| Wed 12 Feb 2003, 10:26 | | Liberty International Plc - 2002 Preliminary Resul |
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Liberty International Plc - 2002 Preliminary Results Announcement
Release Date: 12/02/2003 09:15:44 Code(s): LBT
Liberty International Plc - 2002 Preliminary Results Announcement
LIBERTY INTERNATIONAL PLC
(Registration number UK3685527)
ISIN Code: GB0006834344
JSE Code: LBT
Issuer Code: LILI I
LIBERTY INTERNATIONAL PLC 2002 PRELIMINARY ANNOUNCEMENT
12 FEBRUARY 2003
Contents
This document contains:
Highlights
Chairman`s Statement and Review of Operations
Preliminary results
Financial review
Further Information:
Liberty International PLC is today making a presentation to property analysts
in London. The full text of this presentation, which does not form part of the
Preliminary Announcement, is available today on Liberty International PLC`s
website at www.liberty-international.co.uk.
Enquiries:
Liberty International PLC:
David Fischel Chief Executive +44 (0)20 7960 1207
Aidan Smith Finance Director +44 (0)20 7960 1210
Public relations:
UK: Michael Sandler,
Hudson Sandler +44 (0)20 7796 4133
SA: Gareth David,
College Hill Associates +44 (0)20 7457 2020
Nicholas Williams,
College Hill Associates +27 (0)11 447 3030
LIBERTY INTERNATIONAL PLC
PRELIMINARY RESULTS FOR THE YEAR ENDED 31 DECEMBER 2002
HIGHLIGHTS
Liberty International PLC is a major listed property group owning 100 per
cent of Capital Shopping Centres PLC ("CSC"), the leading UK regional shopping
centre business, and Capital & Counties plc, a commercial and retail property
investment and development company in the UK and USA.
Donald Gordon, Chairman of Liberty International, commented:
"The 2002 year was one of major progress in achieving Liberty International`s
corporate objectives with further dynamic expansion and successful enhancement
of the group`s shopping centre and other real estate business.
Despite the turbulent and volatile conditions currently prevailing in the
world`s financial and securities markets, our chosen sectors in the real estate
markets, notably our shopping centre and retail businesses, which comprise
around 90 per cent of the group`s total assets, have continued to produce a very
sound and stable outcome, demonstrating in particular the exceptional resilience
of our prime regional shopping centre assets."
12 February 2003
Results
* Net asset value per share (adjusted *) increased by 4.2 per cent from 827p
at 31 December 2001 to 862p at 31 December 2002, after providing for the year`s
dividend of 23.75p per share
* Revaluation surplus for the year -
% GBPm
Regional shopping centres (UK) 5.2 177.0
Other commercial and retail (UK) (2.2) (15.4)
USA 9.3 15.9
Overall 4.2 177.5
* Net property investment income, including share of joint ventures,
increased by 10 per cent to GBP224.1 million (2001 - GBP203.9 million)
* Like for like increases in net property investment income
2002 2001
% %
- Regional shopping centres (UK) 5.3 4.6
- Other commercial and retail 1.4 8.7
- Overall 4.3 5.7
* Profit on ordinary activities before taxation of GBP103.8 million (2001 -
GBP90.9 million), an increase of 14 per cent
* Profit on ordinary activities before exceptional items and taxation of
GBP86.6 million (2001 - GBP79.5 million), an increase of 9 per cent
* Exceptional profits of GBP17.2 million (2001 - GBP11.4 million)
Exceptional profits include GBP6.5 million on disposal of shares in other
property companies and GBP9.6 million (2001 - GBP8.3 million) on repurchase of
CSC unsecured bonds.
* Basic earnings per share including exceptional profits of 28.54p (2001 -
25.89p restated), an increase of 10 per cent
* Earnings per share before exceptional items (adjusted *) of 25.58p (2001 -
24.49p), an increase of 4.5 per cent, after underlying tax charge of 16.5 per
cent (2001 - 14.7 per cent)
* Annual dividend increased by 4.4 per cent from 22.75p per share to 23.75p
per share, continuing progressive dividend policy
* net asset value and earnings per share before exceptional items have been
adjusted where indicated to exclude the impact of deferred tax on capital
allowances (see Note 1 on change of accounting policies in relation to the
recently introduced FRS19)
Financial Position
* Shareholders` funds increased from GBP2,342 million (restated) to GBP2,683
million after GBP157.5 million net proceeds of share placing and revaluation
surplus for the year of GBP177.5 million
* Share placing in November 2002 of 28.4 million new ordinary shares (9.9 per
cent of then issued share capital) at 560p per share raising GBP157.5 million
after expenses. The net proceeds of the placing have been applied to the
increased ownership of the Victoria Centre, Nottingham, and to strengthen the
group`s capital base for the overall development programme
* Total return for the year (net asset value per share growth and dividend)
of 10.6 per cent before taking into account the effect of the share placing in
November 2002
* Debt to assets ratio constant at 40 per cent with aggregate net debt of
GBP1.89 billion (31 December 2001 - GBP1.70 billion)
* Interest cover, excluding exceptional profits, constant at 1.67 times (2001
- 1.66 times) - including exceptional profits 1.86 times (2001 - 1.81 times)
* Completion of GBP211 million 12 year, non-recourse term financing secured
