Final Results

11th Jun 2007 07:01

Workspace Group PLC11 June 2007 WORKSPACE - NAV UP 43% FOLLOWING CONVERSION TO A REIT Workspace Group PLC ("Workspace") today announces its preliminary results forthe year ended 31 March 2007. Workspace provides 4.9 million sq. ft of flexiblebusiness accommodation to over 3,700 small and medium size enterprises ("SMEs")in London and the South East. • Valuation Surplus £95.3m 10.5% • Net Asset Value per share £3.40 up 43% • NAV (adjusted for REIT conversion levy) £3.51 up 48% • Diluted Adjusted Net Asset Value per share £3.36 up 11.6% • Basic Earnings per share 115.1p up 77% • Profit Before Tax £112.5m down 24% • Trading Profit Before Tax £10.2m down 32% • Investment Portfolio Valuation £1,001.6m up 3.9% • Portfolio including JV £1,163.8m up 21% • Annual rent roll at year end (directly owned) £47.2m up 18.7% • Rent roll (including JV) £55.3m up 18.6% • Final distribution of 2.76p - total distribution up 10% to 4.14p Commenting on the results, Harry Platt, Chief Executive, said, " This has been another year of progress for Workspace, during which we havecreated the platform for growth over the next few years. The two major events ofthe year were the establishment of the Joint Venture with Glebe and the Group'sconversion to the tax efficient REIT status. Both of these moves havestrengthened the ability of the group to continue to grow. " Our core market of providing space for SMEs in London remains strong. Demandfor space is good and rents are improving. Our space remains good value with ouraverage rent at the year end growing to a still affordable £11.34 per sq. ft. Wehave made £70 million of acquisitions where we have identified the potential forgrowth from our style of ownership, though following the recentinterest rate increases the initial yield on these is below the cost ofborrowing. " The appointment of Angus Boag as Development Director, together with our jointventure with Glebe will enable us to accelerate our programme to add value toboth our directly held properties and those in our joint venture. This is at atime when the need for intensification throughout London is growing. We have anumber of active schemes that are making good progress. " Looking forward, the future for the Group is promising. Our properties areperforming well and many have significant potential to release further value. Wehave a first class team with the proven skills to deliver value for ourshareholders and we look forward to the future with confidence." -ends- Date: 11 June 2007For further information: Workspace Group PLC cityPROFILEHarry Platt, Chief Executive Simon CourtenayMark Taylor, Finance Director William Attwell020-7247-7614 020-7448-3244e-mail: [email protected]: www.workspacegroup.co.uk Chairman's Statement Introduction I am pleased to report upon another year of progress by your Company. Again,shareholder value was enhanced with net asset value per share up 43% to £3.40(assisted by our conversion to a REIT). Total shareholder return was 51% for theyear with 49% and 34% per annum over 3 and 5 year periods. This has been a very active year both in the core business and through two majorcorporate changes - the creation of the joint venture with Glebe and theconversion to a REIT. At a time when sustainable regeneration is a priority on the national and Londonagenda, our business model has never been so relevant to the community in whichwe are based. Our Focused Strategy Our strategy is to focus on Greater London, to focus on providing space forsmall and medium sized enterprises (SMEs), and to focus on non-prime properties.This is where our skills add the greatest value. At the heart of this focus aretwo fundamental factors, the selection of London and the SME sector. Your Boardcontinues to believe that the growth prospects in London are very considerableand that the SME community is integral to this growth of the city. We createvalue by acquiring space with potential, by driving occupancy and rents throughour operational and marketing skills, and then enhancing value throughintensification and higher added value use - often acting as a catalyst andprime mover for more widespread regeneration in an area. Higher interest rates and tighter yields on acquisition have put pressure onshort term trading profits and the ability to acquire property on immediateaccretive terms. Despite this, we continue to acquire where we see good longterm value. We have increased our emphasis on extracting greater value from theintensification of sites. The formation of the joint venture with Glebe reflectsthis but additionally, allowed us to de-gear as interest rates rose. Results Net Asset Value per share grew by 43% to £3.40 per share (Diluted Adjusted NetAsset Value by 11.6% to £3.36 per share). Adding back the exceptional REITconversion charge takes this to £3.51 (up 48%). This growth was driven by a£95.3m valuation surplus, a 10.5% increase in value. Against the IPD (InvestmentProperty Databank) industry benchmark measure, our 16.3% annual returnoutperformed the 15.8% reported for the universe benchmark. On a geared basis,combining this growth with earnings for the year yielded a total return onequity of 21.8% (2006: 40.7%). This is a stronger performance than anticipatedmainly due to the continued growth in capital values, the pace of which we hadexpected to dampen this year. It is pleasing to note that this valueappreciation is now being driven mainly by rental improvements rather than justyield reductions. The Group's rent roll (excluding the joint venture properties)increased by 18.7% to £47.2m with £1.7m of the increase arising fromimprovements in the rental levels in the core portfolio. With market rentallevels (ERVs) rising (up 4.92% on a like for like basis) then this trend is setto continue. Added Value We announced with our results last year our entry into the joint venture withGlebe. This was a new initiative for us, facilitating our participation in theregeneration of certain of our (and Glebe's) assets to a fuller extent thanhitherto. The joint venture has worked well so far with good progress being madeas our first three projects progress through the design and planning process;all of which are showing increased densities over those originally envisaged.Since entering the Glebe joint venture we have refocused our attentions on theretained balance of our portfolio, seeking out opportunities for improvement inthese and have recently appointed a Development Director to lead this. Asexplained in last year's Sustainability Review, much of what we are doing runswith the grain of the Mayor's Plan for London. We consider that any businessthat operates in line with the social and economic environment in which it islocated is truly "sustainable" and that this should favour the advancement ofour plans and proposals. REIT Your Board resolved that it was in the interest of shareholders to convert to aReal Estate Investment Trust (REIT) and, following an EGM in December 2006 atwhich the Group's articles of association were amended to facilitate this, theGroup converted on 1 January 2007. In addition to the taxation benefits, thistransition has increased the profile of the Company and shows potential forassisting corporate acquisitions in the future. A more detailed commentary isgiven on this later. Board and Staff During the year Rupert Dickinson (Chief Executive of Grainger Plc) joined theBoard as a non-executive director. Mark Taylor, who has been Finance Directorsince joining the Group in 1995, has advised of his wish to retire after 12years excellent service. A replacement for Mark, Graham Clemett, has beenidentified. Graham, who is the Finance Director, Corporate Banking of Royal Bankof Scotland will join the Company later this Summer. Angus Boag has joined theExecutive Committee as Development Director. Angus was previously ManagingDirector of Manhattan Lofts. We have a strong and loyal team at Workspace and as the business develops theBoard ensures we continue both to develop the talent within the business and tostrengthen this with judicious external appointments to add new skills. On behalf of the Board, I extend our thanks to all our staff once again. Current Trading Enquiries and lettings have continued at the strong levels recorded last yearand the rent roll has, as a result, increased since the year end. Against this,interest rates have continued to increase and, as a result, it seems likely thatthe combined effect of this and the cost of servicing acquisitions will impacton trading earnings in the current year. Despite this, we consider that itremains in shareholders interests for the Group to continue to acquire propertywhere good medium/long term returns may be anticipated. Growing rentals, boththose passing now and market rent levels (ERVs), should continue to supportvaluation growth going forward. However, it is unlikely that the contribution tovaluation surpluses from yield reductions will continue and so growth will bedriven principally by these rental improvements and our value adding initiativesacross the portfolio. This we believe should be a significant differentiator inportfolio performance going forward. Dividend A final distribution of 2.76 pence per share, making a total of 4.14 pence pershare for the year, once again a 10% increase on the previous year, is proposed. Chief Executive's Review 2006/2007 was another year of excellent growth with the value of the Group'sportfolio increasing from £0.96bn to £1.00bn, and the portfolio under managementto £1.16bn. Last year we further concentrated our portfolio on London - we havethis year increased the pace of our activity in adding value to it. We aim nowto capitalise on our position as the leading provider of SME accommodation inLondon, continuing to expand our portfolio whilst exploiting the regenerationopportunities offered by it. Key Results Strong results have again been achieved with: Diluted Adjusted Net Asset Value per £3.36 up 11.6%shareNet Asset Value per share £3.40 up 43%Net Asset Value (adding back REIT £3.51 up 48%conversion charge)Investment Portfolio Valuation £1,001.6m up 3.9%Valuation Surplus £95.3m 10.5%Portfolio (including Glebe joint venture £1,163.8m up 21% Earnings per share under IFRS is, of course, influenced by valuation surplusesand taxation. Whilst this year's valuation performance is good, it falls behindthe record levels achieved in the previous year. As a result, Profit before Taxat £112.5m is down on last year. Against this the release of deferred