Canary Wharf Group - Final Results - Part 1
RNS Number:1595Q
Canary Wharf Group PLC
25 September 2003
PART 1
CANARY WHARF GROUP PLC
25 September 2003
PRELIMINARY ANNOUNCEMENT OF RESULTS
YEAR ENDED 30 JUNE 2003
FINANCIAL HIGHLIGHTS
Year ended Year ended
30 June 30 June
2003 2002 Change
--------------- ---------------- -----------
£m £m %
Turnover - rents and service charges 250.3 206.8 21.0
Operating profit before exceptional items 165.2 130.2 26.9
Pre-operating profit exceptional items:
- amortisation of investment in own shares (2.8) -
- net profit on sale of completed properties - 169.5
Operating profit 162.4 299.7
Exceptional items:
- deferred consideration on sale of
subsidiary undertaking 2.9 13.4
- costs of group restructuring - (2.4)
Profit before interest after exceptional items 165.3 310.7
Net interest payable (178.5) (107.6)
(Loss)/profit on ordinary activities before tax (13.2) 203.1
(Loss)/profit on ordinary activities before tax
excluding exceptional items (13.3) 22.6
(Loss)/profit for the period after tax (9.5) 193.0
Special dividend (372.8) -
Basic (loss)/earnings per share (1.6)p 30.0p
Diluted (loss)/earnings per share (1.6)p 29.7p
Basic (loss)/earnings per share before
exceptional items (1.6)p 1.9p
Diluted (loss)/earnings per share before
exceptional items (1.6)p 1.9p
At 30 June At 30 June
Notes 2003 2002 Change
--------------- ---------------- -----------
£m £m %
Investment properties (1) 4,182.8 3,268.1
Properties under construction and
properties held for development (2) 1,133.0 1,115.3
Net debt (3,680.9) (2,622.8)
Other net (liabilities)/assets (115.5) 99.7
Net assets at net book value 1,519.4 1,860.3
Net assets at net book value after adding back
deferred tax provision 1,567.3 1,911.9
Properties under construction and
properties held for development (3)
- at Market Value 1,581.0 2,305.9
- at present value of Net Realisable Value 2,305.1 3,490.4
Adjusted Net Asset Value per share based on
Market Value (4) £3.44 £5.10 (32.5)
Adjusted Diluted Net Asset Value per share
based on Market Value (4) £3.44 £5.01 (31.3)
Cumulative return of capital:
- share repurchases 514.2 406.1
- special dividend 372.8 -
--------------- ---------------- -----------
887.0 406.1
(1) Includes adjustment for revaluation of investment properties. This resulted
in a revaluation surplus of £151.8 million, including a £415.4 million
surplus attributable to properties completed in the year.
(2) Properties under construction and properties held for development stated at
cost.
(3) Refer to Operating and Financial Review - Valuations of the preliminary
announcement for an explanation of the basis of valuation.
(4) Refer to Operating and Financial Review - Balance Sheet of the preliminary
announcement for an explanation of the basis of calculation.
AT 30 JUNE 2003:
* The group's investment portfolio totalling 8.4 million sq ft was 89.4% let.
* Surplus on revaluation of the five investment properties completed in the
year of £415.4 million.
* Properties under construction totalled 3.1 million sq ft of which 99% was
covered by agreements to lease, subject to the tenants' ability to sub-let
back to the group up to 0.67 million sq ft of which 0.15 million sq ft is
for a maximum period of 5 years and a further 0.15 million is for a maximum
period of 10 years in respect of occupational leases which are for terms of
25-30 years.
* Decrease on revaluation of the investment properties held throughout the
year of £263.6 million (or 8.1%) of which £87.5 million (or 2.7%) was since
31 December 2002.
* Market Value of property portfolio £5,811.5 million against £5,584.7
million at 30 June 2002, a reduction of £553.8 million (or 8.7%) excluding
additions. The reduction since 31 December 2002 was £126.2 million (or
2.1%) excluding additions.
* Adjusted net asset value per share (based on Market Value) £3.44 at 30 June
2003 against £3.70 at 31 December 2002 and £5.10 at 30 June 2002.
DURING THE YEAR:
* Construction was completed on five properties, all of which were retained
as investment properties, comprising 5 Canada Square (515,100 sq ft, fully
let to CSFB), 20 Canada Square (527,200 sq ft of which 266,200 sq ft has
been let to The McGraw Hill Companies), 16-19 Canada Square (203,300 sq ft
let to Waitrose, Reebok and Conran Restaurants), 20 Bank Street (546,500 sq
ft leased to Morgan Stanley in its entirety) and 40 Bank Street (607,400 sq
ft of which 78,300 sq ft has been leased to Allen & Overy and 133,000 sq ft
to Skadden Arps Slate Meagher & Flom). Options to sublet space back to the
group are disclosed in Note 25 of the announcement.
* During the year 25.2 million shares bought back at a cost of £108.1
million.
* Special dividend paid of £372.8 million bringing the total under the return
of capital programme to date to £887 million.
* The group tapped an existing securitisation raising £510 million in October
2002.
* In January 2003 the group redeemed £85.0 million of Class D Notes (BBB
rated) issued in 1997. Redemption was financed by a new £85.0 million bank
facility.
* In March 2003 £225 million was drawndown from a long-term loan facility
secured against 20 Canada Square. The proceeds were used to refinance the
construction financing on this building totalling £82.3 million.
SUBSEQUENT TO THE YEAR END
* On 11 September 2003 the group announced that, subject to formal contract,
terms have been agreed with British Petroleum's Integrated Supply and
Trading Division for the lease of 128,000 sq ft in 20 Canada Square. The
lease agreement is for 101,000 sq ft on a 20 year term with the first break
at year 10, and a further 27,000 sq ft on a 5 year lease with rights to
extend to run concurrent with the 101,000 sq ft lease.
* On 23 September 2003 the group announced that, subject to formal contract,
terms had been agreed with Reuters for the lease of approximately 281,000
sq ft of space in 30 The South Colonnade from Spring 2005. Reuters will
lease 237,000 sq ft on a 15 year lease and an additional 44,000 sq ft will
be leased on a separate lease with a 5th year break exercisable upon
payment of a substantial rental penalty as well as a further break at the
10th year. In lieu of granting a rent free period the group will take over
three of Reuters' leasehold properties with a total exposure equivalent to
2.5 years rent free at 30 The South Colonnade and acquire the freeholds of
Reuters' current headquarters at 85 Fleet Street and the adjoining building
at a price of £32.3 million with a short leaseback until moving to Canary
Wharf in May 2005.
* On 25 September 2003 the group announced that, subject to formal contract,
terms had been agreed with Goldenberg, Hehmeyer & Co for the leasing of
18,000 sq ft on a single floor in 50 Bank Street. The lease is for a 15
year term with a break at year 10.
* Also on 25 September 2003, the group announced that it had agreed with the
European Medicines Evaluation Agency ('EMEA') the leasing of 13,500 sq ft
on a single floor at 7 Westferry Circus, taking EMEA's occupancy to 116,268
sq ft. The lease will run for 11 years and will run concurrently with
EMEA's existing leases, due to expire in December 2014.
CONTACTS
George Iacobescu
Chief Executive
Peter Anderson
Managing Director, Finance
Wendy Timmons
Head of Corporate Communications
Canary Wharf Group plc
Telephone: 020 7418 2000
A copy of the annual report will be sent to shareholders and copies will be made
available to the public on request to the Group Company Secretary at the
registered office, One Canada Square, Canary Wharf, London E14 5AB.
The information in this announcement, which was approved by the board of
directors on 24 September 2003, does not comprise statutory accounts within the
meaning of the Companies Act 1985.
Introduction to the Chairman's and Chief Executive's Statement
As shareholders will be aware, the weakness in the share price of Canary Wharf
Group plc a few months ago prompted approaches from parties interested in
acquiring the Company. At that stage an Independent Committee of the Board was
formed to evaluate these potential offers. I agreed to be Chairman of the
Committee, which includes all my non-executive colleagues on the Board. During
the summer the potential offerors have undertaken extensive due diligence. We
are now actively involved in the process of reviewing indicative proposals which
we have received in order to determine if any of these can be developed into an
offer suitable for recommendation to shareholders.
