Workspace Group plc

 

We have four clear priorities:

Priority 1: To increase occupancy and rental income

There continues to be strong demand from small and growing businesses across London to lease space on flexible terms; enquiries averaged 960 per month and lettings 88 per month over the last year. Good levels of enquiries and lettings have continued during the first two months of the current financial year.

	Quarter Ended
Average number per month	March 2011	December 2010	September 2010	June 2010
Enquiries	1,045	917	970	908
Lettings	79	97	88	87

Portfolio performance
The overall occupancy across the portfolio at 31 March 2011 was 84.1% (March 2010: 81.9%) and cash rent roll was £52.0m (March 2010: £50.7m). The contracted rent roll was £2.3m higher than the cash rent roll, at £54.3m (March 2010: £53.9m).

The difference between the cash and contracted rent rolls relates to stepped rental increases (£1.7m), rent free periods (£0.5m) and rent discounts (£0.1m). £1.2m of contracted rent roll is due to be converted to cash rent roll in the six months ending September 2011.

For consistency in reporting these lead indicators, the overall rent roll and occupancy statistics at March 2011 include the properties which were sold to the BlackRock Workspace joint venture in February 2011. Excluding these properties, total occupancy at March 2011 was 83.6% and cash rent roll was £48.9m.

A more detailed analysis of performance by property category is set out in the following sections.

Like-for-like Portfolio (80 properties valued at £543m)
This category contains the majority of the property portfolio. It excludes properties purchased in the last 12 months and any properties that have been subject to major refurbishment in the last 24 months (the time it would normally take to reach our target occupancy level of 90%). The comparatives have been restated to exclude the properties we sold into the BlackRock Workspace joint venture in February 2011.

Like-for-like	March 2011	December 2010	September 2010	June 2010	March 2010
Occupancy	86.2%	86.1%	85.3%	84.0%	83.6%
Cash rent roll	£40.1m	£39.1m	£39.1m	£38.6m	£38.6m
Average rent per sq. ft.	£11.89	£11.58	£11.63	£11.66	£11.69

Like-for-like occupancy improved through the year and was up 2.6% in total, to 86.2%. We have seen reduced levels of rent free incentives and discounts on new lettings and increased pricing at some of our more central locations. The combined effect of these improvements was a 3.9% (£1.5m) increase in the cash rent roll in the year.

Our target for like-for-like occupancy is 90%, a level that gives us greater opportunity to increase pricing. We are 3.8% away from this in overall terms, although 39 of the 80 properties at March 2011 were already at or exceeded this 90% occupancy target.

Refurbishment Portfolio (5 properties valued at £106m)
These are properties which we have either refurbished in the last 24 months, are currently refurbishing or have acquired in the last year. We target occupancy of 90% within two years of reopening a refurbished building.

	Occupancy		Cash rent roll
Refurbishment	March 2011	March 2010	March 2011	March 2010
Kennington Park	75%	77%	£3.8m	£4.0m
Other	76%	74%	£3.2m	£2.9m

Included in this category are the refurbishment projects at Kennington Park, Great Guildford Street and Canalot Studios. The other properties in this category comprise Q West, acquired in October 2009, and Barley Mow where the refurbishment was completed in November 2009.

Kennington Park is the highest value property in our portfolio (£57m at March 2011). This seven-acre site, close to Oval underground station, is being repositioned on a phased basis from a closed industrial site used mainly for storage to a thriving open location for a wide range of small and growing businesses. This long-term regeneration project is progressing well.

There are 11 separate buildings on the Kennington site and the first redevelopment was of the Canterbury Court building (102,000 sq. ft.), which we completed in January 2008. We have now almost completed the refurbishment of the adjacent Chichester and Chester House buildings (24,000 sq. ft.), at a total cost of £3.7m, which will provide a broad range of studio-style units over two floors. Our head office will also relocate to Chester House in July 2011 which will enable completion of the sale of our existing head office building, Magenta House, for a student housing development.

In addition to the five properties in this category we have planning consent for additional commercial space and refurbishment at a further seven of our properties that are currently in the like-for-like category. In due course as we proceed with these schemes they will be moved to the refurbishment category.

