Final Results
Unite Group PLC
16 March 2006
Date: 16 March 2006
On behalf of: The UNITE Group plc ('UNITE' or 'the Company')
Embargoed until: 0700hrs
The UNITE Group plc
Preliminary Results for the year ended 31 December 2005
The UNITE Group plc, the UK's leading student hospitality provider, today
releases the preliminary announcement of its results for the year ended 31
December 2005. The key highlights are:
• Adjusted, fully diluted net asset value per share up 11% to 363 pence
(December 2004: 328 pence).
• After adjusting for the impact of the removal of stamp duty relief (£28m or 22
pence per share) growth was 17% for the year.
• Rental income up 21% to £81million (2004: £67 million).
• Operating profits from completed portfolio up 15% to £47 million.
• Portfolio operating margin improved to 63.2% (2004: 62.1%).
• £31 million share placing completed to fund further growth.
• Significant increase in investment activity in the sector.
Today in a separate announcement, the Group has also announced its decision to
appoint Mark Allan as Chief Executive when Nick Porter steps down from his role
to become non-executive Deputy Chairman at the end of the year.
Commenting on the results, Geoffrey Maddrell, Chairman of The UNITE Group plc,
said:
'This has been another year of considerable achievement for UNITE, demonstrated
by solid growth and strong business performance across all areas. UNITE's
position as market leader in the student accommodation sector has been enhanced;
we have continued to commit resources in support of longer term growth and our
underlying market fundamentals remain strong.
'Demand for our accommodation remains robust with high occupancy levels and core
rental growth, whilst we continue to focus on improving operating margins. With
a positive market outlook from both a demand and supply perspective, the
opportunity to deliver strong like-for-like revenue growth in the future
remains.
'Yield compression has continued to be evident across our portfolio and investor
demand for student accommodation has reinforced asset valuations. UNITE has
again been proactive in the property investment arena, accelerating the
development rate and actively managing assets to take advantage of the strength
of real estate investor interest in student accommodation.
'Our development pipeline remains strong and the fund-raising undertaken last
year has enabled the Group to capitalise on further development opportunities
for delivery in the coming years.
'UNITE is in a strong position with a compelling market opportunity, strength
and depth in its management team, an established capital base and a unique
combination of skills, experience and knowledge across all facets of the
business. 2006 and beyond promises to be a rewarding time for UNITE.'
A presentation, by invitation only, will be held today at 0930hrs at Tower 42,
25 Old Broad Street, London EC2N 1HQ.
Enquiries:
The UNITE Group plc T: 0117 302 7112
Nicholas Porter, Chief Executive
Officer
Mark Allan, Chief Financial
Officer
Redleaf Communications Ltd T: 020 7955 1410
Wendy Timmons/Emma Kane
A copy of the investor presentation is available on our website:
www.unite-group.co.uk
Publication quality photographs are available on request.
CHAIRMAN'S STATEMENT
Introduction
The UNITE Group has developed clarity of concept and strategy, to build on its
leadership position in the growing market for student accommodation. Equally we
have sought to ensure that this strategy is fully understood by all stakeholders
- shareholders, partners and employees - and drives operational priorities.
In 2005 we achieved the plans inherent in our strategy. At the same time we have
continued to commit resources to support longer term growth - in improving
customer service, in investing in systems, in strengthening our development
pipeline supported by appropriate financing capability, in training our people
and adhering to a clear set of values throughout the Group.
Financial results
2005 was another year of solid growth for the Group, underpinned by strong
business performance in all areas. Net asset value per share, as reported under
International Financial Reporting Standards, increased 9% to 314 pence from 289
pence at December 2004. When adjusted to exclude movements in provisions for
deferred tax and the market value of interest rate swaps, adjusted net asset
value per share increased by 10% to 367 pence from 335 pence at December 2004.
On a fully diluted basis, adjusted net asset value per share increased 11% to
363 pence from 328 pence a year earlier.
This growth was driven both by ongoing development activity at attractive
margins and by growth in the investment portfolio valuation as a result of
rental growth and yield compression. Importantly, this growth is stated after
absorbing a one-off £28m negative impact on valuation as a result of the
Chancellor removing stamp duty relief for disadvantaged areas in March 2005.
Without this impact, growth in NAV per share, on an adjusted fully diluted
basis, was 17%.
Profit before tax, as reported under IFRS, increased 64% to £28.1m from £17.1m
in 2004. Adjusted earnings (excluding revaluation gains and movements in
ineffective hedges recognised in the income statement) increased to £3.4m (3.0
pence per share) from a loss of £3.8m in 2004.
Dividend
In accordance with our stated policy, the Board is pleased to recommend a final
dividend of 1.67 pence per share, making a total dividend of 2.5 pence per share
for the year (2004: 2.5 pence). The dividend will be paid on 12 May 2006 to
shareholders on the register as at 18 April 2006.
Market update
Our underlying market fundamentals remain strong. The Government looks to be on
target to meet its goal of 50% participation in higher education amongst young
people by 2010, up from the current level of 43% and most regional cities are
still significantly undersupplied. Whilst the trend in university applications
in the past two years has understandably been disrupted by uncertainty amongst
students regarding new funding arrangements, the overall picture remains one of
growth - 2.6% per annum average across both years. 2006/07 applications do show
some reversal of the exceptional jump in 2005/06 applications, but with over
100,000 unsuccessful applicants last year, the overall demand picture remains
strong and we expect the general growth trend to resume in the near term.
On the supply side, April 2006 will at last see the introduction of the Housing
Act, intended to improve the quality of private rented housing through more
stringent standards and the introduction of a licensing regime. The quality and
high standard of UNITE's portfolio means that the Group is well placed to
benefit from this legislation.
