Final Results

12th Jun 2006 07:02

Workspace Group PLC12 June 2006 WORKSPACE POSITIONED FOR FURTHER GROWTH AS NAV JUMPS 36% Workspace Group PLC ("Workspace") today announces its preliminary results forthe year ended 31 March 2006. Workspace provides 5.8 million sq. ft of flexiblebusiness accommodation to over 4,000 small and medium size enterprises ("SMEs")in London and the South East. •Valuation Surplus £131.3m 15.8%•Adjusted Net Asset Value per share £3.12 up 36%•Net Asset Value per share £2.37 up 34%•Profit Before Tax £149.0m up 80%•Trading Profit Before Tax £15.1m up 4%•Basic Earnings per share 65.1p up 80%•Investment Portfolio Valuation £964.3m up 34%•Rent Roll £46.6m up 10%•Final dividend of 2.51p - total dividend up 10.3% to 3.76p Commenting on the results, Harry Platt, Chief Executive, said, " Another year of strong growth with adjusted NAV per share up 36%. Workspace isthe market leader for SME accommodation in London, a substantial and growingmarket place. This has been a very active year. We have made £127m ofacquisitions and £48m of disposals. We sold the majority of our propertiesoutside the M25, and re-invested the proceeds and more in properties in London,in locations with better longer-term prospects for growth. We continue to tracka range of acquisition opportunities." " Looking to the future, the prospects for the long-term performance of thebusiness are promising. We have repositioned the portfolio to focus on Londonwhere we see greatest prospect for increasing rental income, which will underpinour growth. We have improved the range of our offering, through a programme ofrefurbishments. Whilst occupancy has dipped slightly in the year partly due tothese works it will improve as the space is let going forward. " 97% of properties are now located inside the M25, often where there ispressure for higher density, sustainable development, and where available landis scarce. The demands of the Olympic games in 2012 will add further impetus tothe demand for space. We are therefore accelerating our plans for releasing thelatent value in our portfolio through increased density and change of use inline with the London Plan. We have today announced a joint venture which willhelp this process. It will also enable us to re-cycle our funds to invest in thecontinued expansion of the business." -ends- Date: 12 June 2006 For further information: Workspace Group PLC cityPROFILEHarry Platt, Chief Executive Simon CourtenayMark Taylor, Finance Director Andrew Harris020-7247-7614 020-7448-3244e-mail: [email protected]: www.workspacegroup.co.uk--------------------------------- Chairman's Statement Once again, it is a pleasure to report another year of excellent growth inshareholder value, driven by growth of 36% in adjusted net asset value pershare. Total shareholder return in the year was 46.1% and over 5 years has been26.1% per annum. These are good results, achieved at a time when short termrental earnings growth has been muted, primarily due to refurbishment activitiesand the preparation of some estates for redevelopment. The refurbishments willcontribute to longer term growth both in rental and capital values. Furthermore, during the year your Board has sought to increase the momentum inextracting the latent development potential that exists in a significant numberof the properties in its portfolio. The new joint venture with Glebe, announcedwith these results, is a major step forward to realise some of this value. Itallows our shareholders to participate in the substantial upside potential,whilst reducing the risk profile of the Group and releasing funds to be used inthe continued expansion of the core business. Strategy Our strategy is to: - •Actively manage our portfolio for increased shareholder value•Acquire properties that service London's small and medium sized enterprises•Drive underlying values and long term rents by intensification of use, enhanced environment, intensive management and the strength of the Workspace brand•Deliver a superior and supportive service to our customers, and•Create value in the medium term from our sites through mixed use developments and increased densities in line with the needs of London. This year has seen some major steps in the successful execution of thisstrategy. In particular, the Group has increased its focus on London, with thesale of the majority of its sites outside the M25, whilst at the same timeinvesting record sums within the M25. The disposals were made at sharper yieldsthan the acquisitions. Even so, the acquisitions represent better long termvalue given the continued growth of London and the effect of the Olympics onEast London in particular. Results Net Asset Value per share grew by 34% to £2.37 per share (Adjusted Net AssetValue by 36% to £3.12 per share). This growth was driven by a £131.3m valuationsurplus, a 15.8% increase in value. Against the IPD industry benchmark measure,our 23.0% annual return outperformed the 20.9% reported for the universebenchmark, placing us once again in the top quartile in terms of performance. Ona geared basis, combining this growth with earnings for the year yielded a totalreturn on equity of 40.7% (2005: 27.6%). The rent roll increased by 10.2% to£46.6m mainly as a result of acquisitions during the year. These acquisitions,the market rents of which are substantially higher than the initial rent roll atacquisition, offer further scope for growth, particularly at 111 Power Road andKennington Park. REITs There has been considerable press coverage following the Chancellor's Budgetannouncement. The initial prospects are encouraging but there remain many areasof detailed clarification from Her Majesty's Revenue and Customs before a finalrecommendation can be made to shareholders. However, progress has so far beengood and it is likely that a positive decision on this will be made by yourBoard during the year. Reporting In drafting this report your Board has been conscious of the substantial impacton corporate financial reporting obliged by the introduction of IFRS. We haveendeavoured to maintain the process of improvement to our reporting whilstaddressing these changes. Having last year addressed much of the proposedOperating and Financial Review (OFR) requirements, we have decided that weshould stay with this approach notwithstanding the abandonment of the OFR infavour of the simpler Business Review. We are publishing, in parallel with ourannual report, an updated Sustainability Report which addresses Social, Ethicaland Environmental issues. This sister publication explains in more detail howour business model accords with the recognised needs for sustainable developmentin London and gives further insights to our strategy going forward. Board and Staff Dr Chris Pieroni, Senior Non-Executive Director and Chairman of the RemunerationCommittee will retire as a director following the Group's AGM this year. Chrishas given 6 good years service as a non-executive director, a period duringwhich the Group has grown substantially. On Chris's retirement Bernard Cragg,Non-Executive and Chairman of the Audit Committee, will succeed Chris as SeniorNon-Executive Director. A replacement for Chris is being sought. As always, the Company's success and this year's results depends upon thecontinuing enthusiasm and commitment of all of our staff. Our staff are key toall we do and, on behalf of the Board, I wish to thank them all again for theircontribution this year. Current Trading and Prospects Trading conditions are stable with a steady level of enquires and modestincreases in rental levels. Our overall occupancy of 84.3% at 31 March providesscope for increasing income particularly in our refurbished properties atEnterprise, Clerkenwell and Southbank in 2006, and Power Road, Lombard House andKennington Park in future years. In 2006 we expect the rate of tightening ofyields to slow. Rental growth together with the redevelopment, intensificationand change of use of sites must then provide the drivers for continued assetgrowth. The property investment market has experienced an exceptionally buoyantperiod and market conditions which have been unusually favourable, this may notcontinue. Nevertheless, in tighter market conditions, in London Workspace Groupremains well positioned to continue to outperform the sector through its focuson driving up rents and achieving latent added value. Dividend In line with previous practice your board proposes to increase the dividend by10%. It recommends a final dividend payment of 2.51 pence per share making 3.76pence for the year. Chief Executive's Review 2005/2006 was a year of unprecedented growth, with the value of the Group'sportfolio increasing by 34% to £964.3m through record levels of bothacquisitions and valuation surpluses. We have repositioned the portfolio inLondon, with 97% of our properties now within the M25. This is a growing marketplace which we know well and where our intensive management skills can continueto drive rental and capital values at our existing estates and source newopportunities. Key Results Strong results have again been achieved with: Adjusted Net Asset Value per share £3.12 up 36%Net Asset Value per share £2.37 up 34%Trading Operating Profit £37.1m up 11%Trading Profit Before Tax £15.1m up 4%Profit Before Tax £149.0m up 80%Basic Earnings per share 65.1p up 80%Investment Portfolio Valuation £964.3m up 34% (note: adjusted Net Asset Value per share is defined in note 9 to the financialstatements) In particular, adjusted net assets per share increased by 36% following a£131.3m valuation surplus which also contributed to an 80% increase in profitbefore tax to £149.0m (2005: £82.8m). At a trading level, earnings per sharewere up 12.7% to 7.1p (2005: 6.3p) despite a number of significant tenancy voidsduring the year. Strategy Following a year of exceptional growth, the Group has largely achieved its fiveyear target which it set itself in September 2003 of doubling shareholder valueand building a £1bn portfolio. The Group achieved this by outperforming thesector on all key measures over the year: valuation surplus 15.8%; overallportfolio return 23%; equity return 40.7%; and total shareholder return of46.1%. Looking forward, the Group seeks to maintain this out performance by:- - focusing on the SME market in London; which we believe has excellentlong term growth prospects.- growing rents; our average like for like rent of £9.48 per sq ft hassubstantial potential to grow, and yet remain affordable for our customers.- realising the latent value in our portfolio; targeting whereintensification or change of use is possible. In the longer term, some 45% ofthe Group's portfolio has such potential, whilst on a 5 year basis, there areover 20 estates we are working on, of which 11 are in the recently announcedGlebe joint venture.- acquiring properties where we see long term value; we continue totrack a large number of potential property acquisitions in London.