Other (9 properties valued at £70m)
These are properties where occupancy has been affected by our redevelopment plans on the site (such as where landlord breaks are in place to achieve vacant possession) or where we are running down occupancy ahead of disposal.

Other	March 2011	March 2010
Occupancy	75%	76%
Cash rent roll	£1.8m	£2.2m

Included in this category are three properties valued at £41.3m at March 2011 where we are progressing with mixed use redevelopment schemes. In each case, we will receive a new purpose-built business centre as part of the proceeds of the sale of the residential component of the scheme. At Grand Union we have outline planning consent and at Bow Enterprise Park we recently received detailed planning consent. At Wandsworth Business Village, we received planning consent in 2010 and have started on the redevelopment in partnership with a residential developer, Mount Anvil, with completion targeted for mid-2014.

Also included in this category is the northern part of the Tower Bridge Business Complex valued at £14.7m at March 2011 where we have achieved a re-designation for residential use.

Priority 2: To continue to drive value from our existing property portfolio

The valuation of our property portfolio increased by 4.7% over the last year, excluding the impact of capital expenditure and disposals. A summary of the movements in valuation through the year is set out below:

	£m
Portfolio valuation at 31 March 2010	717
Property disposals, including into BlackRock joint venture	(40)
Capital expenditure	10
Property valuation surplus:
– quarter to June 2010	6
– quarter to September 2010	9
– quarter to December 2010	6
– quarter to March 2011	14
Less: Surplus on disposals	(3)
Portfolio valuation at 31 March 2011	719

A more detailed breakdown of the valuation at March 2011 by property category is set out below. Properties have added redevelopment value when we have obtained, or are well advanced with obtaining, planning approval for an intensification of existing use or for alternative use.

Valuation	Existing Use		Added	Total
at March 2011	Valuation*	Yield*	value	Valuation	ERV
Like-for-like properties	£514m	7.8%	£29m	£543m	£48.1m
Refurbishment properties	£93m	7.5%	£12m	£106m	£9.0m
Other properties	£32m	5.6%	£38m	£70m	£4.3m
Total	£639m	7.7%	£79m	£719m	£61.4m

*

The existing use valuation excludes added redevelopment value and the existing use yield is the cash rent roll return on the existing use valuation.

The movement in like-for-like income yield and estimated rental value (ERV) over the year are set out below:

Like-for-like	March 2011	September 2010	March 2010
Existing use income yield	7.8%	7.8%	7.9%
Estimated Rental Value (ERV)	£48.1m	£48.5m	£48.8m

There has been little movement in the like-for-like income yield on our portfolio through the year and only a marginal decline in rental values. In recent months we have seen evidence of new lettings being achieved at rental levels ahead of the March 2011 ERVs.

The total net initial yield on our whole portfolio, as calculated by our valuers CBRE, is 6.8% (March 2010: 7.1%) and the equivalent yield is 8.4% (March 2010: 8.8%). The reduction in net initial yield is a result of the increase in added redevelopment value with only a marginal reduction in the existing use income yield.

The capital value per sq. ft. is £137 (March 2010: £126), lower than the replacement value for the buildings alone (excluding the value of the land) with rents averaging £11.47 per sq. ft. (March 2010: £11.22).

A summary of the movements in added redevelopment value through the year is set out below:

	£m
Added value at 31 March 2010	55
Value added on new schemes in year	12
Increase in value of existing schemes	12
Added value at 31 March 2011	79

The redevelopment value added on new schemes in the year relates to the planning consents received for new commercial space at Kennington Park (£4.5m) and Exmouth House (£1.0m) and the re-designation of Tower Bridge to mixed use (£6.6m).

The increase in the added value of existing schemes is a result of the planning consent now received at Bow Enterprise Park (£4.4m), the conditional sale of the car park at Ewer Street for student housing (£2.7m), which completed in April 2011, and commencement of the mixed use redevelopment at Wandsworth Business Village (£5.3m).

Priority 3: To continue to work and churn the asset base to realise its full potential

During the year we completed £44m of disposals and contracted for a further £13m of conditional disposals, which should complete in 2011/12. The overall exit income yield on this £57m of disposals would be 5.9%. This compares to £55m of disposals made in the previous year at an exit yield of 6.3%. Disposals during the last year comprised £35m of properties sold into our joint venture with BlackRock and £9m of other disposals.

