Final Results

Workspace Group PLC 13 June 2005 WORKSPACE CONFIDENT ON PROSPECTS Workspace Group PLC ('Workspace') today announces its preliminary results for the year ended 31 March 2005. Workspace provides approximately 5.3 million sq. ft of flexible business accommodation for almost 4,000 small and medium size enterprises ('SMEs') in London and the South East. â€¢ Net asset value per share up 21.7% to Â£2.24 â€¢ Like for like occupancy 90% â€¢ Turnover up 7.8% to Â£55.0 million (2004: Â£51.1 million) â€¢ Trading pre-tax profits up 2.6% to Â£14.5 million (2004: Â£14.1 million) â€¢ Pre-tax profits down 4.7% to Â£14.4 million (2004: Â£15.1 million) â€¢ Trading earnings per share up 3.3% to 6.3p (2004: 6.1p) â€¢ Earnings per share down 4.6% to 6.2p â€¢ Final dividend of 2.28p - total dividend up 10% to 3.41p Commenting on the results, Harry Platt, Chief Executive, said ' Workspace has delivered another set of strong results. We have a track record of consistent growth. Over the last five years total shareholder return has been 34% per annum. ' London's economy remains robust. The population is growing as are the number of SMEs. As the leading supplier of space to SMEs in London, with a small market penetration, there are considerable opportunities for growth. ' In a strong commercial property market where yields have reduced in the year we have been able to secure Â£43m of property with good growth prospects. Other acquisitions are in hand. ' Occupancy is now around 90% and we expect the rent roll to increase as we release newly refurbished space. Looking forward, we remain confident about the Group's prospects and the delivery of long term growth in shareholder value.' -ends- Date: 13 June 2005 For further information: Workspace Group PLC City Profile Group Harry Platt, Chief Executive Simon Courtenay Mark Taylor, Finance Director 020-7448-3244 020-7247-7614 web: www.workspacegroup.co.uk High resolution images are available for the media to view and download free of charge from: www.vismedia.co.uk Chairman's Statement The Group has once again delivered strong growth in value for shareholders, with net asset value (NAV) per share up 21.7% to Â£2.24. Since the Group's flotation in 1993, NAV per share has risen 7.02 times and, based on the share price of Â£2.35 on 31 March 2005, the share price has increased by 7.34 times. Shareholders have also benefited from a steady increase in dividend income throughout the period. Total Shareholder Return (TSR) has been equivalent to 34% p.a. compound over the last five years. In recognition of this progress, your Board resolved during the year to sub-divide the Company's shares. Following an Extraordinary General Meeting held on 16 March 2005 a bonus issue of 9 shares per share held was made, leaving shareholders with 10 times their original holdings. Your Board remains committed to driving consistent value for shareholders into the future with its focused strategy and intensive management. Strategy Your Board regularly reviews your business and its market. It believes the service the Group provides - flexible, affordable accommodation to small and medium sized enterprises (SMEs) remains compelling. Our focus on London is particularly relevant as its population is growing, in numbers and wealth, at a faster rate than the rest of the UK. SMEs are similarly increasing, putting ever greater pressure on space to work and live. So our strategy of servicing the SME market in London and the South East, while seeking opportunities to add value to our properties by refurbishment, change of use and redevelopment continues unchanged. Our aim of doubling the value of the Group's portfolio to our target of Â£1 billion by September 2008 remains on track. Results Total rent roll increased during the year by 11.0% to Â£42.3m as occupancy improved. Trading earnings per share growth was slower up 3.3% to 6.3p per share, mainly due to higher interest rates. The total value of the portfolio increased by 14.3% to Â£718.4m. Net assets were up 23%, a very strong performance despite the Chancellor's recent reversal of stamp duty exemption in disadvantaged areas which had a Â£14.3m adverse impact. This reflects the outcome of our own intensive management efforts, as well as the continuing improvement in yields in the property market. However, this yield improvement has compressed the margin over finance costs, making it harder to purchase new sites on attractive terms. Even so, we have made over Â£40m of acquisitions where we believe our management can create real shareholder value. Once again, the Company has recorded a good performance when compared with the Investment Property Databank (IPD) indices, with first and top percentile ranking over 5 and 10 year periods. People and Community Our business is management intensive and so our success is dependent on the efforts of our staff, who are key stakeholders. We play an important role in our communities in the regeneration of economic, cultural and social life through the very nature of our business. We also encourage and support our customers, suppliers and staff to play their own roles in enhancing our communities. In recognition of this, our reporting on these areas has been expanded in this year's report. There have been no further board changes following those referred to in my last report, namely the retirement of Alan Cherry and the appointment of John Bywater. Our staff are to be thanked for yet another set of excellent results. Current Trading and Prospects Like-for-like occupancy is now back over 90% with an average rent of Â£9.29 per sq. ft for a portfolio, two thirds of which is within six miles of Central London. We believe that conditions are now more favourable for rental increases. However, a number of properties remain under development for long term value growth, and so short term growth in the total rent roll will be tempered until they are fully refurbished and well occupied. Once completed, these projects will contribute to the ongoing growth of the business. Since the year end there has been further yield compression in the market as new funds seek to invest in property. This has a positive short term impact on value but makes purchasing on attractive terms increasingly challenging. However, we are continuing to source good opportunities and will only invest where we can create long term value for our shareholders. We continue to monitor closely the possibility of UK legislation on Real Estate Investment Trusts (REITs).Our business model would in many ways be attractive in a REIT but we await details of any legislation and will assess the implications at that time. Dividend The Board recommends a final dividend payment of 2.28p per share making 3.41p for the year, an increase of 10% over last year and making 13.1% p.a. compound growth over 10 years. This strong dividend growth is consistent with the continuing overall progress of your Company. Chief Executive's Review The Group has maintained its consistent growth. Good progress has been made on its current 5 year plan by increasing the portfolio value to Â£718m against the target of achieving Â£1bn by September 2008. Last year, after suffering a slight drop in occupancy, we set ourselves the target in 2004/05 of building this back over the 90% level, excluding developments. This was achieved by the half year stage giving an early start to our next target of growing rental values. Key Results Strong results have again been achieved with: - Net Asset Value per share Â£2.24 (2004: Â£1.84) Turnover Â£55.0m (2004: Â£51.1m) Operating Profit Â£33.3m (2004: Â£29.7m) Trading Profit before tax Â£14.5m (2004: Â£14.1m) Trading Earnings per share 6.3p (2004: 6.1p) Basic Earnings per share 6.2p (2004: 6.5p) Investment Portfolio Valuation Â£715.8m (2004: Â£626.1m) Rent Roll Â£42.28m (2004: Â£38.09m) Net assets per share increased by 21.7% following a Â£67.3m valuation surplus. Basic Earnings per share were 6.2p (2004: 6.5p) following a Â£0.3m price adjustment during the final stages of negotiation for the sale of Three Mills which caused a small loss overall when netted against other profits on sale. Trading Earnings per share were up 3.3% at 6.3p (2004: 6.1p). Overall, Three Mills, together with the other disposals made during the year, showed good internal rates of return over their investment holding periods. Strategy and Prospects The Group last set out its strategy in the form of its five year plan in November 2003. This was to double the value of the portfolio over a five year period through organic growth. One third of this target has been achieved within eighteen months, and so we remain in line with our objective. Our more immediate two year targets were to improve occupancy in the first year, now achieved; and then to grow rental values. This continues to be our key objective in the current year. However, overall rental income will continue to be tempered by voids on certain development projects, like Enterprise, Clerkenwell and Southbank. Our target for next year 2006/07 will therefore be to consolidate this growth in the rent roll into real earnings growth. With continued confidence in the Group's marketplace of SMEs in London and a strong investment market, the prospects for the current year 2005/06 seem good. Meanwhile, we expect to build upon progress achieved this year in accelerating our programme for the change of use of certain estates. Trading Review Our key target for 2004/05 was to rebuild occupancy following the slight decline recorded in the previous year, 2003/04. This was achieved rapidly with like-for-like occupancy (over some 91 estates) rising from 88.9% at 31 March 2004 to 