Slough Estates plc Annual Report 2003 A clear vision Our vision Our vision is to be highly regarded within the sector which means we must strive towards a position where investors understand us and are keen to invest, customers recommend us and expand with us, financiers, commentators and governments prefer us, employees are proud to work for the company and are actually encouraged to develop their skill set, competitors respect us and suppliers want to work with us. Contents 01 Highlights of the year Directors’ report and accounts 02 Slough Estates at a glance 46 Directors’ report 04 Chairman’s statement 50 Directors’ remuneration report 08 Market overview 58 Statement of the directors’ responsibilities 10 Chief Executive’s review 59 Independent Auditors’ Report 14 Case studies 60 The Combined Code and Slough Estates plc’s 16 240-252 Bath Road Statement of Adherence 18 Emerald Park, Bristol East 62 Accounting policies 20 North Feltham Trading Estate 64 Group profit and loss account 22 United States 65 Statement of Group total recognised 24 Pegasus Park, Belgium gains and losses 25 Kapellen, Germany 65 Notes of Group historical cost profits 26 UK property portfolio and losses 28 Overseas property portfolio 65 Reconciliation of movement in Group 30 Development programme shareholders’ funds 32 Financial review 66 Balance sheets 36 Corporate Social Responsibility and 67 Group cash flow statement principles of Group Environmental Policy 68 Notes to the financial statements 40 Corporate Governance Guidelines 88 Five year summary 42 Directors’ biographies 89 Group information 44 Shareholder information 89 Glossary of terms 89 Directors and Officers 01 Slough Estates Annual Report 2003 Highlights of the year +37% 15.0p 28.8 ha New leases for existing space The proposed dividend of During the year the Group increased by 37 per cent. 15.0 pence per share reflects has acquired 28.8 hectares of the Board's confidence in the sites for future development. future, an increase of 7.1% on 2002. Financial summary 2003 2002 % change Core property income £135.7m £140.3m (3.3) Profit before tax and exceptional items £140.1m £143.5m (2.4) Profit before tax after exceptional items £103.8m £143.4m (27.6) Adjusted basic earnings per share▼ 27.6p 28.8p (4.2) Basic earnings per share 19.6p 20.9p (6.2) Recommended final dividend 9.2p 8.55p 7.6 Total dividend for year 15.0p 14.0p 7.1 Diluted net assets per share before FRS 19 deferred tax 505p 519p (2.7) Basic net assets per share 489p 506p (3.4) Core property income comprises investment and joint venture property income less administration and net interest costs. ▼Adjusted to exclude exceptional items and FRS 19 deferred tax. 02 Slough Estates Annual Report 2003 Slough Estates at a glance We are committed to providing flexible business space and retail accommodation to clients across a broad range of business sectors Slough Estates is a property Slough Estates’ business space investments are The Company was founded in 1920 at Slough investment and development mainly within business parks in what have and today its largest business park, the Slough company which is domiciled in been identified to be the locations with the Trading Estate, still remains its largest single best long-term economic prospects. Such investment representing 31 per cent of the the UK and has a listing on the centres have large well educated populations, portfolio. The Slough Trading Estate is a unique London Stock Exchange. Slough a skilled workforce, good infrastructure and the business park of 500 acres in single ownership, Estates develops and invests in capital base to ensure the long-term prosperity close to London’s Heathrow airport and with property in prime business centres for the region. Slough Estates has selected the unrivalled communications by air, road or rail. Thames Valley and Cambridge in the UK, in The Estate is home to some 400 tenants in Western Europe and North Continental Europe, greater Brussels and Paris, covering almost every sector. Such a large America with over 80 per cent the Ruhr and Frankfurt in Germany, and in estate brings continual redevelopment of its assets being invested in California, South San Francisco and San Diego. opportunities and 24 per cent of the Estate edge of town flexible business has been built within the last 10 years. In total the Group has some 1,700 customers space and 16 per cent in six retail which bring an unrivalled diversification of Historically Slough Estates has made its best shopping centres in the UK. risk, and the top twenty customers account returns from development and therefore the for only 31 per cent of total annualised rent. Company continues to hold a substantial land Rental income from this wide customer bank of 147 million hectares, which