Half Year results

Half Year Results

Our market

Introduction

Conditions in central London's economy and its property markets remain supportive. While macro-economic risks remain, against a backdrop of improving GDP growth and business sentiment across the UK, London continues to outperform. In particular, London has witnessed robust employment growth of more than 7.6% over the last 12 months and this is forecast to continue with the level of office-based employment expected to increase by 1.9% per annum over the next five years.

With confidence strengthening further in central London and businesses continuing to be attracted by its high quality labour pool, demand for well-specified space in attractive locations has again improved with occupational take-up on the increase. When combined with current low vacancy levels and constrained supply, occupational market conditions continue to be in landlords' favour, particularly in the core West End, with attractive levels of rental growth being forecast.

In the investment market, transaction activity has also increased and while investment from overseas buyers remains strong, most notably out of Asia including expanded appetite from Chinese investors, there has also been a marked boost in buying activity by domestic institutional investors. This increased demand has maintained downward pressure on prime central London property yields, despite the rise in Government bond yields and swap rates over the summer.

Occupational Markets

Conditions in our occupational markets remain consistent with those that we outlined with our final results in May 2013: namely, the market, particularly in the core of the West End, is underpinned by low levels of current and forecast availability combined with long run average levels of demand.

On the supply side, we estimate that central London development completions will total 1.9 million sq ft in the year to December 2013, a 12% reduction on 2012 and still below the long term average of 4.3 million sq ft. As a result, occupiers seeking to move to better premises or relocate into central London, particularly the West End, are in many instances seeing rental levels increase.

The pipeline of supply of new office space in central London continues to be subdued, particularly in the core of the West End where forecast development completions total 3.2 million sq ft over the next five years, equating to circa 1% of new supply per annum.  We anticipate that this scarcity of new space combined with improving levels of demand, as the economy continues to recover, will support rental growth over the medium term.

West End

Over the six months to 30 September 2013, West End office take-up was 2.2 million sq ft, an increase of 33% on the preceding six months. However, availability has remained stable at 10.4 million sq ft in line with the preceding 6 months and vacancy rates remain low at 3.8%, with the vacancy rate for new or recently refurbished grade A space estimated by CBRE to be only 1.7% of total stock.

Across the West End, CBRE has reported that prime rental values rose 5.6% over the last six months. We believe that the West End will continue to benefit from its diversified occupier base, including the current healthy demand from the business services and technology, media and telecoms (TMT) sectors.

The West End retail market (comprising 25.4% of our West End portfolio by value) has continued its strong performance, with occupational demand continuing to outweigh supply. Demand for retail units in our prime West End retail locations of Oxford Street, Regent Street, Piccadilly and Bond Street remains robust. In particular, we are seeing a continued trend of certain retailers seeking multiple representation on Oxford Street, with strong appetite from retailers to participate in the regeneration of the eastern end of Oxford Street ahead of Crossrail opening in 2018.

City, Midtown and Southwark

Over the six months to 30 September 2013, City office take-up was 2.7 million sq ft, marginally above the preceding six months. Although higher than in the West End, the City office vacancy rate of 6.5% at 30 September 2013 remains low compared to the long run average and CBRE has reported that prime City rental values have remained static over the last six months.

The Midtown and Southwark markets continue to offer an attractive rental outlook based on low vacancy levels and constrained supply, combined with the tenant attractions of relative affordability and improving transport infrastructure.

Our investment markets

Prime commercial property values in core central London have continued to strengthen over the period. Investment in central London offices rose to over £8.3 billion in the six months to 30 September 2013, an increase of 31% from the preceding six months, with CBRE reporting that investment activity of £4.2 billion during the third quarter of 2013 was the strongest quarter since 2007. Overseas investors continue to dominate, accounting for more than 61% of purchases in the last six months, with Asian buyers remaining very active and a noticeable increase in appetite from Chinese investors.  There has also been a significant increase in buying activity by domestic investors (notably the UK institutions), particularly in the third quarter where they accounted for 54% of investment volumes in London.

Although there has been an increase in investment transaction activity across central London, investor demand continues to materially outweigh the supply of commercial property stock available to buy, particularly in the West End. At November 2013, we estimated that there was £25.0 billion of equity demand versus £2.3 billion of assets on the market to sell, giving an equity demand multiple of 10.9 times, a further increase from the multiple of 8.7 times at May 2013. We expect that this surfeit of buyers over sellers will continue to prevail for the foreseeable future, supporting prime property yields around current levels.