90.9% by 30 September 2004. Occupancy remained in the 90% - 91% range for the latter half of the year. Headline occupancy of the whole portfolio including estates under development etc rose even more steeply, from 83.8% at 31 March 2004 to 88.5% by 30 September 2004, remaining in the 88%-89% range for the remainder of the year. This latter improvement was assisted by the disposal of Three Mills which had a high recorded vacancy rate due to the high volumes of short term lets. At the end of the year 46% (2004: 31%) of the Group's properties were 95% or higher occupied. On a like-for-like basis the increase in average rents over the year was 2.9% (2004: 0.6%) from Â£8.57 to Â£8.82 per sq. ft. This year the rolling rent review and lease renewal programme extended to 5.8% of the opening rent roll. The uplift achieved of Â£0.36m through rent reviews and lease renewals represents a 16.7% increase on previous passing levels for these tenancies. This reflects a good performance for a period during which occupancy was still being built up. With occupancy now running at higher levels the platform for rental growth is firmly re-established. The Group has continued with and extended its association with Kingston University through the year. A valuable customer survey was undertaken with the assistance of Kingston. This revealed a fascinating profile of the typical Workspace customer. Details of this work and further updating research work by Kingston has been lodged in the Investor Relations section of the Group's website. Portfolio, Acquisitions, Disposals and Added Value The Group creates value through its active estate management and marketing which keeps high levels of occupancy and drives rental values. In addition, to achieve our target of a Â£1 billion portfolio by September 2008, the Group must continue to buy well, acquiring additional properties that meet the Group's investment criteria and where we are confident of future potential. Opportunities are also taken to add value by the selective refurbishment, intensification, redevelopment and change of use of certain estates. Our business is located in London and the South East with a focus on London. All our acquisitions in the year were located inside the M25. We trail a large number of targets for a long time in this market place which we know well. Properties we acquire are generally multi-let business centres or industrial estates, providing accommodation attractive for letting to SMEs under any economic climate. We like to work off low capital values and acquire properties where there is scope for improvement under our management and where in the long term there may be opportunities for change of use or intensification. During the year the Group acquired 7 properties for Â£43.4m. Both individually and as a group these properties have excellent potential in our hands. Some, like Southbank House, complement and are close to existing properties in our portfolio, others like Homesdale are in parts of London where we have little representation. Some have more immediate angles, others simply need improved management and marketing to extract good growth. We did not meet our target of Â£60m acquisitions in the year. With the current market appetite for commercial property and the consequent yield compression, seeking value has become more difficult and on some acquisitions we were simply priced out. We have stuck to our investment criteria and are pleased with what we have achieved. Our acquisitions this year show an initial yield of 7.26% and a reversionary return of 10.5%. Further, we are confident in our long term tracking of acquisitions where we can create real value through our efforts. Three disposals were completed during the year realising Â£34.78m. The largest disposal was Three Mills for Â£22.6m. We acquired this estate in 1995, and since that time created a thriving film studio. The Group was approached by the London Development Agency who were interested in the site as part of the Olympic Bid. We had taken the property a long way, and it increasingly demanded specialised film studio management which detracted from our main business. As a result, we sold the estate achieving a good pre-tax internal rate of return (IRR) of 11.8% over the life of the investment. The other two disposals at Hooley Lane, Redhill and Union Street SE1 were both sold for redevelopment for housing. Acquired in 1997, we achieved the planning consent on Hooley Lane ourselves, whilst at Union Street (acquired in 1998) we worked with a partner. Both disposals achieved excellent IRRs of 49% and 23% respectively over the holding periods. We continue to review our portfolio to identify the properties with potential over time for added value by intensification and/or change of use. We estimate that some 45% of the Group's estates could, on a 3 to 10 year basis, be subject to some form of development through either refurbishment or extension for the existing use or alternatively redevelopment for another use. In particular, many estates could be subject to more intensive mixed use development, responding to the planning agenda set out by the Mayor of London. We anticipate that this programme will steadily accelerate over time. Of the other 55% of the Group's portfolio, most estates have good long term rental growth prospects supported by the ever-increasing demand for space that a growing city creates. Valuation The valuation of the Group's properties (valued by CB Richard Ellis) at 31 March 2005 was Â£718.4m, an increase of Â£89.9m over the year. The average value of the Group's property was Â£139 per sq. ft, with an immediate income yield on current rents passing of 5.92% (6.21% excluding development properties) and a yield at estimated current market rental values of 8.02%. For properties held throughout the year, comparing their value at 31 March 2004 plus additions and improvements at cost with that at 31 March 2005, the uplift was Â£63.2m or 10.44%. Acquisitions during the year showed a surplus on valuation of Â£4.3m (9.40%). During the year, the Chancellor withdrew the exemption from stamp duty of transfers of property in certain areas. 50% of the Group's properties (by value) were located in these areas. Stamp Duty on these properties would total Â£14.3m which will have affected the Group's valuation and reported surplus for the year. Total estimated rental values (ERVs) or current market rents on all lettable space at 31 March 2005 was Â£57.6m. Allowing for the 10% void that the Group operates at, this shows an achievable rental stream of Â£51.8m. This compares with current net income of Â£42.3m leaving Â£9.5m of potential additional income. Two thirds of this lies in six properties including in particular the refurbishment projects at Clerkenwell, Enterprise and Southbank. Clearly, once these projects are completed and the space re-let rentals and hence earnings will increase. We have again tested the Group's performance against the IPD (Investment Property Databank) March Universe 2005 benchmark. The table below illustrates not only the Group's continued substantial outperformance of sector averages, but also the lower levels of volatility in our particular sector compared with commercial property more generally. One Three Five Ten Total Return (p.a.) Year Years Years Years -------------------------------------------------------------------------- Workspace Group 17.5% 15.2% 16.8% 18.5% IPD March Universe 16.7% 12.6% 11.0% 11.5% Workspace Group 54 23 1 top Percentile Rank IPD Comparator 15.6% 9.6% 9.5% 11.1% The IPD comparator index is a benchmark compiled by IPD of comparable properties in comparable locations to those held by the Group. Improvements in valuation and total returns arise partly from market movements but also as a result of value-adding activity through acquisition, management and refurbishment/redevelopment. Comparison against indices such as these segregates simple market movement from our value-adding activity. With its consistent performance the Group demonstrates its ability to generate enhanced returns from its investments. This consistent strategy will continue - a focused portfolio with low capital values, serving a growing market, with opportunities to add value and to acquire more stock. With this, and the current robust underlying values, there is plenty of scope and opportunity for growth. Financial Review Profits Trading profits in 2004/05 before tax, at Â£14.48m were 2.6% ahead of last year. As predicted earnings growth was affected by the dip in occupancy that had occurred in 2003/04. Whilst the rental reductions arising from this dip were recovered during the first half of 2004/05, the lost income in the early period neutralised an element of the rental growth that was achieved in the year overall. This was compounded by the loss of rents at Clerkenwell Workshops which was vacated at the start of the financial year to enable the planned refurbishment works. These are now progressing well, and once completed, the re-letting of this property will make a valuable contribution to earnings growth going forward. At a headline level, profit before tax at Â£14.41m was reduced (down 4.7%) by a small Â£0.08m loss on disposals (2004: profit of Â£1.00m). This arose from a loss on the sale of Three Mills which eliminated the profits made on the disposal of the Hooley Lane and Union Street sites. Overall, all these properties made good 'whole life' returns and the loss was more of a timing nature. Trading Earnings Per Share and Earnings Per Share were 6.3p and 6.2p respectively; up 3.3% and down 4.6% respectively also. These mirror the performance at the profit before tax