Workspace Group

Enquiries and lettings
Our brand, in particular our reputation with London’s SMEs, provides the platform for our enquiries. They come from a variety of sources ranging from potential customers visiting one of our properties and talking to our on-site staff through to contacting our in-house lettings team by telephone or registering interest by email via the interactive Workspace website. While the overall demand for new space across London has declined over the last year, with our focused marketing efforts and brand, the demand for space at Workspace properties, as represented by enquiries has increased.

In the two months to May 2010 we have continued to see good levels of demand for space with enquiries averaging 885 per month and lettings 98 per month.

Customers
We have over 4,000 customers from a very diverse range of industry sectors. There has been no discernible change in this mix of customers over the last year.

The nature and location of our properties are well suited to the needs of the creative sector. Customers within this sector include advertising and branding agencies, fashion and design consultancies and music, video and performing arts businesses. This sector is a key contributor to the vibrancy and health of the London economy. Indeed, many of our customers are leaders in their field, on a global not just national basis.

Portfolio performance
The overall occupancy across the portfolio at 31 March 2010 was 81.9% (March 2009: 80.3%) and cash rent roll was £50.7m (March 2009: £50.8m), with the contracted rent roll some £3.2m higher than this. The difference between cash and contracted rent roll relates to lettings where there are stepped rental increases in future years (£2.2m), rent free periods (£0.7m) and rent discounts (£0.3m). Of these amounts 50% is expected to convert to cash rent roll over the next six months.

A more detailed analysis of performance by property category is set out on the following pages.

Like-for-like properties
These are properties which have been held for at least 12 months and have not been subject to a refurbishment programme in the last 24 months. This category comprises 83 properties with a value of £514m as at March 2010 and hence the majority of the portfolio.

Like-for-like	March 2010	December 2009	September 2009	June 2009	March 2009
Occupancy	84.7%	84.1%	83.6%	83.5%	82.9%
Cash rent roll	£38.3m	£37.7m	£37.9m	£39.1m	£40.3m
Average rent per sq. ft.	12.20	12.13	12.19	12.57	12.92

Like-for-like occupancy has continued to improve, now at 84.7% up 1.8 percentage points from the lowest level reached in March 2009. Alongside the improvement in occupancy we are now seeing rental pricing levels stabilise. This, together with the unwinding of lease incentives, has resulted in a 1.6% increase in the cash rent roll in the last quarter of the year.

The trend in occupancy and rent roll at our largest properties in this category are set out below:

	Occupancy		Cash rent roll
	March 2010	March 2009	March 2010	March 2009
Leathermarket, SE1	83%	88%	£2.3m	£2.4m
Enterprise House, SE1	87%	86%	£1.8m	£1.8m
Clerkenwell Workshops, EC1	98%	85%	£1.6m	£1.6m
Southbank House, SE1	88%	80%	£1.4m	£1.4m
Great Guildford Street, SE1	77%	66%	£1.3m	£1.3m
Westbourne Studios, W10	88%	82%	£1.4m	£1.3m
Uplands, E17	85%	72%	£1.2m	£1.3m
Exmouth House, EC1	84%	95%	£1.1m	£1.3m
Poplar Business Park, E14	84%	86%	£1.0m	£1.2m
Other	85%	84%	£25.2m	£26.7m
Total	85%	83%	£38.3m	£40.3m

The top nine properties in this category represent some 34% of the total like-for-like cash rent roll. While the occupancy levels at our properties do fluctuate, the overall level of occupancy at our like-for-like properties has been very stable over the last year. What we have seen across all of our properties is the impact of the reduction in pricing on new lettings which has reduced overall like-for-like cash rent roll by 5%.

The lower level of occupancy at our Great Guildford Street property is due to plans that we have to redevelop the entrance area for this building. In advance of achieving planning approval we are keeping the units that would be impacted by the redevelopment vacant, these units represent some 15% of the floor area. We expect to achieve planning approval by October 2010 at which point we will move this property into the refurbishment category.

In this report we have shown the performance of the former Glebe joint venture portfolio separately. In future these properties will be reported in the appropriate property category with eight included in the like-for-like category. Inclusion of these properties would have reduced like-for-like occupancy at March 2010 to 82.8%.