BlackRock Joint Venture
In February 2011, we established a joint venture with the BlackRock UK Property Fund. Workspace holds a 20.1% equity interest in the joint venture, which is called the BlackRock Workspace Property Trust (BWPT).

BWPT’s objective is to invest up to £100m in high-yielding, multi-let office and industrial properties in and around London, where there is potential for rental growth and added value from active asset management. Workspace is responsible for sourcing and recommending investment opportunities and will be the property manager for BWPT’s assets. We will receive asset management and investment fees, together with a performance fee based on BWPT’s relative performance against a comparator IPD index. The Trust was seeded with eight properties from Workspace, sold at the December 2010 valuation of £35.1m. We are currently reviewing a range of potential acquisitions.

Other disposals
We continually focus on opportunities to extract added value from our property portfolio. Particularly attractive is the disposal of low or non-income generating tracts of land, allowing us to reinvest the proceeds in our core business. A summary of completed and contracted disposals is set out below:

 

Property	Status	Timing	Price	Use
Langdale House	Sold	Jul 2010	£4.3m	Commercial
Unit 5, 2 Cullen Way	Sold	Jan 2011	£0.3m	Commercial
Surrey House	Sold	Jan 2011	£4.7m	Hotel
Ewer Street Car Park	Sold	April 2011	£3.9m	Student
				Housing
Magenta House	Contracted – subject to vacant possession	Aug 2011	£4.0m	Student Housing
Alscot Road	Contracted – subject to vacant possession	H1 2011	£1.7m	Residential
Greenheath Car Park	Contracted – subject to planning	H1 2011	£3.4m	Residential

In addition, we are working on a wide range of work-led regeneration opportunities with local authorities across London:
• At Baldwin Gardens EC1, we received planning consent in August 2010 for a new 62,000 sq. ft. commercial building, replacing the existing 43,000 sq. ft. building.
• At Exmouth House EC1, we received planning consent in September 2010 for an additional 8,000 sq. ft. of commercial space on a new floor.
• At Bow Enterprise Park E3, an industrial estate of 77,000 sq. ft., we received planning consent in February 2011 for 550 flats and 60,000 sq. ft. of commercial space.
• At Poplar E14, an industrial estate of 75,000 sq. ft., we submitted a planning application for 345 flats and 62,000 sq. ft. of commercial space, with a determination expected shortly.
• At Wandsworth Business Village SW18, where we have planning consent for 209 flats and 80,000 sq. ft. of commercial space, we have entered into an agreement with Mount Anvil for the redevelopment of the estate. Site clearance has commenced and the scheme is expected to be completed in mid 2014. Workspace will receive a new 60,000 sq. ft., business centre, retain the freehold of the site and receive 50% of any proceeds from the sale of the privately sold flats in excess of £50m; in consideration for granting a 999-year lease to Mount Anvil on the scheme’s residential component. We would envisage a similar partnership model for the redevelopment schemes at Highbury Grove, Bow Enterprise Park and Grand Union.
• At Great Guildford Street SE1, a 93,000 sq. ft. business centre, we received planning consent in October 2010 for a new entrance hall configuration. This will enable us to upgrade the space at this business centre, to take advantage of the Bankside area’s regeneration. We have now submitted a further planning application for 40,000 sq. ft. of new commercial space on an additional floor that we will look to build alongside the repositioning of the entrance hall.
• At Kennington Park SW9, we have received planning consent for 50,000 sq. ft. of retail and gym use in the basement of Canterbury Court and an additional 12,000 sq. ft. floor on Chichester/Chester House.
• At Tower Bridge SE16, following extensive consultation and discussions with the local authority over the last two years, the London Borough of Southwark has re-designated the seven-acre north part of the estate from preferred industrial use to residential use, for up to 1,070 units. We are preparing a planning application and will submit it later this year.

 

Priority 4: To utilise and exploit our brand more fully

Our brand strength across London’s small business community is underpinned by a high satisfaction rating from our customers. In our recently completed annual customer survey, 88% of our customers said they would recommend Workspace to other businesses. Our 4,000 customers employ some 30,000 people and each business has relationships with up to 10 others, so our reputation and brand are critical assets.

