Workspace

TRADING PERFORMANCE

Our aim is to be the preferred choice for new and growing businesses looking for space in London. We have continued to attract strong levels of demand with enquiry levels up 5% on the prior year to an average of 1,009 per month, and new lettings running at an average of 82 per month.

	Quarter Ended
Average number per month	March 2012	Dec 2011	Sept 2011	June 2011
Enquiries	1,231	892	1,000	911
Lettings	84	78	88	77

Good levels of enquiries and lettings have continued during the first two months of the current financial year to the end of May 2012.

The like-for-like property portfolio, which excludes properties impacted by refurbishment or redevelopment, has seen both occupancy and rents improve over the year.

Like-for-Like properties	31 March 2012	30 September 2011	31 March 2011
Occupancy	87.8%	87.7%	86.1%
Rent roll	£44.5m	£43.8m	£42.5m
Rent per sq. ft.	£12.61	£12.38	£12.20

Like-for-like occupancy growth was stronger in the first half of the year while pricing increases were more dominant in the second half. This reflects the increasing number of properties that are now at or above 90% occupancy, the level at which we can typically push pricing on both new lettings and lease renewals. At March 2012, 42 of the 77 properties in the like-for-like category were at or above this 90% occupancy level (March 2011: 37 properties).

Overall occupancy improved to 85.3% at March 2012 (March 2011: 83.6%) and cash rent roll increased to £50.2m (March 2011: £48.9m). The contracted rent roll is £2.5m higher than the cash rent roll at £52.7m at March 2012. This relates primarily to stepped rent increases and rent free periods.

The improving levels of occupancy and rent roll have translated into a good growth in income and trading profit in the year.

£m	31 March 2012	31 March 2011
Net rental income - underlying	44.6	42.9
Net rental income - disposals	0.2	3.0
BlackRock joint venture income	0.5	0.1
Administrative expenses	(10.2)	(9.7)
Net finance costs	(19.1)	(22.1)
Trading Profit after Interest (adjusted)	16.0	14.2

Underlying net rental income is up 4% (£1.7m) in the year. The growth in income at like-for-like properties of 5% (£1.9m) and new income from completed refurbishments has been offset by the income attrition at properties currently being refurbished and redeveloped, as summarised below:

	£m
Like-for-like income growth	1.9
Income uplift at completed refurbishments	0.2
Income lost at sites being refurbished	(0.1)
Income lost at sites being redeveloped	(0.3)
Net rental income increase – underlying	1.7

BlackRock joint venture (JV) income represents our 20.1% share of income from the 8 properties we sold to the JV in February 2011, together with the income from the 3 properties acquired by the JV during the second half of the financial year.

Administrative expenses are up 5% (£0.5m) primarily due to inflationary cost and salary increases and higher bonus levels.

Net finance costs fell by £3.0m with net bank debt reducing over the year from £367m to £314m as a result of the Rights Issue in July 2011, together with a reduction in the average interest cost to 5.1% from 5.3% in the previous year.

Trading profit after interest (adjusted to include the rental income from our BlackRock JV) is up 13% to £16.0m in the year, benefiting from the growth in rental income and reduced interest cost. Based on this trading performance, we are proposing a 10% increase in the dividend for the year. The total cash cost of the dividend is £12.6m up 33% on the prior year due to the 25% increase in issued share capital following the Rights Issue. This total dividend is covered 1.3 times by trading profit after interest (adjusted).

£m	31 March 2012	31 March 2011
Trading Profit after Interest (adjusted)	16.0	14.2
Property Valuation Gain	35.6	30.8
Mark to Market – Interest Hedging	(4.6)	5.3
Other Items	1.5	2.5
Profit before Tax	48.5	52.8

Reported profit before tax has fallen by £4.3m in the year to £48.5m. The growth in trading profit and an increase of £4.8m in the property valuation surplus has been offset by an adverse movement of £9.9m in the mark to market value of our interest rate hedges. These hedges are structured to give stability to the interest cost over the medium-term to June 2015. The mark to market valuation represents the potential cost to the Company if these hedging contracts were cancelled, we intend however to hold these to maturity with the cost expensed as part of our reported interest cost over the period to June 2015.

