Final Results

Workspace Group PLC 11 June 2007 WORKSPACE - NAV UP 43% FOLLOWING CONVERSION TO A REIT Workspace Group PLC ('Workspace') today announces its preliminary results for the year ended 31 March 2007. Workspace provides 4.9 million sq. ft of flexible business accommodation to over 3,700 small and medium size enterprises ('SMEs') in London and the South East. â€¢ Valuation Surplus Â£95.3m 10.5% â€¢ Net Asset Value per share Â£3.40 up 43% â€¢ NAV (adjusted for REIT conversion levy) Â£3.51 up 48% â€¢ Diluted Adjusted Net Asset Value per share Â£3.36 up 11.6% â€¢ Basic Earnings per share 115.1p up 77% â€¢ Profit Before Tax Â£112.5m down 24% â€¢ Trading Profit Before Tax Â£10.2m down 32% â€¢ Investment Portfolio Valuation Â£1,001.6m up 3.9% â€¢ Portfolio including JV Â£1,163.8m up 21% â€¢ Annual rent roll at year end (directly owned) Â£47.2m up 18.7% â€¢ Rent roll (including JV) Â£55.3m up 18.6% â€¢ Final distribution of 2.76p - total distribution up 10% to 4.14p Commenting on the results, Harry Platt, Chief Executive, said, ' This has been another year of progress for Workspace, during which we have created the platform for growth over the next few years. The two major events of the year were the establishment of the Joint Venture with Glebe and the Group's conversion to the tax efficient REIT status. Both of these moves have strengthened the ability of the group to continue to grow. ' Our core market of providing space for SMEs in London remains strong. Demand for space is good and rents are improving. Our space remains good value with our average rent at the year end growing to a still affordable Â£11.34 per sq. ft. We have made Â£70 million of acquisitions where we have identified the potential for growth from our style of ownership, though following the recent interest rate increases the initial yield on these is below the cost of borrowing. ' The appointment of Angus Boag as Development Director, together with our joint venture with Glebe will enable us to accelerate our programme to add value to both our directly held properties and those in our joint venture. This is at a time when the need for intensification throughout London is growing. We have a number of active schemes that are making good progress. ' Looking forward, the future for the Group is promising. Our properties are performing well and many have significant potential to release further value. We have a first class team with the proven skills to deliver value for our shareholders and we look forward to the future with confidence.' -ends- Date: 11 June 2007 For further information: Workspace Group PLC cityPROFILE Harry Platt, Chief Executive Simon Courtenay Mark Taylor, Finance Director William Attwell 020-7247-7614 020-7448-3244 e-mail: info@workspacegroup.co.uk web: www.workspacegroup.co.uk Chairman's Statement Introduction I am pleased to report upon another year of progress by your Company. Again, shareholder value was enhanced with net asset value per share up 43% to Â£3.40 (assisted by our conversion to a REIT). Total shareholder return was 51% for the year with 49% and 34% per annum over 3 and 5 year periods. This has been a very active year both in the core business and through two major corporate changes - the creation of the joint venture with Glebe and the conversion to a REIT. At a time when sustainable regeneration is a priority on the national and London agenda, our business model has never been so relevant to the community in which we are based. Our Focused Strategy Our strategy is to focus on Greater London, to focus on providing space for small and medium sized enterprises (SMEs), and to focus on non-prime properties. This is where our skills add the greatest value. At the heart of this focus are two fundamental factors, the selection of London and the SME sector. Your Board continues to believe that the growth prospects in London are very considerable and that the SME community is integral to this growth of the city. We create value by acquiring space with potential, by driving occupancy and rents through our operational and marketing skills, and then enhancing value through intensification and higher added value use - often acting as a catalyst and prime mover for more widespread regeneration in an area. Higher interest rates and tighter yields on acquisition have put pressure on short term trading profits and the ability to acquire property on immediate accretive terms. Despite this, we continue to acquire where we see good long term value. We have increased our emphasis on extracting greater value from the intensification of sites. The formation of the joint venture with Glebe reflects this but additionally, allowed us to de-gear as interest rates rose. Results Net Asset Value per share grew by 43% to Â£3.40 per share (Diluted Adjusted Net Asset Value by 11.6% to Â£3.36 per share). Adding back the exceptional REIT conversion charge takes this to Â£3.51 (up 48%). This growth was driven by a Â£95.3m valuation surplus, a 10.5% increase in value. Against the IPD (Investment Property Databank) industry benchmark measure, our 16.3% annual return outperformed the 15.8% reported for the universe benchmark. On a geared basis, combining this growth with earnings for the year yielded a total return on equity of 21.8% (2006: 40.7%). This is a stronger performance than anticipated mainly due to the continued growth in capital values, the pace of which we had expected to dampen this year. It is pleasing to note that this value appreciation is now being driven mainly by rental improvements rather than just yield reductions. The Group's rent roll (excluding the joint venture properties) increased by 18.7% to Â£47.2m with Â£1.7m of the increase arising from improvements in the rental levels in the core portfolio. With market rental levels (ERVs) rising (up 4.92% on a like for like basis) then this trend is set to continue. Added Value We announced with our results last year our entry into the joint venture with Glebe. This was a new initiative for us, facilitating our participation in the regeneration of certain of our (and Glebe's) assets to a fuller extent than hitherto. The joint venture has worked well so far with good progress being made as our first three projects progress through the design and planning process; all of which are showing increased densities over those originally envisaged. Since entering the Glebe joint venture we have refocused our attentions on the retained balance of our portfolio, seeking out opportunities for improvement in these and have recently appointed a Development Director to lead this. As explained in last year's Sustainability Review, much of what we are doing runs with the grain of the Mayor's Plan for London. We consider that any business that operates in line with the social and economic environment in which it is located is truly 'sustainable' and that this should favour the advancement of our plans and proposals. REIT Your Board resolved that it was in the interest of shareholders to convert to a Real Estate Investment Trust (REIT) and, following an EGM in December 2006 at which the Group's articles of association were amended to facilitate this, the Group converted on 1 January 2007. In addition to the taxation benefits, this transition has increased the profile of the Company and shows potential for assisting corporate acquisitions in the future. A more detailed commentary is given on this later. Board and Staff During the year Rupert Dickinson (Chief Executive of Grainger Plc) joined the Board as a non-executive director. Mark Taylor, who has been Finance Director since joining the Group in 1995, has advised of his wish to retire after 12 years excellent service. A replacement for Mark, Graham Clemett, has been identified. Graham, who is the Finance Director, Corporate Banking of Royal Bank of Scotland will join the Company later this Summer. Angus Boag has joined the Executive Committee as Development Director. Angus was previously Managing Director of Manhattan Lofts. We have a strong and loyal team at Workspace and as the business develops the Board ensures we continue both to develop the talent within the business and to strengthen this with judicious external appointments to add new skills. On behalf of the Board, I extend our thanks to all our staff once again. Current Trading Enquiries and lettings have continued at the strong levels recorded last year and the rent roll has, as a result, increased since the year end. Against this, interest rates have continued to increase and, as a result, it seems likely that the combined effect of this and the cost of servicing acquisitions will impact on trading earnings in the current year. Despite this, we consider that it remains in shareholders interests for the Group to continue to acquire property where good medium/long term returns may be anticipated. Growing rentals, both those passing now and market rent levels (ERVs), should continue to support valuation growth going forward. However, it is unlikely that the contribution to valuation surpluses from yield reductions will continue and so growth will be driven principally by these rental improvements and our value adding initiatives across the portfolio. This we believe should be a significant differentiator in portfolio performance going forward. Dividend A final distribution of 2.76 pence per share, making a total of 4.14 pence per share for the year, once again a 10% increase on the previous year, is proposed. Chief Executive's Review 2006/2007 was another year of excellent growth with the value of the Group's portfolio increasing from Â£0.96bn to Â£1.00bn, and the portfolio under management to Â£1.16bn. Last year we further concentrated our portfolio on London - we have this year increased the pace of our activity in adding value to it. We aim now to capitalise on our position as the leading provider of SME accommodation in London, continuing to expand our portfolio whilst exploiting the regeneration opportunities offered by it. Key Results Strong results have again been achieved with: Diluted Adjusted Net Asset Value per Â£3.36 up 11.6% share Net Asset Value per share Â£3.40 up 43% Net Asset Value (adding back REIT Â£3.51 up 48% conversion charge) Investment Portfolio Valuation Â£1,001.6m up 3.9% Valuation Surplus Â£95.3m 10.5% Portfolio (including Glebe joint venture Â£1,163.8m up 21% Earnings per share under IFRS is, of course, influenced by valuation surpluses and taxation. Whilst this year's valuation performance is good, it falls behind the record levels achieved in the previous year. As a result, Profit before Tax at Â£112.5m is down on last year. Against this the release of deferred tax liabilities following conversion to a REIT have enhanced Profit After Tax and Earnings Per Share substantially. Trading Profit before Tax Â£10.2m down 32% Profit Before Tax Â£112.5m down 24% Profit After Tax Â£193.4m up 81% Basic Earnings per share 115.1p up 77% Despite good progress in property