Capital & Regional Regulatory News (CAL)

15 Mar 2005 07:03

Capital & Regional plc15 March 2005 15 March 2005 CAPITAL & REGIONAL PLC 2004 PRELIMINARY RESULTS Capital & Regional plc, the co-investing property asset manager, today announcesits unaudited preliminary results for the period ended 30 December 2004. Highlights • Return on equity before exceptionals 39.0% (2003: 37.6%); • The company now has £4.0bn of property assets under management (31 December 2003: £2.9bn); • Adjusted fully diluted net asset value per share up to 710p (31 December 2003: 521p) • Profit before tax and exceptionals £36.2m (2003: £26.3m); • Total return after exceptionals and tax £136.0m (2003: £101.6m); • 56% increase in dividend to 14p for the full year; • All funds outperforming benchmarks on a geared and ungeared basis. Total returns to fund investors, after performance fees, on a geared basis were: • The Mall Fund: 26.0% • The Junction Fund: 35.6% • X-Leisure Fund: 18.0% (9 months only) Commenting on the results, Martin Barber, Chief Executive said: "2004 has been another great year where we have seen further significant growthfor the Group. We are now seeing the benefits of our new business model andremain confident that this will help us deliver sustainable outperformance inthe future". For further information please contact Capital & Regional on 020 7932 8000: Martin Barber, Chief Executive Tel: 020 7932 8101William Sunnucks, Group Finance Director Tel: 020 7932 8125Michael Sandler / James Benjamin, gcg hudson sandler Tel: 020 7796 4133 Chairman's statement 2004 was another extremely successful year for the Company, with strong returns,property acquisitions and new institutional investment all contributing to theincrease in property assets under management from £2.9 billion to £4.0 billion. We generated a return on our equity of 39%, the second consecutive year at thissort of level; the adjusted fully diluted net asset value per share was 710p atthe year end. Our three principal funds, investing in shopping centres, retail parks and urbanentertainment complexes, are run by specialist teams who share an intense focuson attracting visitors to their centres, with a view to enhancing the trading oftheir tenants and, hence, increasing rental values. This proactive approach,combined with the generally favourable conditions in our chosen sectors of theproperty market, has demonstrably delivered excellent results. Our intensive operational approach, allied to our acquisition, development andfinancing expertise, should enable the group to show continued outperformanceagainst market benchmarks, leading to superior returns to our shareholders. Dividends In the light of the substantial increase in recurring management fee incomeachieved during 2004, as well as the good prospects for continuing performancefees becoming payable in future years, the Board believes that it is nowappropriate to rebase the level of the dividend, by recommending a finaldividend of 9p (2003: 5p), to make 14p for the full year (2003: 9p), a 56%increase over the previous year. Board The Board was further strengthened during the year through the appointment ofAlan Coppin as an independent non-executive director. He brings extensiveexperience in the management of major visitor destinations and a strong interestin management and governance best practice. Employees A company rich in physical assets is no less dependent on its human ones than aso-called "people business". As the property assets for which the Company isresponsible have increased fourfold in the past three years, the Capital &Regional team now comprising 128 employees centrally and 497 at individualcentres has worked with huge commitment and imagination. The exceptionalresults that I have been able to report are directly attributable to ouremployees' great efforts, for which, on behalf of the shareholders, I give themcommensurate thanks. Tom Chandos Chairman Chief Executive's Review Financial results I am pleased to be able to report another set of strong financial results for2004, the second full year of operating our new business model. Highlightsinclude: • Return on equity before exceptionals for the year 39.0% (2003: 37.6%) • Adjusted fully diluted net asset value per share up to 710p (31 December 2003: 521p) • Profit before tax and exceptional items of £36.2m (2003: £26.3m); • 56% increase in the full year dividend to 14p (2003: 9p). Background to the financial results We are now seeing the benefits of the decision taken to change the strategicdirection of the Group and specialise in specific sectors. The sectors we have chosen - in town shopping centres, retail warehouses andleisure - are deliberately chosen as ones which respond well to activemanagement. They benefit from being run as businesses, in partnership withoccupiers. The needs of the traders are at the heart of our business, whether the sector isretail or leisure. Our centre managers mainly have a retail background ratherthan one in property, and are expected to understand the operating dynamics ofthe occupiers. Happy