level. Overheads, as a percentage of turnover, remained at the level reported last year of 13.9%. This however conceals the efficiency improvements achieved during the year which in turn afforded the capacity to invest further in staffing to assist in our acquisitions programme and in management of our construction activities. Interest charges were up 21% at Â£18.85m. This increase was due in part to the increased debt levels, with borrowings at 31 March 2005 totalling Â£323.6m (2004: Â£308.2m). A further cost arose from the increase in interest rates. At 4.83% the market daily average rate of LIBOR through 2004/05 was 1.00% higher than that for 2003/04. Interest rate growth appears now to have slowed with a number of forecasters now considering current levels to be the peak of the current interest rate cycle. In these circumstances, interest rate fluctuations in the current year (2005/06) should not have as severe an impact on earnings growth as occurred in 2004/05. Taxation The effective rate of corporation tax in 2004/05 was 29.7% (2003/04: 30.3%). The reduction in the year was due mainly to differences between tax adjustments made for prior period capital allowance claims and the deferred tax provision in respect of these. The net benefit arising from this was reduced by capital gains tax adjustments in respect of disposals. Investigation work into the tax history of recent acquisitions has borne fruit in the current year leading to the Â£1.1m prior year tax adjustment in respect of Industrial Building and Plant allowances. This reduces the amount of the current taxation liability but gives rise to a deferred tax provision. However, over time as buildings reach the end of their IBA life, or plant is replaced these savings will crystallise. It is anticipated that, leaving aside disposals, the current year tax rate for 2005/06 will be of the order of 30%. However, this level may be reduced by further prior year adjustments arising from capital allowance claims. Net Assets and Balance Sheet Overall net worth (net assets employed) increased over the year by Â£69.4m (23.5%) to Â£365.1m with the valuation surplus for the year of Â£67.3m (41.2 pence per share) largely providing this increase. This increase is reflected in the Â£89.7m increase in tangible net assets covered in part by Â£15.9m of increased longer term borrowings and Â£2.6m and Â£1.9m increases to other net current liabilities and deferred tax provisions. The Group's net current liabilities at 31 March 2005 were Â£25.37m (2004: Â£22.82m). Current liabilities include tenants' deposits in the form of advance rent payments and quarterly and monthly rents and service charge payments in advance amounting in aggregate to Â£11.0m (2004: Â£10.5m). The directors consider that in the normal course of business the majority of these liabilities are unlikely to require payment and properly form part of the working capital of the Group. Net cash inflow from operating activities at Â£33.92m (2004: Â£31.6m) improved, principally due to the contribution from newly acquired properties together with increased profitability from existing properties. In March 2005 the Group made a 9 for 1 bonus issue of shares following a Â£15.2m capitalisation of reserves. This resulted in the issue of 151,955,694 shares to existing shareholders. As a result of this issue, net asset value per share was subdivided by ten so that year end net asset value was adjusted from Â£22.40 per share to Â£2.24 per share. Progress Record Progress in key performance indicators over the year and over a five year period was: Compound 2004/2005 2003/2004 annual growth growth growth 2000 - 2005 ------------------------------------------------------------------------------- Improvement in Trading PBT 2.6% 12.8% 11.7% Improvement in Trading EPS 3.3% 2.0% 9.5% Improvement in dividends per share 10.0% 10.3% 10.2% Improvement in NAV (per share) 21.7% 22.1% 19.9% Dividend A final dividend of 2.28p per share is proposed. The interim dividend was 11.3p (equivalent to 1.13p following the bonus share issue in March 2005) per share, and so the total dividend proposed for the year is 3.41p (an increase of 10%). The dividends are covered 1.81 times (2004: 2.11 times ) by earnings, 1.83 times (2004: 1.97 times) if based on trading earnings only. The dividend increase of 10% is in line with previous periods. Whilst the dividend cover is reduced this year the Board believes that the prospects for the Company support continued dividend growth at this rate. Internal performance measures Internal benchmark comparison shows: Performance measures 2005 2004 2003 2002 2001 -------------------------------------------------------------------------------- Turnover per member of staff (Â£000) 380 332 314 294 272 Year-end investment in property per member of staff (Â£000) 5,006 4,092 3,261 2,984 2,581 Administrative expenses as a percentage of revenue 13.9% 13.9% 14.6% 15.3% 13.8% Total return on equity 27.6% 26.2% 15.0% 20.6% 40.7% Return on equity is computed by reference to pre-tax profits plus valuation surpluses/deficits divided by opening shareholders' funds Our target is to achieve a strong double digit return on equity year on year, and in due course to reduce administrative expenses as a percentage of revenue to below 12%. However, the continued growth and expansion of the business slows attainment of this latter target due to the operational issues that arise during the early years following acquisition of new properties. Financing The Group opened the year with Â£18.0m of available resources. This was supplemented by the Â£34.8m (before costs and taxation) realised on the disposals of Hooley Lane, Redhill; Union Street sites and Three Mills. These resources largely provided the funding required for the capital expenditure and acquisitions programme in 2004/05. As flagged in last year's report, the Group's facility with NatWest has been increased from Â£100m to Â£150m during the year and renewed to a fresh five year term. Discussions have commenced with Bradford & Bingley to undertake a similar exercise increasing its facility from Â£200m to Â£250m, refreshing the term of this loan also. This pattern of extending and renewing five year term loans was described in last year's review. Through this approach, the Board considers the Group can access competitively priced funding on a flexible basis to match its cash demands for expansion. With regular reviews and renewals the maturity of these loans can be maintained in the 3 - 5 year range leaving flexibility should markets and circumstances change. The weighted average life of the Group's debt at 31 March 2005 was 3.0 years. At the year end the Group's facilities and drawings thereon were: - 2005 2005 2005 2004 Facility Amount Drawn % of Debt Drawn Â£m Â£m Â£m Debenture Stock 19.5 19.5 6% 19.5 Convertible Loan Stock 2.5 2.5 1% 2.9 Bradford & Bingley loan 200.0 200.0 62% 200.0 NatWest property loan 150.0 100.8 31% 84.5 NatWest overdraft 2.5 0.8 - 1.3 --- ---- ---- ---- 374.5 323.6 100% 308.2 ======= ====== ==== ===== The available resources of approximately Â£50m are equivalent to 8 months spend at the planned capital investment rate for 2005/06. Borrowings over recent years 2005 2004 2003 2002 2001 ---------------------------------------------------------------------------- % Fixed/hedged 62% 59% 75% 77% 89% Average interest rate (year end) 6.3% 5.8% 5.8% 5.8% 7.0% Interest cover 1.77 1.97 2.04 2.15 2.70 Trading Interest Cover 1.77 1.91 1.72 2.09 1.82 Year-end gearing % 88% 104% 98% 81% 83% Debt: Portfolio Value 45% 49% 48% 43% 43% Following the substantial valuation surplus at the year end, gearing reduced to 88%. Both gearing and interest cover levels are comfortably within the levels historically set by the Board of 120% and 1.5 times. The debenture and convertible loan stock, which attract an average 11.3% interest charge, represent just 6% of total borrowings. The debenture stock matures in 2007 with the Convertible maturing in 2011. The maturity of net debt at 31 March 2005 is shown below: - 2005 2004 2003 2002 -------------------------------------------------------------------------------- Maturity of net debt % % % % -------------------------------------------------------------------------------- Under 12 months - - - 1% 1 - 5 years 99% 99% 99% 34% 5 - 10 years 1% 1% 1% 65% 10 years + - - - - -------------------------------------------------------------------------------- Total 100% 100% 100% 100% -------------------------------------------------------------------------------- At 31 March 2005 the average cost of floating rate funds was a margin of 0.94% over LIBOR or base rate (2004: 0.94%). At 31 March 2005 secured borrowings were covered 2.04 times by the value of charged property (with a further Â£62.9m of uncharged property giving an overall cover of 2.24 times). Further details of debt facilities and borrowing policies are given in note 14. International Financial Reporting Standards (IFRS) The Company will be obliged to report using IFRS for the financial year ending 31 March 2006, with its first IFRS based statements being for the quarter ending 30 June 2005. Illustrative unaudited statements reconciling accounts prepared under current UK GAAP with the results presented using IFRS have been prepared (in common with last year) by reference to the principal standards giving rise to the most significant changes in the reporting of the Company's performance. These statements will be included in its briefings to analysts and investors and will be placed on its website. A full reconciliation of accounts and details of conversion adjustments will be provided at the time of the Group's first