focused for growth flexible business space Slough Estates plc Interim Report 2006

Transcription

1 focused for growth flexible business space Slough Estates plc Interim Report 2006

2 About us Slough Estates International (SEI) is a property investment and development company focused on the provision of Flexible Business Space in Europe and North America. SEI seeks to maximise total returns for its shareholders. It is the leading provider of Flexible Business Space in Europe. Flexible Business Space is space on industrial sites or business parks which we put to multiple uses, such as manufacturing, light assembly, distribution (both small and big-box ), research & development, offices and warehousing. Headquartered in the UK, SEI is a FTSE 100 company with operations in nine countries, serving a highly-diversified customer base of over 1,700 tenants operating in a wide range of sectors and representing both small and large businesses, from start ups to global corporations. With property assets of 5.6 billion* and over 4 million sq m of business space, SEI has an annual rent roll of 289 million and the weighted average unexpired lease length is 11.9 years. Flexible Business Space Manufacturing Research & development Light assembly Future growth will come from: A major development pipeline representing future investment spend of 1.9 billion on new business space Active management of the existing property portfolio to increase rental revenues through customer service Further acquisitions of income-producing assets where SEI can add value from asset management or development SEI aims to meet the needs of customers now and in the future through providing Flexible Business Space, delivering quality, scalable facilities in strategic locations at excellent value. The REIT Opportunity Slough Estates expects to convert to Real Estate Investment Trust (REIT) status in It believes that there are clear tax-related benefits from REIT conversion and also that REIT status will facilitate more efficient structuring of its international activities. We believe that Slough Estates will represent an attractive REIT investment: we have a strong concentration on a specific asset category focused on Flexible Business Space with a high quality income profile, a diversified customer base, financial strength and good growth prospects. Contents 01 Highlights 03 Key summary data 05 Operating review 08 Financial review 12 Independent review report to Slough Estates plc 13 Group income statement 14 Statement of recognised income and expense 14 Statement of changes in equity 15 Group balance sheet 16 Group cash flow statement 17 Notes to the financial statements 29 Property portfolio 38 Shareholder information 39 Directors and officers 40 Group information IBC Group at a glance Front cover Buckingham Avenue, Slough Trading Estate. A new development of six trade centre units at the heart of the estate. With their distinctive design and prime location, they have proved popular with new and existing SEI customers. *as at 30 June 2006

3 Financial highlights For the six months ended 30 June 2006 Six months to Six months to 30 June 30 June Change % Profit before tax ( m s) Adjusted* profit before tax ( m s) Basic EPS (p) Adjusted* diluted EPS (p) Interim dividend (p) June 31 December Adjusted* diluted NAV per share (p) Adjusted* gearing (debt to equity) (%) Total property portfolio (including joint ventures) ( m s) 5,559 5, *Note for definitions of adjusted items see footnotes on page three Office Distribution Warehousing Performed strongly again in first half of 2006 UK: sustained delivery of good results 109,000 sq m lettings, including over 10,000 sq m of pre-lettings Underlying vacancy down again to 7.4 per cent (8.1 per cent end 2005, 9.8 per cent end 2004) Valuation surplus of 6.7 per cent: industrial assets up 7.0 per cent, ahead of 6.2 per cent for IPD equivalent Continental Europe: excellent performances from expanded business Ahead of plan with over 183,000 sq m lettings, including over 96,000 sq m pre-lettings North America: real estate biotechnology business continues building on its strong platform 73,000 sq m of lettings, including a 23,000 sq m pre-letting Adjusted NAV per share net growth of 50.4 pence or 7.4 per cent reflects: Adjusted profit 11.6 pence, valuation gains 57.5 pence, currency translation (7.7 pence), dividends (11.0 pence) Driving growth Development pipeline now increased to 2.7 million sq m potential to add 215 million of rental income Over 279,000 sq m under construction, of which over 76 per cent is pre-let or pre-sold 650,000 sq m of construction starts expected in the next 12 months Pace of capital recycling and asset management continues c. 300 million acquired or sold so far in 2006 Significant potential for growth in rental income Maximising the opportunities from REIT conversion Board expects to convert to REIT status in January 2007 Slough Estates plc Interim Report

