Berkeley Group Regulatory News (BKG)

29 Jun 2007 07:02

Berkeley Group Holdings (The) PLC29 June 2007 The Berkeley Group Holdings plc PRESS RELEASE 29TH JUNE 2007 PRELIMINARY RESULTS ANNOUNCEMENT £102.0 MILLION OF CASH GENERATED - BEFORE £241.6 MILLION 2006 B SHARE REDEMPTION LAND BANK STRENGTHENED TO 30,128 PLOTS THROUGH ACQUISITION OF ST JAMES, NEW ST EDWARD JV AND LOCAL AUTHORITY SCHEMES STRENGTH OF FORWARD SALES ADDS TO VISIBILITY OF CASH POSITION PROVIDING CONFI DENCE TO SEEK APPROVAL TO ACCELERATE THE PAYMENT OF THE REMAINING B SHARES AND TO ANNOUNCE NEXT PHASE OF STRATEGY The Berkeley Group Holdings plc ("Berkeley" or "the Group") - the urbanregenerator and residential property developer - announces its full-year resultsfor the year ended 30th April 2007. Highlights of the results include: • Return of Capital £241.6 million (£2 per 2006 B share) returned in January 2007 Remaining 2008 and 2010 B shares to be accelerated, with 2008 B share (£2 per share) payment forecast for January 2008, subject to shareholder approval • Net Cash £81.0 million net cash (2006: £220.6 million) • Land Holdings 30,128 plots - Up from 23,819 at last year-end • Forward Sales £936.3 million - Up £143.0 million from £793.3 million last time (including St James at acquisition) April 2007 April 2006 £'million £'million (unaudited) ----------- -----------Continuing operationsGroup Revenue 918.4 917.9 +0.1% ----------- -----------Operating Profit 177.1 160.9 +10.1%Net Finance Income/(Costs) 4.2 (7.4)Joint Ventures (after tax) 6.8 11.6 -41.4% ----------- -----------Profit Before Tax 188.1 165.1 +13.9%Tax (52.6) (43.7) ----------- -----------Profit After Tax 135.5 121.4 +11.6%Profit from Discontinued Operations - 80.8 ----------- -----------Profit for the Financial Period 135.5 202.2 =========== =========== EPS - Basic 112.6p 168.4pEPS - Continuing 112.6p 101.1p +11.4%ROCE (excluding profit on disposal) 28.1% 24.0%Net Asset Value Per Share 649.0p 697.0p -6.9% Commenting on the results, Managing Director, A. W. Pidgley said: "I am delighted that, at the same time as announcing these exceptional results,I can also announce the Board's intention, subject to shareholder approval, toaccelerate the payment to shareholders of the remaining B shares, and ourproposals for the next phase of Berkeley's strategy. Berkeley has once again benefited from having a very clear strategy that alignsthe interests of management and shareholders and brings a welcome simplicity ofapproach to a complex and cyclical business. As a consequence we have producedanother set of balanced results, generating free cash flow and growing both ourunrivalled land bank and forward sales position, as opposed to concentratingsolely on the income statement. Corporately, 2006/07 has been an active year. It began with the creation of StEdward Homes, a joint venture with Prudential plc, which was followed by ouracquisition of the 50% of St James we did not already own from our originaljoint venture partner, RWE Thames Water plc. The end of the year saw theestablishment of three new joint ventures with Saad Investments Company Limited.On their own, each one of these transactions demonstrates our ability to forminnovative partnerships for the future. Taken together, they indicate theconfidence and pace with which we are facing that future. The achievements of the year are a tribute to the commitment and passion of allour people and in turn a source of great pride for the management of thebusiness. Our people are what really keep Berkeley ahead, and, on behalf of theBoard and shareholders, I would like to thank each and every one of our peoplefor their outstanding contribution this year. I must also mention Roger Lewis who, after 16 years with Berkeley, the lasteight as Chairman, today announces his retirement from the Board. During thistime, Roger has brought to Berkeley a unique blend of industry knowledge,balance and style. No one person will be able to replace every aspect of hiscontribution, and he will be greatly missed. We are therefore delighted that hehas agreed to continue working with Berkeley in a consulting capacity for afurther 12 months." Roger Lewis, Chairman said: "The housing market in London and the South-East has been favourable forBerkeley over the last year. Of course, there remain many challenges within ourindustry - not least those associated with the planning process - and we welcomethe recent announcement that the Office of Fair Trading is to conduct a reviewinto this complex area and, in parallel, that of customer satisfaction. Anyinitiative aimed at improving the supply and quality of housing is one we fullysupport. During the year Berkeley has continued to acquire new sites on a very selectivebasis in what remains a competitive market and we were delighted to exchangedevelopment agreements with the London Boroughs of Hackney and Greenwich for theregeneration of their estates at Woodberry Down and Kidbrooke, respectively. Inaddition we secured a number of new or additional planning consents, notably atThe Warren in Woolwich, Battersea Reach and St