UAI.L Regulatory News (UAI)

21st October 2015

DEVELOPMENT SECURITIES PLC

INTERIM RESULTS

FOR THE SIX MONTHS ENDED 31st AUGUST 2015

Integration of Development Securities and Cathedral Group complete - U and I Group PLC set to deliver high quality, consistent returns

- As announced yesterday, Shareholders have been asked to approve a new name - U and I Group PLC (U+I) to formalise the integration of Development Securities and Cathedral Group

o Shareholder approval requested at a General Meeting on 5th November 2015

- U+I will combine the complementary capabilities of both businesses, specialising in best-in-class mixed-use regeneration to drive high quality consistent returns

- New strategic initiatives announced:

o Focus on a reduced number of larger regeneration opportunities in London City region*, Manchester and Dublin

o Creation of off-balance sheet, specialist platforms for specific asset classes in conjunction with long-term capital partners starting with the launch of a marketing process to establish a private rented sector (PRS) joint venture

o Investment portfolio change process underway to improve performance

- Integration to be completed with the imminent relocation of both organisations to a new headquarters building in Victoria

On track to meet full year targets

- 41 per cent of target full year development and trading gains delivered to date - £12.5 million of development and trading gains secured in the half year with a further £10.0 million secured since the period end

- Good visibility on H2 gains underpins Company's expectation to meet its previous full year guidance of £54.7 million of development and trading gains

- After payment of £4.4 million in dividends and a write down of £3.7 million against one investment asset, NAV decreased by 0.8 per cent to £343.6 million (274 pence per share)

- Interim dividend declared at 2.4 pence

Commenting on these results, Chief Executive, Matthew Weiner said:

"This has been another busy period in which we have maintained our focus on achieving another very strong year of development and trading gains which we are on track to deliver. We have also largely completed the integration of Development Securities and Cathedral Group.

We now have a stronger team with the depth of knowledge and skills to deliver high quality returns across the business. Using our combined expertise we have put in place a number of strategic initiatives as we seek to enhance our position as the UK's most respected mixed-use regeneration company. Leading the integrated teams in our new roles, Richard Upton and I aim to be the inspiration of U+I in that combined, we are stronger and more focused in all we do.

Central to the future evolution of our strategy is a much closer collaboration between our development and investment teams giving us greater scope for delivering the maximum value from every asset in our portfolio. Our combined capabilities also provide us with greater opportunities to take on a reduced number of more significant regeneration projects, whilst remaining disciplined in our ambition to deliver 15 per cent per annum pre-tax total returns.

Looking ahead, this is an exciting time as we target another very strong year of gains. We have a clear strategy and an exceptional team, the combination of which I am convinced will deliver long-term, sustainable returns to our shareholders, and enhance the communities in which we develop."

\* The London City region covers the area within an hour's commute - about 60 miles - of the centre of London and has a population of 20 million people.

Financial summary:

unaudited for the six months ended 31st August 2015

**before exceptional items of £10.6m relating to termination costs of cross currency swap (£7.9m) and acquisition costs of Cathedral Group (£2.7m)

An analyst presentation will be held at 9am this morning. Dial in details as follows:

Participant dial in number: 020 3059 8125

Participant password: Please quote 'Development Securities' to the operator

To download a copy of the results presentation, follow this link http://www.developmentsecurities.co.uk/devsecplc/en/ir/financial-reports

Enquiries

Chief Executive's statement

U+I: the next chapter for the business

100 days into my role as Chief Executive, I am pleased to report on a period of significant activity for the Company. As announced yesterday, we are seeking Shareholder approval to change the name of Development Securities PLC to U and I Group PLC (U+I). This name captures the vision and the values of our evolved business, emerging from our heritage as joint venture partners and showcasing our commitment to being the most respected regeneration company in the UK and Ireland.

We have also completed an in-depth review of the business, seeking out those opportunities where we can apply the complementary skills of Development Securities and Cathedral to maximise the potential within our existing portfolio as well as building a future pipeline of regeneration opportunities. This has resulted in an evolution of our strategy through three principal strategic initiatives:

· A focus on a reduced number of more significant regeneration opportunities in the London City Region, Manchester and Dublin

· The creation of off-balance sheet specialist platforms within specific asset classes in conjunction with long-term capital partners starting with the launch of a marketing process to secure a private rented sector (PRS) joint venture partner 

· A more integrated approach to investment and development activity to maximise the potential of every asset within our portfolio

We are confident that these new initiatives will support and strengthen our overall pre-tax returns target of 15 per cent per annum, enabling us to deliver excellent, long-term value for all of our stakeholders as we regenerate undervalued land and assets into positive places.

