Final Results

RNS Number : 2792O
SEGRO PLC
04 March 2009
 



Issued for immediate release: 4 March 2009

SEGRO Results Announcement for the Full Year to 31 December 2008


SEGRO, the leading provider of Flexible Business Space, announces its results for the year ended 31 December 2008.  SEGRO has today also launched a fully underwritten rights issue to raise net proceeds of approximately £500m.


Highlights of Results


Resilient Operational Performance

  • Net rental income up 20% to £244.9m (2007: £204.8m)

  • Further leasing progress has reduced overall voids to 9.8% (2007: 10.4%)

  • Strong contribution from trading profits and share of joint ventures' trading profits of £35.3m in aggregate (2007: £25.0m)

  • Loss before taxation of £939.2m (2007: £246.5m), reflecting property revaluation deficits

  • Adjusted profit before tax of £123.9m (2007: £131.3m)

  • Basic loss per share of 215.9p (2007: 53.6p) and adjusted earnings per share of 28.0p (2007: 28.2p)


Adjusted diluted NAV down 31.5% to 482p, mainly reflecting decline in UK property valuations

  • Overall valuation deficit on completed investment properties of 18.2% (H1: 7.6%; H2: 11.5%)

  • 25.4% deficit in the UK (H1: 10.5%; H2: 16.6%)

  • 2.8% deficit in Continental Europe (H1: 0.7% gain; H2: 3.5% deficit)

  • 19.1% reduction in the valuation of land and developments in progress


Carefully Managing the Group's Financial Position

  • Recycling capital proactively with £343m of disposals in UK and Continental Europe

  • Total capital expenditure of £464m, a 40% reduction from 2007 (£777m)

  • Speculative development starts reduced by 52% compared with 2007

  • 79% of developments completed in 2008 were let or sold as at 31 December 2008

  • 64% of current development projects already pre-let as at 31 December 2008

  • Reduced cost base and overheads with a c.15% reduction in UK headcount 

  • Successful renegotiation of gearing covenants on banking facilities from 125% to 160%, (post year end)

  • Fully underwritten rights issue separately announced today (see separate announcement)


Final dividend of 5.4p, making 13.7p for the year (2007: 23.0p)  

                    



Ian Coull, Chief Executive commented:


'2008 has provided one of the most challenging economic environments. In this environment, the Group's geographically diversified business model has demonstrated its operational resilience.


Essential to this has been our customer focus, which underpins our Group's culture. As at 31 December, our void rate by rental income was 9.8%, an improvement on the position 12 months earlier. Similarly, we have not yet seen any significant cause for concern regarding insolvency levels amongst our customer base. However, after a strong nine months the occupational market slowed in the fourth quarter, with customer enquiries trending downwards as companies delay relocation or expansion in the light of economic uncertainty.


The global economic environment is likely to remain difficult through the course of the coming year and an early return to an active investment market is unlikely. However, in a period of economic weakness, the industrial sector's defensive qualities should be seen as increasingly attractive compared with other asset classes.


We continue to manage our financial position prudently, having taken a number of early actions to contain our costs and reduce capital expenditure. The renegotiation of our banking facilities and the rights issue we are announcing today leave us very well placed going forward.


We view the current market conditions as creating an environment which will offer attractive opportunities over the years ahead and we are optimistic for the prospects of the Group.'


Summary Financial Statement Tables

    


 

 

 

INCOME STATEMENT

 

 

Continuing Operations

2008

2007

Net rental income(1) (£m)

244.9

204.8

Property losses (£m)

(1,010.4)

(382.2)

Loss before taxation (£m)

(939.2)

(246.5)

Adjusted profit before taxation(2) (£m)

123.9

131.3

Underlying tax rate(3) (%)

2.3

1.4

Basic loss per share (p)

(215.9)

(53.6)

Adjusted diluted earnings per share(4) (p)

28.0

28.2

Total dividend for the year (p)

13.7

23.0

Total return(5)  (%)

(28.2)

0.7


 

 

 

BALANCE SHEET

31 December

 31 December

 

2008

2007

Total properties, including share of Joint Ventures (£m)

4,821.7

5,182.6

Net assets excluding minority interests (£m)

2,007.5

 2,989.0

Adjusted net assets(6) (£m)

2,094.9

3,056.0

Net assets per share (p)

462

690

Adjusted diluted net assets per share(7) (p)

482

704

Net debt (£m)

2,495.8

1,690.8

Debt to equity(8) (%)

119.0

55.7

Loan to value(9) (%)

53.3

33.7


1

Including rental income on trading properties.

2

Profit before tax adjusted for EPRA and exceptional items.

3

Tax charge, excluding deferred tax on valuation movements, as a percentage of adjusted profit before tax. 

4

Earnings per share based on adjusted profit before tax and reflecting the dilutive effects shares held by the ESOP trust.

5

Adjusted NAV growth plus dividends paid in the period (2007 is calculated after adding back the SIIC conversion charge of £13.9 million).

6

Shareholders' funds adjusted to add back deferred tax associated with investment properties.

7

NAV per share adjusted to add back deferred tax associated with investment and development properties and to reflect the dilution caused by shares held in the ESOP.

8

Net debt as a percentage of net assets adjusted to add back deferred tax associated with investment and development properties.

9

Net debt as a percentage of the total property portfolio excluding joint ventures.





Presentation and Conference Call for Investors and Analysts:

There will be a Presentation to Investors and Analysts at 09:30 GMT today, Wednesday 4th March 2009.

VENUE:    Merrill Lynch Financial Centre, The Auditorium

       2 King Edward Street, London EC1A 1HQ

For information on the webcast and conference call please refer to the separate Rights Issue press release.


For further information please contact:

SEGRO

Tel: + 44 207 318 5809

David Sleath/Tamarin Shore

Maitland

Tel: + 44 207 379 5151

Colin Browne / Liz Morley 


Notes:


About SEGRO SEGRO is the leading provider of Flexible Business Space in Europe. Headquartered in the UK, SEGRO is listed on the London Stock Exchange and on Euronext in Paris. The Company is a UK Real Estate Investment Trust (REIT) with operations in ten countries, serving a diversified base of 1,700 customers operating in a wide range of sectors, representing both small and large businesses, from start-ups to global corporations. With property assets of £4.8 billion as at 31 December 2008 and around 5.1 million sq m of business space, SEGRO has an annual rent roll of approximately £314 million (Note: these metrics include trading properties, development assets and the Group's share of joint ventures).   www.SEGRO.com.


Neither the content of SEGRO's website nor any other website accessible by hyperlinks on SEGRO's websites is incorporated in, or forms, part of this announcement.


Forward-looking statements: This announcement may contain certain forward-looking statements with respect to SEGRO's expectations and plans, strategy, management objectives, future developments and performance costs, revenues and other trend information. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that may occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Certain statements have been made with reference to forecast price changes, economic conditions and the current regulatory environment. Any forward-looking statements made by or on behalf of SEGRO speak only as of the date they are made. SEGRO does not undertake to update forward-looking statements to reflect any changes in SEGRO's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. Nothing in this announcement should be construed as a profit forecast. Past share performance cannot be relied on as a guide to future performance.



Chairman's Statement


Your Board began 2008 confident that we had positioned SEGRO to face the challenges that might lie ahead. However, like many others in our sector, we had not anticipated the severity of the banking crisis and the consequences for all classes of property which followed. The IPD (Investment Property Databank) UK All Property index recorded a fall of 15 per cent in the fourth quarter of 2008. 


The performance of our portfolio has, to some extent, been mitigated by our Continental European business which performed comparatively well. Nonetheless, our NAV per share fell over the year to 462 pence. In anticipation of the risk of values continuing to fall, we decided to renegotiate our bank gearing covenants, some of which started at 125 per cent (net debt to adjusted shareholders funds). I am pleased to report that we reached agreement with all banks in February 2009 to increase the gearing covenant from 125 per cent to 160 per cent, in return for a higher cost of borrowing. The Board continues to monitor its financial ratios closely and has already taken, and will continue to pursue, actions to provide additional financial headroom such as asset sales, restricting capital expenditure and reducing costs.


The Board today announces a fully underwritten Rights Issue to raise net proceeds of approximately £500 million, through the issue of 5,240,650,704 New Ordinary Shares. The Rights Issue is subject to approval by the shareholders at a General Meeting to be held on 20 March 2009.


Notwithstanding the difficult market conditions, we have been able to deliver a satisfactory level of underlying profitability, with adjusted earnings per share of 28.0 pence (2007: 28.2 pence from continuing operations), largely due to our successful developments and a good letting and customer retention programme which has reduced the void in the portfolio to less than 10 per cent by rental income. 


The Directors have reviewed the dividend policy in light of the present economic conditions, the need to preserve capital and the difficulty in predicting, with any certainty, the likely level of near term property trading profits. We have concluded that it would be inappropriate to distribute 2008's trading property profits and other income at this stage and to pay-out only from the recurring property rental earnings.


Accordingly, the Board is recommending a final dividend of 5.4 pence per share. This is subject to shareholder approval at the AGM to be held on 30 April 2009 and will be paid as a Property Income Distribution (PID) to shareholders on the register as at 3 April 2009. Accordingly the total dividend for the year will be 13.7 pence per share (compared with 23 pence for the year ended 31 December 2007).


Going forward, the Board's dividend policy will be to balance the needs of the business with the requirement for dividend growth, taking into account the prevailing property market conditions, expected future earnings and the requirement under UK REIT rules to distribute annually at least 90 per cent of the REIT Group's tax-exempt profits as a PID.


It has not been an easy year for any property company but SEGRO employees have responded to the challenges well and we are very grateful to them. During the year, John Heawood and Walter Hens, both Directors, left the business and John Probert, the Company Secretary, retired. We are grateful to John Heawood, Walter Hens and John Probert for their many years of dedicated service to the Group. Ian Sutcliffe joined the Company in June as Managing Director, responsible for the UK, and Inès Reinmann was promoted to the Board as Managing Director responsible for Continental Europe. Elizabeth Blease joined the Company in March and became General Counsel and Group Company Secretary following the AGM in May.


It is extremely difficult to forecast the prospects for this year at a time of such great economic uncertainty. Our efforts will be concentrated on; strengthening the balance sheet; retention of customers and filling voids and preserving the dividends to our loyal shareholders. Once we achieve these goals, I believe your Group will be well placed to take advantage of further attractive investment opportunities in the years ahead. Being an optimist, I can only believe that economies will look better at the end of the year than they do now.



Nigel Rich CBE

Chairman

4 March 2009




Directors' Report


Business Review


A challenging market environment with an unprecedented market downturn in the UK

2008 has provided one of the most challenging economic environments in living memory, and yet, in this environment, the Group's geographically diversified business model has demonstrated its resilience.


UK investment market - Flexible Business Space had proved a popular investment class over recent years as initial yields were driven down to a historic low of 5.3 per cent by the middle of 2007 (source: IPD). A correction was anticipated but the 'credit crunch' prevented a soft landing as the lack of credit removed buyers from the marketplace and frustrated sales. Potential purchasers for investments were, in the main, limited to those with significant equity and without the need to raise debt. Since the correction started in June 2007, prime industrial yields have moved out by 220 basis points (bps) to 7.5 per cent by the end of December 2008, and all property prime yields have increased by 240 bps to 7.0 per cent by the end of the same period (source: IPD). Transaction volumes in all UK property sectors have fallen 52 per cent compared to 2007 (source: DTZ). The magnitude and speed of the fall in prices since June 2007 have been far greater than in the 1990s downturn, and UK All Property values have fallen by 38 per cent from June 2007 to January 2009.


However, in this period of economic weakness, the industrial sector's defensive qualities may be seen as increasingly attractive compared with other asset classes. It is worth noting that over the past 20 years, UK industrial property has shown an average annual total return of 9 per cent compared with offices and retail showing average annual total returns of 6.2 per cent and 7.5 per cent respectively (source: IPD).


Furthermore, industrial property has appeared to perform better than non-industrial property during periods of economic slow-down, as indicated by comparing the IPD annual total performance return of industrial assets against other assets over the period from 31 October 1989 to 31 December 1993, which was 4.9 per cent for industrial compared to 0.9 per cent for non-industrial.


Continental European investment market - Yields for Flexible Business Space in Continental Europe also fell over the last few years with values peaking at the end of 2007. However, yields never reached the low levels seen in the UK (partly due to shorter lease lengths and indexation) and, therefore, the unwinding of yields since then has been more gentle than in the UK. Through 2008, yields have risen for all asset classes typically by 50-100 bps (source: DTZ/CBRE). Property investment transactions for all property in Continental Europe declined by 53 per cent last year when compared with the level for 2007. However, of that total, investment in the industrial and logistics sector declined by only 39 per cent and, at €11.4 billion, represented around 10 per cent of the total volume compared with only 5-6 per cent four years ago (source: CBRE).


UK occupier market - The Group tracks occupier activity in the UK through measuring enquiry levels and viewing levels. After a strong first nine months of the year, the occupational market in the UK slowed in the fourth quarter of 2008, with customer enquiries trending downwards as companies delay relocation or expansion in light of economic uncertainty. The IPD Industrial index for industrial rents fell marginally to show a total fall of 0.3 per cent in ERV over the full year (source: IPD).


Changes to empty rates tax legislation were introduced in April 2008, making owners of industrial / warehousing property liable for business rates if premises are unoccupied for periods longer than six months. For owners of office buildings the period of rate relief is three months. The impact on the Company was an increase in operating costs of approximately £5.5 million in 2008.


Continental European occupier market - During 2008, occupier demand continued to be strong in several areas of Continental Europe, most notably Poland. However, towards the end of the year, potential occupiers were noted to be more cautious as they attempted to gauge the extent to which they may be affected by the current economic difficulties. In our Western European portfolio, Italy and Spain are potentially likely to come under more pressure than some of the other countries. While demand continued to be strong in Poland throughout the year, it is likely that a reduction in Euro zone consumption will begin to impact on occupier demand during 2009.


Pre-emptive actions taken by the management team

Having foreseen some weakening in the economic and investment market environment but perhaps not the full magnitude of the capital value decline which was to follow in the UK, we took firm steps starting in 2007 to prepare the business for the challenges it would face in 2008. The actions taken included:


·         scaling back expansion plans and initiating no significant property acquisitions
·         reducing speculative development starts by 52 per cent compared with 2007 and of the speculative starts in 2008, 81 per cent of these were in Continental Europe where we could continue to exploit strong pockets of demand
·         focusing the development pipeline on pre-lets. Assets in the course of construction as at 31 December 2008 were 64 per cent pre-let on the basis of rental income and 57 per cent pre-let on the basis of space (31 December 2007: 37 per cent pre-let on the basis of space)
·         continuing to sell non-core or mature assets generating proceeds of £343 million during 2008, and over the last three years, the Group has completed asset sales of c.£2.3 billion
·         strengthening the management team with the appointment of Ian Sutcliffe as Managing Director of the UK and Inès Reinmann as Managing Director of Continental Europe
·         announcing in September 2008 that we were devolving to our two main operating businesses a number of activities and services that were previously managed at the centre. The Group now has two strong, well-balanced businesses, with high-quality management in place. These changes were designed to ensure that the Group operates as efficiently and effectively as possible, with a small focused corporate centre
·         reducing our cost base and overheads by way of a headcount reduction of c.15 per cent of employee numbers in the Group Head Office and UK Business 
·         increasing the gearing covenant on banking facilities from 125 per cent to 160 per cent.


In addition, it is worth noting that we are entering the current downturn with specific key factors operating in our favour:


·         our UK industrial portfolio has a void rate by rental income of 10.1 per cent (excluding share of joint ventures and trading properties) as at 31 December 2008 as compared with the IPD All Industrial void rate of 14.6 per cent

·         within the sub 10,000 sq m unit size category of industrial stock, available new industrial stock as a percentage of total available industrial stock was just 8.8 per cent at the end of 2008 compared with 22.2 per cent at the end of 1990 (source: King Sturge). This bodes well for our UK business. Apart from 5 per cent (by valuation) of the UK industrial portfolio comprising large unit logistics, the remaining 95 per cent of the UK industrial portfolio primarily comprises assets with unit sizes under 10,000 sq m.

Resilient operating results in spite of difficult market conditions

The business benefited from steps taken in the past to diversify risk through developing a wider geographical platform. In addition, the portfolio also has a broad customer base of over 1,700 customers with the largest customer accounting for just 5 per cent of rental income, and the top 20 and top 50 customers accounting for 32 per cent and 43 per cent of rental income respectively. Therefore, our Flexible Business Space activities, appealing to different occupier sectors across different geographic locations and reinforced by top quartile independently monitored customer satisfaction levels, has contributed to resilience in our operating performance in spite of the challenging economic environment.


This was another successive year of exceptionally strong leasing performance and the leasing teams secured 522,000 sq m of lettings in 2008 which was up 10.8 per cent year on year (2007: 471,000 sq m). Including joint ventures and licences, the equivalent figures were 649,000 sq m and 596,000 sq m in 2008 and 2007 respectively. The lettings completed in 2008 corresponded with annualised rental income (after the expiry of rent free periods) of £38.2 million which was up 20.5 per cent on the £31.7 million of annualised rental income secured in 2007. The lettings in 2008 also had an increased component of pre-let data centres and pre-let suburban offices which contribute to increasing the security of income through having relatively longer lease lengths. After accounting for income lost through the take back of space, net incremental annualised rental income gained during 2008 amounted to £17.6 million which was higher than the rental income gained in 2007 of £16.4 million.


The leasing performance of the UK and Continental Europe benefited from the steps we had taken to diversify our geographic risk. Lettings in the UK, at 179,000 sq m were down 23 per cent on the levels achieved in 2007, primarily due to potential customers taking a more cautious approach to securing new space in light of the economic uncertainty seen in the UK. With our focus on cash flow, we showed commercial pragmatism in securing new lettings in the UK which were completed at a rental level that was 1.5 per cent below December 2007 ERV. The reduction in year on year lettings in the UK was, however more than offset by the strong performance of our Continental European operations, where lettings in 2008 grew by 44 per cent to 343,000 sq m.


While securing immediate income from lettings completed in 2008, the leasing teams also stayed focused on the future and secured 128,000 sq m of new pre-lets contracted to generate £10.2 million per annum of additional rental income (after expiry of rent free periods) in future years.


Major Lettings in 2008


Customer

Building type

Location

sq m

Rent pa (£000s)

Telefonica O2 UK

Office

Slough, UK

10,338

3,005

Ernst & Young

Office

Pegasus Park, Belgium

17,081

2,182

Unnamed*

Data Centre

Slough, UK

14,019

1,811

Zabka Polska S.A.

Logistics Warehouse

Komorniki, Poland

16,350

1,023

DHL

Office

Pegasus Park, Belgium

7,664

888

Multi-Contact

Industrial

Essen, Germany

11,155

825

Cosmetic Essence

Logistics Warehouse

Stryków, Poland

12,238

717

Decathlon

Logistics Warehouse

Gliwice, Poland

20,967

695

Cerva Logistics

Industrial

Hostivice, Czech Republic

11,315

656

Nec Logistics

Industrial

Hoeksteen,The Netherlands

9,463

643

Pol-Fret

Logistics Warehouse

Lodz, Poland

15,304

625

Aster

Office

Warsaw, Poland (now sold)

4,492

599

Experian

Industrial

La Courneuve Damiers, France

5,111

498

JJB Sports

Industrial

Heywood, UK

9,615

481

Transport Connections

Logistics Warehouse

Northampton, UK

9,621

461

ABX Logistics Deutschland GmbH

Logistics Warehouse

Alzenau, Germany

9,319

461

DSV Solutions

Industrial

Hoeksteen,The Netherlands 

7,243

451









Pre-lettings



sq m

Rent pa (£000s)*

Fluor

Office

Farnborough, UK

19,638

*

Equinix

Data Centre

Slough, UK

10,777

1,508

Athletic

Logistics Warehousing

Nadarzyn, Warsaw, Poland

24,486

952

SAP Italia

Industrial

Vimercate Energy Park, Italy

6,009

866

Plastic Omnium

Logistics Warehousing

Silesia Gliwice, Poland 

14,184

727

Black & Decker

Logistics Warehousing

Silesia Gliwice, Poland 

9,982

398

* Not disclosed due to confidentiality agreement.