quarter results. The principal changes impacting upon the profit and loss account and balance sheet of the Company under IFRS include inclusion of valuation surpluses in the profit and loss account, full recognition of deferred taxation liabilities, adjustment of certain financial liabilities to reflect market values and charging for share based payments. In addition to these there will be extensive new disclosure requirements particularly relating to investment properties, leases and other balance sheet items although these will not have a material impact on reported Net Assets. Understanding Our Business Our Market Place The Group's business model is simple. We are a property-based business providing a variety of accommodation for small and medium sized enterprises (SMEs) in London and the South East. There are over 4.02m businesses in the UK, of which 1.07m are SMEs employing between one and twenty people. Of these, 30% or in excess of 317,000 are based in London and the South East. London alone accounts for 20% of business start-ups and closures in the UK each year and sees the greatest growth in higher 'added-value' businesses. This is a huge market place and despite being the leader in our field our market penetration remains low. There remains therefore considerable scope for us to grow. Our customer base reflects the diversity of the London economy. The three principal business sectors in London are financial services, business and advisory services and the creative and cultural industries. Our customers include many from these latter two sectors. They make attractive tenants to Workspace since they are usually high 'value adding' businesses, ones which are able to increase earnings over time and continue to meet rental obligations. Our new customers are more often second stage businesses, who have moved on from a home environment to more formal business premises. Many of them will, in time, relocate within our portfolio as their need for space changes. Churn - the formation, expansion, reduction and closure of businesses - is a key characteristic of the SME market and a source of opportunity for us. Through the constantly changing SME community and their needs it provides us both with new customers and the opportunity to relocate others; each allowing us to review and increase rents. Finally the Group is very well placed to take advantage of current trends for the growth of London (of both population and employment) and the call in the Mayor's London Plan for more intensive and mixed use of sites so that these increasing demands can be met within the existing built areas. Our assets are valued at a comparatively low level of Â£139 per sq. ft. They are not intensely developed and so, in the medium term, the potential for alternative use and intensification of use remains considerable. Our Business Our core product is an affordable, flexible lease which allows our customers to move in quickly and to expand or contract as their circumstances dictate. Typical lease terms include a tenancy for 3 years, protected in the main by the Landlord and Tenant Act but affording tenants the right to break on 3 months notice. In many respects we are an hotelier of space for small businesses, focused on providing good customer service. With average rents of just Â£9.29 per sq ft and an average unit size of 1,100 sq ft, our 'average' customer in London pays approximately Â£10,200 in rent per annum - which we believe should be readily affordable for small businesses operating in one of the best markets in the UK. Our business, its product and its systems, is designed to accommodate the changing needs of our customers as they upsize or downsize providing an appealing offer to customers whilst generating premium rents. During the year under review we received 7,764 enquiries which yielded 1,012 new lettings. The principal generators of enquiries continued to be estate signboards, internet references and referrals from existing customers. These enquiries are crucial to the Group's success: not only do they provide new lettings but they are also an indication of levels of activity within the SME sector and industry sub-sectors, enabling us to focus our offer effectively on emerging 'value-adding' businesses - those best able to pay improving rents. Enquiries also provide valuable intelligence into the developing patterns and trends in the sector. This influences our acquisition strategy and product development (both in terms of the type and location of the buildings and the services we provide within them). With the growth in internet enquiries we have reviewed the Group's website, focusing on improvements in the sales presentation and customer support aspects of the site. An improved site was launched after the financial year end. Our marketing activities are supported by the Group's association with the Small Business School at Kingston University which continues to provide valuable insights into the activities of SMEs in general and on a segmental basis. Research undertaken with Kingston has provided profiles of our customers and their performance, plans, impressions and attitudes, presentations of which may be found on the Group's website. All this helps us shape our product and manage risk in our business. With its in-house management operations - lettings, estate management and credit control - the Group is attuned to the flexibility needed by the SME marketplace. This enables us to foster close contact with our customers, to monitor changes in the market and to maintain exacting standards. We try to work closely with our customers and to understand and be responsive to their needs. This is reflected not only in our flexible leasing approach but also through a combination of entry and exit interviews and active centre management. From the pricing of our product, the focus on occupancy and actual achieved rates for rentals, to the 'front of house' management (easy-in-easy-out lettings and on-site management) and the provision of 'add-on' services, our approach is, as noted above, like that of an hotelier. We are the largest provider of accommodation focused on the SME sector in London and the South East with 3,940 customers in 103 estates providing 5.3 million sq ft of accommodation. There are few significantly sized competitors in this large but disaggregated marketplace. We have found that our portfolio aggregation has provided both the benefits of greater choice to our customers and improved risk management for the Company. We plan further expansion of our portfolio. To do this we are currently monitoring in detail over 200 properties in London worth in excess of Â£500m with a further 1,500 properties identified. Many of our acquisitions are drawn from this pool. As we expand our portfolio opportunities will arise to 'add value' to our stock, either by refurbishing or extending space to attract better rentals or by change of use. Acquisitions and Disposals 2004/2005 Acquisitions 2004/2005 ---------------------------------------------------------------------------------------------- Name of Property Description Purchase Initial Actual Market rent at Price Income 31/03/05 Â£000 Â£000 Â£000 ---------------------------------------------------------------------------------------------- The Quadrangle, 26,000 sq. ft Fulham SW6 business centre, 26 units Â£4,640.0 329.0 417.8 ---------------------------------------------------------------------------------------------- Southbank 63,000 sq. ft House, London, SE1 business centre, 212 units Â£16,000.0 965.4 2,321.7 ---------------------------------------------------------------------------------------------- Southgate Office 33,900 sq. ft Village, Enfield, N14 office park in 8 blocks Â£7,630.0 653.7 460.7 ---------------------------------------------------------------------------------------------- Chiswick 14,225 sq. ft Studios, London, W4 business centre, 6 units Â£2,875.0 211.0 226.5 ---------------------------------------------------------------------------------------------- Lombard 77,390 sq. ft Business Park office and industrial space Purley Way, Croydon in 13 units Â£7,750.0 720.5 716.9 ----------------------------------------------------------------------------------------------- Lewis House, 3 properties totalling 22,200 Park Royal, sq. ft in 14 units of office London NW10 and industrial space Â£2,370.0 109.5 213.1 ----------------------------------------------------------------------------------------------- Homesdale 15,225 sq ft Business Centre, business centre in Bromley, BR1 14 units Â£2,170.0 166.2 206.9 ----------------------------------------------------------------------------------------------- Total 43,435.0 3,155.3 4,563.6 Disposals 2004/2005 Name of Property Description Sale Price Exit Income Â£000 ------------------------------------------------------------------------------------------ Hooley Lane, Redhill Land for development Â£10.30m Nil Union Street Site, SE1 Land for development Â£1.88m 12.0 Three Mills Estates Film Studios, industrial units Â£22.60m 868.9 and business centre ------------------------------------------------------------------------------------------ Total Â£34.78m 880.9 Acquisitions During the year the Group made 7 acquisitions for a total consideration (excluding acquisition costs) of Â£43.4m, showing an initial yield of 7.27%. The Quadrangle is a 26,000 sq. ft business centre in a converted multi-storey Victorian former warehouse building in Fulham. The property is in a location in which the Group has long sought representation. It provides 26 units of accommodation ranging in sizes from 800 sq ft to 2,600 sq ft let mainly to locally based small