taxliabilities following conversion to a REIT have enhanced Profit After Tax andEarnings Per Share substantially. Trading Profit before Tax £10.2m down 32%Profit Before Tax £112.5m down 24%Profit After Tax £193.4m up 81%Basic Earnings per share 115.1p up 77% Despite good progress in property rental levels (ERVs), trading results havebeen dampened by a number of factors. Interest rates have increased which hasimpacted earnings (reducing trading PBT by £0.9m on a like-for-like basis). Atthe same time yields have reduced to a level where acquisitions are earningsdepletive initially. Notwithstanding this, your Board has resolved to continueto expand the business through acquisitions where good medium to long termperformance can be anticipated. Whilst acquisitions during the year have reducedtrading earnings (with a net shortfall of income against interest costs of£0.6m) they have produced reasonable total returns with valuation surpluses of£5.5m for the year. Strategy The Group's strategy remains both consistent and successful and may besummarised as: - focus on the SME market in London; which we believe has excellent long term growth prospects - acquiring properties where we see long term value; we continue to track a large number of potential property acquisitions in London - growing rents; our average rent of £11.34 per sq. ft has substantial potential to grow, and yet remain affordable for our customers - realising the latent value in our portfolio; targeting where intensification or change of use is possible. In the longer term, some 54% of the Group's portfolio has such potential, whilst on a 5 year basis, there are over 16 estates (28%)on which we are working in addition to the 11 transferred to the Glebe joint venture. Our target remains to double shareholder value over the forthcoming five yearperiod. Looking forward this will be achieved by continuing to grow rents,increasing our rate of acquisitions, and by accelerating our programme for theimprovement and regeneration of existing properties. This aligns with the needsfor London, accommodating its growing population in mixed-use accommodationthrough more intense use of space. Two key events in the delivery of this strategy occurred during the year.Firstly the Group's conversion to a REIT and secondly acceleration of our plansto intensify the use of a number of estates, partly through the establishment ofthe joint venture with Glebe. Further details on these events and how theyassist in the delivery of the Group's strategy are given in the following. REITS On 1 January 2007 the Group (excluding its joint venture with Glebe, which doesnot qualify under the initial rules for the REIT regime) converted to a RealEstate Investment Trust (REIT). REITs were established by the Government toprovide a more attractive tax transparent vehicle for co-ownership of property.Prior to their creation, investors in property companies suffered tax chargesboth in the Company and at their personal level. REITs are largely corporationtax exempt, with tax collection being focused at the individual investor. Adetailed description of REITs and their impact on distributions was included inthe circular issued to shareholders in December 2006 when the Company changedits articles to facilitate operation as a REIT. Workspace Group satisfied all of the criteria for REITs comfortably and yourBoard considered that the Group would continue to do so. Further, theoperational requirements for a REIT were not considered to present unacceptableconstraints on the Group's business. Indeed, the Group's business planning modelwas compared in both a REIT and non-REIT environment. In particular, theincreased distributions with a REIT had little impact on our business plan sincethese were compensated for by tax charges that would no longer arise with theresult that the resources retained for reinvestment were largely unchanged. On converting to REITs, companies incur a one-off charge equivalent to 2% of theportfolio valuation. The cost to Workspace Group will be £18.8m payable in July2007. However, companies are thereafter relieved of liability for tax on theirproperty income and gains on sales. At 30 September 2006, the Group's totaldeferred tax liability was £141.3m of which £138.5m related to valuationsurpluses. Following conversion to a REIT, this liability is avoided. Your Boardwas conscious at the time of conversion, that with its policy of reviewing itsstock and disposing of certain properties that had demonstrated capacity formore intensive and better use in line with the regeneration plans for London, anumber of disposals would in all likelihood arise in the shorter term and thatthe taxation savings on these would cover a substantial proportion of theconversion charge. Adding this with annual charges on income, the payback of theconversion charge would be relatively short. In simple terms conversion to aREIT saved substantial tax liabilities, had a quick pay-back and does not changeour tried and tested business model. Joint Venture The Group believes that of our portfolio approximately 54% will be subject tointensification/change of use over a ten year period. On a nearer five yearbasis we estimate that 28% of the portfolio has this potential. We have recently appointed a new Development Director to accelerate our progress here. The principal initiative in this area this year was the formation in June 2006of a joint venture with Glebe to promote the intensification and change of useopportunities for eleven estates owned by Workspace and three owned by Glebe. The joint venture was formed by a merger of the partners' respective holdings.It is supported by Bank of Scotland who have provided a £126m loan facility. Thebalance of financial resources required to complete the transaction was providedin equal proportions by Workspace and Glebe. These total £19.5m each at present.Workspace continues to provide the day-to-day management of the properties,whilst Glebe is responsible for the promotion of the regeneration opportunitiesat the properties. Neither party charges the joint venture for the servicesprovided to the joint venture, but Workspace recovers the service charge,management and any direct costs associated with the properties. It also receivesany fees that are recoverable from tenants for service charge management. Thefinancing of the transaction was structured to maximise the level of debtreducing the equity requirement from partners. As a result, interest costs in theyear have exceeded net revenues resulting in a small post tax trading loss(Workspace share £0.1m). Against this the joint venture has recorded a valuationsurplus of £2.75m on the transfer values. This is in addition to the £8.59msurplus realised by the Group by reference to the values at which the propertieswere introduced into the joint venture in June 2006. Good progress has been made in the preparation of strategies for each of thejoint venture properties. Progress at Grand Union and Wandsworth is summarisedbelow. Grand Union stands on a significant site at the entry to the Borough ofKensington and Chelsea. The Planning Authority supports the replacement of theexisting two storey buildings by a more prominent multi-storey complex providingresidential accommodation in addition to an increased amount of commercial(offices and retail) accommodation. The current plans envisage more than fourtimes the density of occupation at this site. It is anticipated that anapplication for detailed planning consent for the proposed works will be madethis summer. At the Wandsworth Business Village similar good progress has beenmade. This property sits alongside the former Young's Brewery site theregeneration of which is being promoted by Minerva Plc. Once again, the localauthority is receptive to proposals for the regeneration of our property sinceit assists in their overall planning for the town centre. A detailed planningapplication has been submitted for a scheme that more than doubles the densityof accommodation at this location. It comprises a mixture of residential andcommercial space with the commercial space being broadly equivalent to thatcurrently on the site. In addition to these front-runners concepts are progressing for all other sites.These will come forward over future periods, as was anticipated when the jointventure was established. Trading Review Good progress has been made over the year with the rent roll increasing by 18.7%from £39.71m to £47.15m (opening value adjusted for the properties transferredto the Glebe JV). This increase of £7.44m may be analysed as follows: £m Acquisitions 3.68Disposals (0.84)Letting at refurbishment properties* 2.92Other rental income 1.68 ------ 7.44 * Clerkenwell, Enterprise and The Lightbox (111, Power Road): which after aprogramme of refurbishment are now being re-let. £4.60m (11.6%) of the increase has occurred at properties held throughout theperiod. Occupancy reduced in the first half, recovering during the second. Thisis not an unusual pattern and supports the view of the Group that quarterlyfluctuations should not necessarily be regarded as depicting trends in thebusiness unless these patterns arise consistently over a number of quarters. TheGroup reports on its portfolio progress in its quarterly statement but does notordinarily extend this into the full year reporting with a comparison of thefour quarters. We have incorporated these statistics into this year's report,not because we regard each quarterly level as significant but because we regardthe sequence of these as indicative of the patterns that can arise within thenormal trading activity of the Group. These are: March December September June March 2007 2006 2006 2006 2006 Restated*Number of estates 101 99 99 96 93Total floor space (million sq.ft) 4.90 4.80 4.98 4.89 4.69of which:Like-for-like portfolio (million sq.ft) 4.10 4.10 4.10 4.10 4.10Disposals (million sq.ft) - - 0.20 0.20 0.23Acquisitions (million sq. ft) 0.48 0.37 0.35 0.23 -Improvement properties (million sq. ft) 0.32 0.33 0.33 0.36 0.36Lettable units 4,304 4,233 4,215 4,286 4,108Annual rent roll of occupied units (£m) 47.15 43.69 43.01 40.88 39.71Average rent (£/sq.ft) 11.34 10.85 10.56 10.22 10.21Overall occupancy (%) 84.8% 83.9% 81.7% 81.8% 83.0%Like-for-like Occupancy (%) 86.9% 87.3% 85.3% 86.7% 87.7%Like-for-like Average rent (£/sq. ft) 11.09 10.75 10.90 10.60 10.54Like-for-like Net rent roll (£m) 39.49 38.51 38.12 37.65 37.81 (*restated for disposal to joint venture) As can be seen overall occupancy improved from 