3rd Quarter Results

Workspace Group PLC 13 February 2006 WORKSPACE DELIVERS FURTHER STRONG VALUE GROWTH Workspace Group PLC ('Workspace'), the leading provider of flexible business accommodation to small and medium sized enterprises ('SMEs') in London and the South East today announces its financial results for the third quarter and nine months to 31 December 2005. Highlights: • Net Asset Value (NAV) per share at 31 December 2005 £2.10, up 18.6% over the nine months and up 22.8% over twelve months (31 March 2005: £1.77; 31 December 2004 £1.71). • NAV per share (under former UKGAAP) at 31 December 2005 £2.71, up 21.0% over the nine months and up 35.5% over twelve months (31 March 2005: £2.24; 31 December 2004: £2.00). • Valuation surplus for nine month period, £74.1m (2004: £55.4m). • Pre-tax profits £83.6m (2004: £66.3m). • Pre-tax profits on trading operations £10.7m (2004: £10.8m). • Basic earnings per share 35.8p (2004: 29.0p). • Acquisitions of £95.7m and disposals of £47.6m either under contract or completed over nine months. • Contracts exchanged for redevelopment of Wharf Road. Commenting on the results, Harry Platt, Chief Executive said, ' I am delighted to report yet another quarter of progress by the Group. The Group's portfolio has now advanced to in excess of £900m following a valuation surplus of £33.9m over the three months, an increase of 3.9%, taking the total increase over nine months to 9.0%. ' In this nine month period we have contracted the purchase of £95.7m of property and the sale of £47.6m. These sales included the majority of our properties outside the M25, increasing our focus on London where we believe the best opportunities exist. ' Our customers and market place continue to thrive with enquiry levels good throughout the period and increasing of late. I look forward to reporting continued progress at the full year stage.' - ends- Date: 13 February 2006 For further information contact: Workspace Group PLC cityPROFILE Harry Platt, Chief Executive Jonathan Gillen Mark Taylor, Finance Director Andrew Harris 020-7247-7614 020-7448-3244 e-mail: info@workspacegroup.co.uk Web: www.workspacegroup.co.uk Chairman's Statement These third quarter results show further excellent growth in asset values driven primarily by yield movements reflecting the continuing investor appetite for commercial property. Following our latest external revaluation at 31 December 2005, our total portfolio was valued at £903 million. Adjusted Net Asset Value (NAV) per share at £2.66 is up 19.8% over the nine month period, and 24.9% over the last twelve months. Reported NAV per share has risen to £2.10 (31 March 2005: £1.77). Since the quarter end we have completed the sale of a portfolio of 9 properties (with 2 others pending) within the South East, outside the M25, for a total of £41.7 million. Most of our portfolio of 95 estates, 5.8m sq feet, and 3,800 customers is now focused within the M25. Furthermore, 68% of this portfolio by value is within six miles of the centre of London. In this market Workspace is by far the leading supplier of space for small and medium sized enterprises (SMEs). Yet we have a small proportion of this large and growing market place (comprising over 300,000 SMEs) and the opportunities to continue to expand our portfolio remain considerable as we track 2,000 properties in our target area. Furthermore, with our focused intensive management, marketing and branding, there is the prospect of future growth in rental values from the current low base of £9.58 per sq. ft. Your Board is committed to building long term shareholder value. During the third quarter, I informed you of a possible interest in the Company, which was subsequently withdrawn shortly before Christmas. This interest lay not only in the core business outlined above, but also in the potential for change of use or intensification value of certain estates - the value of which we are well aware. We are developing clear strategies to release this hidden value and during the last few months we have progressed individual 'added value' initiatives (at Wharf Road, Greenheath and Thurston Road). This report also gives some more detail on our approach to this area going forward. Chief Executive's Statement Summary Pre-tax profits during the three quarter period of £83.6m are up 26.1% on last year (31 December 2004: £66.3m) due to the accelerated growth in the value of the portfolio. Pre-tax profits on trading operations of £10.7m are down £0.1m on last year due mainly to higher year on year interest charges in the first quarter, slower rental growth during the year and the level of refurbishment/ redevelopment taking place in the Group's portfolio. Total Rent Roll has increased by £6.1m over the nine months to £48.3m, £5.6m of which is from acquisitions net of disposals with the remaining £0.46m due to growth in the core portfolio. Earnings per share for the nine month period, at 35.8p, are up 23% on last year. Trading earnings per share at 4.6p however are unchanged on the level for the same period last year. Portfolio In the first half of the year the Group made acquisitions of £95.7m. No acquisitions were made in the third quarter, although since the quarter end we have completed the purchase of one property (value £5.15m) and have three others in legal hands. During the quarter we made one disposal and, on 25 January 2006, completed the sale of a portfolio of properties outside the M25. Details are given below. Name of Property Description Exit Income Sale Price Alpine Park, Single warehouse of £0.35m £3.8m Beckton E6 35,036 sq. ft Magenta 11 small unit industrial £2.86m £41.7m Portfolio estates located outside the M25 totalling 321,142 sq. ft in 234 units (deferred completion on 2 properties) Alpine Park was sold to its occupier, Easy Managed Transport (EMT), a classic case study of the Workspace model. It reflects the continuing success story of one of our customers, who joined us in 1990 occupying a small industrial unit on Bow Enterprise Park, E3. Following EMT's continued expansion on that estate, in 2000 Workspace acquired land and financed the development of a warehouse at Alpine Park into which EMT moved on a long term lease with an option to acquire the property. The Magenta Portfolio disposal consisted of the majority of the Group's holdings outside London. The properties have performed well for us in the past and have shown pre-tax internal rates of return of between 13% and 31% and a combined IRR of 22%. A tax charge of £5.2m will arise from this disposal. We now have only four properties outside the M25 at Luton, Basildon, Maidenhead and Harlow. It is our current intention in due course to dispose of the first three of these, whilst the fourth, which continues to fit well with our other ownerships, will be retained. The funds released by these disposals will be used to further expand the business within Greater London where we have recently completed the purchase of Sundial Court,Tolworth, Kingston-upon-Thames. Three other transactions are in legal hands. Further details will be announced shortly. We know London well and are tracking about 2,000 properties of which approximately 700 have been identified as prime acquisition targets. We are confident that we will deliver superior returns by concentrating our management and marketing skills, as well as our brand, on opportunities in this area. Following the disposal completed in the quarter, the portfolio statistics and progress through the year may be summarised as follows:- 31 December 2005 30 September 2005 30 June 2005 31 March 2005 Number of estates 106 107 105 104 Total floor space at end of period (million sq. ft.) 5.89 5.92 5.33 5.16 of which: Like for like portfolio (million sq. ft.) 4.90 4.90 4.90 Acquisitions (million sq.ft.) 0.80 0.80 0.21 Developments (million sq.ft.) 0.18 0.18 0.18 Lettable units (number) 4,922 4,885 4,748 4,717 Annual rent roll of occupied units (£m) 48.34 48.17 43.17 42.28 Average rent(£/sq. ft) 9.58 9.47 9.35 9.29 Average rent of like-for-like portfolio (£/sq. ft) 9.38 9.25 9.25 9.11 Occupancy overall 85.70% 85.92% 86.65% 88.26% Occupancy of like-for-like portfolio 88.55% 88.66% 89.32% 90.20% Comparisons of overall occupancy and rent roll are distorted by acquisitions, disposals and transfers. The 'like-for-like' portfolio is defined as those