Derwent London Regulatory News (DLN)

11 Sep 2007 07:02

Derwent London PLC11 September 2007 11 September 2007 DERWENT LONDON PLC ("Derwent" / "Group") Interim Results for the six months to 30th June 2007 DERWENT LONDON ANNOUNCES EXCELLENT PROGRESS AND STRONG RESULTS Derwent London is pleased to announce excellent progress across all areas ofactivity and extremely strong results for the six months to 30th June 2007. Highlights • Adjusted net asset value per share increased by 12.5% to 1,931p (1stFebruary 2007 proforma: 1,717p); excluding the REIT conversion charge of £54.7million, this rise would have been 15.7%. • Interim dividend up 77.5% to 7.5p. • Value of core Central London portfolio rose 10.7% to £2.53 billion. • Total valuation surplus of £298.4 million: £245.2 million from theinvestment portfolio and £53.2 million from assets under construction. • Investment portfolio valued at £2.8 billion (1st February 2007: £2.5billion). • Adjusted profit before tax increased by 26.8% to £12.3 million.IFRS loss before tax of £20.3 million, after a £297.3 million charge forgoodwill impairment (30th June 2006 profit: £122.6 million). • Conversion to a REIT achieved on 1st July. Subsequent sales ofnon-core assets have realised in excess of £300 million and produced a grosssurplus of £125 million over the proforma values. • 61,000 sq m of development or refurbishment projects underway withan estimated completed rental income of £22 million - 51% of which is pre-let. • £21 million acquisition in Noho in the reporting period; two furtheracquisitions made since the half year at a cost of £104 million. Financial Highlights Half year Half year to Year to Change to 30.06.07 30.06.06 31.12.06 %Adjusted net asset value per share (p)** 1,931 1,540 1,770 12.5*Gross property income (£m) 50.5 26.1 51.3 93.5Adjusted profit before tax (£m) *** 12.3 9.7 16.4 26.8IFRS (loss)/profit before tax (£m) (20.3) 122.6 242.8 n.a.Adjusted earnings per share (p)*** 10.95 23.56 24.83 (53.5)Dividend per share (p) 7.5 4.225 14.75 77.5Total return (%) 9.7 16.1 33.6 - * Change based on proforma figure at 1st February 2007 of 1,717p. ** As defined in note 16 of the following statement. *** As defined in note 7 of the following statement. Robert Rayne, Chairman, commented: "Derwent London has made excellent progress since the formal completion of theacquisition of London Merchant Securities in February and I am pleased toannounce an extremely strong set of results. "After a very active and successful first half, your Group is extremely wellpositioned to take further major steps in its chosen markets. Investor interestin acquiring Central London assets remains high, and occupier demand continuesto be robust. "By applying management's design-led refurbishment and redevelopment skills anddiligent asset management, we believe that shareholders will benefit as wecontinue to unlock the value in the enlarged portfolio. Consequently, in spiteof the current uncertainties in the global financial markets, we look forward tothe future with confidence." For further information, please contact: Derwent London Financial DynamicsJohn Burns, Chief Executive Stephanie Highett/Dido Laurimore/Lauren MillsTel: 020 7659 3000 Tel: 020 7831 3113 CHAIRMAN'S STATEMENT Derwent London has made excellent progress since the formal completion of theacquisition of London Merchant Securities in February and I am pleased toannounce an extremely strong set of results for the six months to 30th June2007. It has been a very active and challenging time for management with emphasisbeing placed on achieving a rapid and smooth integration, rationalising thecombined portfolio, and converting to REIT status. You will see from my detailedcomments that considerable progress has been made on all these fronts. Results overview Adjusted net asset value per share, one of the principal measures of the group'sperformance, increased by 12.5% to £19.31 per share, against a proforma figureat 1st February (the date of the acquisition) of £17.17 per share. This resultis calculated after charging the REIT conversion charge of £54.7 million.Excluding this, the increase would have been 15.7%. The investment portfolio was valued at £2.8 billion and achieved a valuationsurplus of £245.2 million, before the lease incentive adjustment of £2.0million. The underlying valuation increase, excluding development properties,was £204.3 million with £29.0 million from yield compression and £175.3 millionfrom rental growth and asset management. The revaluation of the developmentproperties added £40.6 million as schemes progressed towards completion. Thebalancing surplus of £0.3 million came from the single acquisition made in thefirst half. The overall valuation increase was 9.6%. The Central London portfolio, with avalue of £2.53 billion, increased by 10.7%. Within this, the West Endproperties, valued at £1.96 billion and representing 70% of the investmentportfolio, increased by 10.6%. Here, Belgravia and Victoria were particularlystrong performers with growth of 29.0% and 15.1% respectively. The balance of the Central London portfolio (£0.57 billion), which is almostexclusively located in the City borders, represented 20% of the investmentportfolio and rose by 11.1%. The remaining 10% of the investment portfolio, with a value of £0.29 billion,increased by 0.6%. This is located outside Central London and has beenidentified for disposal. In addition, there was a revaluation surplus of £53.2 million on assets underconstruction, giving a total surplus of £298.4 million. Adjusted profit before tax for the enlarged group, which only includes therecurring elements of profit, was £12.3 million. This profit incorporates fivemonths of results of London Merchant Securities and compares with £9.7 millionfor Derwent Valley in the half year to 30th June 2006. The result under IFRS isa loss of £20.3 million against a profit of £122.6 million for the comparableperiod. There are a number of adjustments made to arrive at the IFRS result, themost significant of which this year relates to the charge of £297.3 millionresulting from the impairment of goodwill. Adjustment has also been made for the£6.8 million development income from the Telstar project. These are in additionto the usual adjustments in respect of the net revaluation surplus, (£243.2million), profit on disposal of investment properties and other investments,(£10.0 million), and the movement in the fair value of derivative financialinstruments, (£6.7 million). Total return for the six month period was 9.7%compared to 16.1% for the six months to 30th June 2006. Dividend As a result of the acquisition and conversion to a REIT, the board has reviewedthe company's dividend policy. It concluded that the dividend would be based onthe policies of the two companies prior to the acquisition, plus a substantialproportion of the tax on income saved through REIT conversion. However, as thegroup only converted on 1st July, the dividend for 2007 will reflect only sixmonths tax saving. The board has declared an interim dividend of 7.5p pershare. This represents an increase of 78% on the 4.225p per share paid at thisstage last year. Further details concerning the dividend are given in note 15 ofthe interim results. Market Review The group's activities are focused in Central London which has continued toperform well. In the West End, against a background of limited supply, tenantdemand has resulted in strong rental growth. These market conditions are ideallysuited to Derwent London's primary focus on reversionary, high potential growthassets, and have enabled us to make a number of lettings in the first half atrecord levels for the properties. With the recent upward movement in interest rates, it is likely that the days ofyield compression across all sectors of the commercial property sector aredrawing to a close. However, strong investor demand persists in our marketsand for our assets, a fact clearly endorsed by the prices we have secured onsales completed since the half year. Conversely, in