Workspace Group

The small business sector in London has, in our experience, proved more resilient over the last two years than many market observers forecast despite a sharp economic recession and a banking crisis. The entrepreneurial spirit of these businesses, combined with their ingenuity and adaptability, has ensured not only their survival but has also produced many examples of expansion. Workspace remains the home for more London entrepreneurs than any other organisation and their future is our future.

In a fragile economic environment, dependent on world and domestic economic factors, risk was reappraised and property values were hit exceptionally hard. We have now begun to see some recovery in values from the low point but the nature of our properties, the leases and the covenant of our customers means that we lag the pace of improvement in yield seen in the prime property sector. Our short-term flexible leases also mean that our rents reflect current pricing unlike some properties with longer leases that may appear over rented in today’s market.

In the last year your Board has focused on the following priorities to build shareholder value:

1. Securing a strong balance sheet
2. Maintaining and attracting customers
3. Driving asset management
4. Resolving the Glebe joint venture favourably.

Good progress has been made on all fronts:

1. Securing a strong balance sheet
The equity issue in March 2009 which raised £81m, provided the Company with financial stability at a time of exceptionally difficult credit availability and falling property values, which had threatened the Group’s valuation related banking covenants. Since then, property values have stabilised, £57m of cash from disposals and a new five year debt facility has been secured as part of the Glebe joint venture acquisition. The Loan to Value (LTV) ratio is now 53%, an appropriate level at this stage in the property cycle, with an average debt maturity of three years. The Company is also in advanced discussions with a group of lenders in relation to a new £200m five year bank facility to replace the existing GE facility (which has an existing term to November 2012) ahead of its first extension period in August 2010. This would increase the average debt maturity to over four years.

2. Maintaining and attracting customers
By responding rapidly and sensitively to customer needs and by effective marketing and use of the Workspace brand, the Company has maintained a high level of enquiries, contained notices to vacate and has improved overall occupancy from 80.3% to 81.9% in the year, thereby underpinning the rent roll. Indeed, our like-for-like occupancy over 83 properties is approaching 85%. Our regular customer surveys have demonstrated again high levels of satisfaction and a strong predilection for our customers to recommend Workspace to others.

3. Driving asset management
In addition to the accelerated disposal programme and focus on generating cash from occupancy improvement, we have also been able to create new value at a number of properties from good progress on intensification and alternative use opportunities despite cutting capital expenditure by a third.

4. Resolving the Glebe joint venture favourably
In December 2009, part funded by a further £19m equity issue, we were delighted to acquire back control of our former JV portfolio from Bank of Scotland. We know this portfolio well, having sold it into the JV in 2006. The acquisition immediately enhanced NAV per share by 1.5p and we are confident of its future potential. The estates had been affected for nine months from the uncertainty concerning the JV’s future. Since acquisition their performance has improved and we are well advanced on selective disposals and in delivering added value from the estates from change of use and intensification.

Going forward our priorities are:

• To increase occupancy and rental income;
• To continue to drive value from our existing property portfolio;
• To continue to work and churn the asset base to realise its full value; and
• To utilise and exploit our brand more fully.

Delivering on our objectives has already resulted in a return to profitability and a good recovery over the last six months in net asset value per share which has improved by 23% to 27p, the level it was at March 2009. The recovery in asset values and an uninterrupted dividend income stream have driven shareholder value during the year. Even so, our property values remain some 36% below their peak in June 2007.

The Company is now better placed to withstand further economic shocks and perhaps more importantly is positioned financially, and managerially to be able to take advantage of any sustained economic recovery. There is considerable value to be created from the existing stock and this is the management priority but selective new opportunities will also be pursued. The challenge for management is to deliver sustained outperformance over the medium-term with substantial increase in shareholder value over the next five years. I am confident we have the vision, skills and team to do so.

The Board is recommending a maintained final dividend of 0.5p per share, which will be paid as a non-PID distribution. This enables us to offer a scrip alternative for the final dividend to shareholders who would prefer shares to a cash payment. Our aim next year is to re-establish our progressive dividend policy that has seen a compound growth in dividends of some 8% p.a. over the last 10 years despite the dividend being held for the last two years.

People
Rupert Dickinson has decided to retire from the Board at the conclusion of the AGM. I would like to thank Rupert for his valued contribution to the Board over several years. I am also pleased to welcome Jamie Hopkins, who joined the Board as an independent Non-Executive Director from 7 June 2010.

I would like to thank all our staff for their considerable efforts in a difficult and uncertain year. Their skill and hard work has been essential to the progress we have made.

Tony Hales CBE
Non-Executive Chairman