properties that have been held throughout the year to date and which are not subject to refurbishment/ redevelopment programmes. Like-for-like occupancy in the quarter has remained in the 88.5% to 89% range, whilst average like-for-like rents have risen by 1.4% (from £9.25 to £9.38). Over the three quarter period like-for-like occupancy has declined from 90.2% to 88.55%, whilst average rents have risen by 3% (from £9.11 to £9.38). This decline in occupancy was caused mainly by the occurrence of several larger voids, some of which have now been re-let, notably the space vacated in the second quarter at Surrey House and that at Tower Bridge Business Complex. However, this has not yet compensated for the other vacancies elsewhere in our portfolio. Furthermore, by the financial year end we anticipate two other significant vacancies will occur which will open up opportunities for the Group to create more space for small businesses. In particular, this includes a vacancy at the recently purchased Kennington Park where we always recognised potential for further refurbishment and subdivision to create small unit space. Aside from the vacation of these larger units, occupancy more generally has been stable. Enquiry rates have been good throughout the nine months and appear to have improved further of late following the start of the new calendar year. Our refurbishment works at Southbank are now complete, and marketing/letting of the space is in progress. Meanwhile, refurbishment works at Enterprise and Clerkenwell will complete in the next three months. Lettings here should improve total occupancy, currently 85.7%, through 2006. We estimate that these three properties alone afford the opportunity to increase the rent roll by £3.6m as the vacant space is let up. Valuation The third quarter external property valuation yielded a net surplus of £74.1m for the 9 months, an uplift of 9.0% (£33.9m for the quarter, an uplift of 3.9%), taking the total value of investment property to £903m. This increase in the valuation has been driven mainly by yield movements (some 80%). The Group's portfolio is valued on an 'existing use' basis. This approach is, as described, based on the current use of the property but will recognise the extra value that will accrue to a property where planning approval has been obtained for a more valuable use of the site. However, it does not recognise the latent potential within the Group's portfolio associated with those sites for which such a consent has not been obtained, irrespective of the opportunity for such. The Group has stated that in the longer term as much as 45% of the existing portfolio has potential for added value activity such as refurbishment, extension and redevelopment. At four estates (Aberdeen Studios, Thurston Rd., Wharf Rd., and Greenheath) planning consents have been obtained or are in progress. When these projects are completed, the density of the estates will increase to almost three times the current levels through the creation of 430,000 sq.ft. of extra space in addition to the replacement of the current 220,000 sq.ft on the sites. This new space will provide both replacement workspace as well as residential, retail and student accommodation. On another eleven estates, we consider density may also be increased to create a further 2.2m sq.ft over the existing 1.2m, again for a mixture of uses. In this way, the Group can improve the quality of the accommodation offered to its customers, whilst achieving attractive financial returns from the redevelopment of its property to provide further much needed accommodation in the Capital. This potential will take time to realise but will mature as work proceeds and pressure on land in London increases. The Group is clearly focused on unlocking this value and ensuring that in addition to its skills of managing and driving rentals from property it also has available to it the correct range of skills which will ensure effective value creation. Financial Review The third quarter valuation surplus of £33.9m followed the substantial surpluses recorded in the first two quarters of £18.1m and £22.1m. This strong pattern of surpluses has impacted both upon Net Asset Value (NAV) per share and gearing with Adjusted NAV up 19.8% to £2.66 and gearing (based on former UKGAAP principles) up just 10% to 97% despite net acquisitions of £90m over the nine month period. After the sale of the £41.7m portfolio referred to earlier, gearing will reduce further to 89%, only marginally above that at the start of the year. The following table summarises the impacts of the changes to Net Asset Value per share: Net Assets per share 31 March 2005 Movements 31 December 2005 Under former UKGAAP £2.24 £0.47 £2.71 Adjustments £(0.47) £(0.14) £(0.61) Under IFRS £1.77 £0.33 £2.10 Earnings per share performance has mirrored the valuation result with EPS for the nine months up 23% over last year at 35.8p. Trading earnings per share, however, were level with that reported last year at 4.6p. With 111, Power Road being mainly vacant on purchase, acquisitions during the current period have been made at much tighter margins over the cost of money. Consequently, with little net contribution from these and with rents on the core portfolio increasing by just £0.5m over the period, earnings growth has been lower. Going forward, with the recent completion of the refurbishment works at Southbank House followed soon by those at Enterprise House and Clerkenwell Studios, there is substantial potential for growth in rents over the next year (with 90% market rent (ERV), some £3.6m over current rents passing). Following this, on the completion of the works at 111 Power Road, there will be further increases (with, at 90% ERV, £0.9m over current rents). Banking facilities were unchanged during the quarter, with the proposed new facility of £25m (referred to at the interim stage) deferred while cash requirements following the recent significant disposal were reappraised. As noted above, the changes to the trading account and balance sheet under IFRS have had a substantial impact on financial ratios, with EPS and gearing affected most. Your Board, in common with the Group's bankers, considers that gearing measurement should continue to be monitored for the present under the former UKGAAP principles. As a result, both IFRS and former UKGAAP measures are incorporated in the following table of key financial statistics and indicators: 9 months to 31 6 months to 30 3 months to 30 Year to 31 9 months to 31 December 2005 September 2005 June 2005 March 2005 December 2004 Net rental income: revenue 74% 73% 72% 74% 74% Trading operating profit: revenue 60% 59% 58% 60% 60% Trading PBT: revenue 24% 23% 22% 26% 26% EPS per share (pence) 35.8 19.6 8.5 36.1 29.0 NAV per share (£) - IFRS 2.10 1.94 1.85 1.77 1.71 - UKGAAP 2.71 2.49 2.35 2.24 2.00 Trading interest cover 1.66 1.65 1.63 1.77 1.77 Gearing - IFRS 126% 137% 112% 112% 111% - UKGAAP 97% 105% 87% 88% 94% Available facilities (£m) *14.7 *13.6 38.0 49.2 62.6 * Arrangements are in hand to increase facilities by a further £25.0m and (at 31 December 2005) contracts had been exchanged for the sale of property for a total consideration of £41.7m. Net cash flow from operating activities was £9.40m (2004: £9.33m). Following expenditures on investment property of £116.45m (2004: £38.23m) and other items the net cash used in investing activities was £113.03m (2004: £5.83m), financed principally by increases in bank borrowings of £109.60m (2004: £1.6m). As noted above, gearing at 31 December 2005, measured under former UKGAAP was 97% (31 December 2004: 94%, 31 March 2005: 88%). Prospects With an active investment market, the potential for continued growth in asset values in the fourth quarter appears good. Whilst property held vacant for refurbishment has slowed earnings growth of late, their reletting should contribute to growth in the near future. We continue to search out opportunities from both within our current portfolio and through acquisition to provide growth both to earnings and capital values. Consolidated Income Statement (unaudited) for the 9 months ended 31 December 2005 Year ended 9 months ended 31 December 2005 9 months ended 31 March 2005 31 December (restated) 2004 (restated) Trading Other Items* Total Operations £000 Notes £000 £000 £000 £000 55,039 