83.0% to 84.8% over the yearassisted in part by lettings at the refurbished properties. Acquisitions showedan overall occupancy of 83.0% at 31 March 2007 and so depressed overalloccupancy but offer scope for income improvements as space is let to bring theseacquired properties in line with the portfolio more generally. Like-for-likeoccupancy (excluding refurbishment properties and acquisitions/disposals) fellfrom 87.7% at 31 March 2006 to 85.3% at the half year stage recovering to 86.9%by the year end. Analysis of this overall reduction in the year identifies thatthis is largely attributable to reductions in properties that are scheduled forimprovement works. As noted above, both like-for-like and refurbishment properties have shownstrong rental growth with the average like-for-like rental increasing by 5.2%(from £10.54 to £11.09 per square foot) over the year and average rents overallincreasing by 11% (from £10.21 to £11.34) (largely due to the high average rentper sq. ft of the refurbishment properties). The patterns over the year may be regarded therefore as typical for thebusiness. Like-for-like occupancy improved as space is let up, but was tempered by reductions at sites being prepared for improvement projects. Average rentals increase as improved space is let at higher rentals and market rental increases secured on other properties. As the valuation results show we are entering a period where stronger growth inmarket rental levels is anticipated. This, in addition to the existingreversion, will impact on lettings of all our stock going forward. The totalmarket rent of the Group's portfolio at 31 March 2007 was £65.3m, allowing a 10%void this equates to an achievable level of £58.8m, £11.6m greater than currentpassing income; the existing reversion. Portfolio Activity: Acquisitions, Disposals and Added Value Portfolio activity (acquisitions and disposals) totalling £242.1m was again atrecord levels this year. Ten properties were acquired for a total considerationof £70.4m (2006: £127.4m) (both excluding costs) whilst disposals, including theproperties transferred to the joint venture with Glebe, totalled £171.7m (2006:£44.4m). Full details of these acquisitions and disposals may be found followingthe Financial Review. Our acquisition/disposal strategy has followed the principles recorded inprevious periods: • Focusing on London • Acquiring assets where we believe we can add value through our management • Focus on transport nodes, locations with SME clusters and properties with low capital value where appreciation is anticipated in the medium term • Disposal of properties that either do not fit our investment criteria (in both locational and performance terms) or for which some added value potential has been realised. Allied to this is our improvement programme through which we add value byreconfiguring space within our portfolio in line with trends in occupationalrequirements. During the year two of our acquisitions, Morie Street and GrevilleStreet, were made in anticipation of implementing such improvements immediatelyfollowing acquisition. On three other estates, Leyton, T Marchant and Avro andHewlett House, such opportunities were anticipated in the medium term. During the year the major refurbishment programmes at Enterprise House,Clerkenwell and The Lightbox (111, Power Road) were completed successfully. TheEnterprise complex was acquired from Shaftesbury PLC in 2002. It comprised threebuildings (Hatfield House, Enterprise House and 1-2 Hatfields) in a prominentlocation on Stamford Street close to the Oxo Tower. A refurbishment programme ofHatfield House and 1-2 Hatfields had already been completed in earlier periods and the latest works comprised the refurbishment of the remainder of the complex, adding an additional floor over part. Over the works period the value of our investment increased to £32.0m, showing a surplus, after accounting for the works, of £5.4m equivalent to a 20.4% uplift on the opening value plus costs. The freehold interest in Clerkenwell was acquired in 2001 with the headleasehold interest subsequently acquired in 2002 enabling the refurbishment ofthe property. This building was one of the original small business "workspace"centres established in the 1980s. However, the fabric of the property had beenpoorly maintained and it had become detached from the improving Clerkenwellmarketplace. At 31 March 2004 the property was valued at £8.7m. Since then atotal of £12.68m has been spent refurbishing the property to provide attractivebusiness space, following which the property is now valued at £27.85m, showing asurplus over this period of £6.47m (30.26%). Our project at The Lightbox (111,Power Road), Chiswick, has yielded even fasterreturns. This property was acquired in 2005 for £7.80m (including acquisitioncosts). Since then we have spent £5.47m on improvement work following which theproperty is now valued at £17.17m, an uplift of £3.90m (29.4%). Recent lettingsat The Lightbox have been achieved at £15.00 per sq. ft, showing an 8.6% returnon the £175 per sq. ft total cost of the building. At Morie Street, acquired in May 2006 works to fit out the remaining space have been completed during the year following which the property has shown a surplus for the period held (10 months) of £0.60m,12.1%, after absorbing the costs of acquisition and well ahead of the 7.25% achieved overall on acquisitions made during the year. As may be seen our "added value" programme has made a substantial contributionto portfolio growth during the year. Looking forward we have two further projects in hand. At Kennington Park, themajor £56m acquisition made last year, contractors are on site refurbishing andsub-dividing the space in Canterbury Court (the largest building at thiscomplex). We described our plans for this site in last year's report, which areto create a thriving centre for small businesses by sub-dividing and upgradingthe accommodation to a level comparable with our Leathermarket centre. Theseworks will create an exciting reception area and catering facility, giving aheart to this complex. They are scheduled for completion in November 2007 and anappraisal of this will be included in next year's report. Works have also been progressing at Lombard House to create a new businesscentre. This property was acquired in 2005, and was let to but not occupied byVodafone at the time of its acquisition. As reported last year, Vodafonesurrendered its lease, paying a surrender premium broadly equivalent to therental liability for the residue of the lease term. Since then we have beenengaged in converting the property back to a business centre, which was what itwas before Vodafone took it over. Again, an appraisal on these works (which arescheduled to complete in June 2007) will be given next year. We have continued to progress wider mixed-use initiatives at a number of otherproperties. The most significant event in this category was the establishment ofa joint venture with Glebe. This is reported upon earlier in this review. Inaddition to this initiative proposals have moved forward at a number of otherproperties: At Wharf Road, part of the property was sold to United House for a considerationcomprising £1.9m in cash together with the provision of a replacement businesscentre valued at £8.5m on our retained portion of the site. In its former usethis property would have attracted a value of approximately £6.8m and so theseinitiatives have yielded a surplus of £3.6m. At Greenheath conditional contracts (dependent on planning and vacant possessionof the relevant portion of the site) have been exchanged for the sale of part ofour ownership to a student housing operator. This deal presents the opportunityto release substantial funds from the sale of this strip of land which issubject to low density occupation at present to enable improvement of the corebusiness centre at the heart of the site. Proposals for the Group's property at Thurston Road continue to be progressedwith the local authority. It is likely that these will be resolved over the nextyear. This property, which was acquired in 1994 for £1.9m is valued now at£13.5m compared with an existing use value of approximately £6.0m. It made an additional contribution to profit this year of £1.1m through option fee receipts. Finally, following the year end the Group obtained, on appeal, planning consentfor the replacement of its Aberdeen Studios Business Centre comprising a newcentre of equivalent size and some residential accommodation doubling thedensity at the site. Combined, these amount to a significant supplement to the Group's performanceand reflect the contribution that this added value activity makes to the overallbusiness model. The acquisition programme is also significant in providingopportunity for value adding activity across the estates. However, it isimportant to note that such activity is not restricted to new acquisitions. Itis estimated that 54% of the Group's portfolio (excluding the joint ventureproperties) could contribute to growth through such value added initiatives. Valuation The consistent progress reported in previous periods was repeated again thisyear. Quarterly surpluses of £34.0m, £25.0m, £12.6m and £23.7m totalling £95.3mwere recorded through the year. This followed the record surplus of £131.3m in2005/06 and that of £67.9m in 2004/05. We had anticipated a slowing in growth ofvalues this year and so it is pleasing to note that, notwithstanding this, avery substantial increase has nevertheless been recorded. Our analysis of thissurplus shows that 70% was contributed by rental growth with the balance fromyield shift. Last year, we considered that yields would stabilise at the 31March 2006 levels and that growth going forward would be driven by rentalimprovements. It is pleasing to note that this rental impact has commenced.Overall the average capital value of the portfolio at 31 March 2007 was £204 persq. ft; for a portfolio 70% of which lies within six miles of the centre ofLondon. We consider these to be robust levels, and levels from which growth maybe continued particularly as the programme of improvement activity andintensification continues. The valuation of the Group's directly held properties (valued by CB RichardEllis) at 31 March 2007 was £1,000.9m. The average value of the Group's propertywas £204 per sq. ft with a yield at estimated current market rental values of6.5%. Our acquisition strategy targets similar properties with low capitalvalues and future potential, as