4 Positive momentum continues We delivered another strong performance in the first half of 2006, sustaining our momentum from The major restructuring of the UK business in 2005 has helped to deliver these good results. Our Continental European business has rewarded our investment with a lettings performance which was ahead of our expectations. Our groupwide development pipeline, our focus on customer service, capital recycling and asset management, and our reversionary potential will drive the Group s future growth. The business is in good shape to maximise its opportunities in a REITs environment. Ian Coull Chief Executive UK An intensive work programme has produced good results in the UK with another record lettings performance driving a net increase in rental income. Across the regions, construction has started on nearly 58,000 sq m of new development projects. The UK portfolio has shown a 6.7 per cent valuation uplift, with our industrial assets up 7.0 per cent ahead of 6.2 per cent for the IPD equivalent. Continental Europe An excellent performance was achieved in Continental Europe with the successful integration of the acquisitions at the end of 2005 acquisitions which had doubled the size of this business. In the first half of 2006, the team secured a very encouraging 183,000 sq m of lettings, including over 87,000 sq m of existing space. 101,000 sq m of developments were under construction at the end of the first half, with 86 per cent of that pre-let, and a further potential 260,000 sq m of new construction starts set for the following twelve months. North America The Group s California based biotechnology real estate business continues to perform strongly with 50,000 sq m of lettings and a 23,000 sq m major pre-let. The strategic rationale of our 2005 move into the mid San Francisco Peninsula region was endorsed by new leases on 6,000 sq m of space. REITs We welcome the introduction of REITs and believe that there will be clear corporate benefits for Slough Estates from REIT conversion. Slough Estates expects to elect for REIT status with effect from 1 January 2007, subject to publication of the final regulations and an extraordinary general meeting to approve an amendment to the Company s Articles of Association, likely to take place in the fourth quarter of the year. We believe that Slough Estates will represent an attractive REIT investment: we have a strong concentration on a specific asset category focused on Flexible Business Space with a high quality income profile, a diversified customer base, financial strength and good growth prospects. As a REIT the main strategy of the Group will continue to be the maximisation of total returns. The Group recognises that in a REIT environment there is likely to be an increased shareholder focus on earnings and dividends and acknowledges the general market expectation of higher dividend payments. The company s future dividend policy will be a central area of importance as the board reaches its final conclusion on REIT conversion. Outlook Since the start of 2006, the economic environments in which we operate have been stable. In the UK good progress has been made in securing new customers during a period of improved demand for industrial buildings. Looking to the second half of the year and beyond, a more balanced investment market seems inevitable, which is likely to see an end to yield compression; rental levels are likely to continue to be constrained, although there are some signs of rents edging upwards. Against this background the UK team is well placed to generate and convert opportunities to drive returns. In Continental Europe, we continue to see increased occupier demand and are generating high levels of enquiries in most locations with little need for special incentives to attract new lessees in particular we see signs that the German economy is improving. In the US, although the general economic outlook suggests slower growth, the biotechnology industry in California looks set to continue to expand, fuelling further growth in this specialist real estate market. Across the board, Slough Estates believes it has significant potential for sustained value creation through its focus on customer service, active capital recycling and asset management and through our 2.7 million sq m development programme. Board Change At the end of last year I reported that we were making progress with a search for a leading business person who would become Chairman of your Company. More recently we announced that Mr Nigel Rich had been elected a director with a view to becoming Chairman on 1 October. He brings to the Company a wealth of experience in real estate and more general business, gained from an outstanding career that has embraced directorships with Hongkong Land, Jardine Mathieson, Trafalgar House and Excel. I am naturally sad to be leaving the Company after almost 27 years as a director but I am confident that it is in very good hands and well positioned for the future. Paul Orchard-Lisle, Chairman 02 Slough Estates plc Interim Report 2006

5 Key summary data Income statement Six months Six months ended 30 ended 30 June 2006 June 2005 Total net rental income (1) ( m s) Net interest costs ( m s) (45.3) (50.6) Loss on disposals of assets ( m s) (0.8) (3.0) Revaluation gain ( m s) Profit before taxation ( m s) Adjusted profit before taxation (2) ( m s) Basic earnings per share (p) Adjusted diluted earnings per share (3) (p) Dividend per share (p) Effective tax rate (%) Underlying tax rate (4) (%) Property return (9) (ungeared) Total return (10) (%) Balance sheet June December Total properties, including share of joint ventures ( m s) 5, ,137.8 Net assets excluding minority interests ( m s) 2, ,440.4 Adjusted net assets (5) ( m s) 3, ,089.6 Adjusted diluted net assets per share (6) (p) Group Net debt ( m s) 2, ,092.3 Debt to equity (7) (%) Loan to value (8) (%) Including share of Joint Ventures Net debt 2, ,121.9 Loan to value Including rental income on trading properties and the Group s share of rental income from joint ventures but excluding exceptional surrender premiums received in Profit before tax excluding exceptional gains and losses, property revaluation surpluses and the gains and losses on derivative instruments. Lease surrender premiums which are exceptional by virtue of their size are excluded from adjusted profit before tax. A reconciliation between profit before tax and adjusted profit before tax is provided on page eight. 3 Earnings per share based on adjusted profit before tax, and reflecting the dilutive effects of preference shares and shares held by the ESOP trust properties. 4 Tax charge, excluding deferred tax on valuation surpluses, as a percentage of adjusted profit before tax. 5 Net assets adjusted to add back deferred tax associated with investment properties. 6 NAV per share adjusted to add back deferred tax associated with investment properties and to reflect the dilution caused by preference shares and shares held in the ESOP. 7 Net debt as a percentage of shareholders funds adjusted to add back deferred tax associated with investment properties and treating preference shares as equity. 8 Net debt as a percentage of the total property portfolio excluding joint ventures 9 Increase in the capital value of properties plus rental income 10 NAV growth plus dividends paid in the period. Investment portfolio summary UK Total property Reversionary/ Gross rental Valuation at Valuation Valuation return (over-renting) income H June 2006 surplus surplus (ungeared) including vacant m m m % % Initial yield space % Slough 34 1, South London & The South North London & The East Midlands & The North West London Thames Valley & The West Total 88 3, Industrial 71 2, Office Retail Total 88 3, Continental Europe Industrial Office (2.7) Retail Total North America Office/R&D Total Group total excluding Land/WIP (2) 127 4, Land/WIP (2) UK 372 (2) (0.6) Continental Europe 33 (1) (2.9) North America Total Land/WIP (2) Group total (1) 127 5, Excluding joint ventures 2 Buildings under construction are carried at cost, land is held at valuation Slough Estates plc Interim Report

