| Thu 28 Jul 2005, 10:00 | | Interim results 30 June 05 |
|
Liberty International Plc
(Registration number UK3685527)
ISIN Code: GB0006834344
JSE Code: LBT
Issuer Code: LILII
28 July 2005
LIBERTY INTERNATIONAL PLC
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2005
Attached is the full Interim Report for the six months ended 30 June 2005:
Highlights
Summary of Investment and Development Property Valuations
Chairman's Statement
Operating and Financial Review
Interim Results
Enquiries:
Liberty International PLC:
Sir Robert Finch Chairman +44 (0)20 7960 1207
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: Matthew Gregorowski,
College Hill Associates +44 (0)20 7457 2020
Nicholas Williams,
College Hill Associates +27 (0)11 447 3030
Background on Liberty International
Liberty International PLC is the UK's third largest listed property company and
a constituent of the FTSE-100 Index of the UK's leading listed companies.
Liberty International owns 100 per cent of Capital Shopping Centres ("CSC"),
the premier UK regional shopping centre business, and Capital & Counties, a
retail and commercial property investment and development company concentrating
in Central London, non-shopping centre retail in the UK and California, USA.
This announcement includes statements that are forward-looking in nature.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of Liberty International PLC to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Any information contained in this announcement on
the price at which shares or other securities in Liberty International PLC have
been bought or sold in the past, or on the yield on such shares or other
securities, should not be relied upon as a guide to future performance.
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2005 -
HIGHLIGHTS
Sir Robert Finch, Chairman of Liberty International, commented:
"The interim results to 30 June 2005 show Liberty International to be in
vibrant good health with a portfolio of first class assets, the market
leadership in the UK's regional shopping centre industry, a promising
development programme and a skilled and experienced management team at all
levels.
These are the first results we have produced under International Financial
Reporting Standards (`IFRS') which change the presentation and format of the
Interim Results; however they have no impact on the cash flows of the business
or its present strategic direction. Looking at the underlying picture, we have
extended our track record of consistent growth and, with a further positive
revaluation in the period, the aggregate value of our property investments has
increased from GBP5.3 billion to GBP6.2 billion."
28 July 2005
DIVIDENDS
The Directors of Liberty International PLC have announced an increased interim
ordinary dividend per share of 13.0p (2004 - 12.4p).
The following are the salient dates for the payment of the interim dividend:
Wednesday 3 August 2005 Sterling/Rand exchange rate struck.
Monday 15 August 2005 Ordinary shares listed ex-dividend on the JSE,
Johannesburg
Wednesday 17 August 2005 Ordinary shares listed ex-dividend on the
London Stock Exchange.
Friday 19 August 2005 Record date for interim dividend in London and
Johannesburg.
Tuesday 6 September 2005 Dividend payment day for shareholders
(Note: Payment to ADR holders will be made on
16 September 2005).
South African shareholders should note that, in accordance with the
requirements of STRATE, the last day to trade cum-dividend will be 12 August
2005 and that no dematerialisation or rematerialisation of shares will be
possible from 15 August to 19 August 2005 inclusive.
No transfers between the UK and South African registers may take place from 3
August to 21 August 2005 inclusive.
A presentation to analysts and investors will take place at 9.30 a.m. The
presentation will also be available to international analysts and investors
through a live audio call.
Slides to accompany the presentation will be available on the group's website
www.liberty-international.co.uk.
An audio replay of the presentation will also be available afterwards on the
group's website.
Financial highlights for the six months ended 30 June 2005
* Investment and development properties increased from GBP5.3 billion to
GBP6.2 billion with over GBP700 million of net additions in the six month
period, particularly the GBP653 million acquisition of interests in
Manchester Arndale and The Mall at Cribbs Causeway, Bristol.
* Revaluation surplus of GBP196 million, with the market value of completed
investment properties increasing by 3.2 per cent in the six month period -
an underlying 5.1 per cent increase adjusted for the withdrawal in the
period of disadvantaged area relief from stamp duty land tax.
* Net assets (diluted, adjusted*) increased from GBP3.61 billion to GBP3.82
billion. Net assets (IFRS basis) increased from GBP2.53 billion to GBP2.59
billion.
* Net assets per share (diluted, adjusted*) increased from 1025p to 1085p in
the six month period, amounting to a 7.3 per cent total return. Adjusting
for the GBP108.5 million (32p per Liberty International share) one-off
impact of the withdrawal in the period of disadvantaged area relief from
stamp duty land tax, the total return would have been 10.7 per cent for
the six months.
* Net rental income increased by GBP18.8 million from GBP125.0 million to
GBP143.8 million, with GBP6.7 million of the increase (5.5 per cent) coming
from underlying rental growth, particularly rent reviews at Braehead,
Renfrew, and the balance from completed developments and acquisitions.
* Underlying profit before tax excluding valuation items, exceptionals and
trading profits increased by 6.3 per cent from GBP50.6 million to GBP53.8
million.
* Profit before tax in IFRS Income Statement of GBP130.1 million (30 June
2004 - GBP277.3 million), reducing basic earnings per share from 62.4p to
28.8p, impacted by the GBP114.3 million decrease in fair value of
derivative financial instruments (30 June 2004 - increase of GBP46.8
million). These movements result from Liberty International predominantly
financing itself by floating rate debt with interest rate exposure reduced
by interest rate swaps; substantially all interest payments on existing
debt and in respect of committed capital expenditure are fixed for the next
ten years.
* Adjusted* earnings per share of 13.3p (30 June 2004 - 13.9p, year ended 31
December 2004 - 27.1p), reflecting lower trading profits in the first half
of 2005 of GBP0.6 million (six months ended 30 June 2004 - GBP6.8 million).
Further trading profits are anticipated in the second half of 2005.