these market conditions, value adding opportunities are rare andthe only acquisition made in the first half was of a 3,200 m(2) office buildingin Noho for £21 million. Since 30th June 2007, two further acquisitions havebeen made for a combined consideration of £104 million. One of the properties islocated in Clerkenwell and the other in Euston, two of our targeted London 'villages'. These reversionary assets both offer future opportunities for valueenhancement. During the first half, we incurred £31 million of capital expenditure on thegroup's pipeline of projects, with £20 million being spent at Horseferry House,2-4 Fitzroy Street (Arup) and 90 Whitfield Street (Qube). The first two of theseare already fully pre-let and marketing of the third is due to commence in theAutumn. Strategy Following the acquisition, our two immediate objectives were to convert to aREIT and to reshape the portfolio in order to focus entirely on Central London.These are clearly linked, since one of the major benefits of REIT status is thatthe tax on the disposal of investment properties is extinguished, therebyallowing the tax-efficient disposal of non-core properties. The group became a REIT on 1st July 2007, after an Extraordinary General Meetingon 26th June 2007. The resulting conversion charge, which was based on the valueof the investment portfolio, is £54.7 million and was included in the first halftax charge. With the change in status completed, our disposal programme increased momentum.Significant progress has been made to date with the completion of the disposalof £103 million of investment properties and £112 million of residential sites.In addition, contracts have been exchanged for the sale of a further £99 millionof investment properties. The proceeds show a substantial gross uplift in valueof £125 million from that included in the proforma balance sheet. Details of thedisposals are given in the operating review. The proceeds from both the above sales and the ongoing disposal programme willbe recycled into our refurbishment and redevelopment programme and furtheradditions to the portfolio. With the integration of the businesses now complete, the enlarged managementteam is utilising its combined expertise to drive the group's core ongoingstrategy - to own and manage a portfolio of Central London property that offerssignificant opportunities to enhance and extract value. To this end, we arerationalising the portfolio, focusing on larger projects and acquisitions, aswell as taking early possession of certain properties which allow redevelopmentschemes to be brought forward. In the operating review, we have commented on our refurbishment, redevelopmentand management activity. Financing Following the acquisition, group net debt at 30th June 2007 has risen to £948million, an increase of £598 million from the £350 million reported at theDecember year end. Most of the increase (£553 million) relates directly to theacquisition: the issue of loan notes as consideration (£32.5 million); cashconsideration and expenses (£20 million) and the net debt within London MerchantSecurities itself (£501 million, inclusive of £30 million arising from the fairvalue of the secured bonds upon acquisition). The June figure shows an increaseof £52 million from that shown in the post acquisition proforma balance sheetincluded at the end of this announcement. In addition to loan notes and cash,ordinary shares to the value of £913 million were issued as consideration toLondon Merchant Securities shareholders. Outside of the acquisition of London Merchant Securities, other notable cashflows are due to property acquisitions and capital expenditure (£67 million) anddisposals (£29 million). Balance sheet gearing at 49.1% shows only a modestincrease from the last year end while profit and loss gearing has risen from the2006 figure of 54% to 67% for the current half year. The latter reflects thehigher operational gearing of London Merchant Securities. At the end of August,62% of net debt, which had fallen as a result of the disposal programme toapproximately £803 million, was either at fixed rates or hedged, mainly throughthe use of swaps. Despite rising interest rates, the current spot averageweighted cost of debt was 6.3%. While the fair value movement of the derivative instruments since acquisition isincluded in the results for the half year, that for the £175 million securedbonds is not required to be adjusted. The fair value adjustment of the securedbonds at 30th June 2007 was £13.2 million, compared with the £22.1 million onacquisition. The board Since the half year, Nick Friedlos, who, prior to the acquisition, was LondonMerchant Securities' finance director, has left the board. Nick made aconsiderable contribution to the efficient integration of the two groups and tothe conversion of Derwent London to a REIT and we would like to wish him successin his new endeavours. Prospects After a very active and successful first half, your group is extremely wellpositioned to take further major steps in its chosen markets. Investor interestin acquiring Central London assets remains high and occupier demand continues tobe robust. In such circumstances, the group's portfolio, which is balancedbetween properties providing recurring and reversionary income and those whichprovide a pipeline of redevelopment projects, is particularly well placed todeliver superior returns. By applying management's design-led refurbishment and redevelopment skills anddiligent asset management, we believe that shareholders will benefit as wecontinue to unlock the value in the enlarged portfolio. Consequently, in spiteof the current uncertainties in the global financial markets, we look forward tothe future with confidence. R.A. Rayne 11th September 2007 OPERATING REVIEW The merger of the businesses of Derwent Valley Holdings and London MerchantSecurities was formally completed on 1st February 2007. The renamed group,Derwent London, is now the UK's 7th largest listed property company and,following its conversion to REIT status, the world's largest Central Londonfocused REIT. A key objective for the first half was the integration of the management of thetwo property portfolios. This process has been completed smoothly with allpersonnel now located at Savile Row. The outcome is an enlarged assetmanagement team, focused on applying its experience and entrepreneurial skillsto the merged portfolio. This has immediately generated many new ideas andopportunities to maximise the potential, both of the assets and their locations. Portfolio The group owns and manages an investment portfolio of over £2.8 billion, ofwhich £2.5 billion or 90% is located in Central London. There is a specificfocus on the West End, making up 70% of the portfolio, and the areas borderingthe City, which comprise 20% of the portfolio. The balancing 10% comprises non-core, provincial properties which are subject toan orderly disposal programme. Progress on this is set out in the final sectionof the review. Our strategy is to acquire and own a portfolio that has reversionary rents andscope to add value through refurbishment and redevelopment. In this regard, ourCentral London properties offer excellent potential for rental growth, being letat a low average level of £259 per m2, with the West End properties at £270 perm2. Furthermore, approximately 50% of the London portfolio is identified ashaving the opportunity, through development, to achieve significant gains infloor area and increase in value. Redevelopment and refurbishment The portfolio contains a phased development pipeline of over 310,000m2. Ofthis, projects committed and under construction will provide in excess of61,000m2 of new space and deliver a rental income approaching £22.0 million perannum. This includes £11.3 million of pre-let income. Projects under construction include: • Horseferry House, Victoria, SW1 A comprehensive refurbishment and remodelling of this building, which will cost£27 million, is progressing on schedule and will create 15,200m2 of