CLS Holdings Regulatory News (CLI)

25 Feb 2005 07:00

Embargoed: 0700hrs, 25 February 2005Contact Details:Sten Mortstedt, Executive ChairmanTom Thomson, Vice Chairman & Chief ExecutiveSteven Board, Chief Operating OfficerCLS Holdings Plc, Tel. 020 7582 7766Adam Reynolds / Ben SimonsHansard CommunicationsTel. 020 7245 1100 CLS HOLDINGS PLC PRELIMINARY FINANCIAL RESULTS FOR THE YEAR TO 31 DECEMBER 2004 FINANCIAL HIGHLIGHTS- Added value to shareholders 20.0 per cent, up 7.2 per cent, based on increasein adjusted NAV per share and distributions in the year (19.9 per cent based onstatutory NAV up 4.8 per cent).- Adjusted Net Asset Value (NAV) per share 516.6 pence, up 15.9 per cent(Statutory NAV per share 508.5 pence up 15.8 per cent).- Profit before tax ‚£18.8 million up 6.8 per cent.- Intended distribution by way of a tender offer buy-back of 1 in 41 shares at485 pence being 11.8 pence per share making a total distribution toshareholders of 19.3 pence per share for the year, up 12.9 per cent.- Property portfolio (including share of JVs) valued at ‚£1.02 billion up 11.3 percent.- Net rental income* (including associates and JVs) ‚£67.5 million up 5.8 percent.- Year end cash ‚£56.7million (2003: ‚£56.7 million).*Net rental income comprises gross rental income and service charge income,less service charge expenses.Key statistics and other financial information 31 Dec 31 Dec 2004 2003 PROFIT AND LOSS Adjusted earnings per share* 22.3 p 20.0 p Up 11.5 % Earnings per share 21.1 p 20.7 p Up 1.9 % Net rental income (including associates and ‚£67.5 m ‚£63.8 m Up 5.8 % JVs) Operating profit (including associates and ‚£52.5 m ‚£46.4 m Up 13.1 % JVs) Net interest payable (including associates and ‚£34.2 m ‚£30.7 m Up 11.4 % JVs) Core profit before tax ‚£20.4 m ‚£21.4 m Down 4.7 % Profit before taxation ‚£18.8 m ‚£17.6 m Up 6.8 % Retained profit ‚£18.1 m ‚£18.8 m Down 3.7 % BALANCE SHEET Adjusted NAV per share* 516.6 p 445.7 p Up 15.9 % Statutory NAV per share 508.5 p 439.2 p Up 15.8 % Distribution per share from tender offer 19.3 p 17.1 p Up 12.9 %buy-backs Property portfolio (including JVs) ‚£1,022.4 m ‚£918.5 m Up 11.3 % Property portfolio (excluding JVs) ‚£981.6 m ‚£882.4 m Up 11.2 % Net asset value ‚£426.4 m ‚£385.0 m Up 10.8 % Cash ‚£56.7 m ‚£56.7 m - % Adjusted gearing* 128.9% 125.1% Up 3.8 % Statutory gearing 130.9 % 126.9% Up 4.0 % Solidity (net assets as a ratio of gross 39.4 % 39.5% Down %assets) 0.1 Shares in issue (000's) - excluding treasury 83,853 87,644 Down %shares 4.3 FRS13 fair value adjustment after tax 28.8 p 20.7 p Up 39.1 % * FRS19 requires a tax provision to be made in respect of capital allowances tothe extent that they are not covered by available tax losses brought forward.In practice we consider it likely that the benefit of these capital allowanceswill continue to be available whether or not the properties are sold in thefuture. The Board has complied with pronouncements from the APB, ASB andListing Authority in showing NAV and Earnings per share including the FRS19provision with equal prominence to the adjusted figures. The effect of FRS 19has been excluded from those statistics that are described as adjusted, areconciliation of which is set out on the final page of this document.At 31 December 2004 the FRS 19 deferred tax charge included in the profit andloss account was ‚£1.1 million and the cumulative reduction to net assets was ‚£6.8 million (31 December 2003: credit to tax of ‚£0.6 million and reduction innet assets of ‚£5.7 million respectively). The accounting policies are as setout in the Group's 2003 Annual Report and Accounts.BUSINESS HIGHLIGHTSDuring 2004- Letting of 24,100 sq m (259,412 sq ft) in Solna, Stockholm to ICA,Scandinavia's largest food retailer.- Unrealised gains from three equity investments that were listed in the yearamounted to ‚£12.4 million. The gain has not been booked and does not feature inour financial results as the investments continue to be held at the lower ofcost and net realisable value.- Acquisition of seven new properties, two in the UK, four in France and one inLuxembourg at a cost of ‚£38.2 million.- One Leicester Square fully let to four tenants, including MTV, at a rental of ‚£1.7 million p a.- Sale of Seine Defense, Paris for ‚£7.4 million (¢â€š¬11.0 million) at a profit of ‚£0.5 million.