* Net assets and net assets per share adjusted according to UK property
industry practice to exclude deferred tax relating to revaluation of
investment properties and capital allowances, and fair value of derivative
financial instruments net of attributable taxation. Earnings per share
adjusted according to UK property industry practice to exclude exceptional
items, gain on revaluation and sale of investment properties, change in
fair value of derivative financial instruments, all net of attributable
taxation, and deferred tax relating to capital allowances. Unless otherwise
stated, references to net assets per share are to net assets per share
(diluted, adjusted) and references to earnings per share are to adjusted
earnings per share. Details of the adjustments made are set out in the
Financial Review, for net assets and net assets per share, and in note 13
to the Interim Results for earnings per share.
Revaluation surplus on completed investment properties for the six months
ended 30 June 2005
Market value
as at 30 June Revaluation
2005 Surplus
Unaudited Unaudited
GBPm GBPm
UK regional shopping centres 5,143 158
US regional shopping centres and other retail 220 10
Central London 367 11
Retail outside London 189 3
Business space outside London 181 8
US other commercial 54 3
Completed investment properties 6,154 193
Developments 57
6,211
Like-for-like
Revaluation Revaluation
Surplus Surplus *
UK regional shopping centres 3.2% 5.2 %
US regional shopping centres and other retail 5.1% 5.1%
Central London 3.1% 4.2%(6.9%)
Retail outside London 1.5% 3.6%(7.0%)
Business space outside London 4.6% 5.2%
US other commercial 5.6% 5.6%
Completed investment properties 3.2% 5.1%
Developments
* Revaluation surplus adjusted for the impact of the loss of
disadvantaged area relief. The percentages in brackets show the
underlying percentage excluding impending redevelopments by Capital &
Counties which had a market value of GBP122 million at 30 June 2005
* Investment properties are valued after deducting notional purchasers' costs
including stamp duty land tax amounting to GBP272 million, equivalent to
77p per Liberty International share, on the theoretical assumption that
assets are sold individually on the open market, without taking account of
the structures through which assets are held.
* Regional shopping centres amount to 86 per cent of aggregate investment
properties and retail overall amounts to 93 per cent.
Development programme
* 530,000 sq.ft. Chapelfield, Norwich, development scheduled for September
2005 opening with lettings agreed or solicitors instructed for 91 per cent
of anticipated income.
* Manchester Arndale Northern Extension, increasing the size of the centre
from 850,000 sq.ft. to 1.4 million sq.ft., due to open in phases from
October 2005 to Autumn 2006. CSC has no financial obligations for these
development costs. Lettings agreed or solicitors instructed for over 50 per
cent of anticipated income. On completion, Manchester Arndale will be the
UK's largest city centre regional shopping centre.
* Aggregate development expenditure programme of GBP1.4 billion, of which
GBP350 million is committed, divided between regional shopping centres
(GBP1.2 billion) and other retail and commercial (GBP200 million)
* The programme includes CSC's major new regional shopping centre
developments in Norwich, Cardiff and Oxford, together with Braehead (Phase
2) and substantial extensions to and additional investment in Eldon Square,
Newcastle; The Harlequin, Watford; and other existing centres
* Capital & Counties' retail and commercial development programme has
increased in the period from GBP150 million to GBP200 million and includes
King's Reach, Southwark; 190 Strand, London and The Headrow, Leeds.
Financial Strength
* Debt to assets ratio increased from 36 per cent to 43 per cent with
aggregate net borrowings of GBP2.69 billion (31 December 2004 - GBP1.94
billion)
* Weighted average maturity of debt of nine years with no significant
repayments expected until 2011. Weighted average interest cost of 6.3 per
cent (5.7 per cent excluding GBP230 million first mortgage debentures 2021
and 2027 and amortisation element of GBP240 million 3.95 per cent
convertible bond 2010).
* Cash balances of GBP163 million and committed facilities of GBP495
million, representing GBP658 million of available financial resources,
substantially in excess of committed projects at 30 June 2005.
SUMMARY OF INVESTMENT AND DEVELOPMENT PROPERTY VALUATIONS
30 June 2005
True
equivalent Market
yield(1)
value
% % GBPm
Lakeside, Thurrock 5.30 (5.54) 1,094.4
MetroCentre, Gateshead 5.32 (5.58) 895.2
Braehead, Renfrew, Glasgow 5.47 (5.72) 621.8
Other M25 Centres 5.48 (5.73) 952.5
Other Centres 5.83 (6.13) 812.9
Manchester Arndale and
Cribbs Causeway, Bristol 5.54 (5.84) 658.0
Other properties 6.83 (7.23) 108.1
UK regional shopping centres 5.50 (5.77) 5,142.9
US regional shopping centres
and other retail 219.9
UK other commercial properties:
Central London 6.67 (7.02) 367.1
Retail outside London 5.84 (6.09) 188.9
Business space outside London 7.08 (7.50) 180.8
US other commercial properties 54.6
6,154.2
Developments 56.7
Total investment and
development properties (3) 6,210.9
/ surplus (4)
30 June 2005
Revaluation surplus
DAR (2) DAR(2)
GBPm GBPm % %
Lakeside, Thurrock (43.2) 16.0 1.5 (5.5)
MetroCentre, Gateshead - 16.5 1.9 (1.9)
Braehead, Renfrew, Glasgow (23.5) 38.0 6.5 (10.5)
Other M25 Centres - 52.5 5.8 (5.8)
Other Centres (16.8) 32.1 4.1 (6.3)
Manchester Arndale and
Cribbs Causeway, Bristol (16.0) 1.9 - (2.7)
Other properties (0.3) 1.1 1.0 (1.3)
UK regional shopping centres (99.8) 158.1 3.2 (5.2)
US regional shopping centres
and other retail - 10.6 5.1 (5.1)
UK other commercial properties:
Central London (3.8) 11.0 3.1 (4.2)
Retail outside London (4.0) 2.7 1.5 (3.6)
Business space outside London (0.9) 7.6 4.6 (5.2)
US other commercial properties - 2.9 5.6 (5.6)
(108.5) 192.9 3.2 (5.1)
Developments 1.2
Total investment and
development properties (3) 194.1
/ surplus (4)
31 December 2004
True
Market equivalent
Value yield
GBPm %
Lakeside, Thurrock 1,075.2 5.37%
MetroCentre, Gateshead 875.0 5.43%
Braehead, Renfrew, Glasgow 580.6 5.68%
Other M25 Centres 899.3 5.57%
Other Centres 774.9 6.03%
Manchester Arndale and
Cribbs Causeway, Bristol -
Other properties 105.2 6.95%
UK regional shopping centres 4,310.2 5.62%
US regional shopping centres
and other retail 194.9
UK other commercial properties:
Central London 354.8 6.94%
Retail outside London 184.4 6.60%
Business space outside London 170.2 7.40%
US other commercial properties 48.0
5,262.5
Developments 47.2
Total investment and
development properties (3) 5,309.7
/ surplus (4)
(1) Yield to a purchaser of the assets individually at Market Value after
taking account of notional acquisition costs. The figure in brackets
represents the yield earned by Liberty International on the asset at
Market Value.
