20th Nov 2006 07:02
Workspace Group PLC20 November 2006 WORKSPACE UPBEAT AT INTERIMS AS IT CONFIRMS REIT CONVERSION Workspace Group PLC ("Workspace") today announces its interim results for thesix months to 30 September 2006. Workspace provides 5 million sq. ft of flexiblebusiness accommodation to over 4,000 small and medium size enterprises ("SMEs")in London and the South East. • Adjusted Net Asset Value (NAV) per share at 30 September 2006 £3.40*, up 9.0% over the six months and up 33% over 12 months (31 March 2006: £3.12; 30 September 2005: £2.55) • NAV per share at 30 September 2006 £2.58* up 9.0% over the six months and up 33% over 12 months (31 March 2006: £2.37; 30 September 2005:£1.94) • Valuation surplus for half year £59.0m (2005: £40.2m) • Pre-tax profits £69.4m (2005: £45.8m) • Pre-tax profits on trading operations £5.1m (2005: £6.3m restated) • Basic earnings per share 29.4p (2005: 19.6p) • Joint venture with Glebe established • Total rent roll £43.0m up 8.3% (excluding Glebe JV but including acquisitions) (31 March 2006: £39.7m restated) • Acquisitions £42.3m since 31 March 2006 to date, with others under negotiation • Disposals of £171.7m (including £146.0m to the Glebe JV) since 31 March 2006 • Interim dividend 1.38 pence (2005: 1.25 pence) * Adjusted NAV per share and NAV per share were affected by the conversion of the loan stock during the period. Commenting on the results, Harry Platt, Chief Executive, said, " We have made great strides in the management of our portfolio and, weanticipate an acceleration in rental growth. Our space remains extremelyaffordable and the average rent per sq.ft has moved forward to £10.58. The startof the JV with Glebe has been encouraging and we are already well advanced on anumber of improvement and intensification schemes." " We plan to convert to a REIT on 1 January 2007. This structure will enableshareholders to benefit from a significantly higher dividend stream, whilst notimpairing the group's strategic progress." " London remains the powerhouse for SME activity in the UK. We are at the centreof this vibrant market. The improvements we have made to our portfolio and ourcustomer offering has created a first class platform from which we will continueour growth. The future for the group remains excellent." -ends- Date: 20 November 2006For further information: Workspace Group PLC cityPROFILEHarry Platt, Chief Executive Simon CourtenayMark Taylor, Finance Director 020-7448-3244020-7247-7614e-mail: [email protected]: www.workspacegroup.co.uk Chairman's Statement Progress over the first six months has been sound. Adjusted NAV per share increased by 9.0% over the six months assisted by arecord valuation surplus for the first half. The 11.0% increase in dilutedadjusted NAV per share was restricted by the conversion of the balance of theGroup's 11% convertible loan stock. The valuation uplift has been driven both bycontinued yield compression and rental improvements. The average rental valueper square foot increased (on a like-for-like basis) by 3.6% from £10.21 to£10.58. We have also seen encouraging signs of the return of stronger levels ofmarket rental growth (ERVs). It appears likely that the yield compression that has made the principalcontribution to the growth in valuation over recent periods is now drawing to aclose. It is reassuring, therefore, to see rental growth playing a more activepart, particularly since this yield compression has resulted in initial yieldsthat are commonly below the cost of money. We will purchase property at theselevels, but only where we can see good growth potential. However, suchacquisitions are dilutive to earnings initially. We have targeted purchases ofat least £60m this year and with £42.3m completed to date, we are well on the way to achieving this target. The most significant event of the first half year was the establishment of ajoint venture with Glebe for the promotion of change of use and otheropportunities on 11 of the Group's estates. More details on the joint ventureare given in the Chief Executive's Statement. The joint venture with Glebe is onlya part of the opportunity for "value adding" activity and just half of that inimmediate prospect. The remainder of the opportunities will continue to bepromoted by the Group. We have today issued a Circular advising shareholders of the Group's intentionto convert to a REIT (Real Estate Investment Trust) and calling a generalmeeting to amend the Company's Articles to provide safe harbour provisions forthe Group against tax penalties arising from distributions to certainshareholdings in excess of 10% within a REIT. Your Board has monitored carefullythe evolution and development of the REIT protocol and considers that conversionto a tax exempt environment offers very real advantages to shareholders throughreceipt of higher dividend distributions at modest cost to the Company. Theconversion charge of approximately £20m should be covered relatively quickly bytax liabilities that will no longer arise as a REIT. Aside from these tangiblebenefits to shareholders, our analysis shows that the regulatory framework forREITs should not constrain the growth of the Group's current business model anddelivery of its strategic plan. As noted in our first quarter statement, I am delighted to welcome RupertDickinson, the Chief Executive of Grainger Trust, to the Board as anon-executive director. Rupert brings a wealth of knowledge and skills in thehousing and mixed-use arenas, a key area of expertise as we increasingly pursuethe mixed-use opportunities on our estates. I would also like to take thisopportunity to thank Chris Pieroni who has retired from the Board after sixyears of service as a non-executive director during which time the Group hasgrown substantially. Bernard Cragg now takes over his duties as SeniorIndependent Non-Executive Director and John Bywater has become Chairman of theRemuneration Committee. An interim dividend of 1.38 pence per share (an increase of 10.4%) has beendeclared with these accounts and will be paid on 1 February 2007. Chief Executive's Statement Summary The good progress of the first quarter has extended through to the half yearstage with pre-tax profits of £69.4m up 52% on last year (30 September 2005:£45.8m). This growth has again been driven by the substantial growth of theportfolio valuation. The surplus for the half year of £59.0m is the highest everrecorded in the first half. Pre-tax profits on trading operations at £5.1m weredown on 2005 (2005: £6.3m, restated). This is attributable partly to the changein mix of the portfolio after the disposals over the last year and partly due toincreased net interest charges. These are described in more detail in theFinancial Review. Following the valuation surplus, adjusted NAV per share increased by 9% over thehalf year to £3.40. This increase was tempered by the conversion of theremainder of the Group's 11% convertible loan stock during the first half. Moredetails of this are given in the Financial Review. At the time of announcement of the preliminary results for 2005/6 we advisedalso of the formation of a 50:50 joint venture with Glebe. This joint venturehas been established to promote the "added value" opportunities of a portfolioof properties, 11 of which were contributed (for a consideration of £146m) bythe Group, alongside 3 from Glebe (at £9.1m). The joint venture is backed byBank of Scotland who have provided £126m of debt finance alongside the £20m ofequity provided by each partner. The properties were sold to the joint ventureat a surplus of £8.6m (before costs). Proposals for the first phase at threeproperties are well advanced. As described in our June statement, entry into the joint venture has enabled theGroup: • To crystallise a portion of the value in our current portfolio at a surplus; • To de-gear and increase substantially our financial capacity for new acquisitions in London; • To retain a significant interest and participation in the gains resulting from the change of use and intensification of these properties with a partner with proven experience in this area; • To maintain our focus on our key skills. Excluding the joint venture properties, the rent roll increased to £43.01m (31March 2006: £39.71m restated). Excluding acquisitions and improvement propertiesthe like-for-like rent roll has increased by £0.29m over the half year. Thisincrease was driven by a 3.6% increase in average rents (compared with a growthrate of 3.6% for the whole of 2005/6) tempered to a degree by reductions inoccupancy, more details of which are given later. Earnings per share at 29.4p are 50% up on last year. Valuation As usual an independent valuation of the Group's portfolio has been undertaken.The valuation, which totalled £932.5m, showed a surplus of £59m for the halfyear, a 6.8% increase attributable approximately 75% to yield compression and25% to rental increases. After a