Development completions during the year amounted to 370,000 sq m of which 79 per cent (by net income) and 79 per cent (by space) was either let or sold by 31 December 2008, as compared with 320,000 sq m of development completions in 2007 of which 71 per cent (by space) was either let or sold by 31 December 2007. In the UK, the figures were 53,000 sq m and 75 per cent for 2008, and 117,000 sq m and 55 per cent for 2007. In Continental Europe, the figures were 317,000 sq m and 79 per cent for 2008, and 203,000 sq m and 81 per cent for 2007.


At 31 December 2008, our void rate by rental income for the Group (excluding joint ventures and trading properties) was 9.8 per cent, and has shown an improvement compared to one year ago when it stood at 10.4 per cent. Furthermore, compared with available external benchmarks, our UK industrial portfolio has a void rate by rental income of 10.1 per cent as compared with the IPD All Industrial void rate of 14.6 per cent which is a testament to the quality of our assets and the vigorous leasing and customer-focused asset management demonstrated by our operating teams. 


Operational highlights of the UK business include:


  • completions of previously contracted pre-let to Telefonica O2 (10,000 sq m / £3.0 million annualised rental income excluding rent frees) and a major financial institution of 14,000 sq m / £1.8 million annualised rental income excluding rent frees

  • pre-let to Equinix (11,000 sq m / £1.5 million annualised rental income excluding rent frees), on the Slough Trading Estate

  • signing a new pre-let to Fluor (20,000 sq m) during the fourth quarter, the largest in the Thames Valley since 2001

  • disposals totalling £215 million of stabilised and / or non-core properties

  • submission of a new Masterplan for the Slough Trading Estate covering a 20 year phased development period

  • vacancy rate by rental value has been reduced to 9.3 per cent in 2008 from 11.4 per cent in 2007


Operational highlights of the Continental European business include:


  • letting of 343,000 sq m of accommodation, an increase of 44 per cent on the previous year

  • opening new offices in Madrid and Berlin to support our growth in these important economic clusters

  • £128 million disposals of stabilised and / or non-core properties (all trading properties)

  • £39 million of trading profits including joint ventures

  • voted Property Week European Industrial Developer of the Year, for the third time in succession 


Staying close to our customers is key to delivering a resilient operating performance

Our stay close to our customers principle, which underpins our Group's culture, has been essential to the resilience shown by our business in the face of the challenges seen in 2008. The level of our customer satisfaction is measured independently and the results are, yet again, a tangible demonstration of our customer focus. The UK business showed an improvement with the percentage of customers appraising our overall service as good or excellent increasing to 78 per cent (2007: 77 per cent). In addition, for the first time this year, we conducted the same independent survey in Continental Europe and 66 per cent of our Continental European customers appraised our overall service as good or excellent (with 88 per cent of them stating that they would recommend SEGRO to others). These rewarding results only serve to strengthen the determination of the asset management teams' to earn a further improvement in these results each year.


Our stay close to our customers principle helps us develop an in depth understanding of our customers' real business needs. This is demonstrated by our strong retention rates on lease expiry or potential break of 65 per cent and 64 per cent respectively (by rental income) in 2008 which is almost identical to the strong performance delivered in 2007. This also compares very favourably with the IPD / Strutt and Parker 2007 Industrial Lease Renewal benchmark rate of just 24 per cent (the 2008 study has not yet been released). As at 31 December 2008 (excluding joint ventures), our weighted average lease length to expiry was 8.3 years (6.0 years with break options). 


The outperformance on lease renewals relative to the IPD All Industrial benchmark, together with contracted rental streams from pre-lets and the consistently high customer satisfaction levels, further reinforces our belief in the resilience of our future income streams. 


Consistently high levels of customer satisfaction also translate into tangible results on rental growth on lease rent reviews and lease renewals. For example, in the UK in 2008, rent reviews and lease renewals were agreed at 3.6 per cent and 0.6 per cent above ERV respectively.


This is important in making further progress on crystallising the £7.6 million per annum of reversionary potential within our currently occupied properties, and the £32.4 million per annum of ERV potential on our vacant properties.


Reversionary Potential as at 31 December 2008

Passing rent subject to rent review in




2009

(£m)

2010

(£m)

2011

(£m)

2012

(£m)

Reversion to ERV on occupied properties (£m)

ERV of vacant properties (£m)

United Kingdom







Logistics warehouses

2.5

1.7

-

-

0.1

0.7

Other industrial

14.9

21.7

17.2

17.1

8.5

16.6

Offices

3.2

4.4

3.4

7.4

(2.0)

2.6

Retail

-

0.6

0.5

-

0.1

-

Continental Europe

-

-

-

-

0.9

12.5

Total

20.6

28.4

21.1

24.5

7.6

32.4

Investment properties only, excluding joint ventures.


By staying close to our customers, we can also identify early signs for any who may potentially face difficulties and work with them to develop a mutually beneficial way forward. However, we have not yet seen any cause for concern regarding insolvency levels in the portfolio. During 2008, annualised rental income lost from insolvencies was 1.1 per cent of total annualised rental income. This was a slight increase on the ratio of 0.8 per cent seen in 2007 and 2006, due in particular to one significant insolvency in France in June 2008. On time cash collection has continued to be strong with, for example in the fourth quarter of 2008 in the UK, 95.7 per cent of cash collected within 10 days of the rent quarter day (2007 fourth quarter: 94.4 per cent). We believe that having over 1,700 customers across the breadth of the economy reduces our vulnerability to the fortunes of specific sectors.


Portfolio performance

The virulence of the credit crunch and its effect on the investment market has had a significant impact on portfolio valuation. The valuation process was made more difficult by the scarcity of comparable transactions in the investment market.


Looking specifically at completed investment properties (excluding joint ventures), the Group portfolio incurred a valuation deficit of 7.6 per cent in the first half of the year (UK falling 10.5 per cent while Continental Europe had a 0.7 per cent valuation gain), and in the second half of the year, the Group portfolio incurred a valuation deficit of 11.5 per cent (with UK and Continental Europe falling 16.6 per cent and 3.5 per cent respectively). 


For the full year the Group property portfolio of completed investment properties suffered a valuation decline of 18.2 per cent comprising 25.4 per cent in the UK and 2.8 per cent in Continental Europe. The valuation decline of 25.4 per cent in the UK should be taken in the context of the IPD All Property capital value decline of 26.4 per cent and the IPD All Industrial capital value decline of 25.7 per cent. In the fourth quarter of 2008 alone, the IPD All Property capital value index fell by 15.0 per cent. Overall Group portfolio capital value declines were lessened due to the Group's geographic diversification over the last few years.


Completed Investment Properties*

Lettable

space

(sq m)

Passing

rent ** at

31.12.08

(£m)

Market

rental

value

(ERV) at

31.12.08

(£m)

Gross

rental

income

2008

(£m)

Net

rental

income

2008

(£m)

Vacancy

rate by

space

(%)

Vacancy

rate by

ERV

(%)

Valuation

at

31.12.08

(£m)

Valuation

surplus/

(deficit)

(£m)

Valuation

surplus/

(deficit)

(%)

Initial

yield

(%)

Topped

up initial

yield †

(%)

True

equivalent

yield

(%)

United Kingdom













Logistics warehouses

 169,235 

 7.8 

 8.6 

 7.8 

 6.5 

 7.1 

 8.1 

 89.9 

 (28.0)

 (23.7)

 8.7 

 8.7 

 8.8

Other industrial

 2,016,206 

 134.3 

 162.9 

 158.2

119.8 

 10.6 

 10.2 

 1,801.9 

 (654.1)

 (26.6)

 7.5 

 7.6 

8.3

Offices

 206,752 

 37.3 

 39.5 

 34.4 

 25.4 

 6.6 

 6.6 

 466.5 

 (121.1)

 (20.6)

 8.0 

 8.3 

8.2

Retail

 14,458 

 2.3 

 2.4 

 5.1 

 4.3 

 0.7 

 0.5 

 28.4 

 (8.6)

 (23.2)

 8.1 

 8.1 

7.8

Total

 2,406,651 

 181.7 

 213.4 

 205.5

 156.0 

 9.9 

 9.3 

 2,386.7 

 (811.8)

 (25.4)

 7.6 

 7.8 

8.3

Continental Europe













Logistics warehouses

 1,263,776 

 49.7 

 59.4 

 48.6 

37.1

 8.5 

 9.9 

 744.3 

 (21.0)

 (2.7)

 6.7 

 6.7 

 

Industrial 

 516,711 

 32.5 

 32.7 

30.1

 24.9

 12.2 

 11.9 

 422.9 

 (10.5)

 (2.4)

 7.7 

 7.8 

 

Offices

 194,536 

 16.4 

 21.4 

 17.2 

 13.1 

 8.7 

 12.1 

 250.7 

 (10.6)

 (4.1)

 6.5 

 7.1 


Retail

 23,439 

 2.1 

 2.2 

 2.0 

 1.5 

 7.3 

 4.5 

 24.5 

 0.4 

 1.7 

 8.6 

 8.6 


Total

1,998,462

 100.7 

 115.7 

97.9 

 76.6

 9.4 

 10.8 

 1,442.4 

 (41.7)

 (2.8)

 7.0 

 7.1 

 7.6

Group














Logistics warehouses

 1,433,011 

 57.5 

 68.0 

 56.4 

 43.6

 8.4 

 9.7 

 834.2 

 (49.0)

 (5.5)

 6.9 

 6.9 

 

Industrial 

 2,532,917 

 166.8 

 195.6 

 188.3

 144.7 

 10.9 

 10.5 

 2,224.8 

 (664.6)

 (23.0)

 7.5 

 7.7 

 

Offices

 401,288 

 53.7 

 60.9 

 51.6 

 38.5 

 7.6 

 8.5 

 717.2 

 (131.7)

 (15.5)

 7.5 

 7.9 


Retail

 37,897 

 4.4 

 4.6 

 7.1 

 5.8 

 4.8 

 2.2 

 52.9 

 (8.2)

 (13.4)

 8.3 

 8.3 


Group Total

 4,405,113 

 282.4 

 329.1 

 303.4 

 232.6

 9.7 

 9.8 

 3,829.1 

 (853.5)

 (18.2)

 7.4 

 7.6 

8.1


*All completed investment properties at 31 December 2008, excluding joint venture properties, trading properties, properties for own occupation, land and properties in the course of construction

 ** Excluding approximately £6.7 million of annualised rent associated with leases signed which were the subject of rent-free periods as at 31 December 2008.

† Includes value of rent-frees.


Full details of the Group's property portfolio are available on the website (www.segro.com/segro/investors/property.htm)





Capital Recycling

The Group continued to recycle capital proactively with £343 million of disposals during the year including £92 million for the sale of the Bath Road Retail Park on the Slough Trading Estate, £110 million for two UK portfolios of non-core assets, £47 million for the sale of a newly developed office in Warsaw and £48 million for the Group's share of the sale of the Portes de France office development scheme in St Denis. The Group also completed acquisitions of £190 million including £90 million for a sale and leaseback transaction with MPM (Mannesmann Plastic Machinery) in Germany and £43 million on completion of the 2007 transactions with Neckermann and DHL. Looking at capital recycling activity over the last three years, the Group has completed asset sales of £2.3 billion (including £1.45 billion relating to the disposal of the US business).


Development Pipeline

A key strength of our development pipeline is the ability to scale down or accelerate activity quickly in anticipation of changes in market demand. This is due to the relatively short construction times for most of our product which can range from 6 to 12 months. As already discussed, the speculative development pipeline was significantly scaled back in response to the market downturn, and the pipeline was focused on pre-lets to mitigate development risk. As at 31 December 2008, 297,000 sq m of assets in the course of construction and committed developments were already 64 per cent pre-let.


Current Projects

Projects currently under construction or committed at 31 December 2008


UK

Western Europe

Central Europe

Total

Land area

ha

14

16

30

60

Space:






Logistics warehousing

sq m

-

13,858

119,511

133,369

Light Industrial

sq m

13,433

54,030

14,865

82,328

Other Industrial

sq m

10,777

-

-

10,777

Offices

sq m

59,569

11,312

-

70,881

Retail

sq m

-

-

-

-

Total


83,779

79,200

134,376

297,355

Investment properties

%

92

36

89

90

Trading properties

%

8

64

11

10

Pre-let 

%

79

28

62

64

Planning status






- fully approved

%

100

100

100

100

- zoned/outline approval

%

-

-

-

-

Rental value when completed

£m

18.2

7.3

5.9

31.4

Current book value - at valuation

£m

81.2

52.4

57.1

190.7

Forecast future costs to completion 

£m

167.8

33.5

19.3

220.6



Looking at the medium term when the markets start to recover, the Group has a substantial discretionary development pipeline and land bank which represents latent potential for future growth. The Group has strategically located land extending to approximately 426 hectares, with the potential to develop 1.9 million sq m of buildings over the coming medium term, which will be exploited when markets sufficiently recover. At today's prices, the Directors estimate that this could entail future development expenditure of approximately £1.2 billion and could produce estimated incremental annual rents in the region of £138 million per annum. As described earlier, the ability to accelerate development of our pipeline at short notice puts us in a strong position to take advantage of markets when they recover.






Future Projects

Potential future projects on land owned as at 31 December 2008


UK

Western Europe

Central

Europe

Total

Land area

ha

43

159

224

426

Space:






Logistics warehousing

sq m

6,503

253,500

839,979

1,099,982

Light industrial

sq m

149,996

381,734

15,188

546,918

Other industrial

sq m

-

-

-

-

Offices

sq m

33,911

204,548

-

238,459

Retail

sq m

10,266

-

-

10,266

Total


200,676

839,782

855,167

1,895,625

Investment properties

%

100

31

84

62

Trading properties

%

-

69

16

38

Pre-let 

%

-

-

-

-

Planning status






- fully approved

%

14

14

1

8

- zoned/outline approval

%

61

67

99

81

Rental value when completed

£m

25.6

74.1

38.0

137.7

Current book value - at valuation

£m

64.8

159.6

100.8

325.2

Forecast future costs to completion 

£m

204.1

707.8

331.3

1,243.2


Strategy in Action

The way in which the Group does business has been radically transformed over the last five years with a deep seated change to the underlying business model, to become a proactive Buy smart, add value, sell well model.


Strategy in Action: 

Careful and well-timed Asset Selection and Asset Acquisition (Land and Existing Buildings) - Buy Smart

In both the UK and Continental Europe, we look for sites and properties that will give us good opportunities in locations we know will work well for us - those in strong commercial centres with critical mass and good real estate fundamentals. These are assets that offer us the potential for attractive returns through either development or asset management or a combination of both. The key to success is making selections that will attract new customers and offer existing customers new or extended facilities. Wherever possible, we seek to utilise 'capital light/opportunity rich' structures such as a joint venture with a landowner. This defers a proportion of upfront capital outlay but secures the opportunity, allowing us to drawdown land as and when occupier demand dictates.


For example, in January 2008, we entered into a partnership agreement covering 38 ha with the Berlin Airport Authorities to develop a business and logistics park (230,000 sq m) in the area of the new international airport that will service Berlin. From 2011, the Berlin Brandenburg International Airport will be the only airport serving the city. The site covered under the partnership agreement offers us huge development potential and shows how, by securing high quality land holdings at the right time, we can realise significant growth opportunities for the future.


Strategy in Action: 

Add value through Development

We work closely with our customers and offer support as their needs change for a variety of reasons - for example, as their business expands and they need larger premises or premises in more than one location, we are able to offer them the flexibility of developing new facilities on our existing sites or finding them a new location. For us, working with our customers in this way enables us to carry out lower risk development where we transform our raw material of cleared land into income producing investment stock and, in so doing, add value to our estates and business parks. 


An example this year was a second pre-let for Equinix, an existing data centre customer for whom we had already created 7,000 sq m on the Slough Trading Estate in 2007, and who was looking to expand. Data centres are an increasingly important part of our business (leading developer of data centres in the UK) and we are providing a second facility of 11,000 sq m producing a completed investment with a rent roll of £1.5 million per annum. Through developing sites like these we are able to add significant value to our existing holdings. 


Strategy in Action: 

Add value through improving Asset Management 

Managing customer relationships is a vital component of our business approach. We offer a flexible, innovative and entrepreneurial approach to how we do business with our customers. This can be in a range of areas such as flexibility with lease agreements, through to working with planners to represent how they wish the premises to be designed and constructed. 


A demonstration of adding value to SEGRO and our customers' business through proactive customer relationship and asset management in 2008 was the creation of a new UK head office campus for O2. In April 2007 we announced we had been successful in bringing together all of O2's UK head office functions to a single location on the Slough Trading Estate. They already occupied 15,000 sq m but needed an additional 10,000 sq m of space. In December 2008 we officially handed over their new combined headquarters on the Bath Road. The new building will be connected to O2's existing building by a state of the art glass walkway. The building and walkway include energy efficient features. By working flexibly with a valued customer we have retained O2, adding value to our portfolio, as well as contributing to their business success by creating facilities they need and that exceed their expectations.


Strategy in Action: 

Value Crystallisation through Capital Recycling - Sell well

During 2008 we disposed £343 million of assets across our UK and Continental European portfolio. This capital was released from stabilised and non core assets which had reached their point of value maximisation for our business. They presented attractive investments for long-term investors with different risk and returns profiles to ourselves but we could use the proceeds more effectively to generate higher returns for our shareholders. 


In the UK, in the second half of the year, we achieved three significant sales including the Bath Road Retail Park which was sold to The Crown Estate for £92 million. In August we announced the sale of two industrial portfolios - one again to The Crown Estate for £64.4 million and the other to a client of Protego Real Estate Investors LLP for £45.8 million. These portfolios comprised 11 individually small estates which were located outside our core locations with little scope for further development. 


In Warsaw, in July, we sold Tulipan House to Commerz Real for £47 million (€59 million). Tulipan House is situated in one of the prime Warsaw office areas and was a site that we had developed and 90 per cent leased. In Hungary, we announced the sale, in November, of Vendel Park in Budapest. Again, a development undertaken after site acquisition, the park had been substantially let (Phase 1 100%, Phase 2 85%) to a mixture of both international and Hungarian companies.


All of these sales demonstrate our business model in action - from buying, improving and adding value through asset management and development, to selling when we can no longer add value but recognising that the assets are attractive propositions for others. 




Outlook and Immediate Priorities

The global economic environment is likely to remain difficult through the course of the coming year with the International Monetary Fund (IMF) suggesting a global growth rate of just 0.5 per cent against a long-term average of 3 per cent since 1980. With continued turmoil in the financial markets, an early return to an active investment market is also unlikely, although there is increasing evidence in recent weeks that a number of buyers, particularly those with no requirement for new debt facilities, have become active once again. Consequently, yields on real estate may continue to move out until they find their floor. Certainly for the first half of the year we expect values to continue to decline with the dual impact of illiquidity in the capital markets and weakening rental levels as the global economy continues to struggle. This will make recycling of capital more difficult as buyers and sellers' price aspirations remain mismatched. However, we will continue to take opportunities to sell non-core and stabilised assets wherever possible, providing prices are sufficiently attractive. 


Given these prevailing conditions, which are likely to last for some time and possibly well into 2010, our approach to 2009 will be cautious and disciplined. Our immediate priorities remain:


  • staying close to our customers: aim to maintain top quartile customer service levels, combined with a vigorous and commercial approach to leasing
  • capital recycling: identify assets reaching value maximisation and conduct disposals when acceptable pricing can be achieved
  • financial and risk management: stringent cost control, limited and low risk development and pro-active balance sheet management
  • capitalising on the current economic environment: identify attractively priced investment opportunities and secure them at the appropriate point in the market cycle


 

We view the current market conditions as creating an environment which will offer remarkable value creation opportunities over the years ahead and we are optimistic for the prospects of the Group.



Principal Risks and Uncertainties

The Group views effective risk management as integral to delivering SEGRO's strategic priorities.


As a consequence of prevailing market conditions, a number of risks identified in last year's Annual Report have increased significantly and other risks have emerged which were not previously considered material. The table below outlines the principal risks and uncertainties we face in delivering our strategic priorities in 2009.