George Wharf in South London,Caspian Wharf in Tower Hamlets, Queen Mary's Hospital in Roehampton, Fleet inHampshire and North Bersted in West Sussex. After 16 years with Berkeley, the last eight as Chairman, I have decided thatthis is the right time for me to retire from the Board and this will beeffective at the end of July. It has long been my intention to retire onreaching 60 and with the business in such good shape I cannot imagine a moreappropriate time. It has been a privilege to oversee Berkeley's development andbe part of a dynamic first class executive team. I am delighted that Victoria Mitchell, currently a non-executive director ofBerkeley and Chairman of the Remuneration Committee, has accepted the positionof Non-Executive Chairman to succeed me and I have no doubt that she will be agreat success in her new role." Scheme of Arrangement and 2007 Strategic Review In June 2004 Berkeley announced its proposals to return £12 per share toshareholders in conjunction with its future strategy to focus on its urbanregeneration business. This was approved by shareholders and effected by a Courtapproved Scheme of Arrangement in October 2004 which created four tranches of Bshares. To date, and in line with the original payment schedule, £7 per sharehas been returned to shareholders with the remaining £2 and £3 per sharescheduled for payment in January 2009 and 2011 respectively. Since 1st May 2004, the time of the strategic review that led to the Scheme ofArrangement, Berkeley has generated some £820 million of cash before payments toshareholders, demonstrating the underlying strength of the Group and its abilityto generate cash and meet its strategic objectives. This, coupled with thestrong forward sales position, has provided the Board with the opportunity toreview the timing of the remaining B share payments and consider the mostappropriate strategy for Berkeley once the B shares are paid. The conclusion ofthis review is that approval will be sought at the Annual General Meeting on 5thSeptember 2007 to accelerate the payment of the 2008 B share (£2 per share) by12 months to the beginning of January 2008 and to pay the final (2010) B shareof £3 per share at a date to be determined but no later than the originalscheduled date of January 2011. With regard to the future strategy, the Board is seeking to replicate the keyfeatures of the Scheme of Arrangement to preserve the environment in which itsentrepreneurial management team has concentrated on maximising returns toshareholders through its focus on optimising Berkeley's land holdings and cashgeneration as opposed to the income statement. This strategy is founded on theBoard's belief that the business has a natural size, and is not scaleable in thetraditional sense due to the complexities of developing and deliveringsustainable mixed-use urban regeneration schemes. Attention to detail andquality together with devoting the necessary amount of time and management toevery aspect of the development cycle for each site is the key to deliveringvalue to shareholders and creating the inspiring sustainable communities thatwe, our customers and other stakeholders demand. As a result, following the completion of the £12 per share Scheme of Arrangementpayments, the Board is proposing to make annual dividend payments at a coverratio of less than 2 times. This will ensure shareholders continue to seeimmediate benefit from the Group's strategy, while allowing the Board tomaximise short term opportunities under an unambiguous long term strategy. The Board believes that it is appropriate to consult with shareholders on theremuneration policy to bring this in line with the proposed acceleration of theremaining B shares and, looking forward, to put in place a new policy aligned tothe next phase of Berkeley's strategy. Accordingly, the Board will consult withshareholders on its proposals during July and August in advance of the AGM. Results Berkeley is delighted to announce a pre-tax profit of £188.1 million for theyear ended 30th April 2007. This is £23.0 million more than the £165.1 millionreported for the same period last year, an increase of 13.9%. Four factors have contributed to the £23.0 million increase in pre-tax profit.These are: a reduction of £7.5 million from the operating activities of theexisting Group (excluding St James); £23.7 million of operating profit earned inSt James since the acquisition of the 50% of St James not already owned on 7thNovember 2006; a reduction in joint ventures of £4.8 million (due to St Jamesonly contributing as a joint venture for the first half of the year); and apositive movement in interest of £11.6 million. A reduction in operating profitin the existing Group was anticipated in recognition of the Group's strategy tofocus more on cash generation than profit growth following the 2004 strategicreview, however, the actual reduction was less pronounced than forecast due tothe strong performance in the underlying business. Basic earnings per share from continuing operations totals 112.6 pence, anincrease of 11.4% on the 101.1 pence reported