The Company's management have supported the Committee through the provision of
information as and when required by us, and I am grateful to them for this.
Meanwhile, in spite of the considerable distractions whilst the Company has been
in an offer period, the management have continued to focus their efforts on
maximising the value of the ongoing business. More detail of the progress
achieved is contained in the Chairman's and Chief Executive's Statement.
Sir Martin Jacomb
Chairman
Independent Committee of the Board
CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT
Introduction
During the last year the UK property sector has operated in a difficult market
environment. However, we are now beginning to see signs of recovery in demand
for office space. It is not clear whether we have reached the bottom of the
market, but from the level of enquiries we are experiencing we would not expect
the current market downturn to be sustained for much longer.
There is, nevertheless, still a significant amount of space available in the
London office market where oversupply, both of new and existing space, has
widened tenant choice and driven rental values downwards. This has had a clear
impact on rental levels and increased tenant inducements. Our recent
experience, however, also shows that several tenants in the market for larger
amounts of space are all looking at the same newly developed buildings. As
these new buildings are committed in the City and Canary Wharf, we would
anticipate next year the beginning of a tightening in the market for the new,
highly specified, large floorplate office space we offer. We do not, however,
foresee an immediate return to new development at Canary Wharf except on a fully
pre-let or bespoke basis.
Over the last 12 months we have made excellent progress on the completion of our
current construction programme. As the initial phases of development near
completion it is an appropriate point at which to consider the disposal of
selected buildings or interests in selected buildings. Although our internal
cash resources are sufficient for ongoing operations, such disposals would
enable us to reduce leverage and to consider continuing our return of capital
programme whilst also maintaining the integrity of the Estate.
Financial Review
Turnover increased from £206.8 million in 2002 to £250.3 million in 2003 (a 21%
increase). Excluding exceptional items, the group recorded a loss before tax
for the year ended 30 June 2003 of £13.3 million, compared to a profit of £22.6
million for 2002. Interest costs increased from £107.6 million to £178.5
million as a result of the two securitisations completed in February and October
2002 and the refinancing of 20 Canada Square in March 2003.
These planned issues increased total debt from £3,950 million to £4,710 million
and were used in part to fund the share buy-back programme (£108.1 million in
the year) and special dividend (£372.8 million paid in November 2002) which
together with past buy-backs have resulted to date in a total return of capital
of £887 million.
Net assets during the year fell by £340.9 million (from £1,860.3 million at 30
June 2002 to £1,519.4 million at 30 June 2003). The reduction from the share
buy-backs and special dividend of 64.27p per share (in total £480.9 million) was
offset by a revaluation of five group investment properties completed in the
year to 30 June 2003 (an increase of £415.4 million) less a reduction of £263.6
million in the valuation of investment properties held during the year. This
latter figure represents a decline of 8%.
The adjusted net asset value basis revalues properties under construction and
those held for development to their Market Value and adds back the adjustments
in respect of lease incentives required by UITF 28 and deferred tax required by
FRS 19. Based on Market Value, the adjusted net asset value per share reduced
from £5.10 per share at 30 June 2002 to £3.44 per share at 30 June 2003 (before
dilution), a reduction of £1.66 per share. This reduction in part reflects the
share buy-back and the special dividend of 64.27p per share and in part the
reduction in the market value of the total portfolio totalling £553.8 million in
the year, or 8.7% disregarding additions, equivalent to £0.95 per share based on
the closing number of shares. At 31 December 2002 net assets per share on the
Market Value basis were £3.70 per share and the reduction of £0.26 per share to
30 June 2003 was primarily attributable to a reduction in the Market Value of
the portfolio of £126.2 million or £0.22 per share.
In July 2003, 10 Upper Bank Street (HQ5) reached Practical Completion and
Clifford Chance gave notice to vacate its offices at Aldersgate Street on 29
September 2003. In accordance with UK GAAP the group has recognised a provision
of £123.5 million in respect of the estimated liability in respect of the
Aldersgate leases which were taken over in connection with the letting of HQ5.
In addition a provision of £27.3 million has also been recognised in respect of
certain incentives payable to Lehman Brothers in respect of their lease of 25-30
Bank Street following the achievement of base building practical completion
which removed any conditionality to these payments. Further detail on the basis
of these provisions is set out in Note 17 of the Preliminary Announcement.
Capital Structure
In October 2002 the group completed a £510 million tap issue taking the total
securitised debt issued by Canary Wharf Finance II plc to £3,117 million. Part
of the proceeds of this tap issue were used to fund payment of the special
dividend of £372.8 million.
In December 2002 the group entered into a loan facility secured on 1 Churchill
Place (BP1) which enables the group to draw up to £605 million once the property
has reached practical completion, scheduled for July 2004, and the related
construction financing has been repaid. Subsequently, in March 2003, the group
entered into a £225 million facility secured on 20 Canada Square which was used
to refinance the £82 million of construction financing on this building with the
balance being retained for general corporate purposes.
As a result of the completion of these facilities, permanent financing in excess
of that required to complete all buildings presently under construction has been
put in place.
Construction
Our construction programme has continued to progress on schedule and during the
year five buildings totalling 2.4 million sq ft were completed.
In September 2002 we opened a new retail building, the 203,000 sq ft extension
to the Canada Place Mall. In October 2002, we completed the 515,000 sq ft
building at 5 Canada Square. This building is let in its entirety to CSFB but
250,000 sq ft was subsequently sub-let by CSFB to Bank of America whose fit-out
is now nearing completion. In January 2003 we reached practical completion of
20 Canada Square in which The McGraw Hill Companies have leased 266,200 sq ft
and British Petroleum have agreed Heads of Terms for a letting of 128,000 sq ft
for its Integrated Supply and Trading division. In March 2003 we reached
practical completion of 40 Bank Street, a 607,000 sq ft building of which 78,300
sq ft has been leased to Allen & Overy and 133,000 sq ft to Skadden Arps Slate
Meagher & Flom. In May 2003 20 Bank Street was completed, a 546,500 sq ft
building let to Morgan Stanley. Subsequent to the year end completion was
achieved of 10 Upper Bank Street, a 1 million sq ft building which has been let
to Clifford Chance who have already taken up occupation. Base building works
practical completion was also achieved on 25-30 Bank Street, the 1.02 million sq
ft building let to Lehman Brothers. Fit-out of the building is expected to be
substantially completed in October 2003.
The final building currently under construction is Barclays' 1 million sq ft
headquarters building at 1 Churchill Place which will complete in mid 2004 along
with 24,000 sq ft of retail space at Cartier Circle. When completed, the
Barclays building will bring the completed Canary Wharf estate to a total of
14.1 million sq ft of which the group will own 11.6 million sq ft.
In the past, as we completed individual buildings we have been shifting key
development and construction personnel to new projects. Whilst we shall retain
our core group of key personnel to enable us to respond to development
opportunities as they arise, the process of scaling down these teams and their
administrative support to reflect the reducing development and construction
programme has begun.
Leasing
It is hard to judge the turning point of the cycle but a number of indicators
now point to an improving prospect for financial and business services
employment. Although there are many competitive schemes aggregating more than 5
million sq ft due for delivery in the next 12 months we can anticipate a rapid
fall off in supply of new space thereafter given the very low level of building
starts in the past 12 months. Throughout the downturn there has been continuing
demand for major office buildings in Central London but from fewer companies.
Canary Wharf has been on the shortlist for most of these enquiries, a number of
which are now reaching a successful conclusion.
One example is our recent announcement that we have agreed Heads of Terms with
British Petroleum's Integrated Supply and Trading division. Another is the
announcement on 23 September 2003 that from Spring 2005 Reuters will lease the
entire 281,000 sq ft building at 30 The South Colonnade following the departure
of London Underground Limited in 2004. We are also able to announce agreed
Heads of Terms with Goldenberg, Hehmeyer & Co Limited for the leasing of 18,000
sq ft on a single floor at 50 Bank Street, and with the European Medicines
Evaluation Agency for a further 13,500 sq ft at 7 Westferry Circus taking their
total occupation in the building to just over 116,000 sq ft. These transactions
confirm that we have the space to meet a variety of client needs and also
indicate our ability to structure deals to meet the specific requirements of
clients.
