UAI.L Regulatory News (UAI)

22nd October 2013

DEVELOPMENT SECURITIES PLC - INTERIM RESULTS

FOR THE SIX MONTHS ENDED 31st August 2013

Positioned for further growth as positive momentum continues across portfolio

Development Securities PLC ("Development Securities" or the "Company"), the leading property development and investment company, today announces interim results for the six months ended 31st August 2013.

Highlights:

· NAV increased by two per cent and earnings increased to 5.9 pence per share (28th February 2013: 2.0 pence per share) after payment of 2013 final dividend

· Investment portfolio valuations stable and set to recapture value - increasing confidence in recovery in secondary market supports asset management and enhancement activities within portfolio

· Development and trading gains of £13.3 million - diversified portfolio of assets continuing to generate steady profits with risk spread across multiple opportunities - on track to generate further gains in second half of year and beyond

· Seven planning consents secured since year end predominantly for foodstore anchored mixed-use developments - underwrites further value across the portfolio

· Four new opportunities secured in the period - recycling an element of realised gains into real estate assets where we can create value through regeneration

· Strong progress to release cash from legacy assets - £11.4 million of cash received through sale of Broughton residential land in the period and planning consent secured at 399 Edgware Road

· Interim dividend of 2.4 pence per share declared

Commenting on these results, Chief Executive, Michael Marx said:

"I am pleased to report a profitable performance during a busy period in which we made good progress across our diverse property portfolio. In the period we realised £13.3 million of development and trading gains building on those delivered in the past couple of years, with good visibility on additional gains in the near- to medium-term. Valuations in our investment portfolio which comprises good quality, higher yielding secondary assets, were stable in the period and are set to recapture value as the economy strengthens and investor appetite in this sub sector continues to grow.

This enhanced financial performance has further strengthened our Balance Sheet and positions us well to deliver significant value to shareholders over the medium-term. We are confident that our strategy of creating value by regenerating redundant or obsolete real estate is the correct one at this point in the economic cycle."

Financial summary:

unaudited for the six months ended 31st August 2013

* Refer notes 10 and 17

** Refer note 17

Chairman's statement

It is pleasing to report a pre-tax profit of £8.1 million for the six months to 31st August 2013, as compared to a loss of £0.7 million for the six months to 31st August 2012. After accounting for the 2013 final dividend of £2.9 million, net assets attributable to shareholders increased in the period by £6.0 million to £312.6 million from £306.6 million at 28th February 2013, equivalent to 255 pence per share as compared to 251 pence per share at 28th February 2013.

During the period, we realised development and trading gains of £13.3 million compared to the realised gains of £11.9 million in the equivalent period last year. We remain confident that significant gains will continue to be generated in the second half of the current financial year and beyond. The Directors have declared an interim dividend of 2.4 pence per share payable on 29th November 2013 to Shareholders on the register on 1st November 2013.

Market overview

There is evidence over recent months that some of the lights are coming back on within the UK economy. Whilst GDP is expected to continue to recover over the next few years, it is still some way off from stabilising at the trend growth rate. A weaker Sterling exchange rate, improving consumer sentiment and Government initiatives to resuscitate the housing market have largely driven this upturn. London, with its population growth and status as a leading global city, has benefited from positive GDP growth for some time now and, with a steady influx of foreign capital and further infrastructure improvements, this seems set to continue. Outside of London, however, concerns remain as to whether this incipient economic recovery is sustainable. Productivity improvement, which is important if we are to raise UK living standards and move to a sustainable cyclical recovery, is still not in evidence and indeed productivity is currently five per cent below its pre-recession peak. In the investment property market, investor sentiment is improving within the secondary sector and we have begun to see this reflected within our property investment portfolio where valuations have stabilised in the last six months.

Major developments

With the economy showing signs of recovery and demand strengthening in fringe locations of Central London, we now anticipate an increased focus on large-scale office developments.

The significant realisation in the period under review arose from the successful conclusion of our involvement in PaddingtonCentral following the disposal by our funding partner, Aviva Investors, of its interests in the scheme. In a number of ways it was sad to withdraw from our 15-year involvement in this significant and successful 1.2 million sq. ft. 'place making' project. We have received a total payment of £12.1 million by way of a concluding agreement including our initial £5.0 million equity investment, generating net development and trading gains of £6.4 million.