Refurbished properties
These are properties which have either been refurbished in the last 24 months, are currently undergoing refurbishment or are being let up after acquisition. This category comprises five properties with a value of £85m as at March 2010. We target to achieve an occupancy of 90% within two years of a refurbished building being opened.

	Occupancy		Cash rent roll
Refurbished	March 2010	March 2009	March 2010	March 2009
Kennington Park, SW9	77%	76%	£4.0m	£3.7m
Barley Mow Centre, W4	67%	90%	£1.1m	£1.3m
Other	75%	47%	£0.8m	£0.6m
Total	76%	73%	£5.9m	£5.6m

At Kennington Park the occupancy of the refurbished Canterbury Court building with new lettable space of 102,000 sq. ft. (opened in January 2008) is now at 90%. We are progressing with a number of further intensification and change of use opportunities on this six acre site which will reduce overall occupancy in the short term.

At the Barley Mow Centre a complete refurbishment of the East Wing of this building (which represents around half of the total lettable area of this building) was completed in November 2009. Occupancy of this wing had reached 35% in the four months to March 2010.

Other properties in this category are Q West, TW8 (the second stage of which was acquired for £4m in October 2009), the Wenlock, N1 which opened in October 2008 and E1 Business Centre, E1 which opened in July 2008. We are making good progress at each of these properties.

Held for redevelopment/sale properties
These are properties where we have obtained, or are progressing with planning approval for mixed-use development. At these properties occupancy and rent roll will be adversely impacted by restrictions we place on lease lengths to ensure that we can quickly achieve vacant possession when planning has been received. This category comprises five properties with a value of £17m as at March 2010.

	Occupancy		Cash rent roll
Held for redevelopment/sale	March 2010	March 2009	March 2010	March 2009
Surrey & St Ives House, SE1	49%	52%	–	£0.3m
Other	74%	64%	£0.4m	£0.5m
Total	69%	63%	£0.4m	£0.8m

Contracts have been exchanged for the sale of Surrey and St Ives House for £4.65m subject to planning consent for a hotel. We will achieve vacant possession on this site shortly. Other properties include Greenheath, E2 where we are progressing with a planning application for affordable housing and Enterprise, Hayes, UB3.

Workspace Glebe Portfolio
This comprises 12 estates across London formerly owned by the Workspace Glebe joint venture. Workspace acquired the properties in December 2009 and whilst the management of these properties has been integrated, their performance for this year end is shown separately below. The occupancy and rent roll is analysed below into the property categories in which they will be reported going forward.

Workspace Glebe Portfolio	Occupancy March 2010	Cash rent roll March 2010
Like-for-like properties
Tower Bridge Business Complex, SE16	74%	£2.4m
Riverside, SW18	85%	£0.7m
Parkhall Road Trading Estate, SE21	78%	£0.7m
Other (5 properties)	71%	£1.4m
Total (like-for-like)	75%	£5.2m
Held for redevelopment/sale
Grand Union Centre, W10	74%	£0.5m
Bow Enterprise, E3	74%	£0.4m
Tower Bridge, Block F, SE16		100%
Wandsworth Business Village, SW18	54%	£0.1m
Total (held for redevelopment/sale)	85%	£1.0m
Total	78%	£6.1m

Trading performance at the like-for-like properties has suffered from a lack of investment over the last year whilst the issues around the joint venture ownership were being resolved.

Tower Bridge is a 13 acre site just south of Bermondsey tube station which has a mixture of office, studios and warehouse space. In the medium term we are hopeful of achieving a re-designation of part of this site for mixed use. Block F at Tower Bridge is a 40,000 sq. ft. warehouse where we will obtain vacant possession in September 2010 with the occupier paying no rent in the last year of the lease in return for early vacation from a long lease. We will be looking to re-let this building on a shorter-term basis whilst planning is progressed.

Wandsworth Business Village is a two acre site close to Wandsworth town centre where we have planning approval for a major mixed use scheme comprising some 200 apartments and 80,000 sq. ft. of new commercial space. We have achieved vacant possession on the majority of this site ahead of its planned redevelopment. The site is currently being marketed.

At Grand Union Centre, close to Ladbroke Grove station, we have outline planning permission subject to a section 106 agreement for 145 apartments and 110,000 sq. ft. of new commercial space.