rental levels (ERVs), trading results have been dampened by a number of factors. Interest rates have increased which has impacted earnings (reducing trading PBT by Â£0.9m on a like-for-like basis). At the same time yields have reduced to a level where acquisitions are earnings depletive initially. Notwithstanding this, your Board has resolved to continue to expand the business through acquisitions where good medium to long term performance can be anticipated. Whilst acquisitions during the year have reduced trading earnings (with a net shortfall of income against interest costs of Â£0.6m) they have produced reasonable total returns with valuation surpluses of Â£5.5m for the year. Strategy The Group's strategy remains both consistent and successful and may be summarised as: - focus on the SME market in London; which we believe has excellent long term growth prospects - acquiring properties where we see long term value; we continue to track a large number of potential property acquisitions in London - growing rents; our average rent of Â£11.34 per sq. ft has substantial potential to grow, and yet remain affordable for our customers - realising the latent value in our portfolio; targeting where intensification or change of use is possible. In the longer term, some 54% of the Group's portfolio has such potential, whilst on a 5 year basis, there are over 16 estates (28%)on which we are working in addition to the 11 transferred to the Glebe joint venture. Our target remains to double shareholder value over the forthcoming five year period. Looking forward this will be achieved by continuing to grow rents, increasing our rate of acquisitions, and by accelerating our programme for the improvement and regeneration of existing properties. This aligns with the needs for London, accommodating its growing population in mixed-use accommodation through more intense use of space. Two key events in the delivery of this strategy occurred during the year. Firstly the Group's conversion to a REIT and secondly acceleration of our plans to intensify the use of a number of estates, partly through the establishment of the joint venture with Glebe. Further details on these events and how they assist in the delivery of the Group's strategy are given in the following. REITS On 1 January 2007 the Group (excluding its joint venture with Glebe, which does not qualify under the initial rules for the REIT regime) converted to a Real Estate Investment Trust (REIT). REITs were established by the Government to provide a more attractive tax transparent vehicle for co-ownership of property. Prior to their creation, investors in property companies suffered tax charges both in the Company and at their personal level. REITs are largely corporation tax exempt, with tax collection being focused at the individual investor. A detailed description of REITs and their impact on distributions was included in the circular issued to shareholders in December 2006 when the Company changed its articles to facilitate operation as a REIT. Workspace Group satisfied all of the criteria for REITs comfortably and your Board considered that the Group would continue to do so. Further, the operational requirements for a REIT were not considered to present unacceptable constraints on the Group's business. Indeed, the Group's business planning model was compared in both a REIT and non-REIT environment. In particular, the increased distributions with a REIT had little impact on our business plan since these were compensated for by tax charges that would no longer arise with the result that the resources retained for reinvestment were largely unchanged. On converting to REITs, companies incur a one-off charge equivalent to 2% of the portfolio valuation. The cost to Workspace Group will be Â£18.8m payable in July 2007. However, companies are thereafter relieved of liability for tax on their property income and gains on sales. At 30 September 2006, the Group's total deferred tax liability was Â£141.3m of which Â£138.5m related to valuation surpluses. Following conversion to a REIT, this liability is avoided. Your Board was conscious at the time of conversion, that with its policy of reviewing its stock and disposing of certain properties that had demonstrated capacity for more intensive and better use in line with the regeneration plans for London, a number of disposals would in all likelihood arise in the shorter term and that the taxation savings on these would cover a substantial proportion of the conversion charge. Adding this with annual charges on income, the payback of the conversion charge would be relatively short. In simple terms conversion to a REIT saved substantial tax liabilities, had a quick pay-back and does not change our tried and tested business model. Joint Venture The Group believes that of our portfolio approximately 54% will be subject to intensification/change of use over a ten year period. On a nearer five year basis we estimate that 28% of the portfolio has this potential. We have recently appointed a new Development Director to accelerate our progress here. The principal initiative in this area this year was the formation in June 2006 of a joint venture with Glebe to promote the intensification and change of use opportunities for eleven estates owned by Workspace and three owned by Glebe. The joint venture was formed by a merger of the partners' respective holdings. It is supported by Bank of Scotland who have provided a Â£126m loan facility. The balance of financial resources required to complete the transaction was provided in equal proportions by Workspace and Glebe. These total Â£19.5m each at present. Workspace continues to provide the day-to-day management of the properties, whilst Glebe is responsible for the promotion of the regeneration opportunities at the properties. Neither party charges the joint venture for the services provided to the joint venture, but Workspace recovers the service charge, management and any direct costs associated with the properties. It also receives any fees that are recoverable from tenants for service charge management. The financing of the transaction was structured to maximise the level of debt reducing the equity requirement from partners. As a result, interest costs in the year have exceeded net revenues resulting in a small post tax trading loss (Workspace share Â£0.1m). Against this the joint venture has recorded a valuation surplus of Â£2.75m on the transfer values. This is in addition to the Â£8.59m surplus realised by the Group by reference to the values at which the properties were introduced into the joint venture in June 2006. Good progress has been made in the preparation of strategies for each of the joint venture properties. Progress at Grand Union and Wandsworth is summarised below. Grand Union stands on a significant site at the entry to the Borough of Kensington and Chelsea. The Planning Authority supports the replacement of the existing two storey buildings by a more prominent multi-storey complex providing residential accommodation in addition to an increased amount of commercial (offices and retail) accommodation. The current plans envisage more than four times the density of occupation at this site. It is anticipated that an application for detailed planning consent for the proposed works will be made this summer. At the Wandsworth Business Village similar good progress has been made. This property sits alongside the former Young's Brewery site the regeneration of which is being promoted by Minerva Plc. Once again, the local authority is receptive to proposals for the regeneration of our property since it assists in their overall planning for the town centre. A detailed planning application has been submitted for a scheme that more than doubles the density of accommodation at this location. It comprises a mixture of residential and commercial space with the commercial space being broadly equivalent to that currently on the site. In addition to these front-runners concepts are progressing for all other sites. These will come forward over future periods, as was anticipated when the joint venture was established. Trading Review Good progress has been made over the year with the rent roll increasing by 18.7% from Â£39.71m to Â£47.15m (opening value adjusted for the properties transferred to the Glebe JV). This increase of Â£7.44m may be analysed as follows: Â£m Acquisitions 3.68 Disposals (0.84) Letting at refurbishment properties* 2.92 Other rental income 1.68 ------ 7.44 * Clerkenwell, Enterprise and The Lightbox (111, Power Road): which after a programme of refurbishment are now being re-let. Â£4.60m (11.6%) of the increase has occurred at properties held throughout the period. Occupancy reduced in the first half, recovering during the second. This is not an unusual pattern and supports the view of the Group that quarterly fluctuations should not necessarily be regarded as depicting trends in the business unless these patterns arise consistently over a number of quarters. The Group reports on its portfolio progress in its quarterly statement but does not ordinarily extend this into the full year reporting with a comparison of the four quarters. We have incorporated these statistics into this year's report, not because we regard each quarterly level as significant but because we regard the sequence of these as indicative of the patterns that can arise within the normal trading activity of the Group. These are: March December September June March 2007 2006 2006 2006 2006 Restated* Number of estates 101 99 99 96 93 Total floor space (million sq.ft) 4.90 4.80 4.98 4.89 4.69 of which: Like-for-like portfolio (million sq.ft) 4.10 4.10 4.10 4.10 4.10 Disposals (million sq.ft) - - 0.20 0.20 0.23 Acquisitions (million sq. ft) 0.48 0.37 0.35 0.23 - Improvement properties (million sq. ft) 0.32 0.33 0.33 0.36 0.36 Lettable units 4,304 4,233 4,215 4,286 4,108 Annual rent roll of occupied units (Â£m) 47.15 43.69 43.01 40.88 39.71 Average rent (Â£/sq.ft) 11.34 10.85 10.56 10.22 10.21 Overall occupancy (%) 84.8% 83.9% 81.7% 81.8% 83.0% Like-for-like Occupancy (%) 86.9% 87.3% 85.3% 86.7% 87.7% Like-for-like Average rent (Â£/sq. ft) 11.09 10.75 10.90 10.60 10.54 Like-for-like Net rent roll (Â£m) 39.49 38.51 38.12 37.65 37.81 (*restated for disposal to joint venture) As can be seen overall occupancy improved from 83.0% to 84.8% over the year assisted in part by lettings at the refurbished properties. Acquisitions showed an overall occupancy of 83.0% at 31 March 2007 and so depressed overall occupancy but offer scope for income improvements as space is let to bring these acquired properties in line with the portfolio more generally. Like-for-like occupancy (excluding refurbishment properties and acquisitions/disposals) fell from 87.7% at 31 March 2006 to 85.3% at the half year stage recovering to 86.9% by the year end. Analysis of this overall reduction in the year identifies that this is largely attributable to