Aug 31, 2000
Summary of Results
-
Profit before tax, excluding investment property sales, up 16.0 per cent to £65.1 million (1999 £56.1 million)
-
Profit before tax up 8.4 per cent to £65.8 million (1999 £60.7 million)
-
Adjusted earnings per share 10.9p per share (1999 10.8p)
-
Interim dividend increased by 6.8 per cent to 4.7p per share (1999 4.4p)
-
400,000 sq.m. (4.3 million sq.ft.) of new buildings completed or under construction
-
Development programme on land owned increases to 1.2 million sq.m. (13.1 million sq.ft.) which will cost £1 billion over several years
Commenting on the results, the Chairman, Sir Nigel Mobbs, said:
“The Group's policy of selective development in prime business centres should deliver strong cash flow and earnings returns to add to those which the Group currently enjoys from a focused and high quality portfolio of investments."
Interim Statement
In the first half of 2000 the Group progressed its well established strategy by adding further sites in prime business locations to its development portfolio, completing the construction of 133,000 sq.m. of business space, improving its quality of earnings through the disposal of assets with limited growth potential and by welcoming many new technology occupiers to its customer base. Occupancy worldwide has increased to 94.4 per cent.
Results
The half year profit before tax at £65.8 million was 8.4 per cent higher than in 1999. However, adjusted to exclude capital profits on the sale of investment properties, pre-tax profits were £65.1 million, £9.0 million or 16.0 per cent higher. The contribution from the development programme increased rental income by £7.9 million compared with the first half of 1999. This has been largely offset by £7.3 million rental income foregone as a result of property sales. Since the beginning of 1999 £207 million of investment properties have been sold because they were not in prime locations or had limited growth potential. The proceeds are being invested in new developments in better locations.
Trading property profits of £5.0 million (1999 £1.1 million) were realised on sales mainly in France and Germany and property joint venture profits increased by £3.4 million to £6.9 million mainly due to the opening of the Buchanan Galleries in Glasgow in 1999.
Tax has been provided at an effective rate of 20 per cent compared to the exceptionally low rate of 10 per cent applied in 1999. As a consequence, adjusted earnings per share at 10.9p were only marginally ahead of last year.
Dividends
An interim dividend of 4.7p per share will be paid on 13 October 2000 to shareholders on the register on 15 September 2000. This represents an increase of 6.8 per cent over the 1999 interim dividend of 4.4p per share.
Cash Flow
After expenditure of £144 million on the purchase and development of investment properties and realising £40 million from the sale of investment properties, the Group had a net cash outflow for the half year of £81.2 million (1999 £9.7 million).
Balance Sheet
The Group’s balance sheet remains very strong. Net borrowings rose by £98 million to £1,187 million. There were two significant new financings in the period, a £225 million Eurobond 2024 issue at a coupon of 6.75 per cent and a $160 million US private placement with an average maturity of 10.7 years and average interest rate of 7.96 per cent. These funds will provide a base alongside committed bank facilities for the Group’s substantial development programme. The weighted average cost of total borrowings remains at 7.7 per cent. Shareholders? equity at 30 June was £2,145 million, based on year end 1999 valuations and subsequent expenditures at cost, resulting in a net debt to equity ratio of 55 per cent.
Review of Activities
Development Programme
In the last annual report the Group’s development potential on land it already controlled was shown as being 1,172,000 sq.m. at a new money cost of £875 million. The acquisition of the Cambridge Research Park in April 2000 will add a further 46,000 sq.m. at a built out cost of £125 million. Cambridge is one of the leading locations for knowledge based business in the UK and this 45 hectare, low density, land reclamation site has the benefit of an outline planning consent for early development. The acquisition included a newly completed 6,000 sq.m. office facility at the park entrance leased to ntl Group.
The total development programme of 1.2 million sq.m. (13.1 million sq.ft.) at a new money cost of £1 billion will be spread over the years 2000 to 2007 provided the economic conditions in the countries in which the Group operates continue to be supportive of profitable development.
In the first half of 2000, 133,000 sq.m. of buildings were completed, of which 86 per cent is leased or sold, a further 267,000 sq.m. is under construction and work is expected to commence before the year end on a further 139,000 sq.m.