VALUATION
At 31 March 2012 the wholly owned portfolio was independently valued by CBRE at £760m. The underlying valuation of our property portfolio increased by 3.0% (£21m) in the second half and 5.1% (£37m) over the year, excluding the impact of capital expenditure and disposals. The valuation movements are set out in detail below:

	£m
Valuation at 31 March 2011	719
Property Disposals	(13)
Capital expenditure	18
Revaluation surpluses:
6 Months to September 2011	16
6 Months to March 2012	21
Other	(1)
Valuation at 31 March 2012	760

The Group delivered a total property return over the year of 13.4% compared to 6.4% for the IPD Universe benchmark. This outperformance was driven by our efforts in driving rental income growth and capturing the redevelopment and alternative use potential at a number of our properties. There was no benefit from movement in valuation yields.

The valuation includes £94m (2011: £79m) of added value in relation to redevelopment potential for additional commercial space or other uses such as residential or student housing. The status of the properties where our valuers have included this added value are detailed below:

	No. of Properties	Added Value
Planning application in progress	7	£17m
Planning consent obtained	15	£37m
Redevelopment in progress	3	£40m
Total Added Value		£94m

A more detailed analysis of the property valuation is set out in Table 1.

The total net initial yield of the portfolio as reported by our valuers CBRE is 7.1% compared to 6.8% at March 2011 with no movement in the reported equivalent yield over the year, steady at 8.4%.

Total Estimated Rental Value (ERV) of the portfolio at March 2012 is £65.4m compared to cash rent roll £50.2m. ERV of the like-for-like portfolio is up 3.5% over the year to £52.9m (cash rent roll £44.5m). Capital value per sq. ft. is £152, up from £137 at March 2011.

During the year we realised £13m from the disposal of various low income producing (£0.3m) tracts of land, comprising:

• car park at Ewer Street on the Southbank for student housing for £3.9m;
• small industrial estate near London Bridge for a 26 unit residential development for £1.7m;
• the Group's former head office and adjacent car park at Whitechapel for student housing for £3.9m; and
• car park at Greenheath Business Centre for a 76 unit residential development for £3.5m.

In April 2012 we established a 50:50 joint venture partnership with Polar Group for the potential redevelopment of Enterprise House, Hayes. This is a 130,000 sq. ft. Grade II listed office building, formerly part of the EMI head office complex, well located adjacent to the proposed Hayes and Harlington Crossrail station. We sold this property into the joint venture at a valuation of £3.2m (a £0.9m valuation uplift from its value at March 2011). We will act as property manager while our partner will progress the planning for a mixed use redevelopment.

NET ASSETS
EPRA net asset value per share at 31 March 2012 was £3.08 (2011: £2.86), an increase of 8% in the year with the main movements in net asset value per share highlighted below:

EPRA NAV per share	£
At 31 March 2011 (restated)	2.86
Property valuation surplus	0.25
Dividends paid in year	(0.07)
Other	0.04
At 31 March 2012	3.08

The increase in net asset value was driven by the increase in the property valuation offset by dividends paid to shareholders in the year.

TABLE 1:
PROPERTY VALUATION

At 31 March 2012	No. of Properties	Existing Value	Added Value	Total Value	Valuation Surplus	Net Initial Yield	Equivalent Yield
Like-for-like Properties	77	£569m	£15m	£584m	3.5%	7.2%	8.3%
Refurbishments	7	£64m	£14m	£78m	2.9%	4.8%	8.1%
Redevelopments	8	£33m	£65m	£98m	15.7%	10.0%	10.4%
Total	92	£666m	£94m	£760m	5.2%	7.1%	8.4%