reductions in properties that are scheduled for improvement works. As noted above, both like-for-like and refurbishment properties have shown strong rental growth with the average like-for-like rental increasing by 5.2% (from Â£10.54 to Â£11.09 per square foot) over the year and average rents overall increasing by 11% (from Â£10.21 to Â£11.34) (largely due to the high average rent per sq. ft of the refurbishment properties). The patterns over the year may be regarded therefore as typical for the business. Like-for-like occupancy improved as space is let up, but was tempered by reductions at sites being prepared for improvement projects. Average rentals increase as improved space is let at higher rentals and market rental increases secured on other properties. As the valuation results show we are entering a period where stronger growth in market rental levels is anticipated. This, in addition to the existing reversion, will impact on lettings of all our stock going forward. The total market rent of the Group's portfolio at 31 March 2007 was Â£65.3m, allowing a 10% void this equates to an achievable level of Â£58.8m, Â£11.6m greater than current passing income; the existing reversion. Portfolio Activity: Acquisitions, Disposals and Added Value Portfolio activity (acquisitions and disposals) totalling Â£242.1m was again at record levels this year. Ten properties were acquired for a total consideration of Â£70.4m (2006: Â£127.4m) (both excluding costs) whilst disposals, including the properties transferred to the joint venture with Glebe, totalled Â£171.7m (2006: Â£44.4m). Full details of these acquisitions and disposals may be found following the Financial Review. Our acquisition/disposal strategy has followed the principles recorded in previous periods: â€¢ Focusing on London â€¢ Acquiring assets where we believe we can add value through our management â€¢ Focus on transport nodes, locations with SME clusters and properties with low capital value where appreciation is anticipated in the medium term â€¢ Disposal of properties that either do not fit our investment criteria (in both locational and performance terms) or for which some added value potential has been realised. Allied to this is our improvement programme through which we add value by reconfiguring space within our portfolio in line with trends in occupational requirements. During the year two of our acquisitions, Morie Street and Greville Street, were made in anticipation of implementing such improvements immediately following acquisition. On three other estates, Leyton, T Marchant and Avro and Hewlett House, such opportunities were anticipated in the medium term. During the year the major refurbishment programmes at Enterprise House, Clerkenwell and The Lightbox (111, Power Road) were completed successfully. The Enterprise complex was acquired from Shaftesbury PLC in 2002. It comprised three buildings (Hatfield House, Enterprise House and 1-2 Hatfields) in a prominent location on Stamford Street close to the Oxo Tower. A refurbishment programme of Hatfield House and 1-2 Hatfields had already been completed in earlier periods and the latest works comprised the refurbishment of the remainder of the complex, adding an additional floor over part. Over the works period the value of our investment increased to Â£32.0m, showing a surplus, after accounting for the works, of Â£5.4m equivalent to a 20.4% uplift on the opening value plus costs. The freehold interest in Clerkenwell was acquired in 2001 with the head leasehold interest subsequently acquired in 2002 enabling the refurbishment of the property. This building was one of the original small business 'workspace' centres established in the 1980s. However, the fabric of the property had been poorly maintained and it had become detached from the improving Clerkenwell marketplace. At 31 March 2004 the property was valued at Â£8.7m. Since then a total of Â£12.68m has been spent refurbishing the property to provide attractive business space, following which the property is now valued at Â£27.85m, showing a surplus over this period of Â£6.47m (30.26%). Our project at The Lightbox (111,Power Road), Chiswick, has yielded even faster returns. This property was acquired in 2005 for Â£7.80m (including acquisition costs). Since then we have spent Â£5.47m on improvement work following which the property is now valued at Â£17.17m, an uplift of Â£3.90m (29.4%). Recent lettings at The Lightbox have been achieved at Â£15.00 per sq. ft, showing an 8.6% return on the Â£175 per sq. ft total cost of the building. At Morie Street, acquired in May 2006 works to fit out the remaining space have been completed during the year following which the property has shown a surplus for the period held (10 months) of Â£0.60m,12.1%, after absorbing the costs of acquisition and well ahead of the 7.25% achieved overall on acquisitions made during the year. As may be seen our 'added value' programme has made a substantial contribution to portfolio growth during the year. Looking forward we have two further projects in hand. At Kennington Park, the major Â£56m acquisition made last year, contractors are on site refurbishing and sub-dividing the space in Canterbury Court (the largest building at this complex). We described our plans for this site in last year's report, which are to create a thriving centre for small businesses by sub-dividing and upgrading the accommodation to a level comparable with our Leathermarket centre. These works will create an exciting reception area and catering facility, giving a heart to this complex. They are scheduled for completion in November 2007 and an appraisal of this will be included in next year's report. Works have also been progressing at Lombard House to create a new business centre. This property was acquired in 2005, and was let to but not occupied by Vodafone at the time of its acquisition. As reported last year, Vodafone surrendered its lease, paying a surrender premium broadly equivalent to the rental liability for the residue of the lease term. Since then we have been engaged in converting the property back to a business centre, which was what it was before Vodafone took it over. Again, an appraisal on these works (which are scheduled to complete in June 2007) will be given next year. We have continued to progress wider mixed-use initiatives at a number of other properties. The most significant event in this category was the establishment of a joint venture with Glebe. This is reported upon earlier in this review. In addition to this initiative proposals have moved forward at a number of other properties: At Wharf Road, part of the property was sold to United House for a consideration comprising Â£1.9m in cash together with the provision of a replacement business centre valued at Â£8.5m on our retained portion of the site. In its former use this property would have attracted a value of approximately Â£6.8m and so these initiatives have yielded a surplus of Â£3.6m. At Greenheath conditional contracts (dependent on planning and vacant possession of the relevant portion of the site) have been exchanged for the sale of part of our ownership to a student housing operator. This deal presents the opportunity to release substantial funds from the sale of this strip of land which is subject to low density occupation at present to enable improvement of the core business centre at the heart of the site. Proposals for the Group's property at Thurston Road continue to be progressed with the local authority. It is likely that these will be resolved over the next year. This property, which was acquired in 1994 for Â£1.9m is valued now at Â£13.5m compared with an existing use value of approximately Â£6.0m. It made an additional contribution to profit this year of Â£1.1m through option fee receipts. Finally, following the year end the Group obtained, on appeal, planning consent for the replacement of its Aberdeen Studios Business Centre comprising a new centre of equivalent size and some residential accommodation doubling the density at the site. Combined, these amount to a significant supplement to the Group's performance and reflect the contribution that this added value activity makes to the overall business model. The acquisition programme is also significant in providing opportunity for value adding activity across the estates. However, it is important to note that such activity is not restricted to new acquisitions. It is estimated that 54% of the Group's portfolio (excluding the joint venture properties) could contribute to growth through such value added initiatives. Valuation The consistent progress reported in previous periods was repeated again this year. Quarterly surpluses of Â£34.0m, Â£25.0m, Â£12.6m and Â£23.7m totalling Â£95.3m were recorded through the year. This followed the record surplus of Â£131.3m in 2005/06 and that of Â£67.9m in 2004/05. We had anticipated a slowing in growth of values this year and so it is pleasing to note that, notwithstanding this, a very substantial increase has nevertheless been recorded. Our analysis of this surplus shows that 70% was contributed by rental growth with the balance from yield shift. Last year, we considered that yields would stabilise at the 31 March 2006 levels and that growth going forward would be driven by rental improvements. It is pleasing to note that this rental impact has commenced. Overall the average capital value of the portfolio at 31 March 2007 was Â£204 per sq. ft; for a portfolio 70% of which lies within six miles of the centre of London. We consider these to be robust levels, and levels from which growth may be continued particularly as the programme of improvement activity and intensification continues. The valuation of the Group's directly held properties (valued by CB Richard Ellis) at 31 March 2007 was Â£1,000.9m. The average value of the Group's property was Â£204 per sq. ft with a yield at estimated current market rental values of 6.5%. Our acquisition strategy targets similar properties with low capital values and future potential, as is shown by our acquisitions this year, which have been completed at an average capital value of Â£140 per sq. ft. For properties held throughout the year, comparing their value at 31 March 2006, plus additions and improvements at cost with that at 31 March 2007, the uplift was Â£89.8m or 9.7%. Acquisitions during the year showed a surplus on valuation of Â£5.5m (7.25%). For the properties held in the joint venture the value at formation, or subsequent acquisition, was Â£154.7m (Â£146m of which related to the Workspace introduced properties which were transferred at a surplus of Â£8.59m). These were valued at Â£162.9m at 31 March 2007 showing (after allowing for capital expenditure) a surplus of Â£2.75m over their values at the time that the joint venture was established. We have again tested the Group's performance against the IPD (Investment Property Databank) March Universe 2007 benchmark. The