Workspace Group
Annual Report 2013

Plain-text annual report

WORkSPAcE UNDERSTANDS WORk SPAcE ANNUAL REPORT AND AccOUNTS 2013 W O R k S P A c E G R O U P P L c A N N U A L R E P O R T A N D A c c O U N T S 2 0 1 3 WORkSPAcE GROUP PLc Chester house Kennington Park 1-3 Brixton road London SW9 6DE telephone: +44 (0) 20 7138 3300 Web: www.workspace.co.uk Email: info@workspace.co.uk if you require information regarding business space in London call +44 (0) 20 7369 2390 or visit www.workspace.co.uk. this report is printed on materials which are FSc® certifi ed from well-managed forests. these materials contain EcF (Elemental chlorine Free) pulp and are 100% recyclable. Designed by carnegie Orr (a Workspace Group customer) +44 (0)20 7610 6140. www.carnegieorr.com cONTENTS REViEW OF OPERATiONS IFC Our business model 01 2013 highlights 02 Strong momentum 04 Chairman’s Statement 06 Chief Executive Offi cer’s Strategic Review 08 Our strategy 10 12 Portfolio potential 14 Corporate Social Responsibility 16 Business Review 26 Key Property Statistics Generating value GOVERNANcE 28 Chairman’s Introduction 30 The Board and Executive Committee 32 Report of the Directors 35 Corporate Governance Report 45 Directors’ Remuneration Report 61 Directors’ Responsibilities FiNANciAL STATEMENTS 62 Independent Auditors’ Report to the Members of Workspace Group PLC 64 65 63 Consolidated Income Statement Consolidated Statement of 63 Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows 66 67 Notes to the Financial Statements 91 Independent Auditors’ Report to the Members of Workspace Group PLC (Parent Company) 92 Parent Company Balance Sheet 93 Notes to the Parent Company Financial Statements 95 Five-Year Performance 95 Key Performance Indicators SHAREHOLDER iNFORMATiON 96 Property Portfolio 99 100 Glossary of Terms Investor Information our business moDel worKspaCe group online WHAT WE DO Workspace provides business premises tailored to the needs of new and growing companies across London. HOW WE DO iT Workspace understands the changing needs of these companies and actively adapts and manages its buildings to create an environment for growth. WHERE WE DO iT Workspace owns over 100 properties in London providing 5.2 million square feet of space and is home to some 4,000 businesses employing more than 30,000 people. HOW WE GENERATE VALUE Workspace is growing through deep market knowledge, operational excellence and strong customer relationships. Workspace is enhancing both core operational income and capital values by repositioning specifi c property assets. Workspace provides the right properties to attract its customers and the right services to retain them and help them grow. RELATED iNFORMATiON OUR STRATEGy P.08 workspace’s comprehensive website gives you fast, direct access to a wide range of Company information. to fi nd out more go to www.workspace.co.uk cUSTOMERS Offi ce Light industrial Studios Workshops Serviced offi ces co-working investors iNVESTORS about us corporate information corporate social responsibility rNS announcements Share price and information Publications archive Bonds cO-WORkiNG club locations Join club Our events hold a meeting about club 2013 highlights iNVESTOR HiGHLiGHTS DiViDEND PER SHARE GROWTH TOTAL SHAREHOLDER RETURN +10% 51% TRADiNG PERFORMANcE ENQUiRiES PER MONTH LikE-FOR-LikE OccUPANcy 1,037 2013 2012 2011 89.8% 1,037 1,009 960 2013 2012 2011 89.8% 87.7% 86.2% LikE-FOR-LikE RENT ROLL TRADiNG PROFiT (AFTER iNTEREST) +9% +12% 2013 2012 2011 up 5% up 4% up 9% 2013 2012 2011 £17.9m £16.0m £14.2m cAPiTAL PERFORMANcE PROPERTy VALUATiON +8% 2013 2012 2011 LOAN TO VALUE 40% up 5.1% up 4.7% up 7.7% 2013 2012 2011 40% 41% 50% EPRA NAV PER SHARE TOTAL PROPERTy RETURN +13% 2013 2012 2011 13.8% £3.08 £2.86 £3.48 2013 2012 2011 13.8% 13.4% 11.7% 01 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013The businesses we host are critical in driving the Uk’s growth and by serving them with focus and energy we will maintain our strong momentum. To achieve this we are putting in place: – Clear priorities. – the right strategy and team. – Deeper customer relationships, increased lettings. – hands-on active portfolio management. – refined debt profile enabling more flexible operations. – Focused programme to refurbish, redevelop and acquire the right properties. DANiEL kiTcHEN NON-ExEcutivE chairmaN strong momentum 02 Workspace Group PLC Annual Report and Accounts 2013Review of operations Governance Financial statements Shareholder information 01-26 27-61 62-95 96-100 03 Workspace Group PLC Annual Report and Accounts 2013Chairman’s statement clear priorities. Renewed momentum. Workspace had a successful year, sticking resolutely to our strategy of driving value by growing income through increased rent and occupancy while adding to the value of our assets through focused refurbishment and redevelopment. i am pleased to report that this has delivered a strong set of results for the year. Our cEO, Jamie hopkins, has brought a renewed energy to bear which has resulted in a clear focus on our priorities, driving our performance and moving the company back into the FtSE250. We achieved strong growth in revenue and trading profit for the year. Group net rental income was £47.1m, an underlying increase of 6%, trading profit after interest was £17.9m, an increase of 12%, and EPra Nav per share was £3.48, an increase of 13%. Based on these results and the company’s future prospects, the Board is recommending the payment of a final dividend of 6.45p per share (a total of 9.67p for the year) to be paid on 2 august 2013, an increase of 10% on last year. this is in line with our progressive dividend policy. During the year we continued to deploy the funds raised in our 2011 rights issue. We executed a focused capital expenditure programme to refurbish and extend existing assets and create buildings that suit our strategy whilst disposing of those that don’t. the result is an integrated portfolio of core buildings that we actively manage, increasing rental values. We also refined our debt profile, lengthening the terms and diversifying the sources of funding. the successful refinance announced on 11 June 2013 alongside the retail Bond issued earlier in the year will have a significant positive impact on the flexibility of our operational capabilities. throughout the year, our Board has played an active role in helping guide the company and we remain committed to a strong succession approach. John Bywater’s retirement as a Non-Executive Director will occur in July this year and he leaves with our thanks for his long-standing contribution over the last nine years. Joining us, we welcome chris Girling and Damon russell. chris has a strong background in finance and management while Damon brings a wealth of experience across the telecommunications, internet, digital and media sectors. Ensuring the long-term strength of our Board is a priority and we will be making a further Non-Executive Director appointment in due course. We are also aware of our wider responsibilities in the communities where we work, as well as being conscious of our environmental impact and we remain committed to strong health and safety and energy sustainability principles. We are proud that we have once again been included in the FtSE4Good index and that we have recently been awarded the Bitc communitymark. We will continue to do the right things by all of our stakeholders. the company is working hard so that our customers and our employees flourish, our communities and environment stay vibrant and our shareholders are rewarded for their support. the achievements during the year are many and i would particularly like to thank our Workspace employees for delivering another strong performance. the Board and i believe that we are clear on our objectives, have the right strategy and team in place to achieve them and, as a result, are ideally positioned to take advantage of the strength of the London economy. the businesses we host are critical in driving the uK’s growth and by serving them with focus and energy we are confident that we will maintain our strong business momentum. DANiEL kiTcHEN NON-ExEcutivE chairmaN RELATED iNFORMATiON cORPORATE SOciAL RESPONSibiLiTy P.14 cORPORATE GOVERNANcE REPORT P.35 04 Workspace Group PLC Annual Report and Accounts 2013Daniel KitChen NON-ExEcutivE chairmaN 05 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013ChieF exeCutive oFFiCer’s strategiC review Our customers need more than just space. We are recognising that with a successful strategy. New and growing companies are the engine of growth for the whole country. Our strategy of focusing our resources on supporting these companies continued to pay off and this, coupled with the quality and location of the assets we own, has helped us to report like-for-like growth of 9% in our rent roll and an 8% uplift to the capital value of our portfolio. Overlaid on our deep understanding of London commercial real estate is a detailed appreciation of the essential attributes of support that help our customers’ businesses be successful; from the right technology and services, to flexibility of environment, these fast-moving companies need more than just space. We are alive to that and last year we developed our customer relationships and grew the number of new lettings by understanding and meeting this need. all of this was achieved by remaining true to the four long-term strategic priorities that underpin everything we do. WE OWN THE RiGHT PROPERTiES THAT ARE TAiLORED TO MEET OUR cUSTOMERS’ NEEDS AND WE iNTENSiVELy MANAGE THEM TO DRiVE OccUPANcy AND RENTS this year saw us drive forward a number of new projects across our portfolio from full building refurbishments and extensions through to new floors and the modernisation of reception areas. at all times we keep as many existing customers in situ as possible while working on the buildings. many of those customers who do have to move out are keen to return once the projects are complete or they often take an alternative solution within our extensive portfolio. more broadly, everyone in our business from our central marketing and lettings teams through to our staff on site are motivated to increase occupancy and rent wherever possible across our portfolio. WE MAXiMiSE THE VALUE OF OUR LONDON-bASED PROPERTy PORTFOLiO AND iTS WiDER OPPORTUNiTiES FOR REPOSiTiONiNG AND REDEVELOPMENT Planning consents progressed strongly resulting in short-term capital gains as well as longer-term income growth potential. Grand union, Kensington, was a good example where we obtained planning permission for 145 residential units alongside a brand new tailor-made business centre on an existing industrial site. We will start to market this business centre to customers upon completion at the beginning of 2015. reflecting our focused portfolio management approach, we also made some disposals, removing properties which were no longer aligned to our strategic objectives. WE UNDERSTAND OUR cUSTOMERS AND ENHANcE OUR bRAND by RESPONDiNG TO THEiR NEEDS a true differentiator for Workspace is the way in which we interact directly with our customers all of the time – we don’t rely on agents or intermediaries – and this allows us to work in true partnership with them and have a stronger understanding of where future demand lies. this has helped us as, amongst other things, roll out more of our co-working club Workspace sites and continue to develop our digital platform, where already we are receiving almost 40,000 visits a month to our website. WE WORk SUSTAiNAbLy AS PART OF EVERyDAy bUSiNESS FOR US, OUR cUSTOMERS AND OUR PARTNERS Promoting entrepreneurship and lowering carbon footprints are no longer mutually exclusive goals as more and more business is transacted digitally and we work hard to ensure we remain at the forefront in environmental and sustainability practice. Elsewhere, working alongside London’s mayor in our inspiresme programme to encourage today’s schoolchildren to aspire to be tomorrow’s entrepreneur was one example of the depth of our involvement in the local community. We also know how important it is that our employees feel fully engaged in what we are doing so this year we launched a Share incentive Plan to help them benefit from the future success of the company. this culture of ownership is creating an even stronger focus on the link between us, our properties and our customers. as our understanding of our customers deepens and our engagement with them broadens, it is clear that demand is evolving into what we see as the next generation of work space. customers are relying increasingly on digital platforms and scalability, but in addition they also value the creative interaction that comes with being part of physical business communities. Listening to them, we are putting in place superior telecoms infrastructure and services on the same flexible terms as our leases. We are also facilitating access to cloud computing, we are bringing customers together at organised events that result in networking and inter-trading and we are broadening our footprint for the smaller entrepreneurs with club Workspace. these and other new initiatives are establishing us as an essential partner to our customers, enabling their businesses to grow faster and, in turn, positioning us as the leading provider of space, environment and communities tailored to the needs of these new and growing companies. Looking forward, i see our target customer base continuing to grow. Whether