BX004_Cover_v1_AW7.qxp:Layout 1 22/4/09 15:46 Page 1 B r i x t o n Head Office p l c 50 Berkeley Street A London W1J 8BX n n Annual Report and Accounts 2008 u a t:+44 (0)20 7399 4500 l R www.brixton.plc.uk e p o r t a n d A c c o u n t s 2 0 0 8 Designed by Black Sun Plc. This report is printed on Revive 50:50 Silk paper. This paper has been independently certified according to the rules of the Forest Stewardship Council (FSC). Printed at St Ives Westerham Press Ltd, ISO14001, FSC certified and CarbonNeutral ® Contents Financial Highlights 2 Chairman’s Statement 4 Chief Executive’s Review 6 Business Review 8 Strategy 8 Portfolio 10 Income security 14 Customers 18 Performance 20 Income Growth 21 Key 2008 Lettings 21 Rental Value Growth 22 Development 22 Vacancies 23 Valuation 24 Financial Review 26 Risk Management 30 Board of Directors 31 Management 32 Directors’ Report 33 Report on Directors’ Remuneration 37 Directors’ Responsibilities 44 Financial Statements 45 Independent Auditors’ Report to the Members of Brixton plc 45 Group Income Statement 46 Group Balance Sheet 47 Group Cash Flow Statement 48 Group Statement of Recognised Income and Expense 49 Notes to the Accounts 50 Independent Auditors’ Report to the Members of Brixton plc 71 Company Balance Sheet 72 Notes to the Company Accounts 73 Ten Year Record 77 Principal Subsidiary Undertakings 78 Shareholder Information 79 Glossary of Terms Advisers 80 An explanation of many of the common terms used in Glossary of Terms this report can be found on the inside back cover. Annual Report and Accounts 2008 1 Financial Highlights Despite the turmoil in the financial and capital markets, Brixton had a good operational performance in 2008. Net rental income +6.8% to £77.4m Like-for-like and excluding empty rates +2.3% Adjusted NAV per share -46.8% to 290p 08 £7 7.4m 08 290p 07 £72.5m 07 545p Investment profit -8.8% to £42.5m Excluding empty rates -0.5% to £46.3m IFRS (loss)/profit before tax (£768.8m) 08 £42.5m 08 (£768.8m) 07 £46.6m 07 £58.2m Adjusted or underlying earnings per share IFRS (loss)/earnings per share (283.0p) -8.7% to 15.7p (Includes revaluation deficit of £673.4m) Excluding empty rates -1.2% to 17.0p 08 (283.0p) 08 15.7p 07 22 .1p 07 17.2p 2 www.brixton.plc.uk Valuation (deficit)/surplus -27.2% -26.4% on IPD basis (cf IPD -26.0%) 1 Total dividend -64.0% to 4.9p Portfolio value £1,799m. Equivalent yield +160bp to 7.0% 08 4.9p 08 -2 7.2% 07 13.6p 07 +0 .7% Overall valuers’ rental growth -0.2% Transactional rental growth +3.2% (cf IPD 0.0%) 1 (cf IPD 0.0%) 1 08 -0.2% 08 +3.2% 07 +5.0% 07 +5 .1% 1 IPD UK Annual Industrial Index Annual Report and Accounts 2008 3 Chairman’s Statement While market conditions remain extremely difficult, we are confident in the resilience of the business and the long term strength of the underlying portfolio. Introduction We hold prime industrial of empty rates of £3.8m. The extreme turmoil in and warehouse property Adjusted earnings per share global financial markets, in strategic locations fell 8.7% to 15.7p, or 1.2% the subsequent reduction in We continue to believe to 17.0p excluding the the availability of credit, and that our portfolio is impact of empty rates. the worsening economic fundamentally attractive, outlook in the UK led to focused on prime strategic The imposition of empty widespread declines in UK locations, able to perform rates in England and Wales commercial property values resiliently in the current could not have happened in 2008. These declines environment and well placed at a worse time for the accelerated in the fourth to benefit from the inevitable business community as quarter at a much greater future recovery in economic operating cash flows are rate than many, including conditions. reduced when cash ourselves, had anticipated. preservation for working It is widely expected that Brixton owns nearly capital is a priority for many there will be further falls 19 million square feet of companies. Empty rates in 2009. industrial and warehouse affects businesses when property in the UK. they are downsizing their Since 2006, the Board has Approximately 72% of the operations as they will not taken various measures portfolio (by value) is located be able to obtain relief for to strengthen the Group’s in the strategic markets of space that they no longer financial position, including Heathrow and Park Royal, occupy under their lease selling non-core secondary where land supply is commitments. At a time properties, restricting constrained and tenants when demand for space new acquisitions to are typically locationally has slowed empty rates prime strategic assets, sensitive. We believe that is an additional burden and