1.    Financial Risks.

 

    Risk                                                                                                            Mitigating factors and additional commentary

General economic environment


Changes in the macro economic environment may affect the Group in a number of ways, including:

  • A decline in the value of the Group's property assets

  • A loss of rental income and increased vacant property costs due to a reduction in the demand for flexible business space, the exercise of lease break options by customers, the failure of tenants to renew expiring leases or the bankruptcy of customers,

  • An inability to sell assets at acceptable prices due to the decline in the demand for investment properties

The Board monitors the external financial environment closely and has established a number of strategic priorities in order to respond to anticipated changes in the global economic environment


During 2008, the slow-down in the global economy and rapid deterioration in international financial and property markets had an adverse impact on the environment in which the group operates.


There are few, if any, geographic markets in which the group operates which will not face an economic recession in 2009 which is likely to mean these risks become a reality to varying degrees in all areas of the business.

Liquidity, covenants and availability of credit facilities


Liquidity risk is the risk of the Group having insufficient funds available to meet the needs of the business or the inability of a counterparty to honour its pre-existing lending commitments.


A decline in the value of the Group's property assets or a material loss of rental income could result in the Group's failure to comply with the financial covenants within its credit facilities. A breach of covenant could accelerate the Group's obligation to repay those borrowings or to cancellation of those facilities.


In such circumstances, the failure of the Group to negotiate a covenant waiver could force the group to sell assets at distressed prices and, ultimately, could bring into question the Group's ability to continue as a going concern.

The Group has a flexible funding strategy and manages liquidity in accordance with Treasury policies which are designed to ensure the Group has adequate funds for its ongoing needs. The policies are described in the Financial Review.


The Board monitors covenant ratios closely and completes scenario analyses to inform its financial planning. As UK property values have been falling rapidly, this risk has increased in significance. The Group took a number of steps in 2008 in order to mitigate the risk of a covenant breach and to provide additional liquidity including a reduction in planned capital expenditure; further, in early 2009, we successfully renegotiated certain of the Group's financial covenants in order to provide further financial headroom.

Interest Rates


The Group is exposed to changes in interest rates affecting the cost of debt.

The majority of borrowings are fixed.

Foreign exchange rates


A reduction in the sterling value of assets, earnings or borrowings could arise if foreign currencies (principally the euro) depreciate against sterling (and vice versa if foreign currencies appreciate against sterling).

The majority of foreign currency assets are matched by borrowing denominated in the same currencies. This provides a natural hedge against the value. The majority of foreign currency assets are matched by borrowing denominated in the same currencies. This provides a natural hedge against the value of the Group's overseas assets and earnings but significant exchange rate changes can also impact the Group's gearing ratio; e.g. in December 2008, the decline in sterling against the euro caused the gearing ratio to increase by approximately 14 per cent. 

Tax Risks and REIT compliance


Potential tax penalties or loss of REIT status by failing to comply with the new REIT rules in the UK.

The Group maintains internal monitoring procedures to track compliance with the appropriate rules. The directors believe the Group to be in compliance with all REIT requirements for 2008 and expect to remain so in 2009.





2.    Real Estate Investment Risks

 

Risk                                                                                                     Mitigating factors and additional commentary

Increased vacancy through customer default and reduced demand


A potential loss of rental income and increased vacant property vacant property costs, including empty rates liabilities, could result from customer insolvency, customers exercising break clauses or terminating occupancy at the end of a lease.

SEGRO has over 1,700 customers in a wide range of businesses and geographic territories; there is a limited exposure to any single customer.


The Group stays close to the customer, monitoring the credit worthiness of the customer base and working closely with individual customers facing financial difficulty. We have a vigorous and pragmatic approach to leasing and we aim to provide a high level of customer service so as to minimise the likelihood of customers leaving the Group's properties at the end of a lease or at point of break option.


Despite the mitigating factors, the Directors believe there is increased risk that vacancy rates will rise during 2009 given the economic environment.

Inability to acquire or dispose of assets at attractive prices


The Group's strategy relies on being able to acquire properties and land for development and to dispose of properties. Property market conditions may not be conducive to acquiring and disposing of properties at acceptable prices. The Group may have insufficient funds available to acquire properties. The Group could misjudge the property cycle and miss both attractive acquisition opportunities and the right time to sell properties.

The Group develops asset management plans for all estates which are intended to identify the optimum point at which to develop, refurbish, redevelop or sell each asset. Local suitable property teams in each market are well placed to identify suitable properties to acquire. The Group was successful in both acquiring and in making disposals in the first three quarters of 2008. However, property investment market conditions deteriorated significantly in the fourth quarter, after which it became very difficult to achieve sales at acceptable prices in most markets.


The Group's Capital Approvals Committee oversees all significant acquisitions and disposals. Investment decisions are based on experience and analysis with reference to data from a wide range of external specialists and internal sources.

Decline in the value of property assets


The value of property assets could decline as result of a variety of factors including:

  • A decline in investment market conditions reducing the demand for the Group's properties.

  • A weakening in demand for flexible business space affecting vacancy rates or market rental levels.

  • Changes in legislation or customer requirements which render some of the Group's properties obsolete

  • The over-development of properties by the Group or its competitors causing an excess supply of flexible business space.

Property investment market conditions have been weak throughout 2008 and are expected to remain so in 2009 which may lead to a further decline in the Group's properties.


The Group actively monitors the external environment including the macro-economic situation, local market conditions, the property investment market, customer trends, legislative changes and competitor activity in order to mitigate the risk of loss of value. 


In the present economic environment, it may not be possible to sell certain assets at the optimum point or at the acceptable prices.



3. Development Risks


Letting and end value of development projects


Developments may fail to deliver expected financial returns due to changes in the demand for space or a reduction in the value of completed developments.

Sensitivity analysis is carried out on all potential investments to ensure that target returns can still be achieved with a delay to leasing assumptions and with lower end value assumptions. The Group adapts the pace of speculated development to current and anticipated market conditions so as to reduce the risk of un-let developments. During 2008, the Group progressively reduced the amount of speculative development projects under development.

 Project management risks


Developments may fail to deliver expected financial returns due to delays in planning approval, increased construction costs or other project management factors.

Most sites are acquired with outline zoning or planning consent already in place. We work closely with local communities and other stakeholders to help reduce the risk that planning approvals are delayed or refused.


Contingencies are built into all development appraisals to allow for cost overruns. We seek to transfer risk to our specialist construction partners. We oversee construction projects using in-house and external project managers and we undertake regular project reviews to monitor progress against plans. 

Holding excess development land


The cost of holding development land may damage the Group's overall financial performance if new developments are postponed or cancelled.

The Group aims to balance the requirement for development land with the cost of a non-productive asset and the Executive Committee regularly reviews the Group's land holdings. The recent slowdown in the economic environment is likely to reduce the amount of development undertaken in 2009. Whilst we believe it is important to maintain an appropriate supply of land, we will seek to reduce land holdings where feasible in 2009 and do not anticipate adding materially to the overall land bank.






4. Operational risks


Key people


Failure to attract, retain and motivate key employees needed to deliver the Group's strategic goals

The Remuneration Committee oversees the remuneration structure which is regularly benchmarked against external market indicators. Succession plans are developed for senior positions. All employees have personal development plans and on-going training.

Land and regulatory


Failing to comply with legal or regulatory requirements. In addition, the introduction of new requirements could impact the Group's reputation and financial position.

The business and its portfolio are actively managed to maintain compliance with legislation and reduce the potential impact of new regulations.

Corporate sustainability


Failure to achieve the Group's sustainability objectives and damage to the Group's reputation and possible criminal or civil action.

The Group Sustainability Committee sets targets, monitors performance and drives a programme of continuous improvement and the Group continues to invest in sustainable developments.

Business disruption or IT system failure


Business disruption following a major physical event or IT incident

A basic IT disaster recovery plan is in place and we are planning a further upgrade during 2009.

Business Information System efficiency


The business may operate inefficiently or management may take sub-optimal business decisions if information systems are not continually improved to reflect current technological and external developments

Information technology and business information systems have been improved with a new Group-wide financial consolidation system, a wide area network and other system enhancements during 2008. A new property management and accounting platform is planned for implementation in Continental Europe during 2009.

Health and safety


The risk of injury or illness to employees or third parties

The Group Health and Safety Manager establishes appropriate policies, training and monitors accident reports which are reviewed and approved by the Executive Committee. All significant accidents are reported to the Board.



Financial Review


Analysis of Movement in Net Asset Value

The principal drivers of the change in adjusted diluted NAV are set out in the table below, with the most significant factor being the property losses of £1,015 million (233.9 pence per share), mainly reflecting significant declines in UK property valuations as the economy and real estate investment market continue to be adversely impacted by the global financial market conditions. Adjusted profit after tax added £121.1 million to NAV whilst dividends paid were £100.0 million and currency translation differences assisted NAV by £45.4 million.


Pence 


£m

per share

Adjusted diluted equity attributable to shareholders at 31 December 2007

3,056.0 

704.3

Property losses

(1,015.0)

(233.9)

Adjusted profit after tax

121.1

27.9

Currency translation differences

45.4

10.5

Ordinary dividends paid

(100.0)

(23.0)

Actuarial gains

(17.2)

(4.0)

Fair value deficit on available-for-sale investments

(3.8)

(0.9)

Other items

8.4  

1.9  

Dilution adjustment for movement in number of shares

-

(0.8)

Adjusted diluted equity attributable to shareholders at 31 December 2008

2,094.9

482.0



Valuation Movements

Overall property losses of £1,015.0 million includes £981.5 million arising in the UK and £33.5 million in Continental Europe.


 
2008
2007
Property (losses)/gains
£m
£m
Property losses on:
 
 
Completed investment properties
(853.5)
(308.4)
Recycled land (within investment property)
(66.4)
(31.1)
Land held for development
(55.7)
(45.7)
Unrealised valuation losses taken through the income statement
(975.6)
(385.2)
Gains & losses realised on the sale of investment properties
(34.8)
3.0
 
(1,010.4)
(382.2)
Gains & losses on the revaluation of JV investment properties
(20.5)
(1.1)
Total property losses taken to the income statement
(1,030.9)
(383.3)
Gains & losses taken through the SORIE
15.9
11.2
Total property losses
(1,015.0)
(372.1)


The overall valuation deficit on completed investment properties amounted to 18.2 per cent for the year, comprised of 7.6 per cent in the first half of the year and a further fall of 11.5 per cent in the second half of the year.


The UK portfolio suffered a loss for the year of 25.4 per cent, whilst the Continental European portfolio saw an overall decline of just of 2.8 per cent. In Continental Europe, the Netherlands, Germany, Italy and Poland all recorded modest gains or losses whilst more significant losses were experienced in France (4.7 per cent) and Belgium (4.9 per cent). The three UK business regions suffered valuation deficits of 23 per cent (Slough), 26 per cent (National Markets) and 27 per cent (London Markets), respectively, broadly in line with the IPD All Industrial Capital Growth index deficit of 25.7 per cent. Further analysis of the valuation gains and losses is provided in the Completed Investment Properties tables in the Property Analysis section of the website (www.segro.com/segro/Investors/Property.htm).


The trading property portfolio had an unrecognised valuation surplus of £50.2 million at 31 December 2008, which has not been recognised in the financial statements. Impairment charges of £4.0 million (2007: £2.3 million) were recorded and are offset against the profit on sale of trading properties. An additional impairment charge of £3.3 million (2007: £1.6 million) is reflected within the share of profits from joint ventures after tax.


Adjusted Profit Before Tax

Adjusted profit before tax for the year amounted to £123.9 million (2007: £131.3 million). This reflected increased net rental income of £41.0 million, offset by increased finance costs (£34.0 million) and a reduction in other income of £16.7 million (2007: £18.4 million). These movements are explained in more detail below.


Reconciliation of adjusted profit before tax

£m

Adjusted profit before tax 2007

 - continuing operations

131.3

Increase in net rental income

41.0

Increased profits from sales of trading properties

1.9

Decrease in other income

(16.7)

Increased finance costs

(34.0)

Increased administration expenses 

(5.5)

Other (increase in share of profits from JVs after tax)

5.9

Adjusted profit before tax 2008

123.9


The increase in net rental income and the increase in finance costs are explained below. 


2008 once again produced excellent profits from the disposal of trading properties, with the Group recording an increase in such profits of £1.9 million to £23.9 million (2007: £22.0 million). In addition, the Group's share of profits from joint ventures included £11.4 million (2007: £3.0 million) from trading property disposals. Highlights in 2008 included the sale of the Group's office developments in Warsaw and St Denis (Paris), as well as the Group's only development in Hungary, a logistics scheme west of Budapest.


The reduction in other income has reduced adjusted profit before tax by £16.7 million, as 2008 saw a lower level of realisations of previous investments by the Candover and Charterhouse USA venture capital investment funds. There was also an increase in administration expenses of £5.5 million to £40.0 million (2007: £34.5 million), mainly due to a full year's impact of the expanded Continental European business, including the Continental European head office and new offices in Germany and Italy. A restructure in the second half of the year resulted in exceptional restructuring costs of £2.6 million, but the resulting reduction in headcount and focus on cost reduction are expected to generate overhead savings in 2009.


Rental Income

Gross rental income increased by £62.6 million (24.2 per cent) to £321.4 million and net rental income, on the same basis, increased by 20.1 per cent to £244.9 million. The key drivers of the increase in net rental income are set out in the table below:

 £m 

Net rental income 2007 

203.9

Acquisitions

40.2

Disposals

(10.3)

New developments, re-lettings and rent reviews

34.7

Space returned

(12.4)

Increase in property operating expenses, net of service charge income

(10.1)

Decrease in lease surrender premiums

(2.1)

Other

1.0

Net rental income 2008

244.9


Rental income on acquisitions included Neckermann.de and MPM, Germany (£13.9 million), Lyon and DHL, France (£8.3 million), Vimercate, Italy (£3.3 million) and other acquisitions of £9.9 million in Continental Europe, plus £4.8 million from various small acquisitions in the UK. The increase in rental income from acquisitions was partially offset by loss of rental income on disposals, mainly on the disposals of the Bath Road Retail Park (£2.8 million), two UK industrial portfolios (£2.4 million) and various other disposals in the UK and Continental Europe (£3.3 million and £1.8 million respectively).


Lettings of new developments, including Thales, Crawley in the UK (£4.0 million), Poland (£3.6 million) and various others in the UK (£5.6 million) and Continental Europe (£8.3 million) contributed to the growth in net rental income, along with re-lettings in the UK (£9.2 million) and Continental Europe (£4.0 million).


Net property operating expenses increased as 2008 saw the full year impact of the growth in the Continental European business and the abolition of empty rates relief in the UK, which added £5.5 million of additional costs in the year.


Analysis of Like-for-Like Rents

United Kingdom

Continental Europe

Group


2008

2007

2008

2007

2008

2007

Gross Rental Income

£m

£m

£m

£m

£m

£m

Completed properties owned throughout 

2007 & 2008 (Like-for-like rents)







163.8

160.2

25.7

25.0

189.5

185.2

Development lettings

8.8

4.0

10.8

4.9

19.6

8.9

Properties taken back for development

0.5

4.8

-

-

0.5

4.8

Properties acquired

5.9

1.2

36.9

9.9

42.9

11.1

Properties sold

7.2

15.5

-

-

7.2

15.5

Rent from trading properties

-

-

18.0

9.9

18.0

9.9

Total rental income pre-exceptionals

186.3

185.7

91.4

49.7

277.7

235.4

Lease surrenders and dilapidations

8.3

11.6

1.2

-

9.5

11.6

Service charge, recharges and exchange differences

10.9

9.3

23.3

2.5

34.2

11.8

Total rental income per accounts

205.5

206.6

115.9

52.2

321.4

258.8


Net Finance Charges

The £34.0 million increase in adjusted net finance costs to £116.5 million is mainly the result of acquisitions and capital expenditure incurred in the second half of 2007 and 2008, resulting in higher levels of net borrowings. Net losses of £32.8 million (2007: £1.9 million net gain) arising on the revaluation of interest rate swaps and other derivatives have been excluded from adjusted earnings in accordance with EPRA guidelines.


Tax

The underlying tax charge on the adjusted profit before tax of £2.8 million (2007: £1.9 million) was 2.3 per cent (2007: 1.4 per cent) reflecting the Group's REIT and SIIC status in the UK and France, respectively.


Earnings per Share

Adjusted diluted earnings per share were in line with the prior year at 28.0 pence, with a basic unadjusted loss per share of 215.9 pence (2007: 53.6 pence), reflecting the valuation deficits across the Group. The 0.7 per cent decrease in adjusted diluted earnings per share is lower than the decrease in adjusted profit before tax of 5.6 per cent mainly due to the lower weighted average number of shares in 2008 compared to 2007, due to the effects of the share consolidation in August 2007.


Capital Expenditure

During the year, the Group made investments totalling £464.1 million, compared with £776.6 million in 2007 (continuing operations only). The most significant acquisition in 2007 was the Mannesmann (MPM) acquisition and leaseback of three industrial sites in Munich, Nuremberg and Hanover, further enhancing our portfolio in Germany. The Group also acquired some further properties as part of the previously contracted Neckermann and DHL transactions. During the year, the Group also signed a major partnership agreement with the Berlin Airports Authority (Berlin BBI) to develop a business and logistics park.


A number of disposals were also made during the year, as the Group continued to recycle properties where we can no longer add value, including the disposal of two industrial portfolios for £110.2 million and the sale of Bath Rd Retail Park in Slough for £92.0 million. Disposals of trading property included the disposal of the joint venture Portes de France development in Paris, France, Vendel Park in Hungary and Tulipan House, an office development in Warsaw, in Poland.


Development expenditure including joint ventures and trading properties amounted to £273.9 million, comprising £96.5 million relating to UK developments and £177.4 million relating to Continental Europe. In addition, land purchases of £22.3 million were made to provide future development opportunities (2007: £74.8 million) comprising Tulipan Park, Prague in the Czech Republic £11.4 million, Komorniki, Poznan in Poland £9.2 million and small sites in Gliwice, Poland and Aachen, Germany totalling £1.7 million.

2008

2007 

Capital Expenditure on Properties

£m

£m

Land acquisitions

22.3

74.8

Development expenditure

222.4

186.4

Acquisitions of income producing properties

118.6

423.6


363.3

684.8

Trading properties

96.3

77.5

Joint venture properties

4.5

14.3

Total capital expenditure

464.1

776.6

Less sales proceeds:



- from disposals of investment properties

(201.5)

(185.1)

- from disposals of trading properties

(141.8)

(84.0)

Net capital expenditure

120.8

507.5


Regarding future capital expenditure plans, we previously agreed acquisitions (both income producing and development land) amounting to £72 million, which will be completed in 2009. This includes land in Gdansk, Poland (€30 million), Düsseldorf, Germany (€10.4 million) and Berlin BBI, Germany (€25.7 million). Future committed development expenditure on projects is approximately £220 million.


Cash Flow

A summary of the cash flow for the period is set out in the table below:

2008

2007


£m

£m

Cash flow from operations

226.0

181.9

Finance costs (net)

(160.1)

(124.6)

Dividends received (net)

6.5

2.5

Tax received/(paid) (net)

(4.3)

4.1

Free cash flow

68.1

63.9

REIT/SIIC conversion charge paid

(45.2)

(44.5)

Tax paid on PIDs

(9.6)

-

Sale of subsidiary undertakings

(13.5)

1,499.7

Tax paid on sale of US subsidiary undertaking

(217.0)

(87.2)

Capital expenditure

(403.8)

(756.9)

Property sales (including joint ventures)

199.9

207.3

Ordinary dividends

(100.6)

(335.9)

Other items

11.4

1.2

Net funds flow

(510.3)

547.6

Net increase/(decrease) in borrowings

282.4

(361.9)

Net cash (outflow)/inflow

(227.9)

185.7

Opening cash and cash equivalents

340.2

151.0

Exchange rate changes

50.2

3.5

Closing cash and cash equivalents

162.5

340.2


Cash flows generated from operations for the period were £226.0 million, an increase of 24.2 per cent from 2007 primarily as a result of increased net rental income. Cash flows generated from continuing operations were £226.0 million (2007: £147.8 million) and from discontinued operations were £nil (2007: £34.1 million).


Finance costs of £160.1 million, net of interest income, increased 28.5 per cent, consistent with the increase in borrowings during the year. Net tax of £4.3 million was paid during the year (2007: £4.1 million tax refund). In addition, US tax of £217.0 million was paid in 2008 relating to the sale of the US property business in 2007, REIT and SIIC conversion charges of £40.9 million and £4.3 million, respectively, were paid and tax on PIDs of £9.6m was paid.