they are labelled ‘new and growing companies’, the ‘tmt’ sector or ‘SmEs’, we do all we can to position ourselves as the landlord of choice for this tenant type. We have an experienced and talented team at Workspace and a very clear and focused strategy for growth. Our assets are of quality and character, relevant to the modern needs of today and extremely well positioned to benefit from the increasing migration of occupiers across London. JAMiE HOPkiNS chiEF ExEcutivE OFFicEr 06 Workspace Group PLC Annual Report and Accounts 2013Jamie Hopkins, CHief exeCutive offiCer witH Claudia and rutH, Centre staff at Canterbury Court in kennington park. Related infoRmation ouR StRategy p.08 geneRating Value p.10 CoRpoRate SoCial ReSponSibility p.14 07 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013our strategy Performance summary. STRATEGic PRiORiTiES PRiORiTiES iN 2012/13 PERFORMANcE iN 2012/13 OWNiNG THE RiGHT PROPERTiES THAT ARE TAiLORED TO OUR cUSTOMERS’ NEEDS AND iNTENSiVELy MANAGiNG THESE PROPERTiES TO DRiVE OccUPANcy AND RENTS. Owning properties that are tailored to our customers’ needs – complete refurbishment of canalot Studios. – commence a further six refurbishment schemes. – refurbishments at canalot Studios and Whitechapel completed. – Six refurbishment schemes commenced comprising 250,000 sq. ft. of which chester house Phase 2 and Leyton Phase 1 completed in march 2013. – Like-for-like occupancy up from 87.7% to 89.8%. – Like-for-like rent roll growth of 9%. – Like-for-like rent per sq. ft. up 7% in the year. MAXiMiSiNG THE VALUE OF OUR LONDON bASED PROPERTy PORTFOLiO AND iTS WiDER OPPORTUNiTiES FOR REPOSiTiONiNG AND REDEVELOPMENT. Repositioning and redevelopment – appoint developers for the mixed use redevelopment schemes at Grand union in Kensington and Bow. – Progress planning consent for mixed use schemes at a further four sites. – Drive value from continued occupancy and rent roll growth. – taylor Wimpey appointed as developer for Grand union. Peabody appointed at Bow. – Planning and applications made at tower Bridge and Faircharm comprising 948 apartments and 112,000 sq. ft. of commercial space. – Successful repositioning at canalot Studios and Parkhall driving pricing growth. – underlying property valuation up 8% in the year. UNDERSTANDiNG OUR cUSTOMERS AND ENHANciNG OUR bRAND by RESPONDiNG TO THEiR NEEDS. Enhancing our brand (responding to customers’ needs) – roll out the club Workspace format at four additional centres. – continue the roll out of our ‘Digital Programme’ meeting the needs of our digital business customers. – Develop inspiresme as a valued platform for advice and support to new and growing businesses. – three new club Workspace co-working lounges opened. – club Workspace revenue growth of 250%. – roll out of ‘digital platform’ providing a high quality business grade service with the same flexibility of our lease terms. – complete three further refurbishment schemes with a fourth due to complete in 2014. – Failure to meet customer space and service expectations. – commence three refurbishment – External macroeconomic factors influence the demand for our accommodation. schemes. – Progress further schemes through design phase. – Focus on driving pricing as occupancy approaches 90%. – Obtain planning consent for Tower – adverse planning decisions. bridge, Poplar and Faircharm. – Make planning applications for three further schemes. – Appoint development partners for Tower bridge and Faircharm. – construction cost and programme over runs. – Downturn in the London property market. – continue the roll out and evolution – Failure to meet customer of the club Workspace brand. – broaden the range of services offered under our digital platform. service expectations. – the performance of our selected digital partners. – Position Workspace as the preferred choice for fast growing businesses. WORkiNG SUSTAiNAbLy AS PART OF EVERyDAy bUSiNESS FOR US, OUR cUSTOMERS AND OUR PARTNERS. Sustainable working – continue support of charities which promote entrepreneurship. – Working with customers to lower our carbon footprint. – inspiresme week placed 20 young people in work experience. – urban 20 cricket giving experience at the Kia Oval cricket Ground for 200 local children. – Ensure that our development – refurbishment schemes achieving activities conform with the highest environmental and sustainability regulations and best practice. ‘very good’ BrEEam (Building research Establishment Environmental assessment method). – continued liaison with customers in helping to reduce our carbon emissions. – To develop cSR a policy for engaging with and encouraging school leavers and graduates into – Failure to meet regulatory environmental requirements. – introduction of new requirements causing additional costs or inhibiting lettings. entrepreneurship. – Demonstrate tangible savings in carbon emissions. – Develop charity strategy. 08 Workspace Group PLC Annual Report and Accounts 2013 Owning properties that are tailored – refurbishments at canalot Studios and OWNiNG THE RiGHT PROPERTiES THAT ARE TAiLORED TO OUR cUSTOMERS’ NEEDS AND iNTENSiVELy MANAGiNG THESE PROPERTiES TO DRiVE OccUPANcy AND RENTS. to our customers’ needs – complete refurbishment of canalot Studios. – commence a further six refurbishment schemes. Whitechapel completed. – Six refurbishment schemes commenced comprising 250,000 sq. ft. of which chester house Phase 2 and Leyton Phase 1 completed in march 2013. – Like-for-like occupancy up from 87.7% – Like-for-like rent roll growth of 9%. – Like-for-like rent per sq. ft. up 7% in to 89.8%. the year. MAXiMiSiNG THE VALUE OF OUR LONDON bASED PROPERTy PORTFOLiO AND iTS WiDER OPPORTUNiTiES FOR REPOSiTiONiNG AND REDEVELOPMENT. Repositioning and redevelopment – appoint developers for the mixed – taylor Wimpey appointed as developer for Grand union. Peabody appointed use redevelopment schemes at Grand union in Kensington at Bow. – Progress planning consent for mixed use schemes at a further commercial space. – Planning and applications made at tower Bridge and Faircharm comprising 948 apartments and 112,000 sq. ft. of – Successful repositioning at canalot and Bow. four sites. – Drive value from continued Studios and Parkhall driving occupancy and rent roll growth. pricing growth. – underlying property valuation up 8% in the year. UNDERSTANDiNG OUR cUSTOMERS AND ENHANciNG OUR bRAND by RESPONDiNG TO THEiR NEEDS. Enhancing our brand (responding to customers’ needs) – three new club Workspace co-working lounges opened. – roll out the club Workspace – club Workspace revenue growth format at four additional centres. of 250%. – continue the roll out of our ‘Digital – roll out of ‘digital platform’ providing Programme’ meeting the needs of a high quality business grade service our digital business customers. with the same flexibility of our – Develop inspiresme as a valued lease terms. platform for advice and support to new and growing businesses. PRiORiTiES FOR 2013/14 kEy RiSkS – complete three further refurbishment schemes with a fourth due to complete in 2014. – commence three refurbishment schemes. – Progress further schemes through design phase. – Focus on driving pricing as occupancy approaches 90%. – Failure to meet customer space and service expectations. – External macroeconomic factors influence the demand for our accommodation. – Obtain planning consent for Tower bridge, Poplar and Faircharm. – Make planning applications for three further schemes. – Appoint development partners for Tower bridge and Faircharm. – adverse planning decisions. – construction cost and programme over runs. – Downturn in the London property market. – continue the roll out and evolution – Failure to meet customer of the club Workspace brand. – broaden the range of services offered under our digital platform. service expectations. – the performance of our selected digital partners. – Position Workspace as the preferred choice for fast growing businesses. iPD Performance 13.8% 13.4% 6.3% 2013 3.2% 2012 2011 11.7% 11.2% Workspace Group PLC IPD Universe (quarterly) WORkiNG SUSTAiNAbLy AS PART OF EVERyDAy bUSiNESS FOR US, OUR cUSTOMERS AND OUR PARTNERS. Sustainable working – inspiresme week placed 20 young – continue support of charities people in work experience. which promote entrepreneurship. – urban 20 cricket giving experience – Working with customers to lower at the Kia Oval cricket Ground for 200 our carbon footprint. local children. – Ensure that our development – refurbishment schemes achieving activities conform with the highest ‘very good’ BrEEam (Building research environmental and sustainability regulations and best practice. Establishment Environmental assessment method). – continued liaison with customers in helping to reduce our carbon emissions. – To develop cSR a policy for engaging with and encouraging school leavers and graduates into entrepreneurship. – Demonstrate tangible savings in carbon emissions. – Develop charity strategy. – Failure to meet regulatory environmental requirements. – introduction of new requirements causing additional costs or inhibiting lettings. RELATED iNFORMATiON PRiNciPAL bUSiNESS RiSkS P.22 09 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013 Generating value. From redevelopment and acquisitions, planning gains and refurbishments, direct communication with our customers and hands-on active management, the case studies we highlighted in our last report have all generated significant value. FOR MORE iNFORMATiON WWW.WORkSPAcE.cO.Uk 10 Workspace Group PLC Annual Report and Accounts 2013repositioning reDevelopment planning gain aCquisition anD Disposal What we said unDerstanDing our Customers Corporate soCial responsibility Driving rental growth repositioning Exmouth house, Ec1r 0Jh redevelopment ScreenWorks, N5 2Ea We anticipate the additional floor and refurbishment of Exmouth house will achieve rental levels similar to that of clerkenwell Workshops, our other business centre in Ec1. On track to open in July 2013. ScreenWorks, our new 61,000 sq. ft. business centre in islington is on track to open in December 2013. planning gain the Pill Box, E2 6JL acquisition and disposal Little London, SE1 2Ba We made a gain from the sale of surplus land with planning consent. We are now investing in a new business centre in Bethnal Green, which is on track to open in January 2014. During the year we acquired five new buildings in the Blackrock Joint venture and sold six from the portfolio. How we delivered understanding our customers club Workspace Our unique club Workspace format has continued to attract new customers and we have opened a further three sites, taking us to a total of five and increased revenue by 250%. Corporate social responsibility chester house, SW9 6DE Our customers tell us the BrEEam ‘very good’ rating at chester house helped attract them and allowed us to gain rents 20% higher than anticipated. Driving rental growth Parkhall, SE21 8EN Our active marketing, digital platforms and flexibility for customers have helped grow like-for-like rent roll by 9%. Workspace Group PLc Annual Report and Accounts 2013 11 portFolio potential The reach and scale of our property portfolio is creating essential business communities across London. – 86% of our customers would recommend us. – 467,000 website visits in the year. – 1,887,730 page visits in the year. – over 90% of all lettings are completed via our in-house sources such as the website, signage and customer referral. – worldwide search volumes for ‘co-working’ have increased by 488% over the last four years. FOR MORE iNFORMATiON www.workspace.co.uk 12 Workspace Group PLC Annual Report and Accounts 201313 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013Corporate soCial responsibility A wider understanding. OUR APPROAcH cUSTOMERS customer satisfaction and loyalty are key to the sustainability of our business. We help our customers to connect with local communities by participating in our community programmes and working with them to improve the environmental performance of our centres. SUPPLiERS AND PARTNERS We aim to build long-term relationships with our suppliers by being a responsible purchaser of goods and services. We also work closely with our partners to integrate sustainability into the design, construction and redevelopment of Workspace centres. cOMMUNiTiES We aim to make the communities in which we operate better places to live and do business in. Our flagship E3 community investment strategy provides education, employment and entrepreneurial opportunities for young people. EMPLOyEES We provide a safe and rewarding work environment to ensure we attract and retain talented and ambitious individuals. Our commitment to diversity encourages innovation and ensures our workforce reflects the diversity of our customers and communities. ENViRONMENT Our buildings are our biggest environmental impact and we are committed to making the most of opportunities to reduce carbon emissions and energy use, benefiting the environment and reducing operating costs. We strive to reduce other environmental impacts and costs such as waste. Jamie hopKins chiEF ExEcutivE OFFicEr We have long understood the value that a focused corporate Social responsibility (cSr) programme can create for Workspace, delivering operational efficiencies in the process and contributing to our reputation as a responsible business. We believe our cSr activities benefit financial performance by driving occupancy rates, delivering cost savings and creating