table below illustrates not only our top quartile performance, 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 16.3% 18.9% 16.9% 19.5% IPD March Universe 15.8% 17.8% 14.9% 13.3% Workspace Group 40 37 22 1 Percentile Rank IPD Comparator 16.3% 17.0% 12.8% 13.1% The IPD comparator index is a benchmark compiled by IPD of similar properties of value up to Â£30m 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. Through its performance the Group has demonstrated its consistent ability to generate enhanced returns from its investments. This 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 The sale of the portfolio of properties to a joint venture with Glebe and the Group's conversion to a REIT have had a major impact on the reported results for the year and the Group's Balance Sheet. In June 2006 the Group transferred Â£137.4m (31 March 2006 valuation) of its property to a joint venture in which it holds a 50% stake. The transfer was made at a value of Â£146.0m. The exit income yield of this sale was 4.92%. As a result both revenue and cost of sales were reduced in the year. However, with LIBOR rates of 4.75% at that time, and after accounting for the carrying cost of the Group's Â£19.5m of equity in the joint venture, the disposal was almost neutral at the 'point of sale'. As interest rates have increased through the year, the impact of the interest savings through the transfer has increased, showing a net benefit for the year of Â£0.4m. Following the transfer, the Group's gearing (at 30 June 2006) reduced to 62%. At 31 December 2006 the Group converted to a REIT. This gave rise to a number of major changes: â€¢ the Group no longer attracted tax liabilities on its rental earnings and capital gains; â€¢ the Group's provision for deferred tax of Â£141.3m at 30 September 2006 was eliminated; â€¢ a current tax liability of Â£18.8m arising from the conversion charge of 2% of the value of the Group's portfolio at 31 December 2006 arose. This tax liability is payable in July 2007. Your Board considered that, had the Group not converted to a REIT, it was likely that a substantial proportion of this sum would have been payable over 2007 and 2008 anyway due to both mainstream tax on the Group's profits and capital gains tax liability arising from sales that were anticipated over this period. As a result of these changes, earnings per share has been substantially increased in the year by the tax credit arising from the release of the deferred tax. At the same time, net asset value has increased due to the net movement in these provisions. The Group has always reported both Trading Earnings per Share (which are based on the cash trading performance of the business and eliminates the impact of valuation surpluses and their related tax adjustments) and Adjusted Net Asset value (which excludes deferred tax provisions). These provide a more meaningful guide to performance in the period (although Adjusted Net Asset Value carries the Â£18.8m (11 pence per share) conversion tax charge which is an exceptional liability arising from conversion). During the year, interest rates have risen with LIBOR moving from 4.61% to 5.62% peaking at 5.63% and averaging 5.09% over the year. This is at a time when property yields are at very low levels and, in some categories, still reducing. The Group's acquisitions for the year show an average yield of 4.36%. As a result, based on 31 March 2007 interest rates, these acquisitions are attracting an annual carrying cost of Â£0.95m p.a. until returns can be improved. The Board has monitored this position carefully throughout the year. It has concluded that with acquisitions averaging Â£140 per sq.ft., these nevertheless remain attractive values notwithstanding the initial yield. Indeed, with acquisitions made during the year yielding a valuation surplus of Â£5.5m over their initial ownership period, positive total returns are being obtained, notwithstanding the earnings shortfall. The Board has resolved, therefore, to continue with acquisitions where it can see long term value despite the initial dilutive impact on cash earnings. This is a position that will be monitored carefully going forward to ensure that REIT and banking covenants are maintained. However, this policy has, in the current year, and will, in forthcoming periods, continue to impact trading earnings. Profits Profits after tax increased by 81% to Â£193.4m for the year (2006: Â£106.6m). This result was assisted by the Group's conversion to a REIT which resulted in the net release of Â£101.5m deferred tax provisions during the year. Profits before tax at Â£112.5m were down on last year (2006: Â£149.0m). The reduction arose principally from a lower valuation surplus for the year at Â£95.3m (2006: Â£131.3m). This surplus was a 10.5% increase on pre-valuation values and was driven principally by rental improvements. As such, it was a good result. Trading profits before tax at Â£10.2m were also reduced from last year's level (2006: Â£15.1m). The contributory factors to this, as noted above, were higher interest rates overall and, aligned to this, the negative contribution from recent acquisitions. National insurance on share options also contributed to this reduction in earnings. Profit before tax included a Â£4.4m contribution from profits on disposals (2006: Â£3.4m). Details of disposals are given following this Financial Review. This profit arose mainly from the disposal of the portfolio of properties to the newly formed joint venture with Glebe. In accordance with accounting convention, only 50% of this profit has been recognised at this stage. The other 50% will be recognised if and when the assets transferred are disposed of by the joint venture and the profit realised. Earnings per share performance both at the basic and trading levels is better than that at the profit before tax level as a result of the favourable tax impacts over the year. As noted above, the release of deferred tax provision enhanced profit after tax and hence basic earnings per share, which at 115.1p were 77% ahead of last year. At the trading level, the reduction in earnings per share at 6.4p (2006: 7.1p) of 10% was substantially less than the reduction in profits before tax again due to a tax credit of Â£0.5m for the year. This credit was attributable in part to REIT conversion, with no tax charge for the 4th quarter, and partly due to balancing capital allowances on disposals. Taxation Overall a net tax credit of Â£80.9m was recorded for the year. This credit has arisen principally from the net deferred tax released on conversion to a REIT and may be analysed as: Â£m Current tax: Tax charge for the year 2.2 Prior year adjustment (0.4) REIT conversion charge 18.8 Deferred tax: Net provision released (101.5) ------ (80.9) ------ The REIT conversion charge comprises the 2% levy on investment property valuation at 31 December 2006, at which time the Group converted to a REIT. This triggered a net release of Â£101.5m deferred taxation on both valuation surpluses and accelerated capital allowances. During the year, the Group participated in the Total Tax Contribution Survey conducted by PricewaterhouseCoopers of FTSE 250 companies (this followed the earlier survey that PricewaterhouseCoopers undertook of the FTSE 100 companies). This survey highlighted that total tax paid by the Group in the year 2005/6 was Â£13.2m with a further Â£8.1m collected from third parties. Of the total collected, corporation tax at Â£6.74m represented 51%, with the residue falling principally to Stamp Duty Land Tax (39% of total), business rates (4%) and employers NIC (6%). As may be seen, whilst the Group's total tax burden will be reduced substantially through its REIT conversion, there nevertheless remains a substantial tax contribution. Indeed, with the increased levels of portfolio activity that are likely in an environment that is not fettered with capital gains liabilities, it is likely that total tax contribution will increase in time back towards pre-REIT levels. Net Assets and Balance Sheet Overall net worth (net assets employed) increased over the year by Â£192.3m (49%) to Â£582.6m due mainly to the valuation surplus for the year of Â£95.3m (55 pence per share) which this year as a REIT attracted no deferred tax liability and the release of Â£101.5m of deferred tax reserves (net of a Â£20.9m indemnity provision). Investment properties at Â£1,001.6m are Â£47.6m up on 2006 (2006: Â£954.0m). Acquisitions and improvements for the year totalled Â£102.1m, with disposals totalling Â£149.5m leaving a net reduction in investment property of Â£47.4m which, when applied to the Â£95.3m valuation surplus, reduced the net increase to Â£47.6m. The improvement in net worth arises principally from the Â£166.9m reduction in non-current liabilities. Â£101.5m of this arose from the net release of deferred tax liability on conversion to a REIT, referred to earlier, with a further Â£65.4m arising from reductions in longer term borrowings. In turn Â£19.5m of this borrowing reduction arose from the reclassification of the Group's debenture stock as a current liability. This debenture stock is repayable at 30 June 2007. Since Â£12.5m of this debt attracts an interest charge at 11.125% with the balance of Â£7.0m at 11.625%, then interest costs will reduce following repayment of these loans. Based on LIBOR rates at 31 March 2007, this saving would be Â£0.92m per annum. The balance of the long term borrowings reduction arises from the net Â£47.4m disposal of investment property during the year. The Group's net current liabilities at 31 March 2007 were Â£59.3m (2006: Â£18.8m). Included in this is the reclassified debenture stock of Â£19.5m (referred to above) and the tax provision for conversion to a REIT of Â£18.8m. Adjusting for these the other net current liabilities total Â£21.0m compared with Â£18.8m last year. 