Lead indicators

We monitor numerous lead indicators to help identify key trends in our market place:

Selected Lead Indicators	Trends in period         March - September 2013
·              Property Capital Values
·              Equity prices	Up
·              Bond prices	Down
·              Real yield spread (West End property)1	Down
·      Volume new property lending in UK	Neutral
·              Transaction volumes in central London direct real estate investment markets	Up
·      Direction of pricing on IPD based derivative contracts ·	Up
Rental Values
·              Forecast UK GDP growth	Up
·              Forecast London GVA growth	Up
·      West End retail sales	Up
·      Business confidence levels in the central London  economy	Up
·      UK output from the financial and business services sector	Down
·      Employment levels in London's finance and business services sectors	Up
·      Central London office market balance2	Neutral

1.         West End property yields over ten year gilt yields adjusted for inflation

2.         Amount of space available to let given current rates of take-up expressed in terms of months

 

Since the spring of 2013, the prospect of central banks tapering their quantitative easing programmes has raised bond yields, resulting in a small narrowing in the positive spread of London property yields over inflation adjusted treasury yields. However, overall our property capital value indicators remain supportive, with no indications to date of any slowdown in the weight of capital seeking to purchase well located, quality buildings in our core central London markets. Our rental value indicators are continuing to improve with upgrades to both UK and London GDP forecasts, supported by increased business confidence and employment levels in central London. Accordingly, with supply remaining constrained and tenant demand improving, we expect that rental values will continue to rise for sensibly priced, well specified space in attractively located central London properties in the medium term.

To view the accompanying graphics, please paste the below link into your web browser

http://www.rns-pdf.londonstockexchange.com/rns/9867S_-2013-11-13.pdf

Our business

Our business is accompanied by graphics (see Appendix 1)

Development management

With the successful completion of our developments at 95 Wigmore Street, W1 and City Tower, EC2, we now have three committed schemes on site - one in the West End, one in Midtown and one in Southwark. Our committed schemes (439,400 sq ft) are expected to deliver a 36.7% profit on cost and are already 67% pre-let. In addition, we have five schemes that could start in the next 24 months. Beyond that, our pipeline includes a further 17 uncommitted projects, giving us a total programme of 2.3 million sq ft, covering 51% of GPE's existing portfolio. Taken together, our capital expenditure to come at our committed schemes at 30 September 2013 totalled £79.4 million, which could rise to £422.1 million if the five near-term uncommitted schemes were started.

Letting successes at our developments

We have continued with the successful leasing of our new development space, often prior to practical completion of the scheme and on some occasions prior to commitment to the scheme. In May, we pre-let the entirety of our 142,500 sq ft, 12 storey office development scheme at 12/14 New Fetter Lane, EC4. Bird & Bird, a leading international law firm, will occupy the whole building on 20.25 year leases (with no breaks) paying a total initial annual rent of £8.3 million, equating to an average of £58.80 per sq ft for the office space.

In September, the Great Wigmore Partnership ("GWP") joint venture let the last available office floor in its 112,300 sq ft West End development at 95 Wigmore Street, W1. The 12,890 sq ft fourth floor was let to Pyrford International on a ten year lease, with a tenant only option to break after 7 years, paying a rent of £1.2 million per annum, equating to £92.50 per sq ft. One of the six retail units (16,000 sq ft) has also been let with a further two under offer and eight of the eleven residential apartments have now been sold, in both cases at rents and sales rates ahead of business plan.

In October, the Great Ropemaker Partnership ("GRP") joint venture pre-let the ninth and tenth floors (together 23,608 sq ft) at its 20 storey scheme at 240 Blackfriars Road, SE1 to the law firm Boodle Hatfield on a ten year lease, paying a total initial annual rent of £1.2 million, equating to £50.00 per sq ft (above the £47.00 per sq ft secured last year from UBM plc on the nine upper floors).

Completed schemes

In July, our development at 95 Wigmore Street, W1 was successfully completed, delivering a profit on cost of 61.4% and ungeared IRR of 29.1%. Following the Pyrford letting detailed above, all the office space has been let to strong tenant covenants at an average rent of £84.50 per sq ft and weighted average unexpired lease term of 11.6 years.