Portfolio performance
Demand for our accommodation remains strong. High occupancy of 94.0% in the
current academic year (94.8% in 2004/05), core rental growth and an improvement
in tenancy mix towards year-round occupation all combined to deliver strong
like-for-like revenue growth of some 7.2% into the current academic year (2004/
05: 6.8%). We are seeing increased competition in a small minority of well
supplied markets, such as Liverpool, which will constrain rental growth in those
areas in the near term, but we are confident that UNITE's focus on high quality
locations and customer service will deliver continued strong relative
performance.
The Group's portfolio operating margin (defined as net rents after all operating
costs expressed as a percentage of gross rents; for the full operational
portfolio including joint ventures and managed assets) increased by 1.1% to
63.2% from 62.1% in 2004. This reflects the growth in like-for-like revenues
referred to above but has been partially offset by significant rises in the cost
of utilities and by our investment in increased staffing resource to improve
service to our customers. Due to the timing of its tenancy pricing, the Group
will be unable to recover these increased utility costs until the academic year
2006/07, for which period the Group has fixed its utilities prices. As a result,
operating margins will continue to come under some pressure for the first half
of 2006, with the expectation that margin growth will be relatively flat
compared to the first six months of 2005.
Looking forward, management continues to be confident of further improvements in
operating margins, through continued rental growth and scale efficiencies, as a
result of investment in our systems and operating platform initiated in 2005.
Development activity
UNITE has again been a very active developer. A total of 4,677 beds were
completed for occupation during 2005 at a total capital investment of £188m.
Over half of these beds were delivered using the Group's modular construction
technology, which assisted us in maintaining development margins in excess of
20% profit on cost. Our 2005 deliveries also included 1,553 beds within our
joint ventures and we are delighted with the success of these initiatives.
Looking forward to 2006, the Group has another 4,276 beds on track for delivery
and occupation, of which 1,808 are being developed within our joint ventures and
2,960 will be modular. In addition, the Group has 6,205 beds secured for
delivery in 2007 and 2008 (of which approximately 3,800 are currently subject to
planning) demonstrating the continued depth of our development pipeline.
Financing and investment activity
In 2005 UNITE continued to be proactive in its financing and investment
strategy. In March we closed a significant joint venture with the Government of
Singapore Investment Corporation ('GIC RE') to develop and operate student
accommodation in the capital cities of London, Edinburgh, Dublin and Belfast. We
plan to develop and operate a portfolio of £350m of student accommodation
through this joint venture and, as of March 2006, are well on track to complete
this programme by 2008. This focussed joint venture has allowed the Group to
accelerate its development rate in capital intensive markets, whilst also adding
new revenue streams in the form of asset management and development management
fees.
In December 2005 we successfully completed the sale of a portfolio of nominated
properties to Cordea Savills for consideration totalling £64m. This equated to a
net initial yield of 5.22% and demonstrated the strength of investor interest in
student accommodation as an emerging asset class. The transaction indicated 55
basis points of yield compression compared to a very similar transaction
undertaken 13 months earlier. During 2006, we will be considering the
opportunities to build on our joint venture and asset sale successes to further
establish the sustainability of our financing base.
Yield compression has been evident across the majority of the portfolio and the
average stabilised yield at 31 December 2005 was 6.32% (2004: 6.56%). Relative
to the IPD All Property Index (5.10% initial yield at 31 December 2005) our
assets continue to offer secure income returns at attractive pricing.
Finally, we successfully placed new shares with investors during November,
raising some £30m of proceeds net of costs. The shares were placed at a price of
330 pence per share and the proceeds will allow the Group to increase its
development roll-out and take a more flexible approach to certain site
acquisition opportunities. The placing was very well received by investors,
underlining shareholders support for UNITE's business plan, and the Group is now
strongly placed to capitalise on continued opportunities to grow its business in
the coming years.
These initiatives helped the Group reduce its gearing levels. At 31 December
2005, adjusted gearing (net debt as a percentage of adjusted net assets) stood
at 162%, down from 197% at 31 December 2004.
People
A fundamental element of our growth strategy is the focus we give to the
development of our people in achieving the expectations of our stakeholders,
notably our customers and shareholders. During 2005, with the Group's Operations
Board firmly established, we strengthened the Divisional executive teams in all
areas. The Group continues to invest significantly in innovative programmes
focussed on leadership development and customer service. In recognition of this
and the Group's wider people practices, we were delighted to achieve Investors
in People accreditation during the year, whilst also being voted one of
country's top employers by The Guardian.
In meeting colleagues across the business I am profoundly impressed by the high
level of commitment, excitement and enthusiasm, which has been the main
component behind our recent success. I would like to congratulate the management
for this decisive achievement, which augurs well for the future, and thank all
UNITE colleagues for responding so wholeheartedly to these initiatives.
Separately today, the Group has announced its decision to appoint Mark Allan as
Chief Executive with effect from the end of 2006. Mark, currently UNITE's Chief
Financial Officer will replace Nicholas Porter who has decided to step down as
Chief Executive and into the new role of non-executive Deputy Chairman. The
recruitment process for a CFO to replace Mark will now commence.
In his role as non-executive Deputy Chairman, Nicholas will continue to provide
valuable input to the business with particular focus on targeted support for our
development teams and through his extensive network of contacts in the Higher
Education sector.
In reaching its decision to appoint Nick's successor, the nominations committee
of the Board, advised by external consultants, set out clear parameters for the
Chief Executive role and conducted a rigorous selection process. The Board was
unanimous in its decision to appoint Mark and UNITE's mission, strategic focus
on customers, people and shareholders and the Group's embedded values will
remain absolutely constant under his leadership.