on The Chimes, Uxbridge and The Glades, Bromley, and GBP134 million 12 year non-
recourse financing secured on The Potteries, Hanley (of which CSC`s share is now
50 per cent), further strengthening the group`s long term debt structure
* In accordance with overall financing strategy of concentrating on non-
recourse asset specific debt, repurchase of a further GBP125 million of CSC
unsecured bonds. The original GBP350 million of CSC unsecured bonds in public
issue reduced by repurchases to GBP113 million at 31 December 2002 (6 per cent
of aggregate debt) and further reduced since 31 December 2002 to GBP107 million
* Weighted average debt maturity of 12 years and weighted average interest
rate, largely fixed rate, of 6.29 per cent, excluding GBP230 million of historic
long term Capital & Counties first mortgage debentures issued between 1987 and
1991 (6.76 per cent overall)
* Cash balances of GBP72 million and unutilised committed bank facilities of
over GBP500 million at 31 December 2002
Property activities
* Aggregate net capital investment in the year of GBP319 million (2001 -
GBP164 million)
* Commitment to major 510,000 sq.ft. regional shopping centre at Norwich
being developed for CSC by Lend Lease Europe. Site clearance works have now
commenced for scheduled completion in 2005. CSC`s commitment estimated at
GBP275 million (GBP40 million paid to date), subject to the level of rental
income achieved which is currently estimated at GBP18 million per annum
* Effective interest in the Victoria Centre, Nottingham increased from 38 per
cent to 100 per cent for a net investment of GBP157 million. Nottingham as a
city is rated 5th nationally by size of shopping population. The centre itself
by size ranks within the top 10 UK shopping centres
* Outline planning permission obtained for Braehead, Glasgow, Phase 2
development, a major regeneration project on 145 acres, involving a mix of
leisure, residential and office uses anticipated to create over 2,000 additional
jobs at Braehead
* Acquisition by Capital & Counties for $119 million (GBP75 million) of
Serramonte Shopping Center, Daly City, San Francisco. By year-end, Serramonte`s
valuation had increased by 20 per cent to $142.5 million (GBP88.5 million)
* Commencement of construction of GBP85 million MetroCentre, Gateshead,
extension for 2004 completion, creating 371,000 sq.ft. of prime retail space
including a new Debenhams department store, 28 new shop units and an 1,100 space
covered car park. MetroCentre will become Europe`s largest covered shopping
centre at 1.78 million sq.ft. overall.
* GBP32 million investment to increase interest in The Potteries Shopping
Centre, Hanley, Stoke on Trent from 35 per cent to 50 per cent converting our
interest to freehold under new joint venture arrangement
Investment properties
* Investment properties of GBP4.54 billion (2001 - GBP4.06 billion) of which
retail in aggregate comprises 90 per cent and regional shopping centres
specifically amount to 82 per cent of the total
* Valuation yields
- Weighted average true equivalent yields improved from 6.19 per cent to
6.10 per cent for UK regional shopping centres
- initial 7.0 per cent (31 December 2001 - 6.6 per cent) reverting to 8.15
per cent (31 December 2001 - 8.4 per cent) for UK investment properties of
Capital & Counties
* Strong lease maturity profile as at 31 December 2002
Lease maturities as a
proportion of current rent
Over
0-5 6-10 11-15 15
years years years years
Regional shopping centres (UK) % 5 29 49 17
Other commercial and retail (UK) %
(including tenants` options to break) 46* 21 26 7
* of which more than half relates to 2006 and 2007
* Extremely low level of voids
- 15 units (2001 - 19 units) out of 1,417 at CSC representing less than 0.5
per cent of passing rents
- 3.5 per cent (2001 - 1.0 per cent) of passing rents at Capital &
Counties, excluding two developments completed at the end of 2001
* Active management
- 108 tenancy changes (2001 - 98) in the year at CSC with aggregate new
passing rents of GBP18.6 million compared with GBP14.7 million on outgoing
tenancies
Trading
* Retailer sales growth at CSC centres in 2002 overall estimated to have
exceeded ONS non-food sales growth of 4.0 per cent
* Braehead, now in fourth year of trading, continues double digit growth in
retailer sales figures
* Uxbridge, into second year of trading in March 2002, also shows encouraging
double digit growth in retailer sales for the comparable nine month period
* Lakeside and other centres overall continue to record strong positive year
on year sales growth
Share capital and FTSE-100 index
* Trading of Liberty International shares on London Stock Exchange moved from
quote-driven SEAQ system to order driven SETS system, with a view to improving
liquidity and reducing dealing spread
* Liberty International became a constituent of the UK`s FTSE 100 Index of
leading companies on 23 December 2002 at number 89. The company was ranked
number 78 as at the close of business on 10 February 2003 with a market
capitalisation of GBP1,730 million on the basis of a 553.5p share price.
Prospects
* Continued reversionary annual rental income potential at both CSC and
Capital & Counties in aggregate estimated at around GBP30 million in excess of
current passing rents.
* Aggregate committed development programme for the group now amounting to
some GBP425 million.