6 Key summary data continued Income quality and lease expiries Contracted rents at 30 June 31 December m m m m m m m Ignoring break clauses Assuming all breaks exercised The weighted average lease expiry excluding breaks is 11.9 years, 10.1 years including breaks (calculated by value of annual contracted rent per year and including pre-let developments and pre-contracted rents). Rental potential Reversion to ERV ERV of on occupied vacant properties properties m m UK Industrial Offices (4.2) 5.4 Retail USA (6.0) 8.4 Europe (0.2) 3.7 Total (2.2) 37.5 Analysis of lettings and space returned By Area 000 s sq m By Rent (1) pa m Six months to Six months to Lettings Space Lettings Space Returned Returned UK Lettings of new developments Existing vacant Licenses Total UK Continental Europe North America Total SEI Rent passing Vacancy Analysis Headline % % UK Continental Europe North America Total Calculation of Underlying UK Vacancy Recent acquisitions (Heywood, Woodside, Land Securities swap, Treforest) Completed development sites (less than 18 months) Underlying UK Vacancy Development pipeline summary Work in Progress Space to Land Current Future Estimated be built (2) area (2) book value (3) spend (3) total spend (3)(5) ERV (3)(4) 000 s sq m hectares m m m m UK Continental Europe North America Total Land Bank Future Development UK , Continental Europe 1, North America Total 2, ,612 2, Group total 2, ,911 2, Including joint ventures on a 100% basis 3 Including the Group s share of joint ventures 4 Rent of 10 million is currently passing on properties to be redeveloped and which are included within the development pipeline 5 Estimated total spend comprises current book value plus all future expenditure including capitalised interest 04 Slough Estates plc Interim Report 2006