businesses. At acquisition, occupancy was 75%. In time we seek to achieve 90%. Southbank House is a 63,000 sq. ft business centre located just off the Albert Embankment in London SE1 close to Lambeth Bridge. It is the former head office and manufacturing premises for Royal Doulton china. It provides 212 units of accommodation ranging in sizes from 50 sq. ft to 2,300 sq ft with an average size of 332 sq. ft. The property complements the Group's other holdings in the area (sitting between Westminster Business Square and Enterprise House/Great Guildford Street) extending the range of accommodation offer and servicing offered to our customers. Part of the premises were occupied by the former owner giving us the opportunity, following its partial refurbishment, of increasing rental income. In contrast, Southgate Office Village is a modern, purpose-built small unit office estate constructed in the mid '80s. It is located close to Southgate underground station and so is well located to service both the local business community and those businesses seeking accommodation near to the North Circular Road. The property was originally let to larger nationally based companies, some of whom have now moved away. We can refocus the property and the leasing package structure to provide a more attractive offer to smaller businesses thereby improving returns. Chiswick Studios is a converted single-storey former industrial building located adjacent to the Chiswick Roundabout in West London, providing immediate access both to the A4/M4 and to the North Circular Road. It provides 14,225 sq. ft in six units, ranging in sizes from 530 sq. ft to 4,400 sq. ft. The Group's Barley Mow Centre is nearby and we are tracking other properties in the area. Lombard House and Lombard Business Park comprise 77,400 sq. ft of office and industrial accommodation located on the A23, Purley Way at its junction with the A236. The 45,000 sq. ft office building is located prominently on the roundabout at this location and is well known locally. The industrial estate is situated to the rear of the office building and comprises eleven single-storey north lit industrial buildings which are let to a mixture of local businesses. The office accommodation is let to Vodafone under a lease extending to March 2010 which obliges Vodafone to convert all the space back to cellular business centre space on expiry of the lease. Lewis House comprises three properties, Lewis House, 3a School Road and 99 Victoria Road in Park Royal. It is very near to the Group's longstanding property, Acton Business Centre, located in School Road and the more recently purchased Westwood Business Centre and Europa House, both located in Victoria Road. It further consolidates the Group's cluster of holdings in Park Royal. Lewis House was vacant on acquisition (with the industrial premises being let). Following refurbishment Lewis House can be sub-divided to provide nine units of accommodation ranging from 200 sq ft to 750 sq. ft. Homesdale Business Centre in Bromley is an attractive Victorian former laundry which has been refurbished to create a 15,225 sq. ft business centre offering 14 units of accommodation ranging from 500 sq. ft to 1,500 sq. ft. It was acquired from Greater London Enterprises, the development agency co-owned by the London boroughs with which the Group has an association and from which it has acquired properties in the past. This is another area in London where the Group has not previously had a presence. As may be seen acquisitions during the year have either complemented the Group's existing holdings, or have enabled penetration into markets where the Group is seeking representation. All the purchases fall within the Group's principal target acquisition area, within the M25. Disposals Three disposals were completed during the year. Two of these, Hooley Lane at Redhill and Union Street, SE1, were both sold for redevelopment for housing. Hooley Lane was acquired in April 1997. It was a 9 acre site, formerly used as railway siding and storage land. It was used, on acquisition, for open storage for builders merchants and similar businesses. It was acquired for a consideration of Â£0.95m. Plans for redevelopment of the site, evaluating a variety of uses including food retail, retail warehousing and residential were investigated leading to a successful application for planning consent for housing. At the same time overage rights over the land were bought in taking the Group's total investment to Â£2.5m. Throughout this period the site showed a 13%, rising to 20% return on the original cost. On its sale for Â£10.3m it realised a 49% pre-tax internal rate of return (IRR) over the investment holding period. The land holdings at Union Street were acquired as part of the Union Street Postal Sorting Office purchase in April 1998. The Post Sorting Office was let to J Sainsbury, refurbished and sold in December 2000 realising a Â£9.5 profit. Three plots of land were retained and planning consent obtained for residential development. This land, which was acquired for Â£0.67m, was sold for Â£1.88m showing a 23% IRR over the holding period. Three Mills was acquired in 1995 for Â£1.6m. This former gin distillery and brewery complex was largely empty and in a dilapidated condition at the time of its acquisition. At the time of purchase there was a fledgling film studio business based at the property. The Group supported the development of this business whilst refurbishing and bringing back into use the derelict buildings, creating film studios and other accommodation for film industry uses. Three Mills was an important feature of the early development of the Group, demonstrating how redundant space could be brought back to productive use creating employment and regenerating buildings. A small vacant portion of the site was sold two years ago to Copthorn Homes for a residential development. Whilst the Group's regeneration of the site has been successful, as Three Mills grew it took the Group further from its core activity, investment and management of small unit space, and further into film studio management, a more demanding and intensive activity and one which required focused industry knowledge and contacts. The Group was approached by the London Development Agency who were interested in the property as a potential media centre for the London Olympic bid. It was felt that the Group had taken this property as far as it could, had stimulated an important part of East London's urban regeneration, but should sell the property to refocus on its core activity areas. A small loss was recorded on its sale due to a price concession made in the final stages of negotiation. However, the property had been revalued at 31 March 2004 and this revaluation had shown a Â£4.1m surplus in 2003/04. The sale at Â£22.6m showed an IRR of 11.8% over the life of the investment. These returns illustrate the levels of return that can be expected from the Group's properties. Where an asset is held as an investment and intensively managed then the high initial income return can be improved through rental growth and capital surpluses to yield IRR's typically in the 10% - 20% region. Where, on top of this, change in use can be obtained then these returns accelerate further rising as high as almost 50% in the case of Hooley Lane, Redhill. These returns and overall performance are significant given the increasingly intense pressure on space in London. Following the year end the Group sold its interests at Payne Road Studios and 5 Payne Road for a combined consideration of Â£2.1m. This property has shown an IRR of 21.1% over the period of ownership. Adding Value: Services The Company has set itself the objective of being a good landlord and providing the highest levels of customer service. It recognises that its standards and efficiency of service, from the initial letting process through to moving in and occupation, should allow customers to maximise time spent on their own businesses. To do this it has developed stream-lined processes and actively seeks out opportunities to complement its accommodation offer. These currently extend principally to energy (electricity and gas), business insurance and internet connectivity services. Whilst these provide a useful supplement to earnings, their main objective is to increase the attractiveness of the Workspace core accommodation offering and support the maintenance of high levels of occupancy and rental income. At 31 March 2005 the Group supplied gas and electricity to 918 customers, had 580 business insurance customers and 256 internet connectivity customers. During the year the Group launched an initiative to provide internet protocol telephony (IPT) on a number of its sites following the successful provision of an IPT service as part of its Quality Court refurbishment project. This project will be progressed through 2005/06 with services being extended to other sites. For many years the Group has operated a tenants' directory - a 'yellow pages' type guide to services offered and preferential terms made available by customers to other Workspace customers. This directory has recently been transferred from a paper form to a web-based solution. Plans are also in hand to upgrade further this service over the next year. The Company has found that this service not only benefits its customers but enhances its brand through wider recognition of the services it provides for SMEs. Properties The Group's core activity is investment in, and the letting of, small-unit accommodation for SMEs. As such, it is not a property development company. However it will, when appropriate, engage either directly