Revenue 1 45,443 - 45,443 41,052 (14,071) Direct costs 1 (11,947) 38 (11,909) (10,649) -------------------------------------------------------------------------------------------------- 40,968 Net rental income 33,496 38 33,534 30,403 (7,643) Administrative (6,452) 119 (6,333) (5,481) expenses 67,923 Gain from change in - 74,149 74,149 55,390 fair value of investment property (75) Profit/(loss) on 2 - 12 12 (377) disposal of investment properties -------------------------------------------------------------------------------------------------- 101,173 Operating profit 27,044 74,318 101,362 79,935 73 Finance income - 104 - 104 60 interest receivable (19,523) Finance costs - 3 (16,411) (1,015) (17,426) (14,569) interest payable 1,097 Change in fair value - (424) (424) 885 financial instruments -------------------------------------------------------------------------------------------------- 82,820 Profit before tax 10,737 72,879 83,616 66,311 (24,342) Taxation 4 (3,252) (21,870) (25,122) (19,406) -------------------------------------------------------------------------------------------------- 58,478 Profit for the period 7,485 51,009 58,494 46,905 after tax and attributable to equity shareholders ================================================================================================== 36.1p Basic earnings per 6 4.6p 31.2p 35.8p 29.0p share 34.8p Diluted earnings per 6 4.5p 29.8p 34.3p 27.9p share *Other Items above include, profits and losses (together with their related taxation) on sales of investment properties, items of a non trading nature, valuation adjustments arising from the fair valuing of financial assets and liabilities, adjustments to direct costs arising from the treatment of head lease payments as interest, adjustments to administrative expenses arising from the estimation under IFRS2 of the cost for the grant of share options and other non-cash remuneration to staff. Consolidated Statement of Recognised Income and Expense (unaudited) for the 9 months ended 31 December 2005 Year ended 9 months ended 9 months ended 31 March 2005 31 December 31 December (restated) 2005 2004 58,478 Profit for the financial period 58,494 46,905 (15) Convertible loan stock conversion - (15) 231 Value of employee services 289 166 -------------------------------------------------------------------------------------------------- 58,694 Total recognised income and expense 58,783 47,056 for the period ================================================================================================== Consolidated Balance Sheet (unaudited) As at 31 December 2005 31 March 2005 Notes 31 December 31 December (restated) 2005 2004 £000 (restated) £000 £000 Assets Non current assets 716,537 Investment properties 8 901,354 686,678 143 Intangible assets 185 146 3,523 Property, plant and equipment 10 3,455 3,491 --------------------------------------------------------------------------------- 720,203 904,994 690,315 --------------------------------------------------------------------------------- Current assets 5,159 Trade and other receivables 11 7,864 6,240 187 Financial assets - derivative 63 67 financial instruments 1,251 Financial assets - tenants' 12 1,744 1,258 deposits 3 Cash and cash equivalents 1,662 1,393 --------------------------------------------------------------------------------- 6,600 11,333 8,958 --------------------------------------------------------------------------------- Liabilities Current liabilities (817) Financial liabilities - borrowings 14 (78) (173) (24,816) Trade and other payables 13 (28,739) (25,925) (2,507) Current tax liabilities (979) (4,614) -------------------------------------------------------------------------------- (28,140) (29,796) (30,712) -------------------------------------------------------------------------------- (21,540) Net current liabilities (18,463) (21,754) --------------------------------------------------------------------------------- Non current liabilities (322,402) Financial liabilities - borrowings 14 (431,937) (307,562) (1,729) Financial liabilities - derivative (2,030) (1,822) financial instruments (86,075) Deferred tax liabilities 16 (108,852) (80,827) --------------------------------------------------------------------------------- (410,206) (542,819) (390,211) --------------------------------------------------------------------------------- 288,457 Net assets 343,712 278,350 --------------------------------------------------------------------------------- Shareholders' equity 16,884 Ordinary shares 17 16,891 1,688 28,388 Share premium 19 28,442 43,586 (5,519) Investment in own shares 19/20 (5,389) (5,827) 461 Other reserves 18 750 396 248,243 Retained earnings 19 303,018 238,507 --------------------------------------------------------------------------------- 288,457 Total shareholders' equity 19 343,712 278,350 --------------------------------------------------------------------------------- £1.77 Net asset value per share (basic) 7 £2.10 £1.71 £2.22 Adjusted net asset value per share 7 £2.66 £2.13 (diluted) Consolidated Cash Flow Statement (unaudited) for the 9 months ended 31 December 200 Year ended Notes 9 months 9 months 31 March 2005 ended 31 ended 31 (restated) December December 2005 2004 (restated) £000 £000 £000 Cash flows from operating activities 33,870 Cash generated from 15 27,084 25,461 operations 73 Interest received 104 60 (19,714) Interest paid (16,117) (13,943) (3,179) Tax paid (1,676) (2,241) --------------------------------------------------------------------------------- 11,050 Net cash from operating 9,395 9,337 activities Cash flows from investing activities (44,944) Purchase of investment (99,956) (31,888) property (9,543) Capital expenditure on (16,490) ( 6,340) investment property 35,362 Proceeds from sales of 6,132 34,960 investment property (2,745) Taxation on disposal of (2,195) (1,888) investment property (44) Purchase of intangible (110) (25) assets (823) Purchase of property, plant (412) (654) and equipment --------------------------------------------------------------------------------- (22,737) Net cash used in investing (113,031) (5,835) activities Cash flows from financing activities 287 Net proceeds from issue of 61 289 ordinary share capital 16,300 Net proceeds from issue of 109,600 1,600 new bank loan 687 Net distribution of own 130 379 shares (51) Finance lease principal (38) (38) payments (5,186) Dividend paid to 5 (3,719) (3,349) shareholders --------------------------------------------------------------------------------- 12,037 Net cash from/(used in) 106,034 (1,119) financing activities --------------------------------------------------------------------------------- 350 Net increase in cash and 2,398 2,383 cash equivalents ================================================================================= (1,159) Cash and cash equivalents (809) (1,159) at start of period (809) Cash and cash equivalents 15 1,589 1,224 at end of period ================================================================================= Notes to the Quarterly Results 1. Analysis of net rental income Year ended 9 months ended 9 months ended 31 March 2005 (restated) 31 December 2005 31 December 2004 (restated) Revenue Costs Net Rental Revenue Costs Net Rental Revenue Costs Net Rental Income Income Income £000 £000 £000 £000 £000 £000 £000 £000 £000 43,270 (278) 42,992 Rental income 35,830 (146) 35,684 32,367 (247) 32,120 9,865 (13,482) (3,617) Service 8,344 (11,351) (3,007) 7,344 (10,265) (2,921) charges and other recoveries 1,904 (311) 1,593 Services, 1,269 (412) 857 1,341 (137) 1,204 fees, commissions and sundry income ------------------------------------------------------------------------------------------------------------- 55,039 (14,071) 40,968 45,443 (11,909) 33,534 41,052 (10,649) 30,403 ============================================================================================================== The Group operates a single business segment providing business accommodation for rent in London and the South East of England, which is continuing. 