At Bow Enterprise, a 3.5 acre site adjacent to Devons Road DLR station (two stops to the Olympic Park and five stops to Canary Wharf) we will be shortly making a planning application for some 550 apartments and 100,000 sq. ft. of new commercial space.

Acquisition of Workspace Glebe Joint Venture
The acquisition of the former Workspace Glebe joint venture business was completed on 11 December 2009. The purchase was satisfied by a cash payment of £15m from the placing of 101.5m shares at 19p and a revised and restated five year debt facility of £68m provided by Bank of Scotland, with further potential amounts payable over time under a proceeds sharing arrangement. The value of our interest in the joint venture had previously been written down to nil and the acquisition of the other 50% has been treated as a Business Combination under International Accounting Standards.

At acquisition the joint venture properties were valued at £97m with a cash rent roll of £6.1m. The acquisition extinguished a tax indemnity of £5.1m and an interest shortfall guarantee provision of £4.4m, subject to payment of a priority fee of £2.4m. The financial impact of the transaction was immediately enhancing to both earnings and NAV per share. The uplift in NAV per share as a result of the acquisition was 1.5p.

The proceeds sharing arrangement shares the benefit of future disposals between Workspace and the lenders once the debt has been repaid and Workspace has received its priority return. The actual timing of disposals is at Workspace’s discretion.

Valuation
The valuation of our property portfolio has increased by 2.3% over the last year. The increase in the underlying valuation in the last two quarters of the year has now reversed the decline in the first two quarters of the year. In addition, there was a significant one-off benefit from the acquisition of the Workspace Glebe JV portfolio. A summary of all the movements in the property valuation through the year is set out below:

	£m
Portfolio valuation at 31 March 2009	662
Property acquisitions and purchase of former joint venture	87
Property disposals	(55)
Property valuation surplus/(deficit):
– quarter to June 2009	(30)
– quarter to September 2009	(16)
– quarter to December 2009	25
– quarter to March 2010	23
– gain on former Workspace Glebe JV portfolio	14
	16
Other movements including capital expenditure	7
Portfolio valuation at 31 March 2010	717

Property acquisitions comprise the Workspace Glebe JV portfolio business acquired for £83m as detailed above (with the properties valued at £97m at acquisition) and £4m for the second stage of the acquisition of Q West, TW8.

Property disposals in the year are a mixture of 14 investment properties and three added value sites where we have achieved planning consent for alternative use. These properties were disposed of at a book value of £55m with cash received in the year of £57m. The overall income yield on these disposals was 6.3%.

A more detailed breakdown of the valuation at March 2010 by property category is set out below:

Valuation at March 2010

Property category	No of properties	Existing use valuation	Existing use yield	Added value	Total valuation	Capital value per sq. ft.
Like-for-like	83	£483m	7.90%	£31m	£514m	£139
Refurbished	5	£84m	6.90%	£1m	£85m	£155
Workspace Glebe	12	£85m	7.30%	£16m	£101m	£81
Held for re-development	5	£11m	4.10%	£6m	£17m	£97
Total	105	£662m	7.70%	£55m	£717m	£126

The existing use valuation is based on the current income generated by a property and the existing use yield is calculated by reference to the cash rent roll.

The overall capital value per sq. ft. of £126 compares to a rebuild cost (for insurance purposes) of the buildings alone, excluding the value of the freehold land of £140.

The total net initial yield on our portfolio as calculated by our valuers, CBRE, is 7.1% (March 2009: 7.4%) and the equivalent yield is 8.8% (March 2009: 9.6%).

The total ERV for the portfolio now stands at £66.4m compared to a cash rent roll of £50.7m. At our targeted occupancy level of 90% the potential reversionary rent roll would be £59.8m, some £9.1m higher than the current cash rent roll.

Added value is attached to properties where we are well advanced on obtaining planning approval (or have already obtained planning) for an intensification of existing use or alternative use on a site. A summary of the movements in added value through the year is set out below:

	£m
Added value at 31 March 2009	38
Value added on new schemes in year	4
Increase in value of existing schemes	8
Extra value achieved for schemes disposed in year	4
Cash realised from schemes disposed in year	(15)
Added value on Workspace Glebe properties acquired	16
Added value at 31 March 2010	55

£15m of cash has been realised from added value schemes during the year, a 36% uplift on the added value of these schemes in the March 2009 valuation. Disposals included the sale of part of Canalot Studios, W10 for student housing (280 units), Thurston Road, SE13 for a residential-led redevelopment (400 units plus 80,000 sq. ft. commercial floorspace) and part of a car park at Bounds Green, N11 for a self-storage scheme.