7 Operating review Business segments by geography UK There continues to be strong competition from investors seeking to acquire all types of property with much of the 6.7 per cent valuation surplus seen in the UK due to yield compression, nonetheless rental values have risen by about 1 per cent, in the first six months of Good progress has been made in securing new customers during a period of improved demand for industrial buildings. 98,490 sq m of new and existing space has been let, producing 6.6 million of rent per annum or 2 million incremental rent income net of rent lost for space returned. Lettings delivered have driven underlying vacancy levels further down from 8.1 per cent to 7.4 per cent. The underlying vacancy excludes developments completed within the last eighteen months and major estates acquired within the last two years Heywood and Woodside, the Land Securities Swap and most recently Treforest vacancies related to all these projects represent a significant business opportunity. 87 per cent of the vacant buildings acquired under the Land Securities swap in 2004 have now either been let, sold or are under active negotiation. New tenancies signed during the period included deals with Jacobs (offices at Winnersh), Bibby Distribution (warehouse at Heywood), Agilent Technologies (warehouse at Winnersh) and The Modular Heating Group (warehouse at Basildon). Over a third of the lettings were to existing customers underlining the value created from building long term relationships. The UK team also secured pre-lettings on 10,805 sq m of space which will produce a further 1.5 million pa of income. A major part of this group of pre-lettings was the purpose built 7,222 sq m data centre for IX Europe on the Slough Trading Estate. During the first half of 2006, 87 rent reviews were agreed at a total rent of 11.2 million ( 78.3 per sq m) this is in line with ERV and produced an uplift of 0.5 million per annum compared with passing rents. Slough Heat & Power again achieved an operating profit with the Group recording a positive 0.5 million net gain from utilities and gas, compared to a 1.0 million loss for the first half of Capital recycling has continued apace, with 37 million of property sold during the first half of the year and a further 110 million of sales agreed during July. We acquired the Treforest Industrial Estate (94,380 sq m of business space) off market for 63 million; in the two months since acquisition it has already delivered 4.5 per cent capital growth (net of costs), improved tenant service and continues to adopt a more pro-active approach to lettings. Indeed across all of the UK portfolio we have been rolling out new improved tenant service initiatives, including new business clubs for tenants, flexible leasing, improved signage and amenities generally, and a further tightening of security on our sites. As is evident from the stream of announcements detailed in the business highlights section, the HelioSlough joint venture has been very active in its big box distribution area of expertise and this joint venture is now profitable for SEI. Looking ahead it is predicted that challenging conditions for occupiers will continue to constrain rental levels and a more balanced investment market seems inevitable. Against this background the UK team is well placed to generate and convert opportunities to drive returns. The UK Property Portfolio including IPD comparisons 39 basis points of further yield compression alongside good progress with the development programme, significant asset management and capital recycling delivered a valuation surplus of 6.7 per cent. 1 per cent of the 6.7 per cent of capital growth in the portfolio was attributable to rental value growth in the region of 1 per cent since December. The industrial core of SEI s portfolio (90 per cent of the UK investment portfolio by space) significantly outperformed the IPD index 7.0 per cent for Slough Estates compared to 6.2 per cent for the index. Generally based outside of the strong London market, Slough Estates offices (6 per cent of the portfolio by space) underperformed the index (5.7 per cent compared to 9.0 per cent). Slough Estates small retail warehouse business strongly outperformed IPD 8.9 per cent for Slough Estates compared to 6.4 per cent for the index. Continental Europe An excellent first half performance, with the acquisitions of the end of 2005 and in early 2006 now being successfully integrated with existing operations. We are pleased to have retained and strengthened the teams within the businesses we acquired. They are already making a significant contribution, having swiftly secured some very strong letting results. Overall lettings of over 183,000 sq m were delivered (including pre-lets). These lettings were in part related to the acquisitions but were also driven by marketing successes and from some modest improvements in the economies we operate in. Rental conditions however as yet remain unchanged that is relatively flat in our major markets. With the level of takebacks stable, and with increasing demand from occupiers, vacancy levels have decreased significantly from 11.0 per cent to 9.3 per cent in the investment property portfolio. In addition to strong new lettings across the board, our French team in particular also secured excellent levels of renewals. In addition to the completion of the acquisitions of assets from Grontmij in Central Europe and from KarstadtQuelle in Germany, we announced the acquisition of a 30 hectare logistics portfolio from ThyssenKrupp Group and, although yields have generally compressed further, we continue to see attractive opportunities. In terms of the outlook, although rental levels remain generally unchanged in our markets, we continue to see increased occupier demand and are generating high levels of enquiries in most locations. North America In the first half of 2006 SEUSA negotiated a major letting to a large biotech company at Britannia Oyster Point II in South San Francisco 7,500 sq m for an existing vacant facility and a 23,000 sq m pre-let securing the development of a $170 million facility. This deal builds on an excellent relationship with this tenant relationships such as this have been the bedrock of the SEUSA biotech franchise once this project is completed this tenant will be leasing over 67,000 sq m from SEI in California. Slough Estates plc Interim Report