- improving margins; on certain estates there is the potential tofurther increase rents with added service offerings. Trading Review We have recorded good growth in our key financial statistics, net asset valueper share and earnings per share. However, underlying this there has been areduction in occupancy which has, on a like-for-like basis excludingre-developments, reduced from 90.2% to 86.7% and reduced overall from 88.3% to84.3%. This 4% reduction can be analysed as follows: - Impact of acquisitions and disposals 1.0%Re-development sites vacated for disposal 0.6%Occupancy loss following fire at Westwood 0.6%Lombard Surrender (see below) 1.0%Other significant sites (Tower Bridge, Seax and N17) 0.8% ------ 4.0% The reductions at Tower Bridge, Seax and N17 arose in part due to the loss of anumber of larger space users, particularly at Tower Bridge where customers usingspace for document storage have reduced their requirements. Of the balance ofthe reduction in occupancy, most of this creates an opportunity for the Group,For example, the lease surrender at Lombard had a twin effect of increasingearnings in the current year, due to the surrender premium received, whilstdepressing current levels of occupancy and rent roll. The surrender premium wasequivalent to the contracted future rentals, notwithstanding the prospect ofre-letting the space. However, the space is now being converted back to abusiness centre, upgrading the services at the same time. This will have a shortterm impact on earnings whilst space is re-let and refurbishment completed.Looking forward the Group's other refurbishment projects underway at EnterpriseHouse and Clerkenwell Workshops will complete in 2006 when there is the prospectof occupancy and rent roll improvements as these properties are let. Whilst occupancy reduced, average like-for-like rents per square foot increased.This was partly a mix factor and partly due to real growth in rental values.Overall, the average like-for-like rent increased by 3.6% to £9.48 per squarefoot; an affordable level for a portfolio, 70% of which is within 6 miles of thecentre of London. The fact that the average rent increased at a time whenoccupancy reduced indicates that the market overall is robust and demand isgood. This year the rolling rent review and lease renewal programme extended to 11.6%of the opening rent roll. The uplift achieved of £0.90m through rent reviews andlease renewals represents a 18.3% increase on previous passing levels for thesetenancies. This reflects a good performance for a period during which occupancyperformance was mixed. With the continued pressures on space in London and ouraffordable rental levels, we consider that the scope for continued growthremains good. Portfolio Activity: Acquisitions, Disposals and Added Value This year the Group's portfolio activity (acquisitions, disposals,refurbishments) was at the highest level in its history. During the year 10properties totalling £127.4m (2005: £43.4m) (both figures net of costs) wereacquired. This was a significant achievement in a competitive property market.Disposals of £47.6m (2005: £34.8m) were also made. Full details of theseacquisitions and disposals may be found on below. In addition to this scale ofportfolio activity four key features stand out. 1. Repositioning the portfolio: With the Group's focus on acquisitions within the M25, coupled with the disposalof the majority of its properties outside the M25, the Group has furtherincreased its concentration in London. 97% (2005: 90%) of its portfolio is nowwithin the M25. This "switch" has been achieved at good values. Whereas thedrier investments outside of the M25 were sold at an exit yield of 6.2% (with areversionary yield at that stage of 7.1%) the acquisitions attracted anaggregate initial yield of 6.4%. These acquisitions also offer much betterprospects for growth both immediately, as is reflected in their reversionaryyield of 8.5%, and in the longer term as our skills are applied to theproperties. 2. Kennington Park, our largest acquisition in the year: The Kennington Park site was acquired for £56.0m and offers exciting prospectsfor the Group. It is a classic Workspace investment. It is in many respectscomparable to the Group's Leathermarket centre. This building was acquired in1993 for £1.7m and following a rolling programme of improvement works, totalling£5.9m to date now attracts a net rent roll of over £1.6m per annum, has an ERVof £2.5m and is valued at £36.2m. At the time of its acquisition Bermondsey wasdepressed. Since then it has emerged as a buoyant vibrant community attractingconsiderable interest for both residential and commercial uses. Kennington Park,a former taxi cab works, is located at the inter-section of the A23 and theA202, just yards from the A3 at the Oval tube station. It occupies a prominentisland 6.2 acre site with 11 discrete attractive buildings arranged around acentral courtyard. With the improvements in neighbouring locations, theKennington area appears set to enjoy a renaissance similar to that of Bermondseywhich will improve the prospects for the site. Kennington, as with theLeathermarket at the time of its acquisition, is divided mainly into largerunits of accommodation, which generally attract lower rental values. Over timethe Leathermarket space has been sub-divided to create accommodation more suitedto its SME customers and this is what we will do at Kennington. 63% of theKennington floorspace is currently in units of 2000 square feet or more(Leathermarket now: 14%) with just 19% allocated to units sized up to 1000square feet (Leathermarket now: 72%). At the time of the acquisition of Kennington Park, one of the larger occupiersin the largest building had served notice to terminate its lease. This loss,which was anticipated, is to the Group's advantage since it allows us torelocate other users in the building so that we can refurbish and divide all ofthe space into smaller units; the first stage of an overall rolling programme ofimprovements on the estate. It is believed that as Kennington Park istransformed through this programme then it will over time attract customers of aprofile similar to those at the Leathermarket where 86% of the space is let tocustomers in the creative, cultural and professional services sectors(Kennington: 25%). These sectors are at the heart of London's knowledge basedSME services sector and have shown greater strength and growth potential. Thisrepositioning of Kennington will (as shown by our experience at theLeathermarket) secure the organic growth of rental and capital values. 3.Olympics related investment: Prior to the announcement of the decision on the 2012 Olympic Games the Groupsought opportunities to invest in potentially affected areas in East London. Twopurchases were completed ahead of the announcement and others are being pursuednow. Uplands Business Park is based in Walthamstow to the north of the Olympiczone. It has the potential to benefit from providing accommodation to businessesthat will be displaced by the Olympics area development. The estate was purchased for a capital value of £83 per square foot. As such, it also offers potential, over time, for change of use, as pressures on land increase in this area. This potential is even more marked in the case of the second acquisition madeonly weeks before the bid success was announced. Marshgate Lane was purchasedfor £5.6m (£60 per square foot). It is located in an area originally designatedfor compulsory purchase for the Olympics. However, following the bid success theLondon Development Agency re-appraised its land needs and the property wasreleased from the compulsory purchase order zone. It is located immediatelyadjacent to the Olympic boundary close to the A11 at the Bow flyover, near thePudding Mill Lane DLR station. Whilst it is presently designated for industrialuse there is increasing pressure for release of land adjacent to the Olympicsite for other mixed uses. As a result, the site attracted a £12.75m valuationat 31 March 2006 (an increase of 128% over original cost) with scope for furtherimprovement. 4. Realising the latent development potential: We believe that at least 45% of the Group's portfolio has scope to add value byimprovement initiatives. Through the year we have continued to work to realisethis value. In our third quarter report we noted that at four key sites(Aberdeen Studios, Thurston Road, Wharf Road and Greenheath), where plans werewell advanced, there was scope to triple the site density adding 430,000 sq ftof space for a variety of uses. We see potential to do the same on a furthereleven estates adding a further 1.47 million sq. ft of extra space. As isexplained in our companion Sustainability Report this sits comfortably with theprinciples set out in the Mayor's Plan for London. The city's growing populationcan only be accommodated within current built areas by increasing the density ofdevelopment of these areas. To be sustainable, this denser occupation of spaceneeds to meet the mixed demands of the community in living, working andrecreational space. During the year the original planning consent at Thurston Road to replace the46,433 sq. ft industrial park with 45,000 sq. ft of retail accommodation and 24residential units was improved to a scheme incorporating 98,650 sq. ft of retailand 18,000 sq. ft of live work space with 271 residential units adding value toour site. Further improvements to this scheme are under consideration. At Wharf Road an agreement was reached with a residential developer to sell thatpart of the site with a residential consent for a consideration comprising£1.86m cash and the provision of a new 30,000 sq. ft business centre to beconstructed on the retained portion of the site. This deal was completed shortlyafter the year end and the developer is now on site. This "new for old" formulais one which we seek to repeat elsewhere. At Greenheath we are progressing proposals to redevelop a 0.34 acre ribbon ofland on the perimeter of the site to provide student accommodation, preservingthe business centre at the heart of the site. If these proposals receive consentthen the business centre will be refurbished alongside the new works. Despite support from the planning officers, our proposals for Aberdeen Studios,Islington have been refused planning consent during this year. This wasdisappointing, particularly since the officers had recognised by theirrecommendation that our proposals were the best for the community. We are nowlooking at options for revisions to our plans which might achieve approval,whilst pursuing a planning appeal on the original application. Work is in hand to promote proposals on other sites Included in this is ourjoint venture with Glebe which is announced with this statement. This is a majorstep forward to accelerate our programme, bringing in additional expertise to dothis, and, whilst continuing to benefit in the upside potential from development, reducing the Group's risk profile. Valuation With the move to IFRS accounting, this year we changed our policy of valuing theportfolio each half year to quarterly valuations. In an active property marketthis showed progressive quarterly surpluses of £18.1m, £22.1m, £33.9m and £57.2mmaking a total of £131.3m. The surplus in the last quarter alone was almost asmuch as the whole for last year, which was itself a record. This was thereforean exceptional result, driven principally by falling investment yields in a verycompetitive investment market. Whilst this yield shift has continued followingthe year end, we expect this to abate during the current year when we anticipatethe fundamentals of rental growth and redevelopment potential will take over todrive our future growth. The valuation of the Group's properties (valued by CB Richard Ellis) at 31 March2006 was £964.3m. The average value of the Group's property was £162 per sq. ft,with a yield at estimated current market rental values of 6.9%. Given thelocation of our portfolio, this represents good underlying value. Ouracquisitions strategy targets similar properties with low capital values andfuture potential, as is shown by our recent acquisitions in East London whichhave been completed at capital values of only £60 - £80 per sq. ft. For properties held throughout the year, comparing their value at 31 March 2005plus additions and improvements at cost with that at 31 March 2006, the upliftwas £121.2m or 17.4%. Acquisitions during the year showed a surplus on valuationof £10.1m (7.5%). The total market rental income (ERV) at 31 March 2006 was £66.5m. Allowing forthe 10% void that the Group typically operates at, this shows an achievablerental stream of £59.8m. This compares with current net income of £47.1m leaving£12.7m of potential additional income. Over half of this lies in sevenproperties including, in particular, the refurbishment projects at Clerkenwell,Enterprise, Southbank and 111 Power Road. Clearly, as these projects arecompleted and the space re-let, rents and hence earnings will increase. We have again tested the Group's performance against the IPD (InvestmentProperty Databank) March Universe 2006 benchmark. The table below illustratesnot only our top quartile performance, but also the lower levels of volatilityin our particular sector compared with commercial property more generally. --------------------------------------------------------------------------------Total Return (p.a.) One Three Five Ten Year Years Years Years--------------------------------------------------------------------------------Workspace Group 23.0% 18.9% 17.0% 19.3%IPD March Universe 20.9% 16.6% 12.9% 13.0%Workspace Group Percentile Rank 23 22 5 topIPD Comparator 20.7% 14.7% 10.8% 12.8% 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. Through its performance the Group has demonstrated its consistent ability togenerate enhanced returns from its investments. This strategy will continue - afocused 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 Introduction 2005/6 was a record year at many levels. Profit before tax of £149.0m, was