highquality, air conditioned, office space centred around a striking receptionatrium. The property, which was pre-let last year to Burberry, theinternational fashion group, at a rent of £5.3 million per annum, will becompleted early next year. The headline rent of £410 per m2 will ensure thatthis asset is well positioned to deliver future rental and capital growthperformance. • Arup Phase II & III, 2-4 Fitzroy Street, Fitzrovia, W1 Phase II of this 13,200m2 development is well advanced, with the externalenvelope cladding system being installed, revealing an inspirational design.Completion of this phase is scheduled for later this year and phase III in 2009. The complex is pre-let to Arup, an international firm of engineers, on a 25year lease at a current income of £2.7 million per annum, which will rise to£6.0 million per annum on completion of both phases. The latter equates to £450per m2, with a rent review in 2011 and presents excellent future prospects forrental growth in a location where rents are approaching £645 per m2. • Qube, 90 Whitfield Street, Fitzrovia, W1 Along with the Arup project, the nearby Qube development is set to transform theheart of our Fitzrovia holdings (representing 21% of the investment portfolio)by providing 9,300m2 of exciting, high quality office space. Due to becompleted later this year, this will be one of the few new office buildings ofthis size and quality available in the West End. This building offers flexiblespace within a panelled glass cladding system and large floor plates of 1,700m2around a central atrium which incorporates the circulation core. In addition,700m2 of retail space has been created at street level to provide a new andvibrant profile for this section of Tottenham Court Road. • 16-19 Gresse Street, Noho, W1 This 4,400m(2) office development offers an opportunity to improve the area andcreate an attractive environment through modern design solutions. Located closeto the group's Holden House property, we expect strong interest from media andcommunication companies when this project is completed in early 2009. • Portobello Dock and Kensal House, Ladbroke Grove, W10 The transformation of these redundant buildings will provide 6,400m2 of space inthis mixed-use scheme. It includes 19 canal-side apartments, a blend of studiooffices and a new air-conditioned office building. The residential units willbe sold on completion later this year and the offices leased. This projectdemonstrates Derwent London's philosophy of creating value by regenerating anarea through a thoughtful, contemporary scheme. Planning permissions and applications We are advancing a number of key planning opportunities to deliver the nextgeneration of schemes and development surpluses and are also actively appraisingand evaluating other important holdings where we have identified the opportunityto increase floor areas substantially. These include: • 55-65 North Wharf Road, Paddington, W2 In June, a planning application was submitted for a landmark office developmentof 22,300m2 and 100 residential units in a self-contained building. A strikingoffice building of 15 storeys will incorporate the latest environmental designand technology and create a distinct new development that will complement andadd to the evolution of Paddington Basin. In addition, the scheme has beendeliberately positioned to open up the canal side to the public as part of anumber of public realm improvements to the location. The quality of thedevelopment, which will replace an existing 7,800m2 low rise 1960's building,will be a further endorsement to this now established West End office location. • The Angel Centre, 403 St John Street, Islington, EC1 This property is leased to BT until 2010. In March, we completed a restructureto gain control of this prominent 15,000m2 building, whereby the £4.2 millionper annum rent will continue to be paid by the tenant until expiry. We are nowfinalising comprehensive refurbishment proposals, and architectural studies haveidentified a number of opportunities which would allow us to extend the size ofthe building to 23,200m2, an increase of over 50%. A planning application is tobe submitted before the end of the year, with anticipated delivery of the spaceby the end of 2009. • 40-43 Chancery Lane, Holborn, WC2 A planning decision is expected later this year for a 9,600m2 officedevelopment. This will be a much welcomed addition to this improving locationwhere there is a shortage of new, grade A buildings, as evidenced by the rapidtake-up of space in nearby schemes. The proposal includes a courtyard settingand an improved street frontage. This application is made in conjunction withthe freeholder and includes their adjacent ownership. The earliest possiblestart of construction will be 2008. • City Road Estate, EC1 It was disappointing to have recently received a planning refusal for our9,300m2 office and 235 residential apartment scheme, despite having planningofficer recommendation. However, the existing 9,300m2 buildings, which produce£1.3 million of income per annum, offer other alternatives for substantialredevelopment and the design is being re-appraised to identify other excitingavenues for the scheme. • Wedge House, 30-40 Blackfriars Road, Southbank, SE1 Planning permission is in place for the redevelopment of this 1950's 3,600m2building to provide 8,200m2 of offices. The detailed design is now beingfinalised and there is the opportunity to commence the development in 2008 whenthe occupational lease expires. • 18-30 Leonard Street, EC2 A planning permission exists for 2,000m2 of offices and 47 private residentialapartments. Subject to the site not being required for planning use inconnection with our proposals for the nearby City Road Estate, construction isexpected to commence later this year. Lettings Despite the enlarged size of the group's portfolio as a result of the merger,the amount of available vacant space is low after last year's record level oflettings, which included the pre-letting of two major schemes. However, we have achieved a number of important transactions, which deliveredstrong rental growth and added value to the portfolio. In total, 12,500m2 oflettings were completed in the first half producing a combined rental of £2.6million per annum. As a result of this activity, available vacant space is only13,600m2, or under 2% of the portfolio's total rental value. In addition tothis, and excluding pre-let schemes, vacant space under development/refurbishment totals 33,000m2 with a potential rental value of over £13 millionper annum. Principal achievements included: • The final space of 1,030m2 was let at the recently completed13,900m2 Johnson Building, Hatton Garden at a record level of rent for thebuilding. The tenant is paying a headline rent of £460 per m2, rising to £480per m2 on first review which is 26% above our initial lettings last year of £380per m2. • Following refurbishment of 6-7 St Cross Street, 1,750m2 waslet in three transactions. At £375 per m(2), these achieved rental levels 27%above those of £295 per m2 anticipated at the outset of the project. The strong letting market also enabled us to implement a number of activemanagement opportunities, whereby leases were surrendered and the spacesubsequently re-let at improved levels. As an example, at Holden House, Noho,following a surrender, we let 630m2 to H&M Hennes, the principal tenant in thebuilding. The rent achieved was £511 per m2, a substantial increase of 36% overthe £375 per m2 passing rent. In addition, at 4 Grosvenor Place, Belgravia, are-letting achieved £745 per m2, the highest rent achieved in this building.Both these lettings will provide the basis of rent review evidence to drivevalues forward at these major holdings. Acquisitions and disposals Demand for Central London investments remains strong in an environment wherethere is buoyant economic activity, healthy tenant take-up and low vacancyrates. These conditions are delivering rental growth and make Central Londonproperty the most sought