After payment of the dividend, there was a net funds outflow of £510.3 million (2007: £547.6 million inflow). Allowing for the increase in borrowings in 2008, the net cash outflow for the period was £227.9 million (2007: £185.7 million inflow).


Proceeds from disposals amounted to £199.9 million compared to 2007 (£1,707.0 million), which included £1,499.7 million from the sale of the US property business and Slough Heat & Power, and £207.3 million from the sale of investment and development properties.


Financial Position

At 31 December 2008, the Group's borrowings totalled £2,661.6 million (31 December 2007: £2,039.1 million). Cash balances totalled £165.8 million (2007: £348.3 million) resulting in reported net debt amounting to £2,495.8 million (2007: £1,690.8 million). The weighted average maturity of the debt portfolio was 8.1 years.


Unsecured borrowings represent 96 per cent of gross debt at the year end. Secured debt totalled £108.8 million representing some historical mortgage debt domiciled in the Group's overseas operations. £1,724.9 million of debt domiciled in the UK was unsecured and was issued by the Parent Company without any supporting up-stream guarantees. £827.9 million of unsecured debt was issued by subsidiary companies predominantly located overseas.


The market value of borrowings of the Group at the end of December 2008 was £2,252.6 million, £409.0 million lower than the book value representing approximately 94 pence per share.


Dividends

The Board recommends a final dividend of 5.4 pence per share to be paid on 6 May 2009 to shareholders on the register at the close of business on 3 April 2009. The total dividend for the year amounts to 13.7 pence, all of which will be paid as a PID.


Gearing and Financial Covenants

The loan to value ratio (net debt divided by property assets) was 53 per cent (2007: 34 per cent) at 31 December 2008 and the adjusted gearing ratio (consolidated net debt divided by consolidated net worth with deferred tax added back) was 119 per cent (2007: 56 per cent).


The gearing level has been adversely affected by the fall in UK property values and the weakening of sterling against the euro which contributed approximately 39 per cent and 14 per cent, respectively, to the increase in gearing. The Group's tightest financial covenant at 31 December 2008 required that adjusted financial gearing remained under 125 per cent and, subsequent to the year end, the Group negotiated an increase in this limit to 160 per cent in order to provide further financial flexibility. 


Interest cover, based upon adjusted profit before interest and tax and adjusted net finance costs, was 1.9 times, or 2.0 times if capitalised interest is included. The Group's financial covenant on interest cover requires that net interest before capitalisation be covered at least 1.25 times by property rental income. The Group comfortably met this ratio at 1.9 times.


Liquidity Position

Funds availability at 31 December 2008 totalled £777.5 million, comprised of £165.8 million of cash deposits and £611.7 million of undrawn bank facilities. Only £44 million of the Group's facilities are uncommitted overdraft lines, with the balance of undrawn facilities being fully committed and with £501.5 million remaining available to 2011/13. 


Hedging Policies

The Group has set policies on interest rate and foreign currency translation exposures, liquidity and funding which are regularly reviewed by the Board. The current policies are to hedge approximately 85 per cent of the Group's debt portfolio with fixed or capped rates of interest and to hedge between 60 per cent and 90 per cent of foreign currency denominated assets with liabilities of the same currency.


Interest Rate Exposure

As at 31 December 2008, 89 per cent (2007: 83 per cent) of the gross debt portfolio attracted a fixed or capped rate of interest at a weighted average rate of 5.5 per cent (2007: 5.6 per cent). Much of this debt was in the form of fixed rate debt issues raised through Sterling Eurobonds with an average rate of 6.2 per cent. Such fixed rate debt issues are held in the balance sheet at amortised cost. Interest rate swaps, caps, collars and forward rate agreements are also used to convert variable rate bank debt to fixed rate and at 31 December 2008, the Group had £1,074.5 million of such borrowings (mostly euros) fixed at an average rate of 4.6 per cent. The 11 per cent of debt remaining at a variable rate of interest brought the overall weighted average cost of debt to 5.2 per cent (2007: 5.5 per cent) for the year.


The Group has decided not to elect to hedge account its interest rate derivatives portfolio. Therefore movements in the fair value are taken to the Income Statement but, in accordance with EPRA recommendations, these gains and losses are eliminated from adjusted profit before tax and adjusted EPS.


Foreign Currency Translation Exposure

Due to the nature of the Group's business, it has no cross-border trading transactions and therefore foreign exchange transaction exposure is negligible. However, it does have operations located overseas which transact business in the domestic currency of the country in which the business is located - mostly in euros. The Group's main currency exposure, therefore, is the translation risk associated with converting foreign currency assets and liabilities back into sterling in the Group consolidated accounts at each balance sheet date. As at 31 December 2008, the Group had foreign currency assets amounting to £2,091 million, which were 87 per cent hedged by foreign currency denominated liabilities of £1,819 million. A 10 per cent movement in the value of sterling against all currencies in which the Group operates would change net assets by £30.2 million, net assets per share by 7 pence or 1 per cent and adjusted gearing by approximately 7 per cent. 


Going Concern

As explained above, the Group had significant funds availability as at 31 December 2008, totalling £777.5 million and comprised of £165.8 million of cash deposits and £611.7 million of undrawn bank facilities. The Group has a relatively good debt maturity profile, with significant long term funding in place. Funds availability is more than adequate to meet the capital expenditure plans and other financial commitments of the Group for the foreseeable future.  


In order to provide further financial flexibility, the Group renegotiated its bank gearing covenant to 160% in February 2009 and, on 4 March 2009 announced a fully underwritten rights issue which is expected to raise additional equity of approximately £500 million after costs.  


The current economic conditions have created a number of uncertainties. Whilst there is uncertainty over future market-driven valuation movements which may affect our ability to remain within our bank covenants, we consider that the revised gearing covenant and the additional equity provide the Company and Group with sufficient financial flexibility for the foreseeable future.


Accordingly, after making enquiries, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.



Responsibility Statement


We confirm to the best of our knowledge:


  • the financial information contained in this announcement has been prepared on the basis of the accounting policies set out in the statutory accounts for the year ended 31 December 2008. Whilst the financial information included in this announcement has been computed in accordance with International Financial Reporting Standards (IFRS), as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS. The financial information does not constitute the Company's statutory accounts for the years ended 31 December 2008 or 2007, but is derived from those accounts. Those accounts give a true and fair view of the assets, liabilities, financial position and profit and loss of the Company and the undertakings included in the consolidation taken as a whole. Statutory accounts for 2007 have been delivered to the Registrar of Companies and those for 2008 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s237(2) or (3) of the Companies Act 1985;


  • the Business Review and Financial Review within this announcement are extracted from the Company's Annual Report which gives a fair review of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face; and


  • the Company's Annual Report, containing the Company's statutory accounts, are available at www.segro.com.





Signed on behalf of the Board on 4 March 2009 







ID Coull


DJR Sleath

Chief Executive Officer


Group Finance Director









Group income statement                                

For the year ended 31 December 2008                        

 

2008

 


 

2007

 

Adjusted

Adjust-

Total

Adjusted

Adjust-

Total



income &

Ments(2)

income &


income & 

Ments(2)

income & 



Expense(1)


expense


expense1


expense

Continuing operations

Notes

£m

£m

£m


£m

£m

£m

Revenue

3

414.7

-

414.7


342.8

-

342.8










Gross property rental income

3

321.4

-

321.4


258.8

-

258.8

Property operating expenses


(76.5)

-

(76.5)


(54.9)

0.9

(54.0)

Net property rental income


244.9

-

244.9


203.9

0.9

204.8

Profit on sale of trading properties less









provisions

2

23.9

-

23.9


22.0

-

22.0

Share of profits/(losses) from property









   joint ventures after tax 

7

9.9

(17.3)

(7.4)


4.0

1.6

5.6

Other investment income

4

1.7

-

1.7


18.4

-

18.4

Administration expenses

5

(40.0)

(2.6)

(42.6)


(34.5)

-

(34.5)

Property losses 

6

-

(1,010.4)

(1,010.4)


-

(382.2)

(382.2)

Operating profit/(loss)


240.4

(1,030.3)

(789.9)


213.8

(379.7)

(165.9)

Finance income

8

11.3

3.8

15.1


17.6

3.5

21.1

Finance costs

9

(127.8)

(36.6)

(164.4)


(100.1)

(1.6)

(101.7)

Profit/(loss) before tax


123.9

(1,063.1)

(939.2)


131.3

(377.8)

(246.5)

Tax (charge)/credit - current


(3.5)

(1.2)

(4.7)


(2.4)

(13.9)

(16.3)

  - deferred


0.7

5.1

5.8


0.5

17.9

18.4

Total tax

10

(2.8)

3.9

1.1


(1.9)

4.0

2.1










Profit/(loss) from continuing









operations


121.1

(1,059.2)

(938.1)


129.4

(373.8)

(244.4)










Discontinued operations









Profit after tax from discontinued









operations

33

-

-

-


18.7

151.9

170.6

Profit/(loss) for the year


121.1

(1,059.2)

(938.1)


148.1

(221.9)

(73.8)

Attributable to equity shareholders


121.5

(1,059.6)

(938.1)


147.6

(222.5)

(74.9)

Attributable to minority interests


(0.4)

0.4

-


0.5

0.6

1.1



121.1

(1,059.2)

(938.1)


148.1

(221.9)

(73.8)










Earnings per share









From continuing and discontinued operations







Basic loss per share




(215.9p)




(16.4p)

Diluted loss per share




(215.9p)




(16.4p)










From continuing operations









Basic loss per share

12



(215.9p)




(53.6p)

Diluted loss per share

12



(215.9p)




(53.6p)


Notes


(1)    'Adjusted income & expense' relates to the Group's income and expense after EPRA adjustments and excluding exceptional items.


(2)    EPRA adjustments arise from adopting the recommendations of the Best Practices Committee of the European Public Real Estate Association (EPRA) as appropriate. Exceptional items are disclosed separately due to their size or incidence to enable a better understanding of performance. Both these types of adjustments are detailed in note 12. 





Statements of recognised income and expense (SORIE)    

For the year ended 31 December 2008

                    


Group


Company



2008

2007


2008

2007

Continuing and discontinued operations

Notes

£m

£m

 

 £m 

 £m 








Exchange movement arising on translation of international operations


64.8

14.3


-

-

Revaluation gains on properties in the course of development

6

15.9

3.3


-

-

Actuarial (losses)/gains on defined benefit pension schemes

22

(17.2)

6.8


(17.2)

6.6

(Decrease)/increase in value of available-for-sale investments

15

(3.8)

8.1


-

-

Tax on items taken directly to equity


(0.5)

0.1


-

-








Net gain/(loss) recognised directly in equity


59.2

32.6


(17.2)

6.6








Transfer to income statement on sale of available-for-sale investments


(1.4)

(4.3)


-

-

Transfer to income statement exchange realised on sale of US property 







business


-

3.5


-

-

(Loss)/profit for the year from continuing operations


(938.1)

(244.4)


(241.9)

686.0

Profit for the year from discontinued operations

33

-

170.6


-

-








Total recognised income and expense for the year


(880.3)

(42.0)


(259.1)

692.6








Attributable to equity shareholders


(881.6)

(43.1)


(259.1)

692.6

Attributable to  minority interests


1.3

1.1


-

-










(880.3)

(42.0)


(259.1)

692.6




Reconciliation of movements in equity    

As at 31 December 2008


Group


Company



2008

2007


2008

2007



£m

£m

 

 £m 

 £m 








Balance at 1 January 


2,989.7

3,382.4


2,018.1

1,669.9

Exchange movements


64.8

14.3


-

-

Retained (loss)/profit


(938.1)

(74.9)


(241.9)

686.0

Other items in SORIE


(5.6)

18.3


(17.2)

6.6

Shares issued


1.9

1.7


1.9

1.7

Dividends paid


(100.0)

(341.9)


(100.0)

(341.9)

Other


(4.5)

(1.2)


1.7

(4.2)

Minority interests


1.0

(9.0)


-

-

Balance at 31 December


2,009.2

2,989.7


1,662.6

2,018.1

  Balance Sheets

As at 31 December 2008


Group


Company



2008

2007


2008

2007

 

Notes

£m

£m


£m

£m

Assets







Non-current assets







Goodwill


1.0

0.8


-

-

Investment and development properties

13

4,311.1

4,761.9


-

-

Owner occupied properties

13

11.1

13.1


-

-

Plant and equipment


9.1

5.8


-

-

Investments in subsidiaries

7

-

-


3,840.4

3,800.8

Investments in joint ventures  

7

67.5

73.4


5.5

5.5

Finance lease receivables

14

10.2

10.4


-

-

Available-for-sale investments

15

41.9

39.5


-

-

Deferred tax asset


-

-


4.3

4.3



4,451.9

4,904.9


3,850.2

3,810.6

Current assets







Trading properties

13

357.8

236.0


-

-

Trade and other receivables

16

136.2

134.5


22.1

18.8

Cash and cash equivalents

17

165.8

348.3


1.3

72.8

Tax recoverable


1.2

0.7


-

-

Finance leases receivables

14

0.2

0.1


-

-



661.2

719.6


23.4

91.6








Total assets


5,113.1

5,624.5


3,873.6

3,902.2








Liabilities







Non-current liabilities







Borrowings

18

2,575.3

1,997.3


1,724.9

1,365.9

Deferred tax provision

20

78.2

65.4


-

-

Provisions for liabilities and charges


7.1

4.4


6.6

3.7

Trade and other payables

21

17.5

18.7


352.3

235.2

 


2,678.1

2,085.8


2,083.8

1,604.8

Current liabilities







Borrowings

18

86.3

41.8


-

7.5

Tax liabilities


25.6

283.3


10.2

225.6

Trade and other payables

21

313.9

223.9


117.0

46.2



425.8

549.0


127.2

279.3








Total liabilities


3,103.9

2,634.8


2,211.0

1,884.1

Net assets


2,009.2

2,989.7


1,662.6

2,018.1








Equity







Share capital

23

118.3

118.1


118.3

118.1

Share premium 

24

370.6

368.9


370.6

368.9

Own shares held

25

(13.4)

(16.8)


(13.4)

(16.8)

Revaluation reserve

26

438.4

1,535.7


-

-

Other reserves

26

36.6

66.0


48.6

50.6

Retained earnings

26

1,057.0

917.1


1,138.5

1,497.3

Total shareholders' equity


2,007.5

2,989.0


1,662.6

2,018.1

Minority interests


1.7

0.7


-

-

Total equity


2,009.2

2,989.7


1,662.6

2,018.1








Net assets per ordinary share







 Basic

12

462p

690p




 Diluted

12

462p

689p













    



Cash flow statements







For the year ended 31 December 2008












Group


Company



2008

2007


2008

2007

 

Notes

 £m 

 £m 


 £m 

 £m 








Cash flows from operating activities

31(i)

226.0

181.9


(52.7)

(17.4)

Interest received on deposits and loans


14.2

22.9


99.9

132.0

Dividends received


6.5

3.8


86.1

635.2

Interest paid 


(174.3)

(147.5)


(143.0)

(87.8)

Minority dividends paid


-

(1.3)


-

-

Tax (paid)/recovered


(59.1)

(40.4)


(0.3)

5.3

Net cash received from/(used in) operating activities


13.3

19.4


(10.0)

667.3








Cash flows from investing activities







Purchase of subsidiary undertakings (net of cash acquired)


-

(95.8)


-

-

Sale of US property business (net of cash disposed of)


(7.3)

1,451.9


-

-

Tax paid on sale of US property business


(217.0)

(87.2)


(217.0)

-

Sale of Slough Heat & Power


(6.2)

47.8


(3.9)

-

Purchase and development of investment properties


(283.2)

(390.7)


-

-

Sale of investment properties


199.9

193.4


-

-

Purchase and development of property, plant and equipment

(120.6)

(249.7)


-

-

Sale of property, plant and equipment


1.2

13.9


-

-

Purchase of available-for-sale investments


(3.8)

(4.7)


-

-

Proceeds from disposal of available-for-sale investments


8.6

27.6


-

-

Additional net investment in subsidiary undertakings


-

-


(203.2)

(123.6)

Loan repayments by/(advances to) subsidiary undertakings


-

-


188.4

(33.7)

Investments and loans to joint ventures 


(0.7)

(21.0)


-

-

Loan repayments by/(advances to) joint ventures


0.5

5.2


2.4

(9.4)

Acquisition of minority interests

-

(20.7)


-

-

Transfer from/(to) restricted deposits


4.1

(0.2)


-

-

Net cash (used in)/received from investing activities


(424.5)

869.8


(233.3)

(166.7)








Cash flows from financing activities







Dividends paid to ordinary shareholders


(100.6)

(335.9)


(100.6)

(335.9)

Proceeds from loans


615.3

62.4


319.0

43.8

Repayment of loans


(223.3)

(244.7)


(47.4)

(151.8)

Net decrease in other borrowings


(109.6)

(179.6)


-

-

Proceeds from the issue of ordinary shares


1.9

1.7


1.9

1.7

Purchase of own shares


(0.4)

(7.4)


(0.4)

(7.4)

Net cash received from/(used in) financing activities


183.3

(703.5)


172.5

(449.6)








Net (decrease)/increase in cash and cash equivalents


(227.9)

185.7


(70.8)

51.0

Cash and cash equivalents at the beginning of the year


340.2

151.0


72.5

20.8

Effect of foreign exchange rate changes


50.2

3.5


(0.7)

0.7

Cash and cash equivalents at the end of the year


162.5

340.2


1.0

72.5








Cash and cash equivalents per balance sheet

17

165.8

348.3


1.3

72.8

Less restricted deposits

31(ii)

-

(4.1)


-

-

Bank overdrafts


(3.3)

(4.0)


(0.3)

(0.3)

Cash and cash equivalents per cash flow


162.5

340.2


1.0

72.5









  Notes to the financial statements 


1.  Basis of preparation


The financial information contained in this announcement has been prepared on the basis of the accounting policies set out in the statutory accounts for the year ended 31 December 2008. The Company's Annual Report, containing the Company's statutory accounts, are available at www.segro.com.


2. Segmental analysis             

2(i) - Geographical segments



Continental


 


United Kingdom


 Europe


Group


2008

2007


2008

2007


2008

2007

Adjusted profit 

£m

 £m 


£m

 £m 


 £m 

 £m 










Segment revenue

 

218.8

254.9


195.9

87.9


414.7

342.8










Net property rental income - investment properties

156.0

160.1


76.6

35.6


232.6

195.7

Net property rental income - trading properties

(0.2)

-


12.5

8.2


12.3

8.2










Proceeds on sale of trading properties

13.3

48.3


80.0

35.7


93.3

84.0

Carrying value of trading properties sold

(8.7)

(33.4)


(60.7)

(28.6)


(69.4)

(62.0)

Profit on sale of trading properties

4.6

14.9


19.3

7.1


23.9

22.0

Share of profits/(losses) from property joint ventures after tax









  - investment properties

2.7

2.3


0.2

0.2


2.9

2.5

  - trading properties

(2.2)

3.2


9.2

(1.7)


7.0

1.5

Other investment income

1.7

18.4


-

-


1.7

18.4

Administration expenses 

(21.3)

(23.1)


(18.7)

(11.4)


(40.0)

(34.5)

Adjusted operating profit

141.3

175.8


99.1

38.0


240.4

213.8

Net finance costs

(63.1)

(54.4)


(53.4)

(28.1)


(116.5)

(82.5)

Adjusted profit before tax

78.2

121.4


45.7

9.9


123.9

131.3

Adjustments

(997.5)

(436.8)


(65.6)

59.0


(1,063.1)

(377.8)

(Loss)/profit before tax 

(919.3)

(315.4)


(19.9)

68.9


(939.2)

(246.5)










Summary balance sheet


















Total property assets 

2,607.7

3,672.4


2,072.3

1,338.6


4,680.0

5,011.0

Net borrowings

(1,220.7)

(791.4)


(1,275.1)

(899.4)


(2,495.8)

(1,690.8)

Other net liabilities

(105.1)

(274.7)


(69.9)

(55.8)


(175.0)

(330.5)

Segment net assets

1,281.9

2,606.3


727.3

383.4


2,009.2

2,989.7










Capital expenditure in the year

105.7

236.4


358.4

532.6


464.1

769.0










 

2(ii) - Business Segments

Investment


Trading 


Other




Property


property


activities


Group

 

2008

2007


2008

2007


2008

2007


2008

2007


£m

£m


£m

£m


£m

£m


£m

£m

Segment revenue

303.4

248.9


111.3

93.9


-

-


414.7

342.8













Segment net assets/(liabilities)

4,148.5

4,652.4


398.4

264.5


(2,537.7)

(1,927.2)


2,009.2

2,989.7













Capital expenditure in the year

363.3

680.6


96.3

85.7


4.5

2.7


464.1

769.0


3. Revenue 

2008

2007

 

 

 

 

 

 

 

 

 

 

£m

£m

Rental income received from investment properties

264.9

215.7

Rent averaging

4.9

9.0

Surrender premiums

9.5

11.6

Interest received on finance lease assets

0.8

0.8

Service charge income

23.3

11.8

Investment property rental income

 

 

 

 

 

303.4

248.9

Trading property rental income

18.0

9.9

Gross property rental income

 

 

 

 

 

 

 

 

 

321.4

258.8

Proceeds from sale of trading properties

93.3

84.0

Total revenue  

 

 

 

 

 

 

 

 

414.7

342.8

  



4. Other investment income 

2008

2007

 

 

 

 

 

 

 

 

 

 

£m

£m

Net profit on available-for-sale investments

0.3

10.2

Transfer of fair value surplus realised on sale of available-for-sale investments

1.2

7.9

Dividends from available-for-sale investments

0.2

0.3

Total other investment income 

 

 

 

 

 

 

 

 

 

1.7

18.4



5. Administration expenses




2008

2007

 

 

 

 

 

 £m 

 £m 

Directors' remuneration

3.7

3.6

Depreciation 

2.0

1.3

Other administration expenses

36.9

29.6

Total administration expenses 

 

 

 

 

 

42.6

34.5





In addition to the above, Directors' remuneration in 2007 included an additional £1.2 million paid in relation to Directors of discontinued operations.  The full 2008 depreciation charge, including amounts charged under other headings, is £3.1 million (2007 £2.0 million), and relates to assets owned by the Group.  Other administration expenses include the cost of services of the Group's auditor. 