is shown by our acquisitions this year, whichhave been completed at an average capital value of £140 per sq. ft. For properties held throughout the year, comparing their value at 31 March 2006,plus additions and improvements at cost with that at 31 March 2007, the upliftwas £89.8m or 9.7%. Acquisitions during the year showed a surplus on valuationof £5.5m (7.25%). For the properties held in the joint venture the value at formation, orsubsequent acquisition, was £154.7m (£146m of which related to the Workspaceintroduced properties which were transferred at a surplus of £8.59m). These werevalued at £162.9m at 31 March 2007 showing (after allowing for capitalexpenditure) a surplus of £2.75m over their values at the time that the jointventure was established. We have again tested the Group's performance against the IPD (InvestmentProperty Databank) March Universe 2007 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. One Three Five Ten Total Return (p.a.) Year Years Years Years Workspace Group 16.3% 18.9% 16.9% 19.5%IPD March Universe 15.8% 17.8% 14.9% 13.3%Workspace Group 40 37 22 1Percentile RankIPD Comparator 16.3% 17.0% 12.8% 13.1% The IPD comparator index is a benchmark compiled by IPD of similar propertiesof value up to £30m in 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 The sale of the portfolio of properties to a joint venture with Glebe and theGroup's conversion to a REIT have had a major impact on the reported results forthe year and the Group's Balance Sheet. In June 2006 the Group transferred £137.4m (31 March 2006 valuation) of itsproperty to a joint venture in which it holds a 50% stake. The transfer was madeat a value of £146.0m. The exit income yield of this sale was 4.92%. As a resultboth revenue and cost of sales were reduced in the year. However, with LIBORrates of 4.75% at that time, and after accounting for the carrying cost of theGroup's £19.5m of equity in the joint venture, the disposal was almost neutralat the "point of sale". As interest rates have increased through the year, theimpact of the interest savings through the transfer has increased, showing a netbenefit for the year of £0.4m. Following the transfer, the Group's gearing (at30 June 2006) reduced to 62%. At 31 December 2006 the Group converted to a REIT. This gave rise to a number ofmajor changes: • the Group no longer attracted tax liabilities on its rental earnings and capital gains; • the Group's provision for deferred tax of £141.3m at 30 September 2006 was eliminated; • a current tax liability of £18.8m arising from the conversion charge of 2% of the value of the Group's portfolio at 31 December 2006 arose. This tax liability is payable in July 2007. Your Board considered that, had the Group not converted to a REIT, it was likely that a substantial proportion of this sum would have been payable over 2007 and 2008 anyway due to both mainstream tax on the Group's profits and capital gains tax liability arising from sales that were anticipated over this period. As a result of these changes, earnings per share has been substantiallyincreased in the year by the tax credit arising from the release of the deferredtax. At the same time, net asset value has increased due to the net movement inthese provisions. The Group has always reported both Trading Earnings per Share(which are based on the cash trading performance of the business and eliminatesthe impact of valuation surpluses and their related tax adjustments) andAdjusted Net Asset value (which excludes deferred tax provisions). These providea more meaningful guide to performance in the period (although Adjusted NetAsset Value carries the £18.8m (11 pence per share) conversion tax charge whichis an exceptional liability arising from conversion). During the year, interest rates have risen with LIBOR moving from 4.61% to 5.62%peaking at 5.63% and averaging 5.09% over the year. This is at a time whenproperty yields are at very low levels and, in some categories, still reducing.The Group's acquisitions for the year show an average yield of 4.36%. As aresult, based on 31 March 2007 interest rates, these acquisitions are attractingan annual carrying cost of £0.95m p.a. until returns can be improved. The Boardhas monitored this position carefully throughout the year. It has concluded thatwith acquisitions averaging £140 per sq.ft., these nevertheless remainattractive values notwithstanding the initial yield. Indeed, with acquisitionsmade during the year yielding a valuation surplus of £5.5m over their initialownership period, positive total returns are being obtained, notwithstanding theearnings shortfall. The Board has resolved, therefore, to continue withacquisitions where it can see long term value despite the initial dilutiveimpact on cash earnings. This is a position that will be monitored carefullygoing forward to ensure that REIT and banking covenants are maintained. However,this policy has, in the current year, and will, in forthcoming periods, continueto impact trading earnings. Profits Profits after tax increased by 81% to £193.4m for the year (2006: £106.6m). Thisresult was assisted by the Group's conversion to a REIT which resulted in thenet release of £101.5m deferred tax provisions during the year. Profits before tax at £112.5m were down on last year (2006: £149.0m). Thereduction arose principally from a lower valuation surplus for the year at£95.3m (2006: £131.3m). This surplus was a 10.5% increase on pre-valuationvalues and was driven principally by rental improvements. As such, it was a goodresult. Trading profits before tax at £10.2m were also reduced from last year'slevel (2006: £15.1m). The contributory factors to this, as noted above, werehigher interest rates overall and, aligned to this, the negative contributionfrom recent acquisitions. National insurance on share options also contributedto this reduction in earnings. Profit before tax included a £4.4m contribution from profits on disposals (2006:£3.4m). Details of disposals are given following this Financial Review. Thisprofit arose mainly from the disposal of the portfolio of properties to thenewly formed joint venture with Glebe. In accordance with accounting convention,only 50% of this profit has been recognised at this stage. The other 50% will berecognised if and when the assets transferred are disposed of by the jointventure and the profit realised. Earnings per share performance both at the basic and trading levels is betterthan that at the profit before tax level as a result of the favourable taximpacts over the year. As noted above, the release of deferred tax provisionenhanced profit after tax and hence basic earnings per share, which at 115.1pwere 77% ahead of last year. At the trading level, the reduction in earnings pershare at 6.4p (2006: 7.1p) of 10% was substantially less than the reduction inprofits before tax again due to a tax credit of £0.5m for the year. This creditwas attributable in part to REIT conversion, with no tax charge for the 4thquarter, and partly due to balancing capital allowances on disposals. Taxation Overall a net tax credit of £80.9m was recorded for the year. This credit hasarisen principally from the net deferred tax released on conversion to a REITand may be analysed as: £mCurrent tax:Tax charge for the year 2.2Prior year adjustment (0.4)REIT conversion charge 18.8Deferred tax:Net provision released (101.5) ------ (80.9) ------ The REIT conversion charge comprises the 2% levy on investment propertyvaluation at 31 December 2006, at which time the Group converted to a REIT. Thistriggered a net release of £101.5m deferred taxation on both valuation surplusesand accelerated capital allowances. During the year, the Group participated in the Total Tax Contribution Surveyconducted by PricewaterhouseCoopers of FTSE 250 companies (this followed theearlier survey that PricewaterhouseCoopers undertook of the FTSE 100 companies).This survey highlighted that total tax paid by the Group in the year 2005/6 was£13.2m with a further £8.1m collected from third parties. Of the totalcollected, corporation tax at £6.74m represented 51%, with the residue fallingprincipally to Stamp Duty Land Tax (39% of total), business rates (4%) andemployers NIC (6%). As may be seen, whilst the Group's total tax burden will be reducedsubstantially through its REIT conversion, there nevertheless remains asubstantial tax contribution. Indeed, with the increased levels of portfolioactivity that are likely in an environment that is not fettered with capitalgains liabilities, it is likely that total tax contribution will increase intime back towards pre-REIT levels. Net Assets and Balance Sheet Overall net worth (net assets employed) increased over the year by £192.3m (49%)to £582.6m due mainly to the valuation surplus for the year of £95.3m (55 penceper share) which this year as a REIT attracted no deferred tax liability and therelease of £101.5m of deferred tax reserves (net of a £20.9m indemnity provision). Investment properties at £1,001.6m are £47.6m up on 2006 (2006: £954.0m).Acquisitions and improvements for the year totalled £102.1m, with disposalstotalling £149.5m leaving a net reduction in investment property of £47.4mwhich, when applied to the £95.3m valuation surplus, reduced the net increase to£47.6m. The improvement in net worth arises principally from the £166.9m reduction innon-current liabilities. £101.5m of this arose from the net release of deferredtax liability on conversion to a REIT, referred to earlier, with a further£65.4m arising from reductions in longer term borrowings. In turn £19.5m of thisborrowing reduction arose from the reclassification of the Group's debenturestock as a current liability. This debenture stock is repayable at 30 June 2007.Since £12.5m of this debt attracts an interest charge at 11.125% with thebalance of £7.0m at 11.625%, then interest costs will reduce following repaymentof these loans. Based on LIBOR rates at 31 March 2007, this saving would be£0.92m per annum. The balance of the long term borrowings reduction arises fromthe net £47.4m disposal of investment property during the year. The Group's net current liabilities at 31 March 2007 were £59.3m (2006: £18.8m).Included in this is the reclassified debenture stock of £19.5m (referred toabove) and the tax provision for conversion to a REIT of £18.8m. Adjusting forthese the other net current liabilities total £21.0m compared with £18.8m lastyear. 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 £12.5m (2006: £12.3m). 