by a strong in-house project management team and within that,
relationships with contractors are crucial.
Funding structure plays an important part in risk transference and our
strategies include bringing in joint venture partners and forward funding.
People
Succession planning in a relatively small business with a few key individuals
can give rise to instability. During the year, the chairmanship of Quintain was
handed over from Nigel Ellis to John Plender in an orderly fashion, according to
a previously announced timetable. The support of senior executives ensured this
was a successful transition.
The loss of key personal represents a risk to the business. Our ongoing
recruitment programme seeks to mitigate this by bringing in highly skilled
employees. This is considered important given the relatively small size of the
existing Quintain team and the large number of projects. Vital employees are
encouraged to remain by long term incentive and remuneration packages.
The culture of the business and its role in the motivation of employees is also
considered critical. Annual employee surveys are carried out to give the
management a formal understanding of this position. However given the nature and
current size of the business, issues are generally known about and addressed on
a timely basis.
Financial Resources and Information
The amount of financial resource required to deliver our urban regeneration
projects could be significant, depending on exit routes, since the two largest
projects have a combined gross development value in excess of £7bn. We are,
effectively, under no obligation to develop out these sites ourselves but, in
seeking to capture potentially significant upside value, our strategy is to
generally assume a proportion of the development. This will have a consequent
impact on financial resources. In anticipation of this, and of the growth in our
Fund Management business, the Group's gearing levels are low. Further capital
can be applied either through recycling of assets elsewhere or additional forms
of financing.
Approval for projects and monitoring of commitments take place at Board level
and also in weekly meetings of the Executive Directors, where financial
information is provided to understand the implications of these decisions. It is
critical that this information is accurate and complete, as such, and given the
complicated nature of our large scale developments, we have significant in-house
modelling and forecasting capabilities. Production of the Greenwich and Wembley
models was outsourced to accountancy firm Deloitte. All models and forecasts are
reviewed by our internal audit function, which is provided by Grant Thornton.
Grant Thornton is also working with us on a detailed budgeting and authorisation
process to ensure that we have the highest quality management information and
the accountability appropriate to a rapidly growing business.
Management Resources
Quintain's philosophy, of being entrepreneurial and 'fleet of foot', is
conducive to operating with a small, close knit team. Our head count is
relatively small when compared with the ambitions of the business. We therefore
endeavour to manage a successful outsourcing model where possible. Where
specialist skills or local knowledge are required we form strategic joint
ventures, for example with BioRegional on sustainable development and with Lace
Market on development opportunities around their Nottingham base.
Reputation
Relationships in our business are critical, not least with local and central
government, business partners and financing institutions. There is a high level
of awareness of this at Board level where our policies of achieving best
practice in our Corporate and Social Responsibility are formed.
Given our commitments to development, Health and Safety is crucial and the team
which has day-to-day responsibility for this has the appropriate expertise,
funding and Board access.
On issues of sustainability Quintain is taking a lead in driving progress within
the industry. Quintain's financial and other resource commitment to this, and
reputational risk, is regularly reviewed by the Board.
Market Risk
Quintain has significant exposure to the residential market as our schemes at
Greenwich and Wembley include planning consent for approximately 14,500
residential units, of which 61% are private. The London housing market has seen
significant price inflation over the last 12 months with forecasts of continued
high single digit growth. The anticipated population growth in London leads us
to believe that demand should remain reasonably resilient. As a landowner and
developer, we have the ability to control the nature and timing of the various
phases of our developments.
The commercial property market has experienced very significant yield
compression over the last few years. In most sectors and locations yields have
stabilised and could increase, which would lead to a fall in property values.
Quintain has the opportunity to add value in these market conditions by its
active management of the investment portfolio, crystallising value in its urban
regeneration projects with planning gains, development profits and place
creation and building up of a fund management business. Very material falls in
property values market-wide would put considerable strain on the Balance Sheet
in the short term. This is mitigated by Quintain's current low levels of
gearing. Such movements would also represent a buying opportunity, since current
pricing means there are very few interesting investment acquisition
opportunities in the market.
Rebecca Worthington
Finance Director
13 June 2007
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