8 Operating review A total of 50,000 sq m of lettings (excluding pre-lettings) has driven vacancy levels down from 20 per cent to 17 per cent, but still leaving a significant rental growth opportunity. Included in the 50,000 sq m, Genentech took delivery of another 21,000 sq m of space further consolidating another key SEUSA client relationship with a further 31,000 sq m of space to complete construction in the second half of this year. 6,000 sq m of lettings to OncoMed and Cordis at Shoreline & Seaport (acquired last year) is strategically significant as it affirms SEUSA s move into this new location in the San Francisco Peninsula. The US economic outlook suggests slower overall growth however the market dynamics of our biotechnology real estate industry in California position it well to continue to expand, creating further opportunities for SEUSA to fill existing vacant space and to replenish its development pipeline. Activity levels in the Bay Area have been very healthy over the past nine months and relatively sluggish in San Diego County. Group Development Programme The overall development pipeline has been increased again and now stands at 2.7 million sq m. We completed 33,000 sq m of the development programme during the first half of the year of which 67 per cent has been either pre-let or sold. At the end of the period 279,000 sq m was under construction of which 76 per cent has been either pre-let or sold. In the twelve months following the end of June 2006 over 650,000 sq m of space is scheduled to start construction. The current development pipeline currently equates to an estimated total future development expenditure of 1.9 billion, with 154 million spent in the first half of 2006, 232 million expected to be spent in the second half of 2006 and a total of 445 million planned for 2007 of which 147 million has already been committed. When fully built out, the current development pipeline would generate 215 million of incremental rental income after allowing for current passing rent of 10 million on properties which are to be redeveloped. Of this amount, 37 million has already been contracted in the form of pre-lets. 46 million of rental income relates to properties which are currently designated as trading stock. Group Business Highlights in 2006 Acquisition of a development company in Central Europe Announced the completion of the 19.1 million acquisition of GREI (Grontmij Real Estate International), the Central European property development operations of Grontmij a leading European engineering firm. The acquisition gave SEI an immediate presence in Poland, the Czech Republic and Hungary with development teams already in place and sites ready to develop. Disposal of business space at Centennial Park, Elstree Disposed of four office buildings totalling 6,285 sq m at Centennial Business Park in Elstree for million. This transaction was part of the active acquisition and disposal programme in line with Slough s strategy of trading stock and recycling capital across the UK portfolio. Remaining land on the site represents an excellent development opportunity within the M25. Joint venture to develop major office scheme in Paris Announced a 50:50 joint venture agreement with Capital & Continental to develop the 26,500 sq m Portes de France office scheme in St Denis, overlooking the Stade de France, Paris. The highly specified scheme will provide two interconnected office buildings either side of the A86 motorway million disposal in Germany SEI announced the disposal of a light industrial property in Hamburg to Halverton for a gross disposal price of 12.3 million, resulting in a profit of 2.5 million. The property part of the Group s trading portfolio in Germany provides a total of 12,368 sq m of light industrial accommodation and is let to 19 tenants. Joint venture acquisition in Belgium In a 50:50 joint venture with KBC, SEI announced the acquisition of two light industrial properties in the Brussels periphery with strong medium and longterm redevelopment potential for a gross purchase price of 5.25 million, reflecting a net initial yield of 8.4 per cent. The properties provide a total of 5,640sq m of office and light industrial accommodation and are let to nine tenants. They currently produce rental income of 441,000 per annum. HelioSlough disposal for 10.2 million HelioSlough (the joint venture between Slough Estates plc and Helios Properties plc) let the final unit at its Traxpark development in Doncaster, South Yorkshire and sold its Traxpark investment to a client of Morley Fund Management for 10.2 million, reflecting a net initial yield of 6 per cent. The 16 hectare Traxpark development comprises 58,153 sq m. HelioSlough 17.7 million acquisition of Lymedale Cross Business Park HelioSlough purchased Lymedale Cross Business Park, Stoke, Staffordshire for 17.7 million. The hectare site comprises 46,450 sq m of predominantly industrial space, producing an annual rental income of over 840,000. Detailed planning consent has been granted for a further 49,887 sq m. The deal also enables an immediate pre-let of 9,290 sq m of new and existing warehouse/office space to Spode Porcelain & Fine China Company, adding circa 450,000 to the annual rental income. This acquisition therefore offers existing income along with immediate development opportunities. HelioSlough acquisition HelioSlough secured property on a former BAe Systems site in Chorley, Lancashire for a new 120,770 sq m industrial/distribution hub to serve the North West. HelioSlough has made an initial purchase of 5.4 hectares for 3.3 million. HelioSlough has contracted on further land which can be drawn down, up to a total of 30 hectares. Outline planning consent already exists for the development and HelioSlough plans to start work on two buildings of 18,580 sq m and 9,290 sq m in the summer. The site is strategically located, close to the M6 and the North West s major conurbations, giving the development the potential to be one of the most significant distribution hubs in the region. SEI announced an agreement to acquire a 30 hectare logistics portfolio from ThyssenKrupp SEI agreed the acquisition of a 30 hectare logistics site from the ThyssenKrupp Group, at a phased purchase price of million. This prime site is to the west of Düsseldorf, in close proximity to the airport, and has direct access to the A44 motorway. The site will also be connected to the railway network. It is one of the very few viable sites for logistics development close to the city of Düsseldorf. SEI will develop 06 Slough Estates plc Interim Report 2006

