Final Results - Part 2

Slough Estates PLC
17 March 2004

17th March 2004


                                   SLOUGH ESTATES plc
           PRELIMINARY RESULTS FOR THE YEAR ENDED 31st DECEMBER 2003

                           PART II - FINANCIAL REVIEW

  • Dividend up 7.1% in 2003 and up 7.6% compound over five years
  • Core property income before exceptionals down 3.3%
  • Adjusted diluted net asset value per share down 2.7% - portfolio valuation
    down 2.7%
  • Basic net assets per share down 3.4%.

Key Drivers for 2003 results

The underlying pre-tax profit before the expensing of interest previously
capitalised and the write down on non-core assets was slightly up on 2002 at
£146.3m showing that, despite a challenging year in the property markets, the
core property business has been stable.

Results

Core property income was down by £4.6 million or 3.3 per cent from £140.3
million in 2002 to £135.7 million.  The core property outturn suffered in 2003
from the increase in net interest costs of financing non core activities (£6.8
million), expensing the holding costs that had previously been capitalised on
development sites mainly at Farnborough and Cambridge (£6.2 million), and the
adverse effect of exchange rate movements (£1.6 million).

Property investment income of £223.1 million was up by £6.2 million or 2.9 per
cent.  New developments added £18.4 million to rental income, which was partly
offset by the loss of £3.9 million of rent from property sales.   On a like for
like basis, rental income increased by £4.7 million or 2.0 per cent.  Property
joint ventures added £15.1 million.

Pre-tax profit, excluding exceptional items, fell by £3.4 million or 2.4 per
cent in 2003 from £143.5 million to £140.1 million.  Earnings per share,
adjusted on a similar basis, and excluding the effects of FRS19 deferred tax,
were down by 4.2 per cent to 27.6 pence.  Year end exchange rates reduced profit
before tax, excluding exceptional items, by only £0.1 million.

Sales of investment properties realised a surplus of £1.6 million over book
value in 2003, compared to a deficit of £0.1 million in 2002.  The principal
contributor in 2003 was the Pentagon Shopping Centre in Chatham.

Exceptional losses of £37.9 million or 5.6 pence per share after tax relating to
the Quail West provision and write down reduced overall basic earnings per share
to 19.6 pence.

The Year Ahead

Looking ahead the picture is more encouraging. Additional year on year rental
income of £14.5 million has already been secured on recent project completions
or properties currently under development, 78 per cent of which will fall into
2004.  The UK portfolio of occupied space was 3.2 per cent reversionary at the
end of 2003, which equates to £5.1 million of potential future rental income as
leases are reviewed or properties re-let.  The estimated rental value of vacant
space at the year end was £30.9 million, of which £21.9 million was in the UK.
Improving occupancy will be a prime objective again during 2004, with a target
to move towards the optimal 95 per cent occupancy.

Security of Income

The Group has excellent income security in that 91 per cent of the current Group
rent roll of £259.8 million is secured on leases with at least ten years
unexpired, or 50 per cent if all tenants exercise break clauses and vacate at
the earliest opportunity.  The weighted average term of unexpired leases is 11.5
years excluding breaks or 9.4 years assuming all breaks are exercised.

The Group is not dependent on any one customer for its principal revenues as it
has over 1400 tenants in the UK and over 1700 tenants in total worldwide. No
tenant accounts for more than 6 per cent of Group rental income.  Nor is the
Group over-reliant on any one business sector.  Its worldwide portfolio (by
rent) is occupied by customers in manufacturing 25 per cent, logistics 8 per
cent, health science research 23 per cent, TMT 17 per cent, service 12 per cent,
retail 14 per cent and others 1 per cent.

Financing

Net interest costs rose by £12.0 million to £88.5 million.  Net interest payable
(before capitalisation of interest) fell marginally from £112.6 million to
£111.6 million.  Capitalised interest was down by £13.0 million to £23.1
million.  This significant reduction was due to the cutback in the development
programme.  Furthermore, accounting rules require that interest holding costs on
development sites be expensed rather than capitalised after extended periods of
inactivity.  This meant that some £6.2 million of interest was expensed on
several sites, particularly those at Farnborough and Cambridge, during the
second half of 2003, rather than being capitalised in the normal way in the
construction phase. It is expected that work will re-start at Farnborough
shortly which will mean interest can again be capitalised.  Gross interest cover
of 2.0 times was at the same level as that of 2002, excluding exceptional items.

Non-core activities

Operating profit of £4.4 million from the Group's non core activities involving
utilities, property trading, oil and gas and other activities, were £1.2 million
higher than last year.