period when rental growth, and its impact onvaluation, has been limited, it is pleasing to see a more significantcontribution returning. Movements in the portfolio may be analysed: £mValuation as at 31 March 2006 964.3Book value of disposals (145.9)Acquisitions 41.4Other expenditure on properties 13.7Valuation surplus 59.0---------------------------------------------------------------------------- 932.5---------------------------------------------------------------------------- Portfolio In the first half the Group made acquisitions (excluding costs) of £39.1m, withanother £3.2m following the period end. Once again these acquisitions have beenidentified partly through opportunities offered to us from the marketplace andpartly from our continued research into target acquisitions through ouracquisitions database and are in locations we know well. We consider that thisyear's acquisitions offer an attractive blend of good initial returns with theopportunity for growth. The Leyton properties are located just three miles northof the Olympic zone and, costing just £97 per square foot, offer interestinglonger term growth prospects. Morie Street SW18 and Greville Street EC1, both ofwhich had substantial voids on acquisition, offer the potential to grow incomethrough asset improvement and active management leading to better rents. TMarchant offers both the prospect for improving current returns but also, in themedium term, the opportunity for intensification and change of use particularlyif the southern extension of the East London line progresses. Spectrum Houseprovides an entry to the Kentish Town market, an area in which the Group hassought a presence for some time. Seven Sisters, being located at a transportnode, the intersection of Seven Sisters Road and the A10 at Seven SistersUnderground Station, should benefit as intensification around such hubsincreases. The table following shows our acquisitions and disposals to date in the year: Acquisitions and DisposalsName of Property Description Price Income Market rent at 30 September 2006 £m £000 £000Acquisitions Acquired during the first half Leyton Industrial Village, 3 small unit industrial 16.0 826.4 1,148.1Fairways Business Centre and estates of 168,000 sq. ftLeyton Studios, London E10 1, Morie Street, Multi let offices of 4.4 178.0 377.1London SW18 22,000 sq.ft 14, Greville Street, Vacant building of 3.8 Nil 670.0London EC1 14,000 sq.ft T Marchant Trading 14 unit industrial estate 6.1 300.5 382.7Estate, Verney totalling 51,000 sq. ft overRoad, SE16 2.1 acres Spectrum House, Gordon 22 unit business centre of 8.8 544.4 621.8House Road, 48,100 sq. ftLondon NW5 ---- 39.1 Purchases completed following the first half Seven Sisters, 7 self-contained office buildings 3.2 188.8 246.9 214-218 Seven Sisters totalling 20,300 sq.ftRoad, London N15 ----------------------------------------------------------------------------------------------------------------- 42.3 2,038.1 3,446.6-----------------------------------------------------------------------------------------------------------------Yield 4.82% 8.15%----------------------------------------------------------------------------------------------------------------- Disposals 11 Properties 11 estates with improvement or 146.0 7,183.0disposed to the Glebe change of use potential. Totaljoint venture. lettable floor area 1.2 million sq.ftRiverside Business Centre, SW18; 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 Stevenage Enterprise Park, Industrial estate of 27,000 3.2 167.0Stevenage, SG1 sq.ft, deferred part of Magenta Portfolio sale of last year. Wharf Road, London, N1 Part of property sold for £1.9m 10.4 Nil with consent for mixed residential and commercial accommodation. Interest retained in commercial element (worth £8.5m). ----- 159.6 Sales completed following the half year Park Avenue, Luton, LU3 203,000 sq. ft industrial estate 12.1 653.4----------------------------------------------------------------------------------------------------------------- 171.7 8,003.4-----------------------------------------------------------------------------------------------------------------Yield 4.66%----------------------------------------------------------------------------------------------------------------- Following the acquisitions and disposals completed in the period, and theestablishment of the joint venture, the portfolio statistics and progressthrough the period may be summarised as follows:- Portfolio Statistics (excluding joint venture with Glebe) September 2006 June 2006 March 2006 Restated* Number of estates 99 96 93Total floor space (million sq.ft) of which 4.98 4.89 4.69 Like-for-like portfolio (million sq.ft) 4.30 4.30 4.30 Disposals (million sq.ft) - - 0.03 Acquisitions (million sq. ft) 0.35 0.23 - Improvement properties (million sq. ft) 0.33 0.36 0.36 Lettable units 4,215 4,286 4,108Annual rent roll of occupied units (£m) 43.01 40.88 39.71 Average rent (£/sq.ft) 10.56 10.22 10.21Overall occupancy (%) 81.7% 81.8% 83.0%Like-for-like Occupancy (%) 85.1% 86.4% 87.7%Like-for-like Average rent (£/sq.ft) 10.58 10.32 10.21Like-for-like Net rent roll (£m) 38.77 38.28 38.48(*restated for disposal to joint venture) Workspace Glebe Joint Venture Portfolio Statistics Number of estates 14 14 11Total floor space (million sq.ft) 1.15 1.14 1.08Lettable units 810 806 797Annual rent roll of occupied units (£m) 7.76 7.50 6.87Average rent (£/sq.ft) 7.39 7.13 7.06Overall occupancy (%) 91.57% 92.45% 89.75% Comparisons of overall occupancy and rent roll are distorted by acquisitions,disposals and transfers. The "like for like" portfolio is defined as thoseproperties that have been held throughout the year to date and which are notsubject to a refurbishment programme. Occupancy during the first half, has declined at an overall level by 1.3%, 2.6%by reference to the "like for like" portfolio. This change, and movements withinthe "like for like" portfolio may be analysed as follows: March September Difference 2006 2006 Overall occupancy 83.0% 81.7% 1.3% Disposals (4 estates, see table below) (0.1)% -Acquisitions - 0.2%Improvement properties 4.8% 3.2%-----------------------------------------------------------------------------------------------------------------"Like for like" occupancy 87.7% 85.1% 2.6%Future improvement or added valueestates (4 estates, see details below) (0.1%) 1.3%Other significant movements (5 estates listed below) 0.5% 1.6%-----------------------------------------------------------------------------------------------------------------"Adjusted like for like" 88.1% 88.0% 0.1% Disposals (Stevenage) were at a higher than average occupancy level (97.1%)whereas acquisitions were lower (79.2%). These are ideal relative levels sincethey confirm that the disposal had little scope for improvement whereas theacquisitions offered more substantial opportunity. Improvement propertiesprogressed well during the half year, as is illustrated in the table below: Completion dates March 2006 September 2006 Occupancy Rent Occupancy Rent £000 £000Clerkenwell Workshops June 2006 0.0% 14 49.8% 645 Enterprise House May 2006 59.5% 652 71.2% 1,320 Power Road October 2006 33.3% 166 33.3% 150 Lombard House Due February 2007 25.9% 205 23.4% 189 The improved occupancy at Clerkenwell Workshops and Enterprise House was thedriver of the reduction in the improvement occupancy adjustment from 4.8% to3.2% over the 6 months as occupancy in improvement properties improved from26.2% to 40.6%. As may be seen from the earlier table the "Adjusted Like for Like" portfoliototals show occupancy only marginally changed (being down just 0.1%). As such,the fall in "like for like" occupancy may be attributed principally to falls inoccupancy on the four sites earmarked for future improvement or disposal(Greenheath, Park Avenue, Parmiter & Kennington Park) where the change inoccupancy has little long term impact (indeed in the case of improvementproperties is beneficial) or at five other estates (Buzzard, Uplands, Homesdale,Barratt Way and Westminster) where larger voids have arisen. Such voids arecommonplace in the Group's business and can reasonably be expected to be coveredby re-letting in the near future. In addition to the disposals into the joint venture, the disposal of StevenageEnterprise Park concluded the sale of the portfolio of properties outside theM25 announced last year. The sale of Wharf Road to United House marks thecompletion of our initiative to add value at this site. We achieved planningconsent here in March 2005 for a mixed-use scheme. The consent provides for thedemolition of the existing 44,000 sq. ft centre to be replaced by buildingscomprising 30,000 sq. ft of workspace in addition to 77 residential units inproperties of up to 10 storeys in height. The consideration, partly in cash andpartly through construction of a new commercial building for Workspace, supportsan overall value for the site in excess