* Significant pipeline of development opportunities including major new
regional shopping centres at Cardiff and Oxford, together with important
extensions within many of CSC`s existing centres
* Strong competitive position and franchise as leading UK company in regional
shopping centre industry
- 3 out of town and 6 in-town centres in the UK
- 6 of the group`s 9 completed UK centres rank in the UK`s top 15 centres
- over 180 million customer visits per annum
- catchment areas serving over one-third of UK`s population
- strong countrywide relationship with major retailers
- extensive experience of working with partners and local authorities
- active management approach treating shopping centres as businesses
- first US regional shopping centre acquired in 2002 in San Francisco Bay
area
- committed development programme and other opportunities will increase
scale substantially
DIVIDENDS
The Directors of Liberty International PLC have proposed a final ordinary
dividend per share of 12.5p (2001 - 12.0p) to bring the total ordinary dividend
per share for the year to 23.75p (2001 - 22.75p).
The following are the salient dates for the payment of the final dividend:
27 March 2003 Sterling/Rand exchange rate struck.
7 April 2003 Ordinary shares listed ex-dividend on the JSE Securities
Exchange South Africa.
9 April 2003 Ordinary shares listed ex-dividend on the London Stock
Exchange.
11 April 2003 Record date for final dividend in London and Johannesburg.
2 May 2003 Dividend payment day. Where previously requested, dividend
cheques available for collection from Registrar.
South African shareholders should note that, in accordance with the
requirements of STRATE, the last day to trade cum dividend will be 4 April 2003.
No dematerialisation or rematerialisation of shares will be possible on the JSE
Securities Exchange from 7 April to 11 April inclusive.
No transfers between the UK and South African registers may take place from
27 March to 11 April inclusive.
CHAIRMAN`S STATEMENT & REVIEW OF OPERATIONS
INTRODUCTION
The 2002 year was one of major progress in achieving Liberty International`s
corporate objectives with further dynamic expansion and successful enhancement
of the group`s shopping centre and other real estate business. On 23 December
2002, the company recorded the significant milestone of entry into the FTSE 100
index of the UK`s leading listed companies in 89th position. Since then, in the
first six weeks as a constituent of the index, our ranking has improved
substantially, in a period of extremely weak international stockmarket
conditions, to number 78 at the close of business on 10 February 2003.
Liberty International`s overall results show a strong and steady improvement.
Profit before taxation increased by 14 per cent (9 per cent if exceptional
profits are excluded) and passed the GBP100 million landmark at GBP103.8
million.
Our financial position remains extremely sound. Shareholders` funds increased
from GBP2.34 billion to GBP2.68 billion after a GBP177.5 million revaluation
surplus and a successful capital raising in November 2002 of GBP157.5 million in
an extremely difficult capital market environment. Net assets per share
increased from 827p to 862p. The total return to shareholders for the year in
terms of net assets per share growth and dividend amounted to 10.6 per cent
before taking into account the November share placing. The key debt to assets
ratio remained virtually unchanged at 40 per cent despite significant net
capital investment including acquisitions of over GBP300 million in the year.
The resilience of prime regional shopping centres was clearly demonstrated by
a valuation surplus of GBP177 million (5.2 per cent) in a year when equity
markets performed poorly, many sectors of the economy have struggled and, in the
property industry, office markets have come under considerable pressure. Two of
the most prominent investments, increasing our ownership level in The Victoria
Centre, Nottingham, to 100 per cent for a net outlay of GBP157 million and the
$119 million (GBP75 million) acquisition of the Serramonte Shopping Center, Daly
City, San Francisco, were both significant contributors to the year`s
substantial overall valuation surplus.
We have a powerful nationwide franchise in the UK shopping centre business,
with six of our nine completed centres ranking in the UK`s top fifteen shopping
centres, each a market leader in its region, benefiting from their scarcity
value and the positive impact for established major shopping centres of the
strict UK planning regime. Overall, our centres receive some 180 million
customer visits per annum. Comparison shopping in attractive destinations
continues to be an integral part of UK lifestyles and, as a core activity,
exhibits strong stability.
The group has a committed development programme of around GBP425 million
which is fully funded by existing cash and committed long term bank facilities.
We have paid careful attention to the risk profile of the group`s current
developments with a substantial proportion involving important extensions to
existing centres with proven successful track records. Also, the arrangements
for the largest currently committed project, Chapelfield Norwich where Lend
Lease Europe is the developer on our behalf, substantially insulate the group
from construction and initial letting risk.
In addition to the committed development programme, we have a strong pipeline
of new opportunities, including major city centre projects at Cardiff and Oxford
and substantial extensions within CSC`s existing centres. Capital & Counties is
also working on a number of promising projects both in the UK and US. These
opportunities in aggregate will significantly increase the scale of Liberty
International`s business and will position the group to continue our track
record of sound consistent growth.
A strong capital base is a pre-requisite for profitable expansion. In
November 2002, Liberty International successfully raised GBP157.5 million of
additional equity, by placing 28.4 million new ordinary shares (9.9 per cent of
Liberty International`s then issued share capital) at 560p per share. The
shares were placed with a range of UK and international institutional investors.
This placing was a major achievement in a difficult equity market and an
important component of the group`s overall strategic financing plans in order to
maintain the debt to assets and interest cover ratios of Liberty International
at appropriate levels, where the cost of capital is optimised.
DIVIDENDS
The Directors are recommending a final ordinary dividend of 12.5p per share
payable on 2 May 2003, to bring the full year`s dividend to 23.75p per share, an
increase of 4.4 per cent on 2001, continuing our long track record of annual
dividend growth.
The Directors regard a full and progressive dividend policy as an important
investment attraction to Liberty International shareholders. In fact our
dividend per share has grown over five-fold since 1984 when a dividend of 4.55p
was paid. This represents a compound growth rate of close to 10 per cent and is
a reliable measure of the group`s robust performance since we focussed our
operating activities primarily on real estate, with a particular emphasis on
large scale regional shopping centres.