for the same period last year. Thebasic earnings per share figure of 112.6 pence compares to 168.4 pence last yearif the profit from discontinued operations of £80.8 million relating to Crosbywhich was sold to Lend Lease on 8th July 2005 is included in last year'sresults. For the year ended 30th April 2007, Berkeley reported 43% of itsprofits in the first half and 57% in the second half. A similar profile isexpected in 2007/08. Over the year, total equity has reduced by £55.6 million to £781.6 million(April 2006 - £837.2 million) and net assets per share by 48 pence (6.9%) from697 pence to 649 pence. The 48 pence reduction is due to the £241.6 million 2006B share redemption in January 2007 (200 pence), offset by the profit after taxfor the year of 112.6 pence; the revaluation reserve arising from fair valuingthe 50% of St James' net assets already owned at acquisition (16.9 pence); andfactors relating to accounting for pensions and share based payments (22.5pence). At 30th April 2007, Berkeley had net cash of £81.0 million (April 2006 - £220.6million) after generating £102.0 million of cash flow in the year before the£241.6 million 2006 B share payments in January 2007; a net reduction of £139.6million. Return on Capital Employed for the year was 28.1% compared to 24.0% last time. Berkeley held forward sales of £936.3 million at 30th April 2007. This is an 18%increase on £793.3 million, the sum of the £581.9 million reported last year bythe existing Group and £211.4 million in St James at acquisition. It has alwaysbeen Berkeley's strategy to sell homes at an early stage in the developmentcycle, often off-plan, to secure customers' commitment and ensure the qualityand certainty of future revenue and cash flow. This year's increase is due toBerkeley capitalising on favourable prevailing market conditions in London. Housing Market The housing market in Berkeley's core regions of London and the South-East hasbeen favourable over the year, driven by the feel-good factor, although thereare distinctions to draw between the two regions. The London market has beenparticularly strong for product which is built to a high quality in the rightlocation for the right price. This is principally due to London's uniquestanding as a World City and financial centre, attracting investment, jobs andfamilies. Put simply, it is a place where people want to be, and Berkeley isbuilding the sustainable communities in which our customers want to live.Outside London in the South East, the market has undoubtedly been tempered bythe four quarter per cent increases in interest rates but remains verysatisfactory. In these generally favourable market conditions Berkeley's concentration on thequality of its product, the location of its developments and its pricingstrategy, rather than the pursuit of volume growth, has created a competitiveadvantage which enables the Group to match supply and demand effectively andfully optimise returns. As a result Berkeley has secured sales reservations witha sales value 15% ahead of those achieved in the previous year and this isreflected in the strong forward sales position at 30th April 2007. As always, the outlook must be balanced with caution as concerns over theaffordability of housing, further rises in interest rates, inflationarypressures and high global stock market valuations could introduce a fragility tothe prevailing feel-good factor. There are also continuing security threats andwe must not ignore the potential impact of these on the world's economic andpolitical stability. Investors remain an important segment of Berkeley's customer profile and haveaccounted for approximately 40% of reservations in the period. This is lowerthan the 50% reported last time but remains very much in our range whichfluctuates due to market conditions, the mix of product and the phasing oflaunches on our sites. Investors are attracted by the fundamentals underpinningthe housing market in London and the South-East and the lack of alternativeinvestment opportunities. Under the Group's definition, investors range from alarge institution to a customer purchasing a second home. Sales price increases have continued to cover cost increases but there are anumber of pressure points that could impact margins adversely in the futureshould the sales environment become less favourable. While materials prices haveincreased over the year, labour prices have remained relatively stable due inpart to the supply of labour from the European Union. This stability will comeunder pressure as construction activity in London builds up towards the 2012Olympics. Perhaps most significantly, the time and costs required to achieve planningconsents continue to rise due to increasing section 106 contributions, includingaffordable housing requirements, and the complexities associated with meetingtoday's high standards of environmental and sustainable development practices.This is a concern, not only from a financial perspective as margins on newplanning consents will be impacted, but also because, in extreme examples, theconflicting demands of all