13th Jun 2005 07:01
Workspace Group PLC13 June 2005 WORKSPACE CONFIDENT ON PROSPECTS Workspace Group PLC ("Workspace") today announces its preliminary results forthe year ended 31 March 2005. Workspace provides approximately 5.3 million sq.ft of flexible business accommodation for almost 4,000 small and medium sizeenterprises ("SMEs") in London and the South East. • Net asset value per share up 21.7% to £2.24 • Like for like occupancy 90% • Turnover up 7.8% to £55.0 million (2004: £51.1 million) • Trading pre-tax profits up 2.6% to £14.5 million (2004: £14.1 million) • Pre-tax profits down 4.7% to £14.4 million (2004: £15.1 million) • Trading earnings per share up 3.3% to 6.3p (2004: 6.1p) • Earnings per share down 4.6% to 6.2p • 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 numberof 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 £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 GroupHarry Platt, Chief Executive Simon CourtenayMark Taylor, Finance Director 020-7448-3244020-7247-7614 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, withnet asset value (NAV) per share up 21.7% to £2.24. Since the Group's flotationin 1993, NAV per share has risen 7.02 times and, based on the share price of£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 incomethroughout 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 tosub-divide the Company's shares. Following an Extraordinary General Meeting heldon 16 March 2005 a bonus issue of 9 shares per share held was made, leavingshareholders with 10 times their original holdings. Your Board remains committed to driving consistent value for shareholders intothe future with its focused strategy and intensive management. Strategy Your Board regularly reviews your business and its market. It believes theservice the Group provides - flexible, affordable accommodation to small andmedium sized enterprises (SMEs) remains compelling. Our focus on London isparticularly relevant as its population is growing, in numbers and wealth, at afaster rate than the rest of the UK. SMEs are similarly increasing, putting evergreater pressure on space to work and live. So our strategy of servicing the SMEmarket in London and the South East, while seeking opportunities to add value toour properties by refurbishment, change of use and redevelopment continuesunchanged. Our aim of doubling the value of the Group's portfolio to our targetof £1 billion by September 2008 remains on track. Results Total rent roll increased during the year by 11.0% to £42.3m as occupancyimproved. Trading earnings per share growth was slower up 3.3% to 6.3p pershare, mainly due to higher interest rates. The total value of the portfolioincreased by 14.3% to £718.4m. Net assets were up 23%, a very strong performancedespite the Chancellor's recent reversal of stamp duty exemption indisadvantaged areas which had a £14.3m adverse impact. This reflects the outcomeof our own intensive management efforts, as well as the continuing improvementin yields in the property market. However, this yield improvement has compressedthe margin over finance costs, making it harder to purchase new sites onattractive terms. Even so, we have made over £40m of acquisitions where webelieve our management can create real shareholder value. Once again, the Company has recorded a good performance when compared with theInvestment Property Databank (IPD) indices, with first and top percentileranking over 5 and 10 year periods. People and Community Our business is management intensive and so our success is dependent on theefforts of our staff, who are key stakeholders. We play an important role in ourcommunities in the regeneration of economic, cultural and social life throughthe very nature of our business. We also encourage and support our customers,suppliers and staff to play their own roles in enhancing our communities. Inrecognition of this, our reporting on these areas has been expanded in thisyear's report. There have been no further board changes following those referred to in my lastreport, namely the retirement of Alan Cherry and the appointment of JohnBywater.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 £9.29 persq. ft for a portfolio, two thirds of which is within six miles of CentralLondon. We believe that conditions are now more favourable for rental increases.However, a number of properties remain under development for long term valuegrowth, and so short term growth in the total rent roll will be tempered untilthey are fully refurbished and well occupied. Once completed, these projectswill contribute to the ongoing growth of the business. Since the year end there has been further yield compression in the market as newfunds seek to invest in property. This has a positive short term impact on valuebut makes purchasing on attractive terms increasingly challenging. However, weare continuing to source good opportunities and will only invest where we cancreate long term value for our shareholders. We continue to monitor closely thepossibility of UK legislation on Real Estate Investment Trusts (REITs).Ourbusiness model would in many ways be attractive in a REIT but we await detailsof any legislation and will assess the implications at that time. Dividend The Board recommends a final dividend payment of 2.28p per share making 3.41pfor the year, an increase of 10% over last year and making 13.1% p.a. compoundgrowth over 10 years. This strong dividend growth is consistent with thecontinuing overall progress of your Company. Chief Executive's Review The Group has maintained its consistent growth. Good progress has been made onits current 5 year plan by increasing the portfolio value to £718m against thetarget of achieving £1bn by September 2008. Last year, after suffering a slightdrop in