after property asset class in the UK. Consequently,value-adding acquisitions are difficult to find, whilst the market's strengthprovides an ideal opportunity for disposals. Only one acquisition was made during the first half, that of Castle House, 75Wells Street, W1 for £20.0 million excluding costs. This prominent cornerbuilding in the Noho village comprises 3,200m2 of multi-let space and offersrefurbishment and lease management potential. The average passing rent is lowat £255 per m2, providing an excellent base for future growth. We continue to seek acquisitions, concentrating particularly on larger buildingswhich provide opportunities to apply our design-led skills to increase floorarea and rents, in both our existing villages and new, improving locations inCentral London. The following two acquisitions have been made since the halfyear: • Woodbridge House, 30 Aylesbury Street, Clerkenwell, EC1 This 7,000m2 office building, located in the heart of Clerkenwell, was acquiredfor £46.3 million, excluding costs. It is let to Pinsent Masons, solicitors, at£2.45 million per annum on a lease expiring in 2015 with a rent review in 2010.The rent passing is £350 per m2 and offers good reversionary growth prospects.In addition, there is the opportunity to create additional space and improve thebuilding configuration. • 132-142 Hampstead Road, Euston, NW1 This acquisition, for £52.5 million, excluding costs, comprises two substantialbuildings providing 21,500m2 of warehouse and office accommodation and a petrolfilling station on a site of 1.85 acres. They are leased to three tenants,British Home Stores, University College Hospital and BP Oil at a combined rentof £2.0 million per annum. There is an existing planning permission for a newoffice building of 19,700m(2) and 4,600m(2) of industrial space. We believethat we can considerably improve on this consent by increasing the amount ofoffice accommodation and introducing residential units to the site. This is animproving location adjacent to the important Euston transport interchange, wherethere are comprehensive proposals to turn this into a core London officelocation. Disposals from the investment portfolio in the first half totalled £19.6million, with further sales held back pending REIT conversion. The principalsale was a residential site at 2-20 Winchester Road, Swiss Cottage, NW3 for£18.25 million, before costs. This figure was 82% above the 31st January 2007value, but the nature of the asset fell outside the opportunity for REIT taxsavings. Other sales included the Swinton Shopping Centre, Manchester in Junefor £36.8 million. This was held in a joint venture and sold at approximatelybook value. Since the half year, disposal activity has dramatically increased with a further£314 million of disposals completed or contracted. These assets produced atotal rental income of £5.4 million per annum, representing a gross disposalyield of 1.7%. Combined, the gross proceeds were 66% or £125 million above theproforma book values of £189 million. These properties were all identified as non-core assets at the time of theacquisition and we have been able to capitalise successfully on the strength ofthe market and the benefit of our REIT status. The principal London disposals were: • Greenwich Reach, Greenwich, SE10 - Proceeds: £111.8 million.Value at 31st January 2007: £53.1 million. An eight acre cleared site on the south bank of the Thames, overlooking CanaryWharf, with planning consent for apartments and commercial space. • 160-166 Brompton Road, Knightsbridge, SW3 - Proceeds: £45.0million. Value at 31st January 2007: £19.2 million. A 2,300m2 retail and office property producing short-term income of £0.8 millionper annum. • Argosy House, 215 Great Portland Street, W1 - Proceeds: £23.0million. Value at 31st December 2006: £16.0 million. A vacant 2,800m2 office building requiring refurbishment. • 3-4 South Place, EC2 - Proceeds: £18.2 million. Value at 31stJanuary 2007: £10.9 million. Two adjacent vacant office buildings situated close to Broadgate and totalling3,500m2. • Broadmead House and Westcombe House, 19-23 Panton Street, SW1- Proceeds: £17.5 million. Value at 31st December 2006: £9.0 million. A multi-let 1,500m2 office and restaurant building located adjacent to LeicesterSquare and providing short-term income of £0.3 million per annum. In addition, disposals of provincial assets included: • Lion and Lamb Yard, Farnham - Proceeds: £32.3 million. Valueat 31st January 2007: £29.4 million. A 6,500m2 shopping centre producing £1.6 million per annum and anchored by aWaitrose supermarket. The property was held in a joint venture with the PortmanEstate. • 32-38 High Street, Dorking - Proceeds: £6.5 million. Value at31st January 2007: £4.5 million. A 2,500m2 supermarket, let to J Sainsbury at a rent of £0.3 million per annum. • Dukes Lane and Middle Street, Brighton - Proceeds: £20.0million. Value at 31st January 2007: £13.1 million. A multi-let central shopping centre and entertainment venue totalling 5,950m2and producing £0.9 million per annum. • Turnford Triangle, Cheshunt - Proceeds: £5.0 million. Valueat 31st January 2007: £2.3 million. A three acre cleared site where we had obtained outline residential planningpermission. • Quadrant Arcade and South Street, Romford - Proceeds: £16.0million. Value at 31st January 2007: £17.5 million. A 5,700m2 multi-let retail arcade in the centre of Romford producing £1.0million per annum. Further disposals are planned in line with our strategy to focus on largerCentral London properties. The capital generated is being reinvested in oursubstantial redevelopment programme which we believe offers high returns and insignificant acquisitions to the portfolio when value enhancing opportunities arefound. J.D.Burns 11th September 2007 GROUP INCOME STATEMENT (UNAUDITED) Half year to Half year Year 30.06.07 to 30.06.06 to 31.12.06 Note £m £m £m Gross property income 50.5 26.1 51.3Development income 2 6.8 6.3 11.6Property outgoings (4.4) (2.5) (4.9) _______ _______ _______Net property income 52.9 29.9 58.0Administrative expenses (10.4) (4.2) (10.1)Goodwill impairment 10 (297.3) - - _______ _______ _______ (254.8) 25.7 47.9Revaluation surplus 243.2 99.2 223.3Profit on disposal of investment properties 3 9.0 1.7 2.9Profit on disposal of investments 1.0 - - _______ _______ _______(Loss)/profit from operations (1.6) 126.6 274.1Finance income 0.6 0.2 0.4Finance costs (24.0) (9.9) (20.4)Exceptional finance costs 4 (1.8) - (18.1)Movement in fair value of derivativefinancial instruments 6.7 2.2 3.2Share of results of joint ventures 5 (0.2) 3.5 3.6 _______ _______ _______(Loss)/profit before tax (20.3) 122.6 242.8Tax credit/(expense) 6 224.0 (30.4) (60.6) _______ _______ _______Profit for the period 14 203.7 92.2 182.2 _______ _______ _______ Attributable to: - Equity shareholders 202.2 92.2 182.2 - Minority interest 1.5 - - _______ _______ _______ Earnings per share 7 220.75p 172.42p 340.13p ______ _______ _______ Diluted earnings per share 7 219.42p 170.98p 337.21p ______ _______ _______ GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE (UNAUDITED) Half year Half year Year to 30.06.07 to 30.06.06 to 31.12.06 £m £m £m Profit for the period 203.7 92.2 182.2Deferred tax in respect of share-based payments - - 0.6Revaluation of assets under construction 53.2 - -Deferred tax in respect of assets under construction (16.0) - -Pension gains 1.5 - - _______ _______ _______Total recognised income and expense relating to theperiod 242.4 92.2 182.8 _______ _______ _______ Attributable to: - Equity shareholders 240.9 92.2 182.8 - Minority interest 1.5 - - _______ _______ _______ GROUP BALANCE SHEET (UNAUDITED) 30.06.07 30.06.06 31.12.06 Note £m £m £mNon-current assetsInvestment property 8 2,804.6 1,144.6 1,274.0Property, plant and equipment 9 110.7 0.3 0.3Investments 8.1 5.3 5.4Pension scheme surplus 2.9 - -Financial assets 12 13.0 - 0.1Other receivables 21.6 13.7 13.7 _______ _______ _______ 2,960.9 1,163.9 1,293.5 _______ _______ _______Current assetsTrading