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 was £14.3m (2006: £14.4m). Progress Record Progress in key performance indicators over the year and over a five year periodwas: 2006/2007 2005/2006 Compound growth/ growth annual growth (decline) 2002 - 2007 Improvement in Adjusted NAV (per share) 9.0% 35.7% 20.2% Improvement in EPS 76.8% 80.3% 83.4%(Reduction)/Improvement in Trading PBT (31.9)% 4.1% (2.3)%(Reduction)/Improvement in Trading EPS (9.9)% 12.7% 3.9%Improvement in dividends per share 10.1% 10.3% 10.2% Dividend A final dividend of 2.76p per share is proposed. The interim dividend was 1.38pper share, and so the total dividend proposed for the year is 4.14p (an increaseof 10.1%). The dividends are covered 27.80 times (2006: 17.31 times) byearnings, 1.55 times (2006: 1.89 times) based on earnings from tradingoperations only. The dividend increase is in line with previous periods. Internal performance measures Internal benchmark comparison shows: Performance measures 2007 2007 2006 2005 2004 2003 Excluding Joint Venture Revenue per member of staff (£000) 387 353 410 380 332 314Year-end investment in property 6,339 5,857 6,262 5,006 4,092 3,261per member of staff (£000)Administrative expenses as a - 16.2% 14.4% 13.9% 13.9% 14.6%percentage of revenueTotal return on equity (pre-tax) - 21.8% 40.7% 27.6% 26.2% 15.0% Return on equity is computed by reference to pre-tax profits plus valuationsurpluses/deficits divided by opening shareholders' funds Our target hithertohas been to achieve a strong double digit return on equity year on year, and indue course to reduce administrative expenses as a percentage of revenue to below12%. However, the continued growth and expansion of the business, together withthe "added value" initiatives undertaken to improve future rental income andcapital values of properties slows attainment of this latter target. Inaddition, administration costs as a percentage were inflated this year by the disposal of property to the joint venture, since we have no revenue from the properties transferred to it, but still incur the management costs. This equates to a cost rate of 14% on revenue on the previous measurement basis. This has correspondingly affected the revenue per number of staff and year end investmentin property measures. Financing The Group opened this year with £15.7m of available borrowing resources (afurther £25m short term facility was secured at this stage to provide investmentcapacity until funds were released through the sale to the joint venture). Thiswas supplemented by the £47.4m (before costs and taxation) realised on the netdisposals during the year. At the year end the Group had available borrowingfacilities of £65.4m. The Board considers that the funding strategy of extending and renewing fiveyear term loans continues to be appropriate at present. However, with itsconversion to a REIT during the year, the Board is reviewing the Group's fundingstrategy going forward. With no tax deduction on interest expense, the cost ofdebt has increased relative to the cost of capital. The Board has resolved,therefore, to monitor REIT capital structures in planning its financing strategyfor the future. It is possible that, with the increasing scale of the Group andthe widening of its activities, a wider range of facilities will be negotiatedgoing forward. The weighted average life of the Group's debt at 31 March 2007was 2.8 years. At the year end the Group's facilities and drawings thereon were: - 2007 2007 2007 2006 Facility Amount Drawn % of Debt Drawn £m £m £mDebenture Stock 19.5 19.5 5% 19.5Convertible loan stock - - - 2.2Bradford & Bingley 270.0 225.0 60% 270.0loanNatWest property loan 150.0 132.7 35% 134.7NatWest overdraft 4.0 0.9 - 3.6 443.5 378.1 100% 430.0 The available resources of £65.4m are equivalent to 8 months spend at theplanned capital investment rate for 2007/08. Borrowings over recent years 2007 2006 2005 2004 2003% Fixed/hedged (year end) 60% 54% 62% 59% 75%Average interest rate (year end) 6.8% 5.9% 6.3% 5.8% 5.8%Interest cover (excl valuation 1.63 1.84 1.77 1.97 2.04surpluses)Trading Interest Cover 1.44 1.69 1.77 1.91 1.72Year-end gearing % (on Adjusted NAV) 65% 85% 88% 104% 98%Debt: Portfolio Value (year end) 38% 45% 45% 49% 48% Gearing measured by reference to adjusted net assets employed, was reduced to65% during the year (2006: 85%). Both gearing and interest cover levels arecomfortably within the levels historically set by the Board of less than 120%and greater than 1.5 times. As a REIT the Group is required to maintain interestcover of 1.25 times or more. The debenture loan stock, which attract an average 11.3% interest charge,represents just 6% of total borrowings. The debenture stock matures in June 2007.The maturity of net debt at 31 March 2006 is shown below: - 2007 2006 2005 2004 2003Maturity of net debt % % % % %Under 12 months 6% - - - -1 - 5 years 94% 99% 99% 99% 99%5 - 10 years - 1% 1% 1% 1% Total 100% 100% 100% 100% 100% At 31 March 2007 the average cost of floating rate funds was a margin of 0.94%over LIBOR or base rate (2006: 0.94%). At 31 March 2007 secured borrowings werecovered 2.15 times by the value of charged property (with a further £186.2m ofuncharged property giving an overall cover of 2.65 times). Further details ofdebt facilities and borrowing policies are given in note 17 to the accounts. Acquisitions and Disposals 2006/2007 Acquisitions 2006/2007 Purchase Initial Market rent price actual income at 31/03/07Name of property Description £m £000 £000Leyton Industrial 3 small unit industrial 16.0 826.4 1,180.9Village, Fairways estates totallingBusiness Centre, Leyton 210,000 sq.ft.Studios, London, E10 Morie Street, London, 22,000 sq.ft. of 4.4 178.0 380.0SW18 multi-let offices 14 Greville Street, 14,000 sq.ft. vacant 3.8 Nil 839.7London, EC1 office building for conversion to a business centre T Marchant Trading 51,000 sq.ft. 14 unit 6.1 300.5 422.3Estate, London, SE16 industrial estate Spectrum House, London, 48,100 sq.ft, 22 unit 8.8 544.4 640.7NW5 business centre Seven Sisters, London, 7 self contained office 3.2 188.8 243.3N15 buildings totalling 20,300 sq ftExmouth House, 52,240 sq.ft. business 18.1 953.2 1,461.7Clerkenwell, London, centre over retail unitsEC1 Avro House and Hewlett 58,000 sq.ft. 51 unit 10.0 418.3 828.2House, Battersea, SW8 business centre in 2 buildingsTotal 70.4 3,409.6 5,996.8 Disposals 2006/2007 +------------------------------+------------------------------+-----------+------------+|Name of property |Description | Sale price| Exit income|| | | | || | | £m| £000|| | | | || | | | |+------------------------------+------------------------------+-----------+------------+|Stevenage Enterprise Park, |Industrial estate of 27,000 | 3.2| 167.0||Stevenage, SG1 |sq.ft, deferred part of | | || |Magenta Portfolio sale of last| | || |year. | | |+------------------------------+------------------------------+-----------+------------+|Wharf Road, London, N1 |Part of property sold for | 10.4| Nil|| |£1.9m with consent for mixed | | || |residential and commercial | | || |accommodation. Interest | | || |retained in commercial element| | || |(worth £8.5m). | | |+------------------------------+------------------------------+-----------+------------+|Park Avenue, Luton, LU3 |203,000 sq.ft. industrial | 12.1| 653.4|| |estate | | || | | | |+------------------------------+------------------------------+-----------+------------+|Sub-total | | 25.7| 820.4|+------------------------------+------------------------------+-----------+------------+| | | | |+------------------------------+------------------------------+-----------+------------+|Disposals to joint venture |11 estates with improvement or| 146.0| 7,183.0|| |change of use potential. Total| | ||Riverside Business Centre, |lettable floor area 1.2 | | ||SW18; |million sq.ft. | | || | | | ||Bow Enterprise Park, E3; | | | || | | | ||Grand Union Centre, W10; | | | || | | | ||Highway Business Park, E1; | | | || | | | ||Hamilton Road Industrial | | | ||Estate, SE27; | | | || | | | ||Parkhall Road Trading Estate, | | | ||SE21; | | | || | | | ||Rainbow Industrial Estate, | | | ||SW20; | | | || | | | ||Tower Bridge Business Complex,| | | ||SE16 and Tower Bridge Block F,| | | ||SE16; | | | || | | | ||Wandsworth Business Village, | | | ||SW18; | | | || | | | ||Zennor Road Industrial Estate,| | | ||SW12 | | | |+------------------------------+------------------------------+-----------+------------+|Total | | 171.7| 8,003.4|+------------------------------+------------------------------+-----------+------------+ Acquisitions During the year the Group made ten acquisitions; all located within the areabounded by the North and South Circular roads in London, for a totalconsideration (excluding costs) of £70.4m and showing an initial yield of 4.84%on acquisition price. The reversionary yield on cost for these properties at 31March 2007 was 8.52%. Three properties were acquired in Leyton close to the Group's Uplands BusinessCentre (acquired last year) at an average capital cost of £95 sq.ft. These lieto the north of the Olympic zone and so should benefit in the short term fromthe displacement of occupiers from the Olympics area and increased demand foroccupiers seeking to locate proximate to the Olympics zone. In the longer term,they will be candidates for improvement as the regeneration of the Lea Valleytriggered by the Olympics extends northwards. Morie Street is a B1 small unit office scheme that was constructed to a shelland core specification by the original developer. Letting to this specificationhad been slow since occupiers of this kind of space expect finishedaccommodation. The Group acquired the property, completed the works and at 31March 2007 had increased occupancy from the 52% at the time of acquisition to72% by 31 March and 86% by mid May. 14 Greville Street is a 1970s office building close to Farringdon Station, andproximate to the Group's Clerkenwell, Quality Court and Hatton Squareproperties. It was vacant on acquisition. It is being refurbished and subdivided(completion June 2007) to provide a business centre to complement our otherproperties in this area. T Marchant Trading Estate is a small trading estate situated on a 2.1 acre sitein a residential area close to the A2, Old Kent Road. With the scheduledextension of the East London Line it is likely that this area will improve overtime and that the opportunity may arise for regeneration of this site. Spectrum House is a business centre located in Kentish Town, a location in whichthe Group hitherto had no