Our policy continues to be to distribute virtually all the group`s recurring
net income after tax. Trading and other exceptional profits, which are less
predictable than the underlying net property investment income, tend to be
retained to assist in delivering the long term growth of the business.
Our primary objective is long term performance, measured by total return, the
combination of growth in net assets per share, primarily through capital
appreciation of our assets, and net dividends. In our experience, rising
dividends and capital appreciation are generally closely linked over any
reasonable time period.
PROPERTY VALUATIONS
Our strong property valuations as at 31 December 2002 were this year released
to the market separately on 28 January 2003 at the earliest opportunity, in
conformity with good corporate governance practice, ahead of the full year
results in order to keep shareholders fully informed of these important figures,
which we judged were substantially in excess of market expectations.
The overall valuation surplus for the year amounted to an exceptionally
encouraging level of GBP177.5 million, equivalent to 54p per Liberty
International share, compared with GBP19.6 million at the 2002 half year stage
and GBP12 million for the whole of 2001.
UK regional shopping centres generated an aggregate surplus of GBP177.0
million (5.2 per cent) through a combination of higher rental values (GBP71
million), improvements in the true equivalent yield bases used by the valuers
(GBP65 million) and the balance of GBP41 million relating to net capital
investment and acquisitions during the year.
The result from the commercial and other retail properties of Capital &
Counties, which represent some 20 per cent of the group`s assets, was more mixed
with effectively an overall neutral result. A 4.1 per cent fall in the value of
Central London assets and a 4.5 per cent fall in M25 and South East offices was
almost exactly offset by a 5.3 per cent surplus on primarily retail properties
in other UK cities and a 9.3 per cent surplus from our US assets, notably
through a strong performance from the recently acquired Serramonte Shopping
Center, Daly City, San Francisco.
Our prime UK regional shopping centre yields at around 6 per cent showed only
a marginal improvement in the year and the asset class is currently valued on a
yield basis in excess of long gilts, where yields reduced sharply in the year
from around 5 per cent to below 4.5 per cent at year end. By way of comparison,
at the end of 1994, the year when Capital Shopping Centres was listed as the
UK`s first specialist shopping centre business, the benchmark yield for prime
regional shopping centres was around 7.5 per cent at a time when UK gilts
yielded around 8.5 per cent.
One would typically expect tangible and reliable growth assets to trade on a
yield basis below that of UK Government securities. Over the 30 year period
since the group first invested in regional shopping centres, these unique assets
have shown a consistent record of rental growth, reflecting their scarcity
value, market leadership in their trading locations, active management of tenant
mix, growth in tenant sales, changing community lifestyles and various other
positive factors.
Perversely a situation has prevailed for some 5 years where in valuation
terms regional shopping centre yields have exceeded gilt yields. Assets such as
ours of true quality and scarcity value, irreplaceable in the tight UK planning
environment, seldom change hands. Assets, which change hands more regularly,
for example high street shops, retail warehouses and secondary shopping centres,
have shown far greater fluctuations in yield. In the case of prime high street
shops, yields have regularly been below those of regional shopping centres and
at times in the range of 4.0 per cent to 5.5 per cent.
Our judgement remains that our UK regional shopping centres are very defensively
valued hard assets on a yield basis substantially in excess of gilt yields and
the likely long term returns from this valuation basis compare very favourably
with other asset classes.
CORPORATE GOVERNANCE AND HIGGS REVIEW
We have always placed a high priority on sound corporate governance and have
benefited enormously from a well balanced Board structure combining a
professional executive team with experienced and knowledgeable non-executives
dedicated to the overall success of the business and actively involved in major
decisions.
We have therefore read with some alarm the recently published Higgs Review.
The Review has substantially toughened the definition of "Independent Director"
with the result that our non-executives, with one exception, could under this
definition be termed non-independent. At the same time, the Review recommends
that, excluding the Chairman, at least half the Board should be "Independent
Directors" with an expanded role, particularly in the area of new nominations to
the Board, including the Chairman.
Should the Higgs Review proposals be adopted, compliance would be virtually
impossible for Liberty International without a substantial Boardroom upheaval,
including for example, if no current non-executive directors retired or
resigned, as many as 10 new independent non-executive director appointments,
with a concomitant extensive training requirement. This would certainly not be
in the best interests of shareholders, the company or management effectiveness
and stability.
Based on over 40 years experience as Chairman, or Deputy Chairman and in some
cases as a senior non-executive director, of a significant number of highly
successful listed companies, including financial institutions in the UK, I have
regretfully come to the conclusion that the bulk of the Higgs recommendations,
which surprisingly appear to give no primacy to business judgement, are
unrealistic, impractical and likely to be seriously detrimental if fully
adopted. In particular, the recommendations risk creating a divisive,
unmanageable and dysfunctional structure and relationship between the Chairman,
Executives and Non-Executives. Furthermore, the doctrine of "comply or
explain" is unlikely in practice to be interpreted with sufficient discernment
and flexibility by investors or commentators to make non-conformity with the
principal Higgs recommendations a viable option, however convincing the
explanations.
In my view, full implementation of the recommendations would be a substantial
handicap in a business world becoming more competitive and challenging by the
day. Some of the recommendations, such as precluding a highly successful and
competent Chief Executive from becoming Chairman of the same company in due
course, are palpably absurd and unhelpful.