tenants means they are trading successfully which meansthe centre is thriving. Specialisation has allowed us to invest in management teams intended to be "bestin class" for their own sectors. Their skills can be spread over biggerportfolios, and they can exploit scale economies for the benefit of occupiers,fund investors and C&R. We believe we have some of the most experienced and effective management teamsin the industry. We are proud of their strength and depth. The interests ofthe management teams, the funds and C&R are well aligned by our business model.We believe that this is at the root of our success. Business Building 2004 was again a year of business building, with the Group's market positionstrengthened in a number of significant ways: • property under management increased from £2.9bn to £4.0bn. In particular we have increased the number of shopping centres we manage from 15 to 21, at 30 December 2004 and to 22 now. • the X-Leisure Fund was established from the tail end of the three funds acquired from MWB. We now have a vibrant leisure division, with sufficient scale and significant opportunities for future expansion • we have restructured our principal investments via Jersey in order to increase liquidity in the market for units. Convertible Unsecured Loan Stock (CULS) In 2004 we started to buy back our CULS. The conversion price of £1.9448 iswell below the current share price so we have had to pay a premium to redeemthem. It is worth noting that the premium paid is written off through theCompany's profit and loss account and reduces its taxable profit. This taxsaving makes it beneficial to buy back CULS rather than shares. We have continued the repurchase programme after the year end, and have nowbought approximately half the CULS issued. . Market overview Current market conditions remain good despite the reported slowdown in consumerdemand. There continues to be strong demand from investors looking for ways offinding suitable property exposure and we believe that there is room for furtherreductions in investment yields, particularly in the leisure sector. Future prospects The current year has started well. We have experienced and well incentivisedmanagement teams and the infrastructure in place for continued organic growth.This will allow us to produce attractive returns for both fund investors and C&R. The longer term outlook is more difficult to predict, but I remain confidentthat our business model will help us outperform. Finance Director's review Return on equity Return on equity is still the key measure for our financial performance.Calculated directly from the unaudited accounts the 2004 figure is 37.0%. Afteradding back exceptional items it is 39.0%. Total return 2004 2003 £m £mProfit before tax and exceptionals 36.2 26.3Exceptional items (10.2) -Gains taken to reserves 122.0 85.9Pre-tax return 148.0 112.2Tax (12.0) (10.6)Total return for the year 136.0 101.6Return on equity 37.0% 37.6%Adjusted return on equity, before exceptionals 39.0% 37.6% Drivers of return 39% is clearly a high return and shareholders will want to understand theeconomic drivers behind it. 1. Earnings businesses: the Group is now a hybrid, with two significant earnings businesses which should be analysed differently from our property investments. Since they generate substantial profit from very little equity they significantly enhance our return on equity. Both businesses have been built up from small beginnings three years ago. Our property management business is operated by Capital & Regional Property Management Limited (CRPM), and our ski slope operating business by Snozone Limited: the corporate structure can be simplified as follows Capital & Regional plc !---------------------------!--------------------------------! ! ! Earnings businesses Property investments (wholly(Property management business and owned properties, joint ventures ski slope business) and fund co-investment) 2. Outperformance by the funds: all three funds are actively managed and outperformed their benchmarks on both a geared and ungeared basis. Strong performance from the funds benefits the Group in two ways: first through its co-investment, and secondly through the performance fees which entitle CRPM to an extra share of the outperformance over and above the benchmarks. Fund performance in 2004 Geared return Ungeared return IPD % % % Mall 26.0 19.6 17.1Junction 35.6 24.0 23.5X-Leisure (9 months only) 18.0 11.4 - 3. Strong Markets: Investor demand for retail property drove up property values during the year, and investment yields fell. We have estimated that our total return can be split up as follows: Effect of yield shift 21.5%Active management and other factors 17.5% Total return before exceptionals 39.0% 4. Non-fund property activity: our retail park and leisure teams still have significant non-fund activities, and these have made a major contribution to our return on equity: Key Non-Fund Investment 2004 Return on equity %Glasgow Fort - 50% JV 38.8Swansea Retail Park - wholly owned 92.8Xscape Milton Keynes - 50% JV 43.1Xscape Castleford - 66.7% JV 24.3Great Northern - 50% JV 9.4 Profit and loss detail The table below breaks down our turnover and profit into its main components: Profit and loss account 2004 2003 £m £m Management fees 19.3 15.7Performance fees 31.2 13.3Ski slope income 9.0 5.5Rental income 2.9 4.9Group turnover 62.4 39.4 Property costs 0.4 (1.3)Income from associates & JVs 30.6 35.9Net interest payable (34.5) (29.5)Ski slope expenses (7.5) (5.1)Amortisation of goodwill (1.2) (1.2)Fixed management expense (13.7) (11.8)Variable management expense (13.0) (7.7)Profit on disposals/investments net 12.8 7.6Exceptional item re Jersey restructuring (2.0) -Exceptional item re CULS (8.2) -Profit before tax 26.0 26.3 Management fees: most of our management fee income is stable. The core feeincome is paid by the funds, the service charge fees by the tenants. Only 8%of the total is related to work on property procurement which will fluctuatewith the level of activity within the funds. Management fees 2004 2003 £m £m Core fee income 11.6 10.7Service charge fees 3.2 2.4Other regular income 3.0 1.4Procurement fees 1.5 1.2Total 19.3 15.7 Performance fees: our property management company, CRPM, is entitled toperformance fees, which are calculated as a share of the excess return overpre-agreed benchmarks. There are significant lags in the formula to ensure thatonly consistent performance is rewarded. • Fees are calculated on a rolling three year basis, so our 2004 performance will contribute to the 2006 performance fee • If the calculation produces a negative figure in either 2005 or 2006, the 2004 fee can be clawed back Thus our strong performances in 2004 gives us a good start towards earningperformance fees in 2005 and 2006. We only include in the 2004 profit and lossaccount the fees that are legally attributable to the year, as shown in thetable below. Performance fees 2004 2003 2002 £000 £000 £000 Mall 22.8 11.1 2.8Junction 7.3 2.2 -X-Leisure 1.1 - - Total 31.2 13.3 2.8 Ski slope income and expense: Snozone produced higher than expected profits in2004. Castleford enjoyed its first full year of trading; cost controls wereoperating strongly at both Castleford and Milton Keynes; and some costs could beshared between locations. The ski slope income comes mainly from ski slope ticket sales. Its expenses arestaff costs and building occupation costs including rent. Share of associates and joint ventures: a breakdown of income from this sourceis shown in notes 6 and 7. All three funds have enjoyed strong capital growth,and paid significant performance fees to CRPM. These fees are currently chargedagainst the operating profit of associates, although they are driven by capitalgrowth. The move to Jersey may allow the funds to offset performance feesagainst capital and in due course we hope that cash distributions will beincreased. Amortisation of goodwill: goodwill arising on the acquisition of the MWB leisurefunds is amortised over 12.5 years. The cost of the goodwill was reduced by£1.2m due to a carried interest earned and credited to C&R as extra units in thenew leisure fund. Management expense: over the last three years our fixed management expense hasgrown from £10.5m to £13.7m while the portfolio has grown from £900m to £4bn.We have tried to moderate the increase in our fixed cost base. The variable management expense includes all payments which vary with theperformance - letting fees paid to members of staff, bonuses, and the cost ofthe Long Term Incentive Plan (LTIP) and the Capital Appreciation Plan (CAP).The cost of the LTIP awards is spread over the three year performance period.The cost of the CAP is borne in the year in which the performance fees areearned, although payouts are delayed for a further two years. Exceptional items: our accounts have borne the cost of writing off £8.2m ofpremium paid for the repurchase of the Convertible Unsecured Loan Stock (CULS).This reduces profit and total return, but it also reduces the number of sharesafter conversion. So on a fully diluted basis NAV per share will be enhanced. The Profit and Loss account also shows a £1.994m exceptional charge for the costof transferring the Group's fund holdings into Jersey holding companies. Financing and corporate structure Value of property management business: we have been asked to provide moreinformation to help investors understand the value of our property managementbusiness. Note 2 therefore includes for the first time an allocation ofmanagement expenses between our property management and property investmentbusinesses based on an allocation of staff costs. The cash flows from the assetmanagement business can be classified as follows: Property management business (CRPM) 2004 2003 £m £m Asset management fees 19.3 15.8Fixed overhead (10.6) (9.1)Ongoing cash flow 8.7 6.7 Performance fees 31.2 13.3Variable overhead (11.8) (6.5)Performance related cash flow 19.4 6.8 Dividend policy: our decision to increase the dividend is driven by an analysisof our recurring income. Recurring income includes rent, management