(2) Disadvantaged Area Relief (DAR) from Stamp Duty Land Tax was withdrawn
in March 2005. Percentage valuation increases after adjusting for the
effect of DAR on opening values are shown in brackets where applicable.
(3) Reconciliation of investment and development property valuation to
Balance Sheet carrying value of property:
30 June 31 December
2005 2004
GBPm GBPm
Investment and development property at market value
as determined by external valuers 6,210.9 5,309.7
Add back minimum payment under head leases
separately included as a creditor in the
balance sheet (see note 14) 56.4 31.9
Deduct accrued rent free periods separately
included as a debtor in the balance
sheet (see note 14) (43.5) (44.0)
Balance Sheet carrying value of investment and
development property 6,223.8 5,297.6
(4) Reconciliation of investment and development property revaluation surplus
to Income Statement gain on revaluation of investment properties:
30 June
2005
GBPm
Investment and development property revaluation surplus as
determined by external valuers 194.1
Add valuation movement in respect of rent free periods 2.5
Less valuation movement in respect of head lease payments (0.2)
Total gain on revaluation of investment and development properties 196.4
Less development property revaluation recognised in equity rather
than the Income Statement (1.2)
Income Statement gain on revaluation of investment properties 195.2
SUMMARY OF CAPITAL & COUNTIES INVESTMENT AND DEVELOPMENT
PROPERTY VALUATIONS
Six months ended
30 June 2005
Net
Number property
of income
properties GBPm
Central London 21 12.2
Retail outside London 7 5.0
Business space outside London 16 5.4
Total United Kingdom
investment properties 44 22.6
United States 11 8.6
Total investment properties 55 31.2
Six months ended
30 June 2005
Market Revaluation
value surplus
GBPm GBPm %
Central London 367.1 11.0 3.1
Retail outside London 188.9 2.7 1.5
Business space outside London 180.8 7.6 4.6
Total United Kingdom
investment properties 736.8 21.3 3.0
United States 274.5 13.5 5.2
Total investment properties 1,011.3 34.8 3.6
Year ended
31 December 2004
Net
property Market
income value
GBPm GBPm
Central London 26.5 354.8
Retail outside London 10.4 184.4
Business space outside London 13.1 170.2
Total United Kingdom
investment properties 50.0 709.4
United States 14.9 242.9
Total investment properties 64.9 952.3
Properties by use: 30 June 2005
Retail Offices Total
GBPm GBPm GBPm
Central London 162.5 204.6 367.1
Retail outside London 188.9 - 188.9
Business space outside London - 180.8 180.8
Total United Kingdom investment properties 351.4 385.4 736.8
United States 219.9 54.6 274.5
Total properties 571.3 440.0 1,011.3
Properties by use: 31 December 2004
Retail Offices Total
GBPm GBPm GBPm
Central London 152.9 201.9 354.8
Retail outside London 184.4 - 184.4
Business space outside London - 170.2 170.2
Total United Kingdom investment properties 337.3 372.1 709.4
United States 194.9 48.0 242.9
Total properties 532.2 420.1 952.3
ANALYSIS OF NET RENTAL INCOME FROM INVESTMENT AND TRADING
PROPERTIES
For the six months ended 30 June 2005
Shopping Other
Total Centres Commercial
UK USA
GBPm GBPm GBPm GBPm
Net rental income six months
ended 30 June 2004 125.0 91.2 25.7 8.1
Foreign Exchange (0.2) - - (0.2)
Sold properties (3.2) - (1.9) (1.3)
Developments, major capex and
acquisitions (0.4) - (0.4) -
Adjusted to 30 June 2004 121.2 91.2 23.4 6.6
Like for like growth 6.7 5.5 0.4 0.8
Adjusted to 30 June 2005 127.9 96.7 23.8 7.4
Sold properties (0.1) - (0.1) -
Developments, major capex and
acquisitions 16.0 13.8 0.5 1.7
Net rental income six months
ended 30 June 2005 143.8 110.5 24.2 9.1
Like for like growth 5.5% 6.0% 1.7% 12.1%
CHAIRMAN'S STATEMENT
June 2005 marked both the 25th anniversary of the formation of Liberty
International and the retirement of Sir Donald Gordon as its Chairman - both
milestones in the history of this company. It is a signal honour that the
Board has asked me to become its Chairman. I shall strive, as I am sure will
all my colleagues, to continue the extraordinary record which Sir Donald has
established.
I am delighted that Sir Donald has accepted the position of President for Life
and that his wise counsel and huge knowledge of the industry and the financial
markets will continue to be available to me and the company as a consultant;
this too will allow us to remain in touch with Sir Donald's family - our
largest shareholder.
The interim results to 30 June 2005 show Liberty International to be in vibrant
good health with a portfolio of first class assets, the market leadership in
the UK's regional shopping centre industry, a promising development programme
and a skilled and experienced management team at all levels. The challenge
going forward will be to continue to find the right mix of investment
properties and development proposals which add to the critical mass of the
business in its core areas.