Looking forward
The Group's fundraising in November has enabled it to capitalise on
opportunities to strengthen its development pipeline. In the four months since
the fund raising was completed, the Group has successfully secured over 1,800
beds for delivery in 2007 and 2008 and gained three important planning consents
for projects comprising 1,160 beds, leaving us well placed to achieve our annual
development targets.
The Group's unique combination of skills in site acquisition, planning and
modular construction, coupled with its unrivalled sector knowledge and market
leading management business, makes for a compelling opportunity to deliver
strong growth in the coming years. With our market outlook remaining positive
from both demand and supply perspectives, the opportunity to deliver strong
like-for-like revenue growth in the future remains.
Investor demand for student accommodation has undoubtedly increased from a
modest start in 2004 and we expect this to reinforce asset valuations as
transactional activity increases. The Group will continue to manage its
investment portfolio proactively so as to ensure that shareholders benefit from
the buoyant property investment market and we continue to monitor developments
with regard to the introduction of REITs to the UK.
The Group is in a particularly strong position; our market opportunity remains
compelling; we have a strong management team backed up by robust systems and
unrivalled experience; and we have a flexible capital base allowing us to pursue
appropriate opportunities. 2006 and beyond promises to be a rewarding time for
UNITE.
Consolidated income statement
For the year to 31 December 2005
Note Year to Year to
31 Dec 2005 31 Dec 2004
£'000 £'000
Revenue 2 113,799 74,623
Cost of sales 2 (54,864) (24,678)
Administrative expenses - goodwill - (2,515)
impairment
- other (15,671) (14,284)
Administrative expenses (15,671) (16,799)
Profit on disposal of property 2,534 23
Net valuation gains on investment 5 23,377 20,869
property
Net operating profit before net 69,175 54,038
financing costs
Loan interest & similar charges 3 (44,212) (38,098)
Changes in fair value of 3 (4,317) -
ineffective hedges
Finance costs (48,529) (38,098)
Finance income 3 1,541 1,137
Net financing costs (46,988) (36,961)
Share of joint venture profit 7 5,944 30
Profit before tax 28,131 17,107
Tax credit 4 4,179 233
Profit for the year 32,310 17,340
Earnings per share
Basic 11 28.7p 15.8p
Diluted 11 28.3p 15.6p
Profit for the year is wholly attributable to equity holders of The UNITE
Group plc.
Consolidated balance sheet
At 31 December 2005
Note 31 Dec 2005 31 Dec 2004
£'000 £'000
Assets
Investment property 5 1,028,747 991,460
Investment property under 6 80,004 119,732
development
Property, plant and equipment 19,303 15,971
Investments in joint ventures 7 18,861 817
Intangible assets 5,465 4,753
Other receivables 8,618 6,079
Total non-current assets 1,160,998 1,138,812
Inventories 13,418 13,401
Trade and other receivables 66,011 26,246
Cash and cash equivalents 30,297 37,582
Total current assets 109,726 77,229
Total assets 1,270,724 1,216,041
Liabilities
Borrowings and financial 8 (124,541) (106,153)
derivatives
Trade and other payables (73,559) (71,675)
Total current liabilities (198,100) (177,828)
Borrowings and financial 8 (644,671) (665,925)
derivatives
Deferred tax liabilities 9 (45,255) (50,479)
Total non-current liabilities (689,926) (716,404)
Total liabilities (888,026) (894,232)
Net Assets 382,698 321,809
Equity
Issued share capital 10 30,435 27,825
Share premium 10 169,957 141,324
Merger reserve 10 40,177 40,177
Retained earnings 10 129,508 96,113
Revaluation reserve 10 17,531 16,370
Hedging reserve 10 (4,910) -
Total equity 382,698 321,809
Total equity is wholly attributable to equity holders of The UNITE
Group plc.
Statements of changes in shareholders equity
For the year to 31 December 2005
Note
2005 2004
£'000 £'000
Investment property under
development:
- revaluation 6 6,208 17,052
- deferred tax (1,843) (5,116)
Other property - revaluation 3,933 -
- deferred tax (1,180) -
Effective hedges - movements (4,212) -
- deferred tax 1,264 -
Share of joint venture valuation 2,898 787
gain (net of related tax)
Share of joint venture movements (845) -
in effective hedges (net of
related tax)
Net gains recognised directly in 6,223 12,723
equity
Profit for the period 32,310 17,340
Total recognised income and
expense for the period 38,533 30,063
Dividends paid 10 (2,787) (2,728)
Own shares acquired - (178)
Shares issued 10 31,243 5,159
Fair value of share options 443 302
expensed
67,432 32,618
Equity at start of year 321,809 289,191
Recognition of fair value of
hedges under IAS39 at 1 January
2005 (6,543) -
Equity at start of year after 315,266 289,191
adoption of IAS39
At end of year 382,698 321,809
Total recognised income and expense for the year is wholly
attributable to equity holders of The UNITE Group plc.