TABLE 2:
REFURBISHMENT ACTIVITY

	Estimated Cost	Expected Completion	Upgraded Area (sq. ft.)	New Area (sq. ft.)	Estimated ERV (psf)
Great Guildford Street, SE1	£14m	Q3 2014	82,000	20,000	£28
Greenheath, E2	£10m	Q3 2013	44,000	–	£22
Exmouth House, EC1R	£4m	Q3 2013	52,000	5,000	£28
Leyton Industrial Village (Phase I), E10	£3m	Q3 2013	–	25,000	£12
Chester House (Phase II), SW9	£2m	Q2 2013	–	9,000	£30
Westminster (Phase I), SE11	£2m	Q2 2013	–	6,000	£30

REFURBISHMENT ACTIVITY
In line with the plans set out at the time of our Rights Issue last year we are now accelerating our refurbishment programme. In June 2011, we completed the first phase refurbishment of 28,000 sq. ft. at Chester House, Kennington (£4m) and we are on schedule to complete by September 2012 the:

• 50,000 sq. ft. refurbishment and two storey roof extension at Canalot Studios (£5m); and
• 9,000 sq. ft. extension to Whitechapel Technology Centre (£2m).

We intend to commence on site at a further six properties over the next three months as detailed in Table 2. Given the current environment we will closely monitor our commitments at every stage of these projects.

We have a further nine schemes, which includes the second phases at Leyton and Westminster, representing 374,000 sq. ft. of space with planning consent that we can progress during 2014 and 2015.

REDEVELOPMENT ACTIVITY
Our properties are in areas across London where there is strong demand for mixed use redevelopment. These schemes generally require demolition of an existing building to deliver new residential and commercial space. Our business model on these schemes is to obtain the mixed use planning consent and then partner a residential developer to undertake the construction of both the residential and commercial buildings at no cost to Workspace. We receive back a new upgraded commercial building together with a combination of cash and overage on the residential component.

We have obtained planning consent on four of these mixed use schemes for 983 residential units and 219,000 sq. ft. of commercial space with redevelopment underway on two and the remaining two in solicitors' hands with potential redevelopment partners. Summary details are set out in Table 3.

A further four schemes are being progressed through planning. The most significant is at Tower Bridge where seven acres of the site has been re-designated for residential use and we hope to submit a planning application for 800 residential units shortly.

FINANCING
The Group continues to generate strong operating cash flow in line with trading profits. We are not seeing any noticeable signs of distress across our customer base with bad debts in the year at £0.4m (2011: £0.2m) and cash collection statistics strong.

TABLE 3:
REDEVELOPMENT ACTIVITY

	Redevelopment Partner	Expected Completion	Commercial Area (sq. ft.)	Estimated ERV (psf)	Other Proceeds
Wandsworth, SW18	Mount Anvil	Q2 2014	53,000	£22	Overage
Highbury Grove, N5	Taylor Wimpey	Q1 2014	61,000	£22	Cash/Overage
Grand Union, W10	In negotiation	2014	60,000	£22	–
Bow Enterprise, E3	In negotiation	2017	45,000	£12	–

Net bank debt has reduced by £53m in the year to £314m at March 2012, which includes £24m of cash on deposit. A summary of the movements in cash flow are set out below.

			£m
Trading
Net cash from operations	17
Dividends paid	(11)		6
Rights Issue Proceeds (net)			63
Other Property Related
Capital expenditure	(19)
BlackRock investment	(5)		(11)
Disposals	13
Other			(5)
Net reduction in bank debt			53
Net bank debt at 31 March 2011			(367)
Net bank debt at 31 March 2012			(314)

The Group has £393m of committed bank facilities with an average period to maturity of 3.2 years and earliest maturity in December 2014. We have a good spread of lenders with a total of eight banks providing our facilities with no individual bank providing more than £62.5m.