stakeholders could result in schemes in which peopledo not want to live. Trading Analysis Revenue for the Group was £918.4 million (2006 - £917.9 million). This comprises£867.9 million (2006 - £890.5 million) of residential revenue, of which £44.0million was from land sales (2006 - £1.1 million), along with £50.5 million(2006 - £27.4 million) of commercial revenue. During the period, the Group sold 2,852 units at an average selling price of£285,000. This compares with 3,001 units at an average selling price of £293,000in the same period last year. At £50.5 million (2006 - £27.4 million), the Group's revenue from commercialactivities represents the disposal of commercial units on fourteen mixed-usesites. The most significant of these was the disposal of 130,000ft2 of academicspace at Brentford. Excluding joint ventures and land sales, the house-building operating margin forthe Group was 19.5% compared to 17.5% for the year ended 30th April 2006. Thisis at the top end of the 17.5% to 19.5% range (depending on mix) reported by theGroup over recent reporting periods and this reflects the favourable marketconditions during the period. Operating margins are expected to remain at thetop end of this range, or even exceed it, but clearly will depend upon marketconditions. Net operating expenses have increased by £20.9 million from £70.9 million in2005/06 to £91.8 million this year. This is due to the inclusion of St James inthe second half of the year (£9.6 million), increased costs associated withaccounting for share based payments (£7.2 million), a one-off pension charge of£1.6 million and an increase of £2.5 million in the underlying business. Thepensions charge is the net cost to Berkeley of members accepting an offer totransfer their benefits out of the Group's defined benefit pension scheme which,along with the normal annual pension scheme movements, has resulted in theretirement benefit obligation being reduced from £10.3 million at the start ofthe year to zero at 30th April 2007. Net finance income of £4.2 million reflects the positive cash position of theGroup and cash generative nature of operating activities in the year which hasseen net cash increase from £220.6 million to £322.6 million at the half yearprior to shareholder payments of £241.6 million in January reducing this to£81.0 million at 30th April 2007. Last year the Group had net finance costs of£7.4 million, reflecting an opening net debt position of £255.1 million at 1stMay 2005 and closing net cash position of £220.6 million at the end of the yearwhich benefited from the disposal of Crosby. The Group's share of post-tax results from joint ventures was £6.8 millioncompared to £11.6 million last year. This arises from the sale of 441residential units (2006 - 816 units) at an average selling price of £329,000(2005 - £372,000) by St James, our then joint venture with RWE Thames Water plc("Thames Water"). With the acquisition of the 50% of St James not already ownedduring the year, Berkeley's share of post-tax results from joint ventures willbe negligible in 2007/08. St James Group On 7th November 2006 Berkeley completed the acquisition of the 50% of St Jamesthat it did not already own from Thames Water for £97.5 million, includinggoodwill of £17.2 million. On completion, St James paid Thames Water a further £93.5 million to acceleratethe settlement of outstanding land creditors and to acquire six previouslyidentified and negotiated sites. Including the six new sites, which containapproximately 700 plots, St James' land bank at acquisition totalled some 5,000plots on 23 sites. In what was widely regarded as a visionary approach to land development, StJames was established as a 50:50 joint venture company by Thames Water andBerkeley in May 1996 to develop residential Thames Water sites and sitesacquired on the open market. Completing some 5,000 unit sales since it wasestablished, St James proved a highly successful joint venture for itsshareholders and Berkeley is delighted to have been able to take the opportunityto acquire 100% control of a business to which it has always been fullycommitted and in which it has historically invested significant management timeand expertise. As a joint venture partner, Berkeley had an intimate knowledge ofSt James' business and, in particular, its land bank which includes anincreasing proportion of third party land. St James is now an establishedbusiness in its own right with its own distinct management team, a number of themembers of which transferred from Berkeley, guided by the same philosophy andoperating procedures as Berkeley's wholly owned divisions. The full integration of St James has been successfully achieved in the secondhalf of the year with St James contributing £23.8 million to the Group'soperating profit since its acquisition. At the point of acquisition, St James ceased to be a joint venture and became afully consolidated subsidiary and this accounts for the reduction in Berkeley'sinvestments accounted for using the equity method from £69.0 million at thestart of the year to £1.7 million at 30th April 