- Financing of property assets raised ‚£111.3 million.After the year end- Pre-let of close to 18,500 sq m (200,000 sq ft) at London Bridge Tower toShangri-La hotel group for 30 years without a break . CHAIRMAN'S STATEMENT IntroductionI am very pleased to report that the Company has performed well during 2004. Our financial results are discussed in detail in the Financial Review andtherefore I will highlight only the principal figures here. Adjusted net assetvalue per share has increased by 15.9 per cent to 516.6 pence (Statutory NAVper share increased by 15.8 per cent to 508.5 pence) and profit before taxationincreased by 6.8 per cent to ‚£18.8 million.Furthermore significant progress has been made during the year in planning andre-developing a number of our properties the benefit of which has not yet beenfully reflected in our reported results for 2004, however this work has laidsolid foundations to further strengthen the Group's position. Business ReviewUKIn particular, progress has been made in the UK including a substantial pre-letof nearly 18,500 sq m (200,000 sq ft) of space at London Bridge Tower to theShangri-La hotel group. SWEDENIn Sweden a major pre-let took place whereby 24,100 sq m (259,412 sq ft) ofoffices and retail space at Solna, Stockholm was let to ICA, Scandinavia'slargest food retailer. The letting, which was one of the largest in Sweden inrecent years comprises 14,700 sq m (158,230 sq ft) of office space let for justunder twelve years and 9,400 sq m (101,182 sq ft) of retail space let forfifteen years. ICA is due to take occupation and commence rental payments onthe newly re-furbished space this Summer. CONTINENTAL EUROPEOur asset portfolio in continental Europe has been further strengthened by fivenew acquisitions in France and Luxembourg at favourable yields and at a cost of‚£30.8 million.EQUITY INVESTMENTSThe performance of our equity investments has shown a significant improvementin the year, principally due to the successful flotations on AIM in London ofAmino Technologies Plc and Clearspeed Technology Plc, and Note AB on theStockholm Stock Exchange. Although these three investments produced anunrealised surplus of ‚£12.4 million at 31 December 2004, the gain has not yetbeen reflected in our results. The market value of our equity investments heldas current assets, is ‚£22.9 million. These investments are carried in ourbooks at ‚£10.5 million, at the lower of cost and net realisable value. Webelieve that there is potential latent value in the remaining unlistedinvestments we hold and it is likely that a number of these will either belisted or sold within the next two years. Market BackgroundThe economies of Europe and the UK in particular have been underpinned byrelatively strong fundamental economic indicators and established performancewhich has stimulated demand for commercial property investments. The weight ofmoney available for investment and relatively stable and low interest rateshave further contributed to enhance property values. Investment in propertyhas shown the highest returns since October 1994 and the total return in 2004to investors on the FTSE Real Estate Index, reflecting share price increase anddistributions, was 45 per cent.Against this backdrop the total return to CLS investors in the year has been 51per cent (Source : Thomson Data Stream).Since our flotation in May 1994 our net assets have grown from ‚£127.7 millionto ‚£426.4 million, an increase of 233.9 per cent, a growth rate of 11.6 percent compound per annum and 11.9 per cent compound per annum over the last fiveyears.Over the same period net asset value per share has increased from 129.0 penceto 516.6 pence, 13.4 per cent compound per annum. Our property assets, based inthe UK, Sweden and France have increased from ‚£287.0 million to ‚£1,022.4million (including joint ventures), an increase of 256.2 per cent.This growth has resulted in our shares outperforming the FTSE Real Estate Indexby 153 per cent and the FTSE All Share Index by 210 per cent since flotation(as at 31 January 2005).As a result of our sustained growth, in May 2004 we were admitted into the FTSE350 indexThe closing price of our shares on 24 February 2005 was 417.5 pence compared toa price of 111 pence on flotation, an increase of 276.1 per cent in thatperiod, and a growth of 50.9 per cent in the year to 31 December 2004.The underlying business focus and principles by which we operateThe continually moving commercial environment requires us to be flexible andvigilant in order to adapt to changing conditions. However this is notincompatible with our strategic focus on the fundamental principles that drivethe business forward. These can be summarised as follows:Primary aim is to provide our tenants with high quality premises - our aim isto provide our tenants with high quality premises that are well managed andoffer flexible facilities in line with their requirements. We recognise theimportance of delivering