The group currently has completed investment properties of approximately 1.0
million sq ft available to let which equates to a vacancy rate of 10.4%. This
could rise to 1.9 million sq ft by the end of 2004 following the exercise of
London Underground's lease break and assuming all remaining options to sublet
space back to the group are exercised. This total will be reduced by the recent
letting announcements which will serve to reduce the space potentially available
by 440,000 sq ft, together with any additional space which may be let during the
period to the end of 2004. Taking into account only the recent announcements,
the maximum vacancy rate in respect of space in the group's ownership would be
12.5% in 2004. In addition, certain tenants at present are openly marketing
some 640,000 sq ft of available space.
In addition to office lettings our highly successful retail offering continues
to expand. In September 2002 we opened a new retail building, the 203,300 sq ft
extension to the Canada Place mall anchored by Waitrose Food and Home. Weekend
trading on the Estate increased markedly as a result. This was followed on 18
September 2003 by the opening of the new 89,900 sq ft Jubilee Place Mall. Marks
& Spencer anchors the 38 unit mall and we have added a wide variety of new
fashion shops including Molton Brown, L K Bennett, Karen Millen, Reiss, Choice
and Whistles. New restaurants to Canary Wharf include Wagamama, Fratelli deli
cafe, Tootsies, Pashmina, Port of Call and Cafe Nero. Jubilee Place Mall
expands the total retail complex to 550,000 sq ft.
Transport
In June 2003 Canary Wharf and London Underground ("LUL") announced that they had
reached agreement on future improvements to, and upgrading of, the Jubilee Line.
Under the terms of this agreement, LUL and Canary Wharf have agreed that, in
satisfaction of rebates totalling £94.6m due to Canary Wharf in respect of its
funding contribution to the Jubilee Line extension LUL will provide a programme
of capacity enhancements. These include the introduction of a 2-hour single
direction peak period timetable (west to east in the morning and east to west in
the evening) of 24 trains per hour in October 2003 (several months ahead of
schedule), seven car trains providing an increase of train capacity of 17% by
July 2006 and new signalling and train control systems which will enable a peak
hour service of up to 30 trains per hour by December 2009.
These improvements will provide an overall increase of up to 45% over the
existing service capacity at Canary Wharf station. LUL will open the eastern
entrances to Canary Wharf station in June 2004. Direct access to Jubilee Place
retail will be linked to the Jubilee Line station by February 2004.
We continue to work with Cross London Rail Ltd (CLRL) and other stakeholders in
promoting the case for Crossrail which is critical to maintaining London's
competitiveness by adding transport capacity between its main commercial
districts (Canary Wharf, the City and the West End) to both Heathrow, in the
west, and housing capacity in the Thames Gateway in the east. In July 2003 the
Secretary of State for Transport issued a House of Commons written statement
which confirmed the Government's support for Crossrail. The statement confirmed
that a station at Canary Wharf was an integral part of Crossrail. CLRL's
objective is for a Hybrid Bill to be lodged in November 2004 with a target date
of opening the link in 2012.
Planning
In March 2003 the group lodged planning applications for two separate
developments at Canary Riverside and North Quay. Both applications are being
considered by London Borough of Tower Hamlets. Riverside consists of three
linked commercial buildings totalling 1.8 million sq ft of which approximately
60,000 sq ft comprises supporting retail premises. North Quay again consists of
three linked commercial buildings totalling 2.4 million sq ft of which a further
55,000 sq ft is supporting retail.
These applications reflect the group's confidence in the medium/ long term
future of this area which is recognised both by National and Local Government as
a key component for London's future growth aspirations. This work will allow
the group to respond to future market demand.
Staff
We and the Board appreciate that the last 12 months have been a particularly
difficult and pressured period for all our employees. The Board would like to
thank the entire staff for their hard work and their continuing contribution to
the success of Canary Wharf.
Paul Reichmann George Iacobescu
CHAIRMAN CHIEF EXECUTIVE OFFICER
OPERATING AND FINANCIAL REVIEW
Property portfolio
The activities of the group are focused on the Canary Wharf development
(including Heron Quays and the adjacent sites at Canary Riverside and North
Quay). The group has two principal business streams: property investment and
property development. The investment arm comprises twenty completed properties
(out of the twenty five constructed at Canary Wharf) totalling 8.4 million sq ft
of net internal area ('NIA'). The properties included in this total are shown
in the table below:
Approx. External
NIA % Leased Valuation
Property Address (sq ft) £m Principal Tenants
-------------------------------- --------------- ----------- ------------- ---------------------------------------------
1 Westferry Circus 219,000 66.6 65.0 ChevronTexaco
7 Westferry Circus 179,300 92.3 80.0 EDS, EMEA, Edward Jones
15 Westferry Circus 171,300 100.0 108.0 Morgan Stanley
17 Columbus Courtyard 199,500 100.0 96.5 CSFB
10 Cabot Square 639,000 100.0 250.0 Barclays Capital, WPP Group
20 Cabot Square 562,000 100.0 230.0 Morgan Stanley, Barclays Capital
One Canada Square 1,246,600 93.8 620.0 Daily Telegraph, KPMG, Mirror Group
Newspapers,
State Street Bank, Bear Stearns, Bank of New
York
5 Canada Square 515,100 100.0 327.0 CSFB
20 Canada Square 527,200 50.5 250.0 The McGraw Hill Companies
25 Canada Square 1,223,500 100.0 690.0 Citigroup
33 Canada Square 562,700 100.0 333.0 Citigroup
25 North Colonnade 363,200 100.0 160.0 Financial Services Authority
30 South Colonnade 296,100 100.0 87.0 London Underground (Lease termination April
2004)
20 Bank Street 546,500 100.0 334.0 Morgan Stanley
40 Bank Street 607,400 34.8 265.0 Skadden Arps Slate Meagher & Flom (subject,
on satisfaction of certain conditions, to
options to sub-let back up to 58,500 sq ft
(Note 25)) and Allen & Overy
50 Bank Street 213,800 63.8 102.0 The Northern Trust Company
Cabot Place Retail 98,400 100.0 69.5 Various retail tenants
Canada Place Retail 66,800 100.0 57.5 Various retail tenants
16-19 Canada Square 203,300 100.0 40.0 Waitrose, Reebok, Conran Restaurants
Nash Court 8,900 100.0 6.0 Smollensky's, Carluccio's
Car Parks - - 60.0
--------------- ----------- -------------
Total 8,449,600 89.4 4,230.5
--------------- ----------- -------------
As well as the rental income generated from the 20 completed properties, of
which 89.4% of NIA has been leased, the group generates income from managing the
entire Canary Wharf estate which, in addition to the completed properties in the
ownership of the group, includes five properties totalling 2.5 million sq ft
which are in other ownerships.
The properties of the group are under lease to high quality tenants which
provide a diversified income stream. At 30 June 2003 the weighted average
unexpired lease term for the office portfolio (built and under construction) was
22.8 years (or 19.0 years assuming exercise of all outstanding break options and
those sub-let options which could be for the remaining term of the leases). Of
the square footage under lease 76.2% does not expire or cannot be terminated by
tenants in more than ten years.
OPERATING AND FINANCIAL REVIEW (Continued)
In calculating the above, sub-lets for less than the remaining term of the
leases have been disregarded. In the case of such sub-lets, space totalling
372,570 sq ft (or 3.0% of the total portfolio), is capable of being sub-let back
to the group for periods between 5 and 10 years at the end of which the space
reverts to the tenant to the end of the lease term. Of this total, 218,370 sq
ft is for a maximum period of 5 years and 154,200 sq ft is for a maximum period
of 10 years.
A table summarising the sub-let options, both exercised and unexercised, is
included in Note 25 to the preliminary announcement.
During the year ended 30 June 2003 the group completed the construction of five
properties, all of which were retained as investment properties (5 Canada
Square, 16-19 Canada Square, 20 Canada Square, 20 Bank Street and 40 Bank
Street).
* 5 Canada Square is a 515,100 sq ft office building which has been leased to
CSFB in its entirety.
* 20 Canada Square is a 527,200 sq ft building of which 266,200 sq ft has
been leased to The McGraw Hill Companies. This tenant had previously agreed
to lease 313,200 sq ft but exercised an option on 3 January 2003 to omit
one floor of 47,000 sq ft from the lease.