CAPITAL SHOPPING CENTRES
Overview
Major regional shopping centres in the UK admirably fit our investment
criteria of quality, scarcity value and scope for active management and
creativity. The year`s results, both in terms of like for like net property
investment income growth of 5.3 per cent and a valuation surplus of around 5.2
per cent, confirm the strength and solidity of the asset class.
The business requires the high degree of specialisation which we possess in
order to produce exceptional returns and the benefits of CSC`s scale are
considerable in a very restrictive planning environment. Active management of
tenant mix, which requires a close relationship with retailers to understand
their requirements, combined with effective marketing and promotion in an
attractive overall environment, are key to maintaining the centres` attraction
to shoppers.
To the greatest extent possible, we aim to have the country`s leading
retailers trading out of flagship stores of optimal size in our centres which
provide an unsurpassed trading opportunity in terms of quality and geographic
diversity. Our goal is to increase over time our centres` market share of UK
non-food retail sales, thereby producing above average rental income growth.
Rental income in established quality centres has, based on our experience
over a considerable period, exhibited a strong and stable growth profile, even
in times of less buoyant consumer spending. In fact such circumstances, when
the consumer looks for greater comparison before committing to purchases, more
readily enable large quality centres to outperform secondary locations.
Retailer Sales
While some sectors of UK industry suffered in the year, overall GDP growth in
the UK in 2002 has been estimated at 1.7 per cent, not an exciting outcome but
certainly not recession. Retail sales in the UK as measured by the British
Retail Consortium increased during the year by 1.7 per cent on a like for like
basis in terms of selling space and 4.1 per cent overall. These figures are
largely consistent with the Office for National Statistics (ONS) figure of 4.0
per cent increase in non-food retail sales and represented a steady outcome,
defying extreme predictions of either boom or bust.
Overall retailer sales at our centres continued to exceed these national
statistics, indicating a steady increase in market share by our prime portfolio,
based on turnover information from our retailers and estimates where these were
not available.
Excellent sales figures continue to be reported by our retailers at Braehead,
Glasgow, now in its fourth year of trading and still maintaining double digit
growth. The Chimes, Uxbridge, which opened in March 2001 also achieved double
digit growth in retailer sales for the comparable nine month period to December
2002. Lakeside and the other centres continue their overall growth profile
showing strong positive comparisons for the twelve month period.
Active tenant mix management
Through our active approach to managing our shopping centres, 108 tenancy
changes took place in 2002, compared with 98 in 2001, some 8 per cent of overall
retail units and producing additional annual rental income of nearly GBP4
million. At the year end, voids only amounted to 15 units, representing 1% of
the total - evidence of the good level of demand by retailers for space in our
centres. Demand was particularly strong for larger units in excess of 10,000
sq.ft. where scarcity is leading to positive competition.
Promotional income
The recently established CSC Enterprises made considerable progress in 2002
in entering into contracts to promote additional commercial opportunities from
advertising, branding and promotions by combining our powerful portfolio of
shopping centres. These contracts are expected to generate meaningful revenue
in 2003, with growth potential thereafter.
Completed Shopping Centres - an active year
In line with our strategy of focussing on dominant regional shopping
locations, the group increased its investment in the Victoria Centre,
Nottingham, in November to become the 100% owner through a restructuring of the
limited partnership owning the centre. At nearly one million sq.ft. and
anchored by John Lewis and House of Fraser, the Victoria Centre is one of the
top 10 centres in the UK. Also in line with our strategy and as reported at the
half year, we increased CSC`s share in The Potteries, Hanley from 35% to 50%.
In October, we sold our share of The Ridings Shopping Centre, Wakefield, and
adjoining properties in Kirkgate for GBP32 million, a price in excess of the
gross valuation. The Ridings was our smallest shopping centre investment and no
longer fitted in with the size and scale of the other shopping centres owned by
the group.
At Lakeside, Thurrock, the works to refurbish and modernise the malls
commenced in January 2003 and are scheduled to be completed by July 2004. The
refurbishment programme is aiming to provide an even more attractive shopping
experience for Lakeside customers. During 2002, we instigated 22 tenancy
changes through active management. At the year end, voids at the centre were a
negligible 2 units, a clear reflection of retailer support for Lakeside, our
flagship and a pre-eminent shopping centre in the UK.
Good progress is being made on the redevelopment of part of the MetroCentre,
Gateshead, to provide a new Debenhams department store, 28 additional shop units
and an 1,100 space car park. The work started in July 2002 and is on target for
completion in Autumn 2004. There is strong interest from retailers for the new
shop units. This long awaited project will increase the size of MetroCentre to
become Europe`s largest covered shopping centre at 1.78 million sq.ft. and
revitalise an important sector of the centre.
Following Renfrewshire Council`s resolution to give a favourable
determination to our outline planning application for the mixed use development
of the Braehead, Glasgow, Phase 2 land of 145 acres, we continue to progress the
proposed leisure scheme under a joint venture with Capital & Regional plc for an
Xscape Snowdome. The other main uses are residential, where we have commenced
discussions with house builders, and business office space. This major
regeneration project is anticipated to create over 2,000 jobs, further
strengthening the Braehead location which is already Scotland`s premier shopping
and leisure destination.