2007. New Joint Ventures While sad that the relationship with Thames Water ended, Berkeley was delightedto have announced new joint ventures during the year; one with Prudential plcand three with Saad Investments Company Limited ("Saad"). St Edward Homes Limited was established in the first half of the year as a jointventure with Prudential, bringing together Prudential's financial strength andcommercial expertise and Berkeley's passion and talent for creating sustainablenew communities. St Edward has a potential land bank of 2,230 plots across itsfirst three sites - Green Park in Reading, an office building in Kensington anda site in Stanmore. On 24th April 2007, shareholders approved the establishment of three new jointventure companies with Saad (a 29.4% shareholder in Berkeley). Berkeley willinvest up to £175 million over an expected 10 year investment period and,together with Saad's investment and external bank debt at a target equity todebt ratio of 30:70, a fund of approximately £1 billion will be available totake advantage of land opportunities as they present themselves to the threecompanies; Saad Berkeley Regeneration Limited, Saad Berkeley DevelopmentsLimited and Saad Berkeley Investments Limited. Saad Berkeley Regeneration Limited will invest in development opportunitieswhich are outside Berkeley's normal acquisition criteria due to the size ofcapital requirement and/or length of planning lead time utilising financialleverage to reflect the capital intensive nature and risk profile of the sites,whilst limiting the shareholders' exposure. Once suitable planning permission isobtained, the sites will be sold for development, either to third parties or toSaad Berkeley Developments Limited, the second of the new companies. Saad Berkeley Investments Limited will acquire commercial property asopportunities are identified by its board of directors with a view to achievingreturns primarily through capital growth. Berkeley has previously conducted suchactivities through Saad Berkeley Investment Properties Limited and BerkeleyEastoak Investments Limited, both joint ventures with Saad, and Saad BerkeleyInvestments Limited is a continuation of this. Commercial property investment iscommonly undertaken through leveraged joint ventures and special purposevehicles to maximise shareholder returns and for Berkeley this also reflects thefact that such investment is of an opportunistic nature. Land Holdings At 30th April 2007, the Group (including joint ventures) controlled some 30,128plots with an estimated gross margin of £2,234 million. This compares with23,819 plots and an estimated gross margin of £1,672 million at 30th April 2006.Of these holdings, 21,209 plots (April 2006 - 19,860) are owned and included onthe balance sheet. In addition, 8,848 plots (April 2006 - 3,264) are contractedand a further 71 plots (April 2006 - 695) have terms agreed and solicitorsinstructed. Over 95% of our holdings are on brownfield or recycled land. Today's land market remains highly competitive, requiring a disciplined andinnovative approach to land acquisition. Of the 18 new sites agreed in the year,two are Prudential sites in St Edward and two are sites that we will develop inpartnership with local authorities. The local authority sites are Woodberry Downin the London Borough of Hackney, a site of over 1,200 units, and Kidbrooke inthe London Borough of Greenwich, a site of over 3,600 units. Working inpartnership with land owners has always been a feature of Berkeley's strategyproving successful both for Berkeley and its partners and we are delighted thata number of local authorities are choosing Berkeley as their preferredregeneration partner. The St Edward and local authority sites account for the majority of thecontracted plots. At the same time Berkeley has continued to maximise itsexisting land holdings, on many of which new applications have been submitted. The Group's land holdings include approximately 1.5 million ft2 of commercialspace within our mixed-use schemes. The Group is not undertaking any standalonecommercial schemes. Sustainability Although our focus remains the same, much has changed in the fifteen years sinceBerkeley took the decision to place its business in the centre of towns andcities. Above all there has been a step-change in the way in which our societythinks about the impact of what we do. Keeping pace with this growing concernwith the legacy we create for future generations has played a central role inBerkeley's success; we have never underestimated the scale of ourresponsibilities and remain passionate about meeting the challenges in the waythat is expected of us. Consequently, the principles of sustainability havebeen, for some time, a driving force of what we do and how we do it. Bringingderelict brownfield land back to life is inherently positive, but we are spurredforwards by a desire to further understand the reality of implementing ourpolicies, not just in strategic terms, but on a day-to-day basis. There are powerful reasons for doing so: the Code for Sustainable Homes has hada major impact