Property trading: Property trading had a more successful year, with profits
rising from £2.8 million to £7.1 million.  Several projects in Germany, France
and Belgium contributed, including the sales of the distribution warehouses at
St. Fargeau to the south of Paris and Kapellen close to Dusseldorf.  There are
sufficient developments underway in Germany, Belgium and France to suggest a
reasonable level of trading profits in 2004, as this type of development in
Continental Europe has traditionally been sold on at attractive prices.

Non property activities:

i) Slough Heat & Power. Although Slough Heat & Power reduced its operating
losses from £4.5 million to £4.2 million, continued delays in commissioning the
new NFFO4 project prevented further improvement during 2003.  This plant is
expected to come on stream early in 2004 and is projected to add some £4.0
million of net revenue annually once it is fully operational.

ii) Tipperary.  Losses on the Group's investment in Tipperary increased from
£1.2 million to £3.5 million, which was mainly due to the cost of developing the
coal seam gas reserves in Queensland.  This is an important step in maximizing
the Group's investment in Tipperary, which had a market value of £40.6 million
against a book value of £15.9 million at the end of 2003. Tipperary will be sold
when the Group has maximized this investment opportunity.

iii) Private Equity Investments. Income of £4.8 million from other activities
was £1.3 million lower than last year.  The contributions from Candover and
CHUSA fell due to fewer realisations being achieved in 2003 than in 2002.  With
an investment of £40.6 million remaining in these funds and uncalled commitments
to them of £35.3 million, further profits can be expected in the future,
although their timing and quantum are difficult to predict. It is not the
Group's intention to extend these investments in future.

iv) Residential leisure development at Quail West. Exceptional items have
considerably affected this year's results.  The steep decline in the number of
sales of lots at the residential leisure development at Quail West in Florida,
caused by adverse market conditions over the last two years or so, has required
a write down in the carrying value of Quail West's assets, and a provision
against future costs there.  The write down amounted to £17.1 million and the
provision to £20.8 million, or £37.9 million in total.  Operating losses at
Quail West were £3.8 million in 2003, which are included in the Group profit and
loss account on the 'Property trading - operating profit' line.  Quail West was
identified in the Strategic Review as  a divestment asset and a transaction will
be made when market conditions allow.

Taxation

The Group's effective current tax rate of 11.1 per cent excluding exceptional
items was higher than 2002's 8.2 per cent.  2002 benefited particularly from the
finalisation of a number of years' tax returns with the Inland Revenue.  The
effective current tax rate is expected to move up to circa 15 per cent in 2004.
FRS19 deferred tax has also had a significant effect on earnings.  The FRS19
deferred tax credit of £3.0 million  in 2003 compares to 2002's deferred tax
charge of £33.1 million.  2003 benefited in deferred tax terms by £14.6 million
from the Quail West write down/provision and the higher level of property sales
in that year.  This gives rise to a much lower overall effective tax rate in
2003 of 11.9 per cent against 2002's 31.1 per cent.  As a company we agree with
other property companies and sector analysts that accounting for deferred tax,
which most likely will not materialize on the sale of properties, is misleading
and adds nothing to the clarity of accounting, and have decided to report key
financial figures adjusted to exclude it.

Dividend

The Board has proposed a total dividend of 15.0 pence per share for 2003, an
increase of 7.1 per cent on 2002.  Dividend cover, adjusted to exclude
exceptional items and FRS19 deferred tax, fell from 2.1 times in 2002 to 1.8
times, as did core income dividend cover from 1.9 times to 1.7 times.

The final ordinary dividend is payable on 14th May 2004 and the record date will
be 23rd April 2004.

Cash Flow

The net cash inflow from operations of £212.3 million was £9.8 million higher
than in 2002, due largely to rents from new developments.  After the payment of
all interest, dividends and tax, there was a free cash inflow of £24.7 million.
Capital expenditure of £109.5 million on the investment property portfolio was
partly offset by proceeds of £59.3 million from investment property sales.
Overall, there was a net cash outflow of £57.3 million for the year.

Balance Sheet and Capital Structure

Shareholders' funds excluding FRS19 deferred tax fell by £54.2 million during
the year to £2,374.4 million, due largely to the £86.9 million revaluation
deficit, partly offset by retained earnings of £19.3 million after exceptional
items of £36.2 million, and exchange differences of £3.5 million.  There was
consequently a 2.7 per cent fall in diluted net assets per share (NAPS) from 519
pence to 505 pence.  The total deferred tax liability reduced from £186.4
million to £182.3 million during 2003.  Diluted NAPS including deferred tax
slipped from 480p in 2002 to 464p.