Services provided by the Group's auditor 



2008


2007




£000


£000

Audit services






Fees payable to the Company's auditor for the audit of Company and consolidated accounts

379


309

Fees payable for the audit of the Company's subsidiaries pursuant to legislation

171


171





Non-audit services




Fees payable to the Company's auditor and associates for other services:




  - Other services pursuant to legislation 

145


135

  - Tax services

667


712

Other services

713


1,092


2,075


2,419




Other services include fees of £622,000 (2007  £573,000) provided by Deloitte that were contracted prior to their appointment as 

auditor and relate primarily to assistance with internal system projects. In addition, in 2007 there were £59,000 of internal audit

fees incurred prior to their appointment as auditor.




Employees' staff costs were:

2008

2007


 £m 

 £m 

Wages and salaries

26.1

31.2

Social security costs

4.3

3.4

Pension costs

2.4

0.8

Share scheme costs

(1.4)

7.0

Termination benefits

2.3

2.2

National Insurance - unexercised share options

-

(0.2)

Total

33.7

44.4




Average number of Group employees

   348

454

            

Disclosures required by the Companies Act 1985 on Directors' remuneration, including salaries, share options, pension contributions and pension entitlement and those specified by the Financial Services Authority are included in the Remuneration Report, within the full Annual Report.   


The aggregate remuneration of employees of the Company is £3.7 million (2007 £4.8 million). All the Executive Directors are employees of SEGRO plc.   






6. Property (losses)/gains




2008

2007


 £m 

 £m 

Income statement  - valuation deficits

(975.6)

(385.2)

  - (losses)/profits from the sale of investment properties

(34.8)

3.0

Total property losses per income statement

(1,010.4)

(382.2)

Statement of recognised income and expense - development valuation surpluses

15.9

11.2

Share of joint ventures' valuation losses

(20.5)

(1.1)

Total property losses 

(1,015.0)

(372.1)





7. Investments in joint ventures and subsidiaries

7(i) - Share of (losses)/profits from joint ventures after tax







2008

2007






£m

£m

Adjusted profits before tax - investment properties

3.6

2.9

Adjusted profits before tax - trading properties

11.4

3.0


15.0

5.9

Valuation deficits - investment properties

(20.5)

(1.1)


(5.5)

4.8

Current tax - investment properties

(0.7)

(0.5)

Current tax - trading properties

(4.4)

(1.4)

Deferred tax - investment properties

3.2

2.7

Group share of (losses)/profits after tax

(7.4)

5.6




Trading properties held by joint ventures were externally valued resulting in an increase in the provision for impairment of £3.3 million (2007 increase of £1.6 million).  The Group's share of trading properties held by joint ventures has an unrecognised surplus of £10.7 million (2007 £34.6 million).    



7(ii) - Investments by the Group

The Group accounts for joint ventures under the equity method. Note 32 lists the significant joint ventures.                    





2008

2007






£m

£m

Cost or valuation at 1 January





73.4

84.5

Exchange movement





7.6

0.8

Additions





-

4.2

Disposals





(0.5)

(26.5)

Loan additions





0.7

7.8

Dividends received





(6.3)

(4.8)

Valuation deficits





(20.5)

-

Deferred tax on valuations and capital allowances 





3.2

2.7

Share of profits net of tax





9.9

4.7

Cost or valuation at 31 December





67.5

73.4








The amount of loans advanced by the Group to joint ventures is £49.5 million (2007 £43.9 million).


















7.  Investments in joint ventures and subsidiaries (continued)

7(ii) - Investments by the Group (continued)


Summarised financial information of Group's share of joint ventures





2008

2007






£m

£m

Balance sheet (Group's share)



Investment and development properties

94.5

111.0

Total non-current assets

94.5

111.0




Trading properties

47.2

60.6

Other receivables

8.7

22.6

Cash

29.7

12.7

Total current assets

85.6

95.9

Total assets

180.1

206.9




Mortgages and loans

76.8

87.5

Deferred tax

8.6

12.0

Other liabilities

0.3

24.7

Total non-current liabilities

85.7

124.2




Mortgages and loans

4.3

-

Other liabilities

22.6

9.3

Total current liabilities

26.9

9.3

Total liabilities

112.6

133.5

Group's share of net assets

67.5

73.4






7(iii) - Investments by the Company



Joint 




Joint


Subsidiaries


ventures


Subsidiaries


ventures


2008


2008


2007


2007


£m


£m


£m


£m

Cost or valuation at 1 January

3,800.8


5.5


3,491.0


5.5

Exchange movement

123.4


-


20.5


-

Additions

203.2


-


123.7


-

Net loan movement

(69.1)


-


187.8


-

Loan write-offs against provisions

-


-


20.0


-

Increase in provision for investments and loans in the income








  statement

(217.9)


-


(42.2)


-

Cost or valuation at 31 December

3,840.4


5.5


3,800.8


5.5









    


            

8. Finance income 

2008

2007

 

 

 

 

 

 £m 

 £m 

Interest received on bank deposits

10.2

16.6

Fair value gains on interest rate swaps and other derivatives

3.8

3.5

Return on pension assets less unwinding of discount on pension liabilities

1.0

0.7

Exchange differences

0.1

0.3

 

 

 

 

 

15.1

21.1





9. Finance costs 

2008

2007

 

 

 

 

 

 £m 

 £m 

Interest on overdrafts and loans

134.2

106.5

Unwinding of discount on the pension liabilities less return on assets

0.1

0.1

Total borrowing costs

134.3

106.6

Less amounts capitalised on the development of - trading properties

(0.6)

(0.9)

  - investment and development properties 

(5.9)

(5.6)

Net borrowing costs

127.8

100.1

Fair value losses on interest rate swaps and other derivatives

36.6

1.6

Total finance costs 

 

 

164.4

101.7


The interest capitalisation rates for 2008 were:  UK 6.25 per cent (2007 6.25 per cent) and in Continental Europe, rates ranging from 3.33 per cent to 6.07 per cent (2007  3.95 per cent to 5.25 per cent). Interest is capitalised gross of tax relief. 



10. Tax (credit)/charge                

10(i) - Tax on profit

2008

2007

 

 

 

 

£m

£m

Current tax



United Kingdom



Corporation tax charged at 28.5 per cent*

-

0.8

 Adjustments in respect of earlier years 

0.1

(1.7)


0.1

(0.9)

International



Current tax charge

3.4

2.7

SIIC conversion charge

1.2

13.9

Adjustments in respect of earlier years

-

0.6


4.6

17.2

 Total current tax 

4.7

16.3




Deferred tax



Released on conversion to SIIC/REIT in respect of investment properties

(1.1)

(30.2)

Origination and reversal of timing differences 

5.4

2.7

Released in respect of property disposals in the year

(0.6)

(0.1)

On valuation movements 

 

 

(7.1)

8.9

Total deferred tax in respect of investment properties

(3.4)

(18.7)

Other deferred tax

(2.4)

0.3

Total deferred tax 

 

 

(5.8)

(18.4)

  

 

 


 

Total tax credit on profit on ordinary activities 

 

 

(1.1)

(2.1)

    



10. Tax (credit)/charge (continued)

10(ii) - Factors affecting tax charge for the year                    

                        

The tax charge is lower than the standard rate of UK corporation tax. The differences are :

2008

2007

 

 

 

 

 

£m

£m

Loss on ordinary activities before tax

 

 

 

 

(939.2)

(246.5)

Add back valuation deficit in respect of UK properties not taxable

925.4

441.7


(13.8)

195.2




Multiplied by standard rate of UK corporation tax of 28.5 per cent* 

(3.9)

58.6

Effects of :



Release of deferred tax provision on conversion to SIIC/REIT

(1.1)

(30.2)

SIIC/REIT conversion charge

1.2

13.9

Exempt SIIC & REIT profits and gains 

(0.9)

(35.3)

Permanent differences

(0.8)

(2.7)

Loss/(profit) on joint ventures already taxed

2.1

(1.6)

Higher tax rates on international earnings

(0.6)

(3.7)

Adjustments in respect of earlier years

2.9

(1.1)

Total tax credit on profit on ordinary activities

 

 

 

 

(1.1)

(2.1)

* The UK corporation tax rate changed from 30 per cent to 28 per cent on 1 April 2008, therefore an effective rate of 28.5 per cent has been applied for the 2008 year. 



10(iii) - Factors that may affect future tax charges 


No deferred tax is recognised on the unremitted earnings of international subsidiaries and joint ventures. In the event of their remittance to the UK, no net UK tax is expected to be payable. 



11. Dividends

2008

2007

 

 

 

 

 

 

£m

£m

Ordinary dividends paid



Interim dividend for 2008 @ 8.3 pence per share

36.1

-

Final dividend for 2007 @ 14.7 pence per share

63.9

-

Interim dividend for 2007 @ 8.3 pence per share

-

35.0

Special dividend for 2007 @ 53.0 pence per share

-

250.0

Final dividend for 2006 @ 12.1 pence per share

-

56.9

 

 

 

 

 

 

 

100.0

341.9



12.  Earnings and net assets per share


The earnings per share calculations use the weighted average number of shares and the net assets per share calculations use the number of shares in issue at the year end. Both the earnings per share and net assets per share calculations exclude 2.1 million shares held by the ESOP Trust (2007  2.9 million).


12(i) - Earnings per share





2008


2007


Earnings

Shares

Pence


Earnings

Shares

Pence


£m

million

per share


£m

million

per share

Basic

(938.1)

434.4

(215.9)


(245.3)

457.1

(53.6)

Dilution adjustments:








Share options and save as you earn schemes

-

-

-


-

0.7

-

Diluted

(938.1)

434.4

(215.9)


(245.3)

457.8

(53.6)









Adjusted








EPRA adjustments:








Negative goodwill credited, net

-


-


(0.9)


(0.2)

Share of joint ventures revaluation deficit/(surplus) 








  after tax

17.3


4.0


(1.6)


(0.3)

Investment property revaluation deficit

975.6


224.6


385.2


84.2

Loss/(profit) on sale of investment properties

34.8


8.0


(3.0)


(0.6)

Adjustments for fair value of derivatives, finance income

(3.8)


(0.9)


(3.5)


(0.8)

Adjustments for fair value of derivatives, finance costs      

36.6


8.4


1.6


0.3

EPRA adjustments before tax

1,060.5


244.1


377.8


82.6

Deferred tax on investment and development property








   which does not crystallise unless sold

(3.4)


(0.8)


(18.1)


(3.9)

Other deferred tax

(1.7)


(0.4)


0.2


-

Total EPRA adjustments after tax

1,055.4


242.9


359.9


78.7









Exceptional items (excluding minority interests)








Restructuring costs

2.6


0.6


-


-

France SIIC conversion charge

1.2


0.3


13.9


3.0

Total exceptional items before tax

3.8


0.9


13.9


3.0

Tax effect of exceptional items

-


-


-


-

Total exceptional items after tax

3.8


0.9


13.9


3.0









Minority interest on adjustments

0.4


0.1


0.6


0.1









Total adjustments

1,059.6


243.9


374.4


81.8

Adjusted diluted

121.5

434.4

28.0


129.1

457.8

28.2

Adjusted basic

121.5

434.4

28.0


129.1

457.1

28.2












12(ii)  - Net assets per share





2008


2007


Equity




Equity




attributable




attributable




to ordinary




to ordinary




shareholders

Shares

Pence


shareholders

Shares

Pence


£m

million

per share


£m

Million

per share

Basic

2,007.5

434.6

462


2,989.0

433.2

690

Dilution adjustments:








Share options and save as you earn schemes

-

-

-


-

0.7

1

Diluted

2,007.5

434.6

462


2,989.0

433.9

689









Adjusted








Adjustment for deferred tax on investment properties:







  - capital allowances

53.6


12


30.8


7

  - valuation surpluses

33.8


8


36.2


8

Adjusted diluted NAV

2,094.9

434.6

482


3,056.0

433.9

704

Adjusted basic NAV

2,094.9

434.6

482


3,056.0

433.2

705









Triple net NAV (NNNAV)








Fair value adjustment in respect of debt

409.0


94


64.1


15

Tax effect of fair value adjustment in respect of debt

(116.6)


(27)


(19.2)


(5)

Deferred tax in respect of capital allowances

(53.6)


(12)


(30.8)


(7)

Deferred tax in respect of valuation surpluses

(33.8)


(8)


(36.2)


(8)

Fair value adjustment in respect of trading properties

50.2


12


74.3


17









Diluted triple net NAV (NNNAV)

2,350.1

434.6

541


3,108.2

433.9

716

Basic triple net NAV (NNNAV)

2,350.1

434.6

541


3,108.2

433.2

717











13. Properties 





13(i) - Total property assets, including joint ventures





Properties are included in the balance sheet as follows :







Continental




UK

Europe




2008

2008

2008

2007

Properties carried at valuation :


£m

£m

 £m 

 £m 

Investment properties


2,525.0

1,451.5

3,976.5

4,485.5

Development properties  


61.4

273.2

334.6

276.4



2,586.4

1,724.7

4,311.1

4,761.9

Owner occupied properties, net of depreciation


9.5

1.6

11.1

13.1



2,595.9

1,726.3

4,322.2

4,775.0

Group's share of investment properties within joint ventures 

88.0

6.5

94.5

111.0

Total properties carried at valuation

 


2,683.9

1,732.8

4,416.7

4,886.0

 

 




 

 

Properties carried at the lower of cost and net realisable value :

 



 

Trading properties


11.8

346.0

357.8

236.0

Group's share of trading properties within joint ventures 

11.4

35.8

47.2

60.6

Total properties carried at the lower of cost and net realisable value

 

 


23.2

381.8

405.0

296.6

Total properties at 31 December 


2,707.1

2,114.6

4,821.7

5,182.6




Investment, development and owner occupied properties were externally valued as at 31 December 2008 by CB Richard Ellis, DTZ Debenham Tie Leung, Colliers CRE or King Sturge. The valuation basis is market value, conforms to international valuation standards and was arrived at by reference to market evidence of the transaction prices paid for similar properties.  In relation to the property valuations applied by the Group's independent, professionally qualified property valuers, the current volatility in the global financial system has created a significant degree of turbulence in commercial real estate markets across the world and the lack of liquidity in the capital markets means that it may be very difficult to achieve a sale of property assets in the short-term. Therefore, the property valuers are of the opinion that 'abnormal' market conditions currently prevail and that there is likely to be a greater than usual degree of uncertainty in respect of the property valuation figures now reported. Until the number and consistency of comparable transactions increases, this situation is likely to remain.  The value of the Group's portfolio is affected by the prevailing market and economic conditions and thus the Group's net asset value can increase or decrease due to external factors outside of the Group's control. However, the Group has a diverse portfolio spread across ten countries in Europe and it is anticipated that this should help to mitigate the impact of the current market and economic conditions on the Group. All the valuers listed above are qualified independent valuers who hold a recognised and relevant professional qualification and have recent experience in the relevant location and the category of properties being valued. All the valuers have adopted policies for the regular rotation of the responsible valuer.


CB Richard Ellis, DTZ Debenham Tie Leung, Colliers CRE and King Sturge also undertake some professional and letting work on behalf of the Group, although this is limited in relation to the activities of the Group as a whole. All four firms advise us that the total fees paid by the Group represent less than 5 per cent of their total revenue in any year.  


13(ii) - Investment and development properties 




 


Investment

Development

 Total 


£m

£m

 £m 

At 1 January 2007

5,130.0

468.7

5,598.7

Exchange movement

37.7

7.7

45.4

Acquisitions

423.6

74.8

498.4

Additions

97.7

178.7

276.4

Disposals

(1,176.4)

(173.1)

(1,349.5)

Transfers between investment and development properties

236.7

(236.7)

-

Transfer from trading properties

1.5

2.3

3.8

Revaluation deficit during the year

(300.3)

(46.0)

(346.3)

At 31 December 2007

4,450.5

276.4

4,726.9

Add tenant lease incentives, letting fees and rental guarantees

35.0

-

35.0


4,485.5

276.4

4,761.9





At 1 January 2008

4,450.5

276.4

4,726.9

Exchange movement

314.4

59.1

373.5

Acquisitions

118.6

22.3

140.9

Additions

125.0

97.4

222.4

Disposals

(234.7)

-

(234.7)

Transfers between investment and development properties

78.1

(78.1)

-

Transfers to trading properties

-

(1.9)

(1.9)

Revaluation deficit during the year

(916.9)

(40.6)

(957.5)

At 31 December 2008


3,935.0

334.6

4,269.6

Add tenant lease incentives, letting fees and rental guarantees


41.5

-

41.5



3,976.5

334.6

4,311.1


Further information on investment and development properties is contained within the Property Analysis section of the website (www.segro.com/segro/Investors/Property/htm).  


Investment properties include £105.9 million (2007 £173.4 million) in respect of properties held for re-development. The balance comprises completed buildings. Investment and development properties include £345.5 million (2007 £409.6 million) of undeveloped land.


The historical cost of investment properties was £3,273.4 million (2007 £2,865.4 million) and the cumulative valuation surplus at 31 December 2008 amounted to £703.1 million (2007 £1,620.1 million).  The historical cost of development properties was £459.5 million (2007 £360.8 million) and the cumulative valuation deficit at 31 December 2008 amounted to £124.9 million (2007 £84.4 million deficit).


Long-term leasehold values within investment properties amount to £11.2 million (2007 £49.1 million). All other properties are freehold.  


Net rental income in the period from rented investment properties was £236.6 million (2007 £241.6 million).


Prepaid operating lease incentives at 31 December 2008 were £31.1 million (2007 £29.4 million).



13(iii) - Trading properties





 

Continental

 

 

UK

Europe

 Total 

 

£m

 £m 

 £m 

2007




Completed properties

5.0

150.1

155.1

Properties under development

3.1

77.8

80.9

At 31 December 2007

 

8.1

227.9

236.0





2008




Completed properties

10.9

271.8

282.7

Properties under development

0.9

74.2

75.1

At 31 December 2008

11.8

346.0

357.8





Trading properties were externally valued resulting in an increase in the provision for impairment of £4.0 million (2007 increase of £2.3 million). The remaining portfolio has an unrecognised surplus of £39.5 million (2007 £39.7 million).    