up80% on last year, driven by a valuation surplus of £131.3m; both record levels.At the same time, our investment in the future through both acquisitions andimprovements to existing property of £154.5m was a record too. Going forward,investment capacity, following the transaction with Glebe, will be at a recordlevel also with funding availability approximately equivalent to last year'sacquisitions and the capacity to raise further debt thereafter. Indeed (based onUK GAAP principles) gearing at this stage will be approximately 60% leavingapproximately £200m headroom to a 100% gearing level. This is the first annual report that the Group has prepared by reference to thenew International Financial Reporting Standards (IFRS). As may be seen from theaccounts and notes this transition has resulted in many significant changes, notonly to the style and content of the reporting but also to the reported figuresthemselves. We have decided to preserve the columnar analysis of performancebetween "Trading Operations" and "Other Items" used hitherto in our formerreporting under UK GAAP since this assists differentiation between our "cash"trading activities and the valuation adjustments introduced under IFRS to bringbook values of assets and liabilities in line with "market values". As such, theperformance reported in the Trading Operations column is only marginallydifferent under IFRS and so correlates well with figures reported previously. Profits As noted above, profits before tax at £149.0m are 80% up on last year (2005:£82.8m), this increase being largely driven by the substantial 93% increase inthe valuation surplus for the year to £131.3m (2005: £67.9m). Elevation ofvaluation surpluses from the former Statement of Total Recognised Gains andLosses to the Income Statement under IFRS is helpful since it providesshareholders with an immediate appreciation of the total gains recognised in thefinancial period, with the result that financial ratios (e.g. EPS) calculated byreference to these statements give a fuller picture also. Trading profit before tax increased also by 4.1% to £15.1m (2005: £14.5m), in ayear when occupancy reduced (some of which was attributable to managementdecisions that will benefit earnings in the future). Although, as recorded innote 1 to the accounts trading earnings were assisted in the year by anexceptional level of income received from surrender premia. However, as there-development projects complete and lettings commence, occupancy and rentalincome will improve. Profit before tax included a £3.4m contribution from profits on disposals (2005:£0.1m loss). Details of disposals are given below. This profit arose mainly fromthe disposal of the Magenta portfolio, eleven properties all located outside theM25 being all of the Group's smaller property holdings outside the M25. Not onlywas this sale achieved at a surplus to the 31 March 2005 valuation but also itshowed an exit yield which was lower than that for the investments made duringthe year on properties inside the M25, mainly in London itself. This switchtherefore was both profitable and performance enhancing both in the short term,from better initial yields, and in the longer term as assets are improved. Earnings per share growth mirrored profit before tax (PBT) up 80% to 65.1p(2005: 36.1p), whilst trading earnings per share were up 12.7% at 7.1p (2005:6.3p) the latter relative improvement (compared with trading PBT growth) was due to the lower tax rate for the year. Administrative expenses were up 19.7% over the year and, as is shown later, haveincreased slightly as a percentage of revenue. This increase was attributable tohigher head office staff costs due to the increasing scale of the business,increases in the fair value of cash settled share based payments due to thesubstantial increase in the Company's share price over the year and IFRStransition fees. Interest charges were up 20% at £23.6m. This increase was due principally to theincreased debt levels, with borrowings at 31 March 2006 up 33% and totalling£429.7m (2005: £323.2m), offset by a saving due to lower interest rates. At4.68% the market daily average rate of LIBOR through 2005/06 was 0.15% lowerthan that for 2004/05. Taxation The effective rate of corporation tax in 2005/06 was 28.4% (2004/05: 29.3%).However, much of this relates to the deferred tax provision relating tovaluation surpluses. At a trading level the taxation rate reduced to 22.5%(2005: 29.7%). Of the total charge of £3.4m just £1.2m relates to currentliabilities with £2.2m being deferred. This low current charge was due mainly toprior period tax adjustments totalling £0.9m made for capital allowance claims.Whilst this reduces the amount of the current taxation liability it also givesrise to a deferred tax provision. Since a number of the buildings will soonreach the end of their IBA life, or as plant is replaced, these liabilities willcrystallise. It is again anticipated that, leaving aside disposals, the currentyear tax rate for 2006/07 will be of the order of 30%. However, this level maybe reduced by further prior year adjustments arising from capital allowanceclaims. Net Assets and Balance Sheet Overall net worth (net assets employed) on an IFRS basis increased over the yearby £101.8m (35.3%) to £390.3m with the valuation surplus for the year of £131.3mbefore tax (77 pence per share) largely providing this increase. This increaseis reflected in the £237.6m increase in non-current assets financed by £103.7mof increased longer term borrowings with the balance arising from the £4.4mreduction in net current liabilities and £36.5m increase in deferred taxprovisions. The Group's net current liabilities at 31 March 2006 were £18.8m (2005: £23.2m).Current liabilities include tenants' deposits in the form of advance rentpayments and quarterly and monthly rents and service charge payments in advanceamounting in aggregate to £12.3m (2005: £11.0m). The directors consider that inthe normal course of business the majority of these liabilities are unlikely torequire payment and therefore form part of the working capital of the Group. Netcash inflow from operating activities at £39.0m (2005: £33.9m) improved,principally due to the contribution from newly acquired properties together withincreased profitability from existing properties. Progress Record Progress in key performance indicators over the year and over a five year periodwas: 2005/2006 2004/2005 Compound annual growth growth growth 2001 - 2006-------------------------------------------------------------------------------- Improvement in Trading PBT 4.1% 2.6% 9.9%Improvement in Trading EPS 12.7% 3.3% 10.2%Improvement in dividends pershare 10.3% 10.0% 10.2%Improvement in Adjusted NAV(per share) 35.7% 21.7% 20.9% Dividend A final dividend of 2.51p per share is proposed. The interim dividend was 1.25pper share, and so the total dividend proposed for the year is 3.76p (an increaseof 10.3%). The dividends are covered 17.30 times (2005: 10.47 times) by earnings, 1.90 times (2005: 1.83 times) based on earnings from trading operations only. The dividend increase is in line with previous periods. Internal performance measuresInternal benchmark comparison shows: Performance measures 2006 2005 2004 2003 2002--------------------------------------------------------------------------------Revenue per member of staff (£000) 410 380 332 314 294Year-end investment in property permember of staff (£000) 6,262 5,006 4,092 3,261 2,984Administrative expenses as apercentage of revenue 14.4% 13.9% 13.9% 14.6% 15.3%Total return on equity (pre-tax) 40.7% 27.6% 26.2% 15.0% 20.6% 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, together with the"added value" initiatives undertaken to improve future rental income and capitalvalues of properties slows attainment of this latter target. Financing The Group opened this year with £50.9m of available borrowing resources. Thiswas supplemented by the £47.6m (before costs and taxation) realised on thedisposals of Payne Road, Alpine Park and the Magenta Portfolio. As flagged lastyear, the Group's facility with Bradford & Bingley has been increased from £200mto £270m during the year and renewed to a fresh five year term. This enlargedfacility together with funds from disposals and other un-utilised facilitiesprovided the resources for the £127.4m (before costs) acquisition programme.This together with other capital expenditure on properties totalled £154.5m inthe year. At the year end the Group had available borrowing facilities of £15.7mwhich was increased immediately following the year end by a further £25mfacility with NatWest increasing funding availability to £40.7m. The disposal ofa portfolio of properties to a separately financed joint venture with Glebe,referred to elsewhere in this report, will give rise to a net inflow ofapproximately £120m to the Group. This will be applied to pay down existing loanfacilities, which will remain available for redrawing in due course as furtheracquisitions are identified. The Board considers that the funding strategy of extending and renewing fiveyear term loans continues to be appropriate. Through this approach, the Boardconsiders the Group can access competitively priced funding on a flexible basisto match its cash demands for expansion. With regular reviews and renewals thematurity of these loans can be maintained in the 3 - 5 year range leavingflexibility should markets and circumstances change. The weighted average lifeof the Group's debt at 31 March 2006 was 3.9 years. At the year end the Group's facilities and drawings thereon were: 2006 2006 2006 2005 Facility Amount Drawn % of Debt Drawn £m £m £mDebenture Stock 19.5 19.5 5% 19.5Convertible Loan Stock 2.2 2.2 1% 2.5Bradford & Bingley loan 270.0 270.0 62% 200.0NatWest property loan 150.0 134.7 31% 100.8NatWest overdraft 4.0 3.6 1% 0.8-------------------------------------------------------------------------------- 445.7 430.0 100% 323.6-------------------------------------------------------------------------------- The available resources of approximately £40m (following the increase referredto above) are equivalent to 8 months spend at the planned capital investmentrate for 2006/07. Borrowings over recent years 2006 2005 2004 2003 2002% Fixed/hedged 54% 62% 59% 75% 77%Average interest rate (year end) 5.9% 6.3% 5.8% 5.8% 5.8%Interest cover (excl valuation 1.84 1.77 1.97 2.04 2.15surpluses)Trading Interest Cover 1.69 1.77 1.91 1.72 2.09Year-end gearing % (on Adjusted NAV) 85% 88% 104% 98% 81%Debt: Portfolio Value 45% 45% 49% 48% 43% Despite the substantial borrowings to finance acquisitions during the year andfollowing the substantial valuation surplus at the year end, gearing measured byreference to adjusted net assets employed, was maintained at 85% (2005: 88%).Both gearing and interest cover levels are comfortably within the levelshistorically set by the Board of less than 120% and greater than 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 June 2007 with the Convertible maturing in 2011. The maturity of netdebt at 31 March 2006 is shown below: - 2006 2005 2004 2003 2002-------------------------------------------------------------------------------- Maturity of net debt % % % % %--------------------------------------------------------------------------------Under 12 months - - - - 1%1 - 5 years 99% 99% 99% 99% 34%5 - 10 years 1% 1% 1% 1% 65%10 years + - - - - --------------------------------------------------------------------------------- Total 100% 100% 100% 100% 100%================================================================================ At 31 March 2006 the average cost of floating rate funds was a margin of 0.94%over LIBOR or base rate (2005: 0.94%). At 31 March 2006 secured borrowings werecovered 1.99 times by the value of charged property (with a further £157.6m ofuncharged property giving an overall cover of 2.38 times). Further details ofdebt facilities and borrowing policies are given in note 17 to the accounts. Acquisitions and Disposals 2005/2006 Acquisitions 2005/2006--------------------------------------------------------------------------------Name of property Description Purchase Initial Market price Actual rent at income 31/03/06 £000 £000================================================================================111 Power Road, Factory complex £7.50m 151.8 1,150.0Chiswick, (98,110 sq.ft) forLondon W4 refurbishment as a business centre-------------------------------------------------------------------------------- Marshgate 