Having reached practical completion at 10 Hammersmith Grove in June 2013, and with five floors, representing 58 per cent, of the building under offer, we are encouraged by the level of interest in the remainder of the space. This 110,000 sq. ft. prime office building is the first of two buildings in Hammersmith town centre. Given our progress, we are now priming the second phase, 12 Hammersmith Grove, a 165,000 sq. ft. grade A office building for commencement in early 2014. As with 10 Hammersmith Grove, this speculative development will be forward-funded with an institutional partner prior to commencing construction.

In September 2013, we secured an option agreement on Algarve House, a derelict office building adjacent to Southwark underground station for £8.2 million for the development of an office-led regeneration project. The option agreement will be paid in phases over the next 18 months with an initial payment of £2.3 million having been made.

Development and trading properties

Disposals

We have continued to make good progress in our strategy of realising value through the regeneration of derelict or otherwise redundant real estate. Further gains have been realised from within the Chrome portfolio and from a number of other development and trading assets. Since 31st August 2013, we have released all of our initial equity investment in the Chrome portfolio through the disposal of the underlying real estate assets. The period under review also saw us successfully conclude the disposal of the final assets within the Rock portfolio, acquired in October 2010, and which has generated cumulative total profits of £8.4 million.

Planning progress

An important part of our development business model is to create value through the planning process via change of use or improved planning consents. Planning consents achieved since 28th February 2013 include:

· Barnstaple, Devon - Resolution to Grant Planning for a phased mixed-use development. The first phase is anchored by a 78,000 sq. ft. foodstore for which a conditional pre-sale has been agreed with ASDA.

· Launceston, Cornwall - Resolution to Grant Planning for a phased mixed-use development. The first phase comprises a 51,000 sq. ft. foodstore for which a site sale has been agreed with Morrisons.

· Cross Quarter, Abbey Wood - Resolution to Grant Planning for an £85 million mixed-use regeneration scheme comprising 220 private and affordable homes, an 80-bed hotel, 5,000 sq. ft. of commercial space and an 81,000 sq. ft. anchor foodstore, pre-let to Sainsbury's.

· Marsh Mills, Plymouth - Resolution to Grant Planning for a retail and leisure scheme comprising 84,500 sq. ft. of bulky goods retail space and 12,800 sq. ft. of café and restaurant space. We are already in discussions with pre-let interest which will be the pre-cursor to securing third party funding.

· North Sprowston and Old Catton, Norwich - Resolution to Grant outline planning for a major mixed-use urban extension including up to 3,520 homes delivered in phases over the next 15 to 20 years. A start on site is anticipated in late 2015 for the first phase of residential-led development comprising 590 new homes. 

We are also pleased to report significant progress in respect of Shepherds Bush Market, a six-acre regeneration project which will include up to 212 apartments, 14,000 sq. ft. of retail space and a revitalised market at its core. The Judicial Review hearing took place in July 2013 and a final favourable decision was handed down by the judge in October. In mid-September, the CPO Inquiry opened, upon which full vacant possession of the site is contingent, and we are hopeful of this being confirmed in early 2014 enabling us then to start on site. In the interim, we have continued our process of land assembly in order to advance our position, notably, securing the conditional exchange on the purchase of the market from TfL.

New real estate opportunities

At this stage in the economic cycle, we are actively seeking opportunities to recycle an element of our capital into further real estate opportunities where we can add value through the process of regeneration. In addition to securing an option to acquire Algarve House, Southwark, we secured three new opportunities during the period within our development and trading portfolio which offer strong potential for value growth.

In July 2013, we acquired Tollgate House and Market Place, a 104,400 sq. ft. mixed-use, town centre opportunity in Romford, Greater London, for £8.3 million. The acquisition comprises three real estate assets with potential to increase value through development, asset management and enhancement. We are now on site and carrying out the construction of the second phase at Market Place where we have fully let the commercial space, with 22 apartments to be rented or sold upon practical completion which is anticipated in Q2 2014.

In October 2013, we acquired a 0.25-acre, derelict site, in one of Dublin's prime residential locations for €2.4 million with a local partner. The site has planning permission for a mixed-use development comprising twelve high quality apartments, 4,700 sq. ft. of restaurant and retail space and 6,500 sq. ft. of office space. Capital expenditure of €5.0 million is required to develop the scheme which will be funded through a mixture of equity and external bank debt.

At a ten-acre site in Essex, we have entered into a joint venture agreement with a development partner to bring forward a mixed-use project. Conditional contracts have been agreed with the current landowners for the acquisition of the site and a conditional pre-lease, subject to planning, has been agreed with a national retailer for a 76,000 sq. ft. foodstore to anchor the development. A detailed planning application is currently being progressed which will be submitted early next year.