a more attractive business environment for our customers. the primary role of our business is to meet the space and environment needs of new and growing companies across London. We foster entrepreneurial activity and create vibrant working communities that in turn support local businesses by boosting employment and economic growth. We believe that by adhering to our fundamental principles of helping businesses to grow and being a good community member, we can be a force for good benefiting both our customers and wider society. Not only do we work within the regulatory environment for real estate providers, adhering to the uK Energy act, carbon reduction commitment and landfill tax regime, but we go beyond our legal obligations. this approach has generated opportunities to reduce operating costs, by sending zero waste to landfill and installing more efficient boilers in our centres, for example. a selection of the year’s performance highlights against stakeholder goals can be seen in the table opposite. We are particularly pleased that our E3 community investment strategy was recognised by Business in the community, one of the uK’s leading cSr organisations, who awarded us their prestigious communitymark. We were amongst four businesses that have achieved this accolade in 2013. Similarly, we are proud to once again be included in the FtSE4Good index which helps us assess our achievements against a transparent and evolving global corporate responsibility standard. Our goal is to ensure that we fully consider the impact that we and our stakeholders have and that we address these impacts positively and transparently. We want to ensure that our customers and employees flourish, our communities and environment stay vibrant and that our shareholders are rewarded for their support. the Board, the management team and i remain focused on these important objectives. more detail on our cSr activities in 2012/13, including our performance against EPra sustainability indicators, is available at www.workspace.co.uk. We are particularly proud to once again be included in the FtSE4Good index which helps us assess our achievements against a transparent and evolving global corporate responsibility standard. 14 We achieved an average customer experience score – Launch programme to reduce energy in partnership of 82% exceeding our target of 80%. with customers at flagship sites. – Review sustainability questions in annual customer survey. – Create a customer focused sustainability marketing factsheet for three assets. We received a Bronze certificate in the Mayor’s Green Procurement Code – the third year we have achieved – Continue to achieve a Bronze certificate in the Mayor’s Green Procurement Code. this award. Payment Code. We are now an approved signatory of the Prompt – Require suppliers to demonstrate that a minimum of 80% of timber is procured from a certified sustainable source (FSC or equivalent). – Register all developments over 2,000m2 with the Considerate Constructors Scheme. We invested in community initiatives. – Continue delivery of E3 strategy. E3 received the Business in the Community CommunityMark in recognition of our commitment to delivering tangible benefits for our business and communities. – Evaluate the socio-economic impact of a completed Workspace development by March 2015. – Develop a strategy for charitable donations. – On-going training and development for all employees – With the Government’s pension auto-enrolment which helps to develop the right skills to support our growth plans. – Over the last 12 months we have embedded a new appraisal process to further enhance employee understanding of how their objectives will assist in driving business performance. – We continued to drive engagement through our communications channels to ensure employees understand our strategy and the part they play. feel engaged in what we are doing, so this year we launched a Share Incentive Plan to help them benefit from the future success of the Company. – Participation in the Sharesave Scheme continues to be popular with employees. In total, 55% of employees participate in the Sharesave Scheme.   changes effective for the Company from April 2014, we will ensure that we can meet the legislative requirements efficiently. – Continue to focus on training and development. – Continue with Director led staff briefings designed to keep employees well informed of the performance and objectives of the Group. – The Group remains committed to an equal opportunities policy from recruitment and selection – We recognise how important it is that our employees through to training and development. Total energy consumption from electricity was 24,360,097 – Set portfolio energy (kWh) reduction target. kWh1. Total energy consumption from fuels was 21,124,428 kWh2. Although energy from electricity decreased by 2% compared to 2011/12 (adjusted for occupancy), our overall energy consumption (electricity and fuels) increased by 9% on an absolute basis. Total direct GHG emissions were 3,878 tonnes CO2e3. Total indirect GHG emissions were 13,179 tonnes CO2e4. This meant our total GHG emissions (direct and indirect) increased by 5% compared to 2011/12 driven by higher gas consumption primarily due to the unusually cold winter. Our centres generated 10.48 tonnes of waste of which 48% (6,612 kg) was recycled and 52% (3,873 kg) was converted to energy5. – Achieve an average recycling rate of 55% for all assets where Workspace manages the waste. – Send zero waste to landfill for all assets where Workspace manages the waste. – Divert at least 75% (by weight) of non-hazardous construction waste away from landfill for all developments and refurbishments over 2,000m2. – Divert at least 90% (by weight) of non-hazardous demolition waste away from landfill for all developments and refurbishments over 2,000m2. – We will record water consumption at all properties. – Achieve BREEAM Very Good for all developments and refurbishments over 2,000m2. Workspace Group PLC Annual Report and Accounts 2013 cUSTOMERS customer satisfaction and loyalty are key to the sustainability of our business. We help our customers to connect with local communities by participating in our community programmes and working with them to improve the environmental performance of our centres. SUPPLiERS AND PARTNERS We aim to build long-term relationships with our suppliers by being a responsible purchaser of goods and services. We also work closely with our partners to integrate sustainability into the design, construction and redevelopment of Workspace centres. cOMMUNiTiES We aim to make the communities in which we operate better places to live and do business in. Our flagship E3 community investment strategy provides education, employment and entrepreneurial opportunities for young people. EMPLOyEES We provide a safe and rewarding work environment to ensure we attract and retain talented and ambitious individuals. Our commitment to diversity encourages innovation and ensures our workforce reflects the diversity of our customers and communities. ENViRONMENT Our buildings are our biggest environmental impact and we are committed to making the most of opportunities to reduce carbon emissions and energy use, benefiting the environment and reducing operating costs. We strive to reduce other environmental impacts and costs such as waste. 1 2 3 4 5 EPra Sustainability Performance measure 3.1 EPra Sustainability Performance measure 3.3 EPra Sustainability Performance measure 3.5 EPra Sustainability Performance measure 3.6 EPra Sustainability Performance measures 3.10 and 3.11 PERFORMANcE HiGHLiGHTS iN 2012/13 TARGETS FOR 2013/14 We achieved an average customer experience score of 82% exceeding our target of 80%. – Launch programme to reduce energy in partnership with customers at flagship sites. We received a Bronze certificate in the Mayor’s Green Procurement Code – the third year we have achieved this award. We are now an approved signatory of the Prompt Payment Code. – Review sustainability questions in annual customer survey. – Create a customer focused sustainability marketing factsheet for three assets. – Continue to achieve a Bronze certificate in the Mayor’s Green Procurement Code. – Require suppliers to demonstrate that a minimum of 80% of timber is procured from a certified sustainable source (FSC or equivalent). – Register all developments over 2,000m2 with the Considerate Constructors Scheme. We invested in community initiatives. E3 received the Business in the Community CommunityMark in recognition of our commitment to delivering tangible benefits for our business and communities. – Continue delivery of E3 strategy. – Evaluate the socio-economic impact of a completed Workspace development by March 2015. – Develop a strategy for charitable donations. – On-going training and development for all employees which helps to develop the right skills to support our growth plans. – Over the last 12 months we have embedded a new appraisal process to further enhance employee understanding of how their objectives will assist in driving business performance. – We continued to drive engagement through our communications channels to ensure employees understand our strategy and the part they play. – We recognise how important it is that our employees feel engaged in what we are doing, so this year we launched a Share Incentive Plan to help them benefit from the future success of the Company. – Participation in the Sharesave Scheme continues to be popular with employees. In total, 55% of employees participate in the Sharesave Scheme.   – With the Government’s pension auto-enrolment changes effective for the Company from April 2014, we will ensure that we can meet the legislative requirements efficiently. – Continue to focus on training and development. – Continue with Director led staff briefings designed to keep employees well informed of the performance and objectives of the Group. – The Group remains committed to an equal opportunities policy from recruitment and selection through to training and development. Total energy consumption from electricity was 24,360,097 kWh1. Total energy consumption from fuels was 21,124,428 kWh2. Although energy from electricity decreased by 2% compared to 2011/12 (adjusted for occupancy), our overall energy consumption (electricity and fuels) increased by 9% on an absolute basis. Total direct GHG emissions were 3,878 tonnes CO2e3. Total indirect GHG emissions were 13,179 tonnes CO2e4. This meant our total GHG emissions (direct and indirect) increased by 5% compared to 2011/12 driven by higher gas consumption primarily due to the unusually cold winter. Our centres generated 10.48 tonnes of waste of which 48% (6,612 kg) was recycled and 52% (3,873 kg) was converted to energy5. – Set portfolio energy (kWh) reduction target. – Achieve an average recycling rate of 55% for all assets where Workspace manages the waste. – Send zero waste to landfill for all assets where Workspace manages the waste. – Divert at least 75% (by weight) of non-hazardous construction waste away from landfill for all developments and refurbishments over 2,000m2. – Divert at least 90% (by weight) of non-hazardous demolition waste away from landfill for all developments and refurbishments over 2,000m2. – We will record water consumption at all properties. – Achieve BREEAM Very Good for all developments and refurbishments over 2,000m2. 15 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100 business review Trading performance. ENQUiRiES AND LETTiNGS average number per month 1,050 1,026 84 70 1,107 104 964 79 Quarter to June 2012 Lettings Quarter to September 2012 Quarter to December 2012 Quarter to March 2013 Enquiries 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 3% on the prior year to an average of 1,037 per month, and new lettings running at an average of 84 per month (2012: 82 per month). Good levels of enquiries and lettings have continued into the first quarter of the current financial year. average number per month Enquiries Lettings march 2013 1,107 104 Quarter Ended Dec 2012 964 79 Sept 2012 1,026 70 June 2012 1,050 84 the like-for-like property portfolio, which excludes properties impacted by refurbishment or redevelopment, has seen both occupancy and rents improve strongly over the year reflecting the consistent high level of customer demand. Occupancy improved by 2.1% to 89.8% and rent per square foot is up by 6.6%. this has produced a strong growth in like-for-like rent roll of 9.1% (2012: 4.7%). LikE-FOR-LikE OccUPANcy AND RENT ROLL 87.0 87.3 87.4 87.7 88.6 89.0 89.9 89.8 90 45.5 45.5 40.6 41.0 41.1 41.7 42.6 43.1 43.8 Jun 2011 Sep 2011 Dec 2011 Mar 2012 June 2012 Sep 2012 Dec 2012 Mar 2013 70 35.0 1231 86.5 104 39.9 0 Mar 2011 0 Rent Roll (£m) Occupancy (%) Like-for-like properties Number Occupancy rent roll rent per sq. ft. 31 march 2013 68 89.8% £45.5m £13.75 30 September 2012 68 89.0% £43.1m £13.12 31 march 2012 68 87.7% £41.7m £12.90 Overall occupancy is 87.0% at march 2013 (march 2012: 85.3%) and cash rent roll has increased to £52.7m (march 2012: £50.2m). the strong growth in like-for-like rent roll has been off-set by the net loss of income at properties where we are undertaking refurbishment and redevelopment activity and property disposals made during the year: rent roll at 31 march 2012 Like-for-like rent roll growth rent reduction on redevelopment and refurbishment underway increase in rent from newly refurbished space rent roll on property disposals rent roll at 