value for money and being responsive to their needs. Wherever practicable we offer the latest technological facilities to ourtenants.Local markets - we only operate in regions where we have a clear understandingof local markets and have firm relationships with well established andreputable professional advisers. Operating from locally based offices alsoenhances our ablity to work closely with our tenants.Long-term investments and long-term relationships - we look to developlong-term relationships with all our business partners including tenants,lending institutions, advisers or suppliers. We do not trade properties, weare long-term investors keen to add value by improving our properties and theirsurroundings. Carefully researched business decisions - commercial decisions, in all ourbusiness locations, are subject to rigorous, carefully researched andanalytical processes and are formally presented to senior management beforebeing effected.Local management - we employ well qualified and experienced local managementwhilst maintaining strong lines of communication with our main London office.Integrity - we recognise the immense value of working with people who havesolid business integrity, sound expertise and who are people we can trust. Risk averse - we identify and monitor business risks and construct risk aversemechanisms in the financing of our assets. Reasonably substantial interestbearing cash reserves are held on our balance sheet in order to be able toreact quickly to potential opportunities.Environmental issues - we will continue our work on improving the environmentaldevelopment of our properties throughout the Group, as already evidenced by theprestigious environmental "P mark" standard we received for developing "green"energy efficient properties through the refurbishment of our Solna complex. The installation of energy efficient plant occurs wherever possible in order toreduce energy consumption in our newly refurbished buildings. We regard greenenergy and cost reduction as a major challenge and we plan to use among otherthings, solar and geo-thermal energy efficient heating and cooling plants whereit is practical to do so. Additionally, we seek to source the materials usedin our development projects from sustainable resources. Open and honest business relationships - we ensure that there are clear, openlines of communication with our lenders and equity investors.Prospects We have made significant progress during 2004 and we look forward to a numberof challenges in the coming months and years. We have several majordevelopments in progress. In the UK our objective, together with our partners,of completing the development of London Bridge Tower will require a great dealof skill and careful attention. We therefore intend to ensure that the verybest team is assembled to bring this important project to a successfulconclusion. In West London, Great West House will be given a majorrefurbishment that will rejuvenate the entire profile of the building,increasing its appeal and value. In Sweden we will finish the extensiverefurbishment to Solna Business Park.We will develop further our use of leading designs and materials in ourrefurbishments. An example of this is the utilisation of faƒ§ade materials atSolna incorporating the technology of Keronite, a UK based associate company,that changes the surface composition of light alloys such as aluminium ormagnesium to produce a diamond hard and corrosion resistant surface. We will continue to seek out and acquire properties where the returns meet ourinvestment criteria and we will also assess the individual performance of ourexisting investments and make selective sales where appropriate.On the letting front, the continuing challenge will be to reduce the availablevacant space in each of our major markets. At 31 December the Group had vacantspace of 24,192 sq m (260,406 sq ft) representing 4.1 per cent of lettablespace with a further 37,430 sq m (402,906 sq ft) or 6.4 per cent underrefurbishment.Our property activities are complemented by the relatively small-scale equityinvestment business that is now showing significant potential returns but isalso a cash equivalent reserve and, in addition, diversifies a small element ofour overall business risk. The CLS share price has performed well in 2004 yet still remains at a discountto net asset value. We believe in the continuing benefit of distributing cashby way of tender offer buy¢â‚¬â€œbacks, as it enhances the net asset value of theremaining shares in issue and is tax beneficial for many shareholders. It isthe intention of the Board to recommend a tender offer