2. Profit/(loss) on disposal of investment properties Year ended 31 9 months ended 9 months ended March 2005 31 December 31 December (restated) 2005 2004 (restated) £000 £000 £000 34,721 Proceeds from sale of investment 5,900 34,421 properties (34,796) Book value at time of sale plus sale (5,888) (34,798) costs --------------------------------------------------------------------------------- (75) Profit /(loss) on sale 12 (377) --------------------------------------------------------------------------------- (4,007) Current tax (235) (3,791) 4,485 Deferred tax released on sale 310 4,487 --------------------------------------------------------------------------------- 478 Net tax 75 696 --------------------------------------------------------------------------------- 403 Net profit on disposal after tax 87 319 --------------------------------------------------------------------------------- During the period to date the Group has disposed of Payne Road Studios and 5 Payne Road, London, E3 for £2.1m and Alpine Park, London, E6 for £3.8m. 3. Finance costs - interest payable Year ended 31 9 months ended 9 months ended March 2005 31 December 31 December (restated) 2005 2004 (restated) £000 £000 £000 Interest expense: (16,806) Interest payable on bank (15,547) (12,472) borrowings (391) Amortisation of issue costs of (332) (287) bank loans (51) Interest payable on finance leases (38) (38) (1,391) Interest payable on 11.125% First (1,043) (1,043) Mortgage Debenture Stock 2007 (814) Interest payable on 11.625% First (611) (611) Mortgage Debenture Stock 2007 (284) Interest payable on 11% (211) (211) Convertible Loan Stock 2011 214 Interest capitalised on investment 356 93 property re-developments --------------------------------------------------------------------------------- (19,523) (17,426) (14,569) ================================================================================= 4. Taxation Year ended 31 9 months ended 9 months ended March 2005 31 December 31 December (restated) 2005 2004 £000 (restated) £000 £000 Analysis of charge in period: 6,190 Current tax 2,345 6,502 18,152 Deferred tax (see note 16) 22,777 12,904 --------------------------------------------------------------------------------- 24,342 Total taxation 25,122 19,406 ================================================================================= The tax on the Group's profit for the period differs from the standard applicable corporation tax rate in the UK (30%). The differences are explained below: - 82,820 Profit before taxation 83,616 66,311 24,846 Tax at standard rate of corporation tax 25,085 19,893 in the UK of 30% (2004/5: 30%) 14 Expenses not deductible for tax purposes 30 30 64 Other differences 85 67 (408) Capital gains adjustments on property (78) (584) disposals (5) Reductions due to application of small - - companies rate (169) Adjustment in respect of previous periods - - --------------------------------------------------------------------------------- 24,342 Tax expense 25,122 19,406 ================================================================================= 5. Dividends paid Year ended 31 9 months ended 9 months ended March 2005 31 December 31 December (restated) 2005 2004 £000 (restated) £000 £000 - Final dividend for year ended 31 3,719 - March 2005 of 2.28p per ordinary share paid 2 August 2005 3,349 Final dividend for year ended 31 - 3,349 March 2004 of 2.07p* per ordinary share paid 2 August 2004 1,837 Interim dividend for year ended 31 - - March 2005 of 1.13p* per ordinary -------------------------------------------------------------------------------- 5,186 Dividends paid out of retained 3,719 3,349 earnings (see note 19) ================================================================================= *Figures adjusted to reflect bonus share issue made in March 2005. In addition an interim dividend for the year ended 31 March 2006 of 1.25p per ordinary share was payable on 1 February 2006. 6. Earnings per share a) Earnings used in calculating earnings per share Year ended 31 9 months ended 9 months ended March 2005 31 December 31 December (restated) 2005 2004 (restated) £000 £000 £000 58,478 Earnings for basic earnings per share 58,494 46,905 191 Interest saving net of taxation on 11% 132 118 Convertible Loan Stock --------------------------------------------------------------------------------- 58,669 Diluted earnings 58,626 47,023 (48,229) Less non trading other items (51,009) (39,394) --------------------------------------------------------------------------------- 10,440 Trading diluted earnings 7,617 7,629 ================================================================================= b) Weighted average number of shares used for calculating earnings per share Year ended 31 9 months ended 9 months ended March 2005 31 December 31 December (restated) 2005 2004 (restated) Number Number Number 161,931,920 Weighted average number of shares 163,440,008 16,162,588 (excluding shares held in the ESOT) - Increase due to capitalisation - 145,463,292 (March 2005) --------------------------------------------------------------------------------- Used for calculating basic earnings per share 161,931,920 (excluding shares held in the ESOT) 163,440,008 161,625,880 1,682,780 Dilution due to Share Option 2,713,973 184,039 Schemes 5,000,000 Dilution due to Convertible Loan 5,000,000 500,000 Stock - Increase due to capitalisation - 6,156,351 (March 2005) --------------------------------------------------------------------------------- 168,614,700 Used for calculating diluted 171,153,981 168,466,270 earnings per share ================================================================================= 7. Net assets per share a) Net assets used in calculating net assets per share 31 March 2005 31 December 31 December (restated) 2005 2004 £000 (restated) £000 £000 288,457 Net assets at end of period 343,712 278,350 2,484 Dilution due to Convertible Loan Stock 2,422 2,409 --------------------------------------------------------------------------------- 290,941 Diluted net assets 346,134 280,759 6,541 Deferred tax on accelerated tax 7,310 5,140 depreciation 80,029 Deferred tax on fair value change of 102,071 76,230 investment properties (463) Deferred tax on derivative financial (590) (527) instruments --------------------------------------------------------------------------------- 377,048 Adjusted diluted net assets 454,925 361,602 ================================================================================= Net asset value used to calculate NAV per share under former UKGAAP has been calculated by adding back the adjustments made under IFRS (mainly deferred tax and valuation adjustments on debt instruments). b) Number of shares used for calculating net assets per share 31 March 2005 31 December 31 December (restated) 2005 2004 Number (restated) Number Number 168,839,660 Shares in issue at end of period 168,909,640 16,883,211 (5,620,370) Less ESOT shares (5,340,370) (612,321) - Increase due to capitalisation - 146,438,010 (March 2005) --------------------------------------------------------------------------------- 163,219,290 Number of shares for calculating 163,569,270 162,708,900 basic net assets per share 1,682,780 Dilution due to Share Option 2,713,973 184,039 Schemes 5,000,000 Dilution due to Convertible Loan 5,000,000 500,000 Stock - Increase due to capitalisation - 6,156,351 (March 2005) --------------------------------------------------------------------------------- 169,902,070 Number of shares for calculating 171,283,243 169,549,290 diluted net assets per share ================================================================================= 8. Investment properties 31 March 2005 31 December 31 December (restated) 2005 2004 (restated) £000 £000 £000 626,817 Balance at beginning of period 716,537 626,817 55,973 Additions during the period 116,214 38,767 214 Capitalised interest on re-developments 356 93 (34,385) Disposals during the period (5,899) (34,385) 67,923 Gain from fair value adjustments on 74,149 55,390 investment property (5) Amortisation of finance leases (3) (4) --------------------------------------------------------------------------------- 716,537 Balance at end of period 901,354 686,678 ================================================================================= Capitalised interest is included as an addition in the period, the rate of capitalisation is 5.77% (31 March 2005: 5.79%; 31 December 2004: 5.76%). 