* 20 Bank Street is a 546,500 sq ft building which has been leased by Morgan
Stanley in its entirety.
* 40 Bank Street is a 607,400 sq ft building of which 211,300 sq ft has been
leased to Allen & Overy and Skadden Arps Slate Meagher & Flom ('Skadden').
Allen & Overy has leased 78,300 sq ft and Skadden has leased 133,000 sq ft
but, subject to certain conditions, has options to sub-let back up to
58,500 sq ft to the group. Skadden can choose to lease this space back for
either 5 years or, at their sole choice, 71/2, 10 or 20 years. The exercise
date for the Skadden options was originally 28 February 2003 but this date
was extended first to 31 May 2003, then to 31 August 2003 and then to 28
November 2003 to allow the tenant more time to determine its space
requirements.
* 16-19 Canada Square is a 203,300 sq ft retail building of which 100,000 sq
ft has been let to Waitrose, 92,000 sq ft has been leased to Sportsplex
(Canary Wharf) Limited ('Sportsplex', the operator of the Reebok Sports
Club), 2,300 sq ft to Robert Dyas and 9,000 sq ft to Conran Restaurants.
Subsequent to the year end, in July 2003, Sportsplex was placed into
administration and the administrator is currently seeking an alternative
operator. In the meantime, the group has the benefit of a £2.2 million
guarantee from Reebok International Ltd, one of the shareholders in
Sportsplex. This equates approximately to one year's rent and service
charge.
There were five properties under construction at 30 June 2003 totalling 3.1
million sq ft net, of which 99% is covered by agreements for lease, subject to
the sub-let arrangements referred to in the table below. Upon completion it is
intended that all of these properties will be held as investments.
OPERATING AND FINANCIAL REVIEW (Continued)
Properties under construction at 30 June 2003 comprised the following:
Approx. Expected
Property Address NIA (sq ft) Completion Date Status
------------------------------------ ------------- ---------------------- ----------------------------------------
1 Churchill Place (BP1) 1,010,000 July 2004 Agreed to be leased to Barclays PLC
subject to option to sub-lease back any
space in excess of 650,000 sq ft (Note
25) and a call option over the adjacent
building BP2 (not exercisable if
sub-lease back operated)
25-30 Bank Street (HQ2) 1,023,300 Base building Agreed to be leased to Lehman Brothers
works completed for 30 years subject to option to
July 2003 sub-lease back 100,800 sq ft for 5 years
and 102,000 sq ft for 10 years (Note 25)
10 Upper Bank Street (HQ5) 1,002,000 Completed Agreed to be leased to Clifford Chance
31 July 2003 LLP for 25 years subject to leaseback of
52,700 sq ft for 5 years and 52,200 sq ft
for 10 years
Jubilee Place Mall (RT3) 89,900 Opened 18 100% pre-let or in solicitors' hands
September 2003
Churchill Place Retail Centre 24,400 July 2004 Unlet
(RT4)
---------
3,149,600
=========
Subsequent to the year end, practical completion was achieved on 10 Upper Bank
Street (HQ5) and the Jubilee Place Mall (RT3). Completion of base building
works was also achieved on 25-30 Bank Street (HQ2) in July 2003 and completion
of fit out is expected during the last quarter of 2003.
As well as the properties under construction referred to above, the group is
continuing substructure works on the remaining sites on Canary Wharf. In
connection with this work, buildings DS3 (650,000 sq ft) and BP2 (200,000 sq
ft) are being constructed up to street level.
Uncommitted development sites on the original Canary Wharf could accommodate a
total of 1.5 million sq ft. In addition the development sites at North Quay and
Canary Riverside allow development of 2.1 million sq ft net based on existing
planning applications. Applications have been made to modify and increase the
permitted density to 4.2 million sq ft, but construction of new buildings will
only commence as and when market conditions allow.
Valuations
The net assets of the group, as stated in its consolidated balance sheet as at
30 June 2003, were £1,519.4 million. In arriving at this total:
(i) properties held as investments were carried at £4,182.8 million, which
represents the Market Value (' MV') of those properties of £4,230.5 million
at that date as determined by the group's external valuers, FPDSavills or
CB Richard Ellis, less an adjustment for lease incentives as required by
Urgent Issues Task Force Abstract 28 (Operating Lease Incentives) ('UITF
28') of £47.7 million.
(ii) properties under construction and properties held for development, were
carried at £909.2 million and £223.8 million respectively, representing
their cost to the group.
OPERATING AND FINANCIAL REVIEW (Continued)
The valuation of the investment portfolio includes those properties which were
completed during the year. These properties were revalued resulting in a
revaluation surplus over their cost of £415.4 million. For those properties
held throughout the year the carrying value reduced from £3,268.1 million at 30
June 2002 to £3,006.3 million at 30 June 2003, a reduction of £263.6 net of
additions and adjustments for UITF 28, or 8.1%, of which £87.5 million arose in
the six months to June 2003. The net revaluation surplus of £151.8 million has
been taken to the revaluation reserve and of this amount £139.8 million arose in
the six months to 30 June 2003.
As well as valuing the investment properties, FPDSavills or CB Richard Ellis
have valued all properties under construction, comprising those properties set
out in the table above. The Market Value of properties under construction at 30
June 2003 was £1,336.0 million in comparison with a carrying value for accounts
purposes of £909.2 million. In valuing the properties under construction, the
valuers have allowed for estimated costs to complete, including fit-out. In
addition they have allowed for letting, marketing and financing costs.
As regards properties held for development, the valuers have provided a joint
opinion as at 30 June 2003 that the Market Value was £245.0 million in
comparison with a carrying value for accounts purposes of £223.8 million. In
valuing the properties held for development, the valuers have allowed for
estimated costs to complete, including an allowance for fit-out. In addition
they have allowed for letting, marketing and financing costs. The Market Value
of £245.0 million represents a reduction of 43.8% excluding additions from that
at 30 June 2002, which reflects a reduction in assumed rental growth, a longer
development horizon and consequently a larger allowance for developer's profit.
Of the reduction in the year of £190.9 million, after additions, £56.2 million
arose in the six months to 30 June 2003.
After additions in the year to 30 June 2003, the valuation of the property
portfolio on the basis of Market Value reduced by £553.8 million to £5,811.5
million (8.7%). Of the reduction in the year £126.2 million, (2.1%), arose in
the six months to 30 June 2003.
There are a number of properties which are subject to sub-let options. These
options, whether exercised or not, are taken into account in the valuations
summarised in the table above.
At the same time as providing their joint opinion of the Market Value of
properties under construction or held for development, the valuers were also
instructed to give their joint opinion of the present value of the Net
Realisable Value of such properties. Net Realisable Value is defined in SSAP 9
(Stocks and Long-term Contracts) as 'the actual or estimated selling price (net
of trade but before settlement discounts) less: (a) all further costs to
completion; and (b) all costs to be incurred in marketing, selling and
distributing.' This same definition of Net Realisable Value is reproduced in
UKPS 1.14 of the RICS 'Standards of Trading Stock'. The Net Realisable Value of
the group's properties under construction and properties held for development
comprises an assessment of the total value to the group, arising from owning and
developing those properties, being the aggregate of:
(a) the Market Value of the land;
(b) developer's profit;
(c) the effect on value of Enterprise Zone Allowances ('EZAs'); and
(d) finance holding costs on the site value (and other minor items) arising
from the fact that the land is already in the ownership of the group.
OPERATING AND FINANCIAL REVIEW (Continued)
Thus, Net Realisable Value allows consideration to be given to the enhancement
in value to the group arising from (b), (c) and (d) which do not form part of
Market Value in the properties' existing state.
The approach adopted by the valuers in arriving at the present value of the Net
Realisable Value at 30 June 2003 is consistent with that adopted for the
previous year end. In summary this involves the following six steps:
Step One - Consider a phased development programme for the remaining sites on
the estate, taking into account the amount of space to be
developed and the rate of take-up.
Step Two - Estimate the completed development value, with growth, of the
buildings, excluding EZAs.
Step Three -Estimate the value enhancement resulting from EZAs.
Step Four - Estimate the cost of development, with inflation.
Step Five - Calculate the Net Realisable Value on completion of development by
deducting the cost of the development, with inflation, from the
total value with growth of the completed buildings.