occupancy, we set ourselves the target in 2004/05 of building this backover the 90% level, excluding developments. This was achieved by the half yearstage 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 £2.24 (2004: £1.84)Turnover £55.0m (2004: £51.1m)Operating Profit £33.3m (2004: £29.7m)Trading Profit before tax £14.5m (2004: £14.1m)Trading Earnings per share 6.3p (2004: 6.1p)Basic Earnings per share 6.2p (2004: 6.5p)Investment Portfolio Valuation £715.8m (2004: £626.1m)Rent Roll £42.28m (2004: £38.09m) Net assets per share increased by 21.7% following a £67.3m valuationsurplus. Basic Earnings per share were 6.2p (2004: 6.5p) following a £0.3m priceadjustment during the final stages of negotiation for the sale of Three Millswhich 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, ThreeMills, together with the other disposals made during the year, showed goodinternal 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 inNovember 2003. This was to double the value of the portfolio over a five yearperiod through organic growth. One third of this target has been achieved withineighteen months, and so we remain in line with our objective. Our more immediatetwo year targets were to improve occupancy in the first year, now achieved; andthen to grow rental values. This continues to be our key objective in thecurrent year. However, overall rental income will continue to be tempered byvoids on certain development projects, like Enterprise, Clerkenwell andSouthbank. Our target for next year 2006/07 will therefore be to consolidatethis growth in the rent roll into real earnings growth. With continuedconfidence in the Group's marketplace of SMEs in London and a strong investmentmarket, the prospects for the current year 2005/06 seem good. Meanwhile, weexpect to build upon progress achieved this year in accelerating our programmefor the change of use of certain estates. Trading Review Our key target for 2004/05 was to rebuild occupancy following the slight declinerecorded in the previous year, 2003/04. This was achieved rapidly withlike-for-like occupancy (over some 91 estates) rising from 88.9% at 31 March2004 to 90.9% by 30 September 2004. Occupancy remained in the 90% - 91% rangefor the latter half of the year. Headline occupancy of the whole portfolioincluding estates under development etc rose even more steeply, from 83.8% at 31March 2004 to 88.5% by 30 September 2004, remaining in the 88%-89% range for theremainder of the year. This latter improvement was assisted by the disposal ofThree Mills which had a high recorded vacancy rate due to the high volumes ofshort term lets. At the end of the year 46% (2004: 31%) of the Group'sproperties 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 £8.57 to £8.82 per sq. ft. This year the rolling rent reviewand lease renewal programme extended to 5.8% of the opening rent roll. Theuplift achieved of £0.36m through rent reviews and lease renewals represents a16.7% increase on previous passing levels for these tenancies. This reflects agood performance for a period during which occupancy was still being built up.With occupancy now running at higher levels the platform for rental growth isfirmly re-established. The Group has continued with and extended its association with KingstonUniversity through the year. A valuable customer survey was undertaken with theassistance of Kingston. This revealed a fascinating profile of the typicalWorkspace customer. Details of this work and further updating research work byKingston has been lodged in the Investor Relations section of the Group'swebsite. Portfolio, Acquisitions, Disposals and Added Value The Group creates value through its active estate management and marketing whichkeeps high levels of occupancy and drives rental values. In addition, to achieveour target of a £1 billion portfolio by September 2008, the Group must continue tobuy well, acquiring additional properties that meet the Group's investmentcriteria and where we are confident of future potential. Opportunities are alsotaken 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. Allour acquisitions in the year were located inside the M25. We trail a largenumber of targets for a long time in this market place which we know well.Properties we acquire are generally multi-let business centres or industrialestates, providing accommodation attractive for letting to SMEs under anyeconomic climate. We like to work off low capital values and acquire propertieswhere there is scope for improvement under our management and where in the longterm there may be opportunities for change of use or intensification. During the year the Group acquired 7 properties for £43.4m. Both individuallyand as a group these properties have excellent potential in our hands. Some,like Southbank House, complement and are close to existing properties in ourportfolio, others like Homesdale are in parts of London where we have littlerepresentation. Some have more immediate angles, others simply need improved management and marketing to extract good growth. We did not meet our target of £60m acquisitions in the year. With the currentmarket appetite for commercial property and the consequent yield compression,seeking value has become more difficult and on some acquisitions we were simplypriced out. We have stuck to our investment criteria and are pleased with whatwe have achieved. Our acquisitions this year show an initial yield of 7.26% anda reversionary return of 10.5%. Further, we are confident in our long termtracking of acquisitions where we can create real value through our efforts. Three disposals were completed during the year realising £34.78m. The largestdisposal was Three Mills for £22.6m. We acquired this estate in 1995, and sincethat time created a thriving