93,400 sq. ft, 25 £5.59m 347.3 478.8Business unit industrial Centre, estate.Stratford,London E15 -------------------------------------------------------------------------------- Evelyn Court, 16,800 sq. ft, 14 £2.64m 210.0 198.1Deptford, unit officeLondon SE8 building -------------------------------------------------------------------------------- Uplands 287,500 sq. ft £24.00m 1,711.0 1,857.4Business Park, industrial estate Walthamstow, with 57 unitsLondon E17 -------------------------------------------------------------------------------- Kennington 332,100 sq. ft £56.00m 3,705.4 4,669.2Park, business park in Kennington, 11 buildings withLondon SW9 70 units -------------------------------------------------------------------------------- Horton Road 41,500 sq. ft £4.04m 304.3 314.4Industrial industrial estate Estate, West with 10 unitsDrayton, UB7 --------------------------------------------------------------------------------Sundial Court, 26,200 sq. ft £5.15m 397.0 416.2Kingston-upon- courtyard officesThames, KT5 over 25 units -------------------------------------------------------------------------------- Park Royal 30,900 sq ft £5.55m 332.1Business business centre Centre, Park with 86 unitsRoyal, LondonNW10 Park Royal 11,300 sq. ft £2.52m 124.8House, business centreLondon NW10 with 38 units 28/30 Park 28,200 sq. ft £3.65m 227.1Royal Road, industrialLondon NW10 building with 8 units 2 Cullen Way 15,200 sq. ft £2.28m 143.6 1,115.5and 10 Cullen industrial Way, London buildings with 7NW10 units -------------------------------------------------------------------------------- 10 Bowling 12,700 sq. ft £4.50m 253.2 309.7Green Lane, business centre Clerkenwell, with 6 unitsLondon EC1 (£176,500 rent free currently)-------------------------------------------------------------------------------- Langdale 10,800 sq ft £4.00m 277.9 310.3House, business centre Borough, with 44 servicedLondon SE1 offices ================================================================================ Total £127.42m 8,185.5 10,819.6================================================================================ Disposals 2005/2006--------------------------------------------------------------------------------Name of Description Sale price Exit incomeproperty £000================================================================================Payne Road Site sold for £2.10m 97.4Studios & mixed use development5 PayneRoad, Bow,London E3--------------------------------------------------------------------------------Alpine Park, Single 35,000 sq. ft £3.80m 350.0Beckton, warehouse sold underLondon E6 option to occupier--------------------------------------------------------------------------------Magenta 11 small unit industrial £41.70m 2,590.0Portfolio estates located outside M25 totalling 321,000 sq. ft in 234 units (the sales price includes Stevenage Business Centre which completed on 14 April 2006)--------------------------------------------------------------------------------Total £47.60m 3,037.4 Acquisitions During the year the Group made ten acquisitions for a total consideration(excluding acquisition costs) of £127.4m. These acquisitions were made at anaggregate initial yield of 6.42%. Allowing for a 10% void level their aggregatereversionary yield would be 7.64%. 111 Power Road, Chiswick, is a former factory complex where the productionactivities had ceased and part of the complex had been converted to businesscentre use. It is close to the Chiswick Studios Business Centre acquired lastyear by the Group and was identified as a possible acquisition following areview of the market around Chiswick Studios. Construction works are in progressto complete the conversion of the remainder of the property to a businesscentre. Due to the substantial void area it was acquired at a low initial yieldof 2.0%. Following the refurbishment works it is anticipated that the yield willimprove to 7.4% on total costs (including capital expenditure since acquisition)and the property will offer accommodation complementing the Group's otherownerships in the area, namely Chiswick Studios and the Barley Mow Centre. Marshgate Business Centre is an industrial estate in Stratford, East London. Itwas acquired as part of the Group's plan to acquire strategically located assetsin and around the Olympics zone. In this case the property was located withinthe designated zone and, as a result, was destined to be subject to a compulsorypurchase order if the Olympics was awarded to London. In the circumstances, ithad been increasingly difficult to manage and the former owners sold at a pricethat recognised this blight. As described above, following the award of theOlympics the circumstances changed and the property is no longer subject to acompulsory purchase order, enhancing its value significantly. Given itsconsiderable attraction for residential development the Group is now reviewingits options for this property. Evelyn Court is a small, 14 lettable unit office scheme in Deptford locatedbetween the Group's major Tower Bridge and Faircharm Studios properties. Itoccupies a prominent site on the A200 in Deptford and services the localbusiness community. Uplands Business Park was the second acquisition in the Group's plan to target"Olympics affected" areas. It is located approximately 3 miles to the north ofthe Olympics zone (between it and the North Circular Road). Its acquisitionprice of £83 per sq. ft, as a site cost, would not deter redevelopment should amore valuable alternative use be identified in due course. Kennington Park was the most significant acquisition of the year. Through it andthe subsequent disposal of the majority of the Group's holdings outside the M25the Group effected a switch to refocus further its activities into London whilstexchanging assets showing lower initial and reversionary yields for ones whichnot only exceeded these but offered significantly greater potential for furtherenhancement. The Group's strategy with regard to this major holding is describedin more detail above. Horton Road Industrial Estate is a small single storey terraced estateconstructed in the 1950s. It is located to the North West side of the StockleyPark business area with good transportation links through this to Heathrow. Itoffers simple affordable space to occupiers in this prime business area. As theStockley Park area continues its spread outwards it is possible in time thatthis site will present opportunities for redevelopment. Sundial Court is prominently located at the intersection of the A3 and A240 inthe Tolworth area of Kingston-upon-Thames. It is a modern courtyard officescheme, constructed in 1990 providing 26,200 sq. ft over 25 office unitsservicing its local office market. This acquisition will assist growth of theGroup's representation in this area in which it holds little property atpresent. The Park Royal portfolio is a package of properties that the Group has beentracking for a number of years. It is located on Park Royal Road and complementsthe Group's existing ownerships (Acton Business Centre, Westwood Business Centreand Europa House) located adjacent to the other major road traversing ParkRoyal, Victoria Road. Park Royal has enjoyed a renaissance over recent yearsfollowing an earlier period of industrial decline. With this acquisition theGroup is now established as the principal supplier of accommodation to smallbusinesses in this area. 10 Bowling Green Lane is a former school building that has been converted into abusiness centre. It adjoins the Group's Clerkenwell Workshops details of whichare given above. Langdale House is a small serviced office business centre located in Southwarkbetween the Group's existing Leathermarket property and the Great GuildfordStreet cluster (Great Guildford Street, Surrey House and Linton House). TheGroup has monitored this property for a number of years and it will complementthe Group's other accommodation in this improving location. It gives a furtherpresence in the serviced office market, focusing on space let to smallbusinesses. Consolidated Income StatementFor the year ended 31 March 2006 2006 2006 2005 2005 2005 Notes Trading Other Total Trading Other Total operations items* operations items* £m £m £m £m £m £m Revenue 1 63.2 - 63.2 55.0 - 55.0Direct costs 1 (16.9) 0.1 (16.8) (14.1) 0.1 (14.0)------------------------------------------------------------------------------------------------ Net rentalincome 1 46.3 0.1 46.4 40.9 0.1 41.0Administrativeexpenses (9.2) 0.1 (9.1) (7.6) - (7.6)Gain fromchange in fairvalue ofinvestmentproperty - 131.3 131.3 - 67.9 67.9Profit/(loss)on disposal ofinvestmentproperties 2 - 3.4 3.4 - (0.1) (0.1)------------------------------------------------------------------------------------------------Operatingprofit 3 37.1 134.9 172.0 33.3 67.9 101.2 Finance income- interestreceivable 0.2 - 0.2 0.1 - 0.1Finance costs- interestpayable 4 (22.2) (1.4) (23.6) (18.9) (0.7) (19.6)Change in fairvalue ofderivativefinancialinstruments - 0.4 0.4 - 1.1 1.1------------------------------------------------------------------------------------------------ Profit beforetax 15.1 133.9 149.0 14.5 68.3 82.8Taxation 6 (3.4) (39.0) (42.4) (4.3) (20.0) (24.3)------------------------------------------------------------------------------------------------ Profit for theperiod aftertax andattributableto equityshareholders 11.7 94.9 106.6 10.2 48.3 58.5================================================================================================ Basic earningsper share 8 7.1p 58.0p 65.1p 6.3p 29.8p 36.1pDilutedearnings pershare 8 7.0p 55.7p 62.7p 6.2p 28.6p 34.8p * Other items above include profits and losses (together with their relatedtaxation) on sales of investment properties and items of a non trading naturesuch as: valuation adjustments arising from the fair valuing of investmentproperties and derivative financial instruments; adjustments arising from thetreatment of head lease payments as interest; and certain adjustments arisingfrom the estimation of the cost of employee share based payments. Consolidated Statement of Recognised Income and Expense (SORIE)For the year ended 31 March 2006 2005 £m £m Profit for the financial year 106.6 58.5--------------------------------------------------------------------------------Total recognised income and expense for the year 106.6 58.5-------------------------------------------------------------------------------- There is no difference between the profit for the financial year and the totalrecognised income and expense for the year. The notes below form part of these financial statements. Consolidated Balance SheetAs at 31 March Notes 2006 2005 £m £m Non-current assetsInvestment properties 10 954.0 716.5Intangible assets 11 0.2 0.2Property, plant and equipment 12 3.6 3.5-------------------------------------------------------------------------------- 957.8 720.2-------------------------------------------------------------------------------- Current assetsTrade and other receivables 13 6.7 5.2Financial assets - derivative financial 17e 0.1 0.2instrumentsInvestment properties held for sale 10 8.2 -Cash and cash equivalents 14 1.7 1.2-------------------------------------------------------------------------------- 16.7 6.6-------------------------------------------------------------------------------- Current liabilitiesFinancial liabilities - borrowings 17a (3.6) (0.8)Financial liabilities - derivative financial 17e (1.2) (1.7)instrumentsTrade and other payables 15 (29.0) (24.8)Current tax liabilities 16 (1.7) (2.5)-------------------------------------------------------------------------------- (35.5) (29.8)-------------------------------------------------------------------------------- Net current liabilities (18.8) (23.2)Non-current liabilitiesFinancial liabilities - borrowings 17a (426.1) (322.4)Deferred tax liabilities 21 (122.6) (86.1)-------------------------------------------------------------------------------- (548.7) (408.5)-------------------------------------------------------------------------------- Net assets 390.3 288.5-------------------------------------------------------------------------------- Shareholders' equityOrdinary shares 16.9 16.9Share premium 28.7 28.4Investment in own shares 22 (5.1) (5.5)Other reserves 0.8 0.5Retained earnings 349.0 248.2-------------------------------------------------------------------------------- Total shareholders' equity 390.3 288.5--------------------------------------------------------------------------------Net asset value per share (basic) 9 £2.37 £1.77Diluted net asset value per share 9 £2.29 £1.71Adjusted net asset value per share (basic) 9 £3.12 £2.30Diluted adjusted net asset value per share 9 £3.01 £2.23 The notes below form part of these financial statements. Consolidated Cash Flow StatementFor the year ended 31 March Notes 2006 2005 £m £m Cash flows from operating activitiesCash generated from operations 18 39.0 33.9Interest received 0.2 0.1Interest paid (22.9) (19.7)Tax paid 19 (1.9) (3.2)--------------------------------------------------------------------------------Net cash from operating activities 14.4 11.1 Cash flows from investing activitiesPurchase of investment properties (132.8) (44.9)Capital expenditure on investment properties (20.9) (9.5)Net proceeds from disposal of investment 44.2 35.4propertiesTax paid on disposal of investment properties 19 (4.8) (2.8)Purchase of intangible assets (0.1) (0.1)Purchase of property, plant and equipment (0.7) (0.8)--------------------------------------------------------------------------------Net cash used in investing activities (115.1) (22.7) Cash flows from financing activitiesNet proceeds from issue of ordinary share - 0.3capitalNet proceeds from issue of bank borrowings 103.9 16.3Net distribution of own shares 0.4 0.7Finance lease principal payments (0.1) (0.1)Dividends paid to shareholders 7 (5.8) (5.2)--------------------------------------------------------------------------------Net cash from financing activities 98.4 12.0--------------------------------------------------------------------------------Net (decrease)/ increase in cash and cash (2.3) 0.4equivalents.