buy¢â‚¬â€œback of one in fortyone shares at a price of 485 pence per share, resulting in a total distributionfor the year of 19.3 pence per share, an increase of 12.9 per cent on theprevious year.I would like to thank Anna Seeley, who resigned her Board position lastNovember, for her contribution to the company and I would also like to thank my fellow directors, our staff, advisers, lenders and shareholders for thesupport they have given to the Company.In conclusion, I am very satisfied with the continuing strong performance ofthe Group and am confident that it will deliver further added value during2005. We are far from complacent and will continue to seek to optimiseshareholder returns.Sten MortstedtExecutive Chairman25 February 2005FINANCIAL REVIEWIntroduction: 2004 has seen further strong growth in the assets in each of ourmarkets. This has been coupled with robust operating performance. Adjusted NAV of 516.6 pence per share (December 2003: 445.7 pence), grew by15.9 per cent during 2004 (Statutory NAV of 508.5 pence per share grew by 15.8per cent over the same period). In the last five years the adjusted net assetvalue per share has grown by 16.2 per cent compound per annum, or a total of211.9 per cent (Statutory NAV has shown a similar growth throughout thatperiod). The organic growth in adjusted net asset value per share over theperiod (taking into account the effect of tender offer buy-backs but excludinggrowth attributable to the purchase of shares on the market for cancellation)has been 191.6 per cent (Statutory NAV has shown similar growth throughout thatperiod). If all share options were to be exercised, the dilutive effect wouldbe to reduce adjusted NAV per share by 2.2 pence (Statutory NAV by 2.1 pence).At the year end the post-tax FRS 13 disclosure, showing the effect of restatingfixed interest loans to fair value, amounted to a reduction of 28.8 pence pershare (December 2003: 20.7 pence).Added value to shareholders increased by 20.0 per cent (December 2003: 12.8 percent), as measured by the increase in adjusted NAV per share and distributionsby tender offer buy-backs. Based on Statutory NAV the return was 19.9 per cent(December 2003: 15.1 per cent).During the year the Company distributed ‚£15.7 million (18.1 pence per share) toshareholders by way of tender offer buy-backs at an average price per share of384 pence (December 2003 : 15.4 pence per share distributed).Net assets grew by ‚£41.4 million to ‚£426.4 million in the year, of which just ‚£0.8 million related to positive foreign exchange translation movements inrespect of the Group's Swedish and French net assets. Foreign exchangemovements are hedged as each property is funded by loans in local currency. Net asset growth is calculated after taking into account the cost of tenderoffer buy-back distributions made during the year, which totalled ‚£15.7 millionas mentioned above.Adjusted gearing at the year end increased to 128.9 per cent (2003: 125.1 percent) (statutory gearing was 130.9 per cent - 2003: 126.9 per cent). Tenderoffer buy-backs during the year had the impact of increasing gearing by 3.6 percent and the positive effect of foreign exchange translation of overseas netassets during 2004 reduced gearing by 0.2 per cent.The Group held ‚£56.7 million cash as at 31 December 2004 (December 2003: ‚£56.7million), the movement in the year being: 2004 2003 ‚£m ‚£m Cash inflow from property activities 51.7 52.2 (Increase) / decrease in equity investments held in current assets (6.5) 0.2 Cash inflow from operations 45.2 52.4 Net interest and other finance costs (33.1) (29.0) Taxation (0.5) (1.4) Properties purchased and enhanced (67.5) (22.6) New loans 111.3 25.5 Properties sold 8.5 23.6 Loans repaid (45.2) (29.2) Tender offer payment to shareholders (15.7) (14.1) Market purchase of shares for cancellation - (2.9) Other (3.0) (11.3) - (9.0) Existing equity investments held amounted to ‚£10.5 million (December 2003: ‚£4.0million). Since the successful flotation of Amino Technologies Plc, ClearspeedTechnology Plc and Note AB, the majority by value are listed investments, whichcontinue to be carried at the lower of cost and net realisable value, andrepresent only 1.0 per cent of the gross assets of the Group.We believe that our unlisted investments have the potential for growth in valuein due course and we continue to be closely involved in their progress and addcommercial support where appropriate.The carrying value of our portfolio of listed investments was ‚£7.4 million atthe year end. Had they been carried at market value an unrealised gain of ‚£12.4 million would have arisen.The underlying elements