film studio. The Group was approached by the LondonDevelopment 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 specialisedfilm studio management which detracted from our main business. As a result, wesold 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 bothsold for redevelopment for housing. Acquired in 1997, we achieved the planningconsent on Hooley Lane ourselves, whilst at Union Street (acquired in 1998) weworked 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 potentialover time for added value by intensification and/or change of use. We estimatethat some 45% of the Group's estates could, on a 3 to 10 year basis, be subjectto some form of development through either refurbishment or extension for theexisting use or alternatively redevelopment for another use. In particular, manyestates could be subject to more intensive mixed use development, responding tothe planning agenda set out by the Mayor of London. We anticipate that thisprogramme will steadily accelerate over time. Of the other 55% of the Group's portfolio, most estates have good long termrental growth prospects supported by the ever-increasing demand for space that agrowing city creates. Valuation The valuation of the Group's properties (valued by CB Richard Ellis) at 31 March2005 was £718.4m, an increase of £89.9m over the year. The average value of theGroup's property was £139 per sq. ft, with an immediate income yield on currentrents passing of 5.92% (6.21% excluding development properties) and a yield atestimated current market rental values of 8.02%. For properties held throughout the year, comparing their value at 31 March 2004plus additions and improvements at cost with that at 31 March 2005, the upliftwas £63.2m or10.44%. Acquisitions during the year showed a surplus on valuation of £4.3m(9.40%). During the year, the Chancellor withdrew the exemption from stamp duty oftransfers 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 £14.3mwhich will have affected the Group's valuation and reported surplus for theyear. Total estimated rental values (ERVs) or current market rents on all lettablespace at 31 March 2005 was £57.6m. Allowing for the 10% void that the Groupoperates at, this shows an achievable rental stream of £51.8m. This compareswith current net income of £42.3m leaving £9.5m of potential additional income.Two thirds of this lies in six properties including in particular therefurbishment projects at Clerkenwell, Enterprise and Southbank. Clearly, oncethese projects are completed and the space re-let rentals and hence earningswill increase.We have again tested the Group's performance against the IPD (InvestmentProperty Databank) March Universe 2005 benchmark. The table below illustratesnot only the Group's continued substantial outperformance of sector averages,but also the lower levels of volatility in our particular sector compared withcommercial property more generally. One Three Five TenTotal 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 topPercentile RankIPD Comparator 15.6% 9.6% 9.5% 11.1% The IPD comparator index is a benchmark compiled by IPD of comparable propertiesin comparable locations to those held by the Group. Improvements in valuation and total returns arise partly from market movementsbut also as a result of value-adding activity through acquisition, managementand refurbishment/redevelopment. Comparison against indices such as thesesegregates simple market movement from our value-adding activity. With its consistent performance the Group demonstrates its ability to generateenhanced returns from its investments. This consistent strategy will continue -a focused portfolio with low capital values, serving a growing market, withopportunities to add value and to acquire more stock. With this, and the currentrobust underlying values, there is plenty of scope and opportunity for growth. Financial Review Profits Trading profits in 2004/05 before tax, at £14.48m were 2.6% ahead of last year.As predicted earnings growth was affected by the dip in occupancy that hadoccurred in 2003/04. Whilst the rental reductions arising from this dip wererecovered during the first half of 2004/05, the lost income in the early periodneutralised an element of the rental growth that was achieved in the yearoverall. This was compounded by the loss of rents at Clerkenwell Workshops whichwas vacated at the start of the financial year to enable the plannedrefurbishment works. These are now progressing well, and once completed, there-letting of this property will make a valuable contribution to earnings growthgoing forward. At a headline level, profit before tax at £14.41m was reduced (down 4.7%) by asmall £0.08m loss on disposals (2004: profit of £1.00m). This arose from a losson the sale of Three Mills which eliminated the profits made on the disposal ofthe 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 6.2prespectively; up 3.3% and down 4.6% respectively also. These mirror theperformance at the profit before tax level. Overheads, as a percentage of turnover, remained at the level reported last yearof 13.9%. This however conceals the efficiency improvements achieved during theyear which in turn afforded the capacity to invest further in staffing to assistin our acquisitions programme and in management of our construction activities. Interest charges were up 21% at £18.85m. This increase was due in part to theincreased debt levels, with borrowings at 31 March 2005 totalling £323.6m (2004:£308.2m). A further cost arose from the increase in interest rates. At 4.83% themarket daily average rate of LIBOR through 2004/05 was 1.00% higher than thatfor 2003/04. Interest rate growth appears now to have slowed with a number offorecasters now considering current levels to be the peak of the