================================================================================ Cash and cash equivalents at start of year 18 0.4 -Cash and cash equivalents at end of year 18 (1.9) 0.4================================================================================ The notes below form part of these financial statements. Significant Accounting Policies The principal accounting policies adopted in the preparation of these financialstatements are set out below. These policies have been consistently applied toall years presented, as explained below, with the exception of IFRS5 'Noncurrent assets held for sale and discontinued operations', which has beenapplied prospectively from 1 April 2005. Basis of Preparation These financial statements have been prepared in accordance with InternationalFinancial Reporting Standards (IFRS) and IFRIC interpretations as adopted by theEuropean Union and with those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS. The financial statements have been prepared under the historical cost conventionas modified by the revaluation of investment properties, fair value ofderivative financial instruments and convertible loan stock. The preparation of financial statements in conformity with generally acceptedaccounting principles requires the use of estimates and assumptions that affectthe reported amounts of assets and liabilities at the balance sheet date and thereported amounts of revenues and expenses during the reporting period. Althoughthese estimates are based on management's best knowledge of the amount, event oractions, actual results ultimately may differ from those estimates. Key judgements include the estimation of fair values of investment propertiesand derivative financial instruments, the assessment of useful economic livesand residual values of property, plant and equipment and estimates of tradereceivables impairment provisions. Adoption of IFRS The Group is required to establish its IFRS accounting policies for the yearended 31 March 2006 and to apply these retrospectively to determine its balancesheet at the date of transition to IFRS, 1 April 2004, and comparative financialinformation for the year ended 31 March 2005. The comparative financial figureshave therefore been amended as required in accordance with the relevantrequirements and disclosures relating to the transition to IFRS. Advantage hasbeen taken of certain exemptions allowed by IFRS 1 'First Time Adoption of IFRS'as follows: • Share based payment transactions - to not apply IFRS2 'Share Based Payment' to equity instruments granted before 7 November 2002 and Cash Settled Share Base Payment liabilities settled prior to 1 January 2005. • Fair value at deemed cost - to take fair value as the deemed cost of owner occupied property at the date of transition. Basis of consolidation The consolidated financial statements include the financial statements of theCompany and all its subsidiary undertakings up to 31 March 2006. Subsidiariesare entities over which the Group has the power to govern the financial andoperating policies. The financial statements of subsidiaries are included in theconsolidated financial statements from the date that control commences to thedate control ceases. Inter company transactions, balances and unrealised gains from intra grouptransactions are eliminated. Unrealised losses are also eliminated unless thetransaction provides evidence of an impairment of the asset transferred. Investment properties Investment properties are those properties owned or leased under a finance leaseby the Group that are held to earn rental income or for capital appreciation orboth and are not occupied by the Company or subsidiaries of the Group. Land or buildings held under operating leases are classified and accounted foras investment properties where the rest of the definition of investment propertyis met. The operating lease is accounted for as if it were a finance lease. Investment property is measured initially at cost, including related transactioncosts. After initial recognition investment property is held at fair value basedon a valuation by a professional external valuer at each reporting date. Changesin fair value of investment property at the reporting date are recorded in theincome statement. Properties are treated as acquired at the point the Group assumes thesignificant risks and returns of ownership and are treated as disposed whenthese are transferred outside the Group. Existing investment property which undergoes redevelopment for continued futureuse as investment property remains in investment property. Property that isbeing constructed or developed for future use as investment property, but hasnot previously been classified as such, is classified as property, plant andequipment and initially recognised at cost until construction or development iscomplete, at which time it is reclassified as investment property at fair value. Subsequent expenditure is charged to the asset's carrying amount only when it isprobable that future economic benefits associated with the expenditure will flowto the Group, and the cost of each item can be reliably measured. All otherrepairs and maintenance costs are charged to the income statement during theperiod in which they are incurred. In the case of existing investment properties undergoing redevelopment,capitalised interest on the redevelopment expenditure is added to the asset'scarrying amount. Borrowing costs capitalised are calculated by reference to theactual interest rate payable on borrowings, or if financed out of generalborrowings by reference to the average rate payable on funding the assetsemployed by the Group and applied to the direct expenditure on the propertyundergoing redevelopment. Interest capitalised is from the date of commencementof the re-development activity until the date when substantially all theactivities necessary to prepare the asset for its intended use are complete. Assets held for sale Properties and land held for sale are included in the balance sheet at fairvalue and presented on the balance sheet as investment properties held for sale. Property plant and equipment All property, plant and equipment is stated at historical cost lessdepreciation. Historical cost includes expenditure that is directly attributableto the acquisition of the items. Subsequent expenditure is charged to the asset's carrying amount or recognisedas a separate asset only when it is probable that future economic benefitsassociated with the expenditure will flow to the Group and the cost of each itemcan be reliably measured. All other repairs and maintenance costs are charged tothe income statement during the period in which they are incurred. In the caseof properties undergoing construction or development, capitalised interest onthe development expenditure is added to the asset's carrying amount. Depreciation is provided using the straight line method to allocate the costless estimated residual value over the asset's estimated useful lives asfollows: Freehold Land not depreciated Buildings 50 years Motor vehicles 4 years Equipment and fixtures 4 years The assets' residual values and useful lives are reviewed and adjusted, ifappropriate, at least at each financial year end. An asset's carrying amount iswritten down immediately to its recoverable amount if its carrying amount isgreater than its estimated recoverable amount. Intangibles Acquired computer software licenses and external costs of implementing ordeveloping computer software programmes are capitalised. These costs areamortised over their estimated useful lives of 4 years on a straight line basis.Intangibles are stated at historical cost. Costs associated with maintaining computer software programmes are recognised asan expense as incurred. Leases A group company as lessee i) Operating leases - leases in which substantially all the risks and rewards ofownership are retained by another party, the lessor, are classified as operatingleases. Payments, including prepayments, made under operating leases are chargedto the income statement on a straight line basis over the period of the lease. ii) Finance leases - leases of assets where the Group has substantially all therisks and rewards of ownership are classified as finance leases. Assets acquiredunder finance leases are capitalised at the lease's commencement at the lower ofthe fair value of the leased property and the net present value of the minimumlease payments. The corresponding rental obligations, net of finance charges,are included in current and non current borrowings. Each lease payment isallocated between liability and finance charges so as to achieve a constant rateon the finance balance outstanding. The interest element of the finance cost ischarged to the income statement. The investment properties acquired underfinance leases are subsequently carried at fair value. A group company as lessor i) Operating leases - properties leased out under operating leases are includedin investment property in the balance sheet. Rental income from operating leasesis recognised in the income statement on a straight line basis over the leaseterm. When the Group provides incentives to its customers the cost of theincentives are recognised over the lease term on a straight line basis as areduction of rental income. ii) Finance leases - when assets are leased out under a finance lease, thepresent value of the minimum lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable represents unearned finance income. Lease income is recognised over the term of the lease using the net investment method before tax, which reflects a constant periodic rate of return. Where the buildings element of a property lease is classified as a finance lease, the land element is treated as an operating lease. Trade and other receivables Trade and other receivables are recognised initially at fair value andsubsequently measured at cost less provision for impairment where it isestablished there is objective evidence that the Group will not be able tocollect all amounts due according to the original terms of the receivable. Theamount of the provision is the difference between the asset's carrying amountand the present value of estimated future cash flows. The provision is recordedin the income statement. Trade and other payables Trade and other payables are stated at cost. Cash and cash equivalents Cash and cash equivalents include cash in hand, deposits held at call with banksand other short term highly liquid investments with original maturities of threemonths or less. Bank overdrafts are included within cash and cash equivalentsfor the purpose of the cash flow statement. Borrowings Borrowings are recognised initially at fair value, net of transaction costsincurred. Borrowings are subsequently stated at amortised cost, any differencebetween the initial amount (net of transaction costs) and