31 march 2013 £m 50.2 3.8 (0.9) 0.6 (1.0) 52.7 the contracted rent roll is £2.3m higher than the cash rent roll at £55.0m at march 2013. this relates primarily to stepped rent increases and rent free periods, with around 75% expected to convert to cash rent roll in the next year. 16 Workspace Group PLC Annual Report and Accounts 2013Driving enquiries and lettings MARkETiNG Cathie Sellars (centre), Head of Marketing discussing enquiries and deals with James Friedenthal, Managing Director Club Workspace and Kylie Ferns, Marketing Executive. cUSTOMER UNDERSTANDiNG We interact directly with our customers. We don’t rely on agents. Over 90% of our lettings come from internally generated leads and managed transactions. OVER 26,000 UNiQUE WEb ViSiTS PER MONTH TO WORkSPAcE.cO.Uk 26,000+ Workspace Group PLc annual report and accounts 2013 17 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100business review cONTiNUED PROFiT bEFORE TAX £m Net rental income – underlying Net rental income – disposals Joint venture income administrative expenses Net finance costs trading Profit after interest change in fair value of investment properties Other items Profit before tax 31 march 2013 46.5 0.6 1.1 (11.0) (19.3) 17.9 59.0 (0.5) 76.4 31 march 2012 43.7 1.1 0.5 (10.2) (19.1) 16.0 35.6 (3.1) 48.5 EPra earnings per share 12.2p 11.9p TRADiNG PROFiT AFTER iNTEREST £m 3.4 (0.6) (0.5) 0.6 (0.8) (0.2) 17.9 16.0 trading profit after interest is up 12% in the year to £17.9m reflecting the strong growth in rental income. Profit before tax is up 58% to £76.4m with the improved trading performance supplemented by an underlying increase of 8% (£59.0m) in the property valuation. EPra earnings per share has increased by 3% to 12.2p, lagging the growth in trading profit following the rights issue which was completed in July 2011. DiViDEND the Board has proposed a final dividend of 6.45 pence per share, (2012: 5.86 pence) which will be paid on 2 august 2013 to shareholders on the register at 12 July 2013. this dividend will be paid as a normal dividend (non-PiD). the total dividend for the year is 9.67 pence, a 10% increase on the prior year, which is covered 1.26 times by EPra earnings per share. PROPERTy VALUATiON at 31 march 2013 the wholly owned portfolio was 20 independently valued by cBrE at £830m, an underlying increase of 8% (£59m) in the year. the main elements of the increase in the valuation over the year are set out below: valuation at 31 march 2012 Property Disposals capital expenditure 0 revaluation surpluses: 6 months to September 2012 6 months to march 2013 capital receipts valuation at 31 march 2013 £m 760 (15) 30 18 41 (4) 830 VALUATiON AT 31 MARcH 2013 £m 760 (19) 30 36 (1) 830 830 24 March 2012 Disposals/ Receipts Capex Refurb/ Redevel Core Like-for-like Properties Other Like- for-like Properties March 2013 500 a more detailed analysis of our properties at 31 march 2013 is set out in table 1. March 2012 Like- for-like Income Refurb/ Redevel Income Disposals Income JV Income Admin Expenses Interest Costs March 2013 the improving levels of occupancy and pricing have translated into a good growth in income with underlying net rental income up 6% (£2.8m) in the year to £46.5m. the growth in net rental income at like-for-like properties of 9% (£3.4m) and new income from completed refurbishments of £0.3m is offset by income reduction of £0.9m at properties currently being refurbished and redeveloped. Joint venture (Jv) income represents our 20.1% share of net rental income from the properties in the Blackrock Workspace Jv. income has grown as properties have been acquired by the Jv with the initial investment phase completed in October 2012. the portfolio comprised of 16 properties with a rent roll of £7.0m at march 2013. administrative expenses have increased by 8% (£0.8m) in the year. Long-term incentive plan costs have increased by £0.8m as a result of the improved share price performance alongside a £0.2m increase in salary and bonus costs offset by net savings of £0.2m in other cost categories. Net finance costs increased by £0.2m with net debt increasing by £14m to £328m over the year as a result of increased capital expenditure but the weighted average interest cost fell by 0.1% to 5.0% (2012: 5.1%). 18 Workspace Group PLC Annual Report and Accounts 2013 Workspace delivered a total property return over the year of 13.8%, well ahead of the iPD universe (Quarterly) at 3.2%. this strong performance came from: – a £36m uplift in value at the core like-for-like properties from driving increases in occupancy and rent roll (which is up 10% in the year) with no benefit from movement in valuation yield, offset by a marginal fall of £1m in the value of other like-for-like properties; and – a £24m uplift in value from our refurbishment and redevelopment activity, mainly in the second half of the year. there was a £6m increase at each of Grand union centre, W10 and Bow Enterprise Park, E3 following the signing of development agreements in October 2012. there was also an £8m increase at tower Bridge Business complex, SE16 ahead of achieving planning consent at this site (subsequently achieved in may 2013) with a further uplift in valuation expected in the current financial year. the other property category represents generally good quality but small properties, primarily industrial estates, where the opportunity for Workspace to add premium operational or brand value is limited. During the year we realised £13m from the disposal of six non core properties at a loss of £2m compared to book value at march 2012. a further three properties are currently under offer for £8m in line with their book values at march 2013. the net initial and equivalent yields of our portfolio as reported by cBrE are set out below: at 31 march Like-for-like Properties refurbishment/ redevelopment total net initial yield 2013 2012 equivalent yield 2012 2013 7.3% 7.2% 8.1% 8.3% 5.3% 6.9% 6.6% 7.1% 8.1% 8.1% 8.9% 8.4% the total net initial yield is impacted by the declining yield at refurbishment and redevelopment properties where we are running down income. the like-for-like (investment) net initial yield has softened marginally to 7.3%. total Estimated rental value (Erv) of the overall portfolio at march 2013 is £67.4m (march 2012: £65.4m). the Erv of the like-for-like portfolio is £51.3m up 4.0% in the year (march 2012: £49.3m). capital value per sq. ft. is £177 up from £152 at march 2012. REFURbiSHMENT AcTiViTy During the year we completed four refurbishments: – 49,000 sq. ft. refurbishment and two storey roof extension at canalot Studios (cost: £5m) – 7,000 sq.ft. side extension at Whitechapel (cost: £2m) – 9,000 sq.ft. roof extension to chester house at Kennington Park (cost: £2m) – 27,000 sq.ft. of new industrial buildings at Leyton, E10 (cost: £3m) We have seen good progress with the letting up of the space at these schemes at pricing levels ahead of our expectations when these projects were approved. the rent roll at these four properties at 31 march 2013 was £0.7m. We would expect to achieve an uplift in rent roll of £1.2m to £1.9m at current estimated rents once these schemes reach 90% occupancy. refurbishment is underway at a further four properties as shown in table 2. these properties were valued at £49m at march 2013 with rent roll of £1.9m. £11m of the total estimated capital expenditure of £30m has been incurred on these projects to date. We expect to achieve an uplift in rent roll of £3.3m to £5.2m, at current estimated rents, once these schemes are completed and have reached 90% occupancy. TAbLE 1: PROPERTiES AT 31 MARcH 2013 No of properties valuation revaluation surplus rent roll yield TAbLE 2: REFURbiSHMENT AcTiViTy Westminster (Phase i), SE11 Exmouth house, Ec1 the Pill Box, E2 metal Box Factory, SE1 like-for-like 47 £509m £36m 7.8% Estimated cost £2m £4m £9m £15m Core refurbishment 8 £110m £4m 4.4% redevelopment 10 £155m £20m 2.5% other like-for-like 21 £56m (£1m) 7.6% Expected completion h1 2013 h1 2013 h1 2014 h2 2014 upgraded area (sq. ft.) 6,000 52,000 – 82,000 New area (sq. ft.) 5,000 5,000 42,000 20,000 19 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100business review cONTiNUED REDEVELOPMENT AcTiViTy many of 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. We obtain mixed use planning consent and then agree terms with a residential developer to undertake the construction at no cost to Workspace. We generally receive back new commercial space together with a combination of cash and overage in return for the sale of the residential component to the developer. in October 2012 we announced that we had exchanged contracts for the redevelopment of Grand union, W10 and the first phase of Bow Enterprise, E3: – at Grand union we will receive back on completion of the redevelopment a new 60,000 sq.ft. business centre together with £5.9m of cash that will be paid over the development period together with overage on the private residential component. – at Bow Enterprise we received £11.5m of cash in april 2013 having achieved vacant possession of the site in six months, and on completion of the redevelopment we will receive 15,000 sq. ft. of new industrial space and overage on the private residential component. We have now signed development agreements for four redevelopment schemes for a total of 693 residential units as detailed in table 3. On these four schemes Workspace will receive a total of 189,000 sq. ft. of new business space, cash of £22m and overage on the residential component of the schemes. these properties were valued at £73m at march 2013 with rent roll of £0.3m which will fall to zero during redevelopment. at current estimated rents and 90% occupancy we would expect the new business space to deliver £3.8m of rent roll. in may 2013 we received planning consent for a further two mixed use redevelopments: – at tower Bridge Business complex, SE16 we secured planning on the northern part of this large 12 acre site for 800 residential units and 60,000 sq. ft. of new business space. – at Faircharm Estate, SE8 we secured planning for 148 residential units and 52,000 sq. ft. of new business space. these two properties, together with Bow (Phase 2), E3 where we have already obtained planning consent for 290 residential units and 30,000 sq. ft. of business space were valued at £43m at 31 march 2013 with rent roll of £1.8m. cASH FLOW AND FiNANciNG Our customer payment profile and cash collection statistics are strong with bad debts in the year of £0.3m (2012: £0.4m). Net debt has increased by £14m to £328m over the year due to an acceleration in capital expenditure on refurbishment projects. a summary of the movements in cash flow is set out below: Net cash from operations Dividends paid capital expenditure Property disposals/capital receipts investment in joint ventures retail Bond issue Net repayment of bank borrowings Other Net movement in year Net debt at 31 march 2012 net debt at 31 march 2013 £m 22 (13) (29) 17 (8) 58 (58) (3) (14) (314) (328) TAbLE 3: REDEVELOPMENT AcTiViTy Wandsworth, SW18 ScreenWorks, N5 Grand union, W10 Bow (Phase 1), E3 Developer mount anvil taylor Wimpey taylor Wimpey Peabody Expected completion h2 2014 h1 2014 h1 2015 h2 2015 residential units 209 72 145 267 commercial area (sq. ft.) 53,000 61,000 60,000 15,000 cash – £5m £6m £11m Other Overage Overage Overage Overage 20 Workspace Group PLC Annual Report and Accounts 2013at 31 march 2013 the Group had £383m of committed facilities with an average period to maturity of 2.9 years and the earliest maturity in June 2015. Details are set out below: rBS/hSBc club Bayern club retail Bond total Drawn Committed amount maturity Facilities £125m £80m Jun 2015 £200m £200m Jun 2015 £58m Oct 2019 £58m £383m £338m the refinance extends the weighted average maturity of our debt at 31 march 2013 from 2.9 years to 7.8 years. Following the refinance we expect the weighted average interest rate on our debt (based on the drawn debt at 31 march 2013) to be around 5.4%. it will be necessary to amend/cancel existing interest rate hedges at an estimated cost of around £10m. EPRA NET ASSET VALUE PER SHARE £ at 31 march 2013 there were £45m of available facilities and £10m in cash deposits. Overall loan to value was 40% with good headroom on all of bank and bond covenants. 