Half year results

In the period, we reported a profit before tax of £1.4 million (Aug 2014: £18.0 million). After the payment of a final dividend of £4.4 million, Shareholder funds decreased to £343.6 million equivalent to 274 pence per share (Feb 2015: £346.4 million, 276 pence per share). During the period we realised £12.5 million of gains from disposals across our portfolio with a further £10.0 million of gains delivered since the period end. We are confident in our ability to deliver our full year guidance for the business.

The Directors have declared an interim dividend of 2.4 pence per share payable on 27th November 2015 to Shareholders on the register on 30th October 2015.

Development and trading portfolio

We realised £12.5 million of gains in the period, principally from our food store anchored mixed-use development in Abbey Wood, South East London and our residential joint venture development, Wick Lane Wharf, in East London.

In August, we completed the construction of the food store and the first phase of 32 residential units at Cross Quarter, Abbey Wood realising profits of £2.9 million in line with our expectations. One final parcel of land remains to be delivered at this gateway regeneration site and we are exploring options to replan this site in order to maximise its value. At Wick Lane Wharf, further apartment sales and a revaluation uplift generated profits of £2.8 million. 55 out of the 82 units have now been sold, exchanged or are under offer. At both of these schemes, residential sales have been achieved ahead of our initial underwrite demonstrating the continued strength of mid-market product in Greater London.

In Hale Barns near Manchester, we have realised gains of £1.0 million in the period from the sale of all of the 24 residential units. Further profit will be realised subject to the completion of the retail lettings and we have made good progress with 60 per cent of the units now let or under offer alongside the anchor foodstore, Booths, which is open and trading.

Since the period end to date, we have delivered a further £10.0 million of gains, principally from the following two projects:

o In Brentwood, Essex, having secured a new planning consent for a residential development on a previously non-income producing site, we have exchanged contracts for the sale of the site to a housebuilder realising £4.3 million of profit

o At The Old Vinyl Factory, our iconic multi-phase regeneration project in Hayes, West London, the sale of two further elements - the Shipping Building, the Picture House - and overage receivable on a previous deal has released £5.7 million of profit, in excess of our original expectations

Further progress underpins future profit flow

The construction of 399 Edgware Road, our significant mixed-use development in North London has been slightly delayed with practical completion of the whole project now anticipated in December 2015. We are confident that upon completion of the food store, which has been pre-sold to Aberdeen Asset Management, and the sale of the remaining retail space, we will deliver profits in line with our current expectations.

Construction is expected to complete at The Deptford Project, our residential-led mixed-use development in an emerging location in South East London, in December 2015. 90 per cent of the residential units had been pre-sold to IP Global and the remaining affordable and private units have also now been sold. We will retain the ground floor retail space consisting of 14 railway arches, a street market, seven commercial units and two restaurants, within our investment portfolio as part of our revised investment strategy.

Dublin

During the period, we have further increased our presence in Dublin, a buoyant market in which we see continued opportunity to extend our regeneration activities. In June, in joint venture with Clarendon Properties, we acquired two retail investment assets for €12.8 million and also in June we acquired an income-producing regeneration opportunity for €6.1 million on our own account, as part of our revised investment strategy. All three of these assets are located in Sandyford, a well-connected suburban location in Dublin. We were also pleased to secure Union Investment as our forward funding partner at Burlington House, our 172,000 sq. ft. prime office development in central Dublin where we and our JV partners are now on site, delivering the largest speculative new office building in the city.

Specialist delivery platforms

Within our portfolio of mixed-use regeneration projects, we have the ability to aggregate product within specific asset classes in order to create off-balance sheet specialist platforms alongside long-term capital partners and to deliver these to the market in bulk rather than scheme by scheme. Within the residential market, for example, we are seeking to establish a long-term partnership with a funding partner for a PRS platform to deliver an initial c. 1,000 residential rental units over three years from our overall pipeline of c. 10,000 residential units. This not only broadens our options for delivery but also enables us to monetise the value of the land within our portfolio, generating fees and profit potential in conjunction with a long-term capital partner, much as we have done in the office market in the last two decades. In addition to PRS, we have a significant pipeline of student accommodation that in aggregate could be delivered alongside an appropriate financial partner.