fees,interest and fixed management expense. It excludes performance fees andvariable overhead. It also excludes the share of the cost of performance feeswhich we bear as an investor in the funds. We calculate that our recurring pre-tax profit for 2004 was £18.4m. Thistranslates into recurring post tax earnings per share of 19.6p, which covers our14p proposed total dividend for 2004 1.4 times. Bank debt: the Group has bank debt of £118m against adjusted shareholders'funds of £515m including CULS of £20.4m. This debt is secured on our whollyowned properties, principally our investment in the Morfa site Swansea, and alsoon our units in the Mall and Junction funds. The Group is also exposed to £531m of bank debt through its interests in thethree funds and its various joint ventures. The Mall and Junction portfoliosare geared roughly 50/50 debt to equity, the X-Leisure fund is slightly higherat 65/35. This £531m includes our share of fund debt for which there is no recoursewhatsoever to Group assets. In some cases there is recourse to the Group fordebt incurred by Joint Ventures. These figures are prepared on a see throughbasis, in other words if we hold 27.86% of the fund, we include 27.86% of thefund debt. On this see through basis we have debt of £649m against adjusted shareholders'funds (including the CULS) of £515m, representing gearing of 126%. Hedging: the floating rate interest on this bank debt must be paid from a fixedflow of rental income, and it is therefore prudent to enter into interest rateswaps to hedge the interest rate exposure. At the year end we had swaps on 72%of the £649m with an average duration of 29 months. Since the year end furtherswaps have increased this to 76% and an average duration of 53 months. Convertible Unsecured Loan Stock (CULS): At 30 December our balance sheetincluded £20.4m of CULS each of which can be converted into shares at aneffective conversion price of £1.9448. This is significantly below the currentshare price and we therefore treat the CULS as equity for gearing purposes. We started to repurchase the CULS during 2004. The effects on our financialstatements are as follows: • We paid £12.4m cash for the repurchase • £4.2m of this reduces the book liability, the £8.2m balance is taken as a loss through the profit and loss account as an exceptional item within interest payable • Net asset value is reduced by £8.2m • Fully diluted NAV per share is enhanced on a post tax basis. We have continued to buy back CULS in 2005. Total buybacks to date can besummarised as follows: Nominal value Expenditure Premium £000 £000 £0002004 buybacks 4,216 12,431 8,2172005 buybacks 7,935 29,379 21,444Total buybacks to date 12,151 41,810 29,661 International Accounting Standards We will continue using UK GAAP for the year ended 30 December 2005. But we arepreparing to adopt IFRS for 2006, and we will be providing supplementaryinformation to shareholders later this year to ensure that they are fullyinformed. The extra year of UK GAAP is clearly in the economic interests ofshareholders because there is certainty under UK GAAP about the accounting andtax treatment of the write-off of the premium paid on repurchase of the CULSunder IAS and FRS26. The financial information contained in this Finance Director's review isextracted or calculated from the attached profit and loss account, balancesheet, cash flow statement, notes and glossary. Data for 2004 is to 30December. Data for 2003 is to 31 December. Operating Review: Shopping Centres The Shopping Centre Market 2004 was a record year for investment transactions with over £5bn worth ofcentres traded. Average lot size also increased to circa £75M with nominalequivalent yields hardening in Mall type centres to 6.25%, on par with TheMall's portfolio yield of 6.3%. It's hard to see a softening of pricing in the short term. Indeed the weight ofmoney for retail investment in particular suggests further yield compressionduring 2005 albeit at a lesser rate than the last two years. As to rental growth, there is general concern in the market about thefundamentals of cooling consumer demand and general retail price deflationpressurising the retailers' capacity to support increased occupationaloverheads. Investors appear to be prepared to take at least a medium term viewon this. The Mall's Market Position The Mall is seeing continuing strong tenant demand across all format sizes,however, particularly so in the 10,000 sq ft plus range. This is reflected in alow void rate of 2.8% which in itself includes strategic vacations forrefiguration and reletting. The Mall model is intended to be robust in a more challenging consumer climate.It offers: • UK wide geographical diversity • No reliance on any single occupier : top 20 retailers liable for only 32% of rent roll • Competitive costs of occupation : average unit rent , £70K pa • Mass market tenancy roster • Convenient & accessible local locations • Emerging Mall Brand loyalty The Malls We now have a portfolio of 22 centres across the UK, one of the largest in thesector: Centre