Real estate loan portfolios

We have noticed a more progressive stance being taken by some banks in response to the improved investment market conditions. Building on the experience gained from the two significant real estate loan portfolio transactions that we undertook in 2012, we are hopeful of securing additional transactions in the near- to medium-term. These are likely to be similar in nature to those deals undertaken to date and involve consensual re-structurings of bi-lateral loans.

Investment Portfolio

After the disposal of our residential land at Broughton for £11.4 million, the valuation of our directly held investment portfolio at 31st August 2013 was £208.0 million as compared to £220.1 million as at 28th February 2013. Our investment portfolio including our share of joint venture assets benefitted from a valuation increase of £0.5 million at 31st August 2013.

We are pleased to report that values within our investment portfolio including our share of joint venture assets have largely stabilised as investment and banking demand spills out from Central London to seek the higher yielding, good quality secondary assets that our portfolio comprises. Competitive bidding for these assets is returning, reflecting improved investor sentiment and increasing availability of debt. Assuming the market remains disciplined, the outlook is for the weight of money to increase in this market, leading to yield tightening across most sub-markets. We are hopeful that not only will values remain stable, but that we will be able to recapture value in the second half of the year as the economy strengthens further and secondary yield compression returns. The strengthening market place is encouraging us to accelerate our program of recycling an element of our investment portfolio.

In October 2013, in joint venture with Patron Capital, we were pleased to announce the sale of the Phones 4u arena for £82.1 million to a fund of Mansford Real Estate LLP. The sale of the arena, in which we owned a 30 per cent share, will generate in excess of £10.0 million of cash to Development Securities before finalising with Patron Capital our promote entitlements.

We continue to proactively manage our investment portfolio to increase occupancy and in turn extract maximum value from our assets. During the period, void rates decreased to 6.3 per cent from 9.7 per cent at 28th February 2013 and rental income remained constant at £15.4 million (28th February 2013: £15.5 million).

At our 112-unit east London residential scheme, Wick Lane Wharf, in joint venture with Realstar Group we have exchanged or completed on the sale of 26 of the 30 apartments which were surplus to the core business plan. It is pleasing to report that these sales have been achieved at an average of 14.0 per cent above appraisal values.

At Atlantic Village, Bideford, as part of our medium-term development proposition, we have continued to retain occupiers and secure new brands to boost footfall. We are certain that over time, this is the correct route to enhancing value as increased occupancy will be beneficial to all traders. However, in the short-term, this has placed further pressure on the asset's capital value and resulted in a further £1.4 million loss over the first six months of the year. Whilst negative yield creep has ceased and capitalisation rates stabilised, incentives and rents to retain and attract tenants have softened. We will continue to enhance critical mass at this location through continued lettings and the development activity at both the second phase of Atlantic Village and also Atlantic Park where during the period, we secured Resolution to Grant planning for a new leisure development.

Legacy assets

Good progress has been achieved during the current financial year on two of our three significant non-income producing legacy assets. In May 2013, we were pleased to complete the sale of our most significant remaining land holding at Broughton to a housebuilder for £11.4 million thus capitalising on the planning consent we obtained during the previous financial year.

At 399 Edgware Road, we have now secured planning consent for our reconfigured mixed-use regeneration scheme which will comprise an 80,000 sq. ft. foodstore, pre-let to Morrisons, 183 residential units and 50,000 sq. ft. of additional space dedicated to Oriental food and retail. This is a key milestone for us in realising cash from this site.

Outlook

With investment valuations set to improve as the economy strengthens and with a steady flow of gains continuing to be generated across our portfolio, we are confident that our strategy will continue to create value and growth for your Company.

It remains for me to thank our management team and staff for their application, expertise and team work in a period during which much progress has been achieved.

D S Jenkins

Chairman

Financial review

Total comprehensive income for the six months was a profit of £8.9 million, (31st August 2012: £2.9 million loss, 28th February 2013: £2.2 million profit). After the final dividend for the year to 28th February 2013 of £2.9 million, net asset value attributable to shareholders increased by £6.0 million to £312.6 million (31st August 2012: £304.4 million, 28th February 2013: £306.6 million).

Profits from development and trading operations were £13.3 million as realisations continued from the previous year (31st August 2012: £11.9 million, 28th February 2013: £28.1 million). These were generated both from direct real estate holdings, amounting to £11.0 million recognised within gross profit, and from indirect holdings, with £2.3 million arising in joint ventures.