currentinterest rate cycle. In these circumstances, interest rate fluctuations inthe current year (2005/06) should not have as severe an impact on earningsgrowth as occurred in 2004/05. Taxation The effective rate of corporation tax in 2004/05 was 29.7% (2003/04: 30.3%). Thereduction in the year was due mainly to differences between tax adjustments madefor prior period capital allowance claims and the deferred tax provision inrespect of these. The net benefit arising from this was reduced by capital gainstax adjustments in respect of disposals. Investigation work into the tax historyof recent acquisitions has borne fruit in the current year leading to the £1.1mprior year tax adjustment in respect of Industrial Building and Plantallowances. This reduces the amount of the current taxation liability but givesrise to a deferred tax provision. However, over time as buildings reach the endof their IBA life, or plant is replaced these savings will crystallise. It isanticipated that, leaving aside disposals, the current year tax rate for 2005/06will be of the order of 30%. However, this level may be reduced by further prioryear adjustments arising from capital allowance claims. Net Assets and Balance Sheet Overall net worth (net assets employed) increased over the year by £69.4m(23.5%) to £365.1m with the valuation surplus for the year of £67.3m (41.2 penceper share) largely providing this increase. This increase is reflected in the£89.7m increase in tangible net assets covered in part by £15.9m of increasedlonger term borrowings and £2.6m and £1.9m increases to other net currentliabilities and deferred tax provisions. The Group's net current liabilities at 31 March 2005 were £25.37m (2004:£22.82m). Current liabilities include tenants' deposits in the form of advancerent payments and quarterly and monthly rents and service charge payments inadvance amounting in aggregate to £11.0m (2004: £10.5m). The directors considerthat in the normal course of business the majority of these liabilities areunlikely to require payment and properly form part of the working capital of theGroup. Net cash inflow from operating activities at £33.92m (2004: £31.6m)improved, principally due to the contribution from newly acquired propertiestogether with increased profitability from existing properties. In March 2005 the Group made a 9 for 1 bonus issue of shares following a £15.2mcapitalisation of reserves. This resulted in the issue of 151,955,694 shares toexisting shareholders. As a result of this issue, net asset value per share wassubdivided by ten so that year end net asset value was adjusted from £22.40 pershare to £2.24 per share. Progress Record Progress in key performance indicators over the year and over a five year periodwas: 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 of10% is in line with previous periods. Whilst the dividend cover is reduced thisyear the Board believes that the prospects for the Company support continueddividend growth at this rate. Internal performance measures Internal benchmark comparison shows: Performance measures 2005 2004 2003 2002 2001--------------------------------------------------------------------------------Turnover per member of staff (£000) 380 332 314 294 272Year-end investment in property permember of staff (£000) 5,006 4,092 3,261 2,984 2,581Administrative expenses as apercentage 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 valuationsurpluses/deficits divided by opening shareholders' funds Our target is toachieve a strong double digit return on equity year on year, and in due courseto reduce administrative expenses as a percentage of revenue to below 12%.However, the continued growth and expansion of the business slows attainment ofthis latter target due to the operational issues that arise during the earlyyears following acquisition of new properties. Financing The Group opened the year with £18.0m of available resources. This wassupplemented by the £34.8m (before costs and taxation) realised on the disposalsof Hooley Lane, Redhill; Union Street sites and Three Mills. These resourceslargely provided the funding required for the capital expenditure andacquisitions programme in 2004/05. As flagged in last year's report, the Group'sfacility with NatWest has been increased from £100m to £150m during the year andrenewed to a fresh five year term. Discussions have commenced with Bradford &Bingley to undertake a similar exercise increasing its facility from £200m to£250m, refreshing the term of this loan also. This pattern of extending and renewing five year term loans was described inlast year's review. Through this approach, the Board considers the Group canaccess competitively priced funding on a flexible basis to match its cashdemands for expansion. With regular reviews and renewals the maturity of theseloans can be maintained in the 3 - 5 year range leaving flexibility shouldmarkets and circumstances change. The weighted average life of the Group's debtat 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 £m £m £mDebenture Stock 19.5 19.5 6% 19.5Convertible Loan Stock 2.5 2.5 1% 2.9Bradford & Bingley loan 200.0 200.0 62% 200.0NatWest property loan 150.0 100.8 31% 84.5NatWest overdraft 2.5 0.8 - 1.3 --- ---- ---- ---- 374.5 323.6 100% 308.2 ======= ====== ==== ===== The available resources of approximately £50m are equivalent to 8 months spendat 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 2.70Trading Interest Cover 1.77 1.91 1.72 2.09 1.82Year-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 to88%. Both gearing and interest cover levels are comfortably within the levelshistorically 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 stockmatures in 2007 with the Convertible maturing in 2011. The maturity of net debtat 