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£12.5m (2006: Â£12.3m). The directors consider that in the normal course of business the majority of these liabilities are unlikely to require payment and therefore form part of the working capital of the Group. Net cash inflow from operating activities was Â£14.3m (2006: Â£14.4m). Progress Record Progress in key performance indicators over the year and over a five year period was: 2006/2007 2005/2006 Compound growth/ growth annual growth (decline) 2002 - 2007 Improvement in Adjusted NAV (per share) 9.0% 35.7% 20.2% Improvement in EPS 76.8% 80.3% 83.4% (Reduction)/Improvement in Trading PBT (31.9)% 4.1% (2.3)% (Reduction)/Improvement in Trading EPS (9.9)% 12.7% 3.9% Improvement in dividends per share 10.1% 10.3% 10.2% Dividend A final dividend of 2.76p per share is proposed. The interim dividend was 1.38p per share, and so the total dividend proposed for the year is 4.14p (an increase of 10.1%). The dividends are covered 27.80 times (2006: 17.31 times) by earnings, 1.55 times (2006: 1.89 times) based on earnings from trading operations only. The dividend increase is in line with previous periods. Internal performance measures Internal benchmark comparison shows: Performance measures 2007 2007 2006 2005 2004 2003 Excluding Joint Venture Revenue per member of staff (Â£000) 387 353 410 380 332 314 Year-end investment in property 6,339 5,857 6,262 5,006 4,092 3,261 per member of staff (Â£000) Administrative expenses as a - 16.2% 14.4% 13.9% 13.9% 14.6% percentage of revenue Total return on equity (pre-tax) - 21.8% 40.7% 27.6% 26.2% 15.0% Return on equity is computed by reference to pre-tax profits plus valuation surpluses/deficits divided by opening shareholders' funds Our target hitherto has been 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, together with the 'added value' initiatives undertaken to improve future rental income and capital values of properties slows attainment of this latter target. In addition, administration costs as a percentage were inflated this year by the disposal of property to the joint venture, since we have no revenue from the properties transferred to it, but still incur the management costs. This equates to a cost rate of 14% on revenue on the previous measurement basis. This has correspondingly affected the revenue per number of staff and year end investment in property measures. Financing The Group opened this year with Â£15.7m of available borrowing resources (a further Â£25m short term facility was secured at this stage to provide investment capacity until funds were released through the sale to the joint venture). This was supplemented by the Â£47.4m (before costs and taxation) realised on the net disposals during the year. At the year end the Group had available borrowing facilities of Â£65.4m. The Board considers that the funding strategy of extending and renewing five year term loans continues to be appropriate at present. However, with its conversion to a REIT during the year, the Board is reviewing the Group's funding strategy going forward. With no tax deduction on interest expense, the cost of debt has increased relative to the cost of capital. The Board has resolved, therefore, to monitor REIT capital structures in planning its financing strategy for the future. It is possible that, with the increasing scale of the Group and the widening of its activities, a wider range of facilities will be negotiated going forward. The weighted average life of the Group's debt at 31 March 2007 was 2.8 years. At the year end the Group's facilities and drawings thereon were: - 2007 2007 2007 2006 Facility Amount Drawn % of Debt Drawn Â£m Â£m Â£m Debenture Stock 19.5 19.5 5% 19.5 Convertible loan stock - - - 2.2 Bradford & Bingley 270.0 225.0 60% 270.0 loan NatWest property loan 150.0 132.7 35% 134.7 NatWest overdraft 4.0 0.9 - 3.6 443.5 378.1 100% 430.0 The available resources of Â£65.4m are equivalent to 8 months spend at the planned capital investment rate for 2007/08. Borrowings over recent years 2007 2006 2005 2004 2003 % Fixed/hedged (year end) 60% 54% 62% 59% 75% Average interest rate (year end) 6.8% 5.9% 6.3% 5.8% 5.8% Interest cover (excl valuation 1.63 1.84 1.77 1.97 2.04 surpluses) Trading Interest Cover 1.44 1.69 1.77 1.91 1.72 Year-end gearing % (on Adjusted NAV) 65% 85% 88% 104% 98% Debt: Portfolio Value (year end) 38% 45% 45% 49% 48% Gearing measured by reference to adjusted net assets employed, was reduced to 65% during the year (2006: 85%). Both gearing and interest cover levels are comfortably within the levels historically set by the Board of less than 120% and greater than 1.5 times. As a REIT the Group is required to maintain interest cover of 1.25 times or more. The debenture loan stock, which attract an average 11.3% interest charge, represents just 6% of total borrowings. The debenture stock matures in June 2007. The maturity of net debt at 31 March 2006 is shown below: - 2007 2006 2005 2004 2003 Maturity of net debt % % % % % Under 12 months 6% - - - - 1 - 5 years 94% 99% 99% 99% 99% 5 - 10 years - 1% 1% 1% 1% Total 100% 100% 100% 100% 100% At 31 March 2007 the average cost of floating rate funds was a margin of 0.94% over LIBOR or base rate (2006: 0.94%). At 31 March 2007 secured borrowings were covered 2.15 times by the value of charged property (with a further Â£186.2m of uncharged property giving an overall cover of 2.65 times). Further details of debt facilities and borrowing policies are given in note 17 to the accounts. Acquisitions and Disposals 2006/2007 Acquisitions 2006/2007 Purchase Initial Market rent price actual income at 31/03/07 Name of property Description Â£m Â£000 Â£000 Leyton Industrial 3 small unit industrial 16.0 826.4 1,180.9 Village, Fairways estates totalling Business Centre, Leyton 210,000 sq.ft. Studios, London, E10 Morie Street, London, 22,000 sq.ft. of 4.4 178.0 380.0 SW18 multi-let offices 14 Greville Street, 14,000 sq.ft. vacant 3.8 Nil 839.7 London, EC1 office building for conversion to a business centre T Marchant Trading 51,000 sq.ft. 14 unit 6.1 300.5 422.3 Estate, London, SE16 industrial estate Spectrum House, London, 48,100 sq.ft, 22 unit 8.8 544.4 640.7 NW5 business centre Seven Sisters, London, 7 self contained office 3.2 188.8 243.3 N15 buildings totalling 20,300 sq ft Exmouth House, 52,240 sq.ft. business 18.1 953.2 1,461.7 Clerkenwell, London, centre over retail units EC1 Avro House and Hewlett 58,000 sq.ft. 51 unit 10.0 418.3 828.2 House, Battersea, SW8 business centre in 2 buildings Total 70.4 3,409.6 5,996.8 Disposals 2006/2007 +------------------------------+------------------------------+-----------+------------+ |Name of property |Description | Sale price| Exit income| | | | | | | | | Â£m| Â£000| | | | | | | | | | | +------------------------------+------------------------------+-----------+------------+ |Stevenage Enterprise Park, |Industrial estate of 27,000 | 3.2| 167.0| |Stevenage, SG1 |sq.ft, deferred part of | | | | |Magenta Portfolio sale of last| | | | |year. | | | +------------------------------+------------------------------+-----------+------------+ |Wharf Road, London, N1 |Part of property sold for | 10.4| Nil| | |Â£1.9m with consent for mixed | | | | |residential and commercial | | | | |accommodation. Interest | | | | |retained in commercial element| | | | |(worth Â£8.5m). | | | +------------------------------+------------------------------+-----------+------------+ |Park Avenue, Luton, LU3 |203,000 sq.ft. industrial | 12.1| 653.4| | |estate | | | | | | | | +------------------------------+------------------------------+-----------+------------+ |Sub-total | | 25.7| 820.4| +------------------------------+------------------------------+-----------+------------+ | | | | | +------------------------------+------------------------------+-----------+------------+ |Disposals to joint venture |11 estates with improvement or| 146.0| 7,183.0| | |change of use potential. Total| | | |Riverside Business Centre, |lettable floor area 1.2 | | | |SW18; |million sq.ft. | | | | | | | | |Bow Enterprise Park, E3; | | | | | | | | | |Grand Union Centre, W10; | | | | | | | | | |Highway Business Park, E1; | | | | | | | | | |Hamilton Road Industrial | | | | |Estate, SE27; | | | | | | | | | |Parkhall Road Trading Estate, | | | | |SE21; | | | | | | | | | |Rainbow Industrial Estate, | | | | |SW20; | | | | | | | | | |Tower Bridge Business Complex,| | | | |SE16 and Tower Bridge Block F,| | | | |SE16; | | | | | | | | | |Wandsworth Business Village, | | | | |SW18; | | | | | | | | | |Zennor Road Industrial Estate,| | | | |SW12 | | | | +------------------------------+------------------------------+-----------+------------+ |Total | | 171.7| 8,003.4| +------------------------------+------------------------------+-----------+------------+ Acquisitions During the year the Group made ten acquisitions; all located within the area bounded by the North and South Circular roads in London, for a total consideration (excluding costs) of Â£70.4m and showing an initial yield of 4.84% on acquisition price. The reversionary yield on cost for these properties at 31 March 2007 was 8.52%. Three properties were acquired in Leyton close to the Group's Uplands Business Centre (acquired last year) at an average capital cost of Â£95 sq.ft. These lie to the north of the Olympic zone and so should benefit in the short term from the displacement of occupiers from the Olympics area and increased demand for occupiers seeking to locate proximate to the Olympics zone. In the longer term, they will be candidates for improvement as the regeneration of the Lea Valley triggered by the Olympics extends northwards. Morie Street is a B1 small unit office scheme that was constructed to a shell and core specification by the original developer. Letting to this specification had been slow since occupiers of this kind of space expect finished accommodation. The Group acquired the property, completed the works and at 31 March 2007 had increased occupancy from the 52% at the time of acquisition to 72% by 31 March and 86% by mid May. 14 Greville Street is a 1970s office building close to Farringdon Station, and proximate to the Group's Clerkenwell, Quality Court and Hatton Square properties. It was vacant on acquisition. It is being refurbished and subdivided (completion June 2007) to provide a business centre to complement our other properties in this area. T Marchant Trading Estate is a small trading estate situated on a 2.1 acre site in a residential area close to the A2, Old Kent Road. With the scheduled extension of the East London Line it is likely that this area will improve over time and that the opportunity may arise for regeneration of this site. Spectrum House is a business centre located in Kentish Town, a location in which the Group hitherto had no presence and which it has targeted to complement its North London ownerships at Belgravia Workshops (to the east of the property) and The Ivories (to the south east of it). Seven Sisters is a 1990s development of 7 self-contained office buildings on Seven Sisters Road adjacent to the Seven Sisters underground station. It fits the Group's acquisition criteria both as a property in N15, an area in which the Group had no ownerships and at a transport node, with its proximity to both Seven Sisters Road and the A10, in addition to the underground station. Exmouth House is a business centre located close to the Group's existing properties at Clerkenwell Studios and Bowling Green Lane. It is a property that has been tracked by the Group for a number of years and adds to the Group's range of offer in the Clerkenwell area. Avro House and Hewlett House are two buildings arranged around a courtyard just off Battersea Park Road, near Battersea Power Station. The property offers scope for improvement both through increasing existing rentals and by reconfiguring space to improve these rentals. It offers potential as a relocation centre for tenants at the Group's joint venture property in Wandsworth as improvement works at this property progress. Disposals Stevenage