of the growth in net assets are set out in the tablebelow. The table includes an un-booked adjustment in respect of the unrealisedequity investment gains mentioned above. This inclusion is for informationpurposes. Due to the existing corporate structure of the Group it is notexpected that deferred taxation would become payable if either the propertiesor the listed investments were sold. It is currently anticipated that theoverseas property assets would be sold within corporate entities. Continental Equity Movement in Net Assets Group UK Sweden Europe investments ‚£000 ‚£000 ‚£000 ‚£000 ‚£000 Opening Net Assets 385.0 181.6 91.6 103.8 8.0 Direct investment Income from investment in property 64.9 30.5 16.5 18.5 (0.6) Realised gains in equity investments 1.5 1.5 Cable company losses (3.6) (3.6) Administrative expenses (9.8) (4.2) (3.1) (1.8) (0.7) Net interest payable (34.2) (16.8) (10.1) (5.1) (2.2) Profit before taxation from direct investment activities 18.8 9.5 3.3 11.6 (5.6) Taxation - Current taxation (0.6) (2.7) (0.6) 2.7 Deferred tax provision (FRS19) (1.1) 0.2 (1.3) Equity minority interest 1.0 1.0 Retained profit 18.1 7.0 3.3 11.0 (3.2) Indirect investment gains Revaluation gains on property investments 34.2 21.6 3.0 9.6 Revaluation gains on joint venture properties 4.7 4.7 38.9 26.3 3.0 9.6 Increase in equity due to direct and indirect investment 57.0 33.3 6.3 20.6 (3.2) Other equity movements Share issues 0.4 0.4 Shares purchased and associated costs (0.1) (0.1) Exchange and other movements 0.8 1.5 (0.7) Movements on inter-company debt (14.9) 10.7 (5.7) 9.9 Minority interest (1.0) (1.0) Capital distributions by way of tender offer buy-backs (15.7) (15.7) Net Assets at 31 December 2004 426.4 184.6 110.1 118.0 13.7 Unrealised unbooked gains on listed investments 12.4 12.4 Net Assets at 31 December 2004 after un-booked gains 438.8 184.6 110.1 118.0 26.1 NAV (including un-booked equity investment gain) 523.3p 220.1p 131.3p 140.7p 31.1p Increase in adjusted Net Assets 53.8 3.0 18.5 14.2 18.1 Increase per share in Net Assets 64.2p 3.6p 22.1p 16.9p 21.6p Return on adjusted net asset 18.0% 18.3% 6.9% 19.8% 115.0% The slight fall in core profit, which shows profit arising solely from propertyrental, has arisen because of the impact of refinancing of properties andincreased interest rates in the UK. 2004 2003 ‚£m ‚£m Profit before tax 18.8 17.6 Deduct: Realised gains/(losses) in equity investments 1.5 (1.4) Cable company losses (3.6) (4.6) Profit on sale of properties 0.5 1.9 Lease surrenders and variations - 0.3 (1.6) (3.8) Core profit 20.4 21.4 (Decrease)/increase on previous year (4.7)% 8.6% REVIEW OF THE PROFIT AND LOSS ACCOUNTFinancial Results by Location: The results of the Group have been analysed bylocation and main business activity as set out below: Continental 2004 Europe Equity Total UK Sweden investments 2003 ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m Net rental income 67.5 31.9 16.9 18.7 - 63.8 Less income in JVs (2.6) (2.6) - - - (1.4) Other income 2.6 0.6 0.6 - 1.4 3.9 Net rental and property related income (excluding JVs) 67.5 29.9 17.5 18.7 1.4 66.3 Operating expenses (18.8) (6.1) (4.1) (2.5) (6.1) (19.6) Realised gains/ 1.5 - - - 1.5 (1.4)(losses) in equity investments Associates / JVs 2.3 2.5 - - (0.2) 1.1operating profit Operating profit 52.5 26.3 13.4 16.2 (3.4) 46.4 Gain from sale of 0.5 - - 0.5 - 1.9investment properties Net interest (34.2) (16.8) (10.1) (5.1) (2.2) (30.7)payable and related charges Profit on ordinary 18.8 9.5 3.3 11.6 (5.6) 17.6activities before tax Tax (1.7) (2.5) - (0.6) 1.4 (0.1) Minority interest 1.0 - - - 1.0 1.3 Retained profit 18.1 7.0 3.3 11.0 (3.2) 18.8 Retained profit 31 18.8 10.0 1.3 10.4 (2.9) December 2003 Increase/ (0.7) (3.0) 2.0 0.6 (0.3) (decrease) in retained profit Net rental income:has increased by 5.8 per cent to ‚£67.5 million and reflects afull year contribution from Coop in Solna, Sweden (‚£1.9 million) and increasedrentals in France due to indexation and lease restructuring (‚£1.4 million). Other income:of ‚£2.6 million (2003: ‚£3.9 million) includes the consolidationof gross margins of telecoms subsidiaries of ‚£1.5 million and dilapidationsincome of ‚£0.2 million at Great West House, Brentford. Of the remainder, gymmembership fees generated from the Solna development amounted to ‚£0.5 million.Operating expenses: Administrative expenditure: relating to the core property business amounted to‚£9.1 million, an increase of ‚£1.5 million over the previous year. The mainreasons for the increase were the write off of capitalised fit-out costs atSolna, Sweden, amounting to ‚£0.3 million, increased