9. Valuation The Group's investment properties were revalued at 31 December 2005 by CB Richard Ellis, Chartered Surveyors, a firm of independent qualified valuers. The valuations were undertaken in accordance with the Royal Institution of Chartered Surveyors Appraisal and Valuation Standards on the basis of market value. Market value is defined as the estimated amount for which a property should exchange on the date of valuation between a willing buyer and willing seller in an arm's length transaction. A full valuation of the portfolio was not undertaken by CB Richard Ellis at 31 December 2004 and has not been undertaken retrospectively. The value for 31 December 2004 has been arrived at by CB Richard Ellis on a pro-rata basis using the actual valuations that were undertaken by CB Richard Ellis both at 30 September 2004 and 31 March 2005, taking into account properties purchased and sold, the actual change in total income and consideration of the performance of the IPD Property Index over this period. Included in the CB Richard Ellis valuations is an amount in respect of the Company's short leasehold interest (expiring 11 February 2011) in the Alpha Business Centre, Walthamstow. For accounts purposes, as the unexpired term of the leasehold interest in Alpha Business Centre is less than 20 years, the valuation of the property has been retained at a nominal £1. The adjustment from the valuation report total to the accounts total may be reconciled as follows: - 31 March 2005 31 December 31 December (restated) 2005 2004 (restated) £000 £000 £000 718,425 Total per CB Richard Ellis valuation 903,375 688,545 report (350) Alpha Business Centre (385) (375) (2,290) Owner occupied property (2,385) (2,245) 752 Head leases treated as finance leases 749 753 under IAS17 --------------------------------------------------------------------------------- 716,537 Total per accounts 901,354 686,678 ================================================================================= 10. Property, plant and equipment Owner occupied Owner occupied Motor Equipment Total land buildings Vehicles and Fixtures £000 £000 £000 £000 £000 Cost Balance at 1 April 2004 (restated) 500 1,525 25 4,165 6,215 Additions - 14 - 640 654 Disposals - - - (939) (939) --------------------------------------------------------------------------------- Balance at 31 December 2004 (restated) 500 1,539 25 3,866 5,930 --------------------------------------------------------------------------------- Balance at 1 April 2004 (restated) 500 1,525 25 4,165 6,215 Additions - 9 - 813 822 Disposals - - - (939) (939) --------------------------------------------------------------------------------- Balance at 31 March 2005 (restated) 500 1,534 25 4,039 6,098 --------------------------------------------------------------------------------- Balance at 1 April 2005 500 1,534 25 4,039 6,098 Additions - 32 8 372 412 Disposals - - - - - --------------------------------------------------------------------------------- Balance at 31 December 2005 500 1,566 33 4,411 6,510 ================================================================================= Cumulative depreciation to 31 December 2004 - 23 14 2,402 2,439 (restated) --------------------------------------------------------------------------------- Net book value at 31 December 2004 (restated) 500 1,516 11 1,464 3,491 ================================================================================= Cumulative depreciation to 31 March 2005 - 30 15 2,530 2,575 (restated) --------------------------------------------------------------------------------- Net book value at 31 March 2005 500 1,504 10 1,509 3,523 (restated) ================================================================================= Cumulative depreciation to 31 - 54 18 2,983 3,055 December 2005 ================================================================================= Net book value at 31 December 2005 500 1,512 15 1,428 3,455 ================================================================================= At 1 April 2004, the fair value of owner occupied land and buildings was adopted as the deemed cost of those assets. The fair value of owner occupied land and buildings was £2,025,000 and the carrying value at 1 April 2004 under UK GAAP was £2,036,401. 11. Trade and other receivables - current 31 March 2005 31 December 31 December (restated) 2005 2004 £000 (restated) £000 £000 --------------------------------------------------------------------------------- 3,484 Trade debtors 4,023 3,511 (385) Less: provision for impairment of (489) (518) receivables --------------------------------------------------------------------------------- 3,099 Trade debtors - net 3,534 2,993 2,060 Prepayments and accrued income 4,330 3,247 --------------------------------------------------------------------------------- 5,159 7,864 6,240 ================================================================================= 12. Financial assets - Tenants' deposits Financial assets - tenant deposits represent returnable cash security deposits received from tenants. These deposit deeds are ring-fenced under the terms of the individual lease contracts and cannot be used to fund the working capital of the Group. They are accordingly held separately from other cash balances and excluded from cash and cash equivalents with a corresponding liability recorded in trade and other payables (note 13). 13. Trade and other payables - current 31 March 2005 31 December 31 December (restated) 2005 2004 £000 (restated) £000 £000 --------------------------------------------------------------------------------- 2,219 Trade payables 2,512 2,052 1,111 Taxation and social security payable 1,084 2,119 1,251 Tenants' deposit deeds (see note 12) 1,744 1,258 4,869 Tenants' deposits 5,307 4,771 10,525 Accrued expenses 11,872 11,095 4,841 Deferred income-rent and service charges 6,220 4,630 --------------------------------------------------------------------------------- 24,816 28,739 25,925 ================================================================================= 14. Financial liabilities - borrowings a) Balances 31 March 2005 31 December 31 December (restated) 2005 2004 £000 (restated) £000 £000 Current 812 Bank overdraft repayable on demand 73 169 (secured) 5 Finance lease obligations 5 4 --------------------------------------------------------------------------------- 817 78 173 Non current 2,484 11% Convertible Loan Stock 2011 2,422 2,409 (unsecured) 12,500 11.125% First Mortgage Debenture Stock 12,500 12,500 2007 (secured) 7,000 11.625% First Mortgage Debenture Stock 7,000 7,000 2007 (secured) 299,671 Other loans (secured) 409,271 284,904 747 Finance lease obligations 744 749 --------------------------------------------------------------------------------- 322,402 431,937 307,562 --------------------------------------------------------------------------------- 323,219 432,015 307,735 ================================================================================= b) Maturity 31 March 2005 31 December 31 December (restated) 2005 2004 £000 (restated) £000 £000 Secured 812 Less than one year 73 169 - Between one year and two years 19,500 - 219,500 Between two years and three years - 219,500 - Between three years and four years 140,400 - 100,800 Between four years and five years 270,000 86,100 --------------------------------------------------------------------------------- 321,112 429,973 305,769 (1,129) Less cost of raising finance (1,129) (1,196) --------------------------------------------------------------------------------- 319,983 428,844 304,573 Unsecured 2,484 In five years and more 2,422 2,409 Finance Leases 752 In five years and more 749 753 --------------------------------------------------------------------------------- 323,219 432,015 307,735 ================================================================================= c) Financial instruments held at fair value The following interest rate caps and collars are held: Amount Interest Rate Interest Rate Expiry £000 Cap Floor Interest rate cap and collar (amortising amount) 102,370 8.00% 4.50% July 2009 Interest rate cap and collar 75,000 6.95% 4.05% July 2009 Interest rate cap and collar (increasing amount) 32,630 7.00% 2.99% Oct 2010 All these instruments are treated as financial instruments at fair value with changes in value dealt with in the income statement at each reporting date. d) Fair values of financial instruments 31 March 2005 31 December 2005 31 December 2004 (restated) (restated) Book Value Fair Value Book Value Fair Value