Investment portfolio

During the period, the value of our investment portfolio increased by £0.1 million to £207.7 million (Aug 2014: £4.1 million increase). This increase was negatively impacted by a £3.7 million decrease in the value of one asset in Cardiff. Excluding this asset, our portfolio value would have increased by 2.1 per cent. Across the portfolio, the initial yield stands at 6.72 per cent (Feb 2014: 6.87 per cent) and void rates are low at 4.2 per cent (Feb 2015: 5.0 per cent).

Focus on improving performance

We have undertaken a detailed review of our investment portfolio during the period with the objective of better integrating our asset management and development activities to drive higher overall returns. Going forwards, we plan to transition our investment portfolio over the next 3 to 5 years. Whilst maintaining the income level and size of the investment portfolio we will undertake a process of:

- Optimisation - Regenerating our investment assets to deliver additional value by combining Development Securities' and Cathedral's core skills

- Rationalisation - Recycling capital out of mature investment assets into new projects

- Change - Reinvesting capital into investment assets that offer better opportunities to drive value through asset management, regeneration and place making

We have made early progress in this process of change and are fully focused on improving the performance of our investment portfolio so that it becomes a dynamic part of the business that better contributes towards our overall returns.

New acquisitions

Since 1st March 2015, we have secured five new regeneration projects in well-connected London City region* locations which demonstrate our ability to acquire off market regeneration opportunities.

Continuing our long and established track record in the Royal Borough of Greenwich, we have secured three well-let, income-producing industrial sites in Charlton, totalling 6.4 acres within the Charlton Riverside regeneration area for £15.1 million at a blended net initial yield of 3.5 per cent. Simultaneously, we have entered into a joint venture with a fund managed by Proprium Capital Partners L.P. to co-fund the acquisition of these sites and additional sites to be identified allowing us to build a scalable opportunity in a capital-efficient manner. Whilst we improve the income across these assets, we will also bring forward a masterplan for a residential-led redevelopment of these sites that complements the wider, long-term plans for the regeneration of Charlton Riverside.

We have also secured two regeneration sites in well-connected, London commuter towns in Kent. In Maidstone, we have exchanged contracts to acquire a 4.9-acre site that benefits from an existing planning consent for 192 residential units and 180,000 sq. ft. of commercial space. We are currently exploring options to maximise the value of this site through an improved planning consent. In Ashford, we have completed the purchase of a nine-acre site for £4.8 million and simultaneously secured the sale of four acres of the site to a residential developer, allowing us to materially de-risk our position and secure an 'equity light' regeneration opportunity. We will now progress a masterplan for a mixed-use development of the remaining five-acre site.

Outlook

The completion of our integration with Cathedral Group and the evolution of our strategy presents a stronger platform for the future growth of your Company. We are well-positioned to create value from regeneration and are focused on maximising the value of every asset within our portfolio to realise consistent and significant gains which, in turn, deliver enhanced returns to Shareholders.

M S Weiner

Chief Executive

\* The London City region covers the area within an hour's commute - about 60 miles - of the centre of London and has a population of 20 million people.

Financial review

Profit before tax for the six months to 31st August 2015 was £1.4 million (31st August 2014: £18.0 million before exceptional costs of £2.7 million relating to the acquisition of Cathedral Group and £7.9 million for the restructure of Euro denominated loan notes). In the period we have made development and trading gains of £12.5 million, primarily driven by our schemes at Wick Lane Wharf and Abbey Wood. Since 31st August we have realised further gains of £10.0 million from disposals at The Old Vinyl Factory in Hayes, and in Brentwood. We have a number of other projects forecast for realisation through the second half of the financial year which will deliver further gains in line with our previous guidance.

Net assets attributable to Shareholders decreased by £2.8 million to £342.9 million (28th February 2015: £345.7 million), reflecting the results for the period and the payment of the final dividend from the previous financial year of £4.4 million.