At Eldon Square, Newcastle upon Tyne, discussions continue with Newcastle
City Council concerning the redevelopment of the southern end and other parts of
the centre, combined with a restructuring of the long term lease arrangements,
potentially enabling an increased participation by CSC.
We continue to actively pursue asset management opportunities with projects
being progressed or in contemplation at most of the other completed centres.
Development activity
Documentation was entered into with Lend Lease Europe in May in respect of
the development of Chapelfield, Norwich, under arrangements whereby Lend Lease
Europe would develop the Centre on behalf of CSC who will become the owner on
completion.
All the pre-conditions to commencing the development were met in December,
triggering an initial GBP40 million contribution by CSC. Demolition and other
site preparation works are now well advanced and completion is targeted for
Autumn 2005. Lend Lease Europe is making good progress with lettings and at the
year end reported 45 per cent of the space was let and a further 18 per cent of
the space was under offer or terms had been agreed.
When completed, Chapelfield, anchored by a House of Fraser department store,
will be the dominant shopping centre in the Norwich region providing 510,000
sq.ft. of retail space. Our total commitment, excluding the residential
element, is estimated at GBP275 million subject to the level of rental income
achieved in the completed centre.
Our proposals under a joint venture with LaSalle Investment Management to
substantially expand, upgrade and improve the Westgate Centre in Oxford remain
at the planning stage. The Planning Inspector for the Public Inquiry held in
November 2001 recommended consent be granted for the scheme, which has the
overwhelming support of Oxford residents and would bring much needed additional
quality retail space to the city. Regrettably, the Secretary of State`s
decision in September 2002 to overturn his Inspector`s recommendation is
unsupported by the conclusions reached by the Inspector and the facts of this
case. In the face of what we consider to be a perplexing and unjustified
decision, we have lodged a legal challenge in the High Court, while, in
addition, Oxford City Council have submitted their own legal challenge to the
Secretary of State`s decision.
Following an extensive public participation exercise, a planning application
was made at the end of October 2002 by our joint venture with Land Securities
Group PLC to extend the St David`s Centre in Cardiff, with a major retail led
mixed use extension of approximately 715,000 sq.ft. of retail space. A decision
on the planning application is expected during 2003.
CAPITAL & COUNTIES
Capital & Counties continues to be an important adjunct to the high profile
shopping centre business. The business gives the group involvement in Central
London and other forms of retail and a window into the US from where so many
significant real estate trends have emerged. In addition, the wider range of
activities ensures that the group has additional skills of value to the shopping
centre business as mixed use development has become a preferred UK planning
approach.
After many years of exceptional returns, 2002 was a year of more subdued
performance for Capital & Counties, which represents some 20 per cent of the
group`s overall assets, around half of which are retail.
UK
In the UK, Capital & Counties has in 2002 continued to see net property
income increase over the prior year (3 per cent on a like for like basis) but
the increasing availability of office space within its core investment locations
of the West End of London and, worse affected, the Western M25, has had the
effect of reducing reversionary rental expectations and capital values.
Vacancy levels overall in the UK amount to 3.5 per cent at 31 December 2002
(2001 - 1.0 per cent) excluding the two developments referred to below.
No acquisitions have been made in the UK since contracts were exchanged in
2001 for the GBP70 million purchase of King`s Reach on London`s South Bank,
mainly because strong investor sentiment in our core areas had resulted in some
excessive price expectations by vendors. However, 2003 may offer better
opportunities to continue to increase the critical mass of the core West End
portfolio.
Central London
West End, Mid Town and now South Bank offices are the largest elements of the
portfolio. Availability within these markets has increased over the year to
levels, in our estimation, last experienced in 1994. As a consequence
reversionary rental values have generally decreased over the year by around 10
per cent with the possibility of some further reduction during 2003. The
emphasis in 2002 has been to deal with rent reviews as early as possible, secure
income continuation on lease renewal and refurbish any unmodernised space to the
highest standards when it falls vacant. The programme to install air
conditioning to all West End office space continues. At King`s Reach, we are
making significant progress in working towards the major upgrade and
repositioning of that investment when the principal tenant`s lease expires in
2007.
The resilience of the retail element of Central London investment properties
has continued, with no current vacancies.
M25 and South East Offices
The Western M25 has seen substantial new office supply, mostly released by
tenants. There is a consequent reduction of up to 20 per cent in effective
rental values though this is obscured by tenant incentive packages. It seems
unlikely that there will be short-term improvement in this market and at Capital
Court, Uxbridge, the company`s recently developed 58,000 sq.ft. scheme,
attracting tenants is proving more difficult. However, a satisfactory letting
of the ground floor of that building was completed after the year end. The
other principal void is 32,500 sq.ft. at the second phase of the development at
Capital Park, Cambridge. Discussions are underway for a potential letting of a
substantial element of that space, and terms are agreed for a potential prelet,
enabling the development of a further 40,000 sq.ft. building on the Park.
Capital & Counties` flexible lease policy (Capitalease) has together with the
Capital Services entity proved effective in engaging tenants` interest for these
vacant buildings.
Provincial & Out of Town Retail
Total return on these investments was 11.7 per cent over the year. Major
initiatives to achieve future performance are under way at the Manchester and
Liverpool department stores. Further advanced is the concept for the
substantial department store at Manchester where we are working together with
the occupiers to promote alternative use for the unoccupied upper floors. The
scheme proposed for this space would provide 140,000 sq.ft. of high quality
offices with an imposing new entrance on Fountain Street. A resolution to grant
planning consent was obtained in January 2003 from Manchester City Council.