Step Six - Discount the Net Realisable Value at completion back to the date
of assessment in recognition of the time cost of money, in order to
arrive at the present value of the Net Realisable Value. At 30 June
2003 the valuers adopted a discount rate of 6.15%, which represents a
notional cost of borrowing equal to 2% above the 10 year gilt rate.
This compares with a rate adopted at the previous year end of 7.15%.
On the basis outlined above the valuers' joint opinion of the present value of
the Net Realisable Value of the properties under construction at 30 June 2003
was £1,685.1 million. Their joint opinion of the present value of the Net
Realisable Value of properties held for development at that date was £620.0
million in comparison with £903.8 million at 30 June 2002, a reduction of 34.7%
after additions.
After additions in the year to 30 June 2003, the valuation of the property
portfolio on the basis of the present value of Net Realisable Value reduced by
£1,014.2 million to £6,535.6 million or 13.4%. Of the reduction in the year
£532.3 million or 7.5% arose in the six months to 30 June 2003.
OPERATING AND FINANCIAL REVIEW (Continued)
The carrying value of the group's properties for accounts purposes in comparison
with the supplementary valuations provided by the external valuers is summarised
in the table below:
30 June 2003 30 June 2002
----------------------------------------------------- ------------------------------------------------
Present Present
Market Value Market Value
Value in of Net Value in of Net
Carrying Existing Realisable Carrying Existing Realisable
Value State Value Value State Value
------------- --------------- --------------- ------------- --------------- ---------------
£m £m £m £m £m £m
Investment 4,182.8 (1) 4,230.5 (2) 4,230.5 (3) 3,268.1 (1) 3,278.8 (2) 3,278.8 (3)
properties
Properties under 909.2 1,336.0 (2) 1,685.1 936.6 1,915.1 (2) 2,586.6
construction
Properties held
for
development 223.8 245.0 620.0 (4) 178.7 390.8 903.8 (4)
------------- --------------- --------------- ------------- --------------- ---------------
Total 5,315.8 5,811.5 6,535.6 4,383.4 5,584.7 6,769.2
============= =============== =============== ============= =============== ===============
Note:
(1) The carrying value of investment properties represents Market Value less an
adjustment for UITF 28. This adjustment has not been made to the Market
Value in existing state or the Present Value of Net Realisable Value.
(2) Stated at Market Value in existing state before adjustment for UITF 28. The
UITF 28 adjustment attributable to investment properties at 30 June 2003
was £47.7 million (2002 - £10.7 million) and the adjustment attributable to
properties under construction which reached base building practical
completion subsequent to the year end was £179.0 million (2002 - £Nil).
(3) Investment properties are stated at Market Value excluding adjustment for
UITF 28 and any potential value attributable to EZAs.
(4) Interests in Heron Quays West included at Market Value of £15.0 million.
Taxation
Property development is carried out by the group's development companies each of
which is a trading company for tax purposes. The trading companies realise
development profits for tax purposes on the sale of each property either to a
group property investment company (which profit is eliminated in the
consolidated accounts) or to a third party. This profit is broadly equivalent
to the difference between the market value of the property on the date of sale
and the cost to the group of constructing the building. If the group property
development company does not sell the property immediately on completion, until
it does so the property is treated as trading stock for the purposes of its own
accounts but will be shown as an investment property in the consolidated balance
sheet, unless it is intended to sell the property to a third party when it will
be shown as trading stock.
On the transfer of the completed properties to a group investment company, the
group becomes eligible to claim EZAs. For properties held within the group, the
EZAs are available as a 100% initial allowance in the year the qualifying
expenditure is incurred by the investment company, or as a 25% writing down
allowance if claimed in subsequent accounting periods. For group investment
companies purchasing properties directly from the group property development
companies, the expenditure which qualifies for EZAs is based on the property's
market value at the time of its transfer to the group property investment
company, less a disallowance for the value of land and other non-qualifying
expenditure. EZAs can be claimed by the group, when required, to shelter
taxable profits arising including trading profits in the property development
companies on the transfer of completed buildings once the accumulated trading
losses have been fully utilised. The group may claim any remaining available
EZAs to shelter future operating profits when necessary.
OPERATING AND FINANCIAL REVIEW (Continued)
In arriving at a market value of the properties in the consolidated balance
sheet, the value of all completed properties is included in Investment
Properties. This market value, summarised in the table in the property
portfolio section of the Operating and Financial Review, ignores any potential
value attributable to EZAs. The group also instructed its valuers to assess the
market values of the properties inclusive of EZAs and has been advised that the
increase in the market value of the group's properties attributable to EZAs is
in the region of £525.0 million. This increase represents the valuers'
assessment of the additional amount that a third party purchaser would pay for
the property recognising that a purchaser would pay more for a building that
attracts EZAs compared to a building that does not. However, this amount does
not reflect the value of the EZAs to the group for two reasons.
Firstly, a disposal of any property may trigger a clawback of any EZAs
previously claimed by the group which would generate a tax liability. (A
deferred tax liability has been provided in respect of this and is disclosed in
Note 17).
Secondly, if the group were to utilise the EZAs available by way of internal
sales of properties, claims for EZAs would be made to shelter the group's
taxable profits and thereby mitigate the payment of corporation tax. The cash
value of the EZAs to the group would then be by reference to the net present
value of the tax savings. The claiming of EZAs will give rise to a deferred
tax liability and so result in no net tax benefit being recognised in the profit
and loss account.
In arriving at the market value inclusive of the value of EZAs, the group
provided the valuers with the quantum of EZAs which it expects to be available
on all properties that are completed and held on investment account for tax
purposes. The Inland Revenue have not yet agreed the quantum of the allowances
in all instances as the EZA claims are still in the process of agreement in the
ordinary course of dealing with the group's corporation tax affairs. For
completed and partly completed properties held on trading account for tax
purposes, the valuers made their own assessment of the quantum of EZAs which
would be available thereon after making an appropriate disallowance for the
value of land and other non-qualifying expenditure.
In the 2003 budget the Chancellor gave full stamp duty relief on properties in
defined "disadvantaged areas". This relief covers all of the properties held by
the group, regardless of value, and consequently the allowance for purchaser's
costs in the valuations has been reduced from 5.75% to 1.75% to take account of
this relief. This concession required approval from the European Commission as
State Aid and is to be reviewed in 2006.
OPERATING AND FINANCIAL REVIEW (Continued)
If the group were to dispose of its property portfolio at the Market Value
disclosed in this Operating and Financial Review, (which excludes any value
attributable to EZAs), a tax liability of £258.1 million would arise after
taking account of available losses and provisions. This amount includes tax on
trading profits and capital gains that would arise on sale of properties under
construction and properties held for development, including land interests. It
does not reflect any amount in relation to capital allowance balancing charges.
The maximum reversal of allowances would be £292.1 million. Deferred tax has
been properly provided in respect of this liability and is a component of the
£85.4 million deferred tax in respect of accelerated capital allowances shown in
Note 17 to the preliminary announcement. The potential tax liability comprises
corporation tax on chargeable gains of £45.5 million and corporation tax on
development surpluses of £212.6 million. Capital losses have reduced the
corporation tax on chargeable gains by £172.8 million and revenue losses have
reduced tax on development surpluses by £207.7 million. In line with FRS 19,
the benefit of these losses has not been recognised through the creation of a
deferred tax asset in the balance sheet.
The total potential tax liability of £258.1 million differs from that in Note 17
because that note relates solely to buildings that are treated as investment
properties for consolidated accounts purposes which have been recognised in the
balance sheet at their Market Value.
Operating results
In the following review of operating results, references to 2003 and 2002 should
be read as references to the years ended 30 June 2003 and 30 June 2002
respectively.
The group's turnover is generated primarily by the rents and service charges
earned from its property interests at Canary Wharf. Turnover increased from
£206.8 million in 2002 to £250.3 million in 2003, an increase of £43.5 million
or 21.0%. The impact of UITF 28 was to increase rental income by £15.8 million
in 2003 (2002 - £15.5 million). Excluding the impact of UITF 28, rental income
increased from £149.1 million to £182.6 million, an increase of 22.5%. This was
primarily attributable to the expiry of rent free or rent reduced periods and
the commencement of rent on recently completed properties. Service charge
income increased from £32.8 million to £38.0 million, an increase of £5.2
million or 15.9%, due primarily to the increased level of occupancy on the
estate. Miscellaneous income, comprising ground rents, insurance recoveries
and tenant service income increased from £9.4 million to £13.9 million,
reflecting the provision of tenant specific services (outside of the standard
service charge) on the estate and the recovery of the increased cost of
insurance cover.