the redemption valueis recognised in the income statement over the period of the borrowings, usingthe effective interest method, except for interest capitalised onredevelopments. Borrowings are classified as current liabilities unless the Group has anunconditional right to defer settlement of the liability for at least 12 monthsafter the balance sheet date. Compound financial instruments At the date of issue of compound financial instruments, the fair value of theliability component is estimated using the prevailing market interest rate forsimilar non-compound debt. The difference between the proceeds of issue and thefair value of the liability is included in equity. The interest payable andamortisation of the carrying value of the liability component are recognised asinterest expense so as to maintain a constant rate of interest on the carryingvalue. Derivative financial instruments The Group enters into derivative transactions such as interest rate collars inorder to manage its interest risk. Derivatives are recorded at fair valuecalculated on valuation techniques based on market prices and estimated cashflows. As the Group does not apply hedge accounting to the interest ratecollars, any changes in value are recognised in the income statement. Share capital Ordinary shares are classified as equity. Incremental costs directlyattributable to the issue of new shares are shown in equity as a deduction, netof tax, from the proceeds. Investment in own shares The Group operates an Employee Share Ownership Trust (ESOT). When the Grouppurchases Company shares, the consideration paid is deducted from shareholders' equity as Investment in Own Shares until the shares are re-issued, cancelled or disposed of. Where shares are re-issued or disposed of any consideration due is included in shareholders' equity as Investment in own shares. Provisions Provisions are recognised when the Group has a current obligation arising from apast event and it is probable that the Group will be required to settle thatobligation. Provisions are measured at the directors' best estimate of thepresent value of the expenditure required to settle that obligation at thebalance sheet date. Revenue recognition Revenue comprises rental income, service charges and other sums receivable fromtenants of the Group's investment properties. Other sums comprise insurancecharges, supplies of utilities, premia associated with surrender of tenancies,commissions, fees and other sundry income. Rental income from operating leases is recognised in the income statement on astraight line basis over the lease term. When the Group provides leaseincentives to its tenants the cost of incentives are recognised over the leaseterm, on a straight line basis, as a reduction to income. Service charge and other sums receivable from tenants are recognised byreference to the stage of completion of the relevant service or transactions atthe reporting date. Rental income from property let out under a finance lease is accounted for byallocating each lease payment between receivable and finance income so as toachieve a constant rate on the finance balance outstanding. The interest elementof the finance income is credited to the income statement over the lease periodso as to produce a constant periodic rate of interest on the remaining balanceof the receivable for each period. Contingent rents, being those lease paymentsthat are not fixed at the inception of the lease, for example increases arisingon rent reviews, are recorded as income in the periods in which they are earned. Income for the sale of assets is recognised when the significant risks andreturns have been transferred to the buyer. In the case of sales of propertiesthis is generally taken on completion. Where any aspect of consideration isconditional then the revenue associated with that conditional item is deferred. Direct costs Minimum lease payments payable under head leases categorised as finance leasesare allocated between liability and finance charges so as to achieve a constantrate on the finance balance outstanding. The interest element of the financecost is charged to the income statement. Contingent rents, being those leasepayments that are not fixed at the inception of the lease, for example increasesarising on rent reviews, are recorded as an expense in the income statement inthe period in which they are incurred. Share based payment Incentives in the form of shares are provided to employees under share optionschemes. The fair value of the options granted is recognised over the vestingperiod. Fair value is measured by the use of Black-Scholes and Monte-Carlo optionpricing models. The expected life used in the models has been adjusted, based onmanagement's best estimate, for the effects of non-transferability, exerciserestrictions and behavioural considerations. The Company has established an ESOT to satisfy part of its obligation to provideshares when employees exercise their options. The Company provides funding tothe ESOT to purchase these shares. Pensions The Group operates a defined contribution pension scheme. Contributions arecharged to the income statement as they fall due. Income tax Income tax on the profit for the year comprises current and deferred tax. Current income tax is tax payable on the taxable income for the year and anyprior year adjustment and is calculated using tax rates that have beensubstantively enacted by the balance sheet data. Deferred income tax is provided in full, using the liability method, ontemporary differences arising between the tax bases of assets and liabilitiesand their carrying amounts in the consolidated financial statements. Deferredincome tax is determined using tax rates that have been substantively enacted bythe balance sheet date and are expected to apply when the related deferredincome tax is realised or the deferred tax liability settled. Deferred tax isprovided in full on the difference between the original cost of investmentproperties and their carrying amounts at the reporting date without taking intoaccount deductions and allowances, which would apply if the assets concernedwere disposed of. No provision is made for temporary differences arising on the initialrecognition of assets or liabilities that affect neither accounting nor taxableprofit or relating to investments in subsidiaries where it is probable that thetemporary differences will not reverse in the foreseeable future. Dividend distributions Final dividend distributions to the Company's shareholders are recognised as aliability in the Group's financial statements in the period in which thedividends are approved, while interim dividends are recognised when paid. New Standards IFRS 6 and 7 and IFRIC 4, 5, 6 and 7 have been adopted by the European Union,but are not effective for the year ended 31 March 2006. It is believed that theywill not have a material impact on the financial statements on initialapplication. Notes to the Financial StatementsFor the year ended 31 March 1.Analysis of net rental income 2006 2005 Revenue Costs Net rental Revenue Costs Net rental income income £m £m £m £m £m £m Rental income* 49.2 (0.2) 49.0 43.3 (0.2) 43.1Servicecharges andotherrecoveries 12.3 (15.9) (3.6) 9.8 (13.5) (3.7) Services,fees,commissionsand sundry income 1.7 (0.7) 1.0 1.9 (0.3) 1.6-------------------------------------------------------------------------------- 63.2 (16.8) 46.4 55.0 (14.0) 41.0-------------------------------------------------------------------------------- *Rental income includes surrender premia of £2.2m (2005: £0.3m). The Group operates a single business segment providing business accommodationfor rent in London and the South East of England, which is continuing. 2. Profit on disposal of investment properties 2006 2005 £m £m Gross proceeds from sale of investment properties 44.5 34.7Book value at time of sale plus sale costs (41.1) (34.8)--------------------------------------------------------------------------------Pre tax profit/(loss) on sale 3.4 (0.1) Current taxation (4.7) (4.0)Deferred tax released on sale 4.9 4.5--------------------------------------------------------------------------------Net tax 0.2 0.5--------------------------------------------------------------------------------Net profit on disposal after tax 3.6 0.4-------------------------------------------------------------------------------- 3. Operating profit The following items have been charged in arriving at operatingprofit: 2006 2005 £m £m Direct costs:Depreciation of property, plant and equipment - owned assets 0.3 0.3Staff costs (note 5) 2.5 2.3Repairs and maintenance expenditure on investment property 3.3 2.3Trade receivables impairment 0.1 0.2 Administrative expenses:Amortisation of intangibles 0.1 0.1Depreciation of property, plant and equipment - owned assets 0.3 0.4Staff costs (note 5) 4.9 4.5Other operating lease rentals payable: - motor vehicles - minimum lease payments 0.1 0.1Auditors' remuneration including expenses 0.1 0.1 Depreciation in direct costs relates to fixtures and fittings installed withininvestment properties. Amounts payable to auditors for non audit fees totalled £103,000 and relateprimarily to the costs of IFRS conversion (2005 - £12,000). 4. Finance costs 2006 2005 £m £m Interest payable on bank loans and overdrafts 21.0 16.8Amortisation of issue costs of bank loans 0.5 0.4Interest payable on finance leases 0.1 0.1Interest payable on 11.125% First Mortgage Debenture Stock 1.4 1.42007Interest payable on 11.625% First Mortgage Debenture Stock 0.8 0.82007Interest payable on 11% Convertible Loan Stock 2011 0.3 0.3Interest capitalised on property re-developments (0.5) (0.2)-------------------------------------------------------------------------------- 23.6 19.6-------------------------------------------------------------------------------- 5. Employees and directors Staff costs for the Group during the year 2006 2005 £m £mWages and salaries 6.3 5.7Social security costs 0.7 0.7Defined contribution pension plan costs 0.4 0.4-------------------------------------------------------------------------------- 7.4 6.8-------------------------------------------------------------------------------- Number of people (including executive directors) employed atthe year end: 2006 2005 Number NumberExecutive directors 4 4Head office staff 63 54Estates staff 87 85-------------------------------------------------------------------------------- 154 143-------------------------------------------------------------------------------- The average number of persons employed during the year was 153 (2005 - 145). Key management for the purposes of related party disclosure under IAS 24 aretaken to be all executive and non executive directors. Included within staffcosts above is remuneration payable to key management personnel as follows: Key management compensation 2006 2005 £m £mSalaries and short-term employee benefits 1.9 1.6Pensions and other post-employment benefits 0.1 0.1Share-based payments (not included in above) 0.7 0.4-------------------------------------------------------------------------------- 2.7 2.1-------------------------------------------------------------------------------- The remuneration of the executive directors is determined by the RemunerationCommittee of the Board. 6. Taxation Analysis of charge in period 2006 2005 £m £mCurrent tax 5.9 6.2Deferred tax 36.5 18.1--------------------------------------------------------------------------------Total taxation 42.4 24.3-------------------------------------------------------------------------------- The charge in the period is analysed as follows: 2006 2005 £m £mCurrent tax:UK corporation tax 6.8 7.3Adjustments in respect of previous periods (0.9) (1.1)-------------------------------------------------------------------------------- 5.9 6.2-------------------------------------------------------------------------------- Deferred tax:On fair value gains of investment properties 34.5 15.9On accelerated tax depreciation 1.2 0.9On derivative financial instruments 0.1 0.3Adjustments to tax in respect of previous periods 0.5 0.9Others 0.2 0.1-------------------------------------------------------------------------------- 36.5 18.1-------------------------------------------------------------------------------- Total taxation 42.4 24.3-------------------------------------------------------------------------------- The tax on the Group's profit for the period differs from the standardapplicable corporation tax rate in the UK (30%). The differences are explainedbelow: 2006 2005 £m £m Profit on ordinary activities before taxation 149.0 82.8--------------------------------------------------------------------------------Tax at standard rate of corporation tax in the UK of 30%(2005: 30%) 44.7 24.8 Effects of:Income taxed as capital gains (0.4) -Contaminated land relief (0.3) -Capital gains adjustments on property disposals (1.2) (0.4)Other items - 0.1Adjustments to tax in respect of previous periods (0.4) (0.2)--------------------------------------------------------------------------------Total taxation 42.4 24.3-------------------------------------------------------------------------------- There are no timing differences associated with investments in subsidiaries, forwhich deferred tax liabilities have not been recognised. The total tax charge represents 28.5% (2005: 29.3%) of profit before tax. Thisreduction was caused by contaminated land relief claims and proportionatelyhigher indexation allowances on capital gains. 