Details of our facilities are set out below:

	Committed Facilities	Drawn Amount	Term	Margin Over LIBOR
RBS/HSBC	£125m	£70m	Jun 2015	2.50%/2.75%
Bayern Club	£200m	£200m	Jun 2015	2.25%
Lloyds Club	£68m	£68m	Dec 2014	1.25%
	£393m	£338m

We have £55m of available facilities and £24m in cash deposits. Overall loan to value of our debt is 41% down from 50% at March 2011 and we have good headroom on all of our bank covenants.

Our interest rate hedging is structured to maintain a stable interest rate over the medium term. We currently have £260m of fixed rate hedges representing 77% (2011: 74%) of our drawn debt facilities at an average rate of 3.5% (2011: 3.8%).

BLACKROCK WORKSPACE PROPERTY TRUST (BLACKROCK JV)
We have a 20.1% interest in this JV for which we also act as property manager receiving management and performance fees. It was initially seeded with eight properties that we sold to the JV in February 2011 for £35m. Three acquisitions have been completed during the year for £21m and subsequent to the year-end we have exchanged on a property on City Road, EC1 for £7.3m with completion set for 20 June 2012. We expect the JV to have fully invested the £100m of equity committed by BlackRock and Workspace by August 2012.

DIVIDEND
The Board has proposed a final dividend of 5.86 pence per share, (2011: 5.33 pence as restated for the Rights Issue in July 2011 and the share consolidation in August 2011) which will be paid on 3 August 2012 to shareholders on the register at 13 July 2012. 50% of this dividend will be paid as a Property Income Distribution (PID) in respect of the Group's tax exempt property rental business, with the balance as a normal dividend (non-PID).

PRINCIPAL BUSINESS RISKS

Risk management is an integral part of our activities and day to day running of the business. Risks are assessed, discussed and taken into account when deciding upon future strategy, approving transactions and monitoring performance. The process of identifying risks, assessing their impact and monitoring their likelihood is considered at two levels:

1. Strategic Risks:
   These are identified, assessed and managed by the Main Board and Audit Committee.


2. Operational Risks:
   These are identified, assessed and managed by Executive Committee Directors.

This segregation ensures that risks related to our strategy and major decisions are considered at Main Board level and that our level of risk appetite remains appropriate. Day to day operational risks are more closely reviewed and managed by the Executive team and senior management, with linkage between the two managed as appropriate.

Risk registers are maintained by the Main Board for strategic risks and by the Executive Committee for operational risks. The absolute levels of risk, the net levels of risk taking into account mitigating controls and the appropriate level of risk appetite are reviewed regularly. High rated risks identified in the registers are regularly reviewed by the Board, Audit and Executive Committees.

Details of our principal strategic risks and the mitigating activities in place to reduce these risks are set out below. There have been no significant changes to the risk profile over the last year and the Board are satisfied that we continue to operate within our risk appetite.

Risk area	Mitigating activities		Change from 2011/12
Finance Risk Reduced availability and cost of bank financing resulting in inability to meet business plans or satisfy liabilities.	Funding requirements for business plans are reviewed regularly and options for alternative sources of funding monitored. Range of banking relationships maintained, refinancing strategy reviewed regularly. Interest rate hedging policy in place to minimise exposure to short-term rate fluctuations.		No Change

Risk area	Mitigating activities		Change from 2011/12
Valuation Risk Value of our properties declining as a result of macroeconomic environment, external market, or internal management factors.	Investment market mood monitoring. Market yields and pricing of property transactions monitored closely across the London market. Alternative use opportunities pursued across the portfolio and planning consent progressed. Sufficient headroom on Loan to Value banking covenants is maintained and reviewed.		No Change

Risk area	Mitigating activities		Change from 2011/12
Occupancy Risk Demand by businesses for our accommodation declining as a result of social, economic or competitive factors.	Weekly monitoring of occupancy levels, pricing and reasons for customers vacating at each property and exit interviews conducted. On-site staff maintain regular contact with customers and local monitoring of competitors offering space. Extensive marketing using the 'Workspace' brand. Flexibility offered on deals by dedicated in-house marketing and letting teams.		No Change