Size (sq ft)The Mall, Aberdeen 200,000The Mall, Barnsley 170,000The Mall, Bexleyheath 400,000The Mall, Birmingham 400,000The Mall, Blackburn 535,000The Mall, Bristol 320,000The Mall, Camberley* 360,000The Mall, Chester 232,000The Mall, Edgware 199,000The Mall, Epsom 400,000The Mall, Falkirk 190,000The Mall, Gloucester 250,000The Mall, Ilford 300,000The Mall, Maidstone 542,000The Mall, Middlesbrough 430,000The Mall, Norwich 400,000The Mall, Preston 270,000The Mall, Romford 320,000The Mall, Southampton 200,000The Mall, Sutton Coldfield 500,000The Mall, Walthamstow 280,000The Mall, Wood Green 570,000TOTAL 7,468,000 * acquired in January 2005 Performance Mall Fund performance 2004 2003Property Level Returns 19.6% 20.1%Fund Level Returns 25.8% 33.5%IPD Benchmark 17.1% 15.2%Performance Fee £22.8M £11.1M The Mall fund has significantly outperformed its IPD shopping centres benchmarkon both a geared and ungeared basis. We believe that this has been driven bythe scale of the portfolio, the benefits of branding and most of all by thestrong teams which we have actively managing each centre in partnership withretailers. Operating review: Retail Parks Retail Park Market Over the last 12 months the retail parks market has been the strongestperforming sector within the UK property investment market. It is attractive toinvestors because there is strong tenant demand combined with tight planningcontrols. There are good prospects for rental growth, and this has beenencouraging investors to drive down yields. Tenant demand from open A1 retailers remains strong as is rental growth forquality locations. Demand from bulky goods retailers is becoming more focusedon prime destination parks, where we expect to see continued rental growthalbeit at a slower rate. Demand for secondary parks in poor locations seemsunlikely to improve. We would expect to see some further favourable yield in the short term, due tothe weight of money the sector has attracted. However, the yield differentialbetween prime and secondary has narrowed to a level which we believe isunsustainable. Retail Park Activities The C&R Retail Park team's main activity is the management of the Junction Fund,but it is also involved in a number of other projects as described below: Investment Description Recent Activity Sq ftJunction Fund 17 Retail Parks 4 other (Retail & Portfolio management 3,460,000 Industrial)Glasgow Fort Shopping park. Sold to Hercules Fund Now trading. C&R still 350,000 in June 2004 entitled to certain overage payments (Phase 1)Morfa Retail Wholly owned retail park development Development completed in 260,000Park, Swansea October 2004.Leckwith Retail Potential large retail park development Pre-letting in progress. 400,000Park, Cardiff The Junction Retail Parks Since inception we have assembled through a mixture of acquisitions, sales,development, extensions and refurbishment a prime portfolio which would beextremely difficult to replicate. Strict investment criteria have ensured thatthe fund concentrates it activities only on prime open A1 and bulky goods parkswhich are dominant and/or have the ability to become dominant in their catchmentarea. Junction Retail Parks Size (sq ft) Aberdeen 140,000 Aylesbury 200,000 (1) Beckton 190,000 Bristol 320,000 Glasgow 190,000 Hull 330,000 (1) Ipswich 210,000 Leeds 140,000 Leicester 170,000 Maidstone 170,000 Oxford 140,000 Paisley 190,000 Portsmouth 160,000 Renfrew 240,000 Junction Thurrock Joint Venture ( 2 ) 320,000 Wembley 260,000 Worcester 90,000 Total 3,460,000 (1.) Park size following completion of development works, currently under construction(2.) The Junction owns 65% of the Junction Thurrock joint venture Performance In both 2004 and 2003 the Junction has outperformed its benchmark. As a resultCapital & Regional has earned significant performance fees. 2004 2003Property level returns 24.0% 17.70%Fund level return 35.6% 28.20%Benchmark 23.5% 16.60%IPD Performance Fee £7.3m £2.2m The 24% property level return in 2004 can be attributed to: • Income 5.3% • Asset Management & ERV growth 5.5% • Planning and Development 2.7% • Yield Shift 10.5% Planning Permission & Development Central Government policies and planning legislation with regard to out of townretail developments has been increasingly restrictive and now borders ondraconian. Despite this, the Junction has achieved considerable success in obtainingplanning consents for new developments, existing park refurbishments andextensions, and change of use totalling 880,000 sq ft. This will assist the Junction in delivering out performance in future years, andhas helped to create the development pipeline summarised below: Development Description Status Existing Area Further (sq ft) Development Area (sq ft)Aylesbury Development of old On site 30,000 108,000 existing retail parkHull - Ph II New space extension On site 240,000 130,000Bristol - Ph IV New space extension Phase V completed 320,000 156,000Wembley Redevelopment & Commence work April 260,000 N/A refurbishment of old 2005 existing retail parkOldbury New development Planning