14. Finance lease receivables                


The Group has leased out a number of investment properties under finance leases. These are presented as finance lease receivables rather than investment properties. A reconciliation between finance lease receivables and the present value of the minimum lease payments receivable at the balance sheet date is as follows:


Present value of minimum


Minimum lease payments

lease payments


2008

2007

2008

2007

  

£m

£m

£m

£m

Amounts receivable under finance leases:





Within one year

1.0

0.9

0.2

0.1

In the second to fifth years inclusive

3.6

3.5

0.6

0.5

Later than five years

25.2

26.3

9.6

9.9


29.8

30.7

10.4

10.5

Less unearned finance income

(19.4)

(20.2)

n/a

n/a

Present value of minimum lease payments receivable

10.4

10.5

10.4

10.5






Analysed as :





Non-current finance lease receivables

28.8

29.8

10.2

10.4

Current finance lease receivables

1.0

0.9

0.2

0.1


29.8

30.7

10.4

10.5


The interest rate inherent in the lease is fixed at the contract date for all of the lease term. The weighted average interest rate on finance lease receivables at 31 December 2008 is 7.7 per cent (2007  7.7 per cent).


At 31 December 2008, the fair value of the Group's finance lease receivables is £10.4 million (2007  £10.5 million), while the unguaranteed residual values of assets leased under finance leases are estimated at £2.4 million (2007  £2.4 million).




15. Available-for-sale investments













2008

2007




£m

£m

Valuation at 1 January 



39.5

44.1

Exchange movement



11.0

1.3

Additions



3.8

2.8

Fair value movement



(3.8)

8.1

Disposals and return of capital



(8.6)

(16.8)

Valuation at 31 December 



41.9

39.5


Available-for-sale investments comprise holdings in private equity funds investing in UK, Continental Europe and USA.



16. Trade and other receivables





Group


Company


2008

2007


2008

2007


£m

£m


£m

£m

Current






Trade receivables

54.4

59.0


0.6

1.6

Other receivables

27.9

25.1


-

-

Prepayments and accrued income

40.4

26.9


-

-

Fair value of interest rate swaps - non hedge

0.7

5.0


-

1.5

Fair value of forward foreign exchange contracts - non hedge

0.1

-


0.2

-

Fair value of forward foreign exchange contracts - hedge

0.1

-


-

-

Amounts due from subsidiaries

-

-


10.4

2.4

Amounts due from related parties

12.4

-


10.9

-


136.0

116.0


22.1

5.5

Non-current






Other receivables

0.2

11.8


-

-

Amounts due from related parties

-

6.7


-

13.3

Total trade and other receivables

136.2

134.5


22.1

18.8







Trade receivables are net of provisions for doubtful debts of £2.7 million (2007 £1.3 million).



17.  Cash and cash equivalents


Cash and cash equivalents comprise cash balances, call deposits held with banks and highly liquid short-term investments that are readily convertible to known amounts of cash within three months from acquisition and subject to an insignificant risk of changes in value.

Group


Company


2008

2007


2008

2007


£m

£m


£m

£m

Bank balance

39.4

97.9


0.3

72.8

Call deposits

126.4

250.4


1.0

-

Cash and cash equivalents 

165.8

348.3


1.3

72.8



18. Borrowings                            

18(i) - Borrowings by type

Group


Company


2008

2007


2008

2007


 £m 

 £m 

 

 £m 

 £m 

Secured Borrowings:






European mortgages (repayable within 1 year)

38.9

22.1


-

-

Euro mortgages 2010 to 2013

25.9

22.4


-

-

Euro mortgages 2014 to 2027

44.0

35.7


-

-

Total secured (on land, buildings and other assets)

108.8

80.2

 

-

-







Unsecured Borrowings:






Bonds






7.125% bonds 2010

124.7

124.6


124.7

124.6

6.25% bonds 2015

148.5

148.3


148.5

148.3

5.5% bonds 2018

198.1

198.0


198.1

198.0

5.625% bonds 2020

247.1

247.0


247.1

247.0

7.0% bonds 2022

148.9

148.8


148.9

148.8

6.75% bonds 2024

221.0

220.8


221.0

220.8

5.75% bonds 2035

198.0

198.0


198.0

198.0

Notes






6.0% unsecured loan notes 2010

5.2

-


-

-

6.417% Euro notes 2011

47.6

36.8


-

-


1,339.1

1,322.3


1,286.3

1,285.5







Bank loans and overdrafts

1,213.4

636.3


438.6

87.9

Preference shares held by subsidiary 

0.3

0.3

 

-

-

Total unsecured 

 

 

2,552.8

1,958.9

 

1,724.9

1,373.4

Total borrowings 

2,661.6

2,039.1

 

1,724.9

1,373.4


The fair value of forward foreign exchange contract liabilities were included in borrowings in prior years within bank loans and overdrafts; however, they have now been presented within trade and other payables at 31 December 2008 and 2007. Please refer to note 21.


The maturity profile of borrowings is as follows:





Group


Company


2008

2007


2008

2007

 Maturity profile of debt 

 

 £m 

 £m 

 

 £m 

 £m 

In one year or less

86.3

41.8


-

7.5

In more than one year but less than two 

373.9

4.6


145.3

-

In more than two years but less than five

995.5

796.1


418.0

205.0

In more than five years but less than ten

389.4

182.8


346.6

148.3

In more than ten years

 

 

816.5

1,013.8

 

815.0

1,012.6

Total debt

 

2,661.6

2,039.1

 

1,724.9

1,373.4












Group


Company


2008

2007


2008

2007

  Maturity profile of undrawn borrowing facilities

 

 £m 

 £m 

 

 £m 

 £m 

In one year or less

85.1

49.3


14.3

27.5

In more than one year but less than two 

28.7

-


20.0

-

In more than two years 

497.9

738.9


467.0

604.8

Total available undrawn borrowing facilities 

611.7

788.2

 

501.3

632.3







There are no early settlement or call options on any of the borrowings. Financial covenants relating to the borrowings include maximum limits to the Group's gearing ratio and minimum limits to permitted interest cover.  Financial covenants are discussed in more detail in the Financial Position and Gearing and Financial Covenants sections in the Financial Review.  


18.  Borrowings (continued)

18(ii) - Borrowings by interest rates

                                            

The interest rate profile of Group and Company debt was as follows:

31 December 2008


31 December 2007


Fixed

Fixed

Fixed

Variable

Total


Fixed

Fixed

Fixed

Variable

Total


Rate

Period

Debt

Debt



Rate

Period

Debt

Debt


Interest rate profile - Group 

%

Years

£m

£m

£m


%

Years

£m

£m

£m

Borrowings

Weighted average after swaps


Weighted average after swaps

Sterling

6.19

12.3

1,291.5

0.7

1,292.2


6.19

13.3

1,285.5

-

1,285.5

Euros

4.56

2.7

1,074.5

284.1

1,358.6


4.56

3.5

730.2

400.6

1,130.8

US dollars

-

-

-

10.5

10.5


-

-

-

-

-

Subsidiary preference shares

-

-

0.3

-

0.3


-

-

0.3

-

0.3

Total before currency 












swaps

5.45

8.0

2,366.3

295.3

2,661.6


5.59

9.8

2,016.0

400.6

2,416.6

US dollars cash swapped into 









-


-


-


(43.0)


(43.0)

euros



-

-

-




-

(43.0)

(43.0)

Sterling cash swapped into









-


-


-


(334.5)


(334.5)

euros



-

-

-




-

(334.5)

(334.5)

Total borrowings



2,366.3

295.3

2,661.6




2,016.0

23.1

2,039.1













Cash and deposits












Sterling




(100.6)

(100.6)





(112.3)

(112.3)

US dollars




(13.6)

(13.6)





(177.4)

(177.4)

Canadian dollars




(1.7)

(1.7)





(4.4)

(4.4)

Polish Zloty




(23.3)

(23.3)





-

-

Euros




(26.6)

(26.6)





(54.2)

(54.2)

Total cash and deposits




(165.8)

(165.8)





(348.3)

(348.3)













Net borrowings



2,366.3

129.5

2,495.8




2,016.0

(325.2)

1,690.8




31 December 2008


31 December 2007


Fixed

Fixed

Fixed

Variable

Total


Fixed

Fixed

Fixed

Variable

Total


Rate

Period

Debt

Debt



Rate

Period

Debt

Debt


Interest rate profile - Company 

%

Years

£m

£m

£m


%

Years

£m

£m

£m

Borrowings

Weighted average after swaps


Weighted average after swaps

Sterling

6.20

12.3

1,286.3

-

1,286.3


6.19

13.3

1,285.5

-

1,285.5

US dollars

-

-

-

10.5

10.5


-

-

-

-

-

Euros

4.43

2.6

425.7

2.4

428.1


4.31

3.4

283.1

182.3

465.4

Total before currency 












Swaps

5.76

8.8

1,712.0

12.9

1,724.9


5.86

10.6

1,568.6

182.3

1,750.9

Sterling cash swapped into 













-


(334.5)


(334.5)

Euros



-

-

-




-

(334.5)

(334.5)

US dollars cash swapped 











-


(43.0)


(43.0)

into Euros



-

-

-




-

(43.0)

(43.0)

Total borrowings



1,712.0

12.9

1,724.9




1,568.6

(195.2)

1,373.4













Cash and deposits












Sterling




(0.1)

(0.1)





(3.0)

(3.0)

US dollars




-

-





(69.8)

(69.8)

Euros




(1.2)

(1.2)





-

-

Total cash and deposits




(1.3)

(1.3)





(72.8)

(72.8)

Net borrowings



1,712.0

11.6

1,723.6




1,568.6

(268.0)

1,300.6


















19.  Financial instruments and fair values


Categories of financial instruments                                    

Financial assets in the Group comprise interest rate swaps and forward foreign exchange contracts, some of which are categorised as derivatives designated as fair value through the income statement (non hedge), and other forward foreign exchange contracts which are classified as derivatives designated as hedges. Financial assets also include finance lease receivables, trade and other receivables, available-for-sale investments and cash and cash equivalents, which are all classified as other financial assets.


Financial liabilities in the Group comprise interest rate swaps and forward foreign exchange contracts, some of which are categorised as derivatives designated as fair value through the income statement (non hedge) and other forward foreign exchange contracts which are classified as derivatives designated as hedges. Financial liabilities also include secured bank loans, unsecured bond issues, unsecured loan notes, bank loans and overdrafts and preference shares, all of which are categorised as debt at amortised cost, and trade and other payables, provisions and current tax liabilities, which are classified as other financial liabilities.  


The carrying values of these financial assets and liabilities approximate their fair value, with the exception of unsecured bond issues,  secured bank loans and unsecured loan notes. At 31 December 2008 the fair value of £1,286.3 million of unsecured bond issues was £875.8 million (2007 £1,285.5 million compared to £1,238.7 million fair value), the fair value of £108.8 million of secured bank loans was £109.2 million (2007 £80.2 million compared to £80.2 million fair value), and the fair value of £52.8 million of unsecured loans was £53.9 million (2007 £36.8 million compared to £38.7 million fair value).


The fair values of financial assets and financial liabilities are determined as follows:


  • Forward foreign exchange contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts.


  • Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates.


  • The fair value of non-derivative financial assets and financial liabilities traded on active liquid markets are determined with reference to the quoted market prices.


  • Financial guarantees are issued by the Parent entity to support bank borrowings of 100 per cent owned subsidiary companies domiciled overseas. The face value of these borrowings is already included in the Group balance sheet. As the borrowing entity will have unencumbered directly owned property assets exceeding the value of the guaranteed borrowings the probability of the Parent entity having to recognise any loss in respect to these guarantees is considered to be highly unlikely. Hence no fair value liability has been ascribed to these guarantees in the accounts of the Parent entity.


Capital risk management

The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns and as such it aims to maintain a prudent mix between debt and equity financing. The current capital structure of the Group consists of a mix of equity and debt. Equity comprises issued capital, reserves and retained earnings as disclosed in notes 23 to 26.  Debt primarily comprises long-term debt issues and drawings against medium-term committed revolving credit facilities from banks as disclosed in note 18.


The Group is not subject to externally imposed capital requirements. 


Foreign currency risk management

The Group does not have any regular transactional foreign currency exposures as it does not have any regular business involving cross border currency flows. However, it does have operations in Europe which transact business denominated mostly in euros. Hence there is currency exposure caused by translating the local trading performance and local net assets into sterling for each financial period and at each balance sheet date.


The Group's approach to managing balance sheet translation exposure is described in the Foreign Currency Translation Exposure section in the Financial Review.   


The Group's balance sheet translation exposure is summarised below:

2008


2007


Euros

US dollars

Total


Euros

US dollars

Total

Group

£m

£m

£m


£m

£m

£m

Gross currency assets

2,054.9

35.7

2,090.6


1,502.6

225.2

1,727.8

Gross currency liabilities

(1,791.0)

(27.6)

(1,818.6)


(1,287.9)

(218.8)

(1,506.7)

Net exposure

263.9

8.1

272.0


214.7

6.4

221.1









Company








Gross currency assets

433.5

-

433.5


328.5

214.0

542.5

Gross currency liabilities

(859.6)

(27.6)

(887.2)


(476.2)

(218.8)

(695.0)

Net exposure

(426.1)

(27.6)

(453.7)


(147.7)

(4.8)

(152.5)









2008 gross currency liabilities include EUR455.7 million (£434.0 million) and USD40.3 million (£27.6 million) designated as net 

investment hedges.

2007 gross currency liabilities include EUR200.0 million (£147.0 million) designated as a net investment hedge.


Foreign currency sensitivity analysis

The Group's main currency exposure is the Euro. The blended sensitivity of the net assets of the Group to a 10 per cent change in the value of sterling against the relevant currencies is £30.2 million (2007 £27.1 million), with a sensitivity of £29.3 million against the Euro (2007 £25.5 million) and £0.9 million against the US dollar (2007 £1.6 million). 


For the Company, the blended sensitivity is £50.4 million (2007 £17.5 million) with a sensitivity of £47.3 million against the Euro (2007 £17.0 million) and £3.1 million against the US dollar (2007 £0.5 million).


Forward foreign exchange contracts

In the current year, the Group has entered into various forward sales and currency swap contracts. Some of these are designated as net investment hedges, and hedge accounted. The others are effectively cash flow hedges, using the surplus cash in one currency to temporarily fund paying off debt in another currency. These have not been designated as hedges and as a consequence their change in fair value is taken through the income statement.


The following table details the forward foreign exchange contracts outstanding as at the year end:

Average exchange


Currency contract






Rates


(local currency)


Contract value


Fair value


2008

2007


2008

2007


2008

2007


2008

2007


rate

Rate


m

m


£m

£m


£m

£m

Group












Cash flow hedges












Sell euros (buy sterling)

1.20

1.41


242.7

267.1


231.1

196.4


(28.0)

(7.2)

Sell euros (buy US dollars)

-

1.42


-

60.2


-

44.3


-

(1.3)













Net investment hedges












Sell euros (buy sterling)

1.23

1.38


209.7

200.0


199.8

147.1


(29.1)

(1.8)

Sell US dollars (buy sterling)

1.45

-


25.0

-


17.1

-


0.1

-











(57.0)

(10.3)













Company












Cash flow hedges












Sell euros (buy sterling)

1.21

1.41


452.4

467.1


430.9

343.5


(57.1)

(9.0)

Sell euros (buy US dollars)

-

1.42


-

60.2


-

44.3


-

(1.3)

Sell US dollars (buy eterling)

1.45

-


25.0

-


17.1

-


0.1

-











(57.0)

(10.3)















Interest rate risk management

The Group is exposed to interest rate risk as entities in the Group borrow funds at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings. The current Group policy states that around 85 per cent of gross borrowings should be at fixed rate provided by long-term debt issues attracting a fixed coupon or from floating rate bank borrowings converted into fixed rate or hedged via interest rate swaps, forwards, caps, collars or floors or options on these products. Hedging activities require the approval of the Treasury Risk Committee and are evaluated and reported on regularly to ensure that the policy is being adhered to. The Group Board reviews the policy on interest rate exposure annually with a view to establishing that it is still relevant in the prevailing and forecast economic environment. 


Interest rate sensitivity analysis

The sensitivity analysis below has been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the balance sheet date. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding at the balance sheet date was outstanding for the whole year. A 1 per cent increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management's assessment of the reasonably possible change in interest rates.


If interest rates had been 1 per cent higher/lower and all other variables were held constant, the Group's profit for the year ended 31 December 2008 would decrease/increase by £3.0 million (2007 decrease/increase by £3.1 million). This is attributable to the Group's exposure to interest rates on its variable rate borrowings and cash deposits. Fixed rate debt issues are held at amortised cost and are not re-valued in the balance sheet to reflect interest rate movements.


Interest rate swap contracts

Under interest rate swap contracts, the Group agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the cash flow exposures on the issued variable rate debt held. The fair value of interest rate swaps at the reporting date is determined by discounting the future cash flows using the yield curves at the reporting date and the credit risk inherent in the contract, and is disclosed below. The average interest rate is based on the outstanding balances at the end of the financial year.


The following tables detail the notional principal amounts and remaining terms of interest rate swap contracts outstanding as at the reporting date:


Economic cash flow hedges

Outstanding pay fixed, received floating contracts are as follows:

Average contract -


Notional




fixed interest rate


principal amount


Fair value


2008

2007


2008

2007


2008

2007


%

%


£m

£m


£m

£m

Group









In one year or less

-

3.2


-

6.3


-

0.1

In more than one year but less than two

4.4

-


212.4

-


(4.7)

-

In more than two years but less than five

3.9

4.0


761.9

568.3


(30.2)

4.1

Total




974.3

574.6


(34.9)

4.2










Company









In one year or less

4.3

-


123.8

-


(2.3)

-

In more than two years but less than five

4.0

4.1


423.8

423.0


(19.2)

1.5

Total




547.6

423.0


(21.5)

1.5










The above are effective economic hedges although the Group has not elected to adopt hedge accounting for them. Hence their change in fair value is taken direct to the income statement rather than to other equity.


The interest rate swaps settle on either a 3 month or 6 month basis with the floating rate side based on the EURIBOR rate for the relevant period. The Group will settle the difference between the fixed and floating interest rate on a net basis.


Credit risk management 

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.  Potential customers are evaluated for creditworthiness and where necessary collateral is secured. There is no concentration of credit risk within the lease portfolio to either business sector or individual company as the Group has a well spread diverse customer base with no one customer accounting for more than 5 per cent of rental income. Trade receivables (which include unpaid rent and amounts receivable in respect of property disposals) were approximately 1 per cent of total assets at 31 December 2008 and at 31 December 2007. The Directors are of the opinion that the credit risk associated with unpaid rent is low. In excess of 95 per cent of rent due is generally collected within 21 days of the due date.


Investment in financial instruments is restricted to short-term liquid funds with a good credit rating. Derivative financial instruments are transacted via ISDA agreements with counterparties with a good investment grade credit rating. The Group's exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties.  


Liquidity risk management 

Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group's short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by having a policy that requires adequate cash and committed bank facilities remain available to cover and match all debt maturities, development spend, trade related and corporate cash flows forward over a rolling 12 month period. This is achieved by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.  Liquidity risk management is discussed in more detail in the Liquidity Position and Going Concern sections in the Financial Review.   


Liquidity and interest risk tables

The following tables detail the Group's remaining contractual maturity profile for its financial instruments. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The tables include both interest and principal cash flows.