Risk area	Mitigating activities		Change from 2011/12
London Changes in the political, infrastructure and environmental dynamics of London lead to reduced demand for space from businesses.	Regular monitoring of the London economy, research reports and the commissioning of research. Regular meetings with the GLA and London Boroughs.		No Change

Risk area	Mitigating activities		Change from 2011/12
Development Risk Impact to underlying income and capital performance due to: Adverse planning rulings. Construction cost and timing overrun. Lack of demand for developments.	Understanding of planning environment and use of appropriate advisers. Detailed development analysis and appraisal undertaken, sensitivity and risk scenarios considered. Board level discussion and approval prior to project commitment. Contract structuring to reduce/eliminate build risk. Construction project teams meet regularly, discuss issues and resolve or escalate as appropriate. Management of development phasing to match demand. Deferral to retain properties for existing rental use.		Increased

Risk area	Mitigating activities		Change from 2011/12
Investment Risk Underperformance due to inappropriate strategy of: Timing of disposal decisions. Acquisitions timing. Non achievement of expected returns.	Regular monitoring of asset performance and positioning of portfolio. Acquisition due diligence appraisal and business plans analysis. Regular monitoring of acquisition performance against target returns.		No Change

Risk area	Mitigating activities		Change from 2011/12
Transactional Risk Joint ventures or other ventures with third parties do not deliver the expected return.	Review and monitoring of potential joint ventures before agreed. Requirements for business plans are reviewed regularly. Regular review of performance of joint ventures throughout term.		No Change

Risk area	Mitigating activities		Change from 2011/12
Regulatory Risk Failure to meet regulatory requirements leading to fines or penalties or the introduction of new requirements that inhibit activity.	REIT conditions monitored and tested on a regular basis and reported to the Board. Close working relationship maintained with appropriate authorities and all relevant issues openly disclosed. Advisers engaged to support best practice operation.		No Change

Risk area	Mitigating activities		Change from 2011/12
Business Interruption Risk Major external events result in Workspace being unable to carry out its business for a sustained period.	Monitor security threat/target information. Business Continuity plans and procedures in place and regularly tested.		No Change

Risk area	Mitigating activities		Change from 2011/12
Reputational Risk Failure to meet customer and external stakeholder expectations.	Customer survey undertaken and results acted upon. Training and mystery shopper initiatives undertaken. Regular communication with stakeholders.		No Change

CORPORATE SOCIAL RESPONSIBILITY

CORPORATE SOCIAL RESPONSIBILITY IS CREATING VALUE FOR WORKSPACE GROUP
Corporate Social Responsibility is fully integrated into our business activities. We believe our Corporate Social Responsibility strategy drives occupancy by delivering cost savings for our properties and rents by helping to create a more attractive business environment for our customers.

Each year, we set targets, focused on increasing occupation and strengthening key stakeholder relationships. In 2011/12, we fully achieved eight targets and partially achieved two, highlights are shown below. Looking ahead, we will continue to focus on improving performance in our four priority areas (carbon management, waste management, customer satisfaction and community investment). We will seek to effectively communicate our strategy and actions in order to:

• Engage our customers in delivering energy and waste efficiencies.
• Strengthen relationships with customers, investors and employees.
• Enhance our brand as a responsible landlord for small and medium enterprises.

Jones Lang LaSalle has assessed our targets and key performance indicators and has carried out a review of our performance over the year.

RECYCLING BUILDINGS SAVES CARBON EMISSIONS
Workspace commissioned the whole lifecycle carbon analysis by Jones Lang LaSalle to determine whether our business model of recycling older building, is inherently more carbon efficient than continually demolishing and rebuilding office space in London.

Over a 60-year lifespan, Workspace Group's recent refurbishment of Chester House delivers:

• 25% lower emissions than a new build central London benchmark building.
• Saving over 9,500 tonnes of CO₂.
• 12% lower emissions than a new build regional benchmark building.
• Saving more than 4,000 tonnes of CO₂.

INDUSTRY INITIATIVES