A more detailed analysis of the like-for-like property valuation compared to March 2009 is set out below:

Like-for-like properties	March 2010	March 2009
Existing use value	£483m	£482m
Added value	£31m	£27m
Estimated rental value (ERV)	£47.2m	£54.4m
Existing use equivalent yield (at 90% occupancy)	8.8%	10.2%
Cash rent roll	£38.3m	£40.3m
Existing use income yield	7.9%	8.4%

Over the year the ERV on the like-for-like properties has declined by 13% reflecting the impact of the reduction in pricing on new lettings.

Income Statement
Overall the Group is reporting a profit before tax for the year of £26.0m compared to a loss of £360.4m in the prior year, with a small revaluation surplus in the year of £1.8m compared to a significant deficit in 2009.

£m	2010	2009	Change
Net rental income	44.4	47.4	(6.3%)
Staff and other administrative costs	(8.0)	(9.0)	(11.1%)
Share-based incentive costs	(1.1)	–	–
Net interest cost (excluding exceptional items)	(24.5)	(28.4)	(13.7%)
Trading profit after interest	10.8	10	+8.0%
Property valuation gain/(deficit)	1.8	(325.3)
Workspace Glebe joint
venture adjustments	14.2	(9.5)
Other items	(0.8)	(35.6)
Net profit/(loss) for the year before tax	26	(360.4)

The trading performance for the Group has been good despite challenging market conditions, with trading profit after interest increasing by 8% to £10.8m. The main components of the £0.8m increase in trading profits are set out below:

	£m
2009 trading profit after interest	10.0
Reduced net rental income – properties owned all year	(2.2)
Lost net rental income – disposals	(2.4)
Net rental income – Workspace Glebe post acquisition	1.6
Reduction in staff and related costs	1.0
Increase in share-based incentive costs	(1.1)
Decrease in interest costs	3.9
2010 trading profit after interest	10.8

The rental income at properties owned throughout the year was adversely impacted by reductions in pricing and increased incentives on new lettings. This was offset by improvements in occupancy levels and a tight control of direct property costs. Empty rates cost reduced by £0.1m to £1.7m in the year.

Staff and related costs have reduced by 11% in total in the year from £9.0m to £8.0m. A streamlining of back-office staff, the reduction of one Executive Director and a salary cap all contributed to the reduction together with cuts and efficiencies across all categories of discretionary spend.

Share-based incentive costs increased from nil to £1.1m in the year. These costs relate to the value of share grants to employees under the Group’s long term incentive plans. The cost is largely a non-cash based accounting charge linked to the absolute and relative performance of the Group over the period of each grant.

Interest costs are lower than in the prior year due to a reduction in the average level of debt. This is a result of the Rights Issue completed in March 2009 and the net impact of acquisitions and disposals. The average interest cost in the year was 6.7% compared to 6.5% in 2008/09.

A number of adjustments have been made to hedging during the year, including the swap acquired when the Glebe portfolio was acquired. The Group has the following interest rate swaps in place at March 2010:

Amount	Rate	Term
£100m	(4.0%)	October 2012
£125m	(5.4%)	October 2012
£50m	(5.2%)	June 2013

These interest rate swaps represent some 70% of the Group’s interest rate exposure with the remainder at 3 months/1 month LIBOR. At March 2010 the exit rate total cost of our debt (including bank margin) is running at some 6%.

Cash flow

£m	2010	2009
Operating cash flow	36.3	40.6
Interest paid	(25.2)	(29.0)
Net cash from operations	11.1	11.6
Dividends to shareholders	(8.1)	(7.8)
Share placing proceeds (net of costs)	18.8	–
Rights Issue proceeds (net of costs)	(4.3)	80.2
Capital expenditure	(5.9)	(9.2)
Property acquisitions	(4.0)	(4.2)
Property disposal proceeds	57.1	11.4
Corporation tax	–	4.9
Hedging amendments	(8.6)	–
Other	(1.8)	(3.3)
	54.3	83.6
Acquisition of Glebe joint venture (including debt)	(83.0)	–
(Increase)/decrease in net borrowings	(28.7)	83.6

The Group continues to generate strong operational cash flow in line with trading profits. Bad debts remain low at £0.3m in the current year (2009: £0.2m) despite the impact of the recession on our customers. The broad spread of our customers, rents and deposits received in advance and tight credit control procedures ensure that we avoid any significant bad debts.