3.08 0.40 0.12 (0.09) (0.03) 3.48 Our interest rate hedging is structured to maintain a stable interest rate over the medium term. at 31 march we had £210m of fixed rate hedges at 2.9% out to June 2015, alongside the fixed 6% retail Bond out to October 2019. the weighted average interest rate on debt in the year was 5.0% (2012: 5.1%). During the year we have focused on diversifying our funding, extending the maturity profile and moving progressively to an unsecured basis to provide operational flexibility. in October 2012 we raised £57.5m from an unsecured retail Bond issue with a 6.0% coupon and a maturity date of October 2019. the proceeds were used to repay secured bank borrowings. On 10 June 2013 we agreed the refinancing of the Group’s remaining bank facilities through a combination of: – the issue of £157.5m of unsecured private placement notes, £148.5m with a 10 year maturity and £9m with a seven year maturity; – unsecured debt of £45m provided by a uK Fund with a 9/10 year maturity; and – £150m of unsecured five year bank debt provided by our core relationship banks, comprising rBS, hSBc and Santander. With effect from 1 July 2013 these new unsecured facilities will replace the existing secured bank facilities. Details on a pro forma basis of the Group’s facilities from 1 July 2013 are set out below: Private Placement notes uK Fund Private Placement notes retail Bond Bank debt total Facility £148.5m maturity June 2023 £45m June 2022/2023 June 2020 October 2019 June 2018 £9m £57.5m £150m £410m March 2012 Valuation Uplift Trading Profit Dividends paid Other March 2013 EPra net asset value per share at 31 march 2013 was £3.48 (2012: £3.08), an increase of 13% in the year with the main movements in net asset value per share highlighted below: EPra Nav per share at 31 march 2012 Property valuation surplus trading profit after interest Dividends paid in year Other at 31 march 2013 £ 3.08 0.40 0.12 (0.09) (0.03) 3.48 bLAckROck WORkSPAcE PROPERTy TRUST (bLAckROck JV) We have a 20.1% interest in Blackrock Jv for which we also act as property manager receiving management and performance fees. it was initially seeded with eight properties sold by Workspace to the Jv in February 2011 for £35m. the fund has acquired a further eight properties to complete the initial investment phase (allowing for the future capital expenditure). as at 31 march 2013 the valuation of these properties stood at £96m, with an underlying increase in the valuation of 5% (£3m) in the year. Subsequent to the year end, cam road, Stratford was sold for £7.6m, a £0.6m surplus to its book value at march 2013. it is intended to reinvest the proceeds in further property acquisitions. 21 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100business review cONTiNUED Principal business risks risk management is an integral part of our activities and the 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. a risk committee is in place to co-ordinate the risk management process and assists with reporting to the Board and audit committee. the risk committee also includes rolling representation from various areas across the business to help ensure that lower level issues and risks are captured, reported and dealt with as appropriate. 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. cHANGE REDUcED STRATEGic RiSk RiSk AREA: FiNANciNG DETAiL reduced availability and cost of bank financing resulting in inability to meet business plans or satisfy liabilities. 2. operational risks: these are identified, assessed and managed by executive Committee Directors. RiSk AREA: PROPERTy VALUATiON 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. DETAiL value of our properties declining as a result of macroeconomic environment, external market, or internal management factors. NO cHANGE investment market mood monitoring. 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 to the right. RiSk AREA: OccUPANcy NO cHANGE DETAiL Demand by businesses for our space declining as a result of social, economic or competitive factors. RiSk AREA: LONDON NO cHANGE DETAiL changes in the political, infrastructure and environmental dynamics of London lead to reduced demand for space from businesses. RiSk AREA: DEVELOPMENT NO cHANGE understanding of planning environment and use of appropriate advisers. DETAiL impact to underlying income and capital performance due to: − adverse planning rulings. − construction cost and timing overrun. − Lack of demand for developments. 22 MiTiGATiNG AcTiViTiES Funding requirements for business plans 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. example of actions undertaken in 2012/13: – the group raised £57.5m funding via a retail bond issue in october 2012. this widened our financing arrangements and also extended our debt maturity. 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. Weekly monitoring of occupancy levels, demand, 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. regular monitoring of the London economy, research reports and the commissioning of relevant research. regular meetings with the GLa and London Boroughs. 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. example of actions undertaken in 2012/13: – as the extensive development programme continues, improvements have been made to monthly reporting of progress on costs and timings to the board of each project underway. – enhanced reporting of progress of letting up and pricing for completed projects with comparison against original appraisals. Workspace Group PLC Annual Report and Accounts 2013 cHANGE REDUcED STRATEGic RiSk RiSk AREA: FiNANciNG DETAiL reduced availability and cost of bank financing resulting in inability to meet business plans or satisfy liabilities. RiSk AREA: PROPERTy VALUATiON DETAiL value of our properties declining as a result of macroeconomic environment, external market, or internal management factors. RiSk AREA: OccUPANcy DETAiL Demand by businesses for our space declining as a result of social, economic or competitive factors. NO cHANGE NO cHANGE RiSk AREA: LONDON DETAiL changes in the political, infrastructure and environmental dynamics of London lead to reduced demand for space from businesses. DETAiL impact to underlying income and capital performance due to: − adverse planning rulings. − construction cost and timing overrun. − Lack of demand for developments. MiTiGATiNG AcTiViTiES Funding requirements for business plans 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. example of actions undertaken in 2012/13: – the group raised £57.5m funding via a retail bond issue in october 2012. this widened our financing arrangements and also extended our debt maturity. NO cHANGE 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. Weekly monitoring of occupancy levels, demand, 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. regular monitoring of the London economy, research reports and the commissioning of relevant research. regular meetings with the GLa and London Boroughs. RETAiL bOND iSSUE Workspace launched a retail Bond in October 2012, successfully raising £57.5m. RiSk AREA: DEVELOPMENT NO cHANGE understanding of planning environment and use of appropriate advisers. ENHANcED REPORTiNG PROcEDURES Our development team report directly to the Board on costs and programme of all larger developments. 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. example of actions undertaken in 2012/13: – as the extensive development programme continues, improvements have been made to monthly reporting of progress on costs and timings to the board of each project underway. – enhanced reporting of progress of letting up and pricing for completed projects with comparison against original appraisals. 23 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100 business review cONTiNUED PRiNciPAL bUSiNESS RiSkS cONtiNuED STRATEGic RiSk RiSk AREA: iNVESTMENT DETAiL underperformance due to inappropriate strategy of: − timing of disposal decisions. − acquisitions timing. − Non achievement of expected returns. RiSk AREA: TRANSAcTiONAL DETAiL Joint ventures or other ventures with third parties do not deliver the expected return. cHANGE NO cHANGE MiTiGATiNG AcTiViTiES regular monitoring of asset performance and positioning of portfolio. plans analysis. target returns. acquisition due diligence appraisal and business regular monitoring of acquisition performance against NO cHANGE review and monitoring of potential joint ventures before agreed. RiSk AREA: REGULATORy NO cHANGE rEit conditions monitored and tested on a regular basis and reported to the Board. DETAiL Failure to meet regulatory requirements leading to fines or penalties or the introduction of new requirements that inhibit activity. RiSk AREA: bUSiNESS iNTERRUPTiON DETAiL major external events result in Workspace being unable to carry out its business for a sustained period. REDUcED continuing monitoring of security threat. RiSk AREA: REPUTATiONAL DETAiL Failure to meet customer and external stakeholder expectations. NO cHANGE customer survey undertaken and results acted upon. training and mystery shopper initiatives undertaken. regular communication with stakeholders. requirements for business plans are reviewed regularly. regular review of performance of joint ventures throughout term. example of actions undertaken in 2012/13: – bwpt joint venture has acquired five properties during 2012/13 taking the total portfolio to 16. – the trust is meeting key objectives and the portfolio is performing well, with regular meetings and monitoring of performance. close working relationship maintained with appropriate authorities and all relevant issues openly disclosed. advisers engaged to support best practice operation. Business continuity plans and procedures in place and regularly tested. example of actions undertaken in 2012/13: – moved to a Data Centre with increased resilience. – hourly replication of data to our business Continuity site with the ability to rapidly redirect services when required. – Creation of a readily available business Continuity office at southbank house. bUSiNESS cONTiNUiTy this year we have established a new Business continuity office at Southbank house, SE1 7SJ. 24 Workspace Group PLC Annual Report and Accounts 2013 strAtegiC risk risk AreA: investMent detAiL Underperformance due to inappropriate strategy of: − Timing of disposal decisions. − Acquisitions timing. − Non achievement of expected returns. detAiL Joint ventures or other ventures with third parties do not deliver the expected return. ChAnge no ChAnge MitigAting ACtivities 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. risk AreA: trAnsACtionAL no ChAnge 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. Example of actions undertaken in 2012/13: – BWPT joint venture has acquired five properties during 2012/13 taking the total portfolio to 16. – The trust is meeting key objectives and the portfolio is performing well, with regular meetings and monitoring of performance. LLoyds Avenue, eC3n 3AX One of the five new buildings acquired this year through the BWPT joint venture. risk AreA: reguLAtory detAiL Failure to meet regulatory requirements leading to fines or penalties or the introduction of new requirements that inhibit activity. risk AreA: Business interruPtion detAiL Major external events result in Workspace being unable to carry out its business for a sustained period. no ChAnge 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. reduCed Continual monitoring of security threat. Business Continuity plans and procedures in place and regularly tested. Example of actions undertaken in 2012/13: – Moved to a Data Centre with increased resilience. – Hourly replication of data to our Business Continuity site with the ability to rapidly redirect services when required. – Creation of a readily available Business Continuity office at Southbank House. risk AreA: rePutAtionAL detAiL Failure to meet customer and external stakeholder expectations. no ChAnge Customer survey undertaken and results acted upon. Training and mystery shopper initiatives undertaken. Regular communication with stakeholders. 25 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100 Key property statistiCs workspace group portfolio Property valuation Number of estates Lettable floorspace (million sq. ft.)† Number of lettable units Erv cash rent roll of occupied units average rent per sq. ft. Overall occupancy Like-for-like lettable floor space (million sq. ft.) Like-for-like cash rent roll Like-for-like average rent per sq. ft. Like-for-like occupancy blackrock workspace property trust Property valuation Number of estates Lettable floorspace (million sq. ft.)† Erv cash rent roll of occupied units average rent per sq. ft. Overall occupancy † Excludes storage space quarter ending 31 march 2013 Quarter ending 31 December 2012 Quarter ending 30 September 2012 Quarter ending 30 June 2012 Quarter ending 31 march 2012 £830m 86 4.7 4,626 £67.4m £52.7m £12.98 87.0% 3.7 £45.5m £13.75 89.8% £96m 16 0.5 £8.4m £7.0m £14.20 90.4% £799m 90 4.8 4,607 £66.7m £51.0m £12.33 87.0% 3.7 £43.8m £13.22 89.9% £94m 16 0.5 £8.4m £7.0m £14.47 88.4% £781m 90 4.8 4,639 £65.3m £50.5m £12.30 84.6% 3.7 £43.1m £13.12 89.0% £77m 13 0.5 £6.9m £5.3m £13.07 89.3% £773m 91 4.9 4,643 £65.1m £50.5m £12.02 85.5% 3.7 £42.6m £13.02 88.6% £69m 12 0.5 £6.2m £4.7m £11.36 88.5% £760m 92 5.0 4,668 £65.4m £50.2m £11.79 85.3% 3.7 £41.7m £12.90 87.7% £62m 11 0.4 £5.5m £4.7m £11.82 89.8% 26 Workspace Group PLC Annual Report and Accounts 2013 governanCe, FinanCial statements anD shareholDer inFormation review of operations Governance Financial statements Shareholder information 01-26 27-61 62-95 96-100 GOVERNANcE 28 Chairman’s Introduction 30 The Board and Executive Committee 32 Report of the Directors 35 Corporate Governance Report 45 Directors’ Remuneration Report 61 Directors’ Responsibilities FiNANciAL STATEMENTS 62 Independent Auditors’ Report to the Members of Workspace Group PLC 63 Consolidated Income Statement 63 64 65 66 67 Notes to the Financial Statements 91 Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Independent Auditors’ Report to the Members of Workspace Group PLC (Parent Company) Notes to the Parent Company Financial Statements 92 Parent Company Balance Sheet 93 95 Five-Year Performance 95 Key Performance Indicators SHAREHOLDER iNFORMATiON 96 Property Portfolio 99 100 Glossary of Terms Investor Information 27 Workspace Group PLC Annual Report and Accounts 2013governance chairman’s introduction daniel Kitchen ChAIRMAN Good governance, based on robust practices and processes, is a fundamental part of being a responsible business. The Board of Workspace is committed to maintaining a high standard of corporate governance in terms of leadership, remuneration matters, accountability, and in our relationship with our shareholders, all as identified by the UK Corporate Governance Code. We believe that good governance, based on robust practices and processes, is a fundamental part of being a responsible business. BOARD APPOINTMENTS AND SUCCESSION In order to implement our strategy successfully, the Board monitors and reviews succession planning and development requirements for key Executives and senior managers across the Company. Consequently, since last year’s report, we have welcomed two new Non-Executive Directors to our Board. In February 2013, we announced the appointment of Chris Girling. Chris was previously Finance Director at Carillion PLC and in recognition of his background and extensive experience it is intended that he will succeed Bernard Cragg as Chairman of the Audit Committee in due course. In May 2013 we appointed Damon Russell, the Chairman of New Telecom Express Group, an interactive media service provider. Damon brings over 20 years of experience across the telecommunications, internet, digital and media sectors. As I explained last year, Bernard Cragg will remain as a Board Director until the Annual General Meeting in 2014. We have been mindful to ensure that a certain level of continuity is retained given the Board changes last year and of course the experience and skills required in performing the role of Chair of the Audit Committee and Senior Independent Director. After nine years on the Board, John Bywater will be retiring at this year’s Annual General Meeting and we would like to thank him for his valued contribution to the Board’s activities over the years and in his role as Chairman of the Remuneration Committee. 