properties 11 9.4 - -Trade and other receivables 34.1 16.6 39.4Corporation tax asset - - 1.4Cash and cash equivalents 20.9 7.2 - _______ _______ _______ 64.4 23.8 40.8 _______ _______ _______ Total assets 3,025.3 1,187.7 1,334.3 Current liabilitiesBank overdraft and loans 12 38.6 - 2.2Trade and other payables 30.4 21.0 32.5Corporation tax liability 62.2 3.8 -Provisions 0.8 0.1 0.1 _______ _______ _______ 132.0 24.9 34.8 _______ _______ _______Non-current liabilitiesFinancial liabilities 12 929.9 335.1 347.6Provisions 4.3 1.3 1.3Deferred tax 13 26.0 131.8 167.2 _______ _______ _______ 960.2 468.2 516.1 _______ _______ _______ Total liabilities 1,092.2 493.1 550.9 _______ _______ _______Total net assets 1,933.1 694.6 783.4 _______ _______ _______ Equity 14Share capital 5.0 2.6 2.6Share premium 156.1 156.1 156.1Revaluation reserve 37.2 - -Other reserves 914.8 2.7 3.8Retained earnings 818.5 533.2 620.9 _______ _______ _______ Equity shareholders' funds 1,931.6 694.6 783.4Minority interest 1.5 - - _______ _______ _______Total equity 1,933.1 694.6 783.4 _______ _______ _______ GROUP CASH FLOW STATEMENT (UNAUDITED) Half year to Half year Year 30.06.07 to 30.06.06 to 31.12.06 Note £m £m £m Operating activitiesCash received from tenants 63.8 29.5 48.7Direct property expenses (7.6) (2.2) (5.5)Cash paid to and on behalf of employees (5.7) (2.9) (4.5)Other administrative expenses (5.5) (1.6) (3.9)Exceptional administrative expenses 17 (17.3) - -Interest received 1.0 0.2 0.4Interest paid (26.5) (10.6) (21.9)Exceptional finance costs 17 (3.3) - (17.6)Tax expense paid in respect of operatingactivities (1.4) (2.2) (1.3) _______ _______ _______Net cash (used in)/from operating activities (2.5) 10.2 (5.6) _______ _______ _______Investing activitiesAcquisition of investment properties (20.9) (32.3) (48.9)Capital expenditure on investment properties (42.9) (8.4) (18.9)Capital expenditure on assets underconstruction (3.2) - -Disposal of investment properties 19.4 12.0 31.2Acquisition of subsidiaries (net of cashacquired) (38.4) - (6.6)Purchase of property, plant and equipment (0.1) - (0.2)Proceeds from sale of property, plant andequipment 0.2 - -Proceeds from sale of investments 9.2 - -Distributions received from joint ventures 5.7 - -Tax expense paid in respect of investmentactivities (0.3) (0.8) (2.9) _______ _______ _______Net cash used in investment activities (71.3) (29.5) (46.3) _______ _______ _______Financing activitiesMovement in bank loans 91.5 18.0 78.5Movement in loan notes 32.5 - -Redemption of debenture (26.6) - (35.0)Net proceeds of share issue - 1.0 1.0Dividends paid (5.6) (5.2) (7.5) _______ _______ _______Net cash from financing activities 91.8 13.8 37.0 _______ _______ _______ Increase/(decrease) in cash and cashequivalents in the period 18.0 (5.5) (14.9) Cash and cash equivalents at the beginningof the period (2.2) 12.7 12.7 _______ _______ _______ Cash and cash equivalents at the end of theperiod 15.8 7.2 (2.2) _______ _______ _______ NOTES TO THE FINANCIAL STATEMENTS 1 This statement does not comprise statutory accounts as defined in Section240 of the Companies Act 1985. The results for the half year to 30th June 2007and the comparative period for the half year to 30th June 2006 have not beenaudited. The results to 31st December 2006 are extracted from the financialstatements for that year. These received an unqualified independent auditor'sreport which did not refer to any matter to which the auditors drew attention byway of emphasis without qualifying their report, nor contain a statement unders237(2)-(3) of the Companies Act 1985 and have been filed with the Registrar ofCompanies. The results for the half year to 30th June 2007 include those for theholding company and all of its subsidiaries, together with the group's share ofthe results of its joint ventures. The results are prepared on the basis of theaccounting policies set out in the 2006 annual report and financial statementswith the addition of the policies below. These new policies relate to new assetand liability classes arising as a result of the acquisition of London MerchantSecurities plc. Business combinations Business combinations are accounted for under the acquisition method.Any excess of the purchase price of business combinations over the fair value ofthe assets, liabilities and contingent liabilities acquired and resultingdeferred tax thereon is recognised as goodwill. Any discount is credited to thegroup income statement in the period of acquisition. Goodwill is recognised asan asset and reviewed for impairment. Any impairment is recognised immediatelyin the group income statement and is not subsequently reversed. Any residualgoodwill is reviewed annually for impairment. Assets under construction Property assets acquired with the intention of subsequent development asinvestment properties are included as "Assets under construction" withinproperty, plant and equipment, until the construction or development iscompleted, at which time they are reclassified as investment properties. Assetsunder construction are included in the balance sheet at fair value, determinedby an independent valuer on the same basis as used for investment properties.If the fair value increases, this increase is credited directly to therevaluation reserve, except to the extent that it reverses a revaluationdecrease of the same asset which previously had been charged to the group incomestatement. If the fair value decreases, this decrease is recognised in thegroup income statement, except to the extent that it reverses previousrevaluation increases of the same asset which have been credited to therevaluation reserve, in which case it is charged against the revaluationreserve. Trading property Trading property includes those properties which were acquiredexclusively with a view to resale or development and resale and are held at thelower of cost or transfer value and net realisable value. Employee benefits (i) Pensions a) Defined contribution plans Obligations for contributions to defined contributionpension plans are recognised as an expense in the group income statement in theperiod to which they relate. b) Defined benefit plans The group's net obligation in respect of defined benefitpost-employment plans, including pension plans, is calculated separately foreach plan by estimating the amount of future benefit that employees have earnedin return for their service in the current and prior periods. That benefit isdiscounted to determine its present value, and the fair value of any plan assetsis deducted. The discount rate is the yield at the balance sheet date on AAcredit rated bonds that have maturity dates approximating the terms of thegroup's obligations. The calculation is performed by a qualified actuary usingthe projected unit credit method. Any actuarial gain or loss in the period isrecognised in full in the statement of recognised income and expense. (ii) Cash settled share-based remuneration For cash-settled share-based payments, a liability is recognisedbased on the current fair value determined at each balance sheet date. Themovement in the current fair value is taken to the group income statement. As permitted under IFRS, the group has chosen not to adopt early IAS 34,Interim Financial Reporting, in preparing this interim report and therefore thefinancial information is not in full compliance with the presentational anddisclosure requirements of IFRS. The preparation of financial statements requires management to makejudgements, assumptions and estimates that affect the application of accountingpolicies and amounts reported in the group income statement and group balancesheet. Such decisions are made at the time the financial statements areprepared and adopted based on the best information available at the time.Actual outcomes may be different from initial estimates and are reflected in thefinancial statements as soon as they become apparent. 