Statement of cash flows
For the year to 31 December 2005
Note 2005 2004
£'000 £'000
Operating activities
Profit for the period 32,310 17,340
Adjustments for:
Depreciation 2,486 2,354
Equity-settled transactions 443 302
Impairment of goodwill - 2,515
Change in value of investment 5 (23,377) (20,869)
property
Net finance costs 46,988 36,961
Gain on sale of investment (2,534) (23)
property
Share of joint venture profit 7 (5,944) (30)
Tax credit 4 (4,179) (233)
Operating profit before changes
in working capital and provisions 46,193 38,317
Increase in trade and other (29,765) (8,230)
receivables
Increase in inventories (17) (10,632)
Increase in trade and other 8,790 3,686
payables
Cash flows from operating 25,201 23,141
activities
Investing activities
Proceeds from sale of investment 134,817 61,008
property
Payments to/on behalf of joint (2,539) -
ventures
Equity invested in joint ventures (8,798) -
Interest received 1,541 1,137
Acquisition of intangibles (1,361) -
Acquisition of property, plant (1,402) (1,208)
and equipment
Acquisition and construction of
investment property (108,936) (174,487)
Cash flows from investing 13,322 (113,550)
activities
Financing activities
Interest paid (51,637) (47,768)
Gain on refinancing - 1,012
Proceeds from the issue of share 31,243 900
capital
Payments to acquire own shares - (178)
Proceeds from other non-current 160,462 423,267
borrowings
Repayment of borrowings (184,076) (274,752)
Payment of finance lease (307) (508)
liabilities
Dividends paid (2,787) (2,728)
Cash flows from financing (47,102) 99,245
activities
Net change in cash and cash (8,579) 8,836
equivalents
Cash and cash equivalents at 1 28,496 19,660
January
Cash and cash equivalents at 31 19,917 28,496
December
Notes
1. Basis of preparation
The financial information set out above does not constitute the company's
statutory accounts for the years ended 31 December 2005 or 2004. Statutory
accounts for 2004, which were prepared under UK GAAP, have been delivered to
the registrar of companies, and those for 2005, prepared under International
Financial Reporting Standards, as adopted by the European Union ('IFRS'),
will be delivered in due course. The auditors have reported on those
accounts; their reports were (i) unqualified, (ii) did not include
references to any matters to which the auditors drew attention by way of
emphasis without qualifying their reports and (iii) did not contain
statements under section 237(2) or (3) of the Companies Act 1985.
On 15 June 2005, the Company published unaudited results for the year ended
31 December 2004 restated in accordance with IFRS (the 'IFRS restatement')
which showed the effect of this restatement on the group's 2004 results and
on its opening and closing balance sheets.
The Group has applied the policies adopted in the IFRS restatement in the
financial statements for the year ended 31 December 2005 in accordance with
International Financial Reporting Standards, as adopted by the European
Union ('IFRS') and with those parts of the Companies Act 1985 applicable to
companies reporting under IFRS. In addition, from 31 December 2005, a policy
of revaluation in respect of land and buildings within property, plant and
equipment has been adopted (see below). The financial statements have been
prepared under the historical cost convention as modified by the revaluation
of properties and derivative financial instruments.
Change of accounting policies
Prior to the adoption of IFRS the financial statements of the Group had been
prepared in accordance with United Kingdom accounting standards (UK GAAP).
UK GAAP differs in certain respects from IFRS and certain accounting,
valuation and consolidation methods have been amended, when preparing these
financial statements, to comply with IFRS. The comparative figures in
respect of 2004 have been restated to reflect these amendments.
Reconciliation and description of the effect of the transition from UK GAAP
to IFRS on the group are set out in note 12.
The Group took advantage of the transitional provisions of IFRS 1 and
adopted IAS 39 (Financial Instruments: Recognition and Measurement) and IAS
32 (Financial Instruments: Disclosure and Presentation) prospectively.
Accordingly, the 2004 comparatives have not been restated in accordance with
IAS 39 and IAS 32. The opening balance sheet on 1 January 2005 has been
restated for IAS 39 (£6.543m debit), these adjustments have been reflected
within reserves.
From 31 December 2005, the group has adopted a policy of revaluation for
land and buildings held in property, plant and equipment which were
previously held at depreciated cost. Valuation has been carried out by an
external, independent valuer, having an appropriate recognised professional
qualification. The effect of this adoption is an increase in carrying value
of these assets of £3.933m and a related increase in deferred tax
liabilities of £1.180m with both of these items recognised through the
revaluation reserve in the year.
2. Segment reporting
Segment information is presented in respect of the Group's business segments
based on the Group's management and internal reporting structure. The
Directors do not consider that the group has meaningful geographical
segments as it operated exclusively in the United Kingdom in the year.
Segment results, assets and liabilities include items directly attributable
to a segment as well as those that can be allocated on a reasonable basis.
Unallocated assets and liabilities consist of deferred tax and interest
bearing loans and borrowings. Segment capital expenditure is the total cost
incurred during the period to acquire segment assets that are expected to be
used for more than one period.
The group comprises the following main business segments:
Investment (the management and holding of investment property)
Development (construction of investment property, primarily for the
Investment business segment)
2005 2004
£'000 £'000
Segment revenue
Rental income 81,080 66,808
Management fees to joint ventures 597 -
Investment revenue 81,677 66,808
Development revenue 32,122 7,815
Total revenue 113,799 74,623
Segment cost of sales
Property operating expenses (26,009) (18,024)
Development cost of sales (28,855) (6,654)
Total cost of sales (54,864) (24,678)
Property operating expenses are wholly attributable to property which was
income generating during the year.