28 Workspace Group PLC Annual Report and Accounts 2013 We continue to review and monitor Board and Board Committee composition against our skills and experience requirements and expect to appoint one further Non-Executive Director this year. We recognise the benefits of diversity of skills, gender, knowledge and independence and we will continue to ensure that this is taken into account when considering any particular appointment. The Company’s policy remains that selection should be based on the best person for the role. We will continue to review candidates from a wide range of backgrounds with our foremost priority being to ensure that we appoint the most appropriate individuals and maintain our merit-based approach to recruitment. In accordance with the UK Corporate Governance Code, all of the Directors have submitted themselves for re-election at the Annual General Meeting. This practice will continue at the Annual General Meeting in 2013. BOARD AND COMMITTEE PERFORMANCE In the previous financial year, we conducted our annual evaluation of the Board and Committee performance through an independent external consultancy. This year, the evaluation was conducted by me with support from the Company Secretary. The process covered Board, Committee and personal performance and the output was reviewed by the Board. The process confirmed that the Board and its Committees continued to work effectively. COMMUNICATION WITH SHAREHOLDERS Communication with shareholders is given a high priority by the Board. During the year, the Remuneration Committee reviewed the remuneration structure in place at Workspace. As part of its review, the Committee identified some modifications for long-term incentive arrangements. These were discussed with the Company’s largest shareholders. When the Company announces its annual and half year results, the Chief Executive Officer, and Chief Financial Officer make presentations to institutional investors and analysts and hold one-to-one briefings with key shareholders. In addition, I am available to meet with shareholders if they wish to raise any matters separately. DANIEL KITCHEN ChAIRMAN CORPORATE GOvERNANCE STRUCTURE I n v e stment C o mmittee E age m e nt enior S n a M c t i v e u t e e m m i t e 3 7 g p a E x e C o x t A u e r d n i t a R e c E x r t u e i r t n m a e l n t The Board t i d u A e e t t i m m o C 2 4 e g a p N o m i n a t i C o m m p a g e i t t o 3 e n 7 e s R e m C o m uneration mittee page 38 A dvisors k R i s C o m m itt e e o l r e c n a n Fi 29 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013 the Board and eXecutive committee THE BOARD 1. Daniel Kitchen Appointment: Non-Executive Chairman committee memBershiPs: Chairman of the Nominations Committee and a member of the Remuneration Committee. BacKground and relevant eXPerience: Daniel Kitchen was appointed to the Board on 6 June 2011 and subsequently took on the role as Chairman in July 2011. He was previously Deputy Chief Executive at Heron International plc and prior to that was Finance Director at Green Property for eight years. He retired as Non-Executive Chairman of Irish Nationwide Building Society in July 2011 and as Non-Executive Director of Kingspan Group PLC in May 2012. current eXternal aPPointments: He is currently Non-Executive Chairman of Key Capital Real Estate Ltd and a Non-Executive Director of LXB Retail Properties PLC, Irish Takeover Panel Limited and Governor of St Patrick Hospital in Dublin. 2. JaMie hOPKinS Appointment: Chief Executive Officer BacKground and relevant eXPerience: Jamie Hopkins was appointed to the Board as a Non-Executive Director in June 2010 then subsequently took on the role as Chief Executive on 1 April 2012. He was previously Chief Executive and a Non-Executive Director of Mapeley PLC and a Director of Chester Properties. Prior to that, Jamie was a Director of Delancey Estates and Savills. current eXternal aPPointments: Jamie is a Member of the Corporate Board of Great Ormond Street Hospital Children’s Charity. 3. GRahaM cleMett BSc, aca Appointment: Chief Financial Officer BacKground and relevant eXPerience: Graham Clemett joined the Board as Finance Director in July 2007. Previously he was Finance Director for UK Corporate Banking at RBS Group PLC where he worked for a period of five years. Prior to that, Graham spent eight years at Reuters Group PLC, latterly as Group Financial Controller. 4. MaRia MOlOneY PhD, B.leG.Sci, D.UniV, M.Phil (laW) Appointment: Non-Executive Director committee memBershiPs: Member of the Audit, Remuneration and Nominations Committees. BacKground and relevant eXPerience: Maria Moloney was appointed to the Board in May 2012. She was previously on the Board of the Belfast Harbour Commissioners, the Industrial Development Board for Northern Ireland and the Northern Ireland Transport Holdings. current eXternal aPPointments: Maria, a lawyer, is currently a Non-Executive Director of the Broadcasting Authority of Ireland in Dublin and a Trustee of the N. Ireland Cancer Centre in Belfast. 5. JOhn BYWateR FRicS Appointment: Non-Executive Director committee memBershiPs: Chairman of the Remuneration Committee and a member of the Audit and Nominations Committees. BacKground and relevant eXPerience: John Bywater was appointed to the Board in June 2004. He was previously an Executive Director of Hammerson PLC and retired in March 2007. current eXternal aPPointments: He is Managing Director of Caddick Developments Ltd, a Non-Executive Director of Canal and River Trust (formerly British Waterways) and Realis Estates, a private property company; a Non-Executive of Low Carbon Workspace Limited and a Trustee of Opera North. 1. 2. 3. 4. 5. 30 Workspace Group PLC Annual Report and Accounts 20136. BeRnaRD cRaGG BSc, aca Appointment: Senior Independent Non-Executive Director committee memBershiPs: Chairman of the Audit Committee and a member of the Remuneration and Nominations Committees. BacKground and relevant eXPerience: Bernard Cragg was appointed to the Board in June 2003. He was previously Chairman of Datamonitor PLC and i-mate PLC, and a Non-Executive Director of Bristol & West PLC. He was formerly Group Finance Director and Chief Financial Officer of Carlton Communications PLC and a Non-Executive Director of Arcadia PLC. current eXternal aPPointments: He is a Non-Executive Director of Astro Overseas Limited and Astro Malaysia Holdings SDN BHD and the Senior Independent Director of Mothercare PLC and Progressive Digital Media PLC. He is also Deputy Chairman and Senior Independent Non-Executive Director of Alternative Networks PLC. 7. DaMOn RUSSell Appointment: Non-Executive Director BacKground and relevant eXPerience: Damon is currently Chairman of New Telecom Express Group, an interactive media service provider, and has more than 20 years’ experience in the industry. He co-founded the company in 1989 and has been responsible for key client relationships and the business’ sales strategy since its inception. Telecom Express was sold to AMV BBDO, part of the Omnicom Group, in 1998. In 2004, Damon led a successful management buyout. He also holds advisory roles for a number of smaller companies in the digital media sector. 8. caRMelina caRFORa FciS Appointment: Company Secretary BacKground and relevant eXPerience: Carmelina Carfora was appointed Company Secretary in March 2010. She was previously Group Company Secretary of Electrocomponents Plc. She has also worked in the construction industry and for a consultancy firm offering company secretarial services. 9. chRiS GiRlinG Appointment: Non-Executive Director committee memBershiPs: Member of the Audit, Remuneration and Nominations Committees. BacKground and relevant eXPerience: Chris Girling was appointed to the Board in February 2013. He was previously Group Finance Director of Carillion PLC. current eXternal aPPointments: Chris is currently a Non-Executive Director and Chairman of the Audit Committees of Elementis PLC and Keller PLC and a Non-Executive Director of Arco Limited. EXECUTIvE COMMITTEE 10. anGUS BOaG MSc cenG Mice Appointment: Development Director BacKground and relevant eXPerience: Angus Boag joined the Group in June 2007 as Development Director. He has extensive experience in property and construction management and was a principal consultant at PA Consulting Group. Prior to joining the Group he was at Manhattan Loft Corporation for 12 years joining as Development Director and then being appointed as Managing Director in 2001. 11. chRiS PieROni Ba (hOnS) MSc (ecOn) PhD (cantaB) acSi Appointment: Operations Director BacKground and relevant eXPerience: Chris Pieroni joined the Group as Operations Director in October 2007. Chris is responsible for asset management, marketing, professional services, brand and business development. Prior to joining Workspace, he worked at KPMG specialising in real estate and infrastructure finance. He began his professional career teaching economics at Cambridge University. Chris was a Non-Executive Director of the Group from 2000 until his retirement from the Board in August 2006. 6. 7. 8. 9. 10. 11. Workspace Group PLC Annual Report and Accounts 2013 31 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100rePort oF the directors CARMELINA CARFORA Company Secretary The Directors present their report on the affairs of the Group together with the audited financial statements for the year ended 31 March 2013. The Business Review and all other sections of the annual report, to which cross reference is made, are incorporated into the Report of the Directors by reference. PRINCIPAL ACTIvITY AND BUSINESS REvIEW The Group is engaged in property investment in the form of letting of business accommodation to new and growing companies located in and around London. At 31 March 2013 the Company had 12 active subsidiaries, six of which are property investment companies owning properties in Greater London. The other six include: Workspace Management Limited which acts as manager for all the Group’s property investment companies and the BlackRock Workspace Property Trust; Workspace 16 (Jersey) Limited which invests in the BlackRock Workspace Property Trust; LI Property Services Limited which procures insurance on behalf of the Group; and Anyspacedirect.co.uk Limited which operates a web-based service for businesses in search of commercial space to rent in the UK. Workspace holdings Limited and Workspace Glebe Limited are intermediate holding companies. A full list of the Company’s trading subsidiaries appears on page 89. Significant events which occurred during the year are detailed in the Chairman’s Statement on page 4, the Chief Executive Officer’s Strategic Review on page 6 and the Business Review on pages 16 to 25. BUSINESS REvIEW AND FUTURE DEvELOPMENTS The Business Review requires a detailed review of the business of the Group, the development and performance of the Company during the year and at the year end and of its strategy and prospects, including an analysis using key performance indicators. This information, together with a description of the principal risks and uncertainties facing the Company, details of the Company’s health and safety policies and its environmental and corporate responsibility activities can be found on pages 1 to 26 and page 34. 