presence and which it has targeted to complement itsNorth London ownerships at Belgravia Workshops (to the east of the property) andThe Ivories (to the south east of it). Seven Sisters is a 1990s development of 7 self-contained office buildings onSeven Sisters Road adjacent to the Seven Sisters underground station. It fitsthe Group's acquisition criteria both as a property in N15, an area in which theGroup had no ownerships and at a transport node, with its proximity to bothSeven Sisters Road and the A10, in addition to the underground station. Exmouth House is a business centre located close to the Group's existingproperties at Clerkenwell Studios and Bowling Green Lane. It is a property thathas been tracked by the Group for a number of years and adds to the Group'srange of offer in the Clerkenwell area. Avro House and Hewlett House are two buildings arranged around a courtyard justoff Battersea Park Road, near Battersea Power Station. The property offers scopefor improvement both through increasing existing rentals and by reconfiguringspace to improve these rentals. It offers potential as a relocation centre fortenants at the Group's joint venture property in Wandsworth as improvement worksat this property progress. Disposals Stevenage Enterprise Park and Park Avenue, Luton are both located outside theM25 and have been sold as part of the refocusing of the Group's activities.These properties have shown IRRs of 21.2% and 15.2% over the period for whichthey were held. At Wharf Road the Group sold part of its total ownership to a residentialdeveloper for a consideration comprising £1.9m in cash and the provision of areplacement 30,000 sq.ft. business centre on the retained portion of the site.The replacement centre is valued at £8.5m. This total consideration of £10.4mcompares with an existing use value for the entire site prior to the disposal of£6.8m and a book value at that time of £8.5m. This formula may be repeatedelsewhere since it provides the Group with a cash benefit, rejuvenation of thefabric of its estate, whilst responding to the Plan for London through theprovision of more intensively occupied mixed use sites. Eleven properties were transferred to the joint venture at £8.6m surplus (beforecosts) to the book value of £137.4m. The exit income yield was 4.92% with theproperties overall showing a lifeline IRR of 24.1%. Consolidated Income StatementFor the year ended 31 March 2007 2007 2007 2006 2006 2006 Trading Other Total Trading Other Total Operations items operations items Notes £m £m £m £m £m £m Revenue 2 61.0 - 61.0 63.2 - 63.2Direct costs 2 (18.3) - (18.3) (16.9) 0.1 (16.8) Net rental income 2 42.7 - 42.7 46.3 0.1 46.4Administrative (9.9) (0.1) (10.0) (9.2) 0.1 (9.1)expensesGain from change in 10 - 95.3 95.3 - 131.3 131.3fair value ofinvestment propertyOther income 3a 0.7 - 0.7 - - -Profit on disposal of 3b - 4.4 4.4 - 3.4 3.4investment propertiesOperating profit 4 33.5 99.6 133.1 37.1 134.9 172.0 Finance income - 0.1 - 0.1 0.2 - 0.2interest receivableFinance costs - 5 (23.3) - (23.3) (22.2) (1.4) (23.6)interest payable 10.3 99.6 109.9 15.1 133.5 148.6Change in fair value - 0.9 0.9 - 0.4 0.4of derivativefinancial instrumentsShare in joint venture 23 (0.1) 1.8 1.7 - - -post tax (losses)/profits Profit before tax 10.2 102.3 112.5 15.1 133.9 149.0Taxation credit/(charge) 6 0.5 80.4 80.9 (3.4) (39.0) (42.4) Profit for the period 10.7 182.7 193.4 11.7 94.9 106.6after tax andattributable to equityshareholders Basic earnings per 8 6.4p 108.7p 115.1p 7.1p 58.0p 65.1pshareDiluted earnings per 8 6.3p 106.2p 112.5p 7.0p 55.7p 62.7pshare Consolidated Statement of Recognised Income and Expense (SORIE)For the year ended 31 March 2007 2006 £m £mProfit for the financial year 193.4 106.6Total recognised income and expense for the year 193.4 106.6 There is no difference between the profit for the financial year and the totalrecognised income and expense for the year. Consolidated Balance SheetAs at 31 March 2007 2006 Notes £m £mNon-current assetsInvestment properties 10 1,001.6 954.0Intangible assets 11 0.3 0.2Property, plant and equipment 12 3.3 3.6Investment in joint venture 23 18.5 - 1,023.7 957.8 Current assetsTrade and other receivables 13 8.8 6.7Financial assets - derivative financial 17e 0.1 0.1instrumentsInvestment properties held for sale 10 - 8.2Cash and cash equivalents 14 2.4 1.7 11.3 16.7 Current liabilitiesFinancial liabilities - borrowings 17a (20.4) (3.6)Financial liabilities - derivative 17e (0.3) (1.2)financial instrumentsTrade and other payables 15 (32.3) (29.0)Current tax liabilities 16 (17.6) (1.7) (70.6) (35.5)Net current liabilities (59.3) (18.8) Non-current liabilitiesFinancial liabilities - borrowings 17a (360.7) (426.1)Deferred tax liabilities 21a (0.2) (122.6)Provisions 21b (20.9) - (381.8) (548.7)Net assets 582.6 390.3 Shareholders' equityOrdinary shares 17.4 16.9Share premium 30.7 28.7Investment in own shares 22 (2.8) (5.1)Other reserves 1.3 0.8Retained earnings 536.0 349.0 Total shareholders' equity 582.6 390.3 Net asset value per share (basic) 9 £3.40 £2.37Diluted net asset value per share 9 £3.35 £2.29Adjusted net asset value per share (basic) 9 £3.40 £3.12Modified net asset value per share (basic)+ £3.51 £3.12Diluted adjusted net asset value per share 9 £3.36 £3.01 +Represents adjusted net asset value per share (basic) modified by adding backprovision of £18.8m for REIT conversion charge (see note 16). Consolidated Cash Flow StatementFor the year ended 31 March 2007 2006 Notes £m £mCash flows from operating activitiesCash generated from operations 18 37.1 39.0Interest received 0.1 0.2Interest paid (23.0) (22.9)Tax refunded/(paid) 19 0.1 (1.9)Net cash from operating activities 14.3 14.4 Cash flows from investing activitiesPurchase of investment properties (74.6) (132.8)Capital expenditure on investment (20.3) (20.9)propertiesNet proceeds from disposal of investment 160.3 44.2propertiesTax paid on disposal of investment 19 (4.8) (4.8)propertiesPurchase of intangible assets (0.2) (0.1)Purchase of property, plant and (0.3) (0.7)equipmentInvestment in and loan to joint venture (19.5) - Net cash from investing activities 40.6 (115.1) Cash flows from financing activitiesNet proceeds from issue of ordinary 0.3 -share capitalNet proceeds from issue of bank - 103.9borrowingsNet repayment of bank borrowings (47.0) -ESOT shares released 1.7 0.4Finance lease principal payments (0.1) (0.1)Dividends paid to shareholders 7 (6.4) (5.8) Net cash from financing activities (51.5) 98.4 Net increase/(decrease) in cash and cash 3.4 (2.3)equivalents Cash and cash equivalents at start of year 18 (1.9) 0.4Cash and cash equivalents at end of year 18 1.5 (1.9) Notes to the Financial StatementsFor the year ended 31 March 1. Basis of Preparation The figures contained here have been extracted from the Group's full IFRSFinancial Statements for the year ended 31 March 2007 have been delivered tothe Registrar of Companies. The Group's full IFRS Financial Statements for the year ended 31 March 2006 have been to the Registrar of Companies. The Auditor's Report on both these sets of Financial Statements were unqualified and did not contain a statement under section 237(2) or section 237(3)of the Companies Act 1985. 2. Analysis of net rental income 2007 2006 Revenue Costs Net Revenue Costs Net rental rental income income £m £m £m £m £m £mRental income* 45.6 (0.2) 45.4 49.2 (0.2) 49.0Service charges and other 12.3 (17.1) (4.8) 12.3 (15.9) (3.6)recoveriesServices, fees, commissions 3.1 (1.0) 2.1 1.7 (0.7) 1.0and sundry income+ 61.0 (18.3) 42.7 63.2 (16.8) 46.4 *Rental income includes surrender premia of £0.3m (2006: £2.2m).+Sundry income includes £1.1m option fees received for the potential sale ofThurston Road (2006: £nil). The Group operates a single business segment providing business accommodationfor rent in London and the South East of England, which is continuing. 3(a) Other Income Following a fire that destroyed part of the Westwood Business Centre, it wasdecided that the damaged portion of the property will not be replaced. As aresult a profit of £0.7m has been recognised in net income reflecting £1.5m insurance proceeds (after site clearance costs) offset by £0.8m diminution in investment property value. 3 (b) Profit on disposal of investment properties 2007 2006 £m £m Gross proceeds from sale of investment 168.3 44.5propertiesBook value at time of sale plus sale costs b (161.2) (41.1) 7.1 3.4Unrealised profit on sale of properties to (2.7) -joint venture (see note 23)Pre tax profit on sale 4.4 3.4 Net tax credit 2.9 0.2Net profit on disposal after tax 7.3 3.6 The profit on disposal includes the sale of 11 properties for proceeds of £146mto the joint venture (see note 23). During the year part of the property at Wharf Road was sold for residentialdevelopment. The consideration for this sale was £1.86m in cash plus theprovision by the developer of a new 30,000 sq.ft business centre to beconstructed on the retained portion of the site. The commitment to deliver thebuilding (costing £5.8m including interest and fees) by the developer has been secured by a charge over the land sold to it, which was considered, on valuation by the Group's valuers, CBRE, to be worth more than the construction liability. On this basis, and on the assumption that the construction works are completed, the profit on this disposal has been recognised above and the value of the retained land and replacement buildings (also valued by CBRE) have been included in investment property. 4. Operating profit The following items have been charged in arriving at 2007 2006operating profit: £m £m Direct costs:Depreciation of property, plant and equipment - owned 0.4 0.3assetsStaff costs 2.4 2.5Repairs and maintenance expenditure on investment 3.0 3.3propertyTrade receivables impairment 0.1 0.1 Administrative expenses:Amortisation of intangibles 0.1 0.1Depreciation of property, plant and equipment - owned 0.2 0.3assetsStaff costs 4.9 4.9Other operating lease rentals payable:- motor vehicles - minimum lease payments 0.1 0.1Audit fees payable to the Company's auditors 0.2 0.1 Audit fees payable to the Company's auditors include £26,000 (2006: £26,000) ofother services pursuant to legislation, in respect of the half year review ofthe consolidated Group accounts and the statutory audits of the subsidiaries inthe Group. Amounts payable to the Company's auditors for other non-audit services totalled £15,200(2006 - £103,000). The 2006 amounts related primarily to the costs of IFRSconversion. Depreciation in direct costs relates to that of fixtures and fittings installedwithin investment properties. 