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 werecovered 2.04 times by the value of charged property (with a further £62.9m ofuncharged property giving an overall cover of 2.24 times). Further details ofdebt 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 ending31 March 2006, with its first IFRS based statements being for the quarter ending30 June 2005. Illustrative unaudited statements reconciling accounts preparedunder current UK GAAP with the results presented using IFRS have been prepared(in common with last year) by reference to the principal standards giving riseto the most significant changes in the reporting of the Company's performance.These statements will be included in its briefings to analysts and investors andwill be placed on its website. A full reconciliation of accounts and details ofconversion adjustments will be provided at the time of the Group's first quarterresults. The principal changes impacting upon the profit and loss account and balancesheet of the Company under IFRS include inclusion of valuation surpluses in theprofit and loss account, full recognition of deferred taxation liabilities,adjustment of certain financial liabilities to reflect market values andcharging for share based payments. In addition to these there will be extensivenew disclosure requirements particularly relating to investment properties,leases and other balance sheet items although these will not have a materialimpact on reported Net Assets. Understanding Our Business Our Market Place The Group's business model is simple. We are a property-based business providinga variety of accommodation for small and medium sized enterprises (SMEs) inLondon and the South East. There are over 4.02m businesses in the UK, of which 1.07m are SMEs employingbetween one and twenty people. Of these, 30% or in excess of 317,000 are basedin London and the South East. London alone accounts for 20% of businessstart-ups and closures in the UK each year and sees the greatest growth inhigher "added-value" businesses. This is a huge market place and despite beingthe leader in our field our market penetration remains low. There remainstherefore considerable scope for us to grow. Our customer base reflects the diversity of the London economy. The threeprincipal business sectors in London are financial services, business andadvisory services and the creative and cultural industries. Our customersinclude many from these latter two sectors. They make attractive tenants toWorkspace since they are usually high "value adding" businesses, ones which areable to increase earnings over time and continue to meet rental obligations. Our new customers are more often second stage businesses, who have moved on froma home environment to more formal business premises. Many of them will, in time,relocate within our portfolio as their need for space changes. Churn - theformation, expansion, reduction and closure of businesses - is a keycharacteristic of the SME market and a source of opportunity for us. Through theconstantly changing SME community and their needs it provides us both with newcustomers and the opportunity to relocate others; each allowing us to review andincrease rents. Finally the Group is very well placed to take advantage of current trends forthe growth of London (of both population and employment) and the call in theMayor's London Plan for more intensive and mixed use of sites so that theseincreasing demands can be met within the existing built areas. Our assets arevalued at a comparatively low level of £139 per sq. ft. They are not intenselydeveloped and so, in the medium term, the potential for alternative use andintensification of use remains considerable. Our Business Our core product is an affordable, flexible lease which allows our customers tomove 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 theLandlord and Tenant Act but affording tenants the right to break on 3 monthsnotice. In many respects we are an hotelier of space for small businesses,focused on providing good customer service. With average rents of just £9.29 persq ft and an average unit size of 1,100 sq ft, our "average" customer in Londonpays approximately £10,200 in rent per annum - which we believe should bereadily affordable for small businesses operating in one of the best markets inthe UK. Our business, its product and its systems, is designed to accommodate thechanging needs of our customers as they upsize or downsize providing anappealing offer to customers whilst generating premium rents. During the year under review we received 7,764 enquiries which yielded 1,012 newlettings. The principal generators of enquiries continued to be estatesignboards, internet references and referrals from existing customers. Theseenquiries are crucial to the Group's success: not only do they provide newlettings but they are also an indication of levels of activity within the SMEsector and industry sub-sectors, enabling us to focus our offer effectively onemerging 'value-adding' businesses - those best able to pay improving rents. Enquiries also provide valuable intelligence into the developing patterns andtrends in the sector. This influences our acquisition strategy and productdevelopment (both in terms of the type and location of the buildings and theservices we provide within them). With the growth in internet enquiries we havereviewed the Group's website, focusing on improvements in the sales presentationand customer support aspects of the site. An improved site was launched afterthe financial year end. Our marketing activities are supported by the Group's association with the SmallBusiness School at Kingston University which continues to provide valuableinsights into the activities of SMEs in general and on a segmental basis.Research undertaken