Book Value Fair Value £000 £000 £000 £000 £000 £000 Financial instruments not at fair value through profit and loss 812 812 Bank overdraft 73 73 169 169 2,484 2,914 11% Convertible 2,422 2,829 2,409 2,849 Loan Stock 2011 12,500 13,474 11.125% First 12,500 13,153 12,500 13,496 Mortgage Debenture Stock 2007 7,000 7,601 11.625% First 7,000 7,400 7,000 7,613 Mortgage Debenture Stock 2007 299,671 299,671 Other loans 409,271 409,271 284,904 284,904 752 752 Finance lease 749 749 753 753 obligations ------------------------------------------------------------------------------------------- 323,219 325,224 432,015 433,475 307,735 309,784 Financial instruments at fair value through profit and loss Derivative financial instruments:- 1,729 1,729 Liabilities 2,030 2,030 1,822 1,822 (187) (187) Assets (63) (63) (67) (67) ------------------------------------------------------------------------------------------- 1,542 1,542 1,967 1,967 1,755 1,755 ------------------------------------------------------------------------------------------- 324,761 326,766 433,982 435,442 309,490 311,539 ------------------------------------------------------------------------------------------- The total loss recorded in the income statement was £424,000 (31 March 2005: £1,097,000 gain, 31 December 2004: £885,000 gain) for changes of fair value of derivative financial instruments. The fair value of the interest rate collars has been determined by reference to market prices and discounted expected cash flows at prevailing interest rates. All other fair values have been calculated by discounting expected cash flows at prevailing interest rates. The total fair value adjustment equates to 0.9p per share (31 March 2005: 1.2p, 31 December 2004: 1.3p). Comparatives have been restated for the bonus issue in March 2005. 15. Cash generated from operations Reconciliation of profit for the period to net cash flow from operations: Year ended 31 9 months ended 9 months ended March 2005 31 December 31 December (restated) 2005 2004 (restated) £000 £000 £000 58,478 Profit for the period 58,494 46,905 24,342 Tax 25,122 19,406 567 Depreciation 479 429 96 Amortisation of intangible assets 67 74 (15) Share based payments (119) (174) 75 (Profit)/loss on disposals of (12) 377 investment property (67,923) Net gain from fair value (74,149) (55,390) adjustments on investment property (1,097) Fair value losses/(gains) on 424 (885) financial instruments (73) Interest income (104) (60) 19,523 Interest expense 17,427 14,569 Changes in working capital: 46 (Increase)/decrease in trade and (3,294) (1,054) other receivables (149) Increase/(decrease) in trade and 2,749 1,264 other payables --------------------------------------------------------------------------------- 33,870 Cash generated from operations 27,084 25,461 ================================================================================== For the purposes of the cash flow statement, the cash and cash equivalents comprise the following: 31 March 2005 31 December 31 December (restated) 2005 2004 (restated) £000 £000 £000 3 Cash and bank balances 1,662 1,393 (812) Bank overdrafts (note 14a) (73) (169) --------------------------------------------------------------------------------- (809) 1,589 1,224 ================================================================================= Total tax paid in the period was £3,871,000 (31 March 2005: £5,924,000; 31 December 2004 £4,129,000). 16. Deferred tax liabilities 31 March 2005 31 December 31 December (restated) 2005 2004 (restated) £000 £000 £000 67,934 Balance at start of period 86,075 67,934 18,152 Deferred tax charge to income statement 22,777 12,904 (11) Deferred tax credit to equity re: - (11) conversion of convertible loan stock --------------------------------------------------------------------------------- 86,075 Balance at end of period 108,852 80,827 ================================================================================= Deferred tax liability recognised in the balance sheet by each category of temporary timing difference is as follows: 31 March 2005 31 December 31 December (restated) 2005 2004 (restated) £000 £000 £000 80,029 Fair value gains on investment 102,071 76,230 properties 6,541 Accelerated tax depreciation 7,310 5,140 (463) Derivative financial instruments (590) (527) (32) Other 61 (16) --------------------------------------------------------------------------------- 86,075 108,852 80,827 ================================================================================= If the investment properties were sold for their revalued amount, there would be a potential liability to corporation tax of £84,687,000 (31 March 2005: £64,456,000, 31 December 2004: £59,924,000). Under IFRS no account is taken of indexation relief on capital gains resulting in the difference between expected corporation tax to be paid and the provision made for deferred tax. 17. Share capital 31 March 2005 31 December 31 December Number 2005 2004 Number Number 240,000,000 Authorised: ordinary shares of 10p 240,000,000 21,500,000 each ================================================================================= 168,839,660 Issued: fully paid ordinary shares of 168,909,640 16,883,211 10p each ================================================================================= £ Issued: fully paid ordinary shares of £ £ 10p each 16,883,966 16,890,964 1,688,321 ================================================================================= Movements in share capital were as follows: 31 March 2005 31 December 31 December Number 2005 2004 Number Number 16,733,811 Number of shares at start of period 168,839,660 16,733,811 151,955,694 Bonus issue - - 50,000 Executive Share Options exercised - 50,000 20,155 Employee Share Options exercised 69,980 19,400 80,000 Convertible Loan Stock converted - 80,000 ================================================================================= 168,839,660 Number of shares at end of period 168,909,640 16,883,211 ================================================================================= 18. Other reserves 31 March 2005 Equity element Equity settled 31 December 31 December 2005 (restated) of convertible share based 2005 2004 Total loan stock payments Total (restated) £000 Total £000 £000 £000 £000 254 At start of 151 310 461 254 period (35) Convertible - - - (35) Loan Stock conversion 11 Deferred tax - - - 11 on conversion 231 Value of - 185 289 166 employee services --------------------------------------------------------------------------------------- 461 At end of 151 495 750 396 period ======================================================================================= 19. Statement of changes in shareholders' equity 31 March 31 December 2005 31 December 2005 Share Share Investment Others Retained Total 2004 (restated) Capital Premium in Own Reserves Earnings Equity (restated) Total Shares Total £000 £000 £000 £000 £000 £000 £000 £000 233,575 At start of 16,884 28,388 (5,519) 461 248,243 288,457 233,575 period 697 Share issues 7 57 - - - 64 689 (10) Share issue - (3) - - - (3) - transaction costs 687 Distribution of - - 130 - - 130 379 own shares (5,186) Dividends paid - - - - (3,719) (3,719) (3,349) (26) Convertible Loan - - - - - - (26) Stock conversion 11 Deferred tax on - - - - - - 11 conversion 231 Value of - - - 289 - 289 166 employee services 58,478 Profit for the - - - - 58,494 58,494 46,905 period ------------------------------------------------------------------------------------------------ 288,457 At end of period 16,891 28,442 (5,389) 750 303,018 343,712 278,350 ================================================================================================ 20. Investment in own shares The Company has established an Employee Share Ownership Trust (ESOT) to purchase shares in the market for distribution at a later date in accordance with the terms of the 1993 and 2000 Executive Share Option Schemes. The shares are held by an independent trustee and the rights to dividend on the shares have been waived. During the period the Trust transferred 280,000 shares to employees on exercise of options. At 31 December 2005, the number of shares held by the Trust totalled 5,340,370 (31 March 2005: 5,620,370, 31 December 2004: 6,123,210) with a book value of £5,389,100 (31 March 2005: £5,518,880, 31 December 2004: £5,827,000). The shares have been included in shareholders equity (see note 19). 