expenditure on professionalfees of ‚£0.5 million and increased costs of ‚£0.6 million resulting fromstrengthening of the management team and small increases as a result ofinflation.The consolidation of ‚£5.1 million of operating costs for WightCable Limited andWightCable North Limited were also included within this category ofexpenditure. Other non-property related overheads amounted to ‚£0.7 million.Net property expenses: of ‚£3.9 million (2003: ‚£4.2 million) includeddepreciation of ‚£0.4 million, letting fees of ‚£0.5 million, mainly relating tothe successful letting of One Leicester Square and vacant space within theFrench portfolio. Of the remainder, operating costs of the gym at Solnaamounted to ‚£0.8 million, void costs were ‚£0.4 million (mainly Great WestHouse, Brentford, undergoing refurbishment and Vista Office Centre, Hounslow),bad debts amounted to ‚£0.7 million and repairs and maintenance costs were ‚£0.2million for minor refurbishment works in Paris and the UK.Realised gains / (losses) in equity investments: amounted to ‚£1.5 million. Included within that amount was a gain of ‚£2.7 million in respect of asettlement of the creditor voluntary arrangement at WightCable North Limited,whereby its liability was significantly reduced through negotiation of an earlysettlement of debt. Also included within this net gain was a provision of ‚£1.5million set against the goodwill held in our balance sheet relating to one ofour unlisted investments. Other trading gains in the year on listed investmentsamounted to ‚£0.4 million. 2004 2003 ‚£m ‚£m Gains/(losses) relating to listed investments 0.4 (0.2) Write downs of unlisted investments (1.6) (1.2) Profit on settlement of CVA at WightCable North 2.7 -Limited 1.5 (1.4) Net interest and financial charges: amounted to ‚£34.2 million and showed anincrease of ‚£3.5 million over net expenditure in 2003, reflecting there-financings within the French portfolio and at Solna and increased interestrates in the UK.The Group's policy is to expense all interest payable to the profit and lossaccount, including interest incurred in the funding of refurbishment anddevelopment projects.A breakdown of the net charge is set out below: 2004 2003 Difference ‚£m ‚£m ‚£m Interest receivable 1.7 1.7 - Foreign exchange 0.1 0.4 (0.3) Interest receivable and similar income 1.8 2.1 (0.3) Interest payable and similar charges (36.0) (32.8) (3.2) Net interest and financial charges (34.2) (30.7) (3.5) Interest payable and similar charges of ‚£36.0 million (2003: ‚£32.8 million)included joint venture interest of ‚£1.8 million (2003: ‚£1.1 million) relatingto the Group's interest in Teighmore Limited, owner of Southwark Towers, and afull years' charge for New London Bridge House Limited which was acquired inSeptember 2003. Depreciation of interest rate caps amounted to ‚£1.0 million(2003: ‚£0.9 million) and amortisation of issue costs of loans totalled ‚£1.1million (2003: ‚£0.9 million).The average cost of borrowing for the Group at 31 December 2004, which includesdepreciation of interest rate caps, is set out below:December 2004 UK Sweden Continental Total Europe Average interest rate on fixed rate debt 7.3% 5.8% 4.6% 6.4% Average interest rate on variable rate 6.6% 3.9% 3.3% 4.6%debt Overall weighted average interest rate 7.1% 4.8% 4.0% 5.7% December 2003 Average interest rate on fixed rate debt 8.1 % 6.1 % 4.6 % 6.7 % Average interest rate on variable rate 5.5 % 4.4 % 3.5 % 4.7 %debt Overall weighted average interest rate 6.7 % 5.3 % 4.0 % 5.6 % Taxation: The Group's current taxation charge has benefited from theutilisation of losses, significant capital allowances, particularly intelecommunications companies held by our investment division, and amortisationdeductions. These factors will have less effect in the future as corporationtax losses are used against expected profits and as allowances and amortisationdeductions decrease in existing subsidiaries. REVIEW OF THE BALANCE SHEET Tangible Assets: The tangible assets of the Group (including plant andmachinery) have increased to ‚£986.6 million (2003: ‚£889.3 million). The netincrease of ‚£97.3 million included expenditure on refurbishments of ‚£29.0million of which ‚£24.2 million was expended at Solna, mainly on theconstruction of retail and office space for ICA. Foreign exchange translationgains on Swedish and French property holdings amounted to ‚£5.7 million in theyear. After taking account of the effect of foreign exchange translation onloans to finance these assets, the net effect was a gain of ‚£0.8 million.Four new properties were purchased in France at a cost of ‚£24.1 