We are working hard to strengthen and extend the reach of our brand. Recent activity includes:
• Rolling-out community web interest sites at our business centres, which contain a rich variety of text and video content. These sites help our customers to network day-to-day and give peer-to-peer business advice. There are now 11 micro sites up and running.
• Using our marketing expertise more widely, we launched anyspacedirect.co.uk in 2010. This website markets small business space for a number of property owners direct to SMEs across the UK. It now hosts around 1,000 properties and receives over 26,000 hits a month.
• Opened our first two Club Workspace business lounges, at Clerkenwell Workshops and The Leathermarket in May 2011. These provide a club-type monthly membership for those entrepreneurs and small businesses that do not yet require permanent business space. Members can utilise the business lounge facilities for a fixed monthly fee. We plan to launch further business lounges across our portfolio over the next two years.
• All of the properties in the BlackRock joint venture are managed and branded by Workspace. As we acquire new properties around London this will further extend the reach of our brand.

Financial performance

Trading

£m	2011	2010
Net rental income	45.9	44.4
Staff and other administrative costs	(8.6)	(8.0)
Share-based incentive costs	(1.1)	(1.1)
Net interest cost	(22.1)	(24.5)
Trading profit after interest	14.1	10.8
Property valuation gain	30.8	1.8
Workspace Glebe joint venture adjustments	–	14.2
Other items	7.9	(0.8)
Profit for the year before tax	52.8	26.0

Profit before tax has increased significantly to £52.8m from £26.0m last year. The largest element of this improvement is the increase in the property valuation.

Trading profit after interest is up 31% (£3.3m) in the year to £14.1m. The main components of this increase were:
• Net rental income is up 3.3% (£1.5m) with the full year benefit from the Glebe portfolio acquired in December 2009 offset by disposals. Empty rates reduced from £1.7m to £1.0m as occupancy levels improved.
• Staff and other costs are up 7.5% (£0.6m). This comprised inflationary cost increases, excluding staff salaries which were flat, and an increase in bonus costs reflecting the improved trading performance.
• Interest costs fell by £2.4m during the year, with the average interest cost running at 5.3% compared to 6.7% last year. We have 74% of our borrowings fixed at an average rate of 3.8%, with the remainder of our debt at 1 or 3 months’ LIBOR, which are currently at historic lows. Our interest rate hedging has been structured with the intention of being able to maintain a stable interest rate over the medium term at 5.5% to 6.0% even as short-term LIBOR rates recover to their longer term levels.

Other items include the increase in the mark to market value of our hedging instruments (£5.3m) and the profit on the property disposals made in the year (£2.8m).

Cash flow

£m	2011	2010
Operating cash flow	37.9	36.3
Net interest paid	(21.8)	(25.2)
Net cash from operations	16.1	11.1
Dividends to shareholders	(8.2)	(8.1)
Share placing proceeds (net of costs)	–	18.8
Rights Issue costs (proceeds in 2009)	–	(4.3)
Capital expenditure	(9.4)	(5.9)
Property acquisitions	–	(4.0)
Property disposal proceeds	43.9	57.1
Investment in BlackRock Workspace joint venture	(7.4)	–
Corporation tax	(2.1)	–
Hedging amendments	(6.5)	(8.6)
Loan facility arrangements fees and costs	(3.8)	–
Loan facility restricted cash	(5.0)	–
Other	(1.0)	(1.8)
	16.6	54.3
Acquisition of Glebe joint venture (including debt)	–	(83.0)
Decrease/(increase) in net borrowings	16.6	(28.7)

The Group continues to generate a strong operating cash flow in line with trading profits. Bad debts continue to be maintained at very low levels and amounted to £0.2m in the year (2010: £0.3m).

As previously highlighted, we have increased the level of refurbishment activity during the year with £2.8m of capital expenditure at Kennington Park on the refurbishment of the Chichester and Chester House buildings. The level of expenditure will increase further during the next year as we progress on the refurbishment projects at Canalot Studios and Great Guildford Street.

Corporation tax of £2.1m paid in the year was the REIT entry charge for the former Glebe joint venture properties which we purchased in December 2009.