2008


2007


Weighted







Weighted







average







average







interest 

Under

1 - 2

2 - 5

Over 5



interest

Under

1 - 2

2 - 5

 Over 5



rate

1 year

years

years

years

Total


rate

1 year

years

years

years

Total


%

 £m 

 £m 

 £m 

 £m 

 £m 


%

 £m 

£m

 £m 

 £m 

 £m 

Group














Non-derivative financial liabilities:










Trade payables


221.1

22.7

0.1

1.8

245.7



213.6

22.6

-

0.5

236.7

Non-interest bearing














  liabilities


25.6

-

-

78.2

103.8



283.3

-

-

65.4

348.7

Variable rate debt 














  instruments

4.3

107.6

298.4

997.7

-

1,403.7


5.0

73.6

34.7

679.6

-

787.9

Fixed rate debt instruments

6.2

88.0

212.6

291.7

1,881.9

2,474.2


6.2

86.4

86.3

392.5

1,961.6

2,526.8















Derivative financial instruments:













Net settled interest rate swaps


7.8

12.8

7.6

-

28.2



(4.2)

-

(1.3)

(5.2)

(10.7)















Gross settled foreign exchange - Forward contracts











- Sold


(390.8)

-

-

-

(390.8)



(376.4)

-

-

-

(376.4)

- Purchased


447.8

-

-

-

447.8



386.7

-

-

-

386.7

Total


507.1

546.5

1,297.1

1,961.9

4,312.6



663.0

143.6

1,070.8

2,022.3

3,899.7















Company














Non-derivative financial liabilities:










Trade payables


31.1

358.9

-

-

390.0



35.9

238.9

-

-

274.8

Non-interest bearing liabilities


10.2

-

-

-

10.2



225.6

-

-

-

225.6

Variable rate debt instruments

4.4

18.9

18.9

446.8

-

484.6


5.0

11.9

4.0

88.8

-

104.7

Fixed rate debt instruments

6.2

80.5

206.3

214.9

1,848.9

2,350.6


6.2

80.5

80.5

344.3

1,920.6

2,425.9















Derivative financial instruments:













Net settled interest rate swaps


4.1

7.7

5.0

-

16.8



(2.4)

-

(0.4)

(2.7)

(5.5)















Gross settled foreign exchange - Forward contracts











- Sold


(390.8)

-

-

-

(390.8)



(376.4)

-

-

-

(376.4)

- Purchased


447.8

-

-

-

447.8



386.7

-

-

-

386.7

Total


201.8

591.8

666.7

1,848.9

3,309.2



361.8

323.4

432.7

1,917.9

3,035.8















The Group has access to cash and financing facilities, the total unused amount of which was £777.5 million (2007 £1,136.5 million) at the balance sheet date.  




 20. Deferred tax provisions


Movement in deferred tax was as follows:

Balance

Exchange

Recognised

Recognised

Balance 31


1 January

movement

in income

in equity

December

Group - 2008

£m

£m

£m

£m

£m

Valuation surpluses on properties

31.9

7.7

(7.7)

1.9

33.8

Accelerated tax allowances

37.4

11.9

4.3

-

53.6

Deferred tax asset

(8.7)

(0.7)

0.6

-

(8.8)

Others

4.8

(0.9)

(3.0)

(1.3)

(0.4)

Total deferred tax provision

65.4

18.0

(5.8)

0.6

78.2








At the balance sheet date, the Group has unused revenue tax losses of £31.0 million (2007 £31.0 million) available for offset against future profits. A deferred tax asset has been recognised in respect of all of these losses as it is expected that future profits will be available. 


21. Trade and other payables

Group


Company


2008

2007


2008

2007


£m

£m


£m

£m

Due within one year






Trade payables

72.4

61.5


-

-

Non-trade payables and accrued expenses

148.7

152.1


31.1

35.9

Fair value of interest rate swaps - non hedge

35.6

-


28.7

-

Fair value of forward foreign exchange contracts - non hedge

29.1

8.5


57.2

10.3

Fair value of forward foreign exchange contracts - hedge

28.1

1.8


-

-

Total trade and other payables due within one year

313.9

223.9


117.0

46.2







Due after one year






Obligations under finance leases

0.4

0.5


-

-

Other payables

17.1

18.2


-

-

Loans from subsidiaries

-

-


352.3

235.2

Total other payables due after one year

17.5

18.7


352.3

235.2







In 2007 and prior years, the fair value of forward foreign exchange contract liabilities were included within borrowings; however they  

have now been reclassified and shown within trade and other payables. Please refer to note 18.





Group obligations under finance leases due after one year are payable as follows:








Present value of


Minimum lease payments


minimum lease payments


2008

2007


2008

2007


£m

£m


£m

£m

Payable between second to fifth years

0.1

0.2


-

-

Payable after five years

2.2

2.3


0.4

0.4


2.3

2.5


0.4

0.4

Less future finance charges

(1.9)

(2.0)


n/a

n/a

Present value of lease obligations

0.4

0.5


0.4

0.4







These are non-current finance lease liabilities on investment properties with a carrying value of £11.2 million (2007 £13.5 million).

Lease agreements range between 99-150 years. There are no restrictions, and contingent rents are not payable, but leased

assets revert to the lessor in the event of default.  




22.  Retirement benefit schemes

Background

The Group has two defined benefit schemes in the UK, the Slough Estates (1957) Pension Scheme (the 'Slough scheme') and the Bilton Group Pension Scheme (the 'Bilton scheme'). Their assets are held by Trustees separately from the assets of the employer. The Bilton scheme was closed to new members from 2003, and the Slough scheme from October 2005.


Valuation of the Slough and Bilton schemes has been based on the most recent actuarial valuation at 31 March 2007 for Slough and 5 April 2007 for Bilton and updated by the independent actuaries in order to assess the liabilities of the schemes at 31 December 2008.  


The Company has an unfunded unapproved retirement benefit scheme (UURBS) for one employee, the Chief Executive. This arrangement is a defined benefit scheme in nature. The calculation of the value of this unapproved benefit promise uses assumptions which are consistent with those used for the Slough scheme. There are no assets supporting this UURBS.


The Group also has a number of defined contribution schemes in the UK and Continental Europe.  


Defined benefit schemes

The most recent full formal actuarial valuations for defined benefit schemes have been updated by qualified actuaries for the financial year ended 31 December 2008 to provide the IAS 19 disclosures below:




2008

2007

The major assumptions used were as follows:




%

%

Discount rate for scheme liabilities




6.0

5.9

Rate of inflation




2.9

3.3

Rate of increase to pensions in payment in excess of GMP






  Before April 2003 (Slough/Bilton)




4.2 / 2.8

4.1 / 3.3

  From April 2003 to October 2005




2.8

3.3

  After October 2005




2.0

2.4

Rate of general long-term increase in salaries




4.9

5.3









Expected 

Analysis 


Expected 

Analysis


return

of assets


return

of assets


2008

2008


2007

2007

Composition of scheme assets

%

£m


%

£m

Equities

7.9

45.0


7.8

62.1

Bonds

4.9

64.0


4.9

53.0

Property

6.9

0.9


6.8

1.3

Other assets

2.8

0.2


6.0

0.6

Overall - Slough scheme

6.2

89.1


6.6

93.5

Overall - Bilton scheme

5.9

21.0


5.9

23.5


The mortality rates used are as follows:

Mortality

Life expectancy at age 65 (years)


table

Male

Female





Current pensioners

PNxA00U2007MC with 1% p.a.

22.0

24.4


underpin to future improvements







Future pensioners

PNxA00U2007MC with 1% p.a.

23.5

25.9


underpin to future improvements







The expected return on plan assets is a blended average of projected long-term returns for the various asset classes. Asset class returns are based on a forward looking building block approach. Equity returns are developed based on the selection of an equity risk premium above the risk free rate which is measured in accordance with the yields on government bonds. Returns on property are assumed to be 1 per cent per annum lower than those on equities. Bond returns are selected by reference to the yields on government and corporate debt as appropriate to the schemes' holdings of these instruments.







2008

2007

Charges on the basis of the assumptions were:






£m

£m

(Charge)/credit to Group income statement









Operating profit: Current service cost





2.5

3.2

   Past service costs





0.3

0.1

  Curtailments





(0.9)

(3.0)

Net finance costs: Interest on pension liabilities





6.9

6.5

   Expected return on scheme assets





(7.8)

(7.0)

Total included within staff costs and finance costs/(income)





1.0

(0.2)










Charge/(credit) to Group statement of recognised income and expense



17.2

(6.8)


All actuarial gains and losses are recognised immediately and relate to continuing operations. The cumulative recognised actuarial losses are £14.9 million (2007 £2.3 million gain).  


Fair value of the assets and liabilities of the schemes

The amount included in the balance sheet arising from the Group's obligations in respect of its defined benefit retirement schemes is as follows:







2008

2007








£m

£m

Movement in assets









1 January







117.0

112.3

Expected return on scheme assets







7.8

7.0

Actuarial losses







(24.1)

(2.9)

Employer cash contributions







15.5

3.9

Member cash contributions







0.6

0.8

Benefits paid







(6.6)

(4.1)

31 December







110.2

117.0










Movement in liabilities









1 January







118.6

127.1

Service cost







2.5

3.2

Curtailments







(0.9)

(3.0)

Past service cost







0.3

0.1

Interest cost







6.9

6.5

Actuarial gains







(5.6)

(9.7)

Benefits paid







(6.6)

(4.1)

Other







0.4

(1.5)

31 December







115.6

118.6










Analysis of net (liabilities)/assets:









Market value of schemes' assets







110.2

117.0

Present value of funded schemes' liabilities







(112.9)

(116.4)

Net (liabilities)/assets for funded schemes







(2.7)

0.6

Less Bilton surplus which cannot be utilised 







(1.0)

(2.4)

Present value of UURBS' liabilities







(2.6)

(2.2)

Retirement benefit obligation recognised in the balance sheet



(6.3)

(4.0)











A further provision of £0.3 million (2007 £0.3 million) is held in the Group in relation to a pension payable to a former Director. 


The Group does not recognise the surplus in the Bilton scheme and consequently it has been reversed and the movement taken to the SORIE.


The actual return on the scheme assets in the period was a loss of £16.3 million (2007 gain of £4.1 million).


History of experience adjustments

2008

2007

2006

2005

2004


£m

£m

£m

£m

£m







Present value of defined benefit obligations

(116.5)

(121.0)

(129.5)

(132.7)

(111.4)

Fair value of schemes' assets

110.2

117.0

112.3

103.6

71.2

Deficit in schemes

(6.3)

(4.0)

(17.2)

(29.1)

(40.2)







Experience adjustments on schemes' assets






Amounts

(21.4)

(2.9)

0.3

10.2

1.1

Percentage of schemes' assets

(19.4%)

(2.5%)

0.3%

9.8%

1.5%







Experience adjustments on schemes' liabilities






Amounts

(0.7)

1.7

(1.8)

(0.4)

6.0

Percentage of present value of schemes' liabilities

0.6%

(1.4%)

1.4%

0.3%

(5.4%)







Effect of changes in assumptions underlying the present






  value of the schemes' liabilities

6.3

7.9

12.3

(13.2)

(18.0)







Total amount recognised in the statement of recognised income and expense



Amounts

(17.2)

6.8

10.2

(4.0)

(10.5)

Percentage of present value of schemes' liabilities

14.8%

(5.6%)

(7.9%)

3.0%

9.4%







The expected employer's contributions to be paid in the year ending 31 December 2009 is £2.0 million.


23. Share capital and share-based payments







23(i) - Share capital







Authorised


Issued and fully paid

Group and Company

Shares m

£m


Shares m

£m

Ordinary shares of 271/12p each at 1 January 2008

541.3

146.6


436.1

118.1

Shares issued during the period to 31 December 2008

-

-


0.6

0.2

Ordinary shares of 271/12p at 31 December 2008 

541.3

146.6


436.7

118.3







All shares issued during the year were issued in connection with the Group's share based payments schemes, details of which are provided below.


23(ii) - Executive share option plan

The options in the Executive share option plan are exercisable after three years but before ten years, subject to performance criteria. The employee would normally have to remain with the Group for the three year period. If the performance conditions have not been met by the third anniversary of the date of the grant, the options lapse. The performance criteria are based on an increase in adjusted diluted earnings per share by the Retail Price Index (RPI) plus 3 per cent per annum over the three year period.  At 2 March 2009, the number of ordinary shares under option in respect of the 1994 approved scheme was 5,415 at an option price of 356.5p. These options expire on 27 March 2011. As at 2 March 2009, the number of ordinary shares under option in respect of the 2002 approved and unapproved schemes were 37,746 and 624,447 respectively with option prices ranging from 290.0p to 476.8p expiring on various dates up to 28 April 2015. The last award under these schemes was made in 2005.

2008


2007


Number of

Weighted average


Number of

Weighted average


options

exercise price


options

exercise price

At 1 January

848,028

425.8p


2,209,295

473.4p

Options exercised

(179,473)

307.3p


(219,699)

323.5p

Options expired/lapsed

(947)

356.5p


(1,141,568)

467.8p

At 31 December

667,608

457.8p


848,028

425.8p







The options outstanding at 31 December 2008 were exercisable between 290.0p and 476.8p per share. The grants made since 7

November 2002 have been fair valued using the Black-Scholes model. The main assumptions are as follows:







Date of grant




20-Mar-03

29-Apr-05

Exercise price/market price




290.0p

476.8p

Risk-free interest rate




5.1%

4.8%

Dividend yield




4.8%

4.0%

Volatility




21.3%

21.0%

Term of option




4 years

4 years

Fair value per share




42p

73p



23(iii) - Save as you earn (SAYE)


The SAYE options are exercisable after three or five or seven years and are not subject to any performance criteria except the employees must remain with the Group for the term of the option.  Options during the year were granted at not less than 80% of the market price of shares on 4 April 2008. At 2 March 2009, the number of ordinary shares under option was 247,520 at option prices ranging from 218.4p to 608.4p expiring on various dates up to 31 October 2015. During 2008, movements in SAYE options to subscribe for ordinary shares of the Company are as follows:

2008


2007


Number of

Weighted average


Number of

Weighted average


options

exercise price


options

exercise price

At 1 January

814,238

341.2p


810,285

325.4p

Options granted

129,750

389.2p


275,863

446.2p

Options exercised

(354,662)

245.4p


(135,225)

299.0p

Options expired/lapsed

(305,466)

423.8p


(136,685)

502.8p

At 31 December

283,860

394.0p


814,238

341.2p







The consideration received by the Company from options exercised during the year was £0.9 million. The options outstanding at 31 December 2008 were exercisable between 218.4p and 608.4p per share. The grants made since 7 November 2002 have been fair valued using the Black-Scholes model. The assumptions are as follows:







Fair value

Fair value 

Fair value 


Market 

Exercise

Risk-free

Dividend


Term of

per share

per share

per share


price

price

interest rate

yield

Volatility

option

three years

five years

seven years

19 March 2003

290.0p

218.4p

5.1%

4.8%

21.2%

3-5-7 years

74p

74p

73p

28 August 2003

380.8p

304.6p

5.1%

3.8%

22.4%

3-5-7 years

96p

103p

106p

17 March 2004

465.5p

372.4p

5.1%

4.8%

22.6%

3-5-7 years

123p

135p

142p

26 August 2004

465.0p

372.0p

5.1%

4.1%

22.7%

3-5-7 years

122p

134p

140p

23 March 2005

493.5p

394.8p

4.8%

3.8%

21.0%

3-5-7 years

118p

126p

129p

22 September 2005

540.5p

432.4p

4.8%

3.5%

21.2%

3-5-7 years

134p

144p

150p

13 April 2006

604.0p

483.2p

4.7%

2.9%

22.0%

3-5-7 years

158p

174p

184p

13 September 2006

660.5p

528.4p

4.7%

2.9%

22.0%

3-5-7 years

172p

191p

202p

30 March 2007

760.5p

608.4p

5.2%

2.7%

22.1%

3-5-7 years

209p

234p

250p

26 September 2007

514.0p

411.2p

5.8%

3.7%

23.3%

3-5-7 years

137p

149p

156p

04 April 2008

486.5p

389.2p

4.1%

4.8%

46.5%

3-5-7 years

162p

174p

177p












Details of share options exercisable at 31 December 2008 


Price per

Number of

Exercisable

Date of grant

Scheme

share

shares

 between

28 March 2001

Executive share option plan 1994

356.5p

5,415

2004 and 2011

30 August 2001

Save as you earn 

284.8p

1,032

2004 and 2008

29 August 2002

Save as you earn 

276.4p

1,669

2004 and 2008

19 March 2003

Save as you earn

218.4p

19,503

2006 and 2010

20 March 2003

Executive share option plan 2002

290.0p

64,309

2006 and 2013

28 August 2003

Save as you earn 

304.6p

15,304

2006 and 2010

17 March 2004

Save as you earn 

372.4p

7,184

2007 and 2011

26 August 2004

Save as you earn 

372.0p

3,866

2007 and 2011

23 March 2005 

Save as you earn 

394.8p

15,110

2008 and 2012

29 April 2005 

Executive share option plan 2002

476.8p

597,884

2008 and 2015

22 September 2005

Save as you earn 

432.4p

12,286

2008 and 2012

13 April 2006

Save as you earn

483.2p

15,763

2009 and 2013

13 September 2006

Save as you earn

528.4p

9,152

2009 and 2013

30 March 2007 

Save as you earn 

608.4p

5,997

2010 and 2014

26 September 2007 

Save as you earn 

411.2p

81,750

2010 and 2014

04 April 2008

Save as you earn

389.2p

95,244

2011 and 2015

Total



951,468







The weighted average remaining contractual life for share options outstanding at the year end is 2.18 years (2007 1.77 years)









23(iv) - Long term incentive plan (LTIP) and long term incentive scheme (LTIS)


Awards under the LTIS are granted at the discretion of the Trustees of the scheme on the recommendation of the Remuneration Committee. Employees are granted the right to shares which will vest at the end of a three year period subject to meeting certain performance criteria. The Company does not issue shares. The shares are purchased on the open market and placed with the Trustees. Dividends are waived.

2008


2007



Weighted average



Weighted average


Number

exercise price


Number

exercise price

At 1 January

2,439,538

585.6p


1,780,340

536.8p

Shares granted LTIP

2,177,634

635.9p


-

-

Shares granted LTIS

-

-


1,056,937

635.1p 

Shares vested

(302,332)

491.2p


(169,456)

522.1p

Shares sold

(212,777)

491.2p


(103,280)

522.6p

Shares expired/lapsed

(51,817)

494.0p


(125,003)

454.6p

At 31 December

4,050,246

495.3p


2,439,538

585.6p







Further information on the LTIP and LTIS Schemes can be found in the Remuneration Report, included in the full Annual Report.   


The Black-Scholes model has been used to fair value the shares granted since 7 November 2002. The assumptions used are as follows:


Date of grant





25-May-06

29-Jun-07

30-May-08

Exercise price / market price





589.2p

635.1p

416.5p

Risk-free interest rate





4.6%

5.8%

4.0%

Dividend yield





2.9%

3.0%

5.8%

Volatility





22.0%

22.0%

25.5%

Term of option





3 years

3 years

3 years

Fair value per share





540p

580p

349.9p









23(v) - Share incentive plan

The share incentive plan started in May 2003.  For 2008, eligible employees were awarded shares based on a percentage of their salary, which is capped. The value of the award was also linked to the Company's prior year performance. In respect of the 2008 award, the shares are held in trust for a three year period.  During the year, 108,580 ordinary shares were subscribed in cash at a price of 404.1p per share and were issued to the Trustees of the Share Incentive Plan (SIP) and allocated at that price to eligible employees under the SIP.  At 2 March 2009, 285,340 ordinary shares were held under the plan. This interest is shown in the Directors' Interests in Shares section in the Remuneration Report (included in the full Annual Report) which represents all of the shares which those Directors hold in a non-beneficial capacity as Trustees but also included therein are those shares beneficially owned under the plan by the Trustees.

2008


2007



Weighted average



Weighted average


Number

exercise price


Number

exercise price

At 1 January

511,464

512.5p


485,725

467.0p

Shares granted

116,778

404.1p


118,168

578.7p

Shares paid out to leavers - pre-consolidation

-

-


(21,983)

456.5p

Shares not paid out to leavers - pre-consolidation

-

-


(6,901)

531.1p

Share consolidation August 2007

-

-


(44,359)

490.4p

Shares not paid out to leavers - post consolidation

(8,198)

600.0p


-

-

Shares paid out to leavers - post consolidation

(334,704)

517.8p


(19,186)

496.7p

At 31 December 

285,340

493.9p


511,464

512.5p







Of the shares outstanding at 31 December 2008, 282,609 (2007 509,575) were exercisable. The fair values of the share incentive

plan were determined by the price of the shares at the date of the grant.






23(vi) - Global share incentive plan

The global share incentive plan was launched in 2008. This plan is designed on a similar basis to the Share Incentive Plan, but is not HMRC approved, and is only operated for non-UK employees.  Awards are made on the basis of the Company's performance against budgeted profit before tax for the previous year. Awards are calculated as a percentage of base salary, which is capped. Awards are released by the plan Trustees at the conclusion of a three year holding period at nil cost to the employee.