5,329,010 shares held by the Trust are subject to option awards. 21. Capital commitments At the period end the estimated amounts of commitments for future capital expenditure not provided for were: 31 March 2005 31 December 31 December £000 2005 2004 £000 £000 8,859 Under contract 5,228 10,474 12,550 Authorised by directors but not 3,598 5,059 contracted ============================================================================ 22. Post balance sheet events Following 31 December 2005 the Group completed on the sale of 9 out of the 11 estates contracted for sale for a total cash consideration of £41.7 million. In addition, the Group has completed the purchase of Sundial Court, Kingston upon Thames for £5.2 million. 23. Basis of preparation This is the Group's first third quarter report prepared under International Financial Reporting Standards (IFRS). The financial information reflects the current versions of the standards of the International Accounting Standards Board (IASB) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC) as currently endorsed by the European Union. IFRS will continue to evolve through development and adoption of new Standards and Interpretations as well as through practical experience gained from the application of IFRS by reporting entities and their auditors. For these reasons, the information contained in this document may be amended before its presentation in the audited financial statements of the Group for the year ended 31 March 2006. UK generally accepted accounting principles (GAAP) differs in certain respects from IFRS. The comparative figures used within this report have been restated accordingly. The Group has issued an explanation and reconciliation of the adjustments from UK GAAP to IFRS for 31 March 2004 and 31 March 2005 and a statement of its IFRS accounting policies in the document entitled 'Workspace Group PLC - Adoption of International Financial Reporting Standards (IFRS)' which is available from the Group's website or Company Secretary. An explanation and reconciliation of the adjustments from UK GAAP to IFRS for the period ended 31 December 2004 is shown in note 24 below. The accounting policies set out in the document 'Workspace Group PLC - Adoption of International Financial Reporting Standards (IFRS)' have been applied in preparing the financial information contained in this report. The Group has not adopted IAS 34 - Interim Financial Reporting. This report was approved by the Board on 10 February 2006. This report is unaudited and does not constitute statutory accounts within the meaning of Section 240 of the Companies Act 1985. The statutory accounts for the year to 31 March 2005, which were prepared under UK GAAP, and on which the auditors issued an unqualified opinion, have been delivered to the Registrar of Companies. 24. Explanation and reconciliation of IFRS adjustments The principal differences between UK GAAP and IFRS as they affect the reported results and their presentation of Workspace Group are set out below: IAS 40 Investment property IAS 40 requires that the revaluation gains or losses on investment property held at fair value be recognised on the face of the Income Statement rather than in reserves in the Statement of Group Total Recognised Gains and Losses as is the case under UK GAAP. As a result the revaluation reserve is no longer shown as a separate component of equity in the Balance Sheet but is included within retained earnings, and is non distributable. Under UK GAAP, on disposal of properties the tax due on the realisation of gains previously recognised through the revaluation reserve was shown in the Statement of Group Total Recognised Gains and Losses. Under IFRS it is included in the Income Statement. The tax due on sale will comprise an element in the Income Statement current tax charge (based on the difference between the sales price and property's carrying value at the point of disposal) and a transfer from the deferred tax reserve of the deferred tax amount already provided in previous periods. IAS 12 Income taxes IAS 12 requires full provision to be made for the deferred tax on revaluation gains or losses of investment properties at the tax rate estimated at the point of realisation. A tax charge therefore arises in the Income Statement if a revaluation surplus occurs, the corresponding entry being a deferred tax liability in the balance sheet. Under IAS12 the provision for deferred tax will take no account of indexation allowances afforded under UK taxation law, the tax provided is not a calculation of potential Capital Gains Tax liability. Under UK GAAP the liability is an estimate of the Capital Gains Tax, but is not provided for, only disclosed in the notes (note 17 in the 31 March 2005 accounts). IAS 17 Leases IAS 17 requires leases, whether as the lessee or lessors to be examined to differentiate between finance and operating leases. Most property leases were recognised as operating leases under UK GAAP but under IFRS different criteria may mean some are considered as finance leases. Leases which extend for long periods and therefore under which a substantial portion of the asset life is consumed may be regarded as finance leases. a) Head leases. Some (or some parts) of the investment properties of the Group are held under long leases which under IFRS are classified as finance leases so requiring recognition of a liability based on the minimum lease payments and a corresponding increase in the carrying value of the investment property. Many of these head leases incur only a peppercorn rent hence creating no finance lease liability. For head leases with rental payments other than peppercorn the rent paid is split between interest payable and repayment of the lease liability. Any rent payable in excess of the minimum lease payments as identified at initial recognition of the lease is considered as contingent rent and is expensed immediately. Under UK GAAP leasehold investment properties were reported at the valuation of the legal interest owned. b) Tenant leases are subject to the same tests. Because of the multi tenanted nature of the Group's buildings and the short-term nature of most tenancies, no leases granted by the Group have been determined to be finance leases. SIC-15 Operating Lease - Incentives SIC-15 requires that any lease incentives offered to tenants, such as rent free periods or reduced initial rents are recognised over the lease term. An adjustment is therefore made to increase revenue in the Income Statement and create a financial asset. Under UK GAAP any incentive was spread to the shorter of the lease term or periods to the first rent review or lease break. The Group has granted no material operating lease incentives. IAS 10 Events after the Balance Sheet Date IAS 10 requires dividends only to be recognised when there is an irrevocable legal obligation to make payment. The final dividend does not become irrevocable until approved by the members at the Annual General Meeting. Under IFRS the final dividend is therefore not recognised until approved and interim dividend not recognised until paid. IAS 16 Property, Plant and Equipment IAS 16 requires owner occupied property to be shown as part of Property, Plant and Equipment. The Group's head office is defined as owner occupied property. As land has an indefinite life and buildings a finite life the land and building elements of the owner occupied property are shown separately, the latter being depreciated over the expected useful life and the former not being depreciated. Under UK GAAP the whole property was subject to depreciation. The valuation of the asset at the date of transition to IFRS is taken to be its deemed cost, any surplus or deficit being recognised in retained reserves. IAS 23 Borrowing costs IAS 23 allows the capitalisation of directly attributable borrowing costs on the creation or refurbishment of property by applying the weighted average borrowing costs to the expenditures on the asset. In the case of investment properties only the expenditure on the improvement costs may be subject to capitalisation of related borrowing costs and the underlying carrying cost of the property is excluded. Under UK GAAP interest capitalisation arose on both the original value of the investment property