32 CORPORATE GOvERNANCE The Company and the Group are committed to high standards of corporate governance, details of which are given in the Chairman’s Governance Introduction on pages 28 and 29 and the Corporate Governance Report on pages 35 to 44 and in the Directors’ Remuneration Report on pages 45 to 60. PROFIT AND DIvIDENDS The Group’s profit after tax for the year attributable to shareholders amounted to £76.4m (2012: £49.0m). The interim dividend of 3.22p (2012: 2.93p) was paid in February 2013 and the Board is proposing to recommend the payment of the final dividend of 6.45p (2012: 5.86p) per share to be paid on 2 August 2013 to shareholders whose names are on the Register of Members at the close of business on 12 July 2013. This makes a total dividend of 9.67p (2012: 8.79p) for the year. GOING CONCERN The Group’s activities, strategy and performance are explained in the Chief Executive Officer’s Strategic Review and Our Strategy on pages 6 to 9 and the Business Review on pages 16 to 25. Further detail on the financial performance and financial position of the Group is provided in the financial statements on pages 63 to 90. The Directors, having made appropriate enquiries, have a reasonable expectation that the Group and the Company have adequate resources and sufficient headroom on the Group’s debt facilities to continue in operational existence for the foreseeable future. For this reason, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Group’s accounts. LAND AND BUILDINGS The Group’s fixed assets are mainly investment properties of £825.9m (2012: £759.3m). The Group’s investment properties have been independently valued by CBRE Limited, Chartered Surveyors, at 31 March 2013 at open market value. DIRECTORS With the exception of Maria Moloney, Chris Girling and Damon Russell who were appointed as Directors on 22 May 2012, 7 February 2013 and 29 May 2013 respectively, the Directors of the Company all held office throughout the year. The current Directors are shown on pages 30 and 31. All the Directors will retire at the Annual General Meeting and, being eligible, will offer themselves up for election or re-election. Workspace Group PLC Annual Report and Accounts 2013DIRECTORS’ INDEMNITIES As permitted under the Companies Act 2006 and the Company’s Articles of Association, the Company has executed a Deed Poll under which it will indemnify its Directors, subject to certain limitations and as permitted by law, for liabilities incurred in connection with their appointment as a Director and in certain circumstances fund a Director’s expenditure on defending criminal or civil proceedings brought against the Director in connection with their position as a Director of the Company or of any Group Company. The indemnity provision was in force during the year and at the date of approval of the financial statements. DIRECTORS’ CONFLICT OF INTEREST No Director had, during the year, any beneficial interest in any contract significant to the Company’s business, other than a contract of employment. Details of the Directors’ shareholdings and options over shares are provided on pages 58 to 60. The Company has procedures in place for managing conflicts of interest. Should a Director become aware that they, or their connected parties, have an interest in an existing or proposed transaction with Workspace Group PLC, they are required to notify the Board in writing or at the next Board Meeting. EMPLOYMENT POLICIES The Group values highly the commitment of its employees and has maintained its practice of communicating business developments to them in a variety of formats. Furthermore, the Group has implemented a series of Director-led staff briefings designed to keep employees well informed of the performance and objectives of the Group. These briefings are held regularly and serve as an informal forum for employees to ask questions about the Company. Employees are appraised regularly. The appraisal process has been designed to link closely with the business planning process and provides employees with a clear set of business and personal objectives. Share Schemes are a long-established and successful part of our total reward package, encouraging and supporting employee share ownership. In particular, all employees are invited to participate in the Company’s Savings Related Share Option Scheme (‘SAYE’). During the year all employees were also able to participate in the Approved Share Incentive Plan (‘SIP’). The Group is committed to an active Equal Opportunities Policy from recruitment and selection, through training and development, performance reviews and promotion. All decisions relating to employment practices are objective, free from bias and based solely upon work criteria and individual merit. The Company is responsive to the needs of its employees, customers and the community at large. We are an organisation which uses everyone’s talents and abilities, where diversity is valued. The Group remains supportive of the employment and advancement of disabled persons and ensures its promotion and recruitment practices are fair and objective. SHARE CAPITAL AND CONTROL Full details of share options and awards under the terms of the Company’s share incentive plans can be found on pages 85 to 88. Other relevant requirements from the takeover directive are included elsewhere in the Report of the Directors, the Corporate Governance Report, the Directors’ Remuneration Report and the notes to the Group and Company financial statements. There are no agreements in place between the Group and its employees or Directors for compensation for loss of office or employment that occur because of a takeover bid. As at 31 March 2013, the Company’s issued share capital comprised of a single class of 144,936,155 ordinary shares of £1.00 each. Details of the Company’s issued share capital are set out on page 84. SUBSTANTIAL SHAREHOLDINGS IN THE COMPANY As at 31 March 2013, the Company has been notified, in accordance with the FSA Disclosure and Transparency Rules of the following interests in the voting rights of the Company: Mr S N Roditi BlackRock Inc Standard Life Investments F&C Asset Management Plc Invesco Perpetual Legal & General Investment Management Aberforth Partners NBIM Number of Shares 38,880,258 16,475,156 8,726,570 8,091,140 7,830,749 6,285,840 6,084,364 4,840,332 Percentage held 26.83 11.37 6.02 5.58 5.40 4.34 4.20 3.34 As at 31 May 2013, the Company has been notified, in accordance with the FSA Disclosure and Transparency Rules of the following interests in the voting rights of the Company: Mr S N Roditi BlackRock Inc Standard Life Investments Invesco Perpetual F&C Asset Management Plc Legal & General Investment Management NBIM Number of Shares 38,880,258 16,347,524 10,322,479 7,587,941 7,130,851 5,871,178 5,741,430 Percentage held 26.83 11.28 7.12 5.24 4.92 4.05 3.96 Mr Roditi’s shareholding is held via a number of different trusts and legal entities. 33 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013rePort oF the directors CONTINUED POLITICAL AND CHARITABLE CONTRIBUTIONS The Group made no political contributions during the year (2012: £nil). Charitable contributions within the UK amounted to £45,940 (2012: £43,824) principally through rental concessions. INDEPENDENT AUDITORS The auditors, PricewaterhouseCoopers LLP (‘PwC’), have indicated their willingness to continue in office and a resolution that they will be reappointed will be included as ordinary business at the Annual General Meeting. ANNUAL GENERAL MEETING The 27th Annual General Meeting of the Company will be held at Chester house, Kennington Park, 1-3 Brixton Road, London SW9 6DE on Thursday 25 July 2013 at 11.00am. Accompanying this report is the Notice of the Annual General Meeting, which sets out the resolutions to be considered and approved at the meeting. By order of the Board CARMELINA CARFORA COMPANY SECRETARY 11 June 2013 HEALTH AND SAFETY We are committed to health and safety best practice as an integral part of our business activities and our drive for high performance. The Group’s policy is to provide and maintain safe and healthy working conditions, equipment and systems of work for all its employees and to provide such information, training and supervision as they need for this purpose. Whilst all employees of the Group have a responsibility in relation to health and safety matters, certain staff have been designated ‘workplace’ responsibilities or other co-ordinating responsibilities throughout the Group, and ultimately, at Board level, the Chief Executive Officer has overall responsibility. PURCHASING POLICIES AND PAYMENTS The Group tries, wherever possible, to procure from within its own customer base providing customers are competitive on price and quality. The Group’s policy is that, unless agreed otherwise at the time of the transaction, its own payments to others for goods and services received are made on average within a month of the date of invoice. During the year to 31 March 2013 the Group’s average payment term from the date of invoice was 29 days (2012: 33 days). The Parent Company has made no trade purchases. FINANCIAL RISK MANAGEMENT The financial risk management objectives and policies of the Company are set out in note 17 to the financial statements and in the Corporate Governance section of this report on pages 43 and 44. DISCLOSURE OF INFORMATION TO AUDITORS The Directors who held office at the date of approval of this Report of the Directors confirm that, so far as they are each aware there is no relevant information of which the Group’s auditors are unaware; and each Director has taken all the steps that they ought to have taken as Directors to make themselves aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. 34 Workspace Group PLC Annual Report and Accounts 2013corPorate governance rePort CORPORATE GOvERNANCE PRINCIPLES AND COMPLIANCE STATEMENT The Board is committed to maintaining high standards of corporate governance and we support and apply the principles of good governance advocated by the UK Corporate Governance Code (the Code). The Board works with honesty and integrity which it considers are vital to building a sustainable business for all of our stakeholders. COMPLIANCE WITH THE UK CORPORATE GOvERNANCE CODE It is the Board’s view that the Group has been fully compliant with the Code throughout the year ended 31 March 2013. The application of the principles contained in the Code is described below. Detailed reports on Directors’ remuneration and the Audit Committee can be found on pages 45 to 60 and pages 42 to 44. The Board believes that implementing a robust governance and corporate social responsibility framework in which appropriate management structures, processes and safeguards are adopted and are transparently communicated to shareholders is essential in aiding sustainable long-term economic performance. CORPORATE GOvERNANCE STRUCTURE The Board is responsible to shareholders for the strategic direction of the Group and the stewardship of its activities. The Board has a number of standing committees to which specific responsibilities have been delegated and for which written terms of reference have been agreed. LEADERSHIP CORPORATE GOvERNANCE STRUCTURE THE BOARD – Establish the core values and standards which are implemented by Workspace’s governance framework and operational activities. – Set Workspace’s business strategy and business objectives in order to create long-term value for shareholders. – Ensure that the necessary resources are available to fulfil Workspace’s strategic objectives. – Review and monitor performance against its business objectives and consider any associated risk factors which may adversely impact the business at large. EXECUTIvE COMMITTEE – Address Group-wide issues and initiatives. – Review and approve capital expenditure, disposals and certain property acquisitions within established levels of authority. – Monitor the operating and financial results against plans and budgets. – Review the effectiveness of risk management and control procedures. REMUNERATION COMMITTEE – Oversee all aspects of remuneration for Executive Directors. – Recommend the Chairman’s remuneration. – Consider remuneration policy and practices of the workforce. NOMINATIONS COMMITTEE – Assess what new skills, knowledge and experience are required on the Board. – Recommend to the Board candidates for appointment as Executive and Non-Executive Directors (‘NEDs’) of the Group. – Consider succession policies and talent management. AUDIT COMMITTEE – Ensure the integrity of financial reporting and audit processes. – Ensure maintenance of a sound internal control and risk management system. – Review and monitor the external auditors independence, objectivity and effectiveness of the audit process. – Establish and implement the policy on non-audit services. ADvISORS – Advise on all aspects of executive remuneration and aspects associated with the LTIP. – Advise on administration and the tax treatment of share option schemes and deferred share awards. EXTERNAL AUDITOR – Audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). FINANCE – Produce the interim and annual financial reports and associated announcements. – Establish and monitor financial processes of control and cash management. RISK COMMITTEE – Review and identify risks facing the Group. – Ensure that appropriate controls are in place to review each issue raised. – Provides reports to the Audit Committee. SENIOR MANAGEMENT – Assist the Executive Committee in the running of day-to-day operations in line with Group strategy. – Review and track major initiatives. – Attend regular meetings with the Executive Committee to review performance and operational activity. INvESTMENT COMMITTEE – Approve any acquisition or disposal of investment property assets. EXTERNAL RECRUITMENT – Advise and assist the Committee in the search for appropriate candidates. – Advise and assist the Nominations Committee in increasing the effectiveness of the Board and ensure that diversity continues