At Swansea an agreement was completed with the City Council for a new long
lease of the retail units surrounding the major anchor of Swansea market.
Braintree Retail Park continues to improve as a result of the factory outlet
centre and a new multi-use leisure scheme adjacent to the park. At Stafford
Retail Park, initiatives continue to enhance tenant mix. Passing rents average
only GBP10.50 per sq.ft. and GBP10 per sq.ft. respectively at those two schemes
which total 240,000 sq.ft. of space.
Capital Enterprise Centres
This joint venture was established in 2001 to create intensively managed and
flexible industrial and business space in the South East. Four projects were
acquired in 2002. These will provide a total of 235,000 sq.ft. of space and
terms are agreed for a further scheme of 57,000 sq.ft. The first centre in
Chelmsford, Essex, will open in April 2003 with all schemes to be managed by our
partner.
US
In March, the company completed the acquisition of Serramonte Shopping
Center, a high quality, well located regional shopping centre in Daly City
adjacent to and south of the City of San Francisco. The property was acquired
because of its solid track record of consistent income and the potential to
enhance the income through management, leasing, marketing, expansion, and
development initiatives. The success of this acquisition contributed to a
strong overall 2002 performance by our US activities.
Part of the acquisition cost of Serramonte was financed by the disposal for
$28 million of two retail properties in Seattle and at Hayward, San Francisco
Bay area, where value adding strategies had been successfully implemented. The
proceeds from both sales were reinvested in Serramonte enabling the deferment of
capital gains tax consequent upon those disposals.
During 2002 we completed the assembly and acquisition of a full city block in
Pasadena, California and secured planning consents for a mixed use project with
16,500 sq.ft. of retail space and 304 apartments. The land and planning
approvals were transferred to a new joint venture with Shea Properties, a
prominent West Coast developer of apartment communities. Shea Properties is
responsible for financing all additional costs and construction of the project
which will start in 2003.
OTHER INVESTMENTS
Other investments amounted to GBP151 million at 31 December 2002 (2001 -
GBP178.9 million) comprising primarily the group`s GBP62.5 million holding of
units in the Edinburgh Property Portfolio and a 19.4 per cent interest valued at
GBP88 million in another UK listed property company, Great Portland Estates, a
London West End specialist company which has had an infusion of new management
in 2002. This interest has been increased since the year end on share market
weakness to 22 per cent.
The Edinburgh Property Portfolio is an Authorised Property Unit Trust which
Capital & Counties manages on behalf of Edinburgh Fund Managers. The fund has
continued to grow through strong new cash flows, increasing in size from GBP80
million to GBP125 million during 2002. As a result, Capital & Counties` interest
in the fund has reduced from 73 per cent to 50 per cent.
Significant exceptional profits of GBP13.3 million were recorded in the year
on the sale of holdings in Rodamco North America and other listed property
companies, of which only GBP6.5 million was recognised in the profit and loss
account for the year as the balance of GBP6.8 million had been included in
revaluation reserves at the end of 2001.
While these investment activities only constitute a small part of the group`s
overall operations, they ensure we remain closely in touch with developments in
listed property share markets around the world and represent a worthwhile and
advantageous extension of our activities.
We were also pleased to record an exceptional profit of GBP2.8 million in
2002 by way of final deferred consideration from the sale in 2001 of the
Portfolio unit trust business following its continued strong performance under
Edinburgh Fund Managers.
ECONOMIC AND FINANCIAL BACKGROUND
2002 was another dismal year for financial markets generally with the UK and
US stock markets showing a third consecutive year of negative returns. The FTSE
100 fell by 24.5 per cent in the year compared with a 23.4 per cent fall in the
S&P 500. This performance was eclipsed by truly dreadful performances in the
major German and French stock markets with the DAX falling by 45 per cent and
the CAC falling by 34 per cent. 2003 has also started very unpromisingly, with
the confidence of investors particularly eroded by the unstable situation in the
Middle East.
Property shares in the UK as measured by the FTSE 350 Real Estate Index fell
by 4.6 per cent overall. The discount to headline net asset value per share
across the FTSE 350 Real Estate Sector was estimated at a substantial 36 per
cent at 31 December 2002. Office specialists suffered particularly during the
second half of the year as investor perceptions of the outlook for office
markets deteriorated significantly. However Liberty International`s share price
increased in the year by 17 per cent from 484p to 565p, reflecting its
predominantly retail asset mix.
Direct property markets overall in the UK held up well with the Investment
Property Databank ("IPD") Monthly Property Index showing a 12 month total return
of 10.5 per cent. However, this result masked a significant divergence between
the performance of offices at 5.9 per cent (including a capital loss of 2.0 per
cent) and retail (mostly not comparable with CSC`s centres) showing 14.0 per
cent total return (including capital appreciation of 6.5 per cent).
The remarkable and sustained outperformance by investment properties in
comparison with equities and gilts has therefore continued for a further year.
Property as measured by the IPD Monthly Index has now outperformed equities and
gilts for one, three, five and ten year periods. Those investors who have
missed this major trend change may be tempted to conclude that now would be too
late to change their investment strategy. This conclusion may still be
erroneous when viewed against property`s initial yield (6.91 per cent at 31
December 2002 according to the IPD Monthly Index) compared with 4.5 per cent on
long gilts and a dividend yield of around 3.5 per cent on the UK All Share Index
at 31 December 2002.