Segment results
Investment 47,676 40,951
Development 1,094 (1,215)
Unallocated:
- corporate costs (5,012) (4,075)
- joint venture set up costs (494) -
- impairment of goodwill - (2,515)
- net valuation gains on 23,377 20,869
investment property
- profit on disposal of property 2,534 23
- net financing costs (46,988) (36,961)
- share of joint venture profit 5,944 30
- tax credit 4,179 233
Profit for the year 32,310 17,340
Operating Margin
The calculation of operating margin on the total portfolio under management on a
comparable basis year over year is as follows:-
2005 2004
£'000 £'000 £'000 £'000
Rental income
- wholly owned 81,080 66,808
- operated in joint ventures 5,117 -
86,197 66,808
Property operating expenses
- wholly owned (26,009) (18,024)
- operated in joint ventures (878) -
Overheads attributable to property (7,994) (7,833)
operations
(34,881) (25,857)
51,316 40,951
Rental payments on properties under 3,145 504
management
Gross margin on portfolio under 54,461 41,455
management
Gross margin expressed as a percentage 63.2% 62.1%
Portfolio profit is calculated as
follows:
2005 2004
£'000 £'000 £'000 £'000
Investment segment result 47,676 40,951
Net financing costs (46,988) (36,961)
Add back: changes in fair value of 4,317 -
ineffective hedges
Net loan interest payable (42,671) (36,961)
Ineffective swap payments (1,069) -
Share of joint venture portfolio profit 392 -
4,328 3,990
3. Net financing costs
2005 2004
£'000 £'000
Interest income (1,541) (1,137)
Finance income (1,541) (1,137)
Gross interest expense 54,846 49,293
Interest capitalised (10,728) (11,294)
Costs written off on refinancing 94 99
Loan interest & similar charges 44,212 38,098
Movement in ineffective hedges 4,317 -
Finance costs 48,529 38,098
Net Finance costs 46,988 36,961
4. Tax credit
Recognised in the income statement
2005 2004
£'000 £'000
Current tax expense - -
Deferred tax credit
Origination and reversal of temporary differences (3,272) (998)
Adjustments for prior years (907) 765
Total tax credit in income statement (4,179) (233)
Reconciliation of effective tax rate 2005 2004
% £'000 % £'000
Profit before tax 100.0% 28,131 100.0% 17,107
Income tax using the domestic
corporation tax rate 30.0% 8,439 30.0% 5,132
Effect of indexation on investment and
development property (28.5)% (8,028) (40.4)% (6,913)
Non-deductible expenses 0.8% 234 4.6% 792
Capital allowances gain crystallised (7.8)% (2,204) - -
Share of joint venture profit (6.1)% (1,713) (0.1)% (9)
Adjustments for prior years (3.2)% (907) 4.5% 765
(14.8)% (4,179) (1.4)% (233)
2005 2004
£'000 £'000
Deferred tax recognised directly in equity
Relating to hedging reserve movements (1,264) -
Relating to net valuation gains recognised directly 3,023 5,116
in equity
1,759 5,116
5. Investment property
2005 2005 2004 2004
£'000 £'000 £'000 £'000
Balance at start of year 991,460 788,304
Acquisitions 1,102 827
Transfer from investment property 120,723 230,501
under development
Disposals (107,915) (49,041)
Valuation gains 43,357 39,676
Valuation losses (19,980) (18,807)
Net valuation gains 23,377 20,869
Balance at end of year 1,028,747 991,460
Investment property is carried at fair value on the basis of 'market value' as
defined in the RICS Appraisal and Valuation Manual issued by the Royal
Institution of Chartered Surveyors as determined by CB Richard Ellis Ltd and
Messrs King Sturge, Chartered Surveyors as external valuers.
6. Investment property under development
2005 2005 2004 2004
£'000 £'000 £'000 £'000
Balance at start of year 119,732 166,446
Cost capitalised 99,507 171,133
Interest capitalised 10,728 11,294
Disposals (35,448) (15,692)
Transfer to investment property (120,723) (230,501)
Valuation gains 9,497 21,648
Valuation losses (3,289) (4,596)
Net valuation gains 6,208 17,052
Balance at end of year 80,004 119,732
Investment property under development is carried at fair value on the basis of
'market value' as defined in the RICS Appraisal and Valuation Manual issued by
the Royal Institution of Chartered Surveyors as determined by CB Richard Ellis
Ltd and Messrs King Sturge, Chartered Surveyors as external valuers.
7. Investments in joint ventures
2005 2004
£'000 £'000
Cost or valuation
Balance at start of year 817 -
Additions 10,047 -
Share of profit 5,944 30
Share of items recognised directly in reserves:
- Valuation gains (net of deferred tax) 2,898 787
- Movements in effective hedges (net of deferred tax) (845) -
Balance at end of year 18,861 817
The Group's interests in joint ventures are held at a carrying value
equivalent to its share of the underlying net asset value of the undertaking.
The Group's share of joint ventures' results are as follows
Group share of: Profit Gains/(losses) Profit Gains
recognised recognised
directly in directly in
equity equity
2005 2005 2004 2004
£'000 £'000 £'000 £'000
Capital Cities JV 3,755 1,083 - -
Student village JVs
- LDC (Project 110) 2,173 (228) 30 787
Ltd
- LDC (Project 170) 16 1,198 - -
Ltd
5,944 2,053 30 787
On 14 March 2005, the Group formed a joint venture with GIC Real Estate Pte
Ltd to develop and operate student accommodation in the capital cities of
London, Edinburgh, Dublin and Belfast in which the Group owns a 30% equity
share. This joint venture takes the form of a Jersey based limited
liability partnership in which the general partner is LDC (Capital Cities)
Ltd, a company incorporated in England and Wales.
The agreements integral to the above, which include the Group assuming
primary responsibility for development, property and asset management of
the venture, result in the Group having joint control of this entity in
conjunction with the majority partner.
On formation of this joint venture, the Group sold 4 investment properties
and 2 investment properties under development for £60.127m and a profit on
disposal of £50,000 is included in the income statement. In addition, set
up costs of £494,000 are included in administrative expenses .