Manchester Arndale and Cribbs Causeway, Bristol
The most important transaction in the period was the GBP653 million acquisition
from Prudential PLC of a joint interest with them in two flagship shopping
centres, Manchester Arndale and The Mall at Cribbs Causeway, Bristol and
associated properties. This acquisition was in line with CSC's strategy to
focus on large scale assets of the highest quality which have both scarcity
value in the restrictive UK planning environment and provide active management
opportunities. The transaction increases to 11 the number of major completed UK
shopping centres in which CSC has an interest, of which 9 are in the top 25
centres in the UK; in addition, CSC has three further centres, Norwich, Cardiff
and Oxford, in the development phase.
Manchester Arndale is at an exciting stage with the Northern Extension opening
in phases between October 2005 and Autumn 2006, increasing the size of the
centre by 550,000 sq.ft. to 1.4 million sq.ft. where it will rank as the UK's
largest city centre shopping centre. Cribbs Causeway, Bristol, is one of the
limited number of out-of-town regional shopping centres in the UK, trades very
successfully and is fully let with substantial unsatisfied demand from
retailers for new or additional space. We look forward to working with
Prudential on these two centres and potentially other projects.
Results for the six months ended 30 June 2005 under International Financial
Reporting Standards (`IFRS')
We have recently released a document entitled "Adoption of International
Financial Reporting Standards - Restatement of the 2004 Income Statement and
Balance Sheet", reconciling the differences between IFRS and the accounting
policies previously adopted by Liberty International.
The 2005 interim results are the first we have produced in accordance with IFRS
and are fully described in the attached Operating and Financial Review. While
the format may be unfamiliar, the changes in presentation have no impact on the
cash flows of the business or its present strategic direction.
After extracting revaluations of investment properties, the change in fair
value of derivative financial instruments and exceptional items from the Income
Statement, our underlying revenue profit showed a 6 per cent increase from
GBP50.6 million to GBP53.8 million. Trading profits only amounted to GBP0.6
million in the period compared with GBP6.8 million in the first half of 2004,
but we do anticipate additional trading profits in the second half of 2005.
The IFRS treatment we have adopted for changes in fair value of derivative
financial instruments has introduced a particularly volatile component to the
Income Statement. We predominantly finance the group through floating rate debt
and reduce interest rate exposure by interest rate swaps as this combination
gives the group the desired certainty over future cash flows without
necessarily incurring the significant penalties associated with early repayment
of fixed rate debt. However, changes in fair value of the derivative financial
instruments are, under IFRS, included by us in the Income Statement, unlike
fixed rate debt where changes in fair value are disclosed by way of note to the
Interim Results.
The yield on the reference 10 year sterling interest rate swap, a reasonable
benchmark for our substantial book of interest rate swaps, reduced in the
period from 4.86 per cent to 4.47 per cent, thereby creating a notional
valuation deficit in the first half year of GBP114.3 million. A substantial
proportion of this deficit has already been reversed as 30 June 2005 may have
marked something of a low point in the UK interest rate cycle for longer
maturities.
The aggregate market value of our investment properties increased significantly
from GBP5.3 billion to GBP6.2 billion, reflecting the GBP653 million
acquisition of interests in Manchester Arndale and the Mall at Cribbs Causeway,
Bristol, and the revaluation of the portfolio in the period. As the
acquisitions were financed by increased borrowings, our debt to assets ratio
increased from 36 per cent to 43 per cent, a level which still provides ample
scope to pursue the group's development programme.
Adjusted net asset value per share increased from 1025p to 1085p, producing a
total return in the six month period, taking dividends into account, of 7.3 per
cent. Total return was 10.7 per cent, adjusting for the withdrawal of
disadvantaged area relief from stamp duty land tax.
The net asset value per share number would be further increased by 77p at 30
June 2005 if purchasers' costs, primarily stamp duty land tax, were not
deducted from the valuations as required by the RICS Appraisal and Valuation
Standards. In our view, this deduction is inappropriate in respect of assets we
have no intention of selling.
Valuations
The valuations of completed investment properties at 30 June 2005 show a
further strong appreciation of GBP193 million (3.2 per cent) in the six months,
with the uplift presented under IFRS as part of the Income Statement for the
period. The underlying increase in the period was however reduced by a one-off
adjustment of GBP108 million (1.9 per cent) as disadvantaged area relief from
stamp duty land tax was quite unexpectedly withdrawn in the period.
The Capital Shopping Centres' uplift was GBP158 million (3.2 per cent
equivalent to 5.2 per cent on a like-for-like basis). Encouragingly, increases
in estimated rental values at the majority of CSC's key shopping centres
produced some 55 per cent of the overall increase. The balance of the uplift
reflects the strong UK property investment market which saw the weighted
average yield applied by the valuers to CSC's completed shopping centre
portfolio reduced in the six months from 5.62 per cent to 5.50 per cent.
The table set out below, based on figures supplied by one of our valuers, CB
Richard Ellis, illustrates representative yields for the different retail asset
classes at 30 June 2005 compared with 31 December 2004 and 2003. The table
shows a further 25 basis points yield reduction across the retail sector in the
half year ended 30 June 2005 following the substantial reductions in 2004:
Nominal Equivalent yield
30 June 31 December 31 December
2005 2004 2003
% % %
Prime High Street Shops 4.25 4.50 5.00
Prime Retail Warehouses 4.75 5.00 5.75
Prime Shopping Centres 5.25 5.50 5.75
Secondary Shopping Centres 6.00 6.25 7.00
(Source: CB Richard Ellis)
This table also illustrates that prime shopping centres, which have in our view
superior rental income growth prospects, a much wider spread of tenants and a
higher degree of stability, anomalously yield more than prime high street shops
and retail warehouses. Secondary shopping centres, which carry much greater
risks and volatility, yield only 0.75 per cent more than prime shopping
centres, a margin which has narrowed significantly in recent years.
The retail and commercial assets of Capital & Counties overall contributed
GBP35 million to the group's GBP193 million valuation surplus with investment
properties increasing from GBP952 million to GBP1,011 million.