Net revaluation of our investment assets, including those within our share of joint ventures, was an increase of £0.5 million. This comprised: negative revaluations in our directly held investment portfolio of £1.0 million (31st August 2012: £7.3 million loss, 28th February 2013: £16.3 million loss), resulting in an increased operating profit of £8.8 million (31st August 2012: £0.9 million, 28th February 2013: £2.2 million); and a revaluation uplift of £1.5 million in respect of our investment assets held in joint venture.

Net finance costs were £5.1 million (31st August 2012: £5.8 million, 28th February 2013: £10.1 million), including £0.7 million of mark-to-market gain in respect of currency and interest rate swaps. In addition, we have benefited from a mark-to-market gain of £2.2 million in respect of the currency and interest rate swap reported in Other comprehensive income.

During the period we secured new bank finance of £6.6 million from Royal Bank of Scotland plc in respect of the acquisition and development of our project in Romford. In October 2013, we completed the repayment of the loan from HSBC in respect of our Chrome loan portfolio joint venture with Pears Group.

Net debt as at 31st August was £143.0 million, representing gearing of 45.7 per cent (31st August 2012: £147.1 million and 48.3 per cent, 28th February 2013: £146.8 million and 47.9 per cent). In addition our share of net debt in joint ventures reduced to £33.7 million, increasing our effective gearing to 56.5 per cent (31st August 2012: 67.7 per cent, 28th February 2013: 63.9 per cent). The weighted average maturity of our debt is 7.6 years, with a weighted average interest rate of 5.7 per cent. The proportion of our portfolio which is subject to fixed interest rates has reduced to 87.3 per cent. If our share of debt in joint ventures is included, weighted average maturity is 6.7 years, the average interest rate is 5.5 per cent, and the proportion of fixed rate debt is 81.0 per cent.

Our Annual Report to 28th February 2013 describes our risk profile and our approach to managing our principal risks. These principal risks remain unchanged as at 31st August 2013. With regard to the second half of the year, whilst acknowledging the signs of recovery currently being shown, the Board remains cautious in its view of UK macro-economic prospects, as set out in the Chairman's Statement. We maintain a strong focus on potential tenant defaults and other counterparty risks.

Portfolio analysis

Income generating properties as at 31st August 2013

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 2013

Notes 1 to 17 form an integral part of these condensed Consolidated set of financial statements

Consolidated balance sheet

unaudited as at 31st August 2013 

Notes 1 to 17 form an integral part of these condensed Consolidated set of financial statements.

Consolidated statement of changes in equity

unaudited as at 31st August 2013

Notes 1 to 17 form an integral part of these condensed Consolidated set of financial statements.

Consolidated cash flow statement

unaudited for the six months ended 31st August 2013

Notes 1 to 17 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 2013

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES

a) General information

These condensed Consolidated set of financial statements for the six months ended 31st August 2013 comprise the results of the Company and its subsidiaries and were authorised by the Board for issue on 21st October 2013.

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 set of 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 2013, which were prepared in accordance with International Financial Reporting Standards ("IFRS"), as endorsed by the European Union, were approved by the board of directors on 1st May 2013 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 Consolidated interim financial statements have been reviewed, not audited.

b) Basis of preparation of half-year report

These condensed Consolidated set of financial statements for the six months ended 31st August 2013 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim financial reporting' as adopted by the European Union. The condensed Consolidated set of financial statements should be read in conjunction with the Group's financial statements for the year ended 28th February 2013, which have been prepared in accordance with IFRSs as adopted 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, despite the continuing uncertain economic outlook. 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 set of financial information, 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 2013.

d) Accounting policies

The accounting policies applied in these condensed Consolidated set of financial statements are consistent with those of the Group's financial statements for the year ended 28th February 2013, 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).

The accounting policies adopted are consistent with those of the previous financial year except as described below.

IFRS 13, 'Fair Value Measurement'. IFRS 13 measurement and disclosure requirements are applicable for the 28th February 2014 year end. The Group has included the disclosures required by IAS 34.

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 2013.

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

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 2013:

The following table presents the Group's assets and liabilities that are measured at fair value at 31st August 2012:

In the period there have been no significant changes in business circumstances that affect the fair value of the Group's financial assets and financial liabilities. Continued uncertainty in the Eurozone has continued to cause volatility on the Group's cross-currency interest rate swap.

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

Level 2 cross-currency interest rate swap and derivative financial instruments comprise a forward foreign exchange contract and a number of interest rate swaps and caps. The cross-currency interest rate swap has been fair valued using forward exchange rates that are quoted in an active market. 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.

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.

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.