of £10m. The sale of Park Avenue, Lutonmarks a further stage in the Group's progressive refocusing away from propertiesoutside of the M25 towards London based property. Proposals for the intensification of the Group's Thurston Road property incentral Lewisham have progressed as have those for part of the Group's propertyat Greenheath in Bethnal Green and that at Aberdeen Studios, Islington. Financial Review Profits before tax at £69.4m were 52% up on last year (September 2005: £45.8m).The performance was driven by another good valuation surplus taking the totalfor the half year to £59.0m (2005: £40.2m). However, at a trading level theperformance was lower with PBT of £5.1m (2005: £6.3m, restated), being reducedby a combination of factors: - Two significant portfolio disposals were made over the last 12months. Firstly, the majority of the Group's properties outside the M25 weresold last year, followed this year by the disposal of properties into the JVwith Glebe. These disposals reduced earnings growth with revenue for the periodincreasing by just 1% to £29.6m (2005: £29.2m). Whilst borrowings fell due tothese disposals, leading to reductions in interest costs, these reductions wereimpacted by short term treasury inefficiencies as the funds released werereinvested. Furthermore, average interest rates over the period were greaterthan last year and, on a weighted basis, impacted more on the periods where debtlevels were greater as described below. Consequently, earnings suffered duringthis period of reorganisation. However, following these disposals the Group nowhas a portfolio that is more closely aligned to its strategic objectives inLondon and with greater income growth potential. - A further factor impacting earnings has been the low average of 5.4%(over the last 12 months) of initial yield from acquisitions. The propertieshave been purchased with voids providing good capacity for rental growth overthe coming periods. This has been compounded by the management steps taken atcertain properties over the last year to enhance earnings in the medium/longterm. For example, at Kennington Park a significant void arose shortly followingpurchase. This event had been anticipated; indeed it was a key factor in theproperty's acquisition since it gave the opportunity to reconfigure the space toprovide more small unit accommodation suiting our customers' needs. Likewise, atLombard House, the acceptance of the surrender of the Vodafone lease last yearhas depressed returns. Both these properties (together with 111 Power Road andGreville Street, bought this year) will contribute to rental growth goingforward. - Administration charges have increased on last year due, mainly(£0.3m), to a further significant increase in the share price giving rise to asubstantial increase in the provision for National Insurance on the exercise ofoptions. - Finance charges in the 6 months were up £0.3m to £11.3m (2005:£11.0m) whilst overall debt levels at £350m were substantially down on thoselast year (2005: £432m). This has only arisen in the second quarter followingthe disposal of the JV portfolio. Debt levels during the first quarter werebroadly in line with the September 2005 levels. As noted above, interest rateshave increased with the average for the half year costing £0.1m. As notedearlier, acquisitions over the last 12 months at 5.4% initial yield have notmade a significant contribution to profits and more recently have not achievedthe cost of money. Many of these factors will turn to the Group's favour going forward. The currentvoids in the portfolio present an opportunity at a time where good demand isexpected. Further, with City/West End rents rising sharply, rental growth shouldbe achieved. Against these, market forecasts of interest rates show them risingto a peak over the next year and then declining. As these changes are absorbedrevenue growth should return. Net Assets increased from £390.3m to £437.4m (up 12.1%) over the half year,mainly as a result of the valuation surplus. Adjusted (basic) net assets pershare increased by 9% from £3.12 to £3.40. Some dilution in the growth of NAVper share arose due to the conversion of the remaining 11% Convertible LoanStock 2011. At 31 March 2006 £2.2m of this stock remained outstanding. This wasconverted into 4,400,000 shares. The residue of the Group's other historicborrowings, the £19.5m 11 1/8% and 11 5/8% Debenture Stock are due for repaymenton 30 June 2007, at which time the Group's borrowing costs will reduce byapproximately £1m pa. The timing of this is fortunate since it is likely thatthe Group will have converted to a REIT and consequently elimination of suchexpensive debt is of increased significance, as the Group will no longer benefitfrom a tax deduction on the interest expense. Following a detailed review of its business and the REIT proposals, your Boardhas concluded that it is in the interest of shareholders to convert. A circularcalling an EGM on 15 December accompanies this statement. At 30 September 2006,the Group's total deferred tax liabilities were £141.3m (note 16 to theaccounts). If the Group's properties had been sold at the values in theSeptember valuation, then a liability to tax of £111.1m would have arisen. Withthe significant numbers of properties upon which intensification and change ofuse proposals are being promoted, it is likely that a significant portion ofthis deferred tax liability would accrue as a current charge in the relativelynear future. As a result, pay back of the conversion charge (which will be ofthe order of £20m) will be relatively short. At this stage, no provisions forthe inclusion of Group JVs (i.e. joint ventures that comprise more than onecompany) have been enacted in the REIT legislation. Consequently, the Group's JVwith Glebe will remain outside the REIT ring fence initially. Representations toHMRC over "Group JVs" have been made by the property industry and it is believedthat further legislation will follow to accommodate them. In the short term,this should not present problems. Further details on the conversion are given inthe circular issued with this statement. The most significant single event of the first half was the entry into the jointventure with Glebe and the associated transfer of £137.4m (March 2006 valuation)of investment property into it at a valuation of £146m showing a surplus of£8.6m. The joint venture has been structured on a ring-fenced standalone basiswith a new £125.6m loan facility from Bank of Scotland, of which £119.2m wasdrawn at 30 September, and the joint venture parties providing the balance ofthe funding equally. The transfer and refinancing of the assets releasedapproximately £123m in cash after the Workspace equity contribution and costshad been accounted for. This was applied in paying down portions of the Group'sfacilities with Natwest and Bradford & Bingley. In the case of Natwest, thedrawn portion of the Group's revolving loan facility was repaid, preservingavailability, whilst with Bradford & Bingley £70m was repaid but a right toredraw the repaid portion was negotiated. As a result, the Group's gearing(based on adjusted net assets) has reduced to 63% whilst preserving theavailability of these facilities. This provides the capacity not only forfunding prospective acquisitions in the next year or so, but also for therepayment of the Group's debenture stock that falls due in June 2007 and paymentof the taxation liability that will arise should the Group convert, as planned,to a REIT next year. Entry into the joint venture was accomplished by merging the Group's interestswith those held by Glebe. In this manner, no tax liability on the assetscontributed to the joint venture was triggered, and the incidence of theliability has been deferred until the investment properties are disposed of bythe joint venture. Key financial statistics, reported both on an IFRS and former UK GAAP basis are: 6 months to 3 months to Year to 6 months to 30 September 30 June 31 March 30 September 2006 2006 2006 2005 Net rental income: revenue 71% 72% 73% 73%Trading operating profit: revenue 55% 57% 59% 59%Trading PBT: revenue 17% 18% 24% 23%EPS per share (pence) 29.4 18.4 65.1 19.6NAV per share (£) - IFRS 2.58 2.56 2.37 1.94 - Adjusted IFRS 3.40 3.36 3.12 2.55Trading interest cover 1.46 1.45 1.69 1.65Gearing - IFRS 80% 77% 110% 137% - UK GAAP 63% 62% 85% 105%Available facilities (£m) 93.9 145.7 15.7 13.6 Prospects Enquiry levels and conversions to lettings remain good. The rent roll increasesrecorded in the latter stages of the period have continued into the thirdquarter and overall the market indicators are for a period of growth in rentals. We continue to track a significant number of opportunities for acquisitions andexpect that our target of £60m for the year will be exceeded, albeit that theseacquisitions may be at lower initial yields with good prospects for growth. Your Board considers that the Group will be a significant beneficiary fromconversion to a REIT. It will facilitate more substantial distributions toshareholders without significant impact on the development of the business.Further, there is every prospect of a more active property market following thecreation of REITs, which should create more opportunities for the Group. Independent review report to Workspace Group PLC Introduction We have been instructed by the company to review the financial information forthe six months ended 30 September 2006 which comprises a consolidated incomestatement, a consolidated statement of recognised income and expense, aconsolidated balance sheet as at 30 September 2006, a consolidated cash flowstatement and related notes. We have read the other information contained in theinterim report and considered whether it contains any apparent misstatements ormaterial inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The Listing Rulesof the Financial Services Authority require that the accounting policies andpresentation applied to the interim figures should be consistent with thoseapplied in preparing the preceding annual accounts except where any changes, andthe reasons for them, are disclosed. This interim report has been prepared in accordance with the basis set out inNote 24. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4issued by the Auditing Practices Board for use in the United Kingdom. A reviewconsists principally of making enquiries of management and applying analyticalprocedures to the financial information and underlying financial data and, basedthereon, assessing whether the disclosed accounting policies have been applied.A review excludes audit procedures such as tests of controls and verification ofassets, liabilities and transactions. It is substantially less in scope than anaudit and therefore provides a lower level of assurance. Accordingly we do notexpress an audit opinion on the financial information. This report, includingthe conclusion, has been prepared for and only for the company for the purposeof the Listing Rules of the Financial Services Authority and for no otherpurpose. We do not, in producing this report, accept or assume responsibilityfor any other purpose or to any other person to whom this report is shown orinto whose hands it may come save where expressly agreed by our prior consent inwriting. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 September 2006. PricewaterhouseCoopers LLPChartered AccountantsLondon17 November 2006 Consolidated Income Statement Audited Unaudited Unaudited Year ended 6 months ended 6 months ended31 March 2006 30 September 2006 30 September 2005 £m Notes Trading Other items* Total £m operations* £m £m £m 63.2 Revenue 1 29.6 - 29.6 29.2 (16.8) Direct costs 1 (8.5) - (8.5) (7.7)------------------------------------------------------------------------------------------------------- 46.4 Net rental income 1 21.1 - 21.1 21.5 (9.1) Administrative (4.7) 0.2 (4.5) (4.2) expenses 131.3 Gain from change in - 59.0 59.0 40.2 fair value of investment property - Other income 8d - 1.6 1.6 - 3.4 Profit on disposal 2 - 4.4 4.4 - of investment properties------------------------------------------------------------------------------------------------------- 172.0 Operating profit 16.4 65.2 81.6 57.5 0.2 Finance income - 0.1 - 0.1 - interest receivable (23.6) Finance costs - 3 (11.3) - (11.3) (11.0) interest payable 0.4 Change in fair value 14d - 0.4 0.4 (0.7) of derivative financial instruments - Share of joint 22 (0.1) (1.3) (1.4) - venture post tax losses------------------------------------------------------------------------------------------------------- 149.0 Profit before tax 5.1 64.3 69.4 45.8 (42.4) Taxation 4 (1.5) (19.1) (20.6) (13.7)------------------------------------------------------------------------------------------------------- 106.6 Profit for the 3.6 45.2 48.8 32.1 period after tax and attributable to equity shareholders------------------------------------------------------------------------------------------------------- 65.1p Basic earnings per 6 2.2p 27.2p 29.4p 19.6p share 62.7p Diluted earnings per 6 2.1p 26.2p 28.3p 18.8p share \* Trading Operations and Other Items are defined in the glossary of terms below. Consolidated Statement of Recognised Income and Expense (SORIE) Audited Unaudited Unaudited Year ended 6 months ended 6 months ended 31 March 2006 30 September 30 September 2006 2005 £m £m £m 106.6 Profit for the financial period 48.8 32.1-------------------------------------------------------------------------------- 106.6 Total recognised income and 48.8 32.1 expense for the period-------------------------------------------------------------------------------- There is no difference between the profit for the financial period and the totalrecognised income and expense for the period. Consolidated Balance Sheet Audited Unaudited Unaudited 31 March 2006 30 September 30 September 2006 2005 (restated*) £m Notes £m £m Non-current assets 954.0 Investment properties 8 930.4 865.1 0.2 Intangible assets 0.2 0.2 3.6 Property, plant and equipment 9 3.5 3.5 - Investment in joint venture 22 16.2 --------------------------------------------------------------------------------- 957.8 950.3 868.8 Current assets 6.7 Trade and other receivables 10 10.0 8.1 0.1 Financial assets - derivative 14d 0.1 0.1 financial instruments 8.2 Investment properties held 8a - - for sale 1.7 Cash and cash equivalents 11 1.8 1.8-------------------------------------------------------------------------------- 16.7 11.9 10.0-------------------------------------------------------------------------------- Current liabilities (3.6) Financial liabilities - 14a (22.3) (1.9) borrowings (1.2) Financial liabilities - 14d (0.8) (2.3) derivative financial instruments (29.0) Trade and other payables 12 (30.5) (28.8) (1.7) Current tax liabilities 13 (2.7) (0.4)-------------------------------------------------------------------------------- (35.5) (56.3) (33.4)-------------------------------------------------------------------------------- (18.8) Net current liabilities (44.4) (23.4) Non-current liabilities (426.1) Financial liabilities - 14a (327.2) (430.0) borrowings (122.6) Deferred tax liabilities 16 (141.3) (98.2)-------------------------------------------------------------------------------- (548.7) (468.5) (528.2)-------------------------------------------------------------------------------- 390.3 Net assets 437.4 317.2-------------------------------------------------------------------------------- Shareholders' equity 16.9 Ordinary shares 17 17.4 16.9 28.7 Share premium 19 30.5 28.4 (5.1) Investment in own shares 20 (4.9) (5.4) 0.8 Other reserves 18 0.7 0.7 349.0 Retained earnings 19 393.7 276.6-------------------------------------------------------------------------------- 390.3 Total shareholders' equity 437.4 317.2-------------------------------------------------------------------------------- £2.37 Net asset value per share 7 £2.58 £1.94 (basic) £2.29 Diluted net asset value per 7 £2.53 £1.87 share £3.12 Adjusted net asset value per 7 £3.40 £2.55 share (basic) £3.01 Diluted adjusted net asset 7 £3.34 £2.45 value per share *Cash and cash equivalents and trade and other receivables have been restated(see note 11) Consolidated Cash Flow Statement Audited Unaudited Unaudited Year ended 6 months ended 6 months ended 30 September 200531 March 2006 30 September (restated) 2006 £m Notes £m £m Cash flows from operating activities 39.0 Cash generated from 15a 17.8 17.8 operations 0.2 Interest received 0.1 - (22.9) Interest paid (12.0) (10.5) (1.9) Tax refunded/(paid) 0.6 (1.7)-------------------------------------------------------------------------------- 14.4 Net cash from operating 6.5 5.6 activities Cash flows from investing activities (132.8) Purchase of investment (41.0) (99.8) properties (20.9) Capital expenditure on (9.2) (10.4) investment properties 44.2 Net proceeds from disposal 148.0 2.3 of investment properties (4.8) Tax paid on disposal of (2.3) (2.0) investment properties (0.1) Purchase of intangible (0.1) - assets (0.7) Purchase of property, (0.3) (0.3) plant and equipment - Investment and loan to (19.5) - joint venture -------------------------------------------------------------------------------- (115.1) Net cash from investing 75.6 (110.2) activities Cash flows from financing activities 103.9 Net proceeds from issue of - 107.7 bank borrowings - Net repayment of bank (77.4) - borrowings 0.4 Net distribution of own 0.2 0.1 shares (0.1) Finance lease principal - - payments - Issue of share capital 0.1 - (5.8) Dividends paid to 5 (4.1) (3.7) shareholders-------------------------------------------------------------------------------- 98.4 Net cash from financing (81.2) 104.1 activities-------------------------------------------------------------------------------- (2.3) Net increase/(decrease) in 0.9 (0.5) cash and cash equivalents-------------------------------------------------------------------------------- 0.4 Cash and cash equivalents 15 (1.9) 0.4 at start of period (1.9) Cash and cash equivalents 15 (1.0) (0.1) at end of period Notes to the Half Year Interim ReportFor the 6 months ended 30 September 2006 1. Analysis of net rental income Year ended 6 months ended 6 months ended 31 March 2006 30 September 2006 30 September 2005 Revenue Direct costs Net rental Revenue Direct costs Net rental Revenue Direct costs Net rental income income income £m £m £m £m £m £m £m £m £m 49.2 (0.2) 49.0 Rental income* 22.5 (0.1) 22.4 23.1 (0.1) 23.0 12.3 (15.9) (3.6) Service 6.3 (8.0) (1.7) 5.5 (7.5) (2.0) charges and other recoveries---------------------------------------------------------------------------------------------------------------------- 1.7 (0.7) 1.0 Services, fees, 0.8 (0.4) 0.4 0.6 (0.1) 0.5 commissions and sundry income---------------------------------------------------------------------------------------------------------------------- 63.2 (16.8) 46.4 29.6 (8.5) 21.1 29.2 (7.7) 21.5---------------------------------------------------------------------------------------------------------------------- *Rental income includes surrender premia of £0.2m (31 March 2006: £2.2m, 30September 2005: £0.2m). 