5. Finance costs 2007 2006 £m £m Interest payable on bank loans and overdrafts 20.9 21.0Amortisation of issue costs of bank loans 0.5 0.5Interest payable on finance leases 0.1 0.1Interest payable on 11.125% First Mortgage Debenture 1.4 1.4Stock 2007Interest payable on 11.625% First Mortgage Debenture 0.8 0.8Stock 2007Interest payable on 11% Convertible Loan Stock 2011 0.1 0.3Interest capitalised on property refurbishments (0.5) (0.5) 23.3 23.66. Taxation Analysis of charge in period 2007 2006 £m £mCurrent tax 20.6 5.9Deferred tax (101.5) 36.5 Total taxation (credit)/charge (80.9) 42.4 2007 2006The charge in the period is analysed as follows: £m £mCurrent tax:UK corporation tax 2.2 6.8REIT conversion charge 18.8 -Adjustments in respect of previous periods (0.4) (0.9) 20.6 5.9Deferred tax:On fair value gains of investment properties (93.7) 34.5On accelerated tax depreciation (8.3) 1.2On derivative financial instruments 0.4 0.1Adjustments to tax in respect of previous periods - 0.5Others 0.1 0.2 (101.5) 36.5 Total taxation (credit)/charge (80.9) 42.4 The tax on the Group's profit for the period differs from the standardapplicable corporation tax rate in the UK (30%). The differences are explainedbelow: 2007 2006 £m £m Profit on ordinary activities before taxation 112.5 149.0Less share of post tax profits in joint venture (1.7) - 110.8 149.0Tax at standard rate of corporation tax in the UK of 33.2 44.730% (2006: 30%) Effects of:Accelerated capital allowances (1.9) -Capitalised interest (0.1) -Income taxed as capital gains (0.4) (0.4)Contaminated land relief (0.1) (0.3)Capital gains adjustments on property disposals (0.7) (1.2)Sale of properties to joint venture (3.7) -Other items 0.1 -Adjustments to tax in respect of previous periods (0.4) (0.4)REIT conversion charge 18.8 -Income not taxable as a REIT (1.1) -Changes in fair value not subject to tax as a REIT (28.3) -Deferred tax released on REIT conversion (96.3) - Total taxation (credit)/charge (80.9) 42.4 The significant tax credit for the year is largely due to the impact of the conversion of the Group to a UK REIT with effect from 1 January 2007. From this date no tax is payable on the Group's UK property rental business (both income and capital gains). As a result £96.3m of deferred tax has been reversed which is part offset by a provision for the REIT entry charge of £18.8m. This will be paid in a single instalment in July 2007. 7. Dividends 2007 2006 £m £m Final dividend 2005/6: 2.51p (2004/05: 2.28p) per 4.1 3.7ordinary share Interim dividend 2006/7: 1.38p (2005/06: 1.25p) per 2.3 2.1ordinary share 6.4 5.8 In addition the directors are proposing a final dividend in respect of thefinancial year ended 31 March 2007 of 2.76p per Ordinary Share which will absorban estimated £4.7m of shareholders' funds. If approved by the shareholders atthe AGM, it will be paid on 3 August 2007 to shareholders who are on theregister of members on 6 July 2007. 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 now has a single class of instruments dilutive to ordinaryshares: employee share options . All the remaining convertible stocks, convertedon 16 August 2006. Reconciliations of the earnings and weighted average number of shares used inthe calculations are set out below. Profit Earnings per shareEarnings used for calculation of 2007 2006 2007 2006earnings per share £m £m pence pence Earnings used for basic earnings per 193.4 106.6 115.1 65.1share Interest saving net of taxation on 11%Convertible Loan Stock dilution 0.1 0.2 (1.1) (1.5) Share option scheme dilution - - (1.5) (0.9)Total diluted earnings 193.5 106.8 112.5 62.7Less non trading items (182.7) (94.9) (106.2) (55.7)Trading diluted earnings 10.8 11.9 6.3 7.0 Weighted average number of shares used for 2007 2006calculating earnings per share Number Number Weighted average number of shares (excluding 168,083,460 163,629,157shares held in the ESOT)Dilution due to Share Option Schemes 2,179,100 2,538,531Dilution due to Convertible Loan Stock 1,651,507 4,400,000 Used for calculating diluted earnings per share 171,914,067 170,567,688 9. Net assets per share Net assets used for calculation of net assets per share 2007 2006 £m £m Net assets at end of year (basic) 582.6 390.3Dilution due to Convertible Loan Stock - 2.2Diluted net assets 582.6 392.5Derivative financial instruments at fair value 0.2 1.1Deferred tax on accelerated tax depreciation - 8.3Deferred tax on fair value change of investment - 114.2propertiesDeferred tax on derivative financial instruments - (0.4)Diluted adjusted net assets 582.8 515.7Adjusted net assets (basic) 582.8 513.5 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 assets 2007 2006per share Number Number Shares in issue at year-end 174,221,087 169,509,640Less ESOT shares (2,738,360) (4,940,960)Number of shares for calculating basic net assets 171,482,727 164,568,680per shareDilution due to Share Option Schemes 2,179,100 2,538,531Dilution due to Convertible Loan Stock - 4,400,000Number of shares for calculating diluted net 173,661,827 171,507,211assets per share 10 Investment properties 2007 2006 £m £m Balance at 1 April 954.0 716.5Additions during the year 102.1 154.5Capitalised interest on refurbishments 0.5 0.5Disposals during the year (149.5) (40.6)Diminution in value due to fire loss (see note 3(a)) (0.8) - Net gain from fair value adjustments on investment 95.3 131.3propertyInvestment property held for sale (note below) - (8.2)Balance at 31 March 1,001.6 954.0 Property held for sale at the balance sheet date is shown separately undercurrent assets as required by IFRS5. Within additions for the year are property purchases, including costs and IAS17finance leases, of £82.7 m (2006: £133.1m). The balance of additions isimprovements made to properties. Capitalised interest is included at a rate of capitalisation of 6.00% (2006:5.73%). The total amount of capitalised interest included in investmentproperties is £2.0m (2006: £1.5m). Investment property includes buildings under finance leases of which thecarrying amount is £3.6m (2006: £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: 2007 2006 £m £m (restated) Within one year 10.6 11.6Between two and five years 7.5 9.6Beyond five years 2.5 9.4 20.6 30.6 Valuation The Group's investment properties were revalued at 31 March 2007 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: 2007 2006 £m £m Total per CB Richard Ellis valuation report 1,000.9 964.3 Owner occupied property (2.5) (2.4)Property held for sale (shown as current assets) - (8.2)Head leases treated as finance leases under IAS 17 3.6 0.7Short leases valued as head leases (0.4) (0.4)Total per balance sheet 1,001.6 954.0 11. Intangible assets 2007 2006Computer software £m £mCostBalance at 1 April 0.7 0.6Additions during the year 0.2 0.1Disposals during the year (0.3) -Balance at 31 March 0.6 0.7 Accumulated amortisation and impairmentBalance at 1 April 0.5 0.4Charge for the year 0.1 0.1Disposals during the year (0.3) -Balance at 31 March 0.3 0.5 Net book value at end of year 0.3 0.2 12. Property, plant and equipment Owner Owner Equipment Total occupied occupied and fixtures land buildings £m £m £m £m CostBalance at 1 April 2005 0.5 1.5 4.1 6.1Additions during the year - 0.1 0.6 0.7Balance at 31 March 2006 0.5 1.6 4.7 6.8Additions during the year - - 0.3 0.3Disposals during the year - - (1.6) (1.6)Balance at 31 March 2007 0.5 1.6 3.4 5.5 Accumulated depreciationBalance at 1 April 2005 - - 2.6 2.6Charge for the year - 0.1 0.5 0.6Balance at 31 March 2006 - 0.1 3.1 3.2Charge for the year - - 0.6 0.6Disposals during the year - - (1.6) (1.6)Balance at 31 March 2007 - 0.1 2.1 2.2 Net book amount at 31 March 2006 0.5 1.5 1.6 3.6 Net book amount at 31 March 2007 0.5 1.5 1.3 3.3 13. Trade and other receivables 2007 2006 £m £m Trade receivables 3.1 3.8Less provision for impairment of receivables (0.3) (0.3)Trade receivables - net 2.8 3.5Taxation and social security - 0.3Prepayments and accrued income 5.3 2.9Other receivables 0.7 - 8.8 6.7 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 3% of trade debtors. There is no material difference between the above amounts and their fair valuesdue to the short term nature of the receivables. 14. Cash and cash equivalents 2007 2006 £m £m Cash at bank and in hand - -Restricted cash - tenants' deposit deeds 2.4 1.7 2.4 1.7 Tenants' deposit deeds represent returnable cash security deposits received 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 2007 2006 £m £m Trade payables 2.4 2.4Taxation and social security payable 2.1 0.4Tenants' deposit deeds (see note 14) 2.4 1.7Tenants' deposits 5.5 5.3Accrued and deferred income 14.6 13.9Deferred income-rent and service charges 4.6 5.3Other payables 0.7 - 32.3 29.0 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 2007 2006 £m £m Current tax liabilities 17.6 1.7 The liabilities at 31 March 2007 include the REIT conversion charge of £18.8mpayable in July 2007. The balance represents an overpayment of tax in currentand prior years which is considered recoverable. 17. Financial liabilities - borrowings a) Balances 2007 2006 £m £mCurrentBank loan and overdrafts due within one year or on 0.9 3.6demand (secured)11.125% First Mortgage Debenture Stock 2007 (secured) 12.5 -11.625% First Mortgage Debenture Stock 2007 (secured) 7.0 - 20.4 3.6Non -current11% Convertible Loan Stock 2011 (unsecured) - 2.211.125% First Mortgage Debenture Stock 2007 (secured) - 12.511.625% First Mortgage Debenture Stock 2007 (secured) - 7.0Other loans (secured) 357.1 403.7Finance lease obligations (secured) 3.6 0.7 360.7 426.1 381.1 429.7 The secured loans and overdraft facility are secured on properties with balancesheet values totalling £739.4m (2006: £806.7m). The Debenture Stocks are repayable on 30 June 2007. b) Maturity 2007 2006 £m £mSecured (excluding finance leases)Repayable in less than one year 20.4 3.6Repayable between one year and two years - 19.5Repayable between two years and three years 132.7 -Repayable between three years and four years 225.0 134.7Repayable between four years and five years - 270.0 378.1 427.8Less cost of raising finance (0.6) (1.0) 377.5 426.8UnsecuredRepayable in five years or more - 2.2Finance leases (unsecured)Repayable in five years or more 3.6 0.7 381.1 429.7 c) Interest rate and repayment profile Principal Interest Interest Repayable £m rate payable CurrentBank loan and overdrafts due within 0.9 Variable Variable On demandone year or on demand11.125% First Mortgage Debenture 12.5 11.125% September June 2007Stock 2007 fixed and March 11.625% First Mortgage Debenture 7.0 11.625% September June 2007Stock 2007 fixed and March Non-current Other loans 225.0 LIBOR +0.94% Variable August 2010 Other loans 132.7 LIBOR +0.95% Variable July 2009 The balance of the 11% convertible loan stock 2011 was converted on 16 August2006. 