Consent n/a 430,000 achievedThurrock Redevelopment & On site March 2005 490,000 N/A refurbishmentPaisley New space extension Planning permission 190,000 85,000 awaited in June 2005Leicester New space extension Planning Consent 170,000 17,500 achieved Phase 1 of our 200,000sq ft development at Aylesbury has been completed andtrading commenced in November 2004 with the balance scheduled for completion inAugust 2005. The 130,000sq ft extension to Hull started on site in September2004 with completion scheduled for August 2005. A further 100,000sq ft wasadded at Bristol during the year, and consent was achieved for 430,000sq ft atOldbury following the planning inquiry in May 2004. Permission was also grantedin October 2004 for the comprehensive redevelopment of 200,000sq ft at Wembley.Prior to commencement the developments will be substantially pre-let, with fixedpriced building contracts signed in order to reduce the risk borne by the Fund. Glasgow Fort Phase I of this project was completed and opened for trade in October 2004.Notable lettings during this year include Zara, New Look and an extended Bootsstore. The overall un-let space by area is now only 4%. The investment was sold during the year by the partnership in which C&R is a 50%partner for £195m to Hercules Unit Trust, with the partnership retaining a rightto receive further capital receipts in respect of the project and subsequentphases. These are subject to certain conditions and no value is included inCapital & Regional's balance sheet. Morfa Shopping Park, Swansea In October 2004 Capital & Regional completed the Morfa Shopping Park in Swansea.This investment comprises 105,000sq ft of Open A1 retail and 132,000sq ft ofbulky goods retail, in addition to some A3 restaurant units. Existing tenantsinclude B&Q, Next, TK Maxx, Boots and Asda George. Of the remaining 30,000sq ftavailable to let, 10,000sq ft is under offer and strong demand in the remainingspace is being shown at significantly higher rent levels. This investment has significantly exceeded our expectations and we anticipatefurther capital growth in 2005. Extracts from Operating Review: Leisure The market for Leisure Properties Increasingly the leisure sector is attractinginterest from a wider audience of investors. This is not surprising when onelooks at the initial yield across leisure investments compared to other assetclasses. The leisure sector is looking good value and the weight of moneycurrently in the market is beginning to harden these yields as investor demandseeks out value. However other special benefits that leisure property offers to the investor arenow being recognized. Unexpired lease lengths in excess of 20 years, goodcovenants and guaranteed rental uplifts at future reviews guaranteeing futurereversionary income stream and the equivalent yields. C&R Leisure division's activities Capital & Regional's leisure team has four major responsibilities: Asset DescriptionX-Leisure Fund A portfolio of 17 urban entertainment complexesXscape Partnerships Xscapes in Milton Keynes and Castleford (near Leeds). A third is being built in Braehead (near Glasgow)Snozone Snow slope operator. Pays rent to Xscape partnershipsGreat Northern partnership Large retail and leisure property in central Manchester X-Leisure Fund The X-Leisure Fund was formally launched on 15 March 2004 with a gross assetvalue at inception of £502m and nine investors with C&R holding 10.77% of theequity. At the year end the Fund's gross asset value £597m with one additionalinvestor - Royal Mail Pension Fund. The X-Leisure Fund is the largest leisurefund in the UK and the scale of ownership provides the opportunity to carry outcross-portfolio deals allowing expansion and restructuring with our occupiers. Acquisitions/disposals The major acquisition in 2004 was the Brighton Marina retail and leisuredestination at £65m. There are capital gains to be made from both short termasset management initiatives as well as longer term and more ambitiousdevelopment plans across the scheme. The scheme also offers branding anddestination marketing opportunities and will therefore benefit from X-Leisure'sspecialist marketing approach and expertise. The asset is now a key holdingwithin the fund. The fund also acquired the 25% holding of the "02" London long leaseholdinterest from JV partner Burford. This resulted in a significant capital valuegain from the merging of the two interests and the benefits from 100% ownershipand initiatives. Other Major Activity The combination of the three funds into one and theextension of the fund life has freed the fund to start a number of significantprojects. For example: • Tower Park, Poole - Planning permission was received for a 16,000sq ft (4 unit) extension. Work has commenced with completion due in Summer 2005. • Star City, Birmingham - the turnaround of this regional destination has commenced with the start on site of the construction of a mini snow slope, skate park, air park and climbing walls. • At Great North, North Finchley, planning was granted and pre-lets were agreed