curtailing new this market specialisation which is further exacerbated development activity. and geographic focus best when insolvencies occur positions the Group to as the loss of rental income However, the deliver attractive returns from a tenant is then unprecedented speed and to shareholders over the compounded by the extent of recent valuation long term. liability for empty rates. declines presents Brixton with a number of challenges Brixton’s operating Our income continues to regarding the current capital performance was good be well spread. Brixton’s structure, as has been in 2008 top 20 tenants represent reflected in the recent share Brixton demonstrated the 31% of the rent roll and no price performance. The resilience of its underlying single non-government Board is acutely focused on operating business in 2008 tenant accounts for more addressing these challenges generating a net annualised than 2.3% of rental income. and continues to explore its increase in income for the Because of the worsening options to strengthen the year from lettings, lease economic environment, balance sheet and provide renewals and rent reviews of the annualised loss of rent the Group with additional £3.6m, approximately three in 2008 was £4.2m or 4.0% financial flexibility. We will times the net new income of the rent roll, of which half make an announcement generated in 2007 (£1.2m). related to Entertainment as soon as appropriate. Investment or underlying UK Ltd (a subsidiary profit fell £4.1m to £42.5m, of Woolworths). reflecting mainly the impact 4 www.brixton.plc.uk Our vacancy rate (by the formation of new joint Peter replaces Tim Wheeler income) was 17.3% at ventures, renegotiations of who will be leaving Brixton December 2008, or 10.6% if our borrowing agreements, after 24 years, the last nine developments are excluded. as well as a potential of which were as Chief Managing our vacancy rate equity raising. Executive. On behalf of the is a key priority for the Board Board I am delighted to as we focus on maximising In the context of welcome Peter in his new income growth. strengthening the Group’s role and would like to thank balance sheet, and also Tim for his contribution Balance sheet in light of the lack of reform to Brixton. In line with prevailing market to empty rates legislation, conditions, Brixton’s the Board has decided that Outlook and priorities portfolio recorded a it would be prudent to for the next year valuation deficit of 27.2% restrict the 2008 dividend While market conditions in 2008 and 19.2% in the to the 4.9p per share remain extremely difficult, second half of the year. The already paid at the Half Year. we are confident in the wholly owned portfolio is The Board intends to keep resilience of the business now valued at £1,605m, its dividend policy for future and the long term strength while the total portfolio years under review. of the underlying portfolio. (including our share of joint We are focused on meeting ventures) is valued at We have a cohesive team the immediate challenge £1,799m. This means that in place to take Brixton to protect against further our portfolio has now fallen forward valuation falls and 33.4% since the market On 2 March 2009, the strengthen our balance peak in June 2007. As a Board appointed Peter sheet. We also intend result, our adjusted NAV per Dawson as Chief Executive. to drive income growth share fell 46.8% to 290p. Formerly Brixton’s through the effective Investment Director, Peter management of our The Group remains has been with the Group vacancy level. compliant with all covenants since 1997 and served on under its borrowing the Board since 2007. He Finally, I would like to thank agreements. However, given has a detailed knowledge of all our staff for their hard widespread expectations the business and is the right work and commitment of further property value person to lead the Group to the Company. falls, our balance sheet through these challenging covenants of asset cover market conditions and into ratio and gearing are likely the next phase of its to come under pressure. development. He will be supported by a very high Focus on strengthening quality and experienced the balance sheet and executive team including maximising our financial Steven Owen, Deputy Chief Louise Patten flexibility Executive and Steve Lee, Chairman As a consequence, Operations Director. the Board is currently exploring a range of options to address this issue. These options include asset disposals, Annual Report and Accounts 2008 5 Chief Executive’s Review Our focus going forward is to maximise income growth, reduce our indebtedness and improve our financial flexibility to maximise shareholder value.