million, and wecompleted the purchase of a property in Luxembourg at a cost of ‚£6.7 million.Quayside Lodge, Fulham was acquired during the year at a cost of ‚£6.0million.We sold our property at Seine Defense during the year for ‚£7.4 million,yielding a profit on disposal of ‚£0.5 million.Revaluation movements on the Group's investment properties were as follows: 2004 2003 ‚£m ‚£m UK 26.3 (0.6) Sweden 3.0 (6.9) Continental Europe 9.6 4.5 Total revaluation 38.9 (3.0) Based on the valuations at 31 December 2004 and annualised contracted rentreceivable at that date of ‚£74.6 million (2003: ‚£69.4 million), the portfolioshows a yield of 6.9 per cent (2003: 7.2 per cent).The uplift in the UK revaluation included ‚£4.7 million in respect of theGroup's share of the gain in value of joint venture properties at London BridgeTower and New London Bridge House. London Bridge Tower has been valued as aninvestment property, no account has been taken of speculative developmentgains. An analysis of the location of investment property assets and related loans isset out below: Total % UK* % Sweden* % Continental % Equity % * Europe** investments ‚£m ‚£m ‚£m ‚£m ‚£m Investment 981.6 100.0 438.6 44.7 273.1 27.8 269.9 27.5 0.0 0.0Properties Loans (609.3) 100.0 (278.6) 45.8 (153.6) 25.2 (173.2) 28.4 (3.9) 0.6 Equity in 372.3 100.0 160.0 43.0 119.5 32.1 96.7 26.0 (3.9) (1.1)Property Assets Other 54.1 100.0 24.6 45.5 (9.4) (17.4) 21.3 39.4 17.6 32.5 Net Equity 426.4 100.0 184.6 43.3 110.1 25.8 118.0 27.7 13.7 3.2 Equity in 37.9% 36.4% 43.9% 35.8% - Property as a Percentage of Investment ‚£m ‚£m ‚£m ‚£m ‚£m Opening 385.0 181.6 91.6 103.8 8.0 Equity Increase 41.4 3.0 18.5 14.2 5.7 Closing 426.4 184.6 110.1 118.0 13.7 Equity *\* The following exchange rates were used to translate assets and liabilities atthe year end : SEK/GBP 12.742 : Euro/GBP 1.4125* Net assets were reduced by payments for tender offer distributionstotalling ‚£15.7 million which are included within the results of the UK. Debt Structure: Borrowings are raised by the Group to finance holdings ofinvestment properties. These are secured, in the main, on the individualproperties to which they relate. All borrowings are taken up in the localcurrencies from specialist property lending institutions.Financial instruments are held by the Group to manage interest and foreignexchange rate risk. Hedging instruments such as interest rate caps areacquired from prime banks. The Group has thereby hedged all of its interestrate exposure and a significant proportion of its foreign exchange rateexposure.Net Interest Total % UK % Sweden % Continental % Equity %Bearing Debt Europe Invest ‚£m ‚£m ‚£m ‚£m ments ‚£m Fixed Rate Loans (374.2) 61.4 (202.2) 72.6 (90.1) 58.7 (81.8) 47.2 (0.1) 2.6 Floating Rate (235.1) 38.6 (76.4) 27.4 (63.5) 41.3 (91.4) 52.8 (3.8) 97.4Loans (609.3) 100.0 (278.6) 100.0 (153.6) 100.0 (173.2) 100.0 (3.9) 100.0 Bank and cash 56.7 17.5 12.4 24.7 2.0 Net Interest (552.6) 100.0 (261.0) 47.2 (141.2) 25.6 (148.5) 26.9 (1.9) 0.3Bearing Debt 2003 (483.8) 100.0 (222.3) 45.9 (133.1) 27.5 (126.6) 26.2 (1.8) 0.4 Non interest bearing debt, represented by short-term creditors, amounted to ‚£40.5 million (December 2003: ‚£35.8 million) Total UK Sweden Continental Europe Floating rate loan caps % % % % 2004 Percentage of net floating rate loans 100.0 100.0 100.0 100.0 capped Average base interest rate at which 5.3 6.6 4.9 4.8 loans are capped Average tenure 3.1 2.7 3.4 3.4 years years years years 2003 Percentage of net floating rate loans 100.0 100.0 100.0 100.0 capped Average base interest rate at which 6.2 6.4 6.0 6.0 loans are capped Average tenure 2.9 3.4 1.7 3.0 years years years years During 2004 the Group took advantage of the historically low interest rates andflat yield curves and increased the fixed proportion of loans to 62% (from 53%in 2003) of outstanding loans at favourable rates while continuing to hedgefloating rate debt with interest rate caps.New Printing House Square was financed in 1992 through a securitisation of itsrental income by way of a fully amortising bond. This bond has a currentoutstanding balance of ‚£38.6 million (December 2003: ‚£39.1 million) at aninterest rate of 10.8 per cent with a maturity date of 2025; and a zero couponbond, with a current outstanding balance of ‚£5.0 million (December 2003: ‚£4.5million), with matching interest rate and maturity date. This debt instrumenthas a significant adverse effect on the average interest rate and the FRS 13adjustment. The net borrowings of the Group at 31 December 2004 of ‚£552.6 million showed anincrease of ‚£68.8 million over 2003, reflecting the refinancing