for the reconfiguration of accommodation. • Successful rent review settlements above estimated rental values were achieved at the 02 Centre, London and Lockmeadow in Maidstone. Performance Over the nine months since inception, the fund level return was18%. Annualised this is an equivalent of 23.3%. The fund's annual hurdle rateof return is 12% and we are pleased to have earned a £1.1m performance fee. Xscape Xscape Milton Keynes The property is fully let although various asset managementinitiatives have moved the value forward over the year increasing rental valuesand rental incomes by sub-divisions/reconfigurations. Xscape Milton Keynesremains the flagship entertainment leisure destination within the UK andwelcomed 6.1m visitors in 2004. Xscape Castleford, Leeds 2004 saw its first full year of operation. Over theyear £550,000 of new rental income was exchanged. At the year end the propertywas 90% let by floor area. The scheme is now trading successfully and year onyear growth being experienced. The surrounding area has seen substantialdevelopment with the opening of a 100,000sq ft B&Q, reconfiguration/expansioncommencing on the adjoining factory outlet and the completion of a 120 bedroomhotel. Xscape Braehead Laing O'Rourke's started construction on site in June 2004 andthe 310,000sq ft building is currently on target to open in Spring 2006. Atremendous level of tenant interest has been experienced with 70% by floor areaalready pre-let. This Xscape is being developed in a joint venture with theowners of the very successful Braehead Shopping Centre on the adjoining site.It will offer additional attractions ensuring that the Xscape brand continues tobe innovative and exciting. Snozone Ltd Snozone operates the indoor snow slopes at the Xscapes and has grown at bothXscape Milton Keynes and Xscape Castleford, exceeding profit forecasts year onyear with an excellent expansion strategy. Year on year growth has been seen inboth destinations and as awareness of the all year round ability to ski withinthe destinations increases the seasonal factor of the business, particularly inMilton Keynes, is becoming less acute. Great Northern Warehouse, Manchester This refurbished former railway warehouse is 50% owned in a JV company, MorrisonMerlin Ltd, with Anglia Water Group. In 2004 an agreement for lease wasexchanged with London Clubs International for a 40,000sq ft casino. Finallicensing and planning approvals are expected in the first half of 2005 enablingthe casino to open in early 2006. CONSOLIDATED PROFIT AND LOSS ACCOUNT For the period ended 30 December 2004 Unaudited (Unaduited) (Audited) Period to 30 Year to 31 Notes December December 2004 2003 £000 £000 Turnover: group income and share of joint ventures' turnover 69,030 44,010 Less: share of joint ventures' turnover (6,658) (4,554)Group turnover 2 62,372 39,456 Cost of sales (7,008) (6,445)Gross profit 55,364 33,011Profit on sale of trading and development properties 327 25 Exceptional Group restructuring costs 5 (1,994) -Other administrative expenses (27,923) (20,650)Total administrative expenses (29,917) (20,650) Group operating profit 25,774 12,386 Share of operating profit in joint ventures and associates 30,574 35,863Total operating profit 56,348 48,249 Income from other fixed asset investments 445 - (Loss)/profit on sale of investment properties and investments (1,771) 5,242Profit on sale of investment properties in associates and joint 13,779 2,385ventures Profit on ordinary activities before interest 68,801 55,876 Interest receivable and similar income 1,872 1,142Interest payable and similar charges - Group (7,389) (7,287)- Share of associates (21,533) (19,789)- Share of joint ventures (7,493) (3,595)- Exceptional premium paid on buyback of Convertible 5 (8,217) - Unsecured Loan Stock (44,632) (30,671) Profit on ordinary activities before taxation 2 26,041 26,347 Taxation on profit on ordinary activities 3 (5,852) (6,966)Profit on ordinary activities after taxation and attributable to the 20,189 19,381shareholders of the Company Equity dividends paid and payable (9,016) (5,602) Profit retained in the period/year 11,173 13,779 Earnings per share - basic 4 32.2p 31.4p Earnings per share - diluted 4 28.4p 27.3p The results of the Group for the period/year relate to continuing operations. CONSOLIDATED BALANCE SHEET As at 30 December 2004 Unaudited (Unaudited) (Audited) Notes 30 December 31 December 2004 2003 £000 £000Fixed assets Intangible assets 12,179 14,540 Property assets 82,938 51,457 Other fixed assets 12,500 12,282 107,617 78,279 Investment in joint ventures: share of gross assets 150,644 183,769 share of gross liabilities (103,902) (127,277) 7 46,742 56,492Investment in associates 6 477,092 372,676 631,451 507,447 Current assets Property assets 8,314 7,941Debtors: amounts falling due after more than one year 3,904 274 amounts falling due within one year 46,350 24,202Cash at bank and in hand 4,427 4,475 62,995 36,892 Creditors: amounts falling due within one year (50,404) (37,232) Net current assets/(liabilities) 12,591 (340) Total