In December 2009 we completed a share placing raising net proceeds of £18.8m to part-fund the acquisition of the Glebe joint venture properties.

The only significant individual capital expenditure project during the year was the refurbishment of the East Wing of the Barley Mow Centre for £1.3m.

During the year we acquired the second phase of Q West, TW8, for £4.0m (including costs). Contracts for this purchase were originally exchanged in June 2007.

A number of interest rate hedging contracts were amended or cancelled during the year at a total cost of £8.6m. This reduced the overall level of hedging in line with the reduction in debt levels from the Rights Issue and property disposals. The overall level of hedging has been maintained at 70% of our total interest rate exposure.

Balance Sheet and financing

£m	2010	2009
Investment properties	713	664
Net borrowings	(383)	(355)
Interest-rate swaps	(23)	(26)
Other net liabilities	(20)	(31)
Net assets	287	252
EPRA NAV per share	27p	27p
Loan to value (LTV)	53%	54%

The EPRA NAV per share has recovered during the year and is now at the same level as at March 2009. This is a result of the improvements in the property valuation during the second half of the year and the write-back of provisions and negative goodwill arising from the acquisition of the Workspace Glebe JV.

The overall LTV of 53% is a level at which the Group is comfortable at this stage in the property cycle. We have good headroom on our covenants and will benefit from a geared return on any further improvements in property values.

The Group has three main banking relationships, with Royal Bank of Scotland (RBS), GE Real Estate (GE) and Bank of Scotland (BoS). £37m of the GE facility is provided by Bayerische Landesbank and £20m of the BoS facility is provided by Bank of East Asia. Details of the facilities and margins are set out below:

	Facility amount £m	Drawn at March 2010 £m	Term	Margin over LIBOR
RBS
Term/revolving facilities	150	114	November 2012	2.75%
Overdraft/(deposit)	4	2	On demand	1.75%
GE
Term facility	199	199	November 2012*	2.00%
BoS
Term facility	68	68	December 2014	1.25%
Total	421	383

* The extension of the GE facility to November 2012 is at the Group’s option and is subject to the payment of extension fees in August 2010 (1.7% of amount extended) and December 2011 (2.25% of amount extended). The margin on the GE facility increases to 3.0% at August 2010 and to 4.0% in January 2012.

The covenants on the bank facilities are set out below:

	Interest cover covenant		Loan to value covenant
	On-secured asset pool	Group level	On-secured asset pool
RBS	1.25	1.50	75%
GE	1.30	1.50	75%
BoS	1.10	–	85%

Each of the facilities is secured on a discrete pool of assets. Covenant tests are on both the discrete pools and at a Group level (which includes £47m of uncharged assets). Interest cover is calculated by reference to net rental income.

Covenants are tested on a quarterly basis and results of our covenant tests at 31 March 2010 and the indicative headroom based on March exit income run rates is as follows:

	At 31 March 2010	Indicative headroom
Interest cover covenant
RBS asset pool	1.9	Income to fall by 35%
GE asset pool	2.2	Income to fall by 41%
BoS asset pool	1.5	Income to fall by 25%
Group asset pool	2.1	Income to fall by 27%
Loan to value
RBS asset pool	50%	Valuation to fall by 33%
GE asset pool	59%	Valuation to fall by 21%
BoS asset pool	67%	Valuation to fall by 21%

We have good covenant headroom on all our facilities.

Dividend
A final dividend of 0.50p per share is proposed. Combined with the interim dividend this would take the total dividend for the year to 0.75p per share, the same as the dividend paid last year.

While the interim dividend was paid as a Property Income Distribution (PID) the final dividend will be a non-PID. Under current legislation scrip dividends cannot be paid as a PID and we are therefore taking this opportunity to offer shareholders the option of electing to receive the final dividend in shares as an alternative to cash. Full details of the share scrip option will be circulated with the notice of the AGM. The final dividend will be paid to shareholders in August 2010.