At City Tower, EC2, our Grade A office refurbishment scheme (138,300 sq ft) owned in The Great Star Partnership ("GSP") joint venture, development works completed in September, delivering a profit on cost of 31.5% so far. We have already let the top floor of the building for £60 per sq ft, bringing the total space let or under offer to 30,00 sq ft, and tenant interest levels are very encouraging for the 59,600 sq ft of remaining space currently available for letting. 

Committed schemes

In May, we committed to develop our 142,500 sq ft office scheme at 12/14 New Fetter Lane, EC4 following the pre-let of the entire building. Demolition works are ongoing and the main building contract has been awarded with practical completion of the scheme scheduled for September 2015.

At Walmar House, W1, our refurbishment is progressing well and we are mid-way through the project to deliver 60,300 sq ft of mixed use space. This building is due to complete in June 2014. Although marketing has yet to commence, interest from prospective tenants is encouraging.

Construction work is also progressing well at our 236,600 sq ft development at 240 Blackfriars Road, SE1, where we have now pre-let 58% of the office space following the recent Boodle Hatfield letting. Completion of the scheme is expected by February 2014.

Project preparation and pipeline

At Rathbone Place, W1, we submitted a planning application in May 2013 for our mixed-use scheme and took vacant possession of the site in the summer. In October, the 414,000 sq ft development (which will include 42,000 sq ft of retail space, 217,000 sq ft of offices and 155,000 sq ft of residential units) received resolution to grant planning consent from the City of Westminster, who described the scheme as "a distinctive, characterful proposal, of high architectural and urban design quality". Subject to completing the remaining pre-development activities, including items such as signing a section 106 agreement with Westminster and resolving the outstanding neighbourly matters (for example, crane over-sailing and rights of light), works are expected to start onsite in 2014 for completion in 2016, ahead of Crossrail opening in 2018.

We continue to prepare our schemes at St Lawrence House, 26/34 Broadwick Street, W1 (where we have a planning application submitted), 48/50 Broadwick Street, W1 and 73/89 Oxford Street, W1 (where we received resolution to grant planning permission for our 88,100 sq ft mixed use scheme in the period) for potential starts over the next 18 months. We have also continued to prepare our consented 56,600 sq ft office scheme at 20 St James's Street, SW1 for a potential start in summer 2015.

Asset management

Our asset management team has continued to deliver strong results since March 2013, with highlights including:

·     38 new leases were agreed during the first half (2012: 45 leases), generating annual rent of £18.1 million (our share: £15.0 million; 2012: £4.5 million), including £10.9 million of pre-lets;

·     market lettings in the first half were 3.2% ahead of March 2013 rental values;

·     97.4% of all tenancies by area, with lease breaks or expiries in the twelve months to 30 September 2013, were retained, re-let, under offer or under refurbishment;

·     15 rent reviews of £2.4 million (our share: £2.3 million; 2012: £1.8 million) were settled during the half year, some 6.8% ahead of ERV at the rent review date and representing an annualized increase of £0.3 million per annum;

·     total space covered by new lettings, reviews and renewals during the first half was 308,300 sq ft (2012: 133,300 sq ft); and

·     since the period end, we have completed £2.6 million (our share: £1.6 million) of new lettings (including pre-lets of £1.2 million (our share: £0.6 million)) and 12 potential new lettings are currently under offer which will deliver a further £2.4 million p.a. in rent (our share: £1.5 million), in total 5.8% ahead of March 2013 ERV's.

As detailed in the Development management section, we have continued to deliver significant lettings at our developments and have good tenant interest in recently completed available space.

Overall, these asset management successes helped maintain a low vacancy rate of 4.4% at 30 September 2013, compared to 2.3% at 31 March 2013. The small increase in the period predominantly resulting from refurbishment completions at our development at City Tower, EC2 and individual floors at Wells & More, W1 and 200 Gray's Road, WC1. Since the period end, the vacancy rate has fallen to 4.0%.

 

The table below summarises our leasing transactions in the period.

Leasing Transactions		Three months ended 30 September 2013	Six months ended 30 September 2013	Six months ended   30 September 2012
New leases and renewals completed
Number		15	38	45
GPE share of rent p.a.		£2.1 million	£15.0 million	£4.5 million
Area (sq ft)		43,900	267,300	102,700
Rent per sq ft (including retail)		£79	£68	£58
Rent reviews settled
Number		11	15	5
GPE share of rent p.a.		£1.8 million	£2.3 million	£1.8 million
Area (sq ft)		36,300	41,000	30,600
Rent per sq ft (including retail)		£50	£58	£96

Note: Includes joint ventures at share

At 30 September 2013, the average rent across our office portfolio was £41.80 sq ft, an increase from £38.10 sq ft six months earlier given continued successful lease up of our new, high quality developed space.