Included in the statement of cash flows are the following cash flows
resulting from the sale of properties into the joint venture:
£'000
Net sale proceeds 58,784
Initial equity investment in joint venture (6,583)
Net effect on cash flows from investing activities 52,201
Repayment of borrowings (financing activities) (50,099)
Net cash flow effect 2,102
The group receives management fees from the joint venture and recharges
build costs in relation to the investment property under development sold
on formation. Revenue for the year includes £13.192m in relation to these.
The Group's joint ventures in student villages with Lehman Brothers are
held as 75% interests in the ordinary shares of LDC (Project 110) Ltd and
LDC (Project 170) Ltd, companies incorporated in England and Wales, whose
principal activity is the construction and letting of investment property.
Under the Articles of Association, the Group cannot exercise control over
these companies and its interest amounts to a 51% share of the profits and
assets of the joint ventures. Under the articles of LDC (Project 170) Ltd,
the Group is additionally entitled to the first £1.25m of net assets on any
winding up of the company. Revenue for the year includes £2,677,000 (2004:
£1,292,000) charged to LDC (Project 110) Ltd and £156,000 (2004: nil)
charged to LDC (Project 170) Ltd in respect of fees and construction costs.
8. Borrowings and financial derivatives
2005 2004
£'000 £'000
Non-current
Bank and other loans 624,450 662,125
Finance lease liabilities 474 781
Interest rate swaps 19,747 3,019
644,671 665,925
Current
Overdrafts 10,380 9,086
Bank loans 61,185 16,768
Build loans 52,601 79,924
Finance lease liabilities 375 375
124,541 106,153
Maturity analysis
Non current bank loans and other loans
fall due as follows:
2004 2004
£'000 £'000
Between one and two years 6,437 66,648
Between two and five years 133,081 83,249
In five years or more 484,932 512,228
624,450 662,125
The Group has various borrowing facilities available to it. The undrawn
committed facilities available at 31 December 2005 in respect of which all
conditions precedent had been met at that date were as follows:
2005 2004
£'000 £'000
Expiring in one year or less
Build facilities 11,552 38,355
Other facilities 19,000 5,000
30,552 43,355
In addition, there are further committed facilities available where not all
conditions precedent have yet been met amounting to £294m (2004:£226m). Of this
amount £158m (2004:£54m) remains available for completed properties and £136m
(2004:£172m) for development properties.
Security for the Group's property development and investment financing is by way
of first charges, and in some instances second charges, over the properties to
which they relate. In certain instances, cross guarantees are provided within
the Group.
9. Deferred tax liabilities
Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
Assets Liabilities Net
2005 2004 2005 2004 2005 2004
£'000 £'000 £'000 £'000 £'000 £'000
Investment property - - 47,193 50,461 47,193 50,461
Investment property under - - 4,142 7,015 4,142 7,015
development
Property, plant and machinery - - 1,395 240 1,395 240
Financial instruments (5,042) - - - (5,042) -
Tax value of loss
carry-forwards recognised (2,433) (7,237) - - (2,433) (7,237)
Tax (assets)/ liabilities (7,475) (7,237) 52,730 57,716 45,255 50,479
Set off of tax 7,475 7,237 (7,475) (7,237) - -
Net tax liabilities - - 45,255 50,479 45,255 50,479
Movement in temporary differences during the
year
Balance Balance
at 31 Effect Balance at 31
Dec of at 1 Jan Recognised Recognised Dec
2004 IAS39 2005 Transfers in income in equity 2005
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Investment property 50,461 - 50,461 4,716 (7,984) - 47,193
Investment property
under development 7,015 - 7,015 (4,716) - 1,843 4,142
Property, plant and 240 - 240 - (25) 1,180 1,395
machinery
Financial instruments - (2,804) (2,804) - (974) (1,264) (5,042)
Tax value of loss
carry-forwards
recognised (7,237) - (7,237) - 4,804 - (2,433)
Total 50,479 (2,804) 47,675 - (4,179) 1,759 45,255
10. Capital and reserves
Reconciliation of movement in capital and reserves
Share Share Merger Hedging Retained Revaluation
capital premium reserve reserve earnings reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 1 January 2004 27,054 136,936 40,177 - 53,147 31,877 289,191
Profit for the year - - - - 17,340 - 17,340
Investment property under
development - revaluation - - - - - 17,052 17,052
- deferred tax (5,116) (5,116)
Share of joint venture
valuation gain (net of
related tax) - - - - - 787 787
Transfer on completion of
investment property - - - - 28,230 (28,230) -
Loan notes converted 613 3,645 - - - - 4,258
Share options exercised 158 743 - - - - 901
Equity settled - - - - 302 - 302
transactions
Own shares acquired - - - - (178) - (178)
Dividends to shareholders - - - - (2,728) - (2,728)
Balance at 31 December 27,825 141,324 40,177 - 96,113 16,370 321,809
2004
Effect of IAS39 - - - (1,117) (5,426) - (6,543)
Balance at 1 January 2005 27,825 141,324 40,177 (1,117) 90,687 16,370 315,266
Profit for the year - - - - 32,310 - 32,310
Investment property under
development - revaluation - - - - - 6,208 6,208
- deferred tax - - - - - (1,843) (1,843)
Other property - revaluation - - - - - 3,933 3,933
- deferred tax - - - - - (1,180) (1,180)
Effective hedges - movements - - - (4,212) - - (4,212)
- deferred tax - - - 1,264 - - 1,264
Share of joint venture
valuation gain (net of
related tax) - - - - - 2,898 2,898
Share of joint venture
movements in effective
hedges (net of related - - - (845) - - (845)
tax)
Transfer on completion or
disposal of investment
property - - - - 8,855 (8,855) -
Share issue 2,348 28,652 - - - - 31,000
Share options exercised 262 1,169 - - - - 1,431
Expenses of shares issued - (1,188) - - - - (1,188)
Equity settled - - - - 443 - 443
transactions
Dividends to shareholders - - - - (2,787) - (2,787)
Balance at 31 December 30,435 169,957 40,177 (4,910) 129,508 17,531 382,698
2005
Share capital
Number of Number of
Ordinary Ordinary
shares shares
2005 2004
Authorised shares of 25p each 155,000,000 155,000,000
In issue at start of year 111,301,195 108,213,432
Loan notes converted - 2,453,219
Share placing 9,393,939 -
Share options exercised 1,044,859 634,544
In issue at end of year 121,739,993 111,301,195
The holders of ordinary shares are entitled to receive dividends as declared
from time to time and are entitled to one vote per share at meetings of the
Company. All shares rank equally with regard to the Company's residual
assets.