9 117,000 sq m of light industrial and logistics accommodation in six buildings in a low density environmentally-sensitive scheme. The delivery of the first phase is anticipated for The transaction increased SEI s Continental European logistics network and enhanced SEI s ability to offer international solutions to pan European logisticians million disposals at Cambridge Research Park Slough Estates completed the sale of three buildings at its Cambridge Research Park site to Zurich Assurance, for 25.9 million. The three office buildings totalled 11,500 sq m and were within a prime business park setting, providing rental income of 1.9 million per annum. Slough Estates retained the remaining 7,461 sq m of business space as well as nearly 11 hectares of development land. This represents a major development opportunity within the Cambridgeshire area and there is already interest from a number of parties. The attractiveness of Cambridge Research Park was improved with the introduction of the easi-lease managed workspace concept a range of small, fully fitted out office suites available on flexible terms. This transaction was another example of the active acquisition and disposal capital recycling programme. 63 million acquisition of Treforest Industrial Estate Slough Estates completed the off-market purchase of the holding entity of the Treforest Industrial Estate in Cardiff, Wales for 63 million. This was Slough Estates first entry into the Welsh market and was in line with its strategy to acquire large business parks in strategic locations with good quality revenue streams and strong development potential. Following this acquisition Slough Estates owns six of the largest industrial estates in the UK; the others being the Slough Trading Estate, Heywood Distribution Park in Manchester, Woodside in Dunstable, Winnersh near Reading and Kings Norton, near Birmingham. Treforest Estate comprises 53 hectares with four hectares of development land and is located adjacent to the A470 Cardiff to Merthyr Tydfil dual carriageway just north of Cardiff. It has been an established trading estate since 1936 and is just north of junction 32 on the M4. With 94,000 sq m of business space, the acquisition provides a solid foundation for growth in what is a strong market with excellent prospects over the coming years. Outsourcing of UK construction activities Outsourced the Company s UK construction activities, reflecting best practice in the property sector. Slough Estates construction activities in Continental Europe and in the USA were already outsourced. This marked a further step in focusing the Company on its core skills on those areas where we are best positioned to add value maintaining the pace of change and further increasing the competitiveness of Slough Estates business. Real Estate Investment Trusts (REITs) The Group welcomes the introduction of REITs in the UK. Whilst there are still some regulations to be finalised, we believe the legislative framework contained in the 2006 Finance Act represents a very workable and sensible package of measures which reflect well on the collaborative approach taken both by the property industry and the government. Slough Estates is well positioned for possible REIT conversion and we currently expect to elect for REIT status with effect from 1 January 2007, subject to publication of the final regulations and an extraordinary general meeting in the fourth quarter of the year. Both the Company and the Group satisfy the various conditions for entry and we believe that ongoing compliance with the requirements of the REIT regime will be achievable for Slough Estates. Based upon 30 June 2006 values, the 2 per cent conversion charge would amount to approximately 78 million. Against this, there are clear corporate benefits to Slough Estates from REIT conversion which include: n The elimination of the contingent capital gains tax liability on the 3.9 billion UK investment portfolio; this will provide more flexibility to undertake asset disposals and support the Group s approach to proactively recycle capital. This contingent deferred tax liability amounted to 460 million at 30 June 2006 n All UK property rental income, less related expenses, will become exempt from corporation tax n Development gains on UK investment property will become tax exempt, subject to each property being held for at least three years following completion n The facilitation of an efficient structuring of Slough Estates international activities Whilst each shareholder s position will differ according to their own tax situation, we also believe that most types of shareholder will benefit from Slough Estates conversion, taking into account the corporation tax saved and the effects of the withholding tax on the property income distribution. Although there appear to be significant benefits from REIT conversion, to both the Group and its shareholders, it is important to note that such an election, if made, would be primarily a tax matter. The legal form and structure of the Group will not necessarily change upon conversion to REIT status and the main strategy of the Group will continue to be the maximisation of total returns from the acquisition, development, management and sale of flexible business space. As a REIT the main strategy of the Group will continue to be the maximisation of total returns. The Group recognises that in a REIT environment there is likely to be an increased shareholder focus on earnings and dividends and acknowledges the general market expectation of higher dividend payments. The company s future dividend policy will be a central area of importance as the board reaches its final conclusion on REIT conversion. We believe that Slough Estates will represent an attractive REIT investment because: n We are strongly concentrated on a specific asset category (flexible business space) in locations where we have deep expertise and knowledge n We are focused on our customers, we have an excellent contracted income profile (rent roll of 289 million with 11.9 years weighted average lease expiry) and a diversified and broad spread of customers (over 1,700) n We manage assets actively to add value (strong letting capability, redevelopment, conversion to higher value uses) and we sell assets where there is little scope to add further value n We have a major development programme driving growth in all three of our geographies n We are financially strong and we expect to operate with a tax efficient structure Slough Estates plc Interim Report

10 Financial review David Sleath Group Finance Director Income statement Profit before tax Profit before tax for the six months to 30 June 2006 was million, an increase of 184 per cent over the first half of 2005, driven mainly by a strong revaluation surplus. Adjusted profit before tax was 68.1 million, an increase of 22 per cent. This improvement mainly reflects increased net rental income attributable to our strong letting performance, development completions and from property acquisitions completed in 2005 and Adjusted profit before tax has been arrived at by following the European Public Real Estates Association s (EPRA) Best Practices Policy Recommendations (January 2006) and by making other adjustments to exclude exceptional gains and losses not related to the Group s underlying property activities, as follows: Six months ended Six months ended 30 June June 2005 Adjusted Total Adjusted Total profit EPRA Exceptional profit profit EPRA Exceptional profit before tax adjustments items before tax before tax adjustments items before tax m m m m m m m m Net rental income from investment properties Net income from trading properties Net gain/(loss) from utilities and gas (1.0) (1.0) Other investment income Administration expenses (10.7) (10.7) (10.0) (10.0) Loss on sale of investment properties (0.8) (0.8) (3.0) (3.0) Net valuation gains Operating income Net finance costs (50.9) 5.6 (45.3) (49.3) (1.3) (125.6) (176.2) Share of profit of joint ventures Profit before tax (72.0) Slough Estates plc Interim Report 2006