assets less current liabilities 644,042 507,107 Creditors: amounts falling due after more than one year 8 (147,674) (137,780)(including convertible debt)Provisions for liabilities and charges (1,831) (2,201) Net assets 494,537 367,126 Capital and reserves Called up share capital 10 6,404 6,311Share premium account 10 167,351 165,574Revaluation reserve 10 247,197 145,245Other reserves 10 1,145 2,468Profit and loss account 10 72,440 47,528 Equity shareholders' funds 494,537 367,126 Net assets per share 11 793p 591p Adjusted fully diluted net assets per share 11 710p 521p STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSESFor the period ended 30 December 2004Unaudited (Unaudited) (Audited) Period to 30 Year to 31 Notes December December 2004 2003 £000 £000Profit before exceptionals 5 36,252 26,347Exceptional items (10,211) -Profit before tax 26,041 26,347Movements in revaluation reserve - on investment properties 16,371 1,111 - on other fixed assets 280 (620) - on joint ventures and associates 105,358 80,870Gains on deemed disposals - 4,498Total gains before tax 148,050 112,206 Tax shown in profit and loss account (5,852) (6,966)Tax on revaluation surplus realised (6,185) (3,651)Total tax charge (12,037) (10,617) Total recognised gains and losses for the period/year 136,013 101,589 Return on equity for the period/year 12 37.0% 37.6% Return on equity before exceptional items 12 39.0% 37.6% RECONCILIATION OF MOVEMENTS IN EQUITY SHAREHOLDERS' FUNDSFor the period ended 30 December 2004Unaudited (Unaudited) (Audited) Period to 30 Year to 31 December December 2004 2003 £000 £000 Profit for the period attributable to shareholders of the Company 20,189 19,381Equity dividends paid and payable (9,016) (5,602) Profit retained in the period/year 11,173 13,779Other recognised gains and losses relating to period/year 115,824 82,208Share capital and share premium issued in period/year (net of expenses) 1,870 2,958Purchase of own shares (3,285) (3,341)LTIP credit in respect of profit and loss charge 1,829 1,184 Net increase in equity shareholders' funds 127,411 96,788 Opening equity shareholders' funds 367,126 270,338 Closing equity shareholders' funds 494,537 367,126 CONSOLIDATED CASH FLOW STATEMENTFor the period ended 30 December 2004Unaudited Notes (Unaudited) (Audited) Period to Year to 30 December 31 December 2004 2003 £000 £000 Net cash inflow from operating activities (i) 10,950 28,947 Dividends received from associates and joint ventures 32,989 14,694 Returns on investments and servicing of finance (7,779) (7,920) Taxation (9,614) (5,496) Capital expenditure and financial investment 6,191 8,442 Acquisitions and disposals and exceptional item (20,278) (48,208) Equity dividends paid (6,226) (4,985) Cash inflow/(outflow) before financing 6,233 (14,526) Financing (6,281) 14,842 (Decrease)/increase in cash (48) 316 Notes to the cash flow statement (i) Net cash inflow from operating activities (Unaudited) (Audited) Period to 30 Year to 31 December December 2004 2003 £000 £000 Group operating profit 25,774 12,386Profit on the sale of the trading and development properties (327) (25) 25,447 12,361 Depreciation of other fixed assets 383 425Amortisation of short leasehold properties 268 203Amortisation of tenant incentives (764) (144)Amortisation of goodwill 1,151 1,162Loss/(profit) on disposal of fixed assets 1 (6)(Increase)/decrease in debtors (29,538) 3,144Increase in creditors 12,173 10,616Non-cash movement relating to LTIP 1,829 1,184Net cash inflow from operating activities 10,950 28,947 (ii) Analysis of net debt At 31 December At 30 December 2003 Cash flows 2004 £000 £000 £000 Cash in hand and at bank 4,475 (48) 4,427 Debt due within one year (200) - (200)Debt due after one year (110,472) (7,567) (118,039)Convertible Unsecured Loan Stock (24,642) 4,216 (20,426) (135,314) (3,351) (138,665) Total (130,839) (3,399) (134,238) 1. Status of financial information The financial information contained in this announcement does not constitutestatutory financial statements within the meaning of Section 240 Companies Act1985. The comparative figures have been extracted from the audited financialstatements for the year ended 31 December 2003 which have been filed atCompanies House. The auditors have reported on those accounts; their report wasunqualified and did not contain statements under S237(2) or (3) of the CompaniesAct 1985. The statutory accounts for the period ended 30 December 2004 will befinalised on the basis of the financial information presented by the directorsin this preliminary announcement and will be delivered to the Registrar ofCompanies following the company's annual general meeting. The preliminary announcement has been prepared in accordance with applicable UKaccounting standards. The accounting policies have all been appliedconsistently throughout the current period and the preceding year. 2. Segmental analysis (Unaudited) (Audited) Period ended Year ended 30 December 31 December Property Property Ski slope Exceptional 2004 2003 Management investment business items Total Total