7. Dividends paid 2006 2005 £m £m Final dividend 2004/5 - 2.28p (2003/04 - 2.07p*) per ordinaryshare 3.7 3.4 Interim dividend 2005/6 1.25p (2004/05 - 1.13p*) per ordinaryshare 2.1 1.8-------------------------------------------------------------------------------- 5.8 5.2-------------------------------------------------------------------------------- *Figures adjusted to reflect bonus share issue made in March 2005. In addition the directors are proposing a final dividend in respect of thefinancial year ended 31 March 2006 of 2.51p per Ordinary Share which will absorban estimated £4.1m of shareholders' funds. If approved by the shareholders atthe AGM, it will be paid on 4 August 2006 to shareholders who are on theregister of members on 7 July 2006. 8. Earnings per share Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary sharesoutstanding during the year, excluding those held in the employee shareownership trust (ESOT). For diluted earnings per share the weighted average number of ordinary shares inissue is adjusted to assume conversion of all dilutive potential ordinaryshares. The group has two classes of dilutive potential ordinary shares: thoseshare options granted to employees and those issuable to convertible bondholders. Reconciliations of the earnings and weighted average number of shares used inthe calculations are set out below. Profit Earnings per share Earnings used for calculation of earningsper share 2006 2005 2006 2005 £m £m pence pence Earnings used for basic earnings per share 106.6 58.5 65.1 36.1 Interest saving net of taxation on 11%Convertible Loan Stock dilution 0.2 0.2 (1.5) (1.0) Share option scheme dilution - - (0.9) (0.3)--------------------------------------------------------------------------------Total diluted earnings 106.8 58.7 62.7 34.8Less non trading items (94.9) (48.3) (55.7) (28.6)--------------------------------------------------------------------------------Trading diluted earnings 11.9 10.4 7.0 6.2--------------------------------------------------------------------------------Weighted average number of shares used forcalculating earnings per share 2006 2005 Number Number Weighted average number of shares (excludingshares held in the ESOT) 163,629,157 161,931,920Dilution due to Share Option Schemes 2,538,531 1,682,780Dilution due to Convertible Loan Stock 4,400,000 5,000,000--------------------------------------------------------------------------------Used for calculating diluted earnings per share 170,567,688 168,614,700-------------------------------------------------------------------------------- 9. Net assets per share Net assets used for calculation of net assets per share 2006 2005 £m £mNet assets at end of year (basic) 390.3 288.5Dilution due to Convertible Loan Stock 2.2 2.5--------------------------------------------------------------------------------Diluted net assets 392.5 291.0Derivative financial instruments at fair value 1.1 1.5Deferred tax on accelerated tax depreciation 8.3 6.6Deferred tax on fair value change of investment properties 114.2 79.7Deferred tax on derivative financial instruments (0.4) (0.5)--------------------------------------------------------------------------------Diluted adjusted net assets 515.7 378.3--------------------------------------------------------------------------------Adjusted net assets (before dilution) 513.5 375.8-------------------------------------------------------------------------------- Net assets have been adjusted to derive a diluted net assets measure as definedby the European Public Real Estate Association (EPRA). Number of shares used for calculating net assetsper share 2006 2005 Number Number Shares in issue at year-end 169,509,640 168,839,660Less ESOT shares (4,940,960) (5,620,370)----------------------------------------------------------------------------------Number of shares for calculating basic net assetsper share 164,568,680 163,219,290Dilution due to Share Option Schemes 2,538,531 1,682,780Dilution due to Convertible Loan Stock 4,400,000 5,000,000----------------------------------------------------------------------------------Number of shares for calculating diluted netassets per share 171,507,211 169,902,070---------------------------------------------------------------------------------- 10(a). Investment properties 2006 2005 £m £m Balance at 1 April 716.5 626.8Additions during the year 154.5 56.0Capitalised interest on re-developments 0.5 0.2Disposals during the year (40.6) (34.4)Net gain from fair value adjustments on investment 131.3 67.9propertyInvestment property held for sale (note below) (8.2) ---------------------------------------------------------------------------------Balance at 31 March 954.0 716.5-------------------------------------------------------------------------------- Property held for sale at the balance sheet date is shown separately undercurrent assets as required by IFRS5. Within additions for the year are property purchases, including costs, of£133.1m (2005: £45.1m). Capitalised interest is included at a rate of capitalisation of 5.73% (2005:5.79%). The total amount of capitalised interest included in investmentproperties was £1.5m (2005: £1.2m). Investment property includes buildings under finance leases of which thecarrying amount is £0.7m (2005: £0.7m). Investment property finance leasecommitment details are show in note 17(h). The Group has determined that all tenant leases are operating leases within themeaning of IAS17. The majority of the Group's tenant leases are granted with arolling three month tenant break clause. The future minimum rental receiptsunder non-cancellable operating leases granted to tenants are as follows: 2006 2005 £m £mWithin one year 23.0 19.0Between two and five years 24.5 18.5Beyond five years 23.5 24.2-------------------------------------------------------------------------------- 71.0 61.7-------------------------------------------------------------------------------- 10(b). Valuation The Group's investment properties were revalued at 31 March 2006 by CB RichardEllis, Chartered Surveyors, a firm of independent qualified valuers. Thevaluations were undertaken in accordance with the Royal Institution of CharteredSurveyors Appraisal and Valuation Standards on the basis of market value. Marketvalue is defined as the estimated amount for which a property should exchange onthe date of valuation between a willing buyer and willing seller in an arm'slength transaction. The reconciliation of the valuation report total shown in the ConsolidatedBalance Sheet as non-current assets, investment properties, is as follows: 2006 2005 £m £m Total per CB Richard Ellis valuation report 964.3 718.4 Owner occupied property (2.4) (2.3)Property held for sale (shown as current assets) (8.2) -Head leases treated as finance leases under IAS 17 0.7 0.7Other (0.4) (0.3)--------------------------------------------------------------------------------Total per balance sheet 954.0 716.5-------------------------------------------------------------------------------- 11. Intangible assetsComputer software 2006 2005 £m £mCostBalance at 1 April 0.6 0.5Additions during the year 0.1 0.1--------------------------------------------------------------------------------Balance at 31 March 0.7 0.6-------------------------------------------------------------------------------- Accumulated amortisation and impairmentBalance at 1 April 0.4 0.3Charged for the year 0.1 0.1--------------------------------------------------------------------------------Balance at 31 March 0.5 0.4--------------------------------------------------------------------------------Net book value at end of year 0.2 0.2-------------------------------------------------------------------------------- 12. Property, plant and equipment Owner occupied Owner occupied Equipment Total land buildings and fixtures £m £m £m £m CostBalance at 1April 2004 0.5 1.5 4.2 6.2Additionsduring theyear - - 0.8 0.8Disposalsduring theyear - - (0.9) (0.9)--------------------------------------------------------------------------------Balance at 31March 2005 0.5 1.5 4.1 6.1Additionsduring theyear - 0.1 0.6 0.7--------------------------------------------------------------------------------Balance at 31March 2006 0.5 1.6 4.7 6.8-------------------------------------------------------------------------------- Accumulated depreciationBalance at 1April 2004 - - 2.7 2.7Charged forthe year - - 0.7 0.7Disposalsduring theyear - - (0.8) (0.8)--------------------------------------------------------------------------------Balance at 31March 2005 - - 2.6 2.6Charged forthe year - 0.1 0.5 0.6--------------------------------------------------------------------------------Balance at 31March 2006 - 0.1 3.1 3.2-------------------------------------------------------------------------------- Net bookamount at 31March 2005 0.5 1.5 1.5 3.5--------------------------------------------------------------------------------Net bookamount at 31March 2006 0.5 1.5 1.6 3.6================================================================================ At 1 April 2004, the transition date to IFRS, the fair value of freehold owneroccupied land and buildings was adopted as the deemed cost of those assets. Thefair value of owner occupied land and buildings was £2.0m and the carrying valueat 1 April 2004, under UK GAAP, was £2.0m. 13. Trade and other receivables 2006 2005 £m £m Trade debtors 3.8 3.5Less provision for impairment of receivables (0.3) (0.4)--------------------------------------------------------------------------------Trade debtors - net 3.5 3.1Taxation and social security 0.3 -Prepayments and accrued income 2.9 2.1-------------------------------------------------------------------------------- 6.7 5.2-------------------------------------------------------------------------------- There is no concentration of credit risk with regard to trade receivables as theGroup has a large number of unrelated customers. No single debtor representsmore than 4.9% of trade debtors. There is no material difference between theabove amounts and their fair values due to the short term nature of thereceivables. 14. Cash and cash equivalents 2006 2005 £m £mCash at bank and in hand - -Restricted cash - tenants' deposit deeds 1.7 1.2-------------------------------------------------------------------------------- 1.7 1.2-------------------------------------------------------------------------------- Tenants deposit deeds represent returnable cash security deposits received fromtenants and are ring-fenced under the terms of the individual lease contracts. Bank overdrafts are included within cash and cash equivalents for the purpose ofthe cash flow statement. 15. Trade and other payables 2006 2005 £m £mTrade payables 2.4 2.2Taxation and social security payable 0.4 1.1Tenants' deposit deeds (see note 14) 1.7 1.2Tenants' deposits 5.3 5.0Accrued expenses 13.9 10.5Deferred income-rent and service charges 5.3 4.8-------------------------------------------------------------------------------- 29.0 24.8-------------------------------------------------------------------------------- There is no material difference between the above amounts and their fair valuesdue to the short term nature of the payables. 