of our assetsat Solna and within the French portfolio, and new loans for acquisitions.Under the requirements of FRS13, which addresses among other things, disclosurein relation to derivatives and other financial instruments, if our loans wereheld at fair value, the Group's fixed rate debt at the year end would be inexcess of book value by ‚£34.5 million (2003: ‚£25.9 million) which net of tax at30 per cent equates to ‚£24.2 million (2003: ‚£18.1 million). The contracted future cash flows from the properties securing the loans arecurrently well in excess of all interest and ongoing loan repaymentobligations. Only ‚£17.4 million (2.9 per cent) of the Group's total bank debtof ‚£609.3 million is repayable within the next 12 months, with ‚£369.2 million(60.6 per cent) maturing after five years.Share Capital: The share capital of the Company totalled ‚£21.4 million at 31December 2004, represented by 85,497,177 ordinary shares of 25 pence each whichare quoted on the main market of the London Stock Exchange. Of the shares inissue, 1,644,176 are held as Treasury shares following the tender offerbuy-back in November 2004, and therefore are not included for the purposes ofthe proposed tender offer buy-back or for calculating Earnings and NAV pershare.A capital distribution payment by way of tender offer buy-back was made both inMay and November of 2004 resulting in the purchase of 4.1 million shares andproviding a distribution of ‚£15.7 million to shareholders, together with costsof ‚£0.1 million. A total of 50.9 million shares have been purchased at a total cost of ‚£109.6million since the programme of buy-backs started in 1998. The average cost ofshares purchased for cancellation over this period was 215 pence per share.The weighted average number of shares in issue during the year was 86,113,994(2003: 90,791,078).The average mid-market price of the shares traded in the market during the yearended 31 December 2004 was 331.4 pence with a high of 410 pence in December2004 and a low of 270 pence in January 2004.An analysis of share movements during the year is set out below: No of shares No of shares Million Million 2004 2003 Opening shares 87.6 94.1 Tender offer buy-back (4.1) (5.4) Buy-backs in the market for cancellation - (1.5) Shares issued for the exercise of options 0.4 0.4 Closing shares for NAV purposes 83.9 87.6 Shares held in Treasury by the Company 1.6 - Closing shares in issue 85.5 87.6 In total 27.1 million shares were traded in the market during 2004.An analysis of the ownership structure is set out below: Number of shares Percentage of shares Institutions 36,555,729 43.6% Private investors 1,261,221 1.5% The Mortstedt family 42,755,371 51.0% Other 3,280,680 3.9% 83,853,001 100.0% Shares held in Treasury by the Company 1,644,176 Total 85,497,177 Should the proposed tender offer buy-back be fully taken up, the number ofshares in issue would be reduced by 2,045,195 to 81,807,806 (excluding sharesheld in treasury of 3,689,371).The Company operates share option schemes to enable its staff to participate inthe prosperity of the Group. At 31 December 2004 there were 585,000 options inexistence with an average exercise price of 207.6 pence.Distribution: As the current share price remains at a considerable discount tonet asset value, your Board is intending to propose a further tender offerbuy-back of shares in lieu of paying a cash dividend, on the basis of 1 in 41shares at a price of 485 pence per share. This will enhance net asset valueper share and is equivalent in cash terms to a final dividend per share of 11.8pence, yielding a total distribution in cash terms of 19.3 pence per share forthe year (2003: 17.1 pence).Corporate Structure: The aim has been to continue to hold individual propertieswithin separate subsidiary companies, each with one loan on a non-recoursebasis. PROPERTY REVIEW Introduction: Our continuing Group strategy is to focus upon low risk highreturn properties in our core locations of London, France and Sweden. Webelieve that our emphasis on actively managing the portfolio maximises longterm capital returns. The Group now owns 113 properties with a total lettablearea of 585,350 sq m (6,300,850 sq ft), of which 45 properties are in the UK,23 in Sweden, 43 in France, 1 in Germany and 1 in Luxembourg. We have 506commercial tenants and 1,291 residential tenants.Strategy: Our strategy is to target above average returns on equity throughacquisition, active management, refurbishment, and selective sales.An analysis of contracted rent, book value and yields is set out below: Contracted % Net % Book % Yield on Yield when Rent Rent net rent fully let