with Kingston has provided profiles of our customers andtheir performance, plans, impressions and attitudes, presentations of which maybe found on the Group's website. All this helps us shape our product and managerisk in our business. With its in-house management operations - lettings, estate management and creditcontrol - the Group is attuned to the flexibility needed by the SME marketplace.This enables us to foster close contact with our customers, to monitor changesin the market and to maintain exacting standards. We try to work closely withour customers and to understand and be responsive to their needs. This isreflected not only in our flexible leasing approach but also through acombination of entry and exit interviews and active centre management. From thepricing of our product, the focus on occupancy and actual achieved rates forrentals, to the "front of house" management (easy-in-easy-out lettings andon-site management) and the provision of "add-on" services, our approach is, asnoted above, like that of an hotelier. We are the largest provider of accommodation focused on the SME sector in Londonand the South East with 3,940 customers in 103 estates providing 5.3 million sqft of accommodation. There are few significantly sized competitors in this largebut disaggregated marketplace. We have found that our portfolio aggregation hasprovided both the benefits of greater choice to our customers and improved riskmanagement for the Company. We plan further expansion of our portfolio. To dothis we are currently monitoring in detail over 200 properties in London worthin excess of £500m with a further 1,500 properties identified. Many of ouracquisitions 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 changeof use. Acquisitions and Disposals 2004/2005 Acquisitions 2004/2005----------------------------------------------------------------------------------------------Name of Property Description Purchase Initial Actual Market rent at Price Income 31/03/05 £000 £000 £000----------------------------------------------------------------------------------------------The Quadrangle, 26,000 sq. ft Fulham SW6 business centre, 26 units £4,640.0 329.0 417.8----------------------------------------------------------------------------------------------Southbank 63,000 sq. ftHouse, London, SE1 business centre, 212 units £16,000.0 965.4 2,321.7----------------------------------------------------------------------------------------------Southgate Office 33,900 sq. ftVillage, Enfield, N14 office park in 8 blocks £7,630.0 653.7 460.7----------------------------------------------------------------------------------------------Chiswick 14,225 sq. ftStudios, London, W4 business centre, 6 units £2,875.0 211.0 226.5----------------------------------------------------------------------------------------------Lombard 77,390 sq. ft Business Park office and industrial space Purley Way, Croydon in 13 units £7,750.0 720.5 716.9 -----------------------------------------------------------------------------------------------Lewis House, 3 properties totalling 22,200 Park Royal, sq. ft in 14 units of officeLondon NW10 and industrial space £2,370.0 109.5 213.1 -----------------------------------------------------------------------------------------------Homesdale 15,225 sq ft Business Centre, business centre inBromley, BR1 14 units £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 £000------------------------------------------------------------------------------------------Hooley Lane, Redhill Land for development £10.30m Nil Union Street Site, SE1 Land for development £1.88m 12.0 Three Mills Estates Film Studios, industrial units £22.60m 868.9 and business centre------------------------------------------------------------------------------------------Total £34.78m 880.9 Acquisitions During the year the Group made 7 acquisitions for a total consideration(excluding acquisition costs) of £43.4m, showing an initial yield of 7.27%. The Quadrangle is a 26,000 sq. ft business centre in a converted multi-storeyVictorian former warehouse building in Fulham. The property is in a location inwhich the Group has long sought representation. It provides 26 units ofaccommodation ranging in sizes from 800 sq ft to 2,600 sq ft let mainly tolocally based small businesses. At acquisition, occupancy was 75%. In time weseek to achieve 90%. Southbank House is a 63,000 sq. ft business centre located just off the AlbertEmbankment in London SE1 close to Lambeth Bridge. It is the former head officeand manufacturing premises for Royal Doulton china. It provides 212 units ofaccommodation ranging in sizes from 50 sq. ft to 2,300 sq ft with an averagesize of 332 sq. ft. The property complements the Group's other holdings in thearea (sitting between Westminster Business Square and Enterprise House/GreatGuildford Street) extending the range of accommodation offer and servicingoffered to our customers. Part of the premises were occupied by the former ownergiving us the opportunity, following its partial refurbishment, of increasingrental income. In contrast, Southgate Office Village is a modern, purpose-built small unitoffice estate constructed in the mid '80s. It is located close to Southgateunderground station and so is well located to service both the local businesscommunity and those businesses seeking accommodation near to the North CircularRoad. The property was originally let to larger nationally based companies, someof whom have now moved away. We can refocus the property and the leasing packagestructure to provide a more attractive offer to smaller businesses therebyimproving returns. Chiswick Studios is a converted single-storey former industrial building locatedadjacent to the Chiswick Roundabout in West London, providing