itself or by working with partners in property improvement and development activities to meet changing consumer needs and to create additional value. The Group has spent a considerable amount of time and effort analysing its portfolio to ensure that it prioritises its efforts on those properties which have significant potential for value enhancement. Recent projects to improve its accommodation offering to customers and the rental potential from its properties which demonstrate this focus include: â€¢ Leathermarket: construction of single storey extensions to two blocks of the estate undertaken in conjunction with refurbishment works; â€¢ Barley Mow: refurbishment of 50% of space at centre to bring it in line with current customer requirements; â€¢ Quality Court: refurbishment of former Patent Office to create managed office space; â€¢ Clerkenwell: extension and refurbishment of centre to target offering at cultural and creative markets in this area; â€¢ Enterprise House: extension, refurbishment and sub-division of single let space to create enlarged business centre. In addition to these projects, initiatives for the partial or complete change of use of sites have been progressed: - â€¢ Thurston Road: this 46,400 sq. ft industrial estate is to be replaced by up to a 75,000 sq ft retail warehouse, together with up to 290 residential units and related parking. Once planning consent and vacant possession have been secured then the property will be sold to a commercial development company; â€¢ Wharf Road: planning consent was received during the year for replacement of the 43,000 sq. ft business centre by 77 residential units and a new 32,500 sq ft business centre. A residential developer partner is to be sought for this site; â€¢ Aberdeen Studios: planning consent has been sought for a mixed-use residential and business centre development involving the replacement of the existing centre and the development of 96 residential units. â€¢ Greenheath Business Centre: planning consent has been sought for a mixed-use residential and business centre development in which the existing 59,000 sq. ft centre would be replaced by a new 48,000 sq. ft centre and 100 residential units. The latter three projects will provide new accommodation in place of the old tired buildings together with a cash consideration of the order of the original value of the existing buildings. Consolidated Profit and Loss Account for the year ended 31 March 2005 2005 2005 2005 2004 2004 2004 Notes Trading Other Total Trading Other Total Operations Items Operations Items Â£000 Â£000 Â£000 Â£000 Â£000 Â£000 Turnover - continuing operations 2 55,039 - 55,039 51,068 - 51,068 Rent payable and direct costs 2 (14,122) - (14,122) (14,229) - (14,229) ---------- --- ---------- ---------- --- ---------- Gross profit 40,917 - 40,917 36,839 - 36,839 Administrative expenses (7,660) - (7,660) (7,145) - (7,145) ---------- --- ---------- ---------- --- ---------- Operating profit 33,257 - 33,257 29,694 - 29,694 (Loss)/surplus on disposal of investment properties 3 - (75) (75) - 1,009 1,009 Net Interest payable and similar charges 4 (18,773) - (18,773) (15,583) - (15,583) ---------- --- ---------- ---------- --- ---------- Profit on ordinary activities before taxation 14,484 (75) 14,409 14,111 1,009 15,120 Taxation on profit on ordinary activities 5 (4,235) (38) (4,273) (4,284) (303) (4,587) ---------- --- ---------- ---------- --- ---------- Profit on ordinary activities after taxation 10,249 (113) 10,136 9,827 706 10,533 Dividends 6 (5,586) - (5,586) (4,981) - (4,981) ---------- --- ---------- ---------- --- ---------- Retained profit for the year 4,663 (113) 4,550 4,846 706 5,552 ======= ======= ======= ======= ===== ======= Basic earnings per share - restated 7 6.3p (0.1)p 6.2p 6.1p 0.4p 6.5p Diluted earnings per share - restated 7 6.2p (0.1)p 6.1p 6.0p 0.4p 6.4p Statement of Group total recognised gains and losses 2005 2004 for the year ended 31 March 2005 Â£000 Â£000 Profit for the financial year 10,136 10,533 Unrealised surplus on revaluation of investment properties 67,256 49,699 Taxation on valuation surpluses realised on sale of investment properties (3,768) (1,215) --------- --------- Total recognised gains relating to the financial year 73,624 59,017 ======== ======== Note of Group historical cost profits and losses 2005 2004 for the year ended 31 March 2005 Â£000 Â£000 Reported profits on ordinary activities before taxation 14,409 15,120 Realisation of property revaluation gains of previous years 13,468 4,408 --------- --------- Historical cost profit on ordinary activities 27,877 19,528 before taxation ======== ======== Historical cost profit for the year retained after taxation and dividends 14,250 8,745 ======== ======= Profit and earnings per share on trading operations are stated before profit on property disposals and other non-recurring items. BALANCE SHEETS As at 31 March 2005 Notes Group Group Company Company 2005 2004 2005 2004 Â£000 (as restated (as restated see note 16) See note 16) Â£000 Â£000 Â£000 Fixed assets Tangible assets: Investment properties 9 715,785 626,060 - 18,355 Other fixed assets 3,675 3,654 13 217 Shares in subsidiary undertakings - - 24 24 ______ ______ _____ _____ 719,460 629,714 37 18,596 Current assets Debtors 10 5,223 6,795 218,917 207,494 Investments 11 1,251 1,150 - - Cash at bank and in 3 181 - - hand ______ _______ _______ _______ 6,477 8,126 218,917 207,494 Creditors: amounts falling due within one year 12 (31,849) (30,942) (76,030) (96,367) ______ _______ _______ _______ Net current (liabilities)/assets (25,372) (22,816) 142,887 111,127 ______ _______ _______ _______ Total assets less current liabilities 694,088 606,898 142,924 129,723 ______ _______ _______ _______ Creditors: amounts falling due after more than one year (including Convertible Loan Stock) 13/14 (321,671) (305,756) (22,000) (22,400) Provision for liabilities and 15 (7,346) (5,483) (983) (1,263) charges ______ _______ _______ _______ Net Assets 365,071 295,659 119,941 106,060 ========= ========= ========= ========= Capital and reserves Called up share capital 16,884 1,673 16,884 1,673 Share premium account 28,388 42,912 28,388 42,912 Revaluation reserve 263,353 209,565 - 4,336 Profit and loss account 61,965 47,715 80,188 63,345 Investment in own shares 16 (5,519) (6,206) (5,519) (6,206) --------- --------- --------- --------- Shareholders' funds 365,071 295,659 119,941 106,060 ========= ========= ========= ========= Net asset value per share (basic)- restated 8 Â£2.24 Â£1.84 Adjusted net asset value per share (diluted)- restated 8 Â£2.21 Â£1.80 The financial statements were approved by the Board of directors on 10 June 2005. H Platt R M Taylor Directors CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 March 2005 Notes 2005 2004 To Cash flow Â£000 Â£000 Net cash inflow from operating activities 1 33,920 31,615 Returns on investments and servicing of 2 (19,641) (15,692) finance Taxation (5,924) (4,110) Net capital expenditure 2 (19,305) (70,155) Equity dividends paid (5,186) (4,952) ------- ------- Net cash outflow before use of liquid (16,136) (63,294) resources and financing Management of liquid resources 2 (101) 1,959 Financing 2 16,587 59,720 ------- ------- Net cash inflow/(outflow) 3 350 (1,615) ======== ======== Reconciliation of net cash flow to movement in net debt Increase/(decrease) in cash 350 (1,615) Increase/(decrease) in liquid resources 101 (1,959) Outflow from movements in debt financing (15,915) (59,766) -------- -------- Changes in net debt resulting from cash flows 3 (15,464) (63,340) Net debt at 1 April 2004 (305,765) (242,425) -------- -------- Net debt at 31 March 2005 (321,229) (305,765) ======== ======== Notes to the Consolidated Cash Flow Statement for the year ended 31 March 2005 2005 2004 Â£000 Â£000 1. Reconciliation of operating profit to operating cash flows Operating profit 33,257 29,694 Depreciation charges 665 585 Decrease in debtors 147 56 (Decrease)/increase in creditors (149) 1,280 ----- ----- 33,920 31,615 ======== ======== 2. Analysis of cash flow: Notes 2005 2004 To cash flow Â£000 Â£000 Returns on investments and servicing of finance Interest received 73 45 Interest paid (including financing costs) (19,714) (15,737) --------- --------- Net cash outflow (19,641) (15,692) ========= ========= Capital expenditure and financial investment Purchase of tangible fixed assets (55,354) (81,934) Net distribution of own shares 687 28 Sale of tangible fixed assets 35,362 11,751 --------- --------- Net cash outflow (19,305) (70,155) ========= ========= Management of liquid resources (Increase)/decrease in short term deposits 3 (101) 1,959 ------- ------- Net cash (outflow)/inflow (101) 1,959 ------- ------- Financing Issue of ordinary share capital 287 220 Drawdown of bank loans 3 16,300 59,500 -------- -------- Net cash inflow 16,587 59,720 ========= ========= 3. Analysis of Net Debt At 1.4.04 Cash Flow Non-cash Items At 31.3.05 Â£000 Â£000 Â£000 Â£000 Cash at bank and in hand 181 (178) - 3 Bank overdraft (1,340) 528 - (812) --------- ----- ------- (1,159) 350 - (809) --------- ----- ------- Debt due after one year: 11% Convertible Loan Stock (2,900) - 400 (2,500) 11.125% First Mortgage Debenture (12,500) - - (12,500) 11.625% First Mortgage Debenture (7,000) - - (7,000) Bank loans (284,500) (16,300) - (300,800) Less cost of raising finance 1,144 375* (390) 1,129 ------- ------ ------- ------ (305,756) (15,925) 10 (321,671) ----------- ---------- -- --------- Short term deposits 1,150 101 - 1,251 ----------- ---------- -- --------- Total (305,765) (15,474) 10 (321,229) =========== ========== === ========== * Included within interest paid Notes to the Financial Statements for the year ended 31 March 2005 1. Basis of Preparation The audited financial information contained in this preliminary announcement report does not comprise statutory accounts within the meaning of Section 240 of the Companies Act 1985. The figures in this preliminary announcement have been prepared under generally accepted accounting policies in the United Kingdom. The accounting policies adopted are those set out in the Annual Report and Accounts for the year ended 31 March 2004. (Except for the change noted below). The Company has adopted UITF Abstract 38 - accounting for ESOP trusts in these financial statements. The adoption of this Absract represents a change in accounting policy and the comparative figures have been restated accordingly. Investment in own shares are now shown as a deduction from shareholders' funds. 