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 Year ended 6 months ended 6 months ended 31 March 2006 30 September 30 September 2006 2005 £m £m £m 44.5 Gross proceeds from sale of 156.2 2.1 investment properties (41.1) Book value at time of sale plus (149.1) (2.1) sale costs-------------------------------------------------------------------------------- 3.4 7.1 - - Group's share of unrealised (2.7) - profits on sale of properties to joint venture-------------------------------------------------------------------------------- 3.4 Pre tax profit on sale 4.4 - (4.7) Current taxation (3.3) (0.2) 4.9 Deferred tax released on sale 1.4 0.2 - Group's share of tax on 0.8 - unrealised profits on sale of properties to joint venture-------------------------------------------------------------------------------- 0.2 Net tax (1.1) --------------------------------------------------------------------------------- 3.6 Net profit on disposal after tax 3.3 --------------------------------------------------------------------------------- 3. Finance costs Year ended 6 months ended 6 months ended 31 March 2006 30 September 30 September 2006 2005 £m £m £m 21.0 Interest payable on bank loans 10.1 9.7 and overdrafts 0.5 Amortisation of issue costs of 0.3 0.2 bank loans 0.1 Interest payable on finance - - leases 1.4 Interest payable on 11.125% First 0.7 0.7 Mortgage Debenture Stock 2007 0.8 Interest payable on 11.625% First 0.4 0.4 Mortgage Debenture Stock 2007 0.3 Interest payable on 11% 0.1 0.2 Convertible Loan Stock 2011 (0.5) Interest capitalised (note 8a) (0.3) (0.2)-------------------------------------------------------------------------------- 23.6 11.3 11.0-------------------------------------------------------------------------------- 4. Taxation Year ended Analysis of charge in period 6 months ended 6 months ended 31 March 2006 30 September 30 September 2006 2005 £m £m £m 5.9 Current tax 2.7 1.6 36.5 Deferred tax 17.9 12.1-------------------------------------------------------------------------------- 42.4 Total taxation 20.6 13.7-------------------------------------------------------------------------------- The charge in the period is analysed as follows: Current tax: 6.8 UK corporation tax 2.7 1.6 (0.9) Adjustments to tax in respect of previous - - periods-------------------------------------------------------------------------------- 5.9 2.7 1.6-------------------------------------------------------------------------------- Deferred tax: 34.5 On fair value gains of investment 17.1 11.8 properties 1.2 On accelerated tax depreciation 0.5 0.5 0.1 On derivative financial instruments 0.2 (0.2) 0.5 Adjustments to tax in respect of previous - - periods 0.2 Others 0.1 --------------------------------------------------------------------------------- 36.5 17.9 12.1-------------------------------------------------------------------------------- 42.4 Total taxation 20.6 13.7-------------------------------------------------------------------------------- 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: 149.0 Profit on ordinary activities before 69.4 45.8 taxation - Add share of post tax losses in joint 1.4 - venture-------------------------------------------------------------------------------- 149.0 70.8 45.8-------------------------------------------------------------------------------- 44.7 Tax at standard rate of corporation tax in 21.2 13.7 the UK of 30% (2005: 30%) Effects of: (0.4) Income taxed as capital gains (0.4) - (0.3) Contaminated land relief - - (1.2) Capital gains adjustments on property (0.2) - disposals (0.4) Adjustments to tax in respect of previous - - periods-------------------------------------------------------------------------------- 42.4 Total taxation 20.6 13.7-------------------------------------------------------------------------------- 5. Dividends paid Year ended 6 months ended 6 months ended 31 March 2006 30 September 30 September £m 2006 2005 £m £m 3.7 Final dividend 2004/5 - 2.28p per - 3.7 ordinary share 2.1 Interim dividend 2005/6 - 1.25p - - per ordinary share - Final dividend 2005/6 - 2.51p per 4.1 - ordinary share-------------------------------------------------------------------------------- 5.8 4.1 3.7-------------------------------------------------------------------------------- In addition the directors have declared an interim dividend in respect of thefinancial year ending 31 March 2007 of 1.38p per ordinary share which will absorban estimated £2.3m of shareholders' funds. It will be paid on 1 February 2007 toshareholders who are on the register of members on 5 January 2007. 6. 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 period, 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. Following the conversion of the 11% Convertible Loan Stock the Group hasonly one class of dilutive potential ordinary shares: those share optionsgranted to employees. Reconciliations of the earnings and weighted average number of shares used inthe calculations are set out below. Profit Earnings Profit Earnings per share per share Year ended Year ended Earnings used 6 months ended 6 months ended 6 months ended 6 months ended 31 March 31 March for calculation 30 September 30 September 30 September 30 September 2006 2006 of earnings per 2006 2005 2006 2005 share £m pence £m £m pence pence 106.6 65.1 Earnings used 48.8 32.1 29.4 19.6 for basic earnings per share 0.2 (1.5) Interest saving 0.1 0.1 (0.6) (0.5) net of taxation on 11% Convertible Loan Stock dilution Share option - (0.9) scheme dilution - - (0.5) (0.3)------------------------------------------------------------------------------------------------------------- 106.8 62.7 Total diluted 48.9 32.2 28.3 18.8 earnings (94.9) (55.7) Less non (45.2) (27.4) (26.2) (16.0) trading items------------------------------------------------------------------------------------------------------------- 11.9 7.0 Trading diluted 3.7 4.8 2.1 2.8 earnings------------------------------------------------------------------------------------------------------------- Year ended Weighted average number of shares 6 months ended 6 months ended 31 March 2006 used for calculating earnings per 30 September 30 September share 2006 2005 Number Number Number 163,629,157 Weighted average number of shares 165,761,714 163,375,024 (excluding shares held in the ESOT) 2,538,531 Dilution due to Share Option 3,330,327 2,622,343 Schemes 4,400,000 Dilution due to Convertible Loan 3,845,480 5,000,000 Stock------------------------------------------------------------------------------------ 170,567,688 Used for calculating diluted 172,937,521 170,997,367 earnings per share------------------------------------------------------------------------------------ 7. Net assets per share 31 March 2006 Net assets used for calculation 30 September 30 September of net assets per share 2006 2005 £m £m £m 390.3 Net assets at end of period (basic) 437.4 317.2 2.2 Dilution due to Convertible Loan Stock - 2.4-------------------------------------------------------------------------------- 392.5 Diluted net assets 437.4 319.6 1.1 Derivative financial instruments at 0.7 2.2 fair value 8.3 Deferred tax on accelerated tax 8.8 7.0 depreciation 114.2 Deferred tax on fair value change of 130.5 91.5 investment properties (0.4) Deferred tax on derivative financial (0.2) (0.7) instruments-------------------------------------------------------------------------------- 515.7 Diluted adjusted net assets 577.2 419.6-------------------------------------------------------------------------------- 513.5 Adjusted net assets (basic) 577.2 417.2-------------------------------------------------------------------------------- 