immediate accessboth to the A4/M4 and to the North Circular Road. It provides 14,225 sq. ft insix units, ranging in sizes from 530 sq. ft to 4,400 sq. ft. The Group's BarleyMow 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 andindustrial accommodation located on the A23, Purley Way at its junction with theA236. The 45,000 sq. ft office building is located prominently on the roundaboutat this location and is well known locally. The industrial estate is situated tothe rear of the office building and comprises eleven single-storey north litindustrial buildings which are let to a mixture of local businesses. The officeaccommodation is let to Vodafone under a lease extending to March 2010 whichobliges Vodafone to convert all the space back to cellular business centre spaceon expiry of the lease. Lewis House comprises three properties, Lewis House, 3a School Road and 99Victoria Road in Park Royal. It is very near to the Group's longstandingproperty, Acton Business Centre, located in School Road and the more recentlypurchased Westwood Business Centre and Europa House, both located in VictoriaRoad. 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 ofaccommodation ranging from 200 sq ft to 750 sq. ft. Homesdale Business Centre in Bromley is an attractive Victorian former laundrywhich has been refurbished to create a 15,225 sq. ft business centre offering 14units of accommodation ranging from 500 sq. ft to 1,500 sq. ft. It was acquiredfrom Greater London Enterprises, the development agency co-owned by the Londonboroughs with which the Group has an association and from which it has acquiredproperties in the past. This is another area in London where the Group has notpreviously had a presence. As may be seen acquisitions during the year have either complemented the Group'sexisting holdings, or have enabled penetration into markets where the Group isseeking representation. All the purchases fall within the Group's principaltarget acquisition area, within the M25. Disposals Three disposals were completed during the year. Two of these, Hooley Lane atRedhill 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 asrailway siding and storage land. It was used, on acquisition, for open storagefor builders merchants and similar businesses. It was acquired for aconsideration of £0.95m. Plans for redevelopment of the site, evaluating avariety of uses including food retail, retail warehousing and residential wereinvestigated leading to a successful application for planning consent forhousing. At the same time overage rights over the land were bought in taking theGroup's total investment to £2.5m. Throughout this period the site showed a 13%,rising to 20% return on the original cost. On its sale for £10.3m it realised a49% 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 StreetPostal Sorting Office purchase in April 1998. The Post Sorting Office was let toJ Sainsbury, refurbished and sold in December 2000 realising a £9.5 profit.Three plots of land were retained and planning consent obtained for residentialdevelopment. This land, which was acquired for £0.67m, was sold for £1.88mshowing a 23% IRR over the holding period. Three Mills was acquired in 1995 for £1.6m. This former gin distillery andbrewery complex was largely empty and in a dilapidated condition at the time ofits acquisition. At the time of purchase there was a fledgling film studiobusiness based at the property. The Group supported the development of thisbusiness whilst refurbishing and bringing back into use the derelict buildings,creating film studios and other accommodation for film industry uses. ThreeMills was an important feature of the early development of the Group,demonstrating how redundant space could be brought back to productive usecreating employment and regenerating buildings. A small vacant portion of thesite 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 Millsgrew it took the Group further from its core activity, investment and managementof small unit space, and further into film studio management, a more demandingand intensive activity and one which required focused industry knowledge andcontacts. The Group was approached by the London Development Agency who wereinterested in the property as a potential media centre for the London Olympicbid. It was felt that the Group had taken this property as far as it could, hadstimulated an important part of East London's urban regeneration, but shouldsell the property to refocus on its core activity areas. A small loss wasrecorded on its sale due to a price concession made in the final stages ofnegotiation. However, the property had been revalued at 31 March 2004 and thisrevaluation had shown a £4.1m surplus in 2003/04. The sale at £22.6m showed anIRR of 11.8% over the life of the investment. These returns illustrate the levels of return that can be expected from theGroup's properties. Where an asset is held as an investment and intensivelymanaged then the high initial income return can be improved through rentalgrowth 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 returnsaccelerate further rising as high as almost 50% in the case of Hooley Lane,Redhill. These returns and overall performance are significant given theincreasingly intense pressure on space in London. Following the year end the Group sold its interests at Payne Road Studios and 5Payne Road for a combined consideration of £2.1m. This property has shown an IRRof 21.1% over the period of ownership. Adding Value: Services The Company has set itself the objective of being a good landlord and providingthe highest levels of customer service. It recognises that its standards andefficiency of service, from the initial letting process through to moving in andoccupation, should allow customers to maximise