 

Investment management

We have had another active period of successful capital recycling, buying property laden with potential and selling properties at healthy surpluses, where we had either completed our business plans or were able to monetise our expected development profits.

During the course of the first half, we purchased Oxford House, 76 Oxford Street, W1, a prominent 79,000 sq ft freehold property at the junction of Oxford Street and Newman Street, adjoining our 2.3 acre Rathbone Place redevelopment site, for £90.0 million. On purchase, the property was fully let generating a total rent of £3.2 million per annum and a net initial yield of 3.5% rising to c.6.0% post a light refurbishment and re-letting. The weighted average unexpired lease term is under a year and the rents are low for this location at £26.17 per sq ft on the office accommodation and £238 per sq ft Zone A on the retail.  In July, we also completed the purchase of Orchard Court, W1 for £37.0 million. The 47,800 sq ft retail and office leasehold property is arranged over basement, ground and the first floor of a significant island site comprising the entire eastern side of Portman Square.

We have also continued to recycle capital with sales of £113.5 million (our share) in the period at a 4.0% premium to book value, taking advantage of strong investor demand. 

In July, we exchanged contracts to sell 90 Queen Street, EC4 for £61.0 million, reflecting a net initial yield of 5.4%, a capital value of £891 per sq ft and a 1.7% premium to the March 2013 book value.  Having purchased the property in 2009 for £45.8 million, we subsequently restructured the leases and this sale, which will complete on 20 December 2013 (or earlier at the Group's option), crystallises the strong performance since acquisition, delivering an ungeared IRR of c.13% per annum.

In September, The Great Capital Partnership ("GCP") also completed the sale of its last remaining asset, Park Crescent West, for £105.0 million (our share: £52.5 million).  The sale price was 6.9% ahead of book value and reflects a net initial yield of circa 2.0% and a capital value of £813 per sq ft on the net internal area.

Since the period end, we created a new 50/50 joint venture, the GHS Limited Partnership ("GHS"), with the Hong Kong Monetary Authority ("HKMA")  to own and develop the Hanover Square Estate in the heart of London's West End. GPE transferred the properties forming part of the Hanover Square Estate to GHS for £202.0 million and the partners intend to develop the site in accordance with the existing planning permission for a 208,000 sq ft redevelopment scheme incorporating 163,500 sq  ft of grade A office accommodation, 32,700 sq ft of prime retail and restaurant space, along with six residential units totalling 11,800 sq ft. Part of the site is owned by Crossrail who are developing the eastern ticket hall of the Bond Street Crossrail station and GHS has an agreement to acquire this element of the site once Crossrail have completed construction of the station structure, currently anticipated to be during 2016, ahead of target delivery date for the development project in 2018. GPE will act as both asset and development manager to GHS. 

Joint ventures

Our joint ventures have continued to perform well during an active period of development, refurbishment and recycling activity. We categorise our active joint ventures at 30 September 2013 into two types:

·     Access to new properties (13.0% of GPE's net asset value). The relevant joint ventures here are The Great Victoria Partnership ("GVP") with Liverpool Victoria Friendly Society, GWP with Scottish Widows and GSP with Starwood Capital; and

·     Risk sharing on development projects and/or large lot size properties (8.7% of GPE's net asset value). The relevant joint venture here is GRP with BP Pension Fund.

Overall, our four active joint ventures at 30 September 2013 represent a significant proportion of the Group's business, although this has reduced over the course of the last 12 months with the successful conclusion of our joint venture with Hypothekenbank Frankfurt (Eurohypo) at 33 Margaret Street, the selldown and restructuring of our interests in The 100 Bishopsgate Partnership and the recent sale of the one remaining asset in GCP, as detailed in the Investment management section.  

 

At 30 September 2013, our joint ventures made up 19.1% of the portfolio valuation, 21.7% of net assets and 21.1% of rent roll (at 31 March 2013: 20.2%, 22.7% and 20.3% respectively), although we expect these proportions to increase in the near term given the creation earlier this month of GHS with HKMA, as detailed in the Investment management section.  