CORPORATE SOCIAL RESPONSIBILITY
A responsible and forward looking approach to environmental issues has been
an important factor in the Liberty International Group`s successful track record
in the UK property industry, where we have established an enviable reputation
for the high standard of our products.
For over 30 years, we have specialised in regenerating redundant or derelict
land, creating the highest quality regional shopping centres and other prime
retail and commercial properties. The positive impact of our property
developments on lifestyles in the United Kingdom is amply evidenced by the 180
million customer visits each year to our UK regional shopping centres.
However, we are aware that shareholder, Government, and stakeholder
expectations are constantly evolving. Our prime aim is to deliver long-term
shareholder value and, in order to do so, we must fully appreciate the
opportunities and risks associated with a wide range of environmental issues
which are assuming ever greater prominence in our affairs. How we manage our
relationship with the environment and our stakeholders - the community, our
shoppers and occupiers and our employees - is vital to the long-term success of
our business. These issues are now collectively termed our Corporate Social
Responsibility (CSR).
We have therefore taken the decision to publish for the first time, with our
2002 Annual Report, a separate report summarising our CSR policy and progress.
This report will be available from the Company Secretary and will be published
on the Company`s website, www.liberty-international.co.uk.
We need no convincing that the creation of long-term shareholder value
requires a strong commitment to high standards of Corporate Social
Responsibility and clear communication thereof both internally and externally.
DIRECTORATE AND MANAGEMENT
Farrell Sher, Executive Director responsible for Legal and Corporate Affairs,
has announced his intention to retire with effect from this year`s Annual
General Meeting. I have worked with Farrell for over 37 years since 1966 when
he joined Liberty International`s former parent, the Liberty Life group in South
Africa. Since coming to the UK in 1994, he has made a major contribution to the
UK group`s success over this period. He has been an excellent colleague of
impeccable professionalism and dedication and we wish him a long and healthy
retirement.
I would also like to express my sincere appreciation for the efforts of my
loyal Board colleagues, both executive and non-executive, during the hectic
months of 2002. In addition, the success of the business is highly dependent on
the exceptional efforts of our dedicated staff at 40 Broadway, on the front-line
at our shopping centres and also in the US. We are very fortunate to have such
an enthusiastic and skilful team across the group, with individuals whose common
characteristic is a desire to be part of and contribute to a successful
organisation and who conduct their daily activities with determination and
passion.
PROSPECTS
Despite the turbulent and volatile conditions currently prevailing in the
world`s financial and securities markets, our chosen sectors in the real estate
markets, notably our shopping centre and retail businesses, which comprise
around 90 per cent of the group`s total assets, have continued to produce a very
sound and stable outcome, demonstrating in particular the exceptional resilience
of our prime regional shopping centre assets.
With a committed, low risk development programme of some GBP425 million and
enormous opportunities both within our existing pool of assets and from new
regional shopping centres such as the proposed Cardiff and Oxford projects, we
look forward to a continuation of our dynamic track record of growing our
remarkable business.
We intend to build on the outstanding achievements of 2002 which must rank as
one of the most active years in the company`s history. Business never loses its
fascination and gloomy, depressing stock market conditions have over history
proved to be the time when some of the most rewarding investment opportunities
have emerged. Our challenge is to identify and act decisively on such
opportunities.
Donald Gordon
London
12 February 2003
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year ended 31 December 2002
2002 2001
Unaudited Restated*
Notes GBP`m GBP`m
Turnover, including share of joint ventures 351.1 331.0
Less: Share of joint ventures 7 (6.5) -
Group turnover 2 344.6 331.0
Property investment income:
Rents receivable 272.6 258.3
Service charge and other income 51.5 41.0
324.1 299.3
Rents payable (37.0) (45.0)
Property outgoings (66.8) (50.4)
Net property investment income 220.3 203.9
Property trading 5.1 6.3
Investment and financial services income 7.2 5.6
Realised trading gains on listed property shares - 3.5
232.6 219.3
Administrative expenses (20.5) (19.9)
Group operating profit 2 212.1 199.4
Share of operating profit of joint ventures 7 3.8 -
Operating profit including joint ventures 215.9 199.4
Exceptional profit on disposal of fixed
assets and subsidiaries 3 8.6 4.0
Profit before interest and taxation 224.5 203.4
Net interest (payable)/receivable - recurring 4 (129.3) (119.9)
Net interest (payable)/receivable - exceptional 4 8.6 7.4
Profit on ordinary activities before taxation 103.8 90.9
Taxation on profit on ordinary activities 5 (18.2) (16.4)
Taxation on profit on exceptional items (4.6) (2.8)
Profit on ordinary activities after taxation 81.0 71.7
Equity minority interests - (0.9)
Profit for the financial year 81.0 70.8
Ordinary dividends - paid and proposed (69.6) (62.3)
Transfer to retained profit 11.4 8.5
Dividends per ordinary share 23.75p 22.75p
Earnings per share before exceptional
items (adjusted) 14 25.58p 24.49p
Earnings per share (basic) 14 28.54p 25.89p
Earnings per share (diluted) 14 27.91p 25.56p
* Restated for the effect of change of accounting policy in respect of deferred
tax (see note 1)
CONSOLIDATED BALANCE SHEET
As at As at