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: 2007 2006 £m £m Net 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 (4.0) (1.8)Liability component as at 31 March - 2.2 The effective interest rate on the liability element at 31 March 2007 was nil %(2006: 11.95%). d) Financial instruments held at fair value through profit and loss The following interest rate collars are held: +---------------------------------+---------+---------+---------+---------+| | Amount| Interest| Interest| Expiry|| | hedged| cap| floor| || | | | | || | £m| %| %| |+---------------------------------+---------+---------+---------+---------+|Interest rate collar (amortising | 95.0| 8.00%| 4.50%|July 2009||amount) | | | | |+---------------------------------+---------+---------+---------+---------+|Interest rate collar | 75.0| 6.95%| 4.05%|July 2009|+---------------------------------+---------+---------+---------+---------+|Interest rate collar (increasing | 40.0| 7.00%| 2.99%| Oct 2010||amount) | | | | |+---------------------------------+---------+---------+---------+---------+ The above instruments are treated as financial instruments at fair value withchanges in value dealt with in the income statement during each reportingperiod. At the year end 5% (2006: 5%) of the Group's borrowings were fixed with afurther 55% (2006: 50%) subject to a collar. e) Fair values of financial instruments +------------------------------+-----------+---------+-----------+---------+| | 2007| 2007| 2006| 2006|| | | | | || | Book Value| Fair| Book Value| Fair|| | | Value| | Value|| | £m| | £m| || | | £m| | £m|+------------------------------+-----------+---------+-----------+---------+|Financial liabilities not at | | | | ||fair value through profit or | | | | ||loss | | | | |+------------------------------+-----------+---------+-----------+---------+|Bank overdraft | 0.9| 0.9| 3.6| 3.6|+------------------------------+-----------+---------+-----------+---------+|11% Convertible Loan Stock | -| -| 2.2| 2.5||2011 | | | | |+------------------------------+-----------+---------+-----------+---------+|11.125% First Mortgage | 12.5| 12.7| 12.5| 13.1||Debenture Stock 2007 | | | | |+------------------------------+-----------+---------+-----------+---------+|11.625% First Mortgage | 7.0| 7.1| 7.0| 7.4||Debenture Stock 2007 | | | | |+------------------------------+-----------+---------+-----------+---------+|Other loans | 357.1| 357.1| 403.7| 403.7|+------------------------------+-----------+---------+-----------+---------+|Finance lease obligations | 3.6| 3.6| 0.7| 0.7|+------------------------------+-----------+---------+-----------+---------+| | 381.1| 381.4| 429.7| 431.0|+------------------------------+-----------+---------+-----------+---------+|Financial liabilities at fair | | | | ||value through profit or loss | | | | |+------------------------------+-----------+---------+-----------+---------+|Derivative financial | | | | ||instruments: | | | | |+------------------------------+-----------+---------+-----------+---------+|Liabilities | 0.3| 0.3| 1.2| 1.2|+------------------------------+-----------+---------+-----------+---------+|Assets | (0.1)| (0.1)| (0.1)| (0.1)|+------------------------------+-----------+---------+-----------+---------+| | 0.2| 0.2| 1.1| 1.1|+------------------------------+-----------+---------+-----------+---------+| | 381.3| 381.6| 430.8| 432.1|+------------------------------+-----------+---------+-----------+---------+ The total gain recorded in the income statement was £0.9m (2006: £0.4m) 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 0.2p pershare (31 March 2006: 0.8p). f) Borrowing facilities At 31 March 2007 the Group had undrawn borrowing facilities of £65.4m (2006:£19.3m) for which conditions precedent had been met. Of the total undrawnfacilities, £3.1m (2006: £0.2m) 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 2007 2006as follows: £m £m Within one year 0.4 0.1Between two and five years 1.2 0.2Beyond five years 21.0 3.7 22.6 4.0Future finance charges on finance leases (19.0) (3.3)Present value of finance lease liabilities 3.6 0.7 18. Notes to cash flow statement Reconciliation of profit for the period to cash generated from operations: 2007 2006 £m £m Profit for the period 193.4 106.6Tax (80.9) 42.4Depreciation 0.6 0.6Amortisation of intangibles 0.1 0.1Profit on disposal of investment properties (4.4) (3.4)Net gain from fair value adjustments on investment (95.3) (131.3)propertyDiminution in value due to fire loss 0.8 -Fair value gains on financial instruments (0.9) (0.4)Interest income (0.1) (0.2)Interest expense 23.3 23.6Share in joint venture post tax profit (1.7) -Changes in working capital:Increase in trade and other receivables (1.1) (1.7)Increase in trade and other payables 3.3 2.7Cash generated from operations 37.1 39.0 For the purposes of the cash flow statement, the cash and cash equivalentscomprise the following: 2007 2006 £m £m Cash at bank and in hand - -Restricted cash - tenants deposit deeds 2.4 1.7Bank overdrafts (0.9) (3.6) 1.5 (1.9) 19. Tax paid 2007 2006 £m £m Tax (refunded)/paid on operating activities (0.1) 1.9Tax paid on investing activities 4.8 4.8Total tax paid 4.7 6.7 20. Analysis of net debt At 1 Cash Flow Non-cash At 31 April Items March 2006 2007 £m £m £m £m Cash at bank and in hand - - - -Restricted cash - tenants' 1.7 0.7 - 2.4deposit deedsBank overdrafts (3.6) 2.7 - (0.9) (1.9) 3.4 - 1.5 11% Convertible Loan Stock (2.2) - 2.2 -11.125% First Mortgage Debenture (12.5) - - (12.5)Stock11.625% First Mortgage Debenture (7.0) - - (7.0)StockBank loans (404.7) 47.0 - (357.7)Less cost of raising finance 1.0 0.1 (0.5) 0.6Finance lease obligations (0.7) 0.1 (3.0) (3.6) (426.1) 47.2 (1.3) (380.2)Total (428.0) 50.6 (1.3) (378.7) 21(a). Deferred tax liabilities 2007 2006 £m £m Balance at 1 April 122.6 86.1Deferred tax (credit)/charge (122.4) 36.5 Balance at 31 March 0.2 122.6 Deferred tax recognised in the balance sheet by each category of temporarytiming difference is as follows: Deferred tax liability 2007 2006 £m £m Fair value gains on investment - 114.2propertiesCapitalised interest - 0.4Accelerated tax depreciation - 8.3Derivative financial instruments - (0.4)Other 0.2 0.1Balance at 31 March 0.2 122.6 If the Group's directly owned investment properties were sold for their revaluedamount there would be a potential liability to corporation tax of £nil followingthe Group's conversion to a REIT (31 March 2006: £95.6m). 21(b). Provisions 2007 2006 £m £m At 1 April - -Provision for tax indemnity 20.9 -At 31 March 20.9 - On the formation of the joint venture with Glebe (which was created by a mergerand so triggered no tax liabilities) the Group gave an indemnity that should atax liability arise in the future on the disposal of any of the 11 propertiesreferred to in note 23, then the Group would pay to the joint venture aproportion of the liability based on the pre-merger gain. An appropriate provision under current tax law has been made for this liability. 22. Investment in own shares The Company has established an Employee Share Ownership Trust (ESOT) to 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 dividends on the shares have beenwaived. During the year the Trust transferred 2,202,600 shares to employees onexercise of options. At 31 March 2007, the number of shares held by the Trusttotalled 2,738,360 (2006: 4,940,960). The shares have been included at cost inshareholders' equity. 2,738,250 shares held by the Trust are subject to optionawards. In addition, the ESOT holds 504,565 shares earmarked for the provision ofmatching awards under the Group's LTIP plan. 23. Joint Venture On 12 June 2006 the Group merged its interests in Workspace 12 Limited, a whollyowned subsidiary which held 11 properties valued at £146m with those of GlebeThree Limited, a wholly owned subsidiary of Glebe Two Limited, a third party,creating a joint venture, Workspace Glebe Limited, a company incorporated inEngland. The purpose of the joint venture is to invest in properties contributedby Workspace and Glebe with potential for intensification and improvement.Workspace Group plc holds 50% of the ordinary share capital of Workspace GlebeLimited. Its interest in this joint venture has been equity accounted for in theGroup's consolidated financial statements. 31 March 2007Investment in joint venture £m Share of joint venture at start of year -Share of joint venture profit after tax for the year 1.7Net equity movements in joint venture 1.0Net loan movements with joint venture 18.5Unrealised profit on sale of properties to joint venture (2.7)Share of joint venture at end of year 18.5 Comprising:Unlisted shares at cost 1.0Group's share of post acquisition retained profit after tax 1.7Unrealised profit on sale of properties to joint venture (2.7)Loan to joint venture 18.5 18.5 The Group's share of amounts of each of current assets, long term assets,current liabilities and long term liabilities, income and expenses are shownbelow: 31 March 2007Balance Sheet £m Investment properties 78.8Current assets 2.2Total assets 81.0Current liabilities (1.8)Non-current liabilities (60.7)Total liabilities (62.5)Group share of joint venture net assets 18.5 Income statement Revenue 4.2Direct costs (1.1)Net rental income 3.1Administrative expenses (0.1)Gain from change in fair value of investment property 1.4Finance costs - interest payable (3.1)Change in fair value of derivative financial instruments 1.2Profit before tax 2.5Taxation (0.8)Profit after tax 1.7 The Group's share of capital commitments of the Workspace Glebe joint venturewere £0.2m for commitments under contract and £5.0m authorised by directors butnot contracted. Transactions between the Group and its joint venture are set out below. Theseare related party transactions as defined in IAS24. £mTransactions:Sale of properties to joint venture (see above) 146.0Recharges to joint venture 0.4Recharges from joint venture (0.2) £mBalances with joint venture at 31 March 2007:Amounts payable (0.7) This information is provided by RNS The company news service from the London Stock Exchange

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Related Shares:

Workspace