2008






Weighted average





Number

exercise price

At 1 January




-

-

Shares granted




44,388

402.1p

Shares paid out to leavers




(1,365)

402.1p

Shares not paid out to leavers




(3,590)

402.1p

At 31 December




39,433

402.1p







Of the shares outstanding at 31 December 2008, 39,433 were exercisable. The fair value of the global share incentive plan was 

determined by the price of the shares at the date of the grant.


23(vii) - Cash settled overseas senior employees' scheme


The plan for overseas senior employees is a cash settlement scheme which mirrors the performance of the Executive share option plan in 23(ii) above. A notional number of shares are granted to the employee equal to 100 per cent of their salary and divided by the share price on the date of the grant. 78,271 shares were granted in 2005, based on the performance and assumptions of the Executive share option plan on 29 April 2005. The Black-Scholes model was used to fair value these shares at prevailing market rates, at a share price of 476.8p per share.



23(viii) - Total share-based payments income statement impact


Due to the release of excess reserves for share-based payments schemes where performance criteria is not expected to be met, income of £1.4 million has been recognised in the income statement for the Group (2007 £6.9 million expense).


24. Share premium account

2008

2007

Group and Company 

£m

£m

Balance at 1 January

368.9

367.3

Premium arising on the issue of shares

1.7

1.6

Balance at 31 December

370.6

368.9




 25. Own shares held

Group


Company


2008

2007


2008

2007


£m

£m


£m

£m

Balance at 1 January

16.8

10.6


16.8

10.6

Shares issued

-

0.6


-

0.6

Shares purchased

0.4

6.8


0.4

6.8

Disposed of on exercise of options

(3.8)

(1.2)


(3.8)

(1.2)

Balance at 31 December

13.4

16.8


13.4

16.8


These represent the cost of shares in SEGRO plc bought in the open market and held by Appleby Trust (Jersey) Limited, to satisfy options under the various Group share option and incentive schemes.



26. Reserves


Other reserves




Share-based

Fair value

Translation



Revaluation

payment

reserve for

and other

Retained


reserve

reserve

AFS investments

reserves

earnings

Group

£m

£m

£m

£m

£m

Balance at 1 January 2007 

2,129.3

4.5

7.4

58.5

698.3

Exchange movement

5.2

-

0.4

-

7.9

Loss for the year

-

-

-

-

(74.9)

Dividends paid

-

-

-

-

(341.9)

Actuarial gains on defined benefit pension 






  schemes 

-

-

-

-

6.5

Surplus on development properties - SORIE

5.7

-

-

-

-

Valuation deficit on investment properties






  transferred from retained earnings

(351.2)

-

-

-

351.2

Valuation surplus on joint ventures transferred






   from retained earnings

2.7

-

-

-

(2.7)

Minority interest on investment property valuation surplus

(0.6)

-

-

-

0.6

Reserve transfer

-

(0.4)

-

15.3

(14.9)

Fair value movement

-

6.9

6.1

-

-

Surplus realised on disposal

(34.8)

-

(4.3)

-

34.8

Exchange arising on translation of international operations

-

-

-

0.9

-

Exchange recycled on the sale of the US 






  property business

-

-

-

(28.1)

31.6

Reserves realised on the sale of the US 






  property business

(220.6)

-

-

-

220.6

Shares vested

-

(1.2)

-

-

-    

Balance at 1 January 2008 

1,535.7

9.8

9.6

46.6

917.1

Exchange movement

42.6

-

2.3

0.3

41.9

Loss for the year

-

-

-

-

(938.1)

Dividends paid

-

-

-

-

(100.0)

Actuarial gains on defined benefit pension schemes

-

-

-

-

(17.2)

Surplus on development properties - SORIE

14.0

-

-

-

-

Valuation deficit on investment properties






  transferred from retained earnings

(967.9)

-

-

-

967.9

Valuation surplus on joint ventures transferred






  from retained earnings

(16.9)

-

-

-

16.9

Minority interest on investment property valuation surplus

(1.3)

-

-

-

-

Reserve transfer

-

(0.7)

-

-

0.7

Fair value movement

-

(1.4)

(2.4)

-

-

Surplus realised on disposal

(167.8)

-

(1.4)

-

167.8

Exchange arising on translation of international operations

-

-

-

(22.3)

-

Shares vested

-

(3.8)

-

-

-

Balance at 31 December 2008

438.4

3.9

8.1

24.6

1,057.0










Other reserves




Share-based

Translation and

Retained



payment reserve

other reserves

earnings

Company


£m

£m

£m

Balance at 1 January 2007


1.5

47.4

1,146.3

Retained profit


-

-

686.0

Dividends paid


-

-

(341.9)

Other items in SORIE


-

-

6.6

Other


1.7

-

0.3

Balance at 1 January 2008 


3.2

47.4

1,497.3

Retained profit


-

-

(241.9)

Dividends paid


-

-

(100.0)

Other items in SORIE


-

-

(17.2)

Other


(2.0)

-

0.3

Balance at 31 December 2008


   1.2

47.4

1,138.5









27. Commitments                                

                                    

Contractual obligations to purchase, construct, develop, repair, maintain or enhance assets are as follows:

                                    

UK


International


Total


2008

2007


2008

2007


2008

2007

Group

 £m 

 £m 

 

 £m 

 £m 

 

 £m 

 £m 










Properties

163.3

97.8


70.6

216.0


233.9

313.8

Available-for-sale investments

-

1.0


4.6

4.9


4.6

5.9

Total capital commitments

163.3

98.8

 

75.2

220.9

 

238.5

319.7










The Group's share of capital commitments of joint ventures is:













Properties 

-

3.3

 

-

7.3

 

-

10.6










There are no significant commitments relating to repairs, maintenance or enhancements relating to investment properties at 31 December 2008 and 2007.


28. Contingent liabilities


The Group sold Slough Heat & Power and the US property business in 2007 and has provided certain representations and warranties which are usual for transactions of this nature, including representations and warranties relating to financial, regulatory, tax, employee, intellectual property, environmental, insurance and legal matters. The Group is not aware of any event that has occurred that would result in a provision to be made at 31 December 2008 in relation to the representations and warranties provided.


The Group has given performance guarantees to third parties amounting to £8.7 million (2007 £9.4 million) in respect of development contracts of subsidiary undertakings. It is unlikely that these contingencies will crystallise.


The Company has guaranteed loans and bank overdrafts of subsidiary undertakings aggregating £800.8 million (2007 £569.2 million) and indicated its intention to provide the necessary support required by its subsidiaries.


29. Operating leases


The Group as lessor



Future aggregate minimum rentals receivable under non-cancellable operating leases are: 




2008

2007


£m

£m

Not later than one year

260.8

255.7

Later than one year but not later than five years

782.1

848.7

Later than five years

679.3

685.3


1,722.2

1,789.7





The Group as lessee

One of the leased properties, which has been sublet by the Group, has been classified as an onerous lease. The lease and sublease expire in 2017. Sublease payments of £0.2 million are expected to be received during next year. The Group has recognised a provision of £0.1 million in respect of this lease.


Future aggregate minimum lease payments on non-cancellable operating leases are:




2008

2007


£m

£m

Not later than one year

0.6

0.5

Later than one year but not later than five years

7.2

6.7

Later than five years

3.7

4.7


11.5

11.9






30.  Related party transactions


Group

Transactions during the year between the Group and its joint ventures are disclosed below:








2008

2007








£m

£m

New loans during the year







0.3

9.2

Loans outstanding at the year end







49.5

43.9

Dividends received







6.3

4.8










Company

Balances outstanding between the Company and external related parties at balance sheet date are £10.9 million (2007 £13.3 million).  Transactions between the Company and its subsidiaries eliminate on consolidation and are not disclosed in this note.


None of the above Group or Company balances are secured. All of the above transactions are made on terms equivalent to those that prevail in arms length transactions.  


Directors' and Executives' remuneration

Full details of remuneration payable to the Directors and other members of key management during the year, as required under the Companies Act 1985, are disclosed in the audited sections of the Remuneration Report, included in the full Annual Report.  Key management have been determined as the four members of the Executive Committee.


31. Notes to the cash flow statements


31(i) - Reconciliation of cash generated from operations

Group


Company


2008

2007


2008

2007

Continuing operations

£m

£m


£m

£m

Operating (loss)/profit

(789.9)

(165.9)


(139.4)

627.6

Adjustments for:






  Depreciation of property, plant and equipment

3.1

1.3


-

-

  Share of losses/(profits) from joint ventures 

7.4

(5.6)


-

-

   Loss/(profit) on sale of properties

34.8

(3.0)


-

-

  Net negative goodwill written off

-

(0.9)


-

-

  Revaluation deficit on investment properties

975.6

385.2


-

-

  Other income reallocated

(1.4)

(18.9)


(86.1)

(635.2)

  Other provisions

(15.5)

-


173.6

(9.1)


214.1

192.2


(51.9)

(16.7)

Changes in working capital:






Increase in trading properties

(38.3)

(19.2)


-

-

Decrease/(increase) in debtors

35.5

(55.5)


1.0

0.2

Increase/(decrease) in creditors

14.7

30.3


(1.8)

(0.9)

Net cash inflow/(outflow) generated from continuing operations 

226.0

147.8


(52.7)

(17.4)

Net cash inflow generated from discontinued operations

-

34.1


-

-

Net cash inflow/(outflow) generated from operations

226.0

181.9


(52.7)

(17.4)


31(ii) - Deposits

Term deposits for a period of three months or less are included within cash and cash equivalents. The restricted deposit, in 2007 related to cash held within an account against which a Letter of Credit has been issued. 



31(iii) - Analysis of net debt


At




On

On 

At 



1 January 

Exchange

Cash 

Non-cash

purchase of

disposal of

31 December



2008

movement

flow

adjustment*

subsidiaries

subsidiaries

2008


Notes

£m

£m

£m

£m

£m

£m

£m

Group









Banks loans and loan capital 


2,035.1

334.7

282.4

6.1

-

-

2,658.3

Bank overdrafts


4.0

-

(0.7)

-

-

-

3.3

Total borrowings

18

2,039.1

334.7

281.7

6.1

-

-

2,661.6










Cash in hand and at bank

17

344.2

50.2

(228.6)

-

-

-

165.8

Restricted deposits


4.1

-

(4.1)

-

-

-

-

Net debt 


1,690.8

284.5

514.4

6.1

-

-

2,495.8










Company









Banks loans and loan capital


1,373.1

78.9

271.6

1.0

-

-

1,724.6

Bank overdrafts


0.3

-

-

-

-

-

0.3

Total borrowings

18

1,373.4

78.9

271.6

1.0

-

-

1,724.9










Cash in hand and at bank

17

72.8

(0.7)

(70.8)

-

-

-

1.3

Net debt


1,300.6

79.6

342.4

1.0

-

-

1,723.6










* The non-cash adjustment relates to the issue of a £5.2 million loan note in settlement of a trading property purchase and the amortisation of issue costs offset against borrowings. 


32. Group entities

The principal entities at 31 December 2008 are listed below (all equity holdings unless otherwise stated).

County of incorporation/

Subsidiaries

Joint ventures


operation

% holding

% holding

Property




* Allnatt London Properties plc

Great Britain

100


* Bilton plc

Great Britain

100


Farnborough Business Park Limited

Great Britain

100


HelioSlough Limited

Great Britain


50

Le Blanc Mesnil

France

100


SEGRO Belgium NV

Belgium

100


SEGRO BV (operating in Netherlands, Italy and Central Europe)

Netherlands

100


* Shopping Centres Limited

Great Britain


50

SEGRO Germany GmbH

Germany

100


SEGRO France SA

France

100


SEGRO Industrial Estates Limited 

Great Britain 

100


SEGRO (KNBC) Limited

Great Britain

100


SEGRO Management NV 

Belgium

100


SEGRO Marly le Ville

France

100


* SEGRO Properties Limited

Great Britain

100


SEGRO (Winnersh) Limited

Great Britain

100


SEGRO 12

Germany

100


SEGRO 23

Germany

100


* Slough Trading Estate Limited

Great Britain

100


Quendis Polska

Poland

100


The Heywood Unit Trust

Great Britain

100


The Woodside Unit Trust

Great Britain

100






Service




* SEGRO Administration Limited

Great Britain

100


* SEGRO Finance plc

Great Britain 

100






Other




* SEGRO Overseas Holdings Limited

Great Britain

100


* SEGRO Holdings France SAS

France

100






* Held directly by SEGRO plc






33. Disclosures of discontinued operations


Discontinued operations comprised the Group's US property business and Slough Heat & Power Limited (a company which provided electricity, water and steam). The agreement to dispose of the US property business was signed on 4 June 2007 and the disposal completed on 1 August 2007. The agreement to dispose of Slough Heat & Power Limited was signed on 14 November 2007 and the disposal was completed on 31 December 2007.


For the year ended 31 December 2007, profit after tax from discontinued operations was £170.6 million.

















Year to 31 December 2007






US property

Slough Heat







business

& Power

Total

Summarised income statement of discontinued operations


£m

£m

£m

Revenue





54.4

44.7

99.1

Expenses





(48.5)

(42.3)

(90.8)

Valuation gains





36.1

-

36.1

Profit before tax





42.0

2.4

44.4

Tax credit/(charge) - current 





2.2

-

2.2

  - deferred





(18.6)

-

(18.6)

Profit after tax from operations





25.6

2.4

28.0

Profit from sale after tax





134.9

7.7

142.6

Total profit after tax





160.5

10.1

170.6










34. Post balance sheet events

On 4 March the Company announced a fully underwritten Rights Issue to raise approximately £524 million. The net proceeds are expected to be £500 million, after expenses of approximately £24 million in connection with the Rights Issue.




Five year financial results

2008

2007

2006

2005

2004


£m

£m

£m

£m

£m

Group income statement






Net property rental income

244.9

246.3

247.2

223.9

228.1

Profit on sale of trading properties

23.9

22.0

6.1

7.0

3.7

Share of pre-tax operating profit from investment property, joint 






  ventures and associates less valuation gains 

2.9

3.1

3.2

4.7

13.5

Share of operating profits/(losses) from trading property joint ventures  

7.0

1.6

3.8

0.6

(0.8)

Net income/(loss) from utilities

-

2.4

2.1

1.2

(4.1)

Net loss from gas

-

-

-

(2.1)

(3.3)

Other investment income

1.7

18.4

8.5

5.5

6.1

Administration expenses

(40.0)

(39.7)

(28.9)

(20.7)

(14.7)

Net finance costs including notional preference share interest less debt






  repayment and close out costs

(116.5)

(100.4)

(99.3)

(100.6)

(108.4)

Adjusted profit before tax and exceptional items

123.9

153.7

142.7

119.5

120.1

Exceptional lease surrender premium

-

-

-

36.4

7.5

Goodwill

-

0.9

-

-

-

Profits from the sale of Slough Heat & Power and US property business

-

445.0

-

-

-

Profits from the sale of Quail West, Tipperary and joint ventures

-

-

-

121.7

12.7

Property (losses)/gains

(34.8)

3.0

4.8

14.4

56.4

Net valuation gains and losses including joint ventures and associates

(996.1)

(349.1)

541.5

419.6

182.1

Notional interest on preference shares

-

-

-

-

13.2

Net (losses)/gains on derivatives

(32.8)

3.1

4.1

(1.0)

-

Exceptional cost of debt repayment

-

(16.4)

-

(126.0)

-

Joint ventures' tax

3.2

2.7

(3.0)

(2.3)

(4.0)

Exceptional restructure costs

(2.6)

-

-

-

-

(Loss)/profit before tax

(939.2)

242.9

690.1

582.3

388.0







Group balance sheet






Investment, development and owner occupied properties

4,322.2

4,775.0

5,683.0

4,876.4

3,729.5

Trading properties

357.8

236.0

232.3

123.6

125.3

Total properties

4,680.0

5,011.0

5,915.3

5,000.0

3,854.8

Plant and equipment

9.1

5.8

48.1

45.0

118.0

Joint ventures and associates

67.5

73.4

84.5

100.1

84.1

Other assets

190.7

186.0

180.7

238.9

166.5

Cash and deposits

165.8

348.3

161.4

172.6

397.4

Total assets

5,113.1

5,624.5

6,390.0

5,556.6

4,620.8

Borrowings

(2,661.6)

(2,039.1)

(2,384.8)

(2,264.9)

(1,722.7)

Deferred tax provision

(78.2)

(65.4)

(298.5)

(635.9)

(448.4)

Other liabilities and minority interests

(365.8)

(531.0)

(334.0)

(215.4)

(284.6)

Shareholders' funds

2,007.5

2,989.0

3,372.7

2,440.4

2,165.1







Total return






(Loss)/profit attributable to ordinary shareholders

(938.1)

(74.9)

916.5

385.1

285.8

Items taken directly to equity

(43.4)

(308.8)

15.8

(6.2)

(63.1)


(981.5)

(383.7)

932.3

378.9

222.7

Data per ordinary share:












Earnings per share:






Basic (loss)/earnings per share

(215.9p)

(16.4p)

201.8p

91.7p

68.5p

Adjusted diluted earnings per share

28.0p

32.2p

25.1p

24.3p

24.4p







Net assets per share basic:






Basic net assets per share

462p

690p

718p

579p

486p

Adjusted basic net assets per share

482p

705p

777p

733p

595p







Net assets per share diluted:






Basic diluted net assets per share

462p

689p

716p

542p

461p

Adjusted diluted net assets per share

482p

704p

775p

680p

558p









Glossary of Terms*


Basis points

A unit that is equal to 1/100th of 1%.


Combined portfolio

The investment, development and trading properties of the Group, including the relevant share of joint ventures' properties.


Development pipeline

The Group's current programme of developments authorised or in the course of construction at the balance sheet date, together with potential schemes not yet commenced on land owned or controlled by the Group or its joint ventures.


Equivalent yield

The internal rate of return from an investment property, based on the value of the property assuming the current passing rent reverts to ERV and assuming the property becomes fully occupied over time. Assumes rent is received quarterly in advance. See also True equivalent yield.


Estimated rental value (ERV)

The estimated annual market rental value of lettable space as determined biannually by the Company's valuers. This will normally be different from the rent being paid.


Estimate to complete (ETC)

Costs still to be expended on a development or redevelopment to practical completion (not to complete lettings), including attributable interest.


Gross rental income

Contracted rental income recognised in the period, including surrender premiums, interest receivable on finance leases and service charge income. Lease incentives, initial costs and any contracted future rental increases are amortised on a straight line basis over the lease term.


Hectares (Ha)

The area of land measurement used in this analysis. The conversion factor used, where appropriate, is 1 hectare = 2.471 acres.


Initial yield

Annualised current passing rent expressed as a percentage of the property valuation.


Joint venture

An entity in which the Group holds an interest and which is jointly controlled by the Group and one or more partners under a contractual arrangement whereby decisions on financial and operating policies essential to the operation, performance and financial position of the venture require each partner's consent.


Net rental income

Gross rental income less ground rents paid, service charge expenses and property operating expenses.


Passing rent

The annual rental income currently receivable on a property as at the balance sheet date (which may be more or less than the ERV - see over-rented and reversionary).


Pre-let

A lease signed with an occupier prior to completion of a development.


REIT

A qualifying entity which has elected to be treated as a Real Estate Investment Trust for tax purposes. In the UK, such entities must be listed on a recognised stock exchange, must be predominantly engaged in property investment activities and must meet certain ongoing qualifications. SEGRO plc and its UK subsidiaries elected for REIT status with effect from 1 January 2007.


Rent roll

See passing rent.


Reversionary yield

The ERV of a property, expressed as a percentage of the property's valuation. In the case of portfolio data, the reversionary yield assumes all properties are fully occupied.


Square metres (sq m)

The area of buildings measurements used in this analysis. The conversion factor used, where appropriate, is 1 square metre = 10.639 square feet.


Topped up initial yield

Annualised current passing rent plus the value of annualised rent free periods expressed as a percentage of the property valuation.


Topped up initial yield excluding vacant properties

Topped up initial yield calculated for occupied properties only.


Total Property Return (TPR)

The change in capital value less any capital expenditure incurred plus net income and plus or minus any gains or losses on disposals expressed as a percentage of capital employed.


True equivalent yield

The equivalent yield assuming rent is received quarterly in arrears.


TSR

Total shareholder return based upon share price movement over the period and assuming reinvestment of dividends.


*    For full Glossary of Terms go to http://www.segro.com/segro/investors/glossaryofterms.htm




This information is provided by RNS
The company news service from the London Stock Exchange
 
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