On 22 November 2005, the Company placed 9,393,939 shares with Appollo
Nominees Ltd (a nominee company for UBS Ltd) at a placing price of £3.30 per
share. The market price on that day was £3.51 per share.
Merger reserve
This reserve represents the excess of the fair value over nominal value of
shares issued as part consideration for assets acquired.
Revaluation reserve
The revaluation reserve represents revaluations relating to properties under
development and land and buildings included in property, plant and equipment
less any related deferred tax.
Hedging reserve
From 1 January 2005, following adoption of IAS39 Financial Instruments:
Recognition and Measurement, the hedging reserve comprises the effective
portion of the cumulative net change in the fair value of cash flow hedging
instruments where the hedged transaction has not yet occurred less any
related deferred tax.
Dividends
The following dividends were declared and paid
during the year:
2005 2004
£'000 £'000
Final dividend re prior year of 1.67p (2004: 1.67p) 1,861 1,807
per 25p ordinary share
Interim dividend of 0.83p (2004: 0.83p) per 25p 926 921
ordinary share
2,787 2,728
After the balance sheet date the following dividends were proposed by the
directors. These dividends have not been provided for.
2005 2004
£'000 £'000
Final dividend proposed of 1.67p per 25p 2,033 1,859
ordinary share
11. Earnings per share and net asset value per share
Earnings per share
The calculations of basic and adjusted earnings per share are as follows:-
2005 2004
Earnings £'000 £'000
Basic (and diluted) 32,310 17,340
Adjustments:
Net valuation gains on investment property (inc. (29,599) (20,869)
share of joint ventures)
Movements in ineffective hedges 4,317 -
Deferred tax (inc share of joint venture) (3,646) (233)
Adjusted 3,382 (3,762)
Weighted Average number of shares (thousands)
Basic 112,633 109,478
Dilutive potential ordinary shares (share options) 1,526 1,330
Diluted 114,159 110,808
Earnings per share (pence)
Basic 28.7 15.8
Diluted 28.3 15.6
Adjusted 3.0 (3.4)
The share placing in 2005 increased the weighted average number of shares
by £1,029,000 (2004: nil). All other movements in weighted average number
of shares have resulted from the exercise of share options.
Net asset value per share
The calculations of basic, diluted and adjusted net asset value per share are
as follows:-
2005 2004
£'000 £'000
Shareholders' funds
Basic 382,698 321,809
Mark to market of interest rate swaps (inc share 17,687 -
of joint ventures)
Deferred tax (inc joint ventures) 46,575 50,787
Adjusted- pre dilution 446,960 372,596
Outstanding share options 5,458 6,584
Adjusted - diluted 452,418 379,180
Number of shares (thousands)
Basic 121,740 111,301
Outstanding share options 2,895 4,321
Diluted 124,635 115,622
Net assets value per share (pence)
Basic 314 289
Adjusted - pre dilution 367 335
Adjusted - diluted 363 328
12. Explanation of transition to IFRS
In preparing its opening IFRS balance sheet , the Group has adjusted amounts
reported previously in financial statements prepared under its previous basis of
accounting (UK GAAP). An explanation of how transition from previous GAAP to IFRS
has affected the Group's financial position and financial performance is set out on
the face of the primary statements and the following notes and tables.