11 Net rental income, excluding the exceptional surrender premium received in 2005, increased by 15.9 per cent from million to million, comprised as follows. Six months ended 30 June m m Rental income from investment properties Less exceptional surrender premiums Property operating costs less recharges to tenants and other property income (14.5) (14.5) Net rental income from investment properties Net rental income from trading properties Share of net rental income of joint ventures Underlying net rental income The 2005 exceptional surrender premium of 36.6 million was received from Pfizer to buy-out its obligations in respect of the Sugen campus in South San Francisco. The movement in underlying net rental income is analysed in the table below. m Net rental income first half of Acquisitions 18.2 New developments 4.3 Other new lettings, rent reviews & other 6.1 Space returned (5.0) Disposals (6.4) Net rental income first half of Net finance costs for the period, although broadly unchanged with the first half of 2005, benefited by approximately 4 million as a result of the bond refinancing undertaken in June 2005 and 2.5 million due to the conversion of all the Group s outstanding preference shares in the first half of Exceptional items and valuation gains and losses Under IFRS, revaluation gains on investment properties are included within the Income Statement and the equivalent items in respect of our joint venture companies are included within the group s share of results of such entities. As recommended by EPRA, such valuation gains have been excluded from adjusted profits before tax. Similarly, the 0.8 million (2005: 3.0 million) losses on the sale of investment properties are excluded from adjusted earnings, as is the 2005 surplus on the disposal of the Group s residential leisure development at Quail West, Florida. Whilst the latter property was classified as a trading activity, it was not part of the core business and, accordingly, the profit on disposal of that asset is excluded from our underlying performance measures. Taxation The tax charge for the year can be analysed as follows: Period ended 30 June m % m % Underlying tax charge on adjusted profit before tax: current tax deferred tax Tax relating to exceptional items and valuation gains/losses Less amounts included above in respect of joint ventures (0.5) 10 Total Group tax charge The underlying tax charge for the period as a percentage of adjusted profit before tax was 20 per cent (2005: 23 per cent), with the first half of 2006 benefiting from increased capital allowances as compared to the previous period. The tax relating to exceptional and valuation gain/losses was 30 per cent (2005: 53 per cent). The high rate in 2005 was primarily due to exceptional gains on disposals arising in the US, which attracted substantial tax costs. Dividends The key dates for dividend payments are as follows: ex-dividend date 6 September 2006 record date 8 September 2006 payment date 6 October 2006 Balance sheet Net assets per share Diluted adjusted net assets per share at 30 June 2006, calculated in accordance with the EPRA guidelines, were pence, an increase of 7.4 per cent over the previous year end. The increase is analysed in the following table: Pence m per share Adjusted diluted equity attributable to shareholders 31 December , Adjusted profit after tax Property valuation gains (including joint ventures) Currency translation differences (34.7) (7.7) Ordinary dividends paid (51.6) (11.0) Actuarial gain on pension scheme, net of tax Fair value of derivatives Increase in value of available for sale investments Loss on sale of investment properties (0.8) (0.2) Other items (12.6) (2.7) Adjusted diluted equity attributable to shareholders 30 June , Slough Estates plc Interim Report

12 Financial review continued Property portfolio The value of the Group s property portfolio increased by million (8 per cent) during the first six months of 2006 to 5,559.6 million, analysed as follows: June December m m Investment properties completed properties 4, ,304.7 under development reclassified as assets held for sale Development properties Investment and development properties 5, ,876.4 Trading properties completed properties properties under development Share of properties held within joint ventures investment properties trading properties Total property portfolio, including share of joint ventures 5, ,137.8 This increase in the value of the portfolio was comprised of: m Additions Disposals (48.6) Valuation surpluses included in Income Statement included in SORIE* 5.2 joint ventures 2.6 Currency translation differences (67.7) Change in total portfolio including assets held for sale *Statement of Recognised Income and Expense Cash flow A summary of the cash flow for the period is as follows: Six months ended 30 June m m Cash flow from operations Finance costs (net) (59.9) (58.5) Dividends received from joint ventures Tax paid (net) (6.6) (49.8) Additional pension scheme contributions (1.0) (15.0) Other 1.3 (3.2) Free cash flow Capital expenditure (191.3) (257.0) Property sales (including joint ventures) Cash cost of bond exchange (40.8) Ordinary dividends (51.6) (41.6) Other items 7.8 (3.6) Net funds flow (136.2) (294.7) Investments in term deposits Net increase in borrowings Net cash outflow (63.5) (42.9) Opening cash and cash equivalents Exchange rate changes (0.3) (0.1) Closing cash and cash equivalents Cash flow from operations for the first half of 2006 were 81.8 million, a decrease of 47 per cent compared to the first half of The reduction was mainly as a result of the exceptional surrender premium and significant trading property sales proceeds received in the first half of Dividends from joint ventures amounted to 31.6 million, 28.8 million higher than 2005 due to the refinancing of the Group s joint venture with Tesco, Shopping Centres Limited, which facilitated the payment of a dividend. Tax paid of 6.6 million was much lower than in 2005 ( 49.8 million) as a result of one off payments in the US in 2005 for profits on the 2004 sale of the Pfizer campus, the Quail West profit and the Sugen surrender premium. In 2005, the Company agreed to make a one-off UK pension contribution of 15 million and to accelerate the elimination of the remaining UK pension scheme deficit. 10 Slough Estates plc Interim Report 2006