Lease incentives include rent-free periods and other incentives given to lessees
on entering into lease arrangements. Under UITF 28, the aggregate cost of lease
incentives is recognised as an adjustment to rental income, allocated evenly
over the lease term or the term to the first market rent review if earlier. The
cost of other lease incentives is included within prepayments and spread on a
straight line basis over a similar period. Accordingly the external valuation
of investment properties is reduced for these incentives.
OPERATING AND FINANCIAL REVIEW (Continued)
The effects of UITF 28 are summarised below:
Year ended Year ended
30 June 2003 30 June 2002
£m £m
------------------- ---------------------
Profit and loss account:
Increase in rental income 15.8 15.5
================== =====================
At 30 June At 30 June
2003 2002
£m £m
------------------- ---------------------
Balance sheet:
Decrease in investment properties (net of
amortisation in the year of £7.7 million) (47.7) (10.7)
Increase in prepayments and accrued income 265.7 26.2
Increase in provisions (150.8) -
Increase in accruals (28.2) -
================== =====================
Rents payable and property management costs increased from £39.2 million to
£50.4 million, an increase of £11.2 million or 28.6%, due primarily to the
increase in occupancy on the estate and the increased insurance costs. After
allowing for service charge and other recoveries included within turnover, there
was a full service charge recovery for the year ended 30 June 2003.
Gross profits increased from £167.6 million in 2002 to £199.9 million in 2003,
an increase of £32.3 million or 19.3% over the previous year, attributable to
the increase in rental income.
Administrative expenses for 2003 were £36.4 million excluding pre-operating
profit exceptional items in comparison with £38.1 million for the previous year.
During the year, a charge of £2.8 million was also incurred in writing down
the carrying value of the group's investment in own shares which has been
treated as a pre-operating profit exceptional item.
The directors estimate that administrative expenses of £26.9 million (or
approximately 74% of the total for 2003) were attributable to the group's
corporate and property investment activities. For the previous year
administrative expenses attributable to these activities were estimated at £23.2
million, or 61% of the total.
The remainder of the administrative expenses are attributable to unallocated
overheads associated with the group's development programme which are expensed
to the profit and loss account (as opposed to costs directly attributable to and
capitalised as part of the cost of construction of particular buildings). For
2003 such unallocated development overheads totalled £9.5 million representing
approximately 26% of administrative expenses. For the previous year development
overheads totalled £14.9 million or 39% of the total. The reduction in
development overheads over the previous year is largely attributable to letting
costs. The current year included letting costs of £0.1 million whereas for the
previous year such costs totalled £5.3 million. The directors consider that
these development overheads will in due course reduce to an insignificant level
upon completion of the development programme.
OPERATING AND FINANCIAL REVIEW (Continued)
For 2003 operating profit was £162.4 million, in comparison with a profit of
£299.7 million for 2002. Included within the total for 2002 was a net profit of
£169.5 million on the disposal of 8 Canada Square which was sold under the terms
of an agreement with HSBC entered into in October 1998. Before exceptional
items the operating profit for the year of £165.2 million compares with £130.2
million for the previous year, an increase of £35.0 million or 26.9%. The
improvement in underlying profit earned by the group is primarily attributable
to the increase in turnover.
Net interest payable increased from £107.6 million in 2002 to £178.5 million in
2003. The increase in net interest payable was attributable to the
securitisations completed in February 2002 and October 2002, a refinancing of 20
Canada Square in March 2003 and the group's return of capital programme. The
long term financing of the ten properties which were added to the group's
securitisation vehicles ahead of completion enabled the return of capital
programme to be accelerated whilst also providing funding for the completion of
these properties.
The loss on ordinary activities after interest for the year was £13.2 million,
in comparison with a profit of £203.1 million for 2002. The profit for 2002
included the net profit on the sale of 8 Canada Square of £169.5 million and
deferred consideration on disposal of certain subsidiary undertakings in 1996 of
£13.4 million, partially offset by costs associated with the group's
restructuring. The result for the current year included a further £2.9 million
of deferred consideration on disposal of the subsidiary undertakings in 1996 and
a charge of £2.8 million incurred in writing down the carrying value of the
group's investment in own shares. Excluding these exceptional items the loss on
ordinary activities before tax for the year of £13.3 million compares with a
profit of £22.6 million for the previous year, a decrease of £35.9 million as a
result of higher interest payable.
The loss on ordinary activities before tax for the six months to 30 June 2003
was £18.2 million. This compares with a profit of £5.0 million for the six
months to 31 December 2002. Operating profit excluding exceptional items
increased in the second half of the year from £81.2 million to £84.0 million,
but this was offset by a higher net interest charge.
For 2003 and 2002 taxation was entirely attributable to deferred tax following
the adoption of FRS 19. This accounting standard has no effect on cashflow.
Moreover, the directors believe it does not reflect the actual tax which may
become payable in the future absent any property disposals.
The loss on ordinary activities after tax for the year ended 30 June 2003 was
£9.5 million in comparison with a profit of £193.0 million for the previous
year, a reduction of £202.5 million, of which £180.4 million was attributable to
the exceptional items referred to above.
On 22 October 2002 the directors declared a special dividend of 64.27p per share
totalling £372.8 million, which was paid on 29 November 2002 as part of the
ongoing return of capital programme.
OPERATING AND FINANCIAL REVIEW (Continued)
Balance Sheet
On the basis of the group's statutory balance sheet, which does not reflect any
revaluation of properties under construction or held for development, net asset
value reduced by £340.9 million from £1,860.3 million at 30 June 2002 to
£1,519.4 million at 30 June 2003. The reduction in net asset value was largely
attributable to the loss of £9.5 million and return of capital during the year,
comprising the special dividend of £372.8 million and share buy-backs of £108.1
million. This was partially offset by a revaluation surplus of £151.8 million.
Net asset value per share at 30 June 2003 was £2.60 in comparison with £2.38 at
31 December 2002, the increase of £0.22 per share being attributable to the
surplus on revaluation of completed investment properties at 30 June 2003 of
£139.8 million, equivalent to £0.24 per share. At 30 June 2002 net asset value
per share was £3.06. The reduction of £0.46 per share which arose in the year
was attributable to the loss for the year of £9.5 million and the special
dividend of £372.8 million. This was partially offset by the revaluation
surplus in the year of £151.8 million and the reduction in the number of shares
from 608 million to 585 million which served to offset the impact of share
buy-backs in the year.
Allowing for the revaluation of properties under construction or held for
development to Market Value or the present value of Net Realisable Value
summarised above, net asset value per share at 30 June 2003 was as set out in
the table below:
Market Value Net Realisable Value
-------------------------------------- ------------------------------------
At At At At
30 June 30 June 30 June 30 June
2003 2002 2003 2002
---------------- ---------------- -------------- ----------------
£m £m £m £m
Net assets per statutory balance
sheet 1,519.4 1,860.3 1,519.4 1,860.3
Revaluation of property portfolio:
Properties under construction 426.8 (1) 978.5 (1) 775.9 (1) 1,650.0 (1)
Properties held for development 21.2 212.1 396.2 725.1
---------------- ---------------- -------------- ----------------
1,967.4 3,050.9 2,691.5 4,235.4
Add: Discounted deferred tax
provision 47.9 51.6 47.9 51.6
---------------- ---------------- -------------- ----------------
Adjusted net assets 2,015.3 3,102.5 2,739.4 4,287.0
================ ================ ============== ================
Adjusted net assets per share (2) £3.44 £5.10 £4.68 £7.05
Fully diluted adjusted net assets
per share (3) £3.44 £5.01 £4.58 £6.83
Notes:
(1) Stated at Market Value in existing state and Net Realisable Value in
existing state excluding adjustment for UITF 28 on properties which reached
base building practical completion subsequent to the year end of £179.0
million (30 June 2002 - £Nil).