2. Trading Analysis 2005 2004 Turnover Costs Gross Turnover Costs Gross Â£000 Â£000 Profit Â£000 Â£000 Profit Â£000 Â£000 Rental income 43,270 (329) 42,941 39,504 (800) 38,704 Service charges and other recoveries 9,865 (13,680) (3,815) 9,059 (13,033) (3,974) Services, fees, commissions and 1,904 (113) 1,791 2,505 (396) 2,109 sundry income _____ ______ _____ _____ ______ _____ 55,039 (14,122) 40,917 51,068 (14,229) 36,839 ======= ======= ======= ======= ======= ======= The Group operates a single business which is continuing and occurs wholly in the United Kingdom. 3. (Loss)/Surplus on Disposal of Investment Properties The loss/surplus arising on the sale of properties is calculated by reference to the book value at the date of sale. Book value comprises the valuation as at 31 March 2004 plus additions at cost since that date. Proceeds from the sale of investment properties totalled Â£34,721,000 (2004: Â£10,637,000). Book value of these assets plus costs of sale totalled Â£34,796,000 (2004: Â£9,628,000) yielding a loss of Â£75,000 (2004: surplus Â£1,009,000). 4. Interest Receivable & Payable and Similar Charges 2005 2004 Â£000 Â£000 The following amounts were earned during the year: Short term deposits 67 30 Other 6 15 __ __ 73 45 === === The following amounts were payable during the year: 11% Convertible Loan Stock 2011 286 319 11.125% First Mortgage Debenture Stock 2007 1,391 1,391 11.625% First Mortgage Debenture Stock 2007 814 814 Bank and other interest on amounts wholly repayable within five years* 17,236 14,210 -------- ------- 19,727 16,734 Interest capitalised on properties undergoing improvement (881) (1,106) ------- ------- 18,846 15,628 ======== ======= Charged to profit and loss account 18,773 15,583 ======== ======= *Includes amortisation of cost of raising finance Â£390,500 (2004: Â£359,700) 5. Taxation on profit on ordinary activities 2005 2004 Â£000 Â£000 Current tax: UK corporation tax on profit for the year at 30% (2004: 30%) 3,308 3,534 Adjustment in respect of previous periods (1,099) (323) ------- ------- Total current tax 2,209 3,211 ------- ------- Deferred tax: Origination and reversal of timing differences 1,134 1,376 Adjustment in respect of previous periods 930 - ------- ------- 2,064 1,376 ------- ------- Taxation on profit on ordinary activities 4,273 4,587 ======= ======= Timing differences are mainly in respect of capital and industrial building allowances and capitalised interest. Of the total charge for the year Â£38,000 (2004: Â£303,000) related to exceptional items (arising from the disposal of investment properties) as disclosed on the face of the profit and loss account. The tax assessed for the period is lower than the standard rate of corporation tax in the UK. The differences are explained below: - 2005 2004 Â£000 Â£000 Profit on ordinary activities before taxation 14,409 15,120 -------- ------- Profit on ordinary activities at standard rate of corporation tax in the UK of 30% (2004: 30%) 4,323 4,536 Capital allowances in excess of depreciation (897) (746) Expenses not deductible for tax purposes 14 26 Interest capitalised (264) (332) Other timing differences 29 61 Capital gains adjustments 4,077 1,215 Capital gains charged direct to reserves (3,969) (1,215) Reductions due to application of small companies rate (5) (11) Adjustment in respect of previous periods (1,099) (323) --------- ------ 2,209 3,211 ======= ======= 6. Dividends 2005 2004 Â£000 Â£000 Interim dividend of 1.13p* (2004 - 1.03p*) per Ordinary Share 1,837 1,653 Proposed final dividend of 2.28p (2004 - 2.07p*) per Ordinary Share 3,721 3,321 Under provision in prior year 28 7 ---- ---- 5,586 4,981 ====== ====== * Figures adjusted to reflect bonus share issue made in March 2005. The interim dividend was paid on 1 February 2005 and the proposed final dividend is payable on 2 August 2005 to shareholders on the register at the close of business on 1 July 2005. 7. Earnings Per Share The following table shows a reconciliation of profit used in calculating basic earnings per share: Profit Basic earnings per share 2005 2004 2005 2004 Â£000 Â£000 pence pence Profit for the year attributable to shareholders 10,136 10,533 6.2 6.5 Non trading other items 113 (706) 0.1 (0.4) ____ ____ ____ ____ Profit for the year attributable to shareholders 10,249 9,827 6.3 6.1 used for calculating trading ====== ====== ==== ==== earnings per share Reconciliation of profit used in calculating diluted earnings per share: Profit Diluted earnings per share 2005 2004 2005 2004 Â£000 Â£000 pence pence Profit for the year attributable to shareholders used for calculating basic earnings per share 10,136 10,533 Interest saving net of taxation on 11% Convertible Loan Stock 200 223 --- --- Profit for the year attributable to shareholders used in calculatingthe underlying diluted earnings per share 10,336 10,756 6.1 6.4 Non trading other items 113 (706) 0.1 (0.4) ---- ---- ---- ---- Profit for the year attributable to shareholders used in calculating the diluted trading earnings per share 10,449 10,050 6.2 6.0 ====== ====== ==== ==== The following table shows a reconciliation of the weighted average number of shares used for calculating the basic and diluted earnings per share: 2005 2004 Used for calculating basic earnings per share (2004) 16,021,462 (excluding shares held in the ESOT) Increase due to capitalisation in year 144,193,158 ----------- Used for calculating basic earnings per share (2005) 161,931,920 160,214,620 (excluding shares held in the ESOT) Dilution due to share option schemes 1,682,780 227,276 Dilution due to Convertible Loan Stock 5,000,000 580,000 Increase due to capitalisation in year - 7,265,484 ------------- ----------- Used for calculating diluted earnings per share 168,614,700 168,287,380 ============= =========== 8. Net assets per share Net Assets used for calculating net assets per share: 2005 2004 Â£000 Â£000 Net assets 365,071 295,659 Dilution due to Convertible Loan Stock 2,500 2,900 ------- ------- Diluted net assets 367,571 298,559 Deferred tax arising from capital allowances and capitalised interest on investment properties (see note 15) 7,381 5,540 ------- ------- Adjusted diluted net assets 374,952 304,099 ========= ========= The additional deferred tax liability arising from capital allowances on investment properties is excluded from the calculation of adjusted net assets as the Group's experience is that deferred tax on capital allowances in relation to investment properties is unlikely to crystallise in practice. The deferred tax on capitalised interest on these properties is added back as it is a permanent timing difference. Number of ordinary shares used for calculating net assets per share: 2005 2004 Shares in issue at year-end 168,839,660 16,733,811 Less ESOT shares (5,620,370) (689,666) Increase due to capitalisation in year - 144,397,305 ------------ ----------- Used for calculating basic net assets per share 163,219,290 160,441,450 Dilution due to share option schemes 1,682,780 227,276 Dilution due to Convertible Loan Stock 5,000,000 580,000 Increase due to capitalisation in year - 7,265,484 ------------ ----------- Used for calculating diluted net assets per share 169,902,070 168,514,210 ============= ============= Net assets per share: 2005 2004 Restated ---------- --------- Net assets per share (basic) Â£2.24 Â£1.84 Diluted net assets per share Â£2.18 Â£1.77 Adjusted net assets per share (basic) Â£2.28 Â£1.88 Adjusted diluted net assets per share Â£2.21 Â£1.80 ---------- --------- 9(a) Investment Properties-Group Freehold Mainly Long Short Total Â£000 Freehold Leasehold Leasehold Â£000 Â£000 Â£000 Â£000 Balance at 1 April 2004 469,310 85,875 70,875 - 626,060 Additions during the 55,780 884 190 - 56,854 year Disposals during the (13,191) (21,194) - - (34,385) year Revaluation during the 51,671 9,235 6,350 - 67,256 year --------- -------- -------- --- -------- Balance at 31 March 2005 563,570 74,800 77,415 - 715,785 ========= ======== ======== === ========= The historical cost of investment properties: Balance at 31 March 2004 307,040 53,503 55,489 7 416,039 ========= ======== ======== === ========= Balance at 31 March 2005 358,735 38,339 55,679 - 452,753 ========= ======== ======== === ========= The directors are advised that the value of the properties at 31 March 2005 was not less than their book cost (see Note 9b). Properties classified as mainly freehold are those where the majority of the estate is owned freehold but where an element of the Group's interest is held leasehold. Additions during the year are stated net of grants receivable of Â£nil (2004 - Â£nil) and include capitalised interest, gross of tax element, of Â£881,000 (2004: Â£1,106,000). 