2 Development income The amount of £6.8 million (half year to 30th June 2006: £6.3 million; year to31st December 2006: £11.6 million) is the proportion of the total profit shareestimated to have been earned by the group in the half year to 30th June 2007from the construction and letting of a property on behalf of a third party. 3 Profit on disposal of investment properties Half year Half year Year to 30.06.07 to 30.06.06 to 31.12.06 £m £m £m Disposal proceeds 19.6 12.0 31.2Carrying value (10.6) (10.3) (30.7)Leasehold liabilities - - 2.4 _______ _______ _______ 9.0 1.7 2.9 _______ _______ _______ 4 Exceptional finance costs Half year Half year Year to 30.06.07 to 30.06.06 to 31.12.06 £m £m £m Cost of acquisition facility 3.3 - -(Profit)/loss on redemption of (1.5) - 18.1debenture _______ _______ _______ 1.8 - 18.1 _______ _______ _______ A debenture was fair valued at £8.1 million on the acquisition of LondonMerchant Securities plc. On redemption, the premium paid was £6.6 milliongenerating a profit of £1.5 million. 5 Share of results of joint ventures Half year Half year Year to 30.06.07 to 30.06.06 to 31.12.06 £m £m £m (Loss)/profit from operations before (0.2) - 0.1revaluation surplusRevaluation surplus - 3.5 3.5 _______ _______ _______ (0.2) 3.5 3.6 _______ _______ _______ 6 Tax (credit)/expense Half year Half year Year to 30.06.07 to 30.06.06 to 31.12.06 £m £m £m Corporation tax expenseUK corporation tax and income tax on profits forthe period 10.2 3.8 0.7REIT conversion charge 54.7 - -Adjustment for over provision in prior periods - - (1.0) _______ _______ _______ 64.9 3.8 (0.3) _______ _______ _______Deferred tax expenseOrigination and reversal of temporary (288.9) 26.6 60.6differencesAdjustment for under provision in prior periods - - 0.3 _______ _______ _______ (288.9) 26.6 60.9 _______ _______ _______ _______ _______ _______ (224.0) 30.4 60.6 _______ _______ _______ The tax for all periods is lower than the standard rate of corporation tax inthe UK. The differences are explained below: Half year Half year Year to 30.06.07 to 30.06.06 to 31.12.06 £m £m £m (Loss)/profit before tax (20.3) 122.6 242.8 _______ _______ _______ Expected tax (credit)/charge based on thestandard rate of corporation tax in the UK of30% (2006: 30%) (6.1) 36.8 72.8Indexation relief on investment properties - (6.7) (11.1)Difference between tax and accounting profit ondisposals 1.0 0.3 0.2Goodwill impairment 89.2 - -Deferred tax write-back on REIT conversion (361.8) - -REIT conversion charge 54.7 - -Other differences (1.0) - (0.6) _______ _______ _______Tax (credit)/expense on current period's profit (224.0) 30.4 61.3Adjustments in respect of prior periods' tax - - (0.7) _______ _______ _______ (224.0) 30.4 60.6 _______ _______ _______ Tax charged/(credited) directly to reservesDeferred tax on revaluation of assets underconstruction 16.0 - -Deferred tax on share-based payments - - (0.6) _______ _______ _______ 16.0 - (0.6) _______ _______ _______ 7 Earnings per share Weighted average Profit for number of Earnings the period shares per share £m '000 p Half year ended 30th June 2007 203.7 92,275 220.75Adjustment for dilutive share-based payments - 561 (1.33) _______ _______ _______Diluted 203.7 92,836 219.42 _______ _______ _______ Half year ended 30th June 2006 92.2 53,475 172.42Adjustment for dilutive share-based payments - 451 (1.44) _______ _______ _______Diluted 92.2 53,926 170.98 _______ _______ _______ Year ended 31st December 2006 182.2 53,567 340.13Adjustment for dilutive share-based payments - 464 (2.92) _______ _______ _______Diluted 182.2 54,031 337.21 _______ _______ _______ Half year ended 30th June 2007 203.7 92,275 220.75Adjustment for: Disposal of investment properties and (7.0) - (7.59)investments Group revaluation surplus (170.3) - (184.55) Derivative fair value movement (6.7) - (7.26) Deferred tax released on REIT conversion (361.8) - (392.09) REIT conversion charge 54.7 - 59.28 Goodwill impairment 297.3 - 322.19 Disposal of joint venture property 0.2 - 0.22 _______ _______ _______Adjusted 10.1 92,275 10.95 _______ _______ _______ Half year ended 30th June 2006 92.2 53,475 172.42Adjustment for: Deferred tax on capital allowances 1.6 - 2.99 Disposal of investment properties (1.0) - (1.87) Group revaluation surplus (75.7) - (141.56) Share of joint venture's revaluation surplus (2.9) - (5.43) Derivative fair value movement (1.6) - (2.99) _______ _______ _______Adjusted 12.6 53,475 23.56 _______ _______ _______ Year ended 31st December 2006 182.2 53,567 340.13Adjustment for: Deferred tax on capital allowances 2.7 - 5.04 Disposal of investment properties (1.7) - (3.17) Group revaluation surplus (167.0) - (311.76) Share of joint venture's revaluation surplus (2.9) - (5.41) _______ _______ _______Adjusted 13.3 53,567 24.83 _______ _______ _______ The adjusted earnings per share excludes the after tax effect of fair valueadjustments to the carrying value of assets and liabilities, and the profit orloss arising from the disposal of investment properties and investments in orderto show the underlying trend. In addition, the conversion charge and therelease of deferred tax related to the transfer to REIT status and theimpairment of goodwill resulting from the acquisition of London MerchantSecurities plc have also been excluded. For the 2006 figures, the adjustedearnings per share figure also excludes the deferred tax charge in respect ofcapital allowances claimed on the basis that it was unlikely that a liabilitywould ever crystallise. 8 Investment property Freehold Leasehold Total £m £m £mCarrying valueAt 1st January 2007 1,025.2 248.8 1,274.0Additions 1,134.7 163.3 1,298.0Disposals (10.6) - (10.6)Revaluation 209.1 34.1 243.2 _______ _______ _______At 30th June 2007 2,358.4 446.2 2,804.6 _______ _______ _______ At 1st January 2006 724.2 291.4 1,015.6Transfer 2.5 (2.5) -Additions 40.1 0.4 40.5Disposals (10.3) - (10.3)Revaluation 81.5 17.7 99.2Movement in grossing up of headlease liabilities - (0.4) (0.4) _______ _______ _______At 30th June 2006 838.0 306.6 1,144.6 _______ _______ _______ At 1st January 2006 724.2 291.4 1,015.6Transfer 38.5 (38.5) -Additions 76.1 0.9 77.0Disposals (10.3) (20.4) (30.7)Revaluation 196.7 26.6 223.3Movement in grossing up of headlease liabilities - (11.2) (11.2) _______ _______ _______At 31st December 2006 1,025.2 248.8 1,274.0 _______ _______ _______Adjustments from fair value to carrying valueAt 30th June 2007Fair value 2,381.4 437.7 2,819.1Adjustment for rents recognised in advance (23.0) (1.0) (24.0)Adjustment for grossing up of headlease - 9.5 9.5liabilities _______ _______ _______Carrying value 2,358.4 446.2 2,804.6 _______ _______ _______ At 30th June 2006Fair value 851.8 287.8 1,139.6Adjustment for rents recognised in advance (13.8) (0.9) (14.7)Adjustment for grossing up of headlease - 19.7 19.7liabilities _______ _______ _______Carrying value 838.0 306.6 1,144.6 _______ _______ _______At 31st December 2006Fair value 1,039.7 243.0 1,282.7Adjustment for rents recognised in advance (14.5) (0.8) (15.3)Adjustment for grossing up of headlease - 6.6 6.6liabilities _______ _______ _______Carrying value 1,025.2 248.8 1,274.0 _______ _______ _______ The investment property was revalued at 30th June 2007 at £2,819.1 million (30thJune 2006: £1,139.6 million; 31st December 2006: £1,282.7 million) by CB RichardEllis Limited and Smiths Gore (2006: CB Richard Ellis Limited and Keith CardaleGroves (Commercial) Limited), as external valuers, on the basis of market valueas defined by the Appraisal and Valuation Standards published by the RoyalInstitution of Chartered Surveyors. At 30th June 2007, the historical cost of investment property owned by the groupwas £1,126.1 million (30th June 2006: £667.4 million; 31st December 2006: £688.9million). Additions for the half year ended 30th June 2007 include £1,104.6 million offreehold property and £141.0 million of leasehold property acquired as a resultof the acquisition of London Merchant Securities plc on 1st February 2007 (seenote 10). 