United Kingdom
Occupier demand has continued to be firm, particularly in the Thames Valley. The supply of space is generally meeting that demand though large office space users are finding some difficulty in identifying suitable buildings.
The Group’s UK occupancy at June was 93.2 per cent, slightly lower than the 93.7 per cent recorded at December 1999, though this is mainly due to recent completions of new developments.
The attraction of the Thames Valley to the IT and communications sector continues unabated and we have welcomed many such new occupiers to our locations this year, including Intel, Bookham Technology and AdvantagE, as well as providing expansion space for Logical Networks, Celltech Group and others. At Slough the availability of fibre optic cabling and an electricity supply within the Group’s control is beginning to be of interest to internet co-location businesses. The Group’s two newest development sites at Cambridge and Farnborough will undoubtedly be attractive to similar high technology companies.
At Farnborough good progress is being made on achieving a planning consent and it is hoped that construction of the infrastructure will start in the autumn, followed shortly by the development of three buildings totalling 23,500 sq.m. Consent should be granted for a total of 155,000 sq.m. of office and R&D space with some ancillary uses.
At Slough, two Bath Road offices are under construction and the first of 4,650 sq.m. has been pre-let to Celltech Group. Elsewhere construction is progressing at Feltham, Acton, Uxbridge, High Wycombe, Wokingham, Elstree and Luton. At Northampton a 9,400 sq.m. distribution unit is being built for Esselte, an existing customer which is relocating from Feltham.
North America
In July work commenced at the Torrey Pines Science Center, San Diego, on the second 12,000 sq.m. phase of the 39,500 sq.m. health science research and development campus being built for Agouron, a subsidiary of Pfizer. This campus is being let on long leases with annual rental increases. Plans are being drawn up for an additional 4,200 sq.m. speculative building.
Two buildings let to research companies Sugen and Exelixis have been completed at Pointe Grand, South San Francisco. A second building is now underway for Exelixis and at Gateway the second building for Fibrogen is under construction. With no land left uncommitted in South San Francisco the acquisition of the new 9.0 hectare Shearwater site is well timed. Once planning has been determined it is expected this former brownfield site at the edge of the Bay will support up to 50,000 sq.m. of health science and high tech office space. Another site of 10.8 hectares in the same area is also under contract, subject to satisfactory environmental conditions.
In Toronto the development of industrial units is progressing well, with most units leasing before or shortly after completion. The Goreway site, now that it is fully committed, has been expanded by the acquisition of an adjacent 12.7 hectares of land. In Burnaby, Vancouver, a 20,800 sq.m. office is under construction to meet demand from the rapid growth of IT industry in an area with almost full occupancy.
Continental Europe
Progress continues at a rapid pace at Pegasus Park, Brussels. Regus took possession of the 5,520 sq.m. serviced office building in May, and a third 8,700 sq.m. building is under construction for Cisco Systems, who have also contracted to lease a fourth building of 7,900 sq.m. to commence construction in October. Work is due to start soon on a new speculative phase of 16,300 sq.m. which includes a prelet 3,600 sq.m. health/fitness centre.
In France, the Marly la Ville site acquired in December 1999 will be fully built out and leased by the end of the year. The strong demand for modern logistics warehouses in the Paris area will have allowed the construction and letting of 97,700 sq.m. in four buildings all within twelve months.
In central Paris the 4,395 sq.m. Rue Vineuse office redevelopment was completed in July on schedule, having been sold prior to completion.
The Group’s programme of small industrial/business park developments in Germany continued with phases totalling 18,800 sq.m. under construction at Neuss, Mönchengladbach and Hamburg and a further 18,500 sq.m. scheduled to commence at Kapellen and Ratingen in the autumn.
Outlook
There are firm grounds to believe that European economies will see sustained growth in the short to medium term and that North America will move ahead, albeit not at the same high levels as those that have been experienced recently. In consequence, inflation and interest rates should continue to be low which will assist the maintenance of a confident business environment. It follows that prospects for the property sector are sound and we believe that prime business centres will show particularly good growth.
The Group’s policy of selective development in such locations should deliver strong new cash flow and earnings returns to add to those which the Group currently enjoys from a focused and high quality portfolio of investments.