will base is the main source of income for the cost approximately £1 billion to build out Group and currently brings an annualised over a 5-10 year period. This land will income of £246 million per annum and be developed when market conditions are on average there is a weighted average favourable. The main land bank is located at unexpired lease term, assuming that breaks Farnborough and Cambridge near London, are exercised at the first opportunity, of at Pegasus Park near Brussels and in South 9.4 years. This ensures excellent security San Francisco. of income for the Group for many years. The Group is financed conservatively in order to reduce long-term financing risks with a long-term average debt profile to maturity of 10.8 years at an average interest cost of 6.68 per cent so providing certainty of finance. Further some 85 per cent of the debt has fixed rates of interest so protecting the company against any upward movements in interest rates. 03 Slough Estates Annual Report 2003 Total Dividend for Year Property Investment Income 16 240 14 15.0p 14.0p 220 12 13.1p 12.1p 200 10 11.2p 180 8 160 6 4 140 2 120 0 100 99 00 01 02 03 99 00 01 02 03 Investment Portfolio Investment Portfolio By value, by location By value, by sector location % sector % ■ UK 76 ■ Industrial 52 ■ Europe 7 ■ Office 16 ■ North America 17 ■ R&D 16 ■ Retail 16 04 Slough Estates Annual Report 2003 Chairman’s statement 05 Slough Estates Annual Report 2003 Your Board is confident that the company is well placed to meet what are expected to be better market conditions in the next few years and believes that the long-term outlook for property remains good 2003 Results The 2.4 per cent fall in profits before tax to £140.1 million The results reflect a robust performance for the year (excluding exceptional items) reflected this slowdown across the Group’s portfolio in what have been in development by the Group in the previous 18 months challenging market conditions. At both the preliminary and was also mirrored by the fall of diluted net asset results last March and the interim results in August we value before FRS19 deferred tax to 505 pence per share indicated that 2003 would be a slow year in terms of reflecting the valuers’, current view of the market. demand and therefore we would continue to hold back Ian Coull discusses these issues in his review on pages 10 to on new development. In these markets we can take a 13 but it is worth pointing to the Board’s recommendation great deal of encouragement from the resilience of our to increase the dividend by 7.1 per cent which reflects its core property income as our strategic bias towards underlying confidence in the prospects for the business. flexible business space has protected us from the worst of the downturn and in recent months there has been The Group has a 147 hectare development land bank an encouraging improvement in occupier enquiries. and conservative gearing of 64 per cent which gives us a solid platform for continuing growth in the future. Strategic review At the interim results in August we reported on the completion of a strategic review of the business, undertaken by the new Chief Executive Ian Coull, which has been approved by the Board. This review concluded that our focus will be on flexible business space, which today accounts for over 80 per cent of our property portfolio, as these well-located blocks of property offer the greatest opportunity for superior returns over time. Our intention will be to increase the Group’s exposure to modern multi-use business parks, maximising returns for each location by providing the most appropriate mix of buildings appropriate for a wide range of customer demand. In terms of geographical spread, we concluded that the opportunities in selected markets outside the UK remain as good or better and that the Group will continue to invest in these Western European and North American business centres on the basis of investing in the locations that offer the most attractive returns for new money. The review also confirmed the value of the small portfolio of retail shopping centres in the UK which will continue to have a limited place in the portfolio. It is also the intention of the Group to find over time the most advantageous exit from its non-property investments which make up just three per cent of the assets of the Group. Chief Executive’s review Ian Coull reports more fully on the business of the Group in his review of Activities on pages 12 to 13. In his first year, he has focused on reviewing all aspects of the business, 06 Slough Estates Annual Report 2003 Chairman’s statement continued providing vision for the future and on streamlining the It is against this environment that my colleagues and management of our activities.