16. Current tax liabilities 2006 2005 £m £mCurrent tax liabilities 1.7 2.5-------------------------------------------------------------------------------- 17. Financial liabilities - borrowings a) Balances 2006 2005 £m £mCurrentBank loan and overdrafts due within one year or on demand(secured) 3.6 0.8 Non -current11% Convertible Loan Stock 2011 (unsecured) 2.2 2.511.125% First Mortgage Debenture Stock 2007 (secured) 12.5 12.511.625% First Mortgage Debenture Stock 2007 (secured) 7.0 7.0Other loans (secured) 403.7 299.7Finance lease obligations (secured) 0.7 0.7-------------------------------------------------------------------------------- 426.1 322.4-------------------------------------------------------------------------------- 429.7 323.2-------------------------------------------------------------------------------- The secured loans and overdraft facility are secured on properties with balancesheet values totalling £806.7m (2005: £655.5m). b) Maturity 2006 2005 £m £mSecured (excluding finance leases)Repayable in less than one year 3.6 0.8Repayable between one year and two years 19.5 -Repayable between two years and three years - 219.5Repayable between three years and four years 134.7 -Repayable between four years and five years 270.0 100.8-------------------------------------------------------------------------------- 427.8 321.1Less cost of raising finance (1.0) (1.1)-------------------------------------------------------------------------------- 426.8 320.0Unsecured Repayable in five years or more 2.2 2.5Finance leases (secured)Repayable in five years or more 0.7 0.7-------------------------------------------------------------------------------- 429.7 323.2-------------------------------------------------------------------------------- c) Interest rate profile Principal Interest Interest Repayable rate payable £m CurrentBank loan and overdraftsdue within one year oron demand 3.6 Variable Variable On demand Non-current11% Convertible LoanStock 2011 2.2 11% fixed June and Sept 2011 December11.125% First MortgageDebenture Stock 2007 12.5 11.125% fixed September June 2007 and March11.625% First MortgageDebenture Stock 2007 7.0 11.625% fixed September June 2007 and MarchOther loans 270.0 LIBOR +0.94% Variable August 2010Other loans 134.7 LIBOR +0.95% Variable July 2009 The 11% convertible loan stock 2011 is convertible each year, within 31 days ofthe date of dispatch of the audited consolidated financial statements, at oneordinary share to £0.50 stock held. The net proceeds received from initial issue of the Convertible Loan Stock 2011have been split between the liability element and an equity element as follows: 2006 2005 £m £mNet proceeds of Convertible Loan Stock 2011 4.0 4.0Less equity component (0.3) (0.3)--------------------------------------------------------------------------------Liability component at date of issue 3.7 3.7Cumulative amortisation since issue 0.3 0.3Liability component of conversion (1.8) (1.5)--------------------------------------------------------------------------------Liability component as at 31 March 2.2 2.5-------------------------------------------------------------------------------- The effective interest rate on the liability element at 31 March 2006 was 11.95%(2005: 11.95%). d) Financial instruments held at fair value through the profit and loss The following interest rate collars are held: Amount hedged Interest cap Interest floor Expiry £ m % % Interest rate collar(amortising amount) 104.2 8.00% 4.50% July 2009Interest rate collar 75.0 6.95% 4.05% July 2009Interest rate collar(increasing amount) 35.1 7.00% 2.99% Oct 2010 The above instruments are treated as financial instruments at fair value withchanges in value dealt with in the income statement during each reportingperiod. At the year end 5% (2005: 7%) of the Group's borrowings were fixed with afurther 50% (2005: 52%) subject to a collar. e) Fair values of financial instruments 2006 2006 2005 2005 Book Value Fair Value Book Value Fair Value £m £m £m £m Financial liabilities not atfair value through profit orlossBank overdraft 3.6 3.6 0.8 0.811% Convertible Loan Stock2011 2.2 2.5 2.5 2.911.125% First MortgageDebenture Stock 2007 12.5 13.1 12.5 13.511.625% First MortgageDebenture Stock 2007 7.0 7.4 7.0 7.6Other loans 403.7 403.7 299.7 299.7Finance lease obligations 0.7 0.7 0.7 0.7-------------------------------------------------------------------------------- 429.7 431.0 323.2 325.2Financial liabilities at fairvalue through profit or lossDerivative financialinstruments:Liabilities 1.2 1.2 1.7 1.7Assets (0.1) (0.1) (0.2) (0.2)-------------------------------------------------------------------------------- 1.1 1.1 1.5 1.5-------------------------------------------------------------------------------- 430.8 432.1 324.7 326.7-------------------------------------------------------------------------------- The total gain recorded in the income statement was £0.4m (2005: £1.1m) forchanges of fair value of derivative financial instruments. The fair value of the interest rate collars has been determined by reference tomarket prices and discounted expected cash flows at prevailing interest rates.All other fair values have been calculated by discounting expected cash flows atprevailing interest rates. The total fair value adjustment equates to 0.8p pershare (31 March 2005: 1.2p). f) Borrowing facilities At 31 March 2006 the Group had undrawn borrowing facilities of £19.3m (2005:£50.9m) for which conditions precedent had been met. Of the total undrawnfacilities, £0.2m (2005: £1.7m) had a maturity of less than 12 months with theremainder 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 andborrowings. The Group borrows at both fixed and floating rates of interest andthen uses interest rate collars to generate the desired interest and riskprofile. The Group's policy is to fix or cap interest rates on at least 50% of itsborrowings. Credit risk The credit risk in liquid funds and derivative financial instruments is limitedbecause the counter parties are banks with investment grade credit ratings. The Group has no significant concentration of credit risk from its customers asexposure is spread over a large number of entities. Liquidity risk The Group minimises liquidity risk by continually refreshing the maturityprofile of its debt. h) Finance leases Finance lease liabilities are in respect of leased investment property. Minimum lease payments under finance leases fall due asfollows: 2006 2005 £m £m Within one year 0.1 0.1Between two and five years 0.2 0.2Beyond five years 3.7 3.7-------------------------------------------------------------------------------- 4.0 4.0Future finance charges on finance leases (3.3) (3.3)--------------------------------------------------------------------------------Present value of finance lease liabilities 0.7 0.7-------------------------------------------------------------------------------- 18. Notes to cash flow statement Reconciliation of profit for the period to cash generated from operations: 2006 2005 £m £m Profit for the period 106.6 58.5Tax 42.4 24.3Depreciation 0.6 0.7Amortisation of intangibles 0.1 0.1(Profit)/loss on disposal of investment properties (3.4) 0.1Net gain from fair value adjustments on investment property (131.3) (67.9)Fair value gains on financial instruments (0.4) (1.1)Interest income (0.2) (0.1)Interest expense 23.6 19.6Changes in working capital:(Increase)/decrease in trade and other receivables (1.7) -Increase/(decrease) in trade and other payables 2.7 (0.3)--------------------------------------------------------------------------------Cash generated from operations 39.0 33.9-------------------------------------------------------------------------------- For the purposes of the cash flow statement, the cash and cash equivalentscomprise the following: 2006 2005 £m £mCash at bank and in hand - -Restricted cash - tenants deposit deeds 1.7 1.2Bank overdrafts (3.6) (0.8)-------------------------------------------------------------------------------- (1.9) 0.4-------------------------------------------------------------------------------- 19. Tax paid 2006 2005 £m £m Tax paid in operating activities 1.9 3.2Tax paid in investing activities 4.8 2.8--------------------------------------------------------------------------------Total tax paid 6.7 6.0-------------------------------------------------------------------------------- 20. Analysis of net debt At 1 April Cash Flow Non-cash Items At 31 March 2005 £m £m 2006 £m £m Cash at bank and in hand - - - -Restricted cash -tenants' deposit deeds 1.2 0.5 - 1.7Bank overdrafts (0.8) (2.8) - (3.6)-------------------------------------------------------------------------------- 0.4 (2.3) - (1.9)-------------------------------------------------------------------------------- 11% Convertible LoanStock (2.5) - 0.3 (2.2)11.125% First MortgageDebenture (12.5) - - (12.5)11.625% First MortgageDebenture (7.0) - - (7.0)Bank loans (300.8) (103.9) - (404.7)Less cost of raisingfinance 1.1 0.3 (0.4) 1.0Finance leaseobligations (0.7) (0.1) 0.1 (0.7)-------------------------------------------------------------------------------- (322.4) (103.7) - (426.1)--------------------------------------------------------------------------------Total (322.0) (106.0) - (428.0)-------------------------------------------------------------------------------- 21. Deferred tax liabilities 2006 2005 £m £mBalance at 1 April 86.1 68.0Deferred tax charge 36.5 18.1--------------------------------------------------------------------------------Balance at 31 March 122.6 86.1-------------------------------------------------------------------------------- Deferred tax recognised in the balance sheet by each category of temporarytiming difference is as follows: Deferred tax liability 2006 2005 £m £m Fair value gains on investment 114.2 79.7propertiesCapitalised interest 0.4 0.3Accelerated tax depreciation 8.3 6.6Derivative financial instruments (0.4) (0.5)Other 0.1 ---------------------------------------------------------------------------------Balance at 31 March 122.6 86.1-------------------------------------------------------------------------------- If the investment properties were sold for their revalued amount there would bea potential liability to corporation tax of £95.6m (31 March 2005: £64.5 m).Under IFRS no account is taken of indexation relief on capital gains resultingin the difference between expected corporation tax to be paid and the provisionmade for deferred tax. 22. Investment in own shares The Company has established an Employee Share Ownership Trust (ESOT) to purchaseshares in the market for distribution at a later date in accordance with theterms of the 1993 and 2000 Executive Share Option Schemes. The shares are heldby an independent trustee and the rights to dividend on the shares have beenwaived. During the year the Trust transferred 679,410 shares to employees onexercise of options. At 31 March 2006, the number of shares held by the Trusttotalled 4,940,960 (2005: 5,620,370). The shares have been included at cost inshareholders' equity. 4,920,600 shares held by the Trust are subject to optionawards. 23. Explanation of the transition to IFRS This is the Group's first full year's financial statements prepared inaccordance with IFRS. The accounting policies set out above have been applied inpreparing the financial statements for the periods ended 31 March 2006, 31 March2005 and in preparing the opening IFRS balance sheet at 1 April 2004, theGroup's date of transition to IFRS. A guide explaining the principal differences between UK GAAP and IFRS as theyaffect the reported results and their presentation was issued in August 2005,entitled Workspace Group PLC, Adoption of International Financial ReportingStandards. This is available from the Group's website at http://www.workspacegroup.co.uk/investors/?pageID=4.22.68 24. Annual Report and Accounts The financial information in this preliminary announcement does not constitutestatutory accounts within the meaning of section 240 of the Companies Act (asamended). The figures contained herein have been extracted from the Group's full IFRSfinancial statements for the year ended 31 March 2006, which will be deliveredto the Registrar of Companies. The Group's full UK GAAP financial statements forthe year ended 31 March 2005 have been delivered to the Registrar of Companies.The auditors' reports on both of these sets of financial statements wereunqualified and did not contain a statement under section 237(2) or section 237(3) of the Companies Act. A printed copy of the Annual Report and Accounts for the Group will be posted toshareholders on 27 June 2006, and will be available on the Group's websitewww.workspacegroup.co.uk This information is provided by RNS The company news service from the London Stock Exchange

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