31 March 2006 Number of shares used for 30 September 30 September Number calculating net assets per share 2006 2005 Number Number 169,509,640 Shares in issue at period end 174,035,087 168,909,640 (4,940,960) Less ESOT shares (4,393,410) (5,340,370)-------------------------------------------------------------------------------- 164,568,680 Number of shares for calculating 169,641,677 163,569,270 basic net assets per share 2,538,531 Dilution due to Share Option 3,330,327 2,622,343 Schemes 4,400,000 Dilution due to Convertible Loan - 5,000,000 Stock -------------------------------------------------------------------------------- 171,507,211 Number of shares for calculating 172,972,004 171,191,613 diluted net assets per share-------------------------------------------------------------------------------- 8(a). Investment properties 31 March 2006 30 September 30 September 2006 2005 £m £m £m 716.5 Balance at beginning of period 954.0 716.5 154.5 Additions during the period 54.8 110.3 0.5 Capitalised interest (note below) 0.3 0.2 (40.6) Disposals during the period (137.7) (2.1) 131.3 Net gain from fair value adjustments 59.0 40.2 on investment property (8.2) Investment property held for sale - - (note below)-------------------------------------------------------------------------------- 954.0 Balance at end of period 930.4 865.1--------------------------------------------------------------------------------Property held for sale at the balance sheet date is shown separately undercurrent assets as required by IFRS 5. Capitalised interest is included at a rate of capitalisation of 5.67% (31 March2006: 5.73%; 30 September 2005: 5.86%). The total amount of capitalised interestincluded in investment properties was £1.8m (31 March 2006 £1.5m; 30 September2005 £1.4m). 8(b). Valuation The Group's investment properties were revalued at 30 September 2006 by CBRichard Ellis, 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 to the total shown in theConsolidated Balance Sheet as non-current assets, investment properties, is asfollows: 31 March 30 September 30 September 2006 2006 2005 £m £m £m 964.3 Total per CB Richard Ellis valuation 932.5 867.0 report (2.4) Owner occupied property (2.4) (2.3) (8.2) Property held for sale (shown as current - - assets) 0.7 Head leases treated as finance leases 0.7 0.8 under IAS 17 (0.4) Other (0.4) (0.4)-------------------------------------------------------------------------------- 954.0 Total per balance sheet 930.4 865.1-------------------------------------------------------------------------------- 8(c). During the period part of the property at Wharf Road was sold forresidential development. The consideration for this sale was £1.86m in cash plusthe provision 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 over the next two years (costing £5.8m including interest and fees) bythe developer has been secured by a charge over the land sold to it; which wasconsidered, on valuation by CBRE, to be worth more than the constructionliability. On this basis, and on the assumption that the construction works arecompleted, the profit on this disposal has been recognised in the period (seenote 2) and the present value of the retained land and replacement buildings(also valued by CBRE) has been included in investment property. 8(d). Following a fire that destroyed part of the Westwood Business Centre, ithas been decided that the damaged portion of the property will not be replaced.As a result the £1.6m net insurance proceeds has been recognised as other incomein the Income Statement in the period. A reduction in fair value of theinvestment property of £0.7m has been recognised in the valuation surplus forthe period. 9. Property, plant and equipment Owner occupied Owner occupied Equipment Total land buildings and fixtures £m £m £m £m Cost Balance at 1 April 2005 0.5 1.5 4.1 6.1Additions during the period - 0.1 0.2 0.3--------------------------------------------------------------------------------Balance at 30September 2005 0.5 1.6 4.3 6.4--------------------------------------------------------------------------------Additions during the period - - 0.4 0.4--------------------------------------------------------------------------------Balance at 31 March 2006 0.5 1.6 4.7 6.8--------------------------------------------------------------------------------Additions during the period - - 0.2 0.2Disposals during the period - - (1.2) (1.2)--------------------------------------------------------------------------------Balance at 30 September 2006 0.5 1.6 3.7 5.8--------------------------------------------------------------------------------Cumulative depreciation to 30September 2005 - 0.1 2.8 2.9--------------------------------------------------------------------------------Net book amount at 30September 2005 0.5 1.5 1.5 3.5--------------------------------------------------------------------------------Cumulative depreciationto 31 March 2006 - 0.1 3.1 3.2--------------------------------------------------------------------------------Net book amount at 31March 2006 0.5 1.5 1.6 3.6--------------------------------------------------------------------------------Cumulative depreciationto 30 September 2006 - 0.1 2.2 2.3--------------------------------------------------------------------------------Net book amount at 30September 2006 0.5 1.5 1.5 3.5-------------------------------------------------------------------------------- 10. Trade and other receivables 31 March 2006 30 September 30 September 2006 2005 £m £m (restated) £m 3.8 Trade debtors 4.4 4.1 (0.3) Less provision for impairment of (0.4) (0.4) receivables---------------------------------------------------------------------------------- 3.5 Trade debtors - net 4.0 3.7 0.3 Taxation and social security - - 2.9 Prepayments and accrued income 6.0 4.4---------------------------------------------------------------------------------- 6.7 10.0 8.1---------------------------------------------------------------------------------- 11. Cash and cash equivalents 31 March 2006 30 September 30 September 2006 2005 £m £m (restated) £m - Cash at bank and in hand - - 1.7 Restricted cash - tenants' deposit 1.8 1.8 ---------------------------------------------------------------------------------- 1.7 1.8 1.8---------------------------------------------------------------------------------- September 2005 comparatives have been restated for the inclusion of restrictedcash. This was previously reported in trade and other receivables. 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 (see note 15b). 12. Trade and other payables 31 March 2006 30 September 30 September 2006 2005 £m £m £m 2.4 Trade payables 3.1 3.2 0.4 Taxation and social security payable 0.3 1.1 1.7 Tenants' deposit deeds (see note 11) 1.8 1.8 5.3 Tenants' deposits 5.8 5.1 13.9 Accrued expenses 14.8 11.1 5.3 Deferred income-rent and service 4.7 6.5 charges-------------------------------------------------------------------------------- 29.0 30.5 28.8-------------------------------------------------------------------------------- There is no material difference between the above amounts and their fair valuesdue to the short term nature of the payables. 13. Current tax liabilities 31 March 2006 30 September 30 September 2006 2005 £m £m £m 1.7 Current tax liabilities 2.7 0.4-------------------------------------------------------------------------------- 14. Financial liabilities - borrowings a) Balances 31 March 2006 30 September 30 September 2006 2005 £m £m £m Current 3.6 Bank overdraft due within one year or 2.8 1.9 on demand (secured) - 11.125% First Mortgage Debenture Stock 12.5 - 2007 (secured) - 11.625% First Mortgage Debenture Stock 7.0 - 2007 (secured) 3.6 22.3 1.9 Non -current 2.2 11% Convertible Loan Stock 2011 - 2.4 (unsecured) 12.5 11.125% First Mortgage Debenture Stock - 12.5 2007 (secured) 7.0 11.625% First Mortgage Debenture Stock - 7.0 2007 (secured) 403.7 Other loans (secured) 326.5 407.4 0.7 Finance lease obligations (secured) 0.7 0.7-------------------------------------------------------------------------------- 426.1 327.2 430.0-------------------------------------------------------------------------------- 429.7 349.5 431.9-------------------------------------------------------------------------------- The Debenture Stocks are repayable on 30 June 2007. b) Maturity 31 March 2006 30 September 30 September 2006 2005 £m £m £m Secured (excluding finance leases) 3.6 Repayable in less than one year 22.3 1.9 19.5 Repayable between one year and two years - 19.5 - Repayable between two years and three 127.3 - years 134.7 Repayable between three years and four 200.0 148.1 years 270.0 Repayable between four years and five - 260.4 years -------------------------------------------------------------------------------- 427.8 349.6 429.9 (1.0) Less cost of raising finance (0.8) (1.1)-------------------------------------------------------------------------------- 