Enterprise Park and Park Avenue, Luton are both located outside the M25 and have been sold as part of the refocusing of the Group's activities. These properties have shown IRRs of 21.2% and 15.2% over the period for which they were held. At Wharf Road the Group sold part of its total ownership to a residential developer for a consideration comprising Â£1.9m in cash and the provision of a replacement 30,000 sq.ft. business centre on the retained portion of the site. The replacement centre is valued at Â£8.5m. This total consideration of Â£10.4m compares with an existing use value for the entire site prior to the disposal of Â£6.8m and a book value at that time of Â£8.5m. This formula may be repeated elsewhere since it provides the Group with a cash benefit, rejuvenation of the fabric of its estate, whilst responding to the Plan for London through the provision of more intensively occupied mixed use sites. Eleven properties were transferred to the joint venture at Â£8.6m surplus (before costs) to the book value of Â£137.4m. The exit income yield was 4.92% with the properties overall showing a lifeline IRR of 24.1%. Consolidated Income Statement For the year ended 31 March 2007 2007 2007 2006 2006 2006 Trading Other Total Trading Other Total Operations items operations items Notes Â£m Â£m Â£m Â£m Â£m Â£m Revenue 2 61.0 - 61.0 63.2 - 63.2 Direct costs 2 (18.3) - (18.3) (16.9) 0.1 (16.8) Net rental income 2 42.7 - 42.7 46.3 0.1 46.4 Administrative (9.9) (0.1) (10.0) (9.2) 0.1 (9.1) expenses Gain from change in 10 - 95.3 95.3 - 131.3 131.3 fair value of investment property Other income 3a 0.7 - 0.7 - - - Profit on disposal of 3b - 4.4 4.4 - 3.4 3.4 investment properties Operating profit 4 33.5 99.6 133.1 37.1 134.9 172.0 Finance income - 0.1 - 0.1 0.2 - 0.2 interest receivable Finance costs - 5 (23.3) - (23.3) (22.2) (1.4) (23.6) interest payable 10.3 99.6 109.9 15.1 133.5 148.6 Change in fair value - 0.9 0.9 - 0.4 0.4 of derivative financial instruments Share in joint venture 23 (0.1) 1.8 1.7 - - - post tax (losses)/ profits Profit before tax 10.2 102.3 112.5 15.1 133.9 149.0 Taxation credit/(charge) 6 0.5 80.4 80.9 (3.4) (39.0) (42.4) Profit for the period 10.7 182.7 193.4 11.7 94.9 106.6 after tax and attributable to equity shareholders Basic earnings per 8 6.4p 108.7p 115.1p 7.1p 58.0p 65.1p share Diluted earnings per 8 6.3p 106.2p 112.5p 7.0p 55.7p 62.7p share Consolidated Statement of Recognised Income and Expense (SORIE) For the year ended 31 March 2007 2006 Â£m Â£m Profit for the financial year 193.4 106.6 Total recognised income and expense for the year 193.4 106.6 There is no difference between the profit for the financial year and the total recognised income and expense for the year. Consolidated Balance Sheet As at 31 March 2007 2006 Notes Â£m Â£m Non-current assets Investment properties 10 1,001.6 954.0 Intangible assets 11 0.3 0.2 Property, plant and equipment 12 3.3 3.6 Investment in joint venture 23 18.5 - 1,023.7 957.8 Current assets Trade and other receivables 13 8.8 6.7 Financial assets - derivative financial 17e 0.1 0.1 instruments Investment properties held for sale 10 - 8.2 Cash and cash equivalents 14 2.4 1.7 11.3 16.7 Current liabilities Financial liabilities - borrowings 17a (20.4) (3.6) Financial liabilities - derivative 17e (0.3) (1.2) financial instruments Trade and other payables 15 (32.3) (29.0) Current tax liabilities 16 (17.6) (1.7) (70.6) (35.5) Net current liabilities (59.3) (18.8) Non-current liabilities Financial liabilities - borrowings 17a (360.7) (426.1) Deferred tax liabilities 21a (0.2) (122.6) Provisions 21b (20.9) - (381.8) (548.7) Net assets 582.6 390.3 Shareholders' equity Ordinary shares 17.4 16.9 Share premium 30.7 28.7 Investment in own shares 22 (2.8) (5.1) Other reserves 1.3 0.8 Retained earnings 536.0 349.0 Total shareholders' equity 582.6 390.3 Net asset value per share (basic) 9 Â£3.40 Â£2.37 Diluted net asset value per share 9 Â£3.35 Â£2.29 Adjusted net asset value per share (basic) 9 Â£3.40 Â£3.12 Modified net asset value per share (basic)+ Â£3.51 Â£3.12 Diluted adjusted net asset value per share 9 Â£3.36 Â£3.01 +Represents adjusted net asset value per share (basic) modified by adding back provision of Â£18.8m for REIT conversion charge (see note 16). Consolidated Cash Flow Statement For the year ended 31 March 2007 2006 Notes Â£m Â£m Cash flows from operating activities Cash generated from operations 18 37.1 39.0 Interest received 0.1 0.2 Interest paid (23.0) (22.9) Tax refunded/(paid) 19 0.1 (1.9) Net cash from operating activities 14.3 14.4 Cash flows from investing activities Purchase of investment properties (74.6) (132.8) Capital expenditure on investment (20.3) (20.9) properties Net proceeds from disposal of investment 160.3 44.2 properties Tax paid on disposal of investment 19 (4.8) (4.8) properties Purchase of intangible assets (0.2) (0.1) Purchase of property, plant and (0.3) (0.7) equipment Investment in and loan to joint venture (19.5) - Net cash from investing activities 40.6 (115.1) Cash flows from financing activities Net proceeds from issue of ordinary 0.3 - share capital Net proceeds from issue of bank - 103.9 borrowings Net repayment of bank borrowings (47.0) - ESOT shares released 1.7 0.4 Finance lease principal payments (0.1) (0.1) Dividends paid to shareholders 7 (6.4) (5.8) Net cash from financing activities (51.5) 98.4 Net increase/(decrease) in cash and cash 3.4 (2.3) equivalents Cash and cash equivalents at start of year 18 (1.9) 0.4 Cash and cash equivalents at end of year 18 1.5 (1.9) Notes to the Financial Statements For the year ended 31 March 1. Basis of Preparation The figures contained here have been extracted from the Group's full IFRS Financial Statements for the year ended 31 March 2007 have been delivered to the Registrar of Companies. The Group's full IFRS Financial Statements for the year ended 31 March 2006 have been to the Registrar of Companies. The Auditor's Report on both these sets of Financial Statements were unqualified and did not contain a statement under section 237(2) or section 237(3)of the Companies Act 1985. 2. Analysis of net rental income 2007 2006 Revenue Costs Net Revenue Costs Net rental rental income income Â£m Â£m Â£m Â£m Â£m Â£m Rental income* 45.6 (0.2) 45.4 49.2 (0.2) 49.0 Service charges and other 12.3 (17.1) (4.8) 12.3 (15.9) (3.6) recoveries Services, fees, commissions 3.1 (1.0) 2.1 1.7 (0.7) 1.0 and sundry income+ 61.0 (18.3) 42.7 63.2 (16.8) 46.4 *Rental income includes surrender premia of Â£0.3m (2006: Â£2.2m). +Sundry income includes Â£1.1m option fees received for the potential sale of Thurston Road (2006: Â£nil). The Group operates a single business segment providing business accommodation for rent in London and the South East of England, which is continuing. 3(a) Other Income Following a fire that destroyed part of the Westwood Business Centre, it was decided that the damaged portion of the property will not be replaced. As a result a profit of Â£0.7m has been recognised in net income reflecting Â£1.5m insurance proceeds (after site clearance costs) offset by Â£0.8m diminution in investment property value. 3 (b) Profit on disposal of investment properties 2007 2006 Â£m Â£m Gross proceeds from sale of investment 168.3 44.5 properties Book value at time of sale plus sale costs b (161.2) (41.1) 7.1 3.4 Unrealised profit on sale of properties to (2.7) - joint venture (see note 23) Pre tax profit on sale 4.4 3.4 Net tax credit 2.9 0.2 Net profit on disposal after tax 7.3 3.6 The profit on disposal includes the sale of 11 properties for proceeds of Â£146m to the joint venture (see note 23). During the year part of the property at Wharf Road was sold for residential development. The consideration for this sale was Â£1.86m in cash plus the provision by the developer of a new 30,000 sq.ft business centre to be constructed on the retained portion of the site. The commitment to deliver the building (costing Â£5.8m including interest and fees) by the developer has been secured by a charge over the land sold to it, which was considered, on valuation by the Group's valuers, CBRE, to be worth more than the construction liability. On this basis, and on the assumption that the construction works are completed, the profit on this disposal has been recognised above and the value of the retained land and replacement buildings (also valued by CBRE) have been included in investment property. 4. Operating profit The following items have been charged in arriving at 2007 2006 operating profit: Â£m Â£m Direct costs: Depreciation of property, plant and equipment - owned 0.4 0.3 assets Staff costs 2.4 2.5 Repairs and maintenance expenditure on investment 3.0 3.3 property Trade receivables impairment 0.1 0.1 Administrative expenses: Amortisation of intangibles 0.1 0.1 Depreciation of property, plant and equipment - owned 0.2 0.3 assets Staff costs 4.9 4.9 Other operating lease rentals payable: - motor vehicles - minimum lease payments 0.1 0.1 Audit fees payable to the Company's auditors 0.2 0.1 Audit fees payable to the Company's auditors include Â£26,000 (2006: Â£26,000) of other services pursuant to legislation, in respect of the half year review of the consolidated Group accounts and the statutory audits of the subsidiaries in the Group. Amounts payable to the Company's auditors for other non-audit services totalled Â£15,200(2006 - Â£103,000). The 2006 amounts related primarily to the costs of IFRS conversion. Depreciation in direct costs relates to that of fixtures and fittings installed within investment properties. 5. Finance costs 2007 2006 Â£m Â£m Interest payable on bank loans and overdrafts 20.9 21.0 Amortisation of issue costs of bank loans 0.5 0.5 Interest payable on finance leases 0.1 0.1 Interest payable on 11.125% First Mortgage Debenture 1.4 1.4 Stock 2007 Interest payable on 11.625% First Mortgage Debenture 0.8 0.8 Stock 2007 Interest payable on 11% Convertible Loan Stock 2011 0.1 0.3 Interest capitalised on property refurbishments (0.5) (0.5) 23.3 23.6 6. Taxation Analysis of charge in period 2007 2006 Â£m Â£m Current tax 20.6 5.9 Deferred tax (101.5) 36.5 Total taxation (credit)/charge (80.9) 42.4 2007 2006 The charge in the period is analysed as follows: Â£m Â£m Current tax: UK corporation tax 2.2 6.8 REIT conversion charge 18.8 - Adjustments in respect of previous periods (0.4) (0.9) 20.6 5.9 Deferred tax: On fair value gains of investment properties (93.7) 34.5 On accelerated tax depreciation (8.3) 1.2 On derivative financial instruments 0.4 0.1 Adjustments to tax in respect of previous periods - 0.5 Others 0.1 0.2 (101.5) 36.5 Total taxation (credit)/charge (80.9) 42.4 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: 2007 2006 Â£m Â£m Profit on ordinary activities before taxation 112.5 149.0 Less share of post tax profits in joint venture (1.7) - 110.8 149.0 Tax at standard rate of corporation tax in the UK of 33.2 44.7 30% (2006: 30%) Effects of: Accelerated capital allowances (1.9) - Capitalised interest (0.1) - Income taxed as capital gains (0.4) (0.4) Contaminated land relief (0.1) (0.3) Capital gains adjustments on property disposals (0.7) (1.2) Sale of properties to joint venture (3.7) - Other items 0.1 - Adjustments to tax in respect of previous periods (0.4) (0.4) REIT conversion charge 18.8 - Income not taxable as a REIT (1.1) - Changes in fair value not subject to tax as a REIT (28.3) - Deferred tax released on REIT conversion (96.3) - Total taxation (credit)/charge (80.9) 42.4 The significant tax credit for the year is largely due to the impact of the conversion of the Group to a UK REIT with effect from 1 January 2007. From this date no tax is payable on the Group's UK property rental business (both income and capital gains). As a result Â£96.3m of deferred tax has been reversed which is part offset by a provision for the REIT entry charge of Â£18.8m. This will be paid in a single instalment in July 2007. 