 

Valuation

Valuation is accompanied by graphics (see Appendix 2)

The valuation of the Group's properties rose to £2,499.5 million as at 30 September 2013, delivering underlying capital growth of 6.7% on a like-for-like basis since 31 March 2013.

At 30 September 2013, the wholly-owned portfolio was valued at £2,022.6 million and the Group had four active joint ventures which owned properties valued at £476.9 million (our share) by CBRE.

The key drivers behind the Group's valuation movement for the six month period were:

·     Rental value growth - since the start of the financial year, rental values have grown by 3.6%. Office rental values have increased by 3.1%, with retail rental values rising by 5.6%, in large part driven by our asset management successes and the lack of grade A supply putting upward pressure on rents. At 30 September 2013, the portfolio was 18.1% reversionary;

·     Intensive asset management - during the six months to 30 September 2013, 53 new leases, rent reviews and renewals were completed, securing £17.3 million (our share) of annual income which supported valuation growth over the period;

·     Development properties - growth of 15.8% increased the valuation of current development properties to £366.8 million. The pre-letting of 142,500 sq ft at 12/14 New Fetter Lane, EC4 and continued progress at our other on-site schemes contributed to this strong valuation performance; and

·     Lower investment yields - equivalent yields reduced by 17 basis points over the period due to the strength of demand for properties in our market (2012: 6 basis points). At 30 September 2013, the portfolio equivalent yield was 5.0%.

Including rent from pre-lets and leases currently in rent free periods, the adjusted initial yield of the investment portfolio at 30 September 2013 was 4.0%, unchanged over the six month period.

Our West End portfolio produced the strongest performance by geographic sector over the period, increasing in value by 5.7% on a like-for-like basis, in part driven by retail capital value growth of 8.5%. City, Midtown and Southwark assets saw a 2.8% uplift in values. Our joint venture properties rose in value by 7.3% over the period while the wholly-owned portfolio rose by 6.6% on a like-for-like basis.

The Group delivered a total property return (TPR) for the twelve months to 30 September 2013 of 14.3%, compared to the central London IPD benchmark of 14.1% and a strong capital return outperformance of 1.2% (GPE at 11.0% versus 9.7% of IPD).

Our financial results

Our financial results are accompanied by graphics (see Appendix 3)

The Group's financial results reflect the successful execution of our strategic priorities and robust central London investment and occupational markets. Our profitable development activities, proactive asset management and disciplined capital recycling have boosted the key balance sheet values compared to six months earlier.

In addition to reporting profit before tax, diluted earnings per share and diluted NAV per share in accordance with EPRA guidance (see Appendix 3 for a summary of our key EPRA measures), following the recent issuance of our convertible bond, we are reporting these three measures on a Company adjusted basis to better reflect the underlying profits and net assets attributable to shareholders. We have made an adjustment to diluted earnings per share to remove fair value movements and the associated one-off issue costs of the convertible bond, and in diluted NAV per share we have included the convertible bond at its nominal value. We refer to these measures below as "Adjusted". We note that EPRA is currently reviewing its guidance regarding the treatment of convertible bonds with flexible settlement options.

Net asset value

Adjusted diluted net assets per share (NAV) at 30 September 2013 was 487 pence per share, an increase of 9.2% over the last six months, largely due to the rise in value of the property portfolio. At 30 September 2013, the Group's net assets were £1,668.3 million, up from £1,537.7 million at 31 March 2013.

The main factors behind the 41 pence per share increase in NAV since 31 March 2013 were:

·     the rise of 43 pence per share arising from the revaluation of the property portfolio. Of this amount, development properties boosted NAV by around 15 pence;

·     profit on property disposals added 1 pence per share to NAV;

·     adjusted earnings for the period of 5 pence per share enhanced NAV;

·     the final dividend of 5 pence per share paid in July 2013 reduced NAV; and

·     other movements, including increased pension liabilities and issue costs of the convertible bond, reduced NAV by 3 pence per share.

Triple net assets per share (NNNAV) was 476 pence per share at 30 September 2013 compared to 434 pence per share at 31 March 2013 (up 9.7%). At the period end, the difference between NAV and NNNAV was the negative mark to market of debt and derivatives of 11 pence, mainly arising from the Group's 2029 debenture, private placement notes and cross currency hedging derivatives. There was no net movement in deferred tax provisions during the period.