Year end net borrowings of £1,507.8 million rose by £18.2 million during the
year.   Gearing (the ratio of net borrowings to shareholders' funds, excluding
FRS19 deferred tax) increased from 61 per cent in 2002 to 64 per cent at the end
of 2003, mainly due to the effect of the revaluation deficit and the exceptional
losses.  The exchange rate effect reduced net borrowings by £32.5 million.

The Group has very little off-balance sheet debt.  In addition to the £1,507.8
million of net borrowings disclosed as such in the balance sheet, £42.6 million
of joint venture debt is included in the balance sheet as part of the £50.5
million 'Investments in joint ventures-share of gross liabilities'.  Only £1.9
million, relating to the Group's share of debt in  a property backed associate
is not carried on balance sheet.

Treasury Policies and Financial Risk Management

The Group operates a UK based centralised treasury function.  Its objectives are
to meet the financing requirements of the Group on a cost effective basis,
whilst maintaining a prudent financial position.  It is not a profit centre and
speculative transactions are not permitted.  Board policies are laid down
covering the parameters of the department's operations including the interest
rate mix of borrowings, net assets exposed to exchange rate movements and
aggregate exposure limits to individual financial institutions.  Derivative
instruments are used to hedge real underlying debt, cash or asset positions and
to convert one currency to another.  Approval to enter into derivative
instruments which affect the Group's exposure is required from two of the Group
Chairman, Chief Executive or Finance Director prior to transacting.

The main financial risks facing the Group are liquidity risk, interest rate risk
and foreign exchange translation exposure.

Regarding liquidity, as property investment is a long term business, the Group's
policy is to finance it primarily with equity and medium and long term
borrowings.  The weighted average maturity of borrowings at the year end was
10.8 years.  £68.3 million of debt is due for repayment or rollover in 2004/
2005.  £1,245.7 million or 75 per cent of the Group's gross debt of £1,667.1
million has a maturity date beyond the year 2008.

At the year end, the Group had £159.3 million of cash balances on deposit and
£364.2 million of undrawn bank facilities.  This availability is more than
adequate to cover the Group's development plans over the next two years or so.
Spend on the development programme is expected to amount to some £180 million in
2004 and about £220 million in 2005.  This will obviously depend on prevailing
market conditions.  Committed property expenditure amounted to £31.4 million at
the end of 2003, 42.0 per cent of which relates to pre-let opportunities.
There are no restrictions on the transfer of funds between the parent and
subsidiary companies.  All covenants in bank or loan agreements restricting the
extent to which the Group may borrow leave substantial headroom for the Group to
expand its operations.

The Group's approach to interest rate risk is that a minimum of around 70 per
cent of the gross debt portfolio must attract a fixed rate of interest or be
variable rate debt hedged with a derivative instrument providing a maximum
interest rate payable.  At the year end, 85 per cent of the debt portfolio was
at fixed rate.  The weighted average cost of fixed rate debt  was 7.34 per cent
which falls to 6.68 per cent when variable rate debt is included.

A number of the Group's historic fundings are at fixed interest rates which are
high compared with current rates, but which reflect market conditions at the
time they were completed.  FRS 13 requires the disclosure of the 'fair value' of
these loans and derivatives.  The fair value at 31 December 2003 of the Group's
borrowings was some £211.0 million higher than book value before tax or £147.7
million after tax.  It is important to realise that the Group is under no
obligation to repay these loans at anything other than their nominal value at
the original maturity dates.

The main currency risk is translation exposure, i.e. the exchange rate effect of
retranslating overseas currency denominated assets back into sterling at each
balance sheet date.  The Group's policy is that currency assets should be
substantially hedged by maintaining liabilities (normally debt or currency
swaps) in a similar currency.  Net assets exposed to exchange rate fluctuations
amounted to £351 million.  A 10 per cent movement in the value of sterling
against all currencies affects net assets per share by 8 pence or 1.6 per cent,
although experience shows that sterling rarely moves in the same direction
against all the currencies involved in the Group's operations.

Accounting Policies

The Group's two defined benefit pension schemes were actuarially valued as at 31
March and 5 April 2001, resulting in an overall past service surplus of £0.9
million.  However, had FRS17 'Retirement Benefits' been adopted in full, net
assets at 31 December 2003 would have been reduced by £20.2 million (2002 £19.4
million) net of deferred tax to reflect the 'Net pension liability' calculated
as specified by the standard.

Dick Kingston
Finance Director



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