Capital & Counties' investment property values in the UK rose to GBP737
million, an increase of 3.0 per cent. That overall increase was adversely
affected by performance at investments where development is imminent or
vacancies have been taken to create opportunity, namely King's Reach,
Southwark; 190 Strand;
Commonwealth House, Hammersmith; and The Headrow, Leeds. Excluding those
properties, the remainder of the portfolio increased in value by 5.8 per cent
over the half year, despite the loss in some cases of disadvantaged area stamp
duty relief.
The investment market in California remained strong in the period and the
market value of Capital & Counties' US investment properties rose in the half
year by 5.2 per cent to $492 million (GBP274 million).
Dividends
The directors have approved an interim ordinary dividend of 13.0p per share
(2004 - 12.4p per share) payable on 6 September 2005. The increase of 4.8 per
cent is in line with our policy of progressive dividend growth and an interim
dividend amounting to approximately half the previous year's annual dividend,
in this case 26.5p per share in 2004. The adoption of IFRS is not anticipated
to have any impact on the group's dividend policy which has consistently
involved distributing substantially all of the group's underlying income
stream. In accordance with IFRS, the interim results contain no provision for
dividends declared after the end of the accounting period.
Trading conditions
UK investment property continues to attract a considerable inflow of capital on
the grounds of yield and stability of returns compared with other asset
classes. As measured by the representative benchmark, the IPD UK monthly index,
UK property delivered a total return of 7.3 per cent for the first six months
of 2005, with the compound total return for the last five years amounting to
11.9 per cent per annum.
The noticeable slowdown in UK retail sales which became apparent in the second
half of 2004 has continued into the first half of 2005, particularly in the
second quarter, with UK non-food retail sales growth* for the last twelve
months now standing at 1.6 per cent year on year. However, comparison goods,
which are predominantly the product mix within our centres, have generally
fared better than household goods which have been more severely impacted by the
anticipated downturn in the UK housing market.
* as measured by the Office for National Statistics non-food index
The year has seen some high profile retail failures, such as Allders, although
in reality the level of failures has not diverged markedly from a typical
retail year. Very often, these failures represent an opportunity for the more
successful retailers or for landlords, such as ourselves, in what continues to
be a dynamic and competitive retail marketplace. In the case of Allders, for
example, we took back their 81,500 sq.ft. store at Lakeside, which has now been
subdivided. The majority of the space has been relet to Primark and the
remainder is under offer. A significantly enhanced overall rental level will be
achieved. Furthermore, the sizeable Allders store at The Headrow, Leeds, has
become a major redevelopment opportunity for Capital & Counties following the
surrender of the lease.
Vacancy levels at our regional shopping centres remain very low at 25 units,
some 1.4 per cent of CSC's rent roll, and we continue to see steady demand from
retailers for extra space at our centres. CSC's like-for-like income growth in
the six month period amounted to 6 per cent, benefiting from the positive
outcome of the first rent review cycle at Braehead, Renfrew, Glasgow.
The group's experience from previous downturns in retailing is that established
prime regional shopping centres with the best retailers trading from flagship
stores are exceedingly resilient. Our net property income progression is more
correlated with the rent review cycle at each centre than short-term
fluctuations in retail sales. We would expect CSC's prime shopping centres to
perform substantially better in more difficult market conditions than assets of
lower quality.
Recent tragic events in London are a further clear reminder of the importance
of security issues for the owners of real estate, and particularly for the
owners of large shopping centres.
We have always placed great emphasis on effective security at our centres. We
are in constant liaison with the police both on-site, locally and nationally
and receive regular input from specialist security advisers. We have in recent
weeks again reviewed our security arrangements and increased the presence and
visibility of security staff where considered appropriate.
Development programme
Our overall development expenditure programme now stands at a substantial
GBP1.4 billion of which GBP350 million is committed, and GBP1,050 million is at
the pre-development stage. Chapelfield, Norwich, which is due to open on time
later this year, is a large part of the committed element. The potential
shopping centre programme includes the major city centre projects at Cardiff and
Oxford together with extensions of Eldon Square, Newcastle, The Harlequin,
Watford and other existing centres. The overall risk profile of the programme
remains attractive as the bulk of CSC's expenditure involves extending what are
already prime retail pitches within well-established locations. In the case of
Capital & Counties, the development element has been growing rapidly and amounts
to GBP200 million of the GBP1.4 billion.
Our current plans are to finance the development programme from within our
existing capital resources. The programme will when completed substantially
increase our market presence in the UK's top shopping centres and represents an
integral part of our goal of delivering superior long-term returns to
shareholders.
Directorate
John Abel, Managing Director of CSC, steps down from his position as Managing
Director of CSC on 30 September 2005 after 33 years of continuous service. His
contribution to our leading position in the UK shopping centre industry has
been immense. We are delighted that his great experience will continue to be
available to the group as a non-executive director of Liberty International
and he will continue to assist us on major projects.
Kay Chaldecott will become the Managing Director of CSC. Richard Cable remains
as CSC Development Director. Kay and Richard are already Liberty International
executive directors and respectively have 20 and 17 years experience with the
group.
Prospects
Liberty International is extremely active on a number of fronts both at CSC and
Capital & Counties as fully described in the attached Operating and Financial
Review. Our underlying income stream is set to benefit from important
forthcoming rent review cycles, including Lakeside, Thurrock in the last
quarter of 2005 and the first round of rent reviews at The Chimes, Uxbridge, in
2006. We have demonstrated through the Manchester Arndale and Cribbs Causeway,
Bristol transactions in the first quarter of 2005 that we remain alert to
suitable acquisition opportunities where these meet our stringent investment
criteria.
Furthermore, we have a wide range of promising development projects which will
ensure the continued steady expansion of the group's activities. We
particularly look forward to the opening, in September, of the 530,000 sq.ft.
regional shopping centre, Chapelfield, Norwich, and, in October, of the first
phase of the Manchester Arndale Northern Extension.
I have been privileged to take over the Chairmanship when Liberty International
can look forward with great confidence - strong core businesses, prospects for
long-term growth from an excellent property portfolio and an enviable track
record. July 2005 finds the company in fine health.