9 Property, plant and equipment Assets under Plant and construction equipment Total £m £m £m Net book valueAt 1st January 2006 - 0.4 0.4Depreciation - (0.1) (0.1) _______ _______ _______At 30th June 2006 - 0.3 0.3Additions - 0.2 0.2Disposals - (0.2) (0.2) _______ _______ _______At 31st December 2006 - 0.3 0.3Arising on acquisition of subsidiary 53.1 1.6 54.7Additions 2.7 0.1 2.8Disposals - (0.2) (0.2)Depreciation - (0.1) (0.1)Revaluation 53.2 - 53.2 _______ _______ _______At 30th June 2007 109.0 1.7 110.7 _______ _______ _______ Net book value at 30th June 2007Cost or valuation 109.0 3.2 112.2Accumulated depreciation - (1.5) (1.5) _______ _______ _______ 109.0 1.7 110.7 _______ _______ _______ Net book value at 30th June 2006Cost or valuation - 1.3 1.3Accumulated depreciation - (1.0) (1.0) _______ _______ _______ - 0.3 0.3 _______ _______ _______Net book value at 31st December 2006Cost or valuation - 1.2 1.2Accumulated depreciation - (0.9) (0.9) _______ _______ _______ - 0.3 0.3 _______ _______ _______ Assets under construction were revalued at 30th June 2007 at £109.0million (30th June 2006: £nil; 31st December 2006: £nil) by CB Richard EllisLimited, as external valuers, on the basis of market value as defined by theAppraisal and Valuation Standards published by the Royal Institution ofChartered Surveyors. 10 Acquisition of subsidiaries The whole of the issued share capital of London Merchant Securities plc,a property investment company, was acquired on 1st February 2007 for a totalcost of £965.6 million. £mCost of acquisition Equity 912.9 Loan notes 32.5 Cash 12.2 Directly attributable acquisition costs 8.0 _______ 965.6 _______ The equity consideration was satisfied by Derwent London plc issuing46,910,232 ordinary shares at a price of £19.46 on 1st February 2007. Thisissue price consists of the nominal value of the ordinary shares of £0.05 and ashare premium of £19.41. Directly attributable acquisition costs are those charged by thecompany's advisers in performing due diligence activities and producing theacquisition documents. The net assets acquired at 1st February were: Book value of net Fair value of net assets acquired assets acquired £m £mNon-current assetsInvestment property 1,245.6 1,245.6Property, plant and equipment 53.9 54.7Investments 18.0 17.5Pension scheme surplus 1.4 1.4Deferred tax asset 12.0 12.0Financial assets 6.1 6.1Other receivables 6.2 6.2 _______ _______ 1,343.2 1,343.5 _______ _______Current assetsTrading property 1.3 9.4Trade and other receivables 9.4 8.8Cash and cash equivalents 13.9 13.9 _______ _______ 24.6 32.1 _______ _______ Total assets 1,367.8 1,375.6 Current liabilitiesBank loans (4.6) (4.6)Trade and other payables (39.8) (40.9) _______ _______ (44.4) (45.5) _______ _______ Non-current liabilitiesFinancial liabilities (480.4) (510.6)Deferred tax liability (148.8) (144.4)Other (6.8) (6.8) _______ _______ (636.0) (661.8) _______ _______Total liabilities (680.4) (707.3) _______ _______Total net assets acquired 687.4 668.3Goodwill on acquisition _______ 297.3 _______Cost of acquisition 965.6 _______ Adjustments from book value to fair value include those arising from thefair value adjustments to property, plant and equipment, trading property,deferred tax and debt. Adjustments arising from the application of DerwentLondon's accounting policies have been made to the book value figures. A detailed review of the existence of intangible assets other thangoodwill has been concluded, and none were found to have any material value. Animpairment test has been carried out on the goodwill arising on the acquisition. The properties acquired on the acquisition of London Merchant Securitiescomplement the existing portfolio of properties held by the group. It isanticipated that, in future, the group will be capable of deriving significantlyenhanced cashflows from the acquired portfolio due to future lease management,refurbishment and redevelopment, which are proposed to be made to the acquiredproperty portfolio. While the amount that the group has paid for LondonMerchant Securities is justified by these anticipated enhancements and benefitsthat will be brought to the group, IAS 36, Impairment of Assets, does not permitsuch enhancements to be included in the cashflows used in estimating value inuse for the purposes of impairment testing, and instead requires the cashflowsto be based on the assets in their current condition. In addition, the benefits arising from the acquired portfolio are specificto the group and, consequently, the fair value, less costs to sell, of theacquired business is unlikely to support the carrying amount of the goodwillassociated with the acquisition. As a consequence, the goodwill associated with this transaction is deemedto be fully impaired and has been written off to the group income statement. If the date for this acquisition had been 1st January 2007 then the grossproperty income for the combined entity would have increased by £4.6 million.As the fair value adjustments and adjustments arising from the application ofDerwent London's accounting policies made above have not been made to theresults of London Merchant Securities for 31st December 2006 it is impracticalto assess the impact on the profit for the period arising from a 1st January2007 acquisition date. The profit for the period ended 30th June 2007 of £203.7million includes post acquisition profits of £195.6 million for London MerchantSecurities plc. At the date of publishing the year end report and accounts, work was stilloutstanding on the fair value verification exercise. This has now beencompleted and a number of amendments were identified to both book value and fairvalue. 11 Trading properties The fair value of trading properties at 30th June 2007 is the same astheir book value. 12 Financial assets and liabilities 30.06.07 30.06.06 31.12.06 £m £m £mNon-current assetsDerivative financial instruments 13.0 - 0.1 _______ _______ _______Current liabilitiesBank loans 33.3 - -Unsecured loans 0.2 - -Overdraft 5.1 - 2.2 _______ _______ _______ 38.6 - 2.2 _______ _______ _______ Non-current liabilities6.5% Secured Bonds 2026 195.4 - -10 1/8% First Mortgage Debenture Stock 2019 - 34.5 -Loan notes 32.5 - -Bank loans 689.0 280.0 341.0Mortgages 2.2 - -Unsecured loans 1.3 - -Leasehold liabilities 9.5 19.7 6.6Derivative financial instruments - 0.9 - _______ _______ _______ 929.9 335.1 347.6 _______ _______ _______ _______ _______ _______Net financial liabilities 955.5 335.1 349.7 _______ _______ _______ 13 Deferred tax Revaluation Capital surplus allowances Other Total £m £m £m £m At 1st January 2007 150.2 16.3 0.7 167.2Arising on acquisition of 135.9 7.8 (11.3) 132.4subsidiaryTransfer to investment injoint ventures (0.7) - - (0.7)Released during the period (343.7) (24.1) 6.0 (361.8)Provided during the period inthe group income statement 72.9 - - 72.9Provided during the period inthe revaluation reserve 16.0 - - 16.0 _______ _______ _______ _______At 30th June 2007 30.6 - (4.6) 26.0 _______ _______ _______ _______ At 1st January 2006 91.6 13.6 - 105.2Provided during the period inthe group income statement 24.1 1.6 0.9 26.6 _______ _______ _______ _______At 30th June 2006 115.7 15.2 0.9 131.8 _______ _______ _______ _______ At 1st January 2006 91.6 13.6 - 105.2Adjustment to reserves inrespect of deferred tax onshare-based payments - - (0.6) (0.6)Arising on acquisition of 1.7 - - 1.7subsidiaryProvided during the period inthe group income statement 56.9 2.7 1.3 60.9 _______ _______ _______ _______At 31st December 2006 150.2 16.3 0.7 167.2 _______ _______ _______ _______ Deferred tax on the revaluation surplus is calculated on the basis of thechargeable gains that would crystallise on the sale of the investment propertyportfolio as at each balance sheet date. The calculation takes account ofindexation on the historic cost of the properties and any available capitallosses. Due to the group's conversion to REIT status on 1st July 2007, deferredtax is only provided at 30th June 2007 on properties outside of the REIT regime. 