time spent on their ownbusinesses. To do this it has developed stream-lined processes and activelyseeks out opportunities to complement its accommodation offer. These currentlyextend principally to energy (electricity and gas), business insurance andinternet connectivity services. Whilst these provide a useful supplement toearnings, their main objective is to increase the attractiveness of theWorkspace core accommodation offering and support the maintenance of high levelsof occupancy and rental income. At 31 March 2005 the Group supplied gas and electricity to 918 customers, had580 business insurance customers and 256 internet connectivity customers. Duringthe year the Group launched an initiative to provide internet protocol telephony (IPT) ona number of its sites following the successful provision of an IPT service aspart of its Quality Court refurbishment project. This project will be progressedthrough 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 bycustomers to other Workspace customers. This directory has recently beentransferred from a paper form to a web-based solution. Plans are also in hand toupgrade further this service over the next year. The Company has found that thisservice not only benefits its customers but enhances its brand through widerrecognition of the services it provides for SMEs. Properties The Group's core activity is investment in, and the letting of, small-unitaccommodation for SMEs. As such, it is not a property development company.However it will, when appropriate, engage either directly itself or by workingwith partners in property improvement and development activities to meetchanging consumer needs and to create additional value. The Group has spent aconsiderable amount of time and effort analysing its portfolio to ensure that itprioritises its efforts on those properties which have significant potential forvalue enhancement. Recent projects to improve its accommodation offering to customers and therental potential from its properties which demonstrate this focus include: • Leathermarket: construction of single storey extensions to two blocks of the estate undertaken in conjunction with refurbishment works; • Barley Mow: refurbishment of 50% of space at centre to bring it in line with current customer requirements; • Quality Court: refurbishment of former Patent Office to create managed office space; • Clerkenwell: extension and refurbishment of centre to target offering at cultural and creative markets in this area; • 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 ofuse of sites have been progressed: - • 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; • 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; • 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. • 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 oldtired buildings together with a cash consideration of the order of the originalvalue of the existing buildings. Consolidated Profit and Loss Accountfor the year ended 31 March 2005 2005 2005 2005 2004 2004 2004 Notes Trading Other Total Trading Other Total Operations Items Operations Items £000 £000 £000 £000 £000 £000 Turnover -continuing operations 2 55,039 - 55,039 51,068 - 51,068Rent payableand direct costs 2 (14,122) - (14,122) (14,229) - (14,229) ---------- --- ---------- ---------- --- ---------- Gross profit 40,917 - 40,917 36,839 - 36,839Administrative expenses (7,660) - (7,660) (7,145) - (7,145) ---------- --- ---------- ---------- --- ----------Operating profit 33,257 - 33,257 29,694 - 29,694 (Loss)/surplus on disposal ofinvestment properties 3 - (75) (75) - 1,009 1,009Net Interestpayable and similar charges 4 (18,773) - (18,773) (15,583) - (15,583) ---------- --- ---------- ---------- --- ----------Profit on ordinaryactivities before taxation 14,484 (75) 14,409 14,111 1,009 15,120 Taxation on profit onordinary activities 5 (4,235) (38) (4,273) (4,284) (303) (4,587) ---------- --- ---------- ---------- --- ---------- Profit on ordinaryactivities after taxation 10,249 (113) 10,136 9,827 706 10,533Dividends 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 earningsper share - restated 7 6.3p (0.1)p 6.2p 6.1p 0.4p 6.5pDiluted earnings per share - restated 7 6.2p (0.1)p 6.1p 6.0p 0.4p 6.4p Statement of Group totalrecognised gains and losses 2005 2004for the year ended 31 March 2005 £000 £000 Profit for the financial year 10,136 10,533Unrealised surplus on revaluation of investment properties 67,256 49,699Taxation on valuation surpluses realised onsale of investment properties (3,768) (1,215) --------- ---------Total recognised gains relating to the financial year 73,624 59,017 ======== ======== Note of Group historicalcost profits and losses 2005 2004for the year ended 31 March 2005 £000 £000 Reported profits on ordinary activities before taxation 14,409 15,120 Realisation of property revaluationgains of previous years 13,468 4,408 --------- ---------Historical cost profit on ordinary activities 27,877 19,528before taxation ======== ======== Historical cost profitfor the year retained aftertaxation and dividends 14,250 8,745 ======== ======= Profit and earnings per share on trading operations are stated before profit on propertydisposals and other non-recurring items. BALANCE SHEETSAs at 31 March 2005 Notes Group Group Company Company 2005 2004 2005 2004 £000 (as restated (as restated see note 16) See note 16) £000 £000 £000 Fixed assetsTangible assets:Investment properties 9 715,785 626,060 - 18,355Other fixed assets 3,675 3,654 13 217Shares in subsidiaryundertakings - - 24 24 ______ ______ _____ _____ 719,460 629,714 37 18,596 Current assetsDebtors 10 5,223 6,795 218,917 207,494Investments 11 1,251 1,150 - -Cash at bank and in 3 181 - -hand ______ _______ _______ _______Related Shares:
Workspace