Income statement and earnings per share

In line with our plans, the income statement is now benefitting from the successful delivery and letting of our development and refurbishment projects. As a result, adjusted profit before tax was £18.1 million, 103.4% higher than for the same period last year, and overall we expect that the income statement will be significantly enhanced this financial year compared to the prior year by the additional rental income we have created through successful leasing of our development schemes and our accretive acquisitions.

Leasing activity remains strong and rental income from wholly-owned properties and joint venture fees for the period were £34.9 million and £3.7 million respectively, generating a combined income of £38.6 million, up 27.4% on last year. The £8.4 million increase in rental income predominantly resulted from the commencement of Savills lease at 33 Margaret Street, W1 and our £202.0 million of accretive purchases since 30 September 2012.  Joint venture fees were in line with the prior period, with further sales fees generated on property sales by GCP and continued development fees at 240 Blackfriars Road, SE1. Adjusting for acquisitions, disposals and transfers to and from the development programme, like-for-like rental income (including from joint venture properties) increased 2.6% on the prior period.

Property expenses in the period increased to £4.8 million (2012: £3.4 million), principally due to third party costs related to our management of joint ventures. Administration costs marginally fell to £11.3 million (2012: £11.5 million).

Adjusted profits from joint ventures (excluding fair value movements) were £4.4 million, up from £3.0 million last year, predominantly due to letting activity at 95 Wigmore Street, W1. Our share of joint venture interest expenses were 27% lower largely due to the repayment of GCP bank debt.

Underlying net finance costs were 7.4% lower at £8.8 million (2012: £9.5 million) as the increased Group net debt position following acquisitions and investment in our development programme was more than offset by our lower weighted average cost of debt and greater levels of capitalised interest as Group development schemes have commenced.

Revaluation gains and underlying profits enabled the Group to report an accounting profit after tax of £146.9 million (2012: £76.7 million). Basic EPS for the six months was 43.0 pence, compared to 24.8 pence for 2012. Diluted EPS for the six months was 42.8 pence compared to 24.8 pence for 2012.

Adjusted diluted EPS was 5.3 pence (2012: 2.9 pence), an increase of 82.8% and in line with our expectations.

Results of joint ventures

The Group's net investment in joint ventures was £361.8 million, up from £348.3 million at 31 March 2013, due to property valuation increases of £31.7 million and capital expenditure at 95 Wigmore Street, W1 and 240 Blackfriars Road, SE1, offset by the sale of the one remaining GCP asset in the period.

Our share of joint venture net rental income was £10.0 million, down from £10.6 million for the same period last year, as a result of the loss of rental income from GCP sales partly offset by the new rental income generated at 95 Wigmore Street, W1. The underlying joint venture profits are stated after charging £3.7 million of GPE management fees (2012: £3.8 million).

Our share of non-recourse net debt in the joint ventures was £101.9 million at 30 September 2013 (31 March 2013: £102.2 million).

Financial resources and capital management

Group consolidated net debt was £782.7 million at 30 September 2013 up from £658.9 million at 31 March 2013 as a consequence of our accretive acquisitions and development capital expenditure, partly mitigated by proceeds from disposals. Group gearing rose to 46.9% at 30 September 2013 from 42.8% at 31 March 2013 as higher debt levels prevailed over the portfolio valuation rise. Including our share of the non-recourse debt in the joint ventures, total net debt was £884.6 million (31 March 2013: £761.1 million) equivalent to a loan-to-value of 35.4% (31 March 2013: 32.7%). Pro forma loan-to-value, which adjusts for the deferred consideration of £31.6 million due to the Group on sale of the 37.5% interest in 100 Bishopsgate, EC2 and property investment transactions which had not completed by 30 September 2013 (being the sale of 90 Queen Street, EC4 and formation of the GHS Limited Partnership), was lower at 28.7%.

We have continued to be successful in our financing activities, again focusing on our objectives of maximising operational flexibility, maintaining the cost of our debt as one of the lowest in the sector and further diversifying our funding sources. In September, the Group issued a £150.0 million five year unsecured convertible bond on highly attractive terms benefiting from strong investor demand. The conversion price was set at £7.15, a 35% premium to the share price on the launch date, and the fixed annual coupon is 1.0%, which we understand represents the lowest ever achieved for a sterling denominated convertible bond in the UK public markets. If converted, the Group has the option to settle in shares or cash or a combination of shares and cash.