7. Dividends 2007 2006 Â£m Â£m Final dividend 2005/6: 2.51p (2004/05: 2.28p) per 4.1 3.7 ordinary share Interim dividend 2006/7: 1.38p (2005/06: 1.25p) per 2.3 2.1 ordinary share 6.4 5.8 In addition the directors are proposing a final dividend in respect of the financial year ended 31 March 2007 of 2.76p per Ordinary Share which will absorb an estimated Â£4.7m of shareholders' funds. If approved by the shareholders at the AGM, it will be paid on 3 August 2007 to shareholders who are on the register of members on 6 July 2007. 8. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year, excluding those held in the employee share ownership trust (ESOT). For diluted earnings per share the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. The group now has a single class of instruments dilutive to ordinary shares: employee share options . All the remaining convertible stocks, converted on 16 August 2006. Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below. Profit Earnings per share Earnings used for calculation of 2007 2006 2007 2006 earnings per share Â£m Â£m pence pence Earnings used for basic earnings per 193.4 106.6 115.1 65.1 share Interest saving net of taxation on 11% Convertible Loan Stock dilution 0.1 0.2 (1.1) (1.5) Share option scheme dilution - - (1.5) (0.9) Total diluted earnings 193.5 106.8 112.5 62.7 Less non trading items (182.7) (94.9) (106.2) (55.7) Trading diluted earnings 10.8 11.9 6.3 7.0 Weighted average number of shares used for 2007 2006 calculating earnings per share Number Number Weighted average number of shares (excluding 168,083,460 163,629,157 shares held in the ESOT) Dilution due to Share Option Schemes 2,179,100 2,538,531 Dilution due to Convertible Loan Stock 1,651,507 4,400,000 Used for calculating diluted earnings per share 171,914,067 170,567,688 9. Net assets per share Net assets used for calculation of net assets per share 2007 2006 Â£m Â£m Net assets at end of year (basic) 582.6 390.3 Dilution due to Convertible Loan Stock - 2.2 Diluted net assets 582.6 392.5 Derivative financial instruments at fair value 0.2 1.1 Deferred tax on accelerated tax depreciation - 8.3 Deferred tax on fair value change of investment - 114.2 properties Deferred tax on derivative financial instruments - (0.4) Diluted adjusted net assets 582.8 515.7 Adjusted net assets (basic) 582.8 513.5 Net assets have been adjusted to derive a diluted net assets measure as defined by the European Public Real Estate Association (EPRA). Number of shares used for calculating net assets 2007 2006 per share Number Number Shares in issue at year-end 174,221,087 169,509,640 Less ESOT shares (2,738,360) (4,940,960) Number of shares for calculating basic net assets 171,482,727 164,568,680 per share Dilution due to Share Option Schemes 2,179,100 2,538,531 Dilution due to Convertible Loan Stock - 4,400,000 Number of shares for calculating diluted net 173,661,827 171,507,211 assets per share 10 Investment properties 2007 2006 Â£m Â£m Balance at 1 April 954.0 716.5 Additions during the year 102.1 154.5 Capitalised interest on refurbishments 0.5 0.5 Disposals during the year (149.5) (40.6) Diminution in value due to fire loss (see note 3(a)) (0.8) - Net gain from fair value adjustments on investment 95.3 131.3 property Investment property held for sale (note below) - (8.2) Balance at 31 March 1,001.6 954.0 Property held for sale at the balance sheet date is shown separately under current assets as required by IFRS5. Within additions for the year are property purchases, including costs and IAS17 finance leases, of Â£82.7 m (2006: Â£133.1m). The balance of additions is improvements made to properties. Capitalised interest is included at a rate of capitalisation of 6.00% (2006: 5.73%). The total amount of capitalised interest included in investment properties is Â£2.0m (2006: Â£1.5m). Investment property includes buildings under finance leases of which the carrying amount is Â£3.6m (2006: Â£0.7m). Investment property finance lease commitment details are show in note 17(h). The Group has determined that all tenant leases are operating leases within the meaning of IAS17. The majority of the Group's tenant leases are granted with a rolling three month tenant break clause. The future minimum rental receipts under non-cancellable operating leases granted to tenants are as follows: 2007 2006 Â£m Â£m (restated) Within one year 10.6 11.6 Between two and five years 7.5 9.6 Beyond five years 2.5 9.4 20.6 30.6 Valuation The Group's investment properties were revalued at 31 March 2007 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. The reconciliation of the valuation report total shown in the Consolidated Balance Sheet as non-current assets, investment properties, is as follows: 2007 2006 Â£m Â£m Total per CB Richard Ellis valuation report 1,000.9 964.3 Owner occupied property (2.5) (2.4) Property held for sale (shown as current assets) - (8.2) Head leases treated as finance leases under IAS 17 3.6 0.7 Short leases valued as head leases (0.4) (0.4) Total per balance sheet 1,001.6 954.0 11. Intangible assets 2007 2006 Computer software Â£m Â£m Cost Balance at 1 April 0.7 0.6 Additions during the year 0.2 0.1 Disposals during the year (0.3) - Balance at 31 March 0.6 0.7 Accumulated amortisation and impairment Balance at 1 April 0.5 0.4 Charge for the year 0.1 0.1 Disposals during the year (0.3) - Balance at 31 March 0.3 0.5 Net book value at end of year 0.3 0.2 12. Property, plant and equipment Owner Owner Equipment Total occupied occupied and fixtures land buildings Â£m Â£m Â£m Â£m Cost Balance at 1 April 2005 0.5 1.5 4.1 6.1 Additions during the year - 0.1 0.6 0.7 Balance at 31 March 2006 0.5 1.6 4.7 6.8 Additions during the year - - 0.3 0.3 Disposals during the year - - (1.6) (1.6) Balance at 31 March 2007 0.5 1.6 3.4 5.5 Accumulated depreciation Balance at 1 April 2005 - - 2.6 2.6 Charge for the year - 0.1 0.5 0.6 Balance at 31 March 2006 - 0.1 3.1 3.2 Charge for the year - - 0.6 0.6 Disposals during the year - - (1.6) (1.6) Balance at 31 March 2007 - 0.1 2.1 2.2 Net book amount at 31 March 2006 0.5 1.5 1.6 3.6 Net book amount at 31 March 2007 0.5 1.5 1.3 3.3 13. Trade and other receivables 2007 2006 Â£m Â£m Trade receivables 3.1 3.8 Less provision for impairment of receivables (0.3) (0.3) Trade receivables - net 2.8 3.5 Taxation and social security - 0.3 Prepayments and accrued income 5.3 2.9 Other receivables 0.7 - 8.8 6.7 There is no concentration of credit risk with regard to trade receivables as the Group has a large number of unrelated customers. No single debtor represents more than 3% of trade debtors. There is no material difference between the above amounts and their fair values due to the short term nature of the receivables. 14. Cash and cash equivalents 2007 2006 Â£m Â£m Cash at bank and in hand - - Restricted cash - tenants' deposit deeds 2.4 1.7 2.4 1.7 Tenants' deposit deeds represent returnable cash security deposits received from tenants and are ring-fenced under the terms of the individual lease contracts. Bank overdrafts are included within cash and cash equivalents for the purpose of the cash flow statement. 15. Trade and other payables 2007 2006 Â£m Â£m Trade payables 2.4 2.4 Taxation and social security payable 2.1 0.4 Tenants' deposit deeds (see note 14) 2.4 1.7 Tenants' deposits 5.5 5.3 Accrued and deferred income 14.6 13.9 Deferred income-rent and service charges 4.6 5.3 Other payables 0.7 - 32.3 29.0 There is no material difference between the above amounts and their fair values due to the short term nature of the payables. 16. Current tax liabilities 2007 2006 Â£m Â£m Current tax liabilities 17.6 1.7 The liabilities at 31 March 2007 include the REIT conversion charge of Â£18.8m payable in July 2007. The balance represents an overpayment of tax in current and prior years which is considered recoverable. 17. Financial liabilities - borrowings a) Balances 2007 2006 Â£m Â£m Current Bank loan and overdrafts due within one year or on 0.9 3.6 demand (secured) 11.125% First Mortgage Debenture Stock 2007 (secured) 12.5 - 11.625% First Mortgage Debenture Stock 2007 (secured) 7.0 - 20.4 3.6 Non -current 11% Convertible Loan Stock 2011 (unsecured) - 2.2 11.125% First Mortgage Debenture Stock 2007 (secured) - 12.5 11.625% First Mortgage Debenture Stock 2007 (secured) - 7.0 Other loans (secured) 357.1 403.7 Finance lease obligations (secured) 3.6 0.7 360.7 426.1 381.1 429.7 The secured loans and overdraft facility are secured on properties with balance sheet values totalling Â£739.4m (2006: Â£806.7m). The Debenture Stocks are repayable on 30 June 2007. b) Maturity 2007 2006 Â£m Â£m Secured (excluding finance leases) Repayable in less than one year 20.4 3.6 Repayable between one year and two years - 19.5 Repayable between two years and three years 132.7 - Repayable between three years and four years 225.0 134.7 Repayable between four years and five years - 270.0 378.1 427.8 Less cost of raising finance (0.6) (1.0) 377.5 426.8 Unsecured Repayable in five years or more - 2.2 Finance leases (unsecured) Repayable in five years or more 3.6 0.7 381.1 429.7 c) Interest rate and repayment profile Principal Interest Interest Repayable Â£m rate payable Current Bank loan and overdrafts due within 0.9 Variable Variable On demand one year or on demand 11.125% First Mortgage Debenture 12.5 11.125% September June 2007 Stock 2007 fixed and March 11.625% First Mortgage Debenture 7.0 11.625% September June 2007 Stock 2007 fixed and March Non-current Other loans 225.0 LIBOR +0.94% Variable August 2010 Other loans 132.7 LIBOR +0.95% Variable July 2009 The balance of the 11% convertible loan stock 2011 was converted on 16 August 2006. The net proceeds received from initial issue of the Convertible Loan Stock 2011 have been split between the liability element and an equity element as follows: 2007 2006 Â£m Â£m Net proceeds of Convertible Loan Stock 2011 4.0 4.0 Less equity component (0.3) (0.3) Liability component at date of issue 3.7 3.7 Cumulative amortisation since issue 0.3 0.3 Liability component of