A number of interest rate hedging contracts were amended or cancelled during the year, as a result of the reduction in the level of debt and the Bayern Club refinancing. The Bayern Club refinancing also has an adverse working capital impact due to a rolling three month delay on the release of surplus rental income until the interest payment has been made each quarter. The Bayern Club facility is provided by Bayern LB, Deutsche Pfandbriefbank, Santander and Nationwide.

Balance Sheet and Financing

£m	2011	2010
Investment properties	713	713
Investment in BlackRock Workspace joint venture	7	–
Net borrowings	(367)	(383)
Interest-rate swaps	(11)	(23)
Other net liabilities	(8)	(20)
Net assets	334	287
EPRA NAV per share	29.5p	26.7p
Loan to value (LTV)	50%	53%

We have three banking facilities, details of which are set out below:

	Facility amount £m	Drawn at March 2011 £m	Term	Margin over LIBOR
RBS*
Term/revolving facilities	125	95	June 2015	2.50%/
				2.75%
Overdraft	4	4	On demand	2.25%
Bayern Club
Term facility	200	200	June 2015	2.25%
Lloyds BoS
Term facility	68	68	December 2014	1.25%
Total	397	367

*

A new RBS facility to June 2015 was signed in June 2011.

We test the covenants on each of our facilities every quarter. We continue to have in excess of 20% headroom on all our valuation and interest related covenants.

Dividend

Reflecting improved trading performance during the year, the Board proposes a final dividend of 0.55p per share. Combined with the interim dividend, this would take the total dividend for the year to 0.825p per share, an increase of 10% on prior year. The final dividend will be paid as a Property Income Distribution (PID) to all shareholders on the shareholder register as at 15 July 2011.

Share consolidation

We are proposing at the forthcoming AGM a resolution for a 1 for 10 share consolidation. Based on the current issued share capital of the Company this would reduce the number of shares in issue from 1.15 billion to 115 million.

Key Statistics

	Quarter ending 31 March 2011	Quarter ending 31 December 2010	Quarter ending 30 September 2010	Quarter ending 30 June 2010	Quarter ending 31 March 2010
Workspace Group Portfolio
Number of estates	94	104	104	105	105
Lettable floorspace (million sq. ft.)†	5.1	5.4	5.5	5.5	5.5
Number of lettable units	4,856	5,175	5,175	5,205	5,156
ERV	£61.4m	£65.1m	£65.6m	£66.1m	£66.4m
Reversionary yield*	8.5%	8.8%	9.0%	9.1%	9.3%
Cash rent roll of occupied units	£48.9m	£51.0m	£51.0m	£51.2m	£50.7m
Average rent per sq. ft.	£11.47	£11.10	£11.19	£11.26	£11.22
Overall occupancy	83.6%	84.4%	83.2%	82.7%	81.9%
Like-for-like lettable floor space (million sq. ft.)	3.9	3.9	3.9	3.9	3.9
Like-for-like cash rent roll	£40.1m	£39.1m	£39.1m	£38.6m	£38.6m
Like-for-like average rent per sq. ft.	£11.89	£11.58	£11.63	£11.66	£11.69
Like-for-like occupancy	86.2%	86.1%	85.3%	84.0%	83.6%
BlackRock Workspace Property Trust
Property valuation (£m)	£35m	–	–	–	–
Number of estates	8	–	–	–	–
Number of lettable units	281	–	–	–	–
ERV	£3.4m	–	–	–	–
Lettable floorspace (million sq. ft.)†	0.3	–	–	–	–
Cash rent roll of occupied units	£3.1m	–	–	–	–
Average rent per sq. ft.	£10.57	–	–	–	–
Overall occupancy	92.1%	–	–	–	–
Financial performance
Property valuation (£m)	719	741	732	725	717
Net assets (£m)	334	–	300	–	287
EPRA NAV per share (p)	29.5	–	27.6	–	26.7
Net rental income interest cover (cumulative)	2.07x	–	2.04x	–	1.81x
Trading interest cover (cumulative)	1.63x	–	1.59x	–	1.44x
Gearing (%) on EPRA net assets	106%	–	123%	–	125%
Loan to value (%)	50%	–	54%	–	53%
Available borrowing facilities (£m)	30	–	21	–	36

†

Excludes storage space

*

Based on ERV divided by valuation