on the development industry and we have reviewed its requirementsto understand the commercial implications of reaching its higher levels. We arealso responding to our customers, who demonstrate increasing interest in livingin homes that respect the environment; our people, who have become genuinelypassionate about sustainability; and, of course, our investors, who wish us tosustain value in the medium and longer term. Alongside this, however, is a senseof the opportunities associated with our role, not just as part of the mix offorces that drive the regeneration of urban areas, but also as part of a widercommunity that is attempting to understand the changes it needs to make if it isto become truly sustainable. It is this focus that, we believe, helps enhancethe value of our business in the long-term in a way that in turn helps buildbetter futures for our customers. We were delighted to have these effortsrecognised externally this year and to receive the Building Award forRegeneration Housebuilder of the Year, as well as Sustainability Awards forSustainable Developer (Berkeley Homes) and Sustainable Development of the Year(Ropetackle in Shoreham, a development undertaken in partnership with SEEDA). Board Changes After 16 years with Berkeley, the last eight as Chairman, Roger Lewis hasannounced that he will retire from the Board at the end of July. During histime as Chairman, Roger has overseen Berkeley's transition from traditional housebuilder to urban regenerator and the implementation of the strategy thathas served Berkeley and its shareholders so well over recent years. WhileRoger will be sorely missed, Berkeley is fortunate to have such an ablesuccessor as Victoria Mitchell already on the Board as a non-executive directorand Victoria's appointment as Non-Executive Chairman will become effective atthe beginning of August. As announced in December last year, Tony Palmer will retire at the AGM. Tony hasbeen a non-executive member of the Board for nine years and is the seniorindependent director. The Board would like to thank Tony for his outstanding contribution over these years. David Howell, a non-executive director sinceFebruary 2004 and the Chairman of the Audit Committee, will replace Tony as thesenior independent director at the AGM. During the year Alan Coppin joined the Board as a non-executive director,bringing with him a wealth of corporate experience in the property sector. Currently a non-executive director of Capital and Regional plc, Alan has also served on the boards of Carillion plc as a non-executive director and Wembleyplc as CEO. Following the AGM the Board will comprise a non-executivechairman, four executive directors and three non-executive directors and it istherefore the intention to recruit a fourth non-executive director to ensurethe balance of the Board meets the Combined Code's recommendations in thisarea. Our People Berkeley's success is driven by the passion, dedication and innovation of itspeople. The Group's philosophy is to devolve operational responsibility andaccountability to autonomous management teams and this creates an environment inwhich these attributes flourish. Urban regeneration is complex and it requires arelentless attention to detail that can only thrive if people are trulypassionate about what they do and are motivated to achieve the higheststandards. This deeply embedded culture is what sets Berkeley apart from itspeers and makes it a place where people at the top of their discipline want towork. On behalf of the Board and shareholders, we would like again to express ourcontinued thanks and appreciation to all those who have contributed to thisyear's outstanding results and who will contribute to the exciting future aheadfor Berkeley. Prospects In 2006/07 Berkeley has continued to concentrate on its areas of competitiveadvantage and the business is well placed to look to the future with confidence.We have the right strategy for the market in which we operate, an unrivalledland bank and exceptional teams throughout the business with the passion andentrepreneurial flair to unlock value by creating truly sustainable communities. When combined with forward sales of £936.3 million and the strong cashgeneration over the last three years, the Board now has sufficient visibilityover the future to seek approval to accelerate the remaining B share payments toshareholders. The market in London and the South East is favourable due largely to thecapital's unique standing as a World City and financial centre, but we shouldnot ignore the imbalances in the wider economy that can lead to a sense ofuncertainty. Berkeley is in a strong position and has in place the right strategy to maximisereturns to shareholders and to take advantage of new opportunities as theyarise. We look forward to an exciting future with confidence. For further information please contact: The Berkeley Group Holdings plc Cardew GroupA W Pidgley Tim RobertsonR C Perrins Sofia RehmanT: 01932 868555 T: 0207 930 0777 This information is provided by RNS The company news service from the London Stock Exchange