conversion (4.0) (1.8) Liability component as at 31 March - 2.2 The effective interest rate on the liability element at 31 March 2007 was nil % (2006: 11.95%). d) Financial instruments held at fair value through profit and loss The following interest rate collars are held: +---------------------------------+---------+---------+---------+---------+ | | Amount| Interest| Interest| Expiry| | | hedged| cap| floor| | | | | | | | | | Â£m| %| %| | +---------------------------------+---------+---------+---------+---------+ |Interest rate collar (amortising | 95.0| 8.00%| 4.50%|July 2009| |amount) | | | | | +---------------------------------+---------+---------+---------+---------+ |Interest rate collar | 75.0| 6.95%| 4.05%|July 2009| +---------------------------------+---------+---------+---------+---------+ |Interest rate collar (increasing | 40.0| 7.00%| 2.99%| Oct 2010| |amount) | | | | | +---------------------------------+---------+---------+---------+---------+ The above instruments are treated as financial instruments at fair value with changes in value dealt with in the income statement during each reporting period. At the year end 5% (2006: 5%) of the Group's borrowings were fixed with a further 55% (2006: 50%) subject to a collar. e) Fair values of financial instruments +------------------------------+-----------+---------+-----------+---------+ | | 2007| 2007| 2006| 2006| | | | | | | | | Book Value| Fair| Book Value| Fair| | | | Value| | Value| | | Â£m| | Â£m| | | | | Â£m| | Â£m| +------------------------------+-----------+---------+-----------+---------+ |Financial liabilities not at | | | | | |fair value through profit or | | | | | |loss | | | | | +------------------------------+-----------+---------+-----------+---------+ |Bank overdraft | 0.9| 0.9| 3.6| 3.6| +------------------------------+-----------+---------+-----------+---------+ |11% Convertible Loan Stock | -| -| 2.2| 2.5| |2011 | | | | | +------------------------------+-----------+---------+-----------+---------+ |11.125% First Mortgage | 12.5| 12.7| 12.5| 13.1| |Debenture Stock 2007 | | | | | +------------------------------+-----------+---------+-----------+---------+ |11.625% First Mortgage | 7.0| 7.1| 7.0| 7.4| |Debenture Stock 2007 | | | | | +------------------------------+-----------+---------+-----------+---------+ |Other loans | 357.1| 357.1| 403.7| 403.7| +------------------------------+-----------+---------+-----------+---------+ |Finance lease obligations | 3.6| 3.6| 0.7| 0.7| +------------------------------+-----------+---------+-----------+---------+ | | 381.1| 381.4| 429.7| 431.0| +------------------------------+-----------+---------+-----------+---------+ |Financial liabilities at fair | | | | | |value through profit or loss | | | | | +------------------------------+-----------+---------+-----------+---------+ |Derivative financial | | | | | |instruments: | | | | | +------------------------------+-----------+---------+-----------+---------+ |Liabilities | 0.3| 0.3| 1.2| 1.2| +------------------------------+-----------+---------+-----------+---------+ |Assets | (0.1)| (0.1)| (0.1)| (0.1)| +------------------------------+-----------+---------+-----------+---------+ | | 0.2| 0.2| 1.1| 1.1| +------------------------------+-----------+---------+-----------+---------+ | | 381.3| 381.6| 430.8| 432.1| +------------------------------+-----------+---------+-----------+---------+ The total gain recorded in the income statement was Â£0.9m (2006: Â£0.4m) 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 0.2p per share (31 March 2006: 0.8p). f) Borrowing facilities At 31 March 2007 the Group had undrawn borrowing facilities of Â£65.4m (2006: Â£19.3m) for which conditions precedent had been met. Of the total undrawn facilities, Â£3.1m (2006: Â£0.2m) had a maturity of less than 12 months with the remainder having a maturity of in excess of two years. g) Financial instrument risk management objectives and policy Interest risk 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 collars to generate the desired interest and risk profile. The Group's policy is to fix or cap interest rates on at least 50% of its borrowings. Credit risk The credit risk in liquid funds and derivative financial instruments is limited because the counter parties are banks with investment grade credit ratings. The Group has no significant concentration of credit risk from its customers as exposure is spread over a large number of entities. Liquidity risk The Group minimises liquidity risk by continually refreshing the maturity profile of its debt. h) Finance leases Finance lease liabilities are in respect of leased investment property. Minimum lease payments under finance leases fall due 2007 2006 as follows: Â£m Â£m Within one year 0.4 0.1 Between two and five years 1.2 0.2 Beyond five years 21.0 3.7 22.6 4.0 Future finance charges on finance leases (19.0) (3.3) Present value of finance lease liabilities 3.6 0.7 18. Notes to cash flow statement Reconciliation of profit for the period to cash generated from operations: 2007 2006 Â£m Â£m Profit for the period 193.4 106.6 Tax (80.9) 42.4 Depreciation 0.6 0.6 Amortisation of intangibles 0.1 0.1 Profit on disposal of investment properties (4.4) (3.4) Net gain from fair value adjustments on investment (95.3) (131.3) property Diminution in value due to fire loss 0.8 - Fair value gains on financial instruments (0.9) (0.4) Interest income (0.1) (0.2) Interest expense 23.3 23.6 Share in joint venture post tax profit (1.7) - Changes in working capital: Increase in trade and other receivables (1.1) (1.7) Increase in trade and other payables 3.3 2.7 Cash generated from operations 37.1 39.0 For the purposes of the cash flow statement, the cash and cash equivalents comprise the following: 2007 2006 Â£m Â£m Cash at bank and in hand - - Restricted cash - tenants deposit deeds 2.4 1.7 Bank overdrafts (0.9) (3.6) 1.5 (1.9) 19. Tax paid 2007 2006 Â£m Â£m Tax (refunded)/paid on operating activities (0.1) 1.9 Tax paid on investing activities 4.8 4.8 Total tax paid 4.7 6.7 20. Analysis of net debt At 1 Cash Flow Non-cash At 31 April Items March 2006 2007 Â£m Â£m Â£m Â£m Cash at bank and in hand - - - - Restricted cash - tenants' 1.7 0.7 - 2.4 deposit deeds Bank overdrafts (3.6) 2.7 - (0.9) (1.9) 3.4 - 1.5 11% Convertible Loan Stock (2.2) - 2.2 - 11.125% First Mortgage Debenture (12.5) - - (12.5) Stock 11.625% First Mortgage Debenture (7.0) - - (7.0) Stock Bank loans (404.7) 47.0 - (357.7) Less cost of raising finance 1.0 0.1 (0.5) 0.6 Finance lease obligations (0.7) 0.1 (3.0) (3.6) (426.1) 47.2 (1.3) (380.2) Total (428.0) 50.6 (1.3) (378.7) 21(a). Deferred tax liabilities 2007 2006 Â£m Â£m Balance at 1 April 122.6 86.1 Deferred tax (credit)/charge (122.4) 36.5 Balance at 31 March 0.2 122.6 Deferred tax recognised in the balance sheet by each category of temporary timing difference is as follows: Deferred tax liability 2007 2006 Â£m Â£m Fair value gains on investment - 114.2 properties Capitalised interest - 0.4 Accelerated tax depreciation - 8.3 Derivative financial instruments - (0.4) Other 0.2 0.1 Balance at 31 March 0.2 122.6 If the Group's directly owned investment properties were sold for their revalued amount there would be a potential liability to corporation tax of Â£nil following the Group's conversion to a REIT (31 March 2006: Â£95.6m). 21(b). Provisions 2007 2006 Â£m Â£m At 1 April - - Provision for tax indemnity 20.9 - At 31 March 20.9 - On the formation of the joint venture with Glebe (which was created by a merger and so triggered no tax liabilities) the Group gave an indemnity that should a tax liability arise in the future on the disposal of any of the 11 properties referred to in note 23, then the Group would pay to the joint venture a proportion of the liability based on the pre-merger gain. An appropriate provision under current tax law has been made for this liability. 22. 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 dividends on the shares have been waived. During the year the Trust transferred 2,202,600 shares to employees on exercise of options. At 31 March 2007, the number of shares held by the Trust totalled 2,738,360 (2006: 4,940,960). The shares have been included at cost in shareholders' equity. 2,738,250 shares held by the Trust are subject to option awards. In addition, the ESOT holds 504,565 shares earmarked for the provision of matching awards under the Group's LTIP plan. 23. Joint Venture On 12 June 2006 the Group merged its interests in Workspace 12 Limited, a wholly owned subsidiary which held 11 properties valued at Â£146m with those of Glebe Three Limited, a wholly owned subsidiary of Glebe Two Limited, a third party, creating a joint venture, Workspace Glebe Limited, a company incorporated in England. The purpose of the joint venture is to invest in properties contributed by Workspace and Glebe with potential for intensification and improvement. Workspace Group plc holds 50% of the ordinary share capital of Workspace Glebe Limited. Its interest in this joint venture has been equity accounted for in the Group's consolidated financial statements. 31 March 2007 Investment in joint venture Â£m Share of joint venture at start of year - Share of joint venture profit after tax for the year 1.7 Net equity movements in joint venture 1.0 Net loan movements with joint venture 18.5 Unrealised profit on sale of properties to joint venture (2.7) Share of joint venture at end of year 18.5 Comprising: Unlisted shares at cost 1.0 Group's share of post acquisition retained profit after tax 1.7 Unrealised profit on sale of properties to joint venture (2.7) Loan to joint venture 18.5 18.5 The Group's share of amounts of each of current assets, long term assets, current liabilities and long term liabilities, income and expenses are shown below: 31 March 2007 Balance Sheet Â£m Investment properties 78.8 Current assets 2.2 Total assets 81.0 Current liabilities (1.8) Non-current liabilities (60.7) Total liabilities (62.5) Group share of joint venture net assets 18.5 Income statement Revenue 4.2 Direct costs (1.1) Net rental income 3.1 Administrative expenses (0.1) Gain from change in fair value of investment property 1.4 Finance costs - interest payable (3.1) Change in fair value of derivative financial instruments 1.2 Profit before tax 2.5 Taxation (0.8) Profit after tax 1.7 The Group's share of capital commitments of the Workspace Glebe joint venture were Â£0.2m for commitments under contract and Â£5.0m authorised by directors but not contracted. Transactions between the Group and its joint venture are set out below. These are related party transactions as defined in IAS24. Â£m Transactions: Sale of properties to joint venture (see above) 146.0 Recharges to joint venture 0.4 Recharges from joint venture (0.2) Â£m Balances with joint venture at 31 March 2007: Amounts payable (0.7) This information is provided by RNS The company news service from the London Stock Exchange

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