Sir Robert Finch
Chairman
28 July 2005
OPERATING AND FINANCIAL REVIEW FOR THE SIX MONTHS ENDED 30
JUNE 2005
OPERATING REVIEW
CAPITAL SHOPPING CENTRES ('CSC')
Market Background
CSC's completed shopping centres have many attractive investment
characteristics, including a high degree of stability, a profile of steady
income growth and considerable reversionary income potential reflecting the lag
factor embedded within the five year rent review cycle contained in most of our
leases.
The quality of CSC's regional shopping centre business has been demonstrated
in the first six months by further increases in market valuations, continued
retailer demand reflected in low vacancy levels and rising rental values.
Through our active management approach to tenant mix, we have made 48 tenancy
changes producing additional annual rental income of GBP2.5 million, and
continued to have a negligible level of voids (25 units out of a total of 1727
units) at the end of the half year.
Like-for-like net property income for this year and the next few years will
benefit from current and forthcoming rent review cycles. The first rent reviews
since Braehead, Renfrew, Glasgow opened in 1999 started in September last year
and have now largely been settled.
Rent review cycles take place at Lakeside, Thurrock, this year and at
MetroCentre, Gateshead and The Chimes, Uxbridge, in 2006; in the latter case
the reviews are the first to occur since the centre opened in March 2001. Total
net property investment income for the first half has increased by GBP19.3
million to GBP110.5 million, with a like-for-like increase of 6 per cent,
primarily reflecting the positive outcome of our rent reviews at Braehead.
For many retailers, the trading climate during the first half of this year,
particularly the second quarter, has been more difficult. The Office for
National Statistics has reported year-on-year non-food sales growth for the
twelve months to the end of June reducing to 1.6 per cent from an equivalent
year on year growth rate at the end of December 2004 of just under 5 per cent.
However, our net property income progression is more correlated with the rent
review cycle at each centre than short-term fluctuations in retail sales. These
conditions make tenant mix management increasingly important. We aim constantly
to refresh our offer to the public by attracting retailers who best meet
shoppers' needs and aspirations at any given time.
Development activities in respect of completed shopping centres
An important part of our asset management activities is to strengthen and
extend our existing prime locations.
At Lakeside, Thurrock, our successful major refurbishment and remodelling of
the centre completed last year has encouraged over 100 retailers to re-fit
their stores. The final phase of refurbishment of the centre, the remodelling
and extension of the Pavilion, to improve the catering offer at Lakeside and
provide 42,000 sq.ft. of restaurants is programmed to start on site in January
2006 and complete in Spring 2007.
At MetroCentre, Gateshead, we have embarked on a programme of refurbishment to
complement the major extension which opened last October and has significantly
added to the retail offer on both trading levels.
At Braehead, Renfrew, Glasgow, the second phase of this development which
comprises some 165 acres of land continues to be progressed. The construction
of the 460,000 sq.ft. Xscape Leisure scheme, a joint venture with Capital &
Regional Plc, which will include an indoor ski-slope, cinema, bowling,
restaurants, cafes and speciality retailers, is on target to open in Spring
2006. Lettings are progressing well and 70 per cent of the income is now
accounted for by completed lettings or lettings where solicitors have been
instructed. Sales of land for more residential and other uses continue to be
progressed. Conditional contracts have been entered into to sell a further 25
acres for residential use and 4 acres for showroom use.
At Eldon Square, Newcastle, preliminary works have now started on site for the
first of the three projects to improve and expand the centre. This first
project will involve the relocation of the bus station and the provision of
48,000 sq.ft. of retail space which is programmed for completion during 2007
and 2008. The smaller second phase is the creation of 21,000 sq.ft.
of new and remodelled space and is programmed to start later this year and open
in Autumn 2006. The largest of the three phases which will provide 410,000
sq.ft. of new retail space including a 175,000 sq.ft. department store is due
to start on site in Autumn 2006. When all three projects have been completed,
Eldon Square will provide 1.3 million sq.ft. of retail space, putting it
amongst the UK's largest city centre regional shopping centres.
In Watford, the planning brief for our proposed mixed use scheme of up to
600,000 sq.ft. on the site of Charter Place, an older style shopping centre
owned by Watford Borough Council, constructed in the 1970s and adjoining our
centre, The Harlequin, is being finalised. We have entered into a preliminary
agreement with the Council for the project which, when implemented, will
significantly enhance the status of Watford in the regional retail hierarchy.
At the Victoria Centre, Nottingham, the 40,000 sq.ft. remodelling project to
create an additional 31,600 sq.ft. of prime space from available indoor market
space has now been completed. The three new retailers, Top Shop, Republic and
Monsoon, will commence trading in Autumn 2005.
At The Glades, Bromley, where we purchased properties in the high street
adjoining the main entrance to the shopping centre, planning consent has now
been granted for our proposal to provide some 38,000 sq.ft. of new retail space
and the project is due to start on site in 2006 for trading from the new units
in early 2008.
At Manchester Arndale, PruPIM, the property asset management division of our
partners, Prudential, are making good progress with the Northern Extension
which will add 550,000 sq.ft. of retail space and provide some 83 retail units.
The first phase which includes a major 150,000 sq.ft. Next store will open in
October this year; the second phase is due to open in Spring 2006 and the third
and fourth phases are due to complete in Autumn 2006. Whilst Prudential retains
the financial obligation to complete the Northern Extension, letting risk is
shared equally between the joint owners. Retailer interest is strong and total
lettings have been completed or solicitors instructed for 72 per cent of the
space, representing over 50 per cent of the anticipated income.
New Projects
The development of the 530,000 sq.ft. shopping centre in Norwich, where CSC
will become the owner on completion, is in the final stages of construction.
Lend Lease have announced that the centre will open for trade on 21 September
2005. An excellent line-up of retailers has been secured anchored by a House of
Fraser department store. We expect the centre will be virtually fully let on
completion. CSC's estimated cost of the centre, excluding the residential
element, is around GBP260 million, as previously reported, of which around
GBP220 million remains to be paid.