The valuation of our investment portfolio has been broadly flat across the period. This has been a result of the decrease in value of our retail asset in Cardiff by £3.7 million as a result of a transaction in an adjoining block and certain lease events. This decline has offset an equivalent increase in the value of the rest of the portfolio. Excluding the impact of Cardiff, our portfolio increased in value by 2.1 per cent over the six month period (31st August 2014: 2.5 per cent).

Net finance costs for the period were £5.6 million, amounting to £5.2 million net of foreign exchange movements (31st August 2014: £4.1 million on an equivalent basis). The increase in net finance costs has been primarily driven by a reduction in interest received from loans to historic joint ventures. Whilst overall debt has increased in the period, the majority of this has been asset specific development finance where the interest cost is capitalised.

During the period, we secured several new debt facilities including a revolving credit facility of €20 million from Allied Irish Bank to fund the acquisition of properties in Dublin, of which we have drawn down £11.0 million to fund the acquisitions of Donnybrook House, Charlemont Clinic and The Avid Building. In addition, we have continued to drawdown development funding for the pre-sold residential developments at Abbey Wood and Deptford. Overall debt has increased by £33.1 million in the six months from £205.0 million to £238.1 million.

During the six months to 31st August 2015 cash holdings have reduced to £34.8 million from £79.3 million at 28th February 2015. Of this reduction of £44.5 million, £14.4 million represents the payment of both the special (£10.0 million) and final (£4.4 million) dividends relating to the prior financial year. In addition, we have invested £12.1 million of equity into new projects and made debt repayments on existing facilities of £5.1 million.

As at 31st August 2015 our net debt stood at £203.3 million representing gearing of 59.2 per cent (28th February 2015: £125.7 million and 36.3 per cent). This level of gearing will fall back below our target level of 50.0 per cent as we complete the pre-sold residential development at Deptford and following the completion of the disposals post period end at Brentwood and The Old Vinyl Factory.

Of our gross borrowings of £238.1 million, £75.8 million is repayable within one year (28th February 2015; £205.0 million, £36.0 million). Of the £75.8 million, £20.0 million is represented by the 11.0 per cent Debenture which we are in the process of refinancing at a significantly lower cost, £20.1 million is the development funding on the presold residential schemes at Deptford and Abbey Wood, whilst £11.0 million is part of the €20.0 million revolving facility in Dublin which we will seek to renew in April 2016 on its anniversary.

Overall the weighted average maturity of our debt is 4.4 years, excluding joint ventures, with a weighted average interest rate of 5.3 per cent. The repayment of development funding loans referred to earlier and the refinancing of the Debenture will further increase the maturity profile of our debt. In respect of our Euro debt exposures, we maintain a policy of hedging the majority of our foreign exchange exposure by the use of hedging instruments and also seeking to match Euro denominated assets and liabilities.

As has been highlighted earlier, we are imminently moving into a single headquarters for the Group which will give us the opportunity to ensure we drive efficient ways of working throughout the combined business as a key part of our operations going forward.

Our Annual Report to 28th February 2015 describes our risk profile and our approach to managing our principal risks. These principal risks remain unchanged as at 31st August 2015.

Portfolio analysis

Income generating properties as at 31st August 2015

Investment property - key statistics

* Based on the core investment property assets only.

Consolidated statement of comprehensive income

unaudited for the six months ended 31st August 2015

Notes 1 to 19 form an integral part of these condensed consolidated set of financial statements

Consolidated balance sheet

unaudited as at 31st August 2015 

Notes 1 to 19 form an integral part of these condensed consolidated set of financial statements.

Consolidated statement of changes in equity

unaudited as at 31st August 2015

Notes 1 to 19 form an integral part of these condensed consolidated set of financial statements.

Consolidated cash flow statement

unaudited for the six months ended 31st August 2015

Notes 1 to 19 form an integral part of these condensed consolidated set of financial statements.

Notes to the interim financial information

unaudited for the six months ended 31st August 2015

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES

a) General information

The principal activity of Development Securities PLC and its subsidiaries is property investment and development.

The condensed consolidated financial statements for the six months ended 31st August 2015 comprise the results of the Company and its subsidiaries and were authorised by the Board for issue on 21st October 2015.

The Company is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the UK. The address of its registered office is Portland House, Bressenden Place, London, SW1E 5DS.