At 30 September 2013, the Group, including our share of joint ventures, had cash and undrawn committed credit facilities of £310 million, rising to £503 million on a pro forma basis as detailed above. The Group's weighted average cost of debt, including fees and joint venture debt, for the period was a record low 3.7%, a reduction of 60 basis points compared to the prior period. The weighted average interest rate (excluding fees) at the period end was 3.2% (31 March 2013: 3.7%). At 30 September 2013, 72% of the Group's total drawn debt (including non-recourse joint venture debt) was provided on an unsecured basis (31 March 2013: 67%) and 69% was from non-bank sources (31 March 2013: 60%).

At 30 September 2013, 78% of the Group's total drawn debt (including non-recourse joint ventures) was at fixed or hedged rates (31 March 2013: 71%). However, a significant proportion of hedged debt is subject to capped arrangements and as a result, we are benefiting from low floating rates on around 42% of our total debt. Interest cover for the twelve months to 30 September 2013 was 2.8x (2012: 2.2x).

We have no debt maturities until July 2015 and our weighted average drawn debt maturity was 6.3 years at 30 September 2013 (31 March 2013: 6.9 years). The Group, including its joint ventures, is operating with substantial headroom over its debt covenants.

Cash collection and tenant delinquencies

The quarterly cash collection profile has continued to be strong throughout 2013. We secured 98% of rent within seven working days following the September quarter day, similar to the March and June quarters earlier this year both at 99%. Tenants on monthly payment terms represent around 3.4% of our rent roll (30 September 2012: 3.7%). We had no tenant delinquencies around the September quarter day and only two in the six month period, accounting for 0.14% of total rent roll; however, we remain vigilant and continue to monitor the financial position of our tenants.

Taxation

The tax charge in the income statement for the half year is £nil (2012: £nil) and the underlying effective tax rate was 0% (2012: 0%) as a result of the tax free nature of much of the Group's income and other allowances being available to set against non-REIT profits.

Dividend

The Board has declared an interim dividend of 3.4 pence per share (2012: 3.3 pence) which will be paid in January 2014. Of this dividend, 1.2 pence per share will be a REIT Property Income Distribution (PID) in respect of the Group's tax exempt property rental business.

Outlook

We are pleased to report a strong first half performance and another period of outperformance of the London commercial property market; we have delivered material surpluses from our exceptional development programme, attractive West End acquisitions, profitable asset sales, a new joint venture with promising prospects and new financing at a record low cost.

With a strengthening macro-economic backdrop and supportive property market conditions in the Capital, we expect to see further growth during the second half. London's businesses are, once more, investing for growth and our limited available space to let is attracting significant interest, enabling us to lease at rates ahead of ERV's.  Meanwhile, central London's appeal as an investment destination of choice continues unabated.

Within this positive context, we maintain our confident outlook; our portfolio, 100% in Central London, is full of opportunity; and our conservative gearing and low cost financing will enable us to deliver on our existing growth plans and exploit new opportunities as we find them.

Group income statement

For the six months ended 30 September 2013

 

Year to 31 March 2013 Audited £m			Notes		Six months to 30 September 2013 Unaudited £m		Six months to 30 September 2012 Unaudited £m
69.0		Total revenue	2		42.8		33.4
57.1		Net rental income	3		34.9		26.5
6.1		Joint venture fee income	9		3.7		3.8
63.2		Rental and joint venture fee income			38.6		30.3
(6.5)		Property expenses	4		(4.8)		(3.4)
56.7		Net rental and related income			33.8		26.9
(22.8)		Administrative expenses			(11.3)		(11.5)
33.9		Operating profit before surplus on investment property and results of joint ventures			22.5		15.4
99.0		Surplus from investment property	8		113.3		49.1
61.2		Share of results of joint ventures	9		40.4		28.7
(0.5)		Loss on disposal of joint venture			-		-
193.6		Operating profit before financing costs			176.2		93.2
(13.0)		Net finance costs	5		(29.3)		(16.5)
180.6		Profit before tax			146.9		76.7
-		Tax	6		-		-
180.6		Profit for the period			146.9		76.7
56.3p		Basic earnings per share	7		43.0p		24.8p
55.7p		Diluted earnings per share	7		42.8p		24.8p
6.9p		Adjusted earnings per share	7		5.3p		2.9p

     

      All results are derived from continuing operations in the United Kingdom.