In Cardiff, the St David's Partnership, our joint venture with Land Securities
Group PLC, continues to progress the proposed 967,500 sq.ft. retail-led
mixed-use extension of the existing St David's shopping centre in the heart of
the city. Terms have been agreed with the John Lewis Partnership to occupy a
major new department store. Construction under the main building contract is
due to commence on site in Spring 2006.
In Oxford, following the finalisation of the master planning exercise, the
Westgate Partnership, our joint venture with LaSalle Investment Management, is
now preparing a planning application for the retail-led mixed-use scheme which
when completed will increase the size of the existing Westgate shopping centre
from 231,000 sq.ft. to 750,000 sq.ft. The proposals also include a major
department store for the John Lewis Partnership.
Our experience in Norwich is a good example of CSC's philosophy towards
shopping centre projects. First, establish critical mass in prime locations
with good transport facilities; second, seek above average prospects for
sustained income growth from a quality tenant mix; and above all create the
facilities which make them a destination for the public.
CAPITAL & COUNTIES
UK
The first half of 2005 was exceptionally busy as Capital & Counties prepared
for a number of substantial refurbishment and redevelopment projects.
In the immediate future, these include schemes at Commonwealth House,
Hammersmith, London W6; Hagley Road, Birmingham; Wapping Wall, London E1 and
the former Allders store at The Headrow, Leeds. We have obtained vacant
possession of significant areas of these properties (totalling 743,000 sq.ft.)
in order to carry out the schemes, which has led to a temporary reduction in
net property income. In 2007 and 2008, redevelopments at 190 Strand, London
WC1 and King's Reach, Southwark, London SE1 will follow.
In addition, the income position has been impacted by our reluctance to
reinvest into the market the proceeds of the major sales conducted in 2004
since acquisitions with prospects for adding real value have not been
identified.
Central London offices and retail
At 31 December 2004, Capital & Counties had over 25,000 sq.ft. of office space
available to let or undergoing refurbishment. 13,000 sq.ft. of that has been
let over the last six months with Mayfair and Piccadilly seeing more buoyant
tenant demand than some other Central London areas. This is reflected in two
lettings we have achieved in Jermyn Street at GBP50 per sq.ft.
We have taken vacant possession of 70,000 sq.ft. (with an additional 23,000
sq.ft. expected) in order to carry out a major refurbishment of our investment
at Commonwealth House adjacent to Hammersmith public transport interchange.
We submitted, in April, a planning application for the redevelopment of our
investment at 190 Strand. This proposes the development of 190,000 sq.ft. of
new office space, 11,700 sq.ft. of retail space and 44 residential units.
Vacant possession of the entire property is anticipated to be available from
June 2007. Prudential own the freehold of the site and discussions are
continuing with them over the terms of a joint venture to facilitate
development.
After the period end, the London Borough of Southwark resolved to grant consent
to our planning application for the redevelopment and refurbishment of the
King's Reach complex on London's South Bank. The scheme proposes a total of
350,000 sq.ft. of offices both within a refurbished tower and in adjoining and
linked office buildings to be developed around it. The proposed retail element
of 28,000 sq.ft. would flank a new public right-of-way linking Stamford Street
to the river via the Oxo Tower.
Retail outside London
Allders, the department store retailer, entered administration in January 2005;
we secured a consequential surrender of the lease of their store in The
Headrow, Leeds and took vacant possession in May. We are now preparing a
planning application for a major refurbishment of the property for mixed use.
Current proposals envisage the creation of 4 retail units of between 19,000 and
36,000 sq.ft. on the lower floors and the conversion of the upper floors into
units of high quality flexible office accommodation and residential penthouses.
Although at an early stage, we have had positive interest shown in the retail
space.
Elsewhere, we are continuing with our asset management initiatives at the two
retail parks we own at Braintree, Essex, and Stafford, including the potential
sub-division and extension of space which B&Q intend to vacate at Queens Retail
Park, Stafford, where interest from high street retailers is promising.
Business space outside London
The first half of 2005 saw the letting of the last 14,000 sq.ft. of offices at
Capital Court, Uxbridge on a ten year lease without break at a rent rising to
GBP23.75 per sq.ft. The remaining restaurant unit at the property is currently
under offer.
At Capital Park in Cambridge, following letting of the three earlier phases, we
have commenced construction of a further office project of 39,000 sq.ft.
signifying our confidence in this improving market. Completion is programmed
for early summer 2006.
Trading
A number of potential sales from the trading portfolio both in the UK and the
US are currently in negotiation and we anticipate these should conclude in the
second half year.
Trading acquisitions continued with the purchase of a retail warehouse in
Rotherham, let to B&Q but with an open A1 consent and expansion potential.
Meanwhile further major refurbishment schemes are being planned to enhance
value at two properties.
At the 144,000 sq.ft. office building at 54 Hagley Road, Birmingham, 85,000
sq.ft. has been vacated and we are planning major upgrading of office space and
services including a dramatic new entrance lobby, communal meeting rooms and
increased parking.
A different style of scheme is being planned at Wapping, London E1 where the
intention is to create a concept of atmospheric and spacious studios and mixed
use space at this 150,000 sq.ft. riverside building.
USA
Asset management and development activities have continued apace in the half
year. We have progressed existing and new initiatives at the Serramonte Center
and The Willows, Concord to upgrade and extend various areas of each scheme,
the purpose of which is to improve tenant mix and enhance the attraction of
each scheme for shoppers.
We also continue to make progress on realising value from the 42 acre site
acquired at Antioch in 2004. Here we are considering the sale of some 15 acres
of the site to an owner- occupier retailer while drawing up plans for the
development of a `lifestyle centre' on much of the remainder.
FINANCIAL REVIEW
ACCOUNTING ISSUES
International Financial Reporting Standards ("IFRS") became mandatory for all
listed companies within the European Union from 1 January 2005 and the Interim
Report for 2005 has been prepared in compliance with IFRS. The comparative
figures for 2004 have been restated accordingly and the notes to the Interim
Results contain summary reconciliations to the previously reported figures. A
more extensive commentary and explanation of the changes brought about by the
transition to IFRS is contained in a separate document published on 26 July
2005 which is available on the company's website
(www.liberty-international.co.uk).