14 Equity Share Share Revaluation Other Retained capital premium reserve reserves earnings £m £m £m £m £m At 1st January 2007 2.6 156.1 - 3.8 620.9Issue of shares 2.4 - - - -Premium on issue of shares - - - 910.5 -Revaluation of assets underconstruction - - 53.2 - -Deferred tax on revaluation ofassets under construction - - (16.0) - -Pension gains - - - - 1.5Foreign exchange translationdifferences - - - - (0.5)Share-based payments expensetransferred to reserves - - - 0.5 -Profit for the period - - - - 203.7Dividend paid - - - - (5.6) _______ _______ _______ _______ _______ 5.0 156.1 37.2 914.8 820.0 Minority interest - - - - (1.5) _______ _______ _______ _______ _______At 30th June 2007 5.0 156.1 37.2 914.8 818.5 _______ _______ _______ _______ _______ At 1st January 2006 2.6 155.1 - 2.3 446.2Premium on issue of shares - 1.0 - - -Share-based payments expensetransferred to reserves - - - 0.4 -Profit for the period - - - - 92.2Dividend paid - - - - (5.2) _______ _______ _______ _______ _______At 30th June 2006 2.6 156.1 - 2.7 533.2 _______ _______ _______ _______ _______ At 1st January 2006 2.6 155.1 - 2.3 446.2Premium on issue of shares - 1.0 - - -Share-based payments expensetransferred to reserves - - - 0.9 -Deferred tax in respect ofshare based payments - - - 0.6 -Profit for the period - - - - 182.2Dividend paid - - - - (7.5) _______ _______ _______ _______ _______At 31st December 2006 2.6 156.1 - 3.8 620.9 _______ _______ _______ _______ _______ The £910.5 million movement in other reserves relates to the premium onthe issue of shares as equity consideration for the acquisition of LondonMerchant Securities (see note 10). 15 Dividend The results for the half year to 30th June 2007 do not include thedividend declared after the end of the accounting period. In respect of theseresults, a dividend of 7.5p per share (2006 interim: 4.225p; 2006 2nd interim:10.525p) will be paid on 9th November 2007 to those shareholders on the registerat the close of business on 5th October 2007. The second interim dividendpayment of 10.525p for 2006 replaced the final dividend in respect of that year. 16 Net asset value per share Net asset Net Number of value per assets shares share £m '000 p At 30th June 2007 1,933.1 100,574 1,922Adjustment for deferred tax on revaluation 0.3 - -surplusAdjustment for fair value of derivativefinancial instruments (13.0) - (13)Adjustment for fair value adjustment of secured 22.1 - 22bonds _______ _______ _______Adjusted 1,942.5 100,574 1,931 _______ _______ _______ At 30th June 2006 694.6 53,656 1,295Adjustment for deferred tax on capital 15.2 - 28allowancesAdjustment for deferred tax on revaluation 115.7 - 216surplusAdjustment for post tax fair value of derivativefinancial instruments 0.6 - 1 _______ _______ _______Adjusted 826.1 53,656 1,540 _______ _______ _______ At 31st December 2006 783.4 53,656 1,460Adjustment for deferred tax on capital 16.3 - 30allowancesAdjustment for deferred tax on revaluation 150.2 - 280surplusAdjustment for post tax fair value of derivativefinancial instruments (0.1) - - _______ _______ _______Adjusted 949.8 53,656 1,770 _______ _______ _______ At 30th June 2006 and 31st December 2006, adjusted net assets excluded thedeferred tax provided in respect of capital allowances claimed, on the basisthat it was unlikely that this liability would ever crystallise. The deferredtax on the revaluation surplus and the post tax fair value of derivativefinancial instruments are also excluded, on the basis that these amounts are notrelevant when considering the group as an ongoing business. At 30th June 2007, the majority of the deferred tax on the revaluation surplusrelates to a property which was disposed of shortly after the balance sheet datecrystallising the tax at that date. Therefore, the deferred tax on thisproperty has not been added back to arrive at the adjusted net assets. Theremaining deferred tax on the revaluation surplus together with the fair valueof derivative financial instruments and the secured bonds are excluded fromadjusted net assets. 17 Exceptional cash flows The half year to 30th June 2007 contained exceptional administrationcosts of £17.3 million (half year to 30th June 2006: £nil; year to 31st December2006: £nil) which relate to costs incurred by London Merchant Securities plcprior to the acquisition and accrued at 31st January 2007 in the fair valuebalance sheet shown in note 10. The half year to 30th June 2007 also contained exceptional finance costsof £3.3 million (half year to 30th June 2006: £nil; year to 31st December 2006:£17.6 million), which is the cost of acquisition finance (see note 4). 18 Total return Total return for the half year to 30th June 2007 is 9.7% (half year to 30th June2006: 16.1%; year to 31st December 2006: 33.6%). Total return is the movementin adjusted net asset value per share, as derived in note 16, plus the dividendper share paid during the period expressed as a percentage of the adjusted netasset value per share at the beginning of the period. 19 Gearing Balance sheet gearing at 30th June 2007 was 49.1% (30th June 2006: 47.1%; 31stDecember 2006: 44.7%). This is defined as net debt divided by net assets. Profit and loss gearing for the half year to 30th June 2007 was 1.50 (half yearto 30th June 2006: 2.07; year to 31st December 2006: 1.85). This is defined asrecurring net property income less administrative costs divided by net interestpayable, having reversed the reallocation of ground rent payable on leaseholdproperties to interest payable of £0.3 million (half year to 30th June 2006:£0.6 million; year to 31st December 2006: £0.9 million). 20 Post balance sheet events Since the 30th June 2007, the group has completed the purchase of afreehold property for £46.3 million, excluding costs, and exchanged contractsfor the purchase of a freehold property for £52.5 million, excluding costs. Inaddition, the group has completed the disposal of 9 properties for a total of£215.4 million, excluding costs, and exchanged contracts on the disposal of afurther 9 properties for a total of £98.8 million, excluding costs. 21 Copies of this announcement are being posted to shareholders on 20thSeptember 2007 and will be available on the company's website,www.derwentlondon.com, from the date of this statement. Copies will also beavailable from the Company Secretary, Derwent London plc, 25 Savile Row, London,W1S 2ER. Post acquisition proforma balance sheet (unaudited) Derwent Group LMS Derwent 31.12.06 Group London £m 31.01.07 Adjustments Group £m £m £mNon-current assetsInvestment property 1,274.0 1,245.6 - 2,519.6Property, plant and equipment 0.3 54.7 - 55.0Investments 5.4 17.5 - 22.9Pension scheme surplus - 1.4 - 1.4Deferred tax asset - 12.0 - 12.0Financial assets 0.1 6.1 - 6.2Other receivables 13.7 6.2 - 19.9 _______ _______ _______ _______ 1,293.5 1,343.5 - 2,637.0 _______ _______ _______ _______ Current assetsTrading property - 9.4 - 9.4Corporation tax asset 1.4 - - 1.4Trade and other receivables 39.4 8.8 (8.0) 40.2Cash and cash equivalents - 13.9 - 13.9 _______ _______ _______ _______ 40.8 32.1 (8.0) 64.9 _______ _______ _______ _______ Current liabilitiesBank overdraft and loans (2.2) (4.6) - (6.8)Trade and other payables (32.5) (40.9) - (73.4)Provisions (0.1) - - (0.1) _______ _______ _______ _______ (34.8) (45.5) - (80.3) _______ _______ _______ _______ Non-current liabilitiesFinancial liabilities (347.6) (510.6) (44.7) (902.9)Deferred tax liability (167.2) (144.4) - (311.6)Provisions (1.3) - - (1.3)Other - (6.8) - (6.8) _______ _______ _______ _______ (516.1) (661.8) (44.7) (1,222.6) _______ _______ _______ _______ Total net assets 783.4 668.3 (52.7) 1,399.0 _______ _______ _______ _______ EquityShare capital 2.6 82.6 (80.2) 5.0Share premium 156.1 22.2 (22.2) 156.1Other reserves 3.8 11.1 899.4 914.3Retained earnings 620.9 496.4 (793.7) 323.6Equity minority interests - 56.0 (56.0) - _______ _______ _______ _______Total equity 783.4 668.3 (52.7) 1,399.0 _______ _______ _______ _______ Net asset value per share 1,391p _______Adjusted net asset value pershare 1,717p _______ This information is provided by RNS The company news service from the London Stock Exchange