         Group statement of comprehensive income

               For the six months ended 30 September 2013

 

Year ended 31 March 2013 Audited £m			Six monthsto 30September 2013 Unaudited £m	Six months to 30 September 2012 Unaudited £m
180.6		Profit for the period	146.9	76.7
		Items that will not be reclassified subsequently to profit and loss:
(0.2)		Actuarial deficit on defined benefit scheme	(1.1)	(0.3)
		Items that may be reclassified subsequently to profit and loss:
-		Accounting charge on cancellation of derivatives in joint ventures	-	2.9
3.0		Fair value movements on derivatives taken to equity in joint ventures	-	0.1
183.4		Total comprehensive income for the period	145.8	79.4

Group balance sheet

At 30 September 2013

 

As at 31 March 2013 Audited £m			Notes	As at 30 September 2013 Unaudited £m	As at 30 September 2012 Unaudited £m
		Non-current assets
1,899.5		Investment property	8	2,063.0	1,581.3
348.3		Investment in joint ventures	9	361.8	479.5
16.7		Other investment	10	17.6	-
0.6		Plant and equipment	11	0.4	0.8
-		Pension asset		-	0.2
2,265.1				2,442.8	2,061.8
		Current assets
51.2		Trade and other receivables	12	105.8	19.8
6.3		Cash and cash equivalents		4.9	6.8
57.5				110.7	26.6
2,322.6		Total assets		2,553.5	2,088.4
		Current liabilities
(78.2)		Trade and other payables	13	(42.8)	(37.4)
(78.2)				(42.8)	(37.4)
		Non-current liabilities
(666.0)		Interest-bearing loans and borrowings	14	(800.7)	(705.7)
(40.4)		Obligations under finance leases		(40.4)	(40.5)
(0.3)		Pension liability		(1.3)	-
(706.7)				(842.4)	(746.2)
(784.9)		Total liabilities		(885.2)	(783.6)
1,537.7		Net assets		1,668.3	1,304.8
		Equity
43.0		Share capital	15	43.0	39.1
352.0		Share premium		352.0	218.1
16.4		Capital redemption  reserve		16.4	16.4
1,130.0		Retained earnings		1,255.4	1,037.3
(3.7)		Investment in own shares	16	1.5	(6.1)
1,537.7		Total equity		1,668.3	1,304.8
451p		Net assets per share	7	487p	421p
446p		Adjusted net assets per share	7	487p	424p

 

Group statement of cash flows

For the six months ended 30 September 2013                  

Year to 31 March 2013 Audited £m			Notes	Six months to 30 September 2013 Unaudited £m	Six months to 30 September 2012 Unaudited £m
		Operating activities
193.6		Operating profit before financing costs		176.2	93.2
(158.5)		Adjustments for non-cash items	17	(155.4)	(76.7)
0.8		Decrease/(increase) in receivables		1.8	(3.0)
2.7		(Decrease)/increase in payables		(0.7)	2.4
38.6		Cash generated by operations		21.9	15.9
(26.1)		Interest paid		(14.1)	(11.9)
12.5		Cash flows from operating activities		7.8	4.0
		Investing activities
110.6		Distributions from joint ventures		55.6	108.4
(401.4)		Purchase and development of property		(144.7)	(327.3)
(0.1)		Purchase of fixed assets		-	(0.1)
59.8		Sale of properties		5.4	58.1
(15.6)		Investment in joint ventures		-	-
15.3		Sale of joint ventures		-	-
(25.5)		Payment to acquire control of G.P.E. (Marcol House) Limited		-	-
15.8		Cash acquired on consolidation of G.P.E. (Marcol House) Limited		-	-
(241.1)		Cash flows used in investing activities		(83.7)	(160.9)
		Financing activities
140.6		Issue of share capital - proceeds from equity placing		-	-
(2.8)		Issue of share capital - associated costs		-	-
-		Issue of convertible bond		146.7	-
33.0		Borrowings (repaid)/drawn		(29.0)	63.0
127.2		Draw down of private placement notes		-	127.0
(39.5)		Funds to joint ventures		(25.2)	(14.2)
(27.6)		Equity dividends paid		(18.0)	(16.1)
230.9		Cash flows generated from financing activities		74.5	159.7
2.3		Net (decrease)/increase in cash and cash equivalents		(1.4)	2.8
4.0		Cash and cash equivalents at 1 April		6.3	4.0
6.3		Cash and cash equivalents at balance sheet date		4.9	6.8