(2) Adjusted net assets per share has been calculated by reference to the
closing number of shares of 585.0 million (30 June 2002 - 608.3 million).
(3) The fully diluted net assets per share calculation increases adjusted net
assets by £176.9 million (30 June 2002 - £169.2 million) and the number of
shares by 52.2 million (30 June 2002 - 44.6 million) reflecting the assumed
exercise of all outstanding share options and warrants.
OPERATING AND FINANCIAL REVIEW (Continued)
The reduction in adjusted net assets per share on a Market Value basis from
£5.10 at 30 June 2002 to £3.44 at 30 June 2003 is partly attributable to the
special dividend of £372.8 million, equivalent to 64.27p per share. In
addition, the reduction in value of the property portfolio on a Market Value
basis, excluding additions, was £553.8 million or £0.95 per share based on the
closing number of shares. At 31 December 2002 net assets per share on the
Market Value basis were £3.70 and the reduction of £0.26 per share to 30 June
2003 was primarily attributable to a reduction in the Market Value of the
portfolio of £126.2 million or £0.22 per share.
The reduction in adjusted net assets per share on a Net Realisable Value basis
from £7.05 at 30 June 2002 to £4.68 at 30 June 2003 is also partly attributable
to the special dividend. The reduction in the value of the property portfolio
on a Net Realisable Value basis, after excluding additions, was £1,014.2 million
or £1.73 per share based on the closing number of shares.
In arriving at adjusted net asset value per share, the provision recognised in
accordance with FRS 19 has been added back. FRS 19 requires, inter alia,
provision for deferred tax on capital allowances claimed notwithstanding that no
tax would become payable in respect of the profits which would be realised
unless the related properties were disposed of. In contrast no provision is
required for the tax which would become payable if the group were to dispose of
its properties at their revalued amount. This inconsistency in the standard has
therefore been reversed in calculating the adjusted net asset value per share.
Borrowings
In October 2002 a further tap issue on the June 2000 (second) securitisation was
completed, involving the issue of £510 million of AAA and AA rated notes. The
proceeds were used to fund a special dividend totalling £372.8 million (see Note
7) and in addition £39.8 million was set aside in certain reserves required to
fund the completion of the three additional properties included in the tap
issue. The combined pool of notes for the second securitisation is now £3,117.0
million of which £3,027.0 million (97%) is rated AAA or AA. The balance of £90
million, rated A or BBB, has been repurchased by the group but will be available
for resale following completion of the buildings on Heron Quays.
During the year ended 30 June 2003, the group reduced the amount available for
drawdown under its main construction loan facility from £1 billion to £750
million. At 30 June 2003 £76.8 million of a £407 million commitment had been
drawn down as funding for construction of 1 Churchill Place leaving a further
£343 million available to fund future construction in the event of a pre-let.
During the year, £48.1 million was drawn down under a separate £125 million loan
facility used to fund construction of 20 Canada Square, bringing the total drawn
down on this facility to £82.3 million. In March 2003, upon completion of the
building, a group company entered into a £225 million loan secured against 20
Canada Square, the proceeds of which were used in part to repay the balance on
the construction loan Note 16 (9). Interest on the new loan is charged at LIBOR
plus 1.125%. The loan has been fully hedged at 6.056% and is repayable in
instalments from April 2008 with a financial maturity in January 2025.
OPERATING AND FINANCIAL REVIEW (Continued)
In December 2002, the group entered into a facility to borrow up to £605 million
secured against 1 Churchill Place, a property that is currently under
construction. The facility may be drawn down when the property has reached
practical completion, which is expected in July 2004, and the related
construction facility has been repaid. The amount which may be drawn is
dependent on the amortisation period chosen. A minimum of £529 million may be
drawn on the basis of paying interest only for the first ten years of the
facility whereas drawings can be increased to £605 million on a fully amortising
basis. The loan is currently hedged to reflect the £529 million minimum drawing
resulting in a hedged interest rate of 5.82% and a final maturity in July 2034.
If a shorter amortisation period is chosen, the increased borrowings will
require additional hedging.
Also in December 2002 the group entered into a facility to borrow £85.0 million
which was drawn down in January 2003 to fund the redemption of the D Notes (BBB
rated) of the December 1997 securitisation. The term of the facility is 18
months from first drawing and the loan carries an interest charge of LIBOR +
2.1%. The group has entered into an interest rate collar arrangement which
serves to cap the portion linked to LIBOR to 5.5%. The floor is set at 3.39%.
An analysis of net debt is given below. The increase in gross borrowings from
£3,950.0 million to £4,710.0 million reflects the £510 million October 2002 tap
issue of the second securitisation, and drawings under the £750 million
construction loan facility, the drawdown of the £225 million loan facility
secured against 20 Canada Square, offset by the repayment of the £125 million
construction loan facility. The increase in gross borrowings was accompanied by
a reduction in cash and term deposits from £1,327.2 million to £1,029.1 million.
At 30 June 2003 the group's weighted average cost of debt was 6.0% (2002 -
6.3%).
The group expects initially to fund its future construction activities either
from existing resources or from its construction facility.
At 30 June 2003 net debt (after allowing for cash in hand and cash collateral)
stood at £3,680.9 million, up from £2,622.8 million at the previous year end,
comprising:
At 30 June At 30 June
2003 2002
----------------- ----------------
£m £m
Securitised debt 3,741.4 3,317.9
Loans 385.6 55.1
Finance lease obligations 583.0 577.0
----------------- ----------------
Total borrowings 4,710.0 3,950.0
Less: cash collateral for borrowings (751.1) (899.8)
Less: other cash collateral excluding prepayments (1.2) (5.9)
----------------- ----------------
3,957.7 3,044.3
Less: cash deposits (276.8) (421.5)
----------------- ----------------
Net debt 3,680.9 2,622.8
================= ================
The increase in net debt of £1,058.1 million was primarily attributable to
development costs totalling £503.4 million (including land acquisitions), the
special dividend of £372.8 million and share buy-backs of £108.1 million.
OPERATING AND FINANCIAL REVIEW (Continued)
Cashflow
Net cashflow from operating activities increased from £81.2 million in 2002 to
£189.4 million in 2003, an increase of £108.2 million, driven primarily by the
increase in rental income and movements in working capital.
Capital expenditure reduced from £987.2 million in 2002 to £503.7 million in
2003. Expenditure in 2003 included development expenditure of £454.1 million
and payment for land and density purchases of £49.3 million whilst expenditure
in 2002 included development expenditure of £957.2 million and land and density
payments of £28.0 million.
Financing cashflows reduced from £902.5 million in 2002 to £644.7 million in
2003, a reduction of £257.8 million. In 2003, financing cashflows reflected the
£510 million tap of the group's second securitisation, the £225 million
refinancing of 20 Canada Square and construction loan drawings. This was
partially offset by repayment of the construction loan facility on 20 Canada
Square and share buy-backs of £108.1 million. In 2002, financing cashflows
reflected the second tap of the group's second securitisation of £1,340.1
million. This was partially offset by repayments under the group's construction
loan facilities of £382.8 million and share buy-backs of £392.4 million. The
increase in borrowings has also impacted the net cash expended on debt service
which rose from £173.6 million in 2002 to £258.6 million in 2003.
Segmental reporting
The financial statements incorporate disclosure concerning the results and net
assets of two segments. The properties in each segment comprise:
Canary I - Those properties in the group's ownership within the original Canary
Wharf estate identified at the time of the group's flotation,
including the benefit of the agreement with British Waterways
Board concerning the removal of the density cap. The status of
these properties at 30 June 2003 was as follows:
Net Internal Area
million
sq ft %
----------------------- ------------
Completed and let (subject to options) 7.6 58.0
Completed and available to let 0.9 6.9
Under construction and pre-let (subject to options) 3.0 22.9
Under construction and available to let 0.1 0.8
Uncommitted development sites 1.5 11.4
----------------------- ------------
Total owned by group 13.1 100.0
Owned by third parties 2.5 ============
-----------------------
Canary Wharf estate following removal of density cap 15.6
=======================
OPERATING AND FINANCIAL REVIEW (Continued)
Canary II - Those properties outside of the original estate which, at 30 June
2003, and subject to obtaining planning consent to increase the
approved density, comprised:
Net Internal Area
million
sq ft
-----------------------
Uncommitted (based on existing planning permission):
North Quay 1.4
Riverside South 0.7
-----------------------
2.1
Applications for increased planning density 2.1
-----------------------
Potential future development (assuming successful
application to increase planning density) 4.2
=======================
The total excludes interests in land at Heron Quays West which as a site is in
the process of being assembled.