Reconciliation of Equity
1 January 2004 31 December 2004
Note UK GAAP Effect of IFRS UK GAAP Effect of IFRS
transition transition
to IFRS to IFRS
£'000 £'000 £'000 £'000 £'000 £'000
Assets
Investment property (b) 788,304 - 788,304 991,460 - 991,460
Investment property under (b) 160,488 5,958 166,446 118,990 742 119,732
development
Property, plant and (d) 19,726 (2,610) 17,116 18,099 (2,128) 15,971
equipment
Investment in joint venture (a) - - - 1,125 (308) 817
Intangible assets (d) 5,140 2,610 7,750 2,475 2,278 4,753
Trade & other receivables (d) - 1,850 1,850 - 6,079 6,079
Total non-current assets 973,658 7,808 981,466 1,132,149 6,663 1,138,812
Inventories 2,769 - 2,769 13,401 - 13,401
Trade & other receivables (d) 20,072 (1,850) 18,222 32,325 (6,079) 26,246
Cash and cash equivalents 24,980 - 24,980 37,582 - 37,582
Total current assets 47,821 (1,850) 45,971 83,308 (6,079) 77,229
Total assets 1,021,479 5,958 1,027,437 1,215,457 584 1,216,041
Liabilities
Borrowings and financial (107,664) - (107,664) (106,153) - (106,153)
derivatives
Trade & other payables (d) (75,823) 5,056 (70,767) (76,777) 5,102 (71,675)
Total current liabilities (183,487) 5,056 (178,431) (182,930) 5,102 (177,828)
Borrowings and financial (511,200) (3,019) (514,219) (662,906) (3,019) (665,925)
derivatives
Deferred tax liabilities (a) - (45,596) (45,596) - (50,479) (50,479)
Total non-current (511,200) (48,615) (559,815) (662,906) (53,498) (716,404)
liabilities
Total liabilities (694,687) (43,559) (738,246) (845,836) (48,396) (894,232)
Net Assets 326,792 (37,601) 289,191 369,621 (47,812) 321,809
Equity 326,792 (37,601) 289,191 369,621 (47,812) 321,809
Reconciliation of Profit
Year ended 31 Dec 2004
Year ended 31 December 2004 Note UK GAAP Effect of IFRS
transition to
IFRS
£'000 £'000 £'000
Gross rental income 66,808 - 66,808
Development sales 7,815 - 7,815
Revenue 74,623 - 74,623
Property operating expenses (18,024) - (18,024)
Development cost of sales (6,654) - (6,654)
Cost of sales (24,678) - (24,678)
Goodwill amortisation/ impairment (d) (2,665) 150 (2,515)
Administrative expenses - other (d) (14,154) (130) (14,284)
Administrative expenses (16,819) 20 (16,799)
Profit on disposal of investment 23 - 23
property
Net valuation gains on investment (b) - 20,869 20,869
property
Net operating profit before net 33,149 20,889 54,038
financing costs
Finance income 1,137 - 1,137
Finance costs (38,098) - (38,098)
Net financing costs (36,961) - (36,961)
Share of joint venture profit (a) - 30 30
Profit before tax (3,812) 20,919 17,107
Tax credit (a) - 233 233
Profit for the period (3,812) 21,152 17,340
Explanatory Notes
(a) Deferred tax
IAS 12 requires full provision of all taxable temporary differences whereas
an exemption to provision for potential capital gains was available under
UK GAAP. Hence under IFRS the Group has to recognise the capital gains tax
that would be payable if it were to sell its property portfolio at book
value. The resultant deferred tax liabilities have been provided in both
restated balance sheets. This also affects the carrying value of the
Group's joint venture at 31 December 2004 which must now make a provision
for deferred tax in its balance sheet (hence reducing the Group's share of
its net assets).
The movements in the deferred tax liabilities are recognised directly in
equity to the extent that they relate to items recognised directly in
equity, otherwise being recognised in the income statement. Revaluation of
investment property under development falls into the former category (refer
below) and therefore the deferred tax movement relating to these
revaluations is also recognised directly in equity.
(b) Investment property and investment property under development
Under IFRS, completed investment property (accounted for under IAS40) must
be held separately from investment property under development (accounted
for under IAS16). For ease of comparison, the investment property under UK
GAAP (in the reconciliation above) has been divided into complete and under
development properties.
Completed investment property is carried at fair value under IAS40, which
equates to the market value previously applied under UK GAAP. There is
therefore no equity impact arising from the change to IFRS in respect of
these properties.
Investment property under development is carried at fair value under IAS16
which differs slightly from the directors' valuations previously applied
under UK GAAP. This has resulted in additional value being recognised in
both the opening and closing balance sheets.
IFRS fair values for both the above classes of property have been
calculated by the Group's external valuers.
Under UK GAAP, all revaluations of property were made directly in equity
(unless values fell below cost). Under IFRS, investment properties under
development continue to be accounted for in this way but completed property
valuation movements are recognised in the income statement. In addition,
when a property under development is completed and transferred to
investment property the difference between its fair value at that date and
its previous carrying amount is recognised in the income statement. These
have resulted in an increase in profit for the year of £20.869m under IFRS.
(c) Interest rate swaps - Group
Interest rate swaps have been carried at cost under UK GAAP and IFRS up
until 31 December 2004 but have been carried at fair value with effect from
1 January 2005, the date of transition for the purposes of IAS39. The
adjustments for IFRS in this note do not reflect the effects of IAS39 as
they show the impact on the 2003 & 2004 balance.
At 1 January 2005 the Group was required to recognise liabilities totalling
£9.347m and a related deferred tax asset of £2.804m in relation to its
interest rate swaps. The resulting movement in net assets of £6.543m is
split between swaps which do not qualify as hedges which must be debited to
retained earnings and those which do qualify, which must be debited to the
hedging reserve. Under the transitional provisions of IAS39 this takes
effect as an adjustment to the opening reserves for 2005.
(d) Other changes
Under the transitional rules goodwill has been recognised at 'deemed cost'
equivalent to its carrying value. Unlike UK GAAP, goodwill is not
amortised under IFRS but is subject to impairment testing. The impact in
2004 is that £2.665m of UK GAAP amortisation is replaced by £2.515m of
impairment in the profit for the year.
Dividends are not recognised until declared under IFRS. The 2003 and 2004
final proposed dividends are therefore added back to net assets at the
relevant balance sheet dates (£1.807m and £1.859m for 2003 and 2004
respectively).
The Group's share based incentives for employees are recognised through
the income statement at fair value over the vesting period (small
adjustments to both income statement and balance sheets)
Computer software is held as an intangible asset under IFRS resulting in a
transfer between asset categories (no profit impact).
Receivables due after more than one year are shown separately as
non-current under IFRS (previously included in current assets but
disclosed as recoverable in more than one year).
Under IFRS, the revaluation reserve at 31 December 2004 represents
cumulative valuation gains and losses (less related deferred tax
liabilities) on properties classified as investment properties under
development at the balance sheet date
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