and on the improvement costs. IAS 38 Intangible Assets IAS 38 requires externally acquired computer software to be classified as an intangible asset. Under UK GAAP software was shown within fixtures and fittings amongst other tangible assets. IAS 32/39 Financial Instruments: Disclosure and Presentation, Recognition and Measurement a) IAS 32 requires the Convertible Loan Stock to be split into its equity and debt components. The debt element is carried at amortised cost, amortised over the life of the instrument, such that interest is charged at a constant effective interest rate compared to the liability outstanding at any given point in time. Under UK GAAP the instrument was considered wholly as debt. b) IAS 39 requires derivative financial instruments to be valued at fair value through the Income Statement and their carrying values shown in the Balance Sheet unless they meet the IFRS hedging criteria. Under UK GAAP the fair value of such items was disclosed by way of a note and any original cost amortised over the life of the item. c) IAS 39 requires the identification of any embedded derivatives in the Group's contractual arrangements. Embedded derivatives are derivative instruments that have been combined with other contractual arrangements to create a composite contract. The Group currently believes it has no material embedded derivatives. IAS 7 Cash Flow Statements IAS 7 defines cash and cash equivalents to include short-term, highly liquid investments, thus including short-term bank deposits. Cash equivalents were shown as investments under UK GAAP. IFRS 2 Share-based payment The Group operates an employee Save as You Earn Scheme, an Executive Share Option Scheme and a Long Term Incentive Plan (LTIP). IFRS 2 requires the cost of services provided where payment is made through a share based payment scheme to be recognised as an expense in the Income Statement over their vesting periods and requires that where there is no reliable estimate of the cost of these services then the fair value of the options granted should be recognised as the cost of services. The fair values have been estimated by use of the Black- Scholes option valuation model in the case of the SAYE and Executive Share Option Schemes which have non market related performance conditions and by use of Monte Carlo simulation in the case of the LTIP whose performance conditions are market related. Subsequent changes in fair value are shown as an expense in the Income Statement. Provision is also made for employer's National Insurance costs relating to share based payment schemes. Under UK GAAP the SAYE and Executive Share Option Schemes were not directly recognised as an expense (although the interest costs arising from borrowings made to finance the purchase of shares held in the Group's ESOT to satisfy option exercises were recognised, together with share dilution where new shares were issued). The purchase cost of the matching shares was recognised for the LTIP on a straight line basis over the vesting period. Employer's National Insurance costs were recognised on share options expected to meet their vesting criteria. IAS 7 Cash Flow statements Under IFRS the consolidated cash flow statement describes movements in cash and cash equivalents. Under UK GAAP the cash flow analyses movements in cash only. With that exception there are no material differences between the previously published and restated cash flow statements. Workspace Group PLC Reconciliation of consolidated profit for the 9 months ended 31 December 2004 IAS 40 IAS 12 IAS 17 IAS 23 IAS 32/39 IAS 39 IFRS 2 Restated Previous Investment Contingent Property head Capitalisation Convertible Fair value Share based under IFRS GAAP Property tax leases of interest loan stock of payments derivatives £000 £000 £000 £000 £000 £000 £000 £000 £000 Revenue - continuing operations 41,052 41,052 Direct costs (10,687) 38 (10,649) ------------------------------------------------------------------------------------------------------------------------ Net rental Income 30,365 0 0 38 0 0 0 0 30,403 Administrative expenses (5,655) 174 (5,481) Gain from change in fair value of investment property 0 54,821 569 55,390 Loss on disposal of investment properties (377) (377) ------------------------------------------------------------------------------------------------------------------------ Operating profit 24,333 54,821 0 38 569 0 0 174 79,935 Interest receivable and payable and similar charges (13,937) (38) (569) 6 29 (14,509) Change in fair value of derivative financial instruments 0 885 885 ------------------------------------------------------------------------------------------------------------------------ Profit before tax 10,396 54,821 0 0 0 6 914 174 66,311 Taxation (3,209) 643 (16,445) (28) (275) (92) (19,406) ------------------------------------------------------------------------------------------------------------------------ Profit for the period 7,187 55,464 (16,445) 0 0 (22) 639 82 46,905 ======================================================================================================================== Reconciliation of equity at 31 December 2004 IAS 40 IAS 12 IAS 17 IAS 10 IAS 16 IAS 38 IAS 32/39 IAS 39 IAS 7 IFRS 2 Previous Investment Contingent Property Dividends Owner Computer Convertible Fair Cash and Share Restated GAAP Property tax head occupied software loan stock value cash based under leases property intangible of equivalents payments IFRS derivatives £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 Non current assets Investment properties 658,137 27,788 753 686,678 Intangible assets 0 146 146 Property, plant and equipment - other 3,648 (511) (146) 2,991 Property, plant and equipment - land 0 500 500 ------------------------------------------------------------------------------------------------------------------------ Total non current assets 661,785 27,788 0 753 0 (11) 0 0 0 0 0 690,315 Current assets Trade and other receivables 6,340 (177) 77 6,240 Financial assets - derivative financial instruments 0 67 67 Tenant deposits/other investments 2,647 (1,389) 1,258 Cash and cash equivalents 4 1,389 1,393 ------------------------------------------------------------------------------------------------------------------------ Total current assets 8,991 0 0 0 0 0 0 0 (110) 0 77 8,958 Current Liabilities Financial liabilities - borrowings (169) (4) (173) and other payables (27,813) 1,832 56 (25,925) Current tax liabilities (4,605) (9) (4,614) ------------------------------------------------------------------------------------------------------------------------ Total current liabilities (32,587) 0 0 (4) 1,832 0 0 0 (9) 0 56 (30,712) Net current (liabilities)/ assets (23,596) 0 0 (4) 1,832 0 0 0 (119) 0 133 (21,754) Non Current Liabilities Financial liabilities - borrowings (306,904) (749) 91 (307,562) Financial liabilities - derivative financial instruments 0 (1,822) (1,822) Deferred tax liabilities (5,842) 4,286 (79,741) (27) 527 (30) (80,827) ------------------------------------------------------------------------------------------------------------------------ Total non current liabilities (312,746) 4,286 (79,741) (749) 0 0 0 64 (1,295) 0 (30) (390,211) ------------------------------------------------------------------------------------------------------------------------ Net Assets 325,443 32,074 (79,741) 0 1,832 (11) 0 64 (1,414) 0 103 278,350 ======================================================================================================================== Ordinary shares 1,688 1,688 Investment in own shares (5,827) (5,827) Share premium 43,586 43,586 Other reserves 0 151 245 396 Revaluation reserve 222,346 (222,346) 0 Retained earnings 63,650 254,420 (79,741) 0 1,832 (11) (87) (1,414) (142) 238,507 ------------------------------------------------------------------------------------------------------------------------ Total equity 325,443 32,074 (79,741) 0 1,832 (11) 0 64 (1,414) 0 103 278,350 25. Quarterly Report Copies of this statement will be dispatched to shareholders on 13 February 2006 and will be available from the Group's registered office at Magenta House, 85 Whitechapel Road, London, E1 1DU from 9.00am on that day. This information is provided by RNS The company news service from the London Stock Exchange

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