9(b) Valuation The Group's investment properties were valued by CB Richard Ellis, Chartered Surveyors, at 31 March 2005 on the basis of open market value, as defined in Statement 4 of the Practice Statements contained in the Appraisal and Valuation Manual issued by the Royal Institution of Chartered Surveyors. The valuation at that date amounted to Â£718,425,000 (2004 - Â£628,485,000). This included Â£350,000 (2004: Â£400,000) 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 Â£1. The adjustment from the valuation total to the accounts total may be reconciled as follows: - 2005 2004 Â£000 Â£000 Total per CBRE valuation report 718,425 628,485 Alpha Business Centre (350) (400) Property held for own use as headquarters and shown in other fixed assets (2,290) (2,025) ______ ______ Total per Accounts 715,785 626,060 ========= ========= 10. Debtors Group Company 2005 2004 2005 2004 Â£000 Â£000 Â£000 Â£000 Amounts falling due within one year: Trade debtors 3,099 4,765 - - Amounts owned by subsidiary undertakings - - 215,433 201,997 Deposits on investment acquisitions - 464 - - Taxation and social security - 4 - - Corporation tax - payments on account - - 3,447 5,497 Prepayments and accrued income 2,124 1,562 37 - ----- ----- ---- --- 5,223 6,795 218,917 207,494 ===== ======= ========= ========= 11. Investments Investments represent returnable security deposits received from tenants. These 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. 12. Creditors: Amounts falling due within one year Group Company 2005 2004 2005 2004 Â£000 Â£000 Â£000 Â£000 Bank overdraft (secured, see note 13) 812 1,340 - - Trade creditors 2,219 1,902 - - Amounts owed to subsidiary undertakings - - 72,108 92,966 Corporation tax payable 2,495 2,242 - - Taxation and social security 1,111 1,757 - - Tenants' deposits (see note 11 also) 6,120 5,461 - - Accruals 10,530 9,884 199 80 Deferred income-rent and service charges 4,841 5,035 2 - Dividends 3,721 3,321 3,721 3,321 ------- ------- ------- ------- 31,849 30,942 76,030 96,367 ======== ======== ======== ======== 13. Creditors: Amounts falling due after more than one year Group Company Long-term borrowings consist of: 2005 2004 2005 2004 Â£000 Â£000 Â£000 Â£000 Unsecured: 11% Convertible Loan Stock 2011 2,500 2,900 2,500 2,900 Secured: 11.125% First Mortgage Debenture Stock 2007 12,500 12,500 12,500 12,500 11.625% First Mortgage Debenture Stock 2007 7,000 7,000 7,000 7,000 Other secured loans 299,671 283,356 - - --------- --------- --------- --------- 321,671 305,756 22,000 22,400 ========= ========= ========= ========= The secured loans and overdraft facility are secured on properties with values totalling Â£655,515,000. Interest on the Debenture Stocks is payable on 31 March and 30 September each year. Interest on the 11% Convertible Unsecured Loan Stock 2011 is payable on 30 June and 31 December each year. Other secured loans include a loan of Â£200,000,000 carrying an interest rate of 0.94% over LIBOR and repayable in July 2007 and a loan totalling Â£100,800,000 carrying an interest rate of 0.95% over LIBOR repayable in July 2009. Workspace Holdings Ltd holds an interest rate collar on Â£104.2m which has a cap of 8% and a floor of 4.5% each until July 2009. Workspace 2 Ltd holds an interest rate collar on Â£75m which has a cap of 6.95% and a floor of 4.05% each until July 2009. The 11% Convertible Unsecured Loan Stock 2011 holders have the option to convert in each year on the basis of one ordinary share for every Â£0.50 of stock held (as adjusted for bonus issue in year). Loans totalling Â£2,500,000 (2004: Â£2,900,000) have a maturity of five years or more (see note 14). 14. Borrowings and Financial Instruments (i) Policies The Group finances its operations through a mixture of retained profits and borrowings. The Group borrows at both fixed and floating rates of interest and then uses interest rate swaps and caps to generate the desired interest and risk profile. Details of the interest rate collars held by the Group to manage interest rate exposures are given in note 13. No premium payment was made for either of these collars. However, the Â£104.2m collar is financed by a 0.22% adjustment to the interest rate margin paid on the borrowings. The Group's policy is to fix or cap interest rates on at least 50% of its borrowings. At the year-end 7% (2004: 7%) of the Group's borrowings were fixed with a further 55% (2004: 52%) subject to a collar. At 31 March 2005 the weighted average life of the Group's bank loan facilities was 3.02 years and 99% of the Group's total debt had a maturity of 1 - 5 years. It is the Group's practice to procure funding on a shorter 5 year term basis, ensuring that facilities are renewed or replaced 1 to 2 years before the maturity date. The Group has taken advantage of the exemption for disclosure of short-term debtor and creditor balances. (ii) Financial Assets All of the Group's financial assets are denominated in sterling. The interest rate profile at 31 March 2005 was: 2005 2004 Â£000 Â£000 Cash at bank and in hand (no interest) 3 181 Floating rate tenants' deposits 1,251 1,150 ------- ------- 1,254 1,331 ======= ======= (iii) Financial Liabilities All of the Group's financial liabilities are denominated in sterling. The interest rate profile of the Group's financial liabilities at 31 March 2005 was: 2005 2004 Â£000 Â£000 Floating rate financial instruments 301,612 285,840 Fixed rate financial liabilities 22,000 22,400 -------- -------- 323,612 308,240 ========= ========= As noted above (note 13) the Group has the benefit of interest rate collars operating in respect of each of its principal bank loan facilities. For its fixed rate financial liabilities: Weighted average interest rate 11.27% Weighted average period fixed 2.45 years Floating rate financial liabilities comprise bank loans that bear interest at rates based upon 1, 3, 6 or 12 month LIBOR. The average margin on these borrowings at 31 March 2005 was 0.94%. (iv) Maturity of Financial Liabilities A maturity analysis of loans is shown below: Group Company 2005 2004 2005 2004 Â£000 Â£000 Â£000 Â£000 Less than one year 812 1,340 - - Between one year and two years - - - - Between two years and three years 219,500 - 19,500 - Between three years and four years - 304,000 - 19,500 Between four years and five years 100,800 - - - In five years and more 2,500 2,900 2,500 2,900 ------- ------- ------- ------- 323,612 308,240 22,000 22,400 Less cost of raising finance (1,129) (1,144) - - ------- ------- ------- ------- 322,483 307,096 22,000 22,400 ======== ======== ======== ======== Cost of raising finance is being amortised over 5 years. (v) Borrowing Facilities At 31 March 2005 the Group had undrawn borrowing facilities of Â£50,888,000 (2004: Â£16,660,000) which conditions precedent had been met. Of the total undrawn facilities Â£1,688,000 (2004: Â£1,341,700) had a maturity of less than 12 months with the remainder having a maturity of in excess of two years. (vi) Fair Value of Financial Assets and Liabilities Book and fair values of financial assets and liabilities are: 2005 2005 2004 2004 Book Value Fair Value Book Value Fair Value Â£000 Â£000 Â£000 Â£000 Primary Financial Instruments Short term liabilities (812) (812) (1,340) (1,340) Long term borrowing (321,671) (329,562) (305,756) (312,196) Financial assets 1,254 1,254 1,331 1,331 Derivative Financial Instruments Interest rate cap/collar 167 (1,543) 206 (2,639) _______ _______ _______ _______ (321,062) (330,663) (305,559) (314,844) ========== ========== ========== ========== The fair value of the interest rate cap/collar/swaps have 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 5.9p per share (2004: 5.8p) (2.0p (2004: 3.0p) based on diluted share capital). Comparatives have been restated for bonus issue in year. 15. Provision for Liabilities and Charges Group Company 2005 2004 2005 2004 Â£000 Â£000 Â£000 Â£000 Deferred Taxation: Balance at 1 April 2004 5,483 4,107 1,263 1,086 Deferred tax charge/(credit) for the year 2,064 1,376 (79) 177 Transfer direct to reserves on sale of investment properties (201) - (201) - ------- ------- --- ------- Balance at 31 March 2005 7,346 5,483 983 1,263 ======= ======= ===== ======= The provision for deferred tax comprises: Accelerated capital allowances 6,541 4,763 887 985 Capitalised interest 840 777 96 296 Other short term timing differences (35) (57) - (18) ------ ------ --- ------ 7,346 5,483 983 1,263 ======= ======= ===== ======= If the investment properties were sold for their revalued amounts there would be a potential liability to corporation tax of Â£64,456,000 (2004: Â£51,293,000). In accordance with FRS 19 no provision has been made for these amounts. 16. 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 year the Trust transferred 127,629 shares (prior to the bonus issue in the year) to employees on exercise of options. At 31 March 2005, the number of shares held by the Trust totalled 5,620,370 (2004: 6,896,660) with a nominal value of Â£562,037 (2004: Â£689,666) and the book value of the shares amounted to Â£5,518,800 (2004: Â£6,205,600). At 31 March 2005 the market value of the shares held by the Trust was Â£13,207,870. 5,609,010 shares held by the trust are subject to option awards. Numbers of shares and comparatives have been restated due to the bonus issue that took place during the year. In accordance with UITF Abstract 38 - accounting for ESOP trusts, investment in own shares has been reclassified as a deduction from shareholders' funds giving rise to restatement of 2003/4 comparatives, and has led to a decrease in shareholder funds of Â£5,518,800 (2004: Â£6,205,600) This information is provided by RNS The company news service from the London Stock Exchange

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