The condensed consolidated financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 28th February 2015, which were prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union, were approved by the Board of Directors on 29th April 2015 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

These condensed consolidated financial statements have been reviewed, not audited.

b) Basis of preparation of half-year report

These condensed consolidated financial statements for the six months ended 31st August 2015 have been prepared in accordance with IAS 34, 'Interim financial reporting'. The condensed consolidated financial statements should be read in conjunction with the Group's financial statements for the year ended 28th February 2015, which have been prepared in accordance with IFRS, as endorsed by the European Union.

Going concern basis

The Group has considerable financial resources. Rental income continues to be robust, with the risk of significant default assessed by the Directors as low. Development and trading activities are well diversified across regions and sectors. Debt finance is secured for appropriate periods and the Group is comfortable with its covenant positions. As a result the Directors believe that the Group is well placed to manage its business risks successfully. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the interim financial statements.

c) Judgements and key sources of estimation uncertainty

The preparation of financial statements requires management to make judgements, assumptions and estimates that affect the application of accounting policies and reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing the condensed consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 28th February 2015.

d) Accounting policies

The accounting policies applied in these condensed consolidated financial statements are consistent with those of the Group's financial statements for the year ended 28th February 2015, as described in those financial statements.

New and amended standards and interpretations need to be adopted in the first interim financial statements issued after their effective date (or date of early adoption). There are no additional standards or interpretations, other than those disclosed in the Group's financial statements for the year ended 28th February 2015, which are expected to have a material impact on the Group.

The accounting policies adopted are consistent with those of the previous financial year.

e) Financial risk management

Financial risk factors

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk.

The condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's financial statements as at 28th February 2015.

There have been no changes in risk management or in any risk management policies since the year end.

Liquidity risk

Compared to the year end, there was no material change in the contractual undiscounted cash out flows for financial liabilities.

Fair value estimation

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

· Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

· Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

· Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

The following table presents the Group's assets and liabilities that are measured at fair value at 31st August 2015:

The following table presents the Group's assets and liabilities that are measured at fair value at 31st August 2014:

Derivative financial instruments at fair value through profit or loss of £0.1 million loss (31st August 2014: gain of £0.5 million and 28th February 2015: gain of £0.4 million) are recorded in Finance income or Finance costs as appropriate in the condensed consolidated financial statements.

There have been no reclassifications of financial assets during the period.

Level 2 derivative financial instruments comprise of a number of interest rate swaps and caps and a forward foreign exchange contract. Interest rate swaps and caps are valued using forward interest rates extracted from observable yield curves taking account of the risk of default of either counterparty to the financial instrument. The effects of discounting are generally insignificant for level 2 derivatives.

Fair value measurement using significant unobservable inputs (level 3)

A review of the fair value of financial assets is performed at each reporting date with any significant changes in value reported to the Executive Board and Audit Committee. Level 3 assets consist of loans to associates or joint ventures. Each receivable is reviewed as to its recoverability. If recoverability is in doubt an appropriate provision for impairment would be made based on the best estimate of the loan recoverable. The Board have concluded that there are no financial assets recognised where the loan amount is not the best evidence of fair value.

Contingent consideration in a business combination

The Group had no contingent consideration liabilities at 31st August 2015, 31st August 2014 or 28th February 2015.

Group's valuation processes

The Group engages external, independent and qualified valuers to determine the fair value of Level 3 investment property assets. The valuers liaise with the Investment Team every six months, reviewing tenant information relating to covenant strength, lease period and rental terms. Valuers will also review comparable transactions in the market. The fair value of Level 3 assets is also determined by reviewing local sales data or, where the assets are held for the purpose of extending an existing retail asset, by reviewing appraisals relating to the proposed scheme.

The key unobservable assumptions used in the valuations are:

More information relating to valuation methodology is contained within the Group's financial statements as at 28th February 2015.

The carrying value of the following financial assets and liabilities approximate to their fair value:

· Trade and other receivables

· Other current financial assets

· Cash and cash equivalents

· Trade and other payables

· Borrowing costs

2. SEGMENTAL ANALYSIS

For management purposes, the Group is organised into three operating divisions, whose principal activities are as follows:

These divisions are the basis on which the Group reports its primary segmental information. All operations occur and all assets are located in the United Kingdom. All revenue arises from continuing operations.