Taking the valuations set out earlier in this section, the net asset value
attributable to each segment at 30 June 2003 was as follows:
Canary I Canary II
---------------------------------------------------------- ---------------------------------------
Book Book
Value MV NRV Value MV NRV
£m £m £m £m £m £m
--------------- --------------- ------------- ---------- ---------- ------------
Investment properties 4,182.8(1) 4,230.5 (2) 4,230.5(3) - - -
Properties under 909.2 1,336.0 (2) 1,685.1 - - -
construction
Properties held for 72.0 105.0 325.0 151.8 140.0 295.0 (4)
development
--------------- --------------- ------------- ---------- ---------- ------------
5,164.0 5,671.5 6,240.6 151.8 140.0 295.0
Other net liabilities
prior to funding (114.5) (162.2) (162.2) (1.0) (1.0) (1.0)
--------------- --------------- ------------- ---------- ---------- ------------
Net assets prior to 5,049.5 5,509.3 6,078.4 150.8 139.0 294.0
funding
Net debt (external) (3,680.9) (3,680.9) (3,680.9) - - -
Intragroup funding 150.8 150.8 150.8 (150.8) (150.8) (150.8)
--------------- --------------- ------------- ---------- ---------- ------------
Net assets/(liabilities) 1,519.4 1,979.2 2,548.3 - (11.8) 143.2
=============== =============== ============= ========== ========== ============
Notes
(1) The carrying value of investment properties is Market Value less an
adjustment for UITF 28. This adjustment has not been made to the Market
Value and Present Value of Net Realisable Value in the above table.
(2) Stated at Market Value in Existing State before adjustment for UITF 28. The
UITF 28 adjustment attributable to investment properties at 30 June 2003
was £47.7 million (2002 - £10.7 million) and the adjustment attributable to
properties under construction which reached base building practical
completion subsequent to the year end was £179.0 million (2002 - £Nil).
(3) Investment properties are stated at Market Value which excludes any
adjustment for UITF 28 and potential value attributable to EZAs.
(4) Interests in Heron Quays West included at Market Value of £15.0 million.
The segmental analysis of the group's profit and loss account and balance sheet
prior to revaluation of properties under construction and held for development
for 2003 is set out in Note 2.
For 2003, Canary I recorded a loss before tax of £8.7 million (2002 - profit
of £207.7 million) including exceptional items giving rise to a net gain of
£0.1 million (2002 - gain of £180.5 million).
OPERATING AND FINANCIAL REVIEW (Continued)
Canary II recorded a loss before tax of £4.5 million for 2003 (2002 - £4.6
million), attributable entirely to administrative expenses associated with
working up proposals for its development sites. The directors estimate that of
the total development overheads of £9.5 million for 2003 (2002 - £14.9
million) £5.0 million was attributable to Canary I (2002 - £10.3 million) and
the remaining £4.5 million was attributable to Canary II (2002 - £4.6
million). The directors consider that development overheads attributable to
Canary I will in due course reduce to an insignificant level upon completion of
its development programme.
Throughout 2002 and 2003 Canary II was funded by way of an interest free
inter-company loan.
CANARY WHARF GROUP PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30 JUNE 2003
Year ended Year ended
30 June 30 June
Notes 2003 2002
---------- ------------------ ------------------
£m £m
Turnover - rents and service charges 2 250.3 206.8
Cost of sales
rents and property management costs (50.4) (39.2)
------------------ ------------------
GROSS PROFIT 199.9 167.6
Administrative expenses
- before exceptional item (36.4) (38.1)
- exceptional item: amortisation of investment
in own shares 12 (2.8) -
------------------ ------------------
(39.2) (38.1)
Other operating income
- before exceptional item 1.7 0.7
- exceptional item: net profit on sale of
completed property 10 - 169.5
------------------ ------------------
OPERATING PROFIT 3 162.4 299.7
Exceptional items:
- deferred consideration on disposal of
subsidiary undertaking 12 2.9 13.4
- costs of group restructuring 1 - (2.4)
Interest receivable 4 45.0 48.8
Interest payable 5 (223.5) (156.4)
------------------ ------------------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAX (13.2) 203.1
Tax on (loss)/profit on ordinary activities 6 3.7 (10.1)
------------------ ------------------
(LOSS)/PROFIT ON ORDINARY ACTIVITIES AFTER TAX 19 (9.5) 193.0
Dividend 7 (372.8) -
------------------ ------------------
TRANSFERRED TO RESERVES 19 (382.3) 193.0
================== ==================
Basic earnings per share 9 (1.6)p 30.0p
Diluted earnings per share 9 (1.6)p 29.7p
Before exceptional items:
Basic earnings per share 9 (1.6)p 1.9p
Diluted earnings per share 9 (1.6)p 1.9p
The above results relate to the continuing activities of the group.
CANARY WHARF GROUP PLC
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEAR ENDED
30 JUNE 2003
Year ended Year ended
30 June 30 June
Notes 2003 2002
-------- ---------------- ---------------
£m £m
(Loss)/profit for the financial year (9.5) 193.0
Unrealised surplus on revaluation of investment
properties 10 151.8 458.4
---------------- ---------------
TOTAL RECOGNISED GAINS AND LOSSES RELATING TO THE YEAR 142.3 651.4
================ ===============
CANARY WHARF GROUP PLC
CONSOLIDATED BALANCE SHEET AT 30 JUNE 2003
30 June 30 June
Notes 2003 2002
--------- --------------- ------------------
£m £m
FIXED ASSETS
Investment properties 10 4,182.8 3,268.1
Properties under construction 10 909.2 936.6
Properties held for development 10 223.8 178.7
Other tangible fixed assets 11 5.1 8.1
Investments 12 12.8 24.0
--------------- ------------------
5,333.7 4,415.5
--------------- ------------------
CURRENT ASSETS
Debtors: due in more than one year 13 265.7 26.2
Debtors: due within one year 13 141.4 355.2
Cash at bank and in hand 14 1,029.1 1,327.2
--------------- ------------------
1,436.2 1,708.6
CREDITORS: Amounts falling due within one year 15 (427.7) (341.7)
--------------- ------------------
NET CURRENT ASSETS 1,008.5 1,366.9
--------------- ------------------
TOTAL ASSETS LESS CURRENT LIABILITIES 6,342.2 5,782.4
CREDITORS: Amounts falling due after more than one year 16 (4,624.1) (3,870.5)
Provisions for liabilities and charges 17 (198.7) (51.6)
--------------- ------------------
NET ASSETS 1,519.4 1,860.3
=============== =================
CAPITAL AND RESERVES
Called up share capital 18 5.9 6.1
Reserves:
- Share premium 19 4.1 2.6
- Revaluation reserve 19 1,665.7 1,513.9
- Capital redemption reserve 19 0.7 0.4
- Special reserve 19 264.8 637.6
- Profit and loss account 19 (421.8) (300.3)
--------------- ------------------
SHAREHOLDERS' FUNDS - EQUITY 20 1,519.4 1,860.3
=============== =================
CANARY WHARF GROUP PLC
CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2003
Year ended Year ended
Notes 30 June 30 June
2003 2002
-------- ----------------- ------------------
£m £m
NET CASH INFLOW FROM
OPERATING ACTIVITIES 22 189.4 81.2
---------------- ------------------
Returns on investments and servicing of finance 23 (258.6) (173.6)
Capital expenditure and financial investment 23 (500.8) (941.3)
Equity dividend paid (372.8) -
---------------- ------------------
(1,132.2) (1,114.9)
---------------- ------------------
Cash outflow before management of liquid resources
and financing (942.8) (1,033.7)
Management of liquid resources 23 153.4 (150.3)
Financing 23 644.7 902.5
---------------- ------------------
DECREASE IN CASH IN THE YEAR 24 (144.7) (281.5)
================ ==================
The above cash flows relate to the continuing activities of the group.
This information is provided by RNS
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