13 Capital expenditure of million was 65.7 million lower than 2005 mainly due to higher acquisition expenditure in Development expenditure for the period, including expenditure on trading properties, amounted to 154 million and this is expected to increase to approximately 386 million for the full year. Property sales in the period generated proceeds of 51.7 million. After the payment of dividends, there was a net funds outflow of million (2005: million). Allowing for movements in borrowings, the net cash outflow for the period was 63.5 million (2005: of 42.9 million). Financing At 30 June 2006, the Group s borrowings totalled 2,185.2 million. Cash balances totalled million resulting in reported net debt of 2,079.8 million (2005: 2,092.3 million). The weighted average maturity of the debt portfolio was 11.4 years. Unsecured borrowings represent 96 per cent of gross debt at the half year end. Secured debt totalled 77.8 million being certain historical mortgage debt domiciled in the Group s overseas operations. 1,626.2 million of debt is domiciled in the UK, is unsecured and is issued by the Parent Company without any supporting up-stream guarantees million of debt is unsecured and is issued by subsidiary companies located overseas. On 22 March the Company, for the first time, had the opportunity to issue a redemption notice in respect of the 8.25 pence convertible redeemable preference shares Such a notice was indeed served and, as anticipated, virtually all holders instead exercised their conversion options at new ordinary shares for each 100 preference shares. After enforcing conversion on those holders that did not specifically request redemption 99.9 per cent of the preference shares were converted to 47,053,908 new 25 pence ordinary shares. As a result of this conversion Group Net Debt was reduced by million compared to year end Reported financial gearing was 76 per cent (2005: 86 per cent) or 61 per cent (2005: 62 per cent) on an adjusted basis after adding back deferred tax of million. The loan to value ratio (net debt divided by property assets) was 38 per cent (2005: 42 per cent). Interest cover based upon profit before interest and tax and adjusted net finance costs was 2.2 times (2005: 2.2 times), or 1.94 times (2005: 2.0 times) based upon recurring income and allowing for the inclusion of capitalised interest. The market value of borrowings at the end of December 2005 was 54.3 million higher than the book value, equivalent, after tax relief, to a reduction in net asset value of 12 pence per share or 1.6 per cent. Funds availability at 30 June totalled million, comprised of million of cash deposits and million of undrawn bank facilitates. Only 25 million of this total is uncommitted overdraft lines with the balance of undrawn facilities being fully committed and with million remaining available to 2010/11. In April a new 200 million 5 year committed revolving credit facility was closed on behalf of Slough Commercial Properties GmbH to finance the acquisition cost of the KarstadtQuelle portfolio in Germany and to provide some additional finance for development purposes. In July a new 100 million five year committed revolving credit facility was closed on behalf of Slough BV and its subsidiaries to provide finance for the Group s new operations in Central Europe following the takeover of Grontmij Real Estate International at the end of Interest rate exposure As at 30 June per cent (2005: 87 per cent) of the debt portfolio attracted a fixed or capped rate of interest at a weighted average rate of 6.1 per cent (2005: 6.2 per cent). Much of this debt is in the form of fixed rate debt issues raised through Sterling Eurobonds and US dollar private placements. Such fixed rate debt issues are held in the balance sheet at amortised cost. Interest rate swaps, caps, collars and forward rate agreements are also used to convert variable rate bank debt to fixed rate. The 13 per cent of debt remaining at a variable rate of interest brought the overall weighted average cost of debt down to 5.8 per cent (2005: 5.8 per cent). Foreign currency translation exposure The Group s main currency exposure is the translation risk associated with converting net currency assets back into sterling in the Group consolidated accounts at each balance sheet date. At 30 June 2006, 519 million or 37 per cent of foreign currency denominated net assets were exposed to currency movements. In July 2006, $500 million were sold at $1.85 to increase the level of US dollar denominated liabilities. Following that transaction, the level of aggregate exposure to exchange rates was reduced to 248 million. Slough Estates plc Interim Report

14 Independent review report to Slough Estates plc Introduction We have been instructed by the Company to review the financial information for the six months ended 30 June 2006 which comprises the consolidated interim balance sheet as at 30 June 2006 and the related consolidated interim statements of income, cash flows and changes in shareholders equity for the six months then ended and related notes. We have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out in the note on page 17. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and, based thereon, assessing whether the disclosed accounting policies have been applied. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit and therefore provides a lower level of assurance. Accordingly we do not express an audit opinion on the financial information. This report, including the conclusion, has been prepared for and only for the Company for the purpose of the Listing Rules of the Financial Services Authority and for no other purpose. We do not, in producing this report, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June PricewaterhouseCoopers LLP Chartered Accountants Reading 22 August 2006 Notes: (a) The maintenance and integrity of the Sough Estates plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the interim report since it was initially presented on the website. (b) Legislation in the United Kingdom governing the preparation and dissemination of financial information may differ from legislation in other jurisdictions. 12 Slough Estates plc Interim Report 2006