INCOME STATEMENT
Analysis of profit before tax
Six months ended Year ended
30 June 30 June 31 December
2005 2004 2004
GBPm GBPm GBPm
Underlying profit before tax 53.8 50.6 100.8
Trading profits 0.6 6.8 6.2
Profit before tax, valuation and
exceptional items 54.4 57.4 107.0
Revaluation gains on investment
properties 195.2 171.2 357.3
Movement in fair value of derivative
financial instruments (114.3) 46.8 (41.4)
Exceptional items (5.2) 1.9 32.2
Profit before tax 130.1 277.3 455.1
Underlying profit before tax increased by 6.3 per cent to GBP53.8 million from
GBP50.6 million reflecting rent reviews and interest savings, offset in part by
the impact of active management and acquisitions all of which are discussed in
more detail below.
Trading profits in the first half of 2005 were considerably lower at GBP0.6
million than the GBP6.8 million recorded in the first half of 2004. Further
trading profits are however expected in the second half of the year. As a
result of the impact of lower trading profits, overall profit before tax,
valuation and exeptional items decreased from GBP57.4 million to GBP54.4
million.
In addition to exceptional items, material items which need to be disclosed by
virtue of their size or incidence, profit before tax, under IFRS, includes
other items which are unpredictable by their nature, such as revaluation gains
on investment properties and the movement in fair value of derivative financial
instruments. These items can have a significant impact on the presentation and
interpretation of the revenue results. In order to compare one period with
another, the results have been analysed above to show the effect of these
items.
Under IFRS, the revaluation movements on investment properties, other than on
first time developments, are presented in the Income Statement rather than in
the revaluation reserve. Commentary on this movement is dealt with below under
the section, investment properties. Also, under IFRS, the fair value of
derivative financial instruments is now included in the balance sheet and the
movement in fair value of derivative financial instruments is included in the
Income Statement. This change creates considerable volatility in the Income
Statement and has particular significance for Liberty International because of
our chosen method of financing.
The group uses derivative financial instruments such as interest rate swaps to
achieve fixed rate funding while retaining the flexibility afforded by
borrowing on a floating rate basis. This combination gives the group the
desired certainty over future cash flows and the ability to repay debt without
necessarily incurring the significant penalties associated with the early
repayment of fixed rate debt. For example, the separation of the fixed and
floating elements in this way enabled us to benefit from reduced margins,
through the early refinancing of non- recourse facilities secured on our major
shopping centres, in a way which would not have been possible had the original
financing been on a fixed rate basis.
The treatment we have adopted under IFRS is not to use hedge accounting but to
account for derivative financial instruments at fair value and show the
movements in fair value in the Income Statement. This differs from the
treatment of fixed rate debt where the movement in fair value does not impact
the Income Statement even though the cash flows from both types of financing
should be broadly similar.
Over the period to 30 June 2005, interest rates in general fell and in
particular the ten-year sterling interest rate swap, which represents a
suitable benchmark for the group's fixed rate obligations, decreased from 4.86
per cent to 4.47 per cent. As a result the fair value of the group's derivative
financial instruments, which are outlined in more detail below under Maturity
and Interest Rate Profile of Debt, declined by GBP114.3 million and this
movement has been reported in the Income Statement. Since the period end the
ten-year swap had risen to 4.61 per cent at 26 July 2005 reversing a
considerable proportion of the movement in the first half year.
The fair value of financial instruments is extremely sensitive to movements in
interest rates. An increase of around 0.75% in swap rates would be sufficient
to eliminate the GBP247 million negative fair value shown in the balance sheet
at 30 June 2005 while such a rise in interest rates would have a minimal impact
on the group's financing cash flows.
Exceptional items in the period to 30 June 2005 primarily comprised the
unamortised costs of the original MetroCentre and Braehead facilities which
were written off when these facilities were repaid during the period. Further
commentary on the impact of the financings is included below under the section
net interest payable.
Profit before tax reduced to GBP130.1 million from GBP277.3 million, largely as
a result of the impact of movements in the fair value of derivative financial
instruments.
Net rental income increased to GBP143.8 million from GBP125.0 million. The
increase has two components, like-for-like rental growth and acquisitions net
of disposals. Overall the like-for- like rental growth amounted to GBP6.7
million (5.5 per cent), with GBP5.5 million (6.0 per cent like-for-like)
generated from shopping centres primarily from the favourable rent reviews at
Braehead. The US contributed 12.1 per cent underlying growth with a much lower
level of 1.7 per cent from the UK properties largely reflecting management
decisions to sacrifice short-term revenue for medium and longer-term
refurbishment or redevelopment opportunities.
Other income decreased to GBP1.3 million from GBP12.6 million reflecting the
reduced level of investments as a result of our disposal of the interest in
Great Portland Estates and other investments during 2004.
Net interest payable, excluding the impact of valuation and exceptional items,
increased to GBP77.3 million from GBP68.2 million, reflecting the increase in
net debt during the period but benefiting from the savings resulting from the
refinancings carried out since June 2004 referred to below. The increase in
interest payable reflects expenditure on property acquisitions both in the
latter part of 2004, when we increased our interest in The Potteries,
Stoke-on-Trent and Eldon Square, Newcastle, and more significantly in 2005 the
acquisition from Prudential of interests in Manchester Arndale and The Mall at
Cribbs Causeway.
Since June 2004, Liberty International has undertaken three major non-recourse
refinancings, effectively replacing secured bank loans with commercial mortgage
backed securities, gaining the advantage of capital markets pricing while
retaining the flexibility of a bank loan. The combined savings from the first
two financings amounted to around GBP6 million per annum, commencing in August
2004 with the GBP650 million seven-year Lakeside facility and continuing in
February 2005 with a GBP600 million ten-year facility secured on MetroCentre
(GBP532 million net of the GBP68 million higher coupon bonds retained by
Liberty International).
The thi