426.8 348.8 428.8 Unsecured 2.2 Repayable in five years or more - 2.4 Finance leases (secured) 0.7 Repayable in five years or more 0.7 0.7-------------------------------------------------------------------------------- 429.7 349.5 431.9-------------------------------------------------------------------------------- c) 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) 97.5 8.00% 4.50% July 2009Interest rate collar 75.0 6.95% 4.05% July 2009Interest rate collar(increasing amount) 37.5 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 period end 6% (31 March 2006: 5%, 30 September 2005: 5%) of the Group'sborrowings were fixed with a further 60% (31 March 2006: 50%, 30 September 2005:49%) subject to a collar. d) Fair values of financial instruments 31 March 2006 31 March 2006 30 September 30 September 30 September 30 September 2006 2006 2005 2005Book Value Fair Value Book Value Fair Value Book Value Fair Value £m £m £m £m £m £m Financial liabilities not atfair value through profit or loss 3.6 3.6 Bank overdraft 2.8 2.8 1.9 1.9 2.2 2.5 11% Convertible - - 2.4 2.9 Loan Stock 2011 12.5 13.1 11.125% First 12.5 12.9 12.5 13.4 Mortgage Debenture Stock 2007 7.0 7.4 11.625% First 7.0 7.2 7.0 7.5 Mortgage Debenture Stock 2007 403.7 403.7 Other loans 326.5 326.5 407.4 407.4 0.7 0.7 Finance lease 0.7 0.7 0.7 0.7 obligations----------------------------------------------------------------------------------------------------- 429.7 431.0 349.5 350.1 431.9 433.8 Financial liabilities at fair value through profit or loss Derivative financial instruments: 1.2 1.2 Liabilities 0.8 0.8 2.3 2.3 (0.1) (0.1) Assets (0.1) (0.1) (0.1) (0.1)----------------------------------------------------------------------------------------------------- 1.1 1.1 0.7 0.7 2.2 2.2----------------------------------------------------------------------------------------------------- 430.8 432.1 350.2 350.8 434.1 436.0----------------------------------------------------------------------------------------------------- The total gain recorded in the income statement was £0.4m (31 March 2006: £0.4m;30 September 2005: £0.7m loss) for changes of fair value of derivative financialinstruments. 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 0.4p pershare (31 March 2006: 0.8p, 30 September 2005: 1.1p). 15. Notes to cash flow statement a) Reconciliation of profit for the period to cash generated from operations: Year ended 6 months ended 6 months ended31 March 2006 30 September 30 September 2006 2005 (restated) £m £m £m 106.6 Profit for the period 48.8 32.1 42.4 Tax 20.6 13.7 0.6 Depreciation 0.3 0.3 0.1 Amortisation of intangibles 0.1 - (3.4) Profit on disposal of investment (4.4) - properties (131.3) Net gain from fair value (59.0) (40.2) adjustments on investment property (0.4) Fair value gains on financial (0.4) 0.7 instruments (0.2) Interest income (0.1) - 23.6 Interest expense 11.3 11.0 - Share of joint venture 1.4 - - Share based payment (0.2) - Changes in working capital: (1.7) Increase in trade and other (3.1) (3.1) receivables 2.7 Increase in trade and other 2.5 3.3 payables--------------------------------------------------------------------------------- 39.0 Cash generated from operations 17.8 17.8--------------------------------------------------------------------------------- b) Reconciliation of cash and cash equivalents: For the purposes of the cash flow statement, the cash and cash equivalentscomprise the following: 31 March 2006 30 September 30 September 2006 2005 (restated) £m £m £m - Cash at bank and in hand - - 1.7 Restricted cash - tenants' deposit 1.8 1.8 deeds (3.6) Bank overdrafts (2.8) (1.9)-------------------------------------------------------------------------------- (1.9) (1.0) (0.1)-------------------------------------------------------------------------------- September 2005 comparatives have been restated for the inclusion of restrictedcash. This was previously reported in trade and other receivables. 16. Deferred tax liabilities 31 March 2006 30 September 30 September 2006 2005 £m £m £m 86.1 Balance at start of period 122.6 86.1 36.5 Deferred tax charge 17.9 12.1 - Group's share of tax on unrealised profits 0.8 - on sale of properties to joint venture-------------------------------------------------------------------------------- 122.6 Balance at end of period 141.3 98.2-------------------------------------------------------------------------------- Deferred tax recognised in the balance sheet by each category of temporarytiming difference is as follows: 31 March 2006 30 September 30 September 2006 2005 £m £m £m 114.2 Fair value gains on investment 130.5 91.5 properties - Profit on sale to joint venture 1.6 - 0.4 Capitalised interest 0.5 0.4 8.3 Accelerated tax depreciation 8.8 7.0 (0.4) Derivative financial instruments (0.2) (0.7) 0.1 Other 0.1 --------------------------------------------------------------------------------- 122.6 141.3 98.2-------------------------------------------------------------------------------- If the investment properties were sold for their revalued amount there would bea potential liability to corporation tax of £111.1m (31 March 2006: £95.6m, 30September 2005: £74.9m). Under IFRS no account is taken of indexation relief oncapital gains resulting in the difference between expected corporation tax to bepaid and the provision made for deferred tax. 17. Share capital 31 March 2006 30 September 30 September 2006 2005 Number Number Number 240,000,000 Authorised :Ordinary shares 40,000,000 240,000,000 of 10p each 169,509,640 Issued: Fully paid ordinary shares 174,035,087 168,909,640 of 10p each £ £ £ 16,950,964 Issued: Fully paid ordinary shares 17,403,509 16,890,964 of 10p each Number Number Number Movements in share capital were as follows: 168,839,660 Number of shares at start of period 169,509,640 168,839,660 69,980 Save as You Earn share options 125,447 69,980 exercised 600,000 Convertible Loan Stock converted 4,400,000 --------------------------------------------------------------------------------- 169,509,640 Number of shares at end of period 174,035,087 168,909,640-------------------------------------------------------------------------------- 18. Other reserves 31 March 2006 Equity element Equity settled 30 September 30 September of convertible share based 2006 2005 loan stock payments Total Total £m £m £m £m £m 0.5 Balance at start 0.2 0.6 0.8 0.5 of period - Loan stock (0.2) - (0.2) - conversion 0.3 Value of - 0.1 0.1 0.2 employee services--------------------------------------------------------------------------------------- 0.8 Balance at end - 0.7 0.7 0.7 of period--------------------------------------------------------------------------------------- 19. Statement of changes in shareholders' equity 31 March 2006 Share Share Investment in Other reserves Retained 30 September 30 September capital premium own shares earnings 2006 2005 Total Total Total equity equity equity £m £m £m £m £m £m £m £m 288.5 Balance at start 16.9 28.7 (5.1) 0.8 349.0 390.3 288.5 of period 0.3 Share issues 0.1 - - - - 0.1 - 0.4 Distribution of - - 0.2 - - 0.2 0.1 own shares (5.8) Dividends paid - - - - (4.1) (4.1) (3.7) - Loan stock 0.4 1.8 - (0.2) - 2.0 - - conversion 0.3 Value of - - - 0.1 - 0.1 0.2 employee services 106.6 Profit for the - - - - 48.8 48.8 32.1 period------------------------------------------------------------------------------------------------------------------- 390.3 Balance at end 17.4 30.5 (4.9) 0.7 393.7 437.4 317.2 of period------------------------------------------------------------------------------------------------------------------- 20. 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 period the Trust transferred 547,550 shares to employees onexercise of options. At 30 September 2006, the number of shares held by theTrust totalled 4,393,410 (31 March 2006: 4,940,960, 30 September 2005:5,340,370). The shares have been included at cost in shareholders' equity.4,373,110 shares held by the Trust are subject to option awards. 21. Capital commitments At the period end the estimated amounts of contractual commitments for futurecapital expenditure not provided for were: 31 March 2006 30 September 30 September 2006 2005 £m £m £m Under contract: 6.5 Purchases, construction or 18.3 6.5 refurbishment of investment property 0.2 Repairs, maintenance or enhancement of 1.3 1.0 investment property-------------------------------------------------------------------------------- 6.7 19.6 7.5-------------------------------------------------------------------------------- Authorised by directors but not contracted : 0.2 Property, plant and equipment 0.1 0.2 0.1 Intangible assets - 0.1 6.9 Purchases, construction or 4.3 - refurbishment of investment property 8.5 Repairs, maintenance or enhancement of 5.6 3.4 investment property-------------------------------------------------------------------------------- 15.7 10.0 3.7-------------------------------------------------------------------------------- 22. 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. 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: 30 September 2006 £mInvestment property 74.9Current assets 2.3--------------------------------------------------------------------------------Total assets 77.2--------------------------------------------------------------------------------Current liabilities (1.9)Non-current liabilities (59.1)--------------------------------------------------------------------------------Total liabilities (61.0)--------------------------------------------------------------------------------Group share of joint venture net assets 16.2--------------------------------------------------------------------------------Revenue 1.5Direct costs (0.4)--------------------------------------------------------------------------------Net Rental Income 1.1Administrative expenses -Change in fair value of investment property (1.6)Finance costs - interest payable (1.2)Change in fair value of derivative financial instruments (0.2)--------------------------------------------------------------------------------Loss before tax (1.9)Taxation 0.5--------------------------------------------------------------------------------Loss after tax (1.4)-------------------------------------------------------------------------------- 30 September 2006 £mShare of joint venture at start of period -Share of joint venture loss after tax for the period (1.4)Net equity movements in joint venture 1.0Net loan movements with joint venture 18.5Group's share of unrealised profits after tax on sale ofproperties to the joint venture (1.9)--------------------------------------------------------------------------------Share of joint venture at end of period 16.2--------------------------------------------------------------------------------Comprising:Unlisted shares at cost 1.0Group's share of post acquisition retained losses after tax (1.4)Group's share of unrealised profits after tax on sale ofproperties to the joint venture (1.9)Loan to joint venture 18.5-------------------------------------------------------------------------------- 16.2-------------------------------------------------------------------------------- The Group's share of capital commitments of the Workspace Glebe joint venturewere £0.1m for commitments under contract and £0.3m authorised by directors butnot contracted. 23. Post balance sheet events On 2 November 2006 the Group acquired Seven Sisters, London N15, a 20,000 sq.ft.office building, for a cash consideration of £3.2m. On 3 November 2006 the Group completed the sale of Park Avenue, Luton for a cashconsideration of £12.1m being £0.3m over the book value at 31 March 2006. 24. Basis of preparation The financial information reflects the current versions of the standards of theInternational Accounting Standards Board (IASB) and interpretations of theInternational Financial Reporting Interpretations Committee (IFRIC) as currentlyadopted by the European Union. The interim financial statements have been prepared in accordance with theListing Rules of the Financial Services Authority. The accounting policies setout in the Annual Report and Financial Statements for the year ended 31 March2006 have been applied in preparing the financial information contained in thisreport. The Group has not adopted IAS 34 "Interim Financial Reporting" in these interimfinancial statements. This report was approved by the Board on 17 November 2006. This report is unaudited and does not constitute statutory accounts within themeaning of Section 240 of the Companies Act 1985. The financial statements forthe year to 31 March 2006, which were prepared under IFRS have been delivered tothe Registrar of Companies. The auditors' opinion on those financial statementswas unqualified and did not contain a statement made under Section 237(2) orSection 237(3) of the Companies Act 1985. 25. Interim Report Copies of this statement will be dispatched to shareholders on 20 November 2006and will be available from the Group's registered office at Magenta House, 85Whitechapel Road, London, E1 1DU and on the Group's websitewww.workspacegroup.co.uk from 9.00am on that day. Glossary of Terms Adjusted NAV per share is NAV excluding deferred tax on revaluation surpluses and capital allowances, and the fair value of derivative financial instruments(net of tax). Adjusted net assets are shareholders' funds excluding deferred tax onrevaluation surpluses and capital allowances and the fair value of derivativefinancial instruments(net of tax). Comparator IPD Index is a benchmark index computed by IPD of comparableproperties in comparable locations to those held by the Group. Core portfolio (like-for-like portfolio) are those properties that have beenheld throughout the period and which are not subject to significantimprovement/refurbishment works. Diluted NAV per share is NAV adjusted for the effect of those shares potentiallyissuable under convertible loan stock or employee share schemes. Earnings per share (EPS) is the profit after taxation divided by the weightedaverage number of shares in issue during the period. Diluted and Adjusted EPSare determined as set out under NAV. Employee Share Ownership Trust (ESOT) is the trust created by the Group to holdshares pending exercise of employee share options. Equivalent Yield is a weighted average of the initial yield and reversionaryyield and represents the return a property will produce based upon the timing ofthe income received. Estimated rental value (ERV) or market rental value is the Group's externalvaluers' opinion as to the open market rent, which on the date of valuation,could reasonably be expected to be obtained on a new letting or rent review. Gearing is the Group's net debt as a percentage of net assets. Initial yield is the net rents generated by a property or by the portfolio as awhole expressed as a percentage of its valuation. Interest cover is the number of times net interest payable is covered byoperating profit. IPD is the Investment Property Databank Ltd, a company that produces anindependent benchmark of property returns. Like-for-like (see core portfolio). Market rental values (see ERV). Net assets per share (NAV) are shareholders' funds, divided by the number ofshares in issue at the period end (excluding shares held in the ESOT). Net rents are current rents excluding any contracted increases and afterdeduction of inclusive service charge revenue. Occupancy percentage is the area of space let divided by the total net lettablearea (excluding land used for open storage). Open market value is an opinion of the best price at which the sale of aninterest in the property would complete unconditionally for cash considerationon the date of valuation (as determined by the Group's external valuers). Other Items in the Income Statement include profits and losses (together withtheir related taxation) on sales of investment properties and items of a nontrading nature such as: valuation adjustments arising from the fair valuing ofinvestment properties and derivative financial instruments; adjustments arisingfrom the treatment of head lease payments as interest; insurance claim proceeds;and certain adjustments arising from the estimation of the cost of employeeshare based payments. Profit before tax (PBT) is income less all expenditure other than taxation. REIT Real Estate Investment Trust is a tax transparent property investmentvehicle as enacted in the Finance Act 2006 and due to come into being on 1January 2007. Rent per sq ft is the current net rent divided by the occupied area. Reversion is the increase in rent estimated by the Group's external valuers,where the net rent is below the current estimated rental value. The increases torent arise on rent reviews, letting of vacant space and expiry of rent freeperiods or rental increase steps. Reversionary yield is the anticipated yield, which the initial yield will riseto once the rent reaches the estimated rental value. It is calculated bydividing the ERV by the valuation. SEE means Social Ethical and Environmental matters. The Group produces aseparate SEE report, the most recent report was titled Sustainability Report2006. Small and Medium Sized Enterprises (SMEs) are those businesses with a turnoverof less than £1m p.a. or staff of less than 50. Most Workspace customers are SMEbusinesses with staffing of up to 20. Total Shareholder Return (TSR) is the return obtained by a shareholdercalculated by combining both share price movements and dividend receipts. Trading Operations/earnings/PBT etc is that element of earnings/PBT that arisesfrom trading activity alone. It therefore excludes Other Items (above). Valuation Surplus and growth rate is measured as the valuation surplus for theperiod divided by the total value of the portfolio before revaluation. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Workspace