to be a major factor in profiling candidates. – Review and monitor integration plans for acquisitions. – Approve and monitor development contracts. – Approve and monitor asset management property improvements. – Make recommendations to the Board for its approval of any business initiative with a value of more than £2m. 35 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013corPorate governance rePort CONTINUED THE BOARD The Board has a duty to promote the long-term success of the Company for its shareholders and is responsible for safeguarding their interests by establishing a robust governance framework which is applied to all aspects of its business. The Board is collectively responsible for the performance of the Group. The Board will review and monitor strategic plans and objectives, approval of acquisition of investment properties, disposals, financing arrangements and capital expenditure and of the Group’s systems of internal control, governance and risk management. Other day-to-day operational decisions are delegated by the Board to the Executive Committee. The Chairman promotes open discussion among the Board members and encourages the Non-Executive Directors to constructively challenge strategic and other business related debate in order to ensure that the decisions adopted by the Board have been vigorously tested. To assist the Board in effectively discharging its duties, Directors receive relevant supporting information, which include but is not limited to the Group’s financial results, performance reports and risk assessment reports. The governance framework implemented by the Group ensures that open communication channels exist between the Board, its principal committees and from within the organisation. Copies of committee minutes are distributed to all Directors and Committee Chairmen report back to the Board. Furthermore, the Board routinely considers safety, environmental, ethical and reputational issues in order to ensure that they are fully reflected in the risk management process. BOARD ACTIvITIES The full schedule of matters reserved for the Board can be found on the Company website at www.workspace.co.uk. At least once a year the Board reviews the nature and scale of matters reserved for its decision. During the past financial year, the Board has met for scheduled Board meetings eleven times. Key matters reserved for the Board at those meetings include: – strategy: the setting and monitoring of strategy, including the dividend policy; – strategy: reviewing performance and implementation of the strategy by the Executive Directors; – Property: reviewing the Group’s property valuation; – Financing: considering significant financing arrangements; – acquisitions and disposals: examine and approve potential acquisitions and disposals; – Business Plans and Budget: reviewing and approval of budgets, business plans and performance; – redevelopment activity: approval of redevelopment activity and major developments; – Financial reporting & controls: approval of the annual, half yearly and interim management statement; – internal controls: ensuring a sound system of internal control and risk management; review of crisis management plan; – Policy: reviewing and approving policy on key areas including sustainability objectives, health and safety and the environment; – Board membership: approval of Board appointments and ensuring adequate succession planning is in place; – corporate governance: undertaking a review of its own performance and that of its committees, the independence of the Non-Executive Directors and reviewing the governance framework in place. The Company maintains Directors’ and Officers’ Liability insurance which is reviewed annually. BOARD ATTENDANCE The Board normally meets at regular intervals during the year. Supplementary meetings are also held as and when necessary. During the year ended 31 March 2013, the attendance of Directors at Board meetings was as follows: Daniel Kitchen Jamie hopkins Graham Clemett Bernard Cragg John Bywater Maria Moloney1 Chris Girling1 Damon Russell2 Scheduled Board Meetings (11) 10 11 11 10 9 10 3 0 Notes: 1. Maria Moloney and Chris Girling were appointed to the Board on 22 May 2012 and 7 February 2013 respectively. Since their appointment, both Maria Moloney and Chris Girling have attended all Board meetings that they were eligible to attend. 2. Damon Russell was appointed to the Board on 29 May 2013. Where Directors are unable to attend meetings, their comments, as appropriate, are provided to the Board or Committee Chairman prior to the meeting. During the year, the Board held an annual strategy meeting at which it considered the future strategy of the Group. 36 Workspace Group PLC Annual Report and Accounts 2013 THE EXECUTIvE COMMITTEE The Executive Committee consists of the Executive Directors together with the Operations Director and Development Director. It is chaired by the Chief Executive Officer. The purpose of the Committee is to facilitate and assist the Chief Executive Officer in managing the day-to-day activities of the Group and addressing Group-wide issues and initiatives. The Executive Committee is responsible for reviewing and approving capital expenditure; disposals and acquisitions of investment properties at certain levels as determined by the Board; the monitoring of the operating and financial results against plans and budgets; and to ensure the effectiveness of risk management and control procedures. The Executive Committee has its own terms of reference. The Committee has met 18 times during the year ended 31 March 2013. An Investment Committee was also established during the year under review, again this comprises the Executive Committee and senior managers will be invited to attend as required. The responsibilities of the Executive Committee members include: Jamie hopkins, chief executive officer Strategic management; investor relations; acquisitions and disposals; health and safety; staff; equal opportunities; remuneration; and training and development. graham clemett, chief Financial officer Finance; treasury; company secretarial; investor relations; and the Group’s IT strategy. chris Pieroni, operations director Portfolio performance; asset management, marketing, professional services, brand and business development. angus Boag, development director Planning consents; development of assets; valuations; disposals; sustainability; and environmental strategy. BOARD COMMITTEES The Board has a number of standing committees, namely the Remuneration, Audit, and Nominations Committee, to which specific responsibilities have been delegated and for which written terms of reference have been agreed. The terms of reference for the Remuneration, Audit and Nominations Committee are available for inspection on the Company’s website. Each of these Committees is comprised of Independent Non-Executive Directors of the Company who are appointed by the Board. Board members receive minutes of meetings of all the Board’s committees and can request presentations or reports on areas of interest. The Company Secretary is secretary to each Committee. Attendance at Committee meetings by Committee members during the year was as follows: Nominations Committee (3 Meetings) Remuneration Committee (7 Meetings) Audit Committee (4 Meetings) chairman Daniel Kitchen non-executive directors Bernard Cragg John Bywater Maria Moloney1 Chris Girling1 3 3 3 1 – 6 7 7 6 2 – 4 4 3 1 Notes: 1. The attendance of Maria Moloney and Chris Girling is based on the number of meetings held in which they were eligible to attend following their appointment as a formal member of the Committee. EFFECTIvENESS NOMINATIONS COMMITTEE DANIEL KITCHEN Chairman During the year, the Nominations Committee was chaired by the Company Chairman, Daniel Kitchen and comprised all of the Non-Executive Directors. The names of the members of the Committee are shown in the table above together with attendance at meetings. The full terms of reference of the Nominations Committee are available for inspection on the Company’s website at www.workspace.co.uk. The Committee meets as required and recommends to the Board candidates for appointment as Directors of the Company. The Committee periodically assesses what new skills, knowledge and experience are required on the Board and, if necessary, the balance of independence. If appropriate, a candidate profile is recommended which is then used to brief recruitment consultants appointed by the Committee to undertake the selection process. Initial meetings are generally held by the Company Chairman with prospective candidates, and a shortlist of individuals is then selected by the Chairman in conjunction with the recruitment consultants, to meet with other Nominations Committee members and the Executive Directors. The Nominations Committee then meets and decides which candidate, if any, will be recommended to join the Board. 37 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013 corPorate governance rePort CONTINUED During the year, the Nominations Committee worked on three Non-Executive Director appointments. The Committee appointed Spencer Stuart, an external search consultancy, to assist it in identifying external candidates with diverse experience, one of whom with relevant financial experience. The Committee met with a number of candidates and following several meetings and discussions, the preferred candidates, Maria Moloney, Chris Girling and Damon Russell, met with each member of the Board prior to their appointments on 22 May 2012, 7 February 2013 and 29 May 2013 respectively. BOARD COMPOSITION The effectiveness of the Board and its Committees is vital to the success of the Company. The Board considers there to be an appropriate balance between Executive and Non-Executive Directors required to lead the business and safeguarding the interest of shareholders. The Board’s current composition of a Non-Executive Chairman, two Executive Directors and five Non-Executive Directors meets the requirement of the code for at least half the Board, excluding the Chairman, to be independent Non-Executive Directors. In the Board’s view, all of the current Non-Executive Directors are independent and this is explained in more detail on pages 39 and 40. REMUNERATION COMMITTEE JOHN BYWATER FRICS Non-Executive Director During the year ended 31 March 2013, the Remuneration Committee was chaired by John Bywater and comprises all of the Non-Executive Directors and the Company Chairman who was independent upon appointment. The names of the members of the Committee are shown in the Table on page 37, together with attendance at meetings. The full terms of reference of the Remuneration Committee are available for inspection on the Company’s website at www.workspace.co.uk. The Chief Executive Officer is, other than discussions in respect of his own position, invited to attend and contribute towards meetings. Under its terms of reference the Committee meets at least twice a year. During the year under review the Committee met seven times. It is responsible for all aspects of the remuneration of the Executive Directors. The Committee is also responsible for recommending the Chairman’s remuneration to the Board in compliance with the UK Corporate Governance Code. Further details of the Remuneration Committee, remuneration policy and of the remuneration of each Director are set out in the Remuneration Report. The Non-Executive Chairman was considered by the Board to be independent upon his appointment. During the year, a number of changes have been made to the Board. On 1 April 2013, Jamie hopkins was appointed Chief Executive Officer following the retirement of harry Platt in March 2012. Maria Moloney was appointed as a Non-Executive Director on 22 May 2012 and Chris Girling joined the Board as a Non-Executive Director on 7 February 2013. Damon Russell was also appointed to the Board as a Non-Executive Director on 29 May 2013. The biographies of all members of the Board are set out on pages 30 and 31. The Nominations Committee regularly reviews the composition of the Board to ensure that we have an appropriate and diverse mix of skills, experience, independence and knowledge of the Group. The following Table illustrates the balance of Non-Executive Directors to Executive Directors, excluding the Chairman, on the Board during the past year: BALANCE OF NON-EXECUTIvE AND EXECUTIvE DIRECTORS 31 March 2013 31 March 2012 0 10 20 30 40 50 60 70 % 80 90 100 Non-Executive Directors Executive Directors BACKGROUND AND EXPERIENCE OF THE BOARD The Board currently has eight Directors that bring considerable and diverse experience which enables them to make a valuable contribution to the Group. Their experience, gained from varied commercial backgrounds, enables them to bring specific insights and make valuable contributions to the Company. 38 Workspace Group PLC Annual Report and Accounts 2013 The following Table illustrates the collective business experience held by Board Directors, outside that acquired at Workspace Group PLC. BOARD EXPERIENCE AND SKILLS Industry Experience Finance Property, Real Estate and Infrastructure Retail Media 0 1 2 3 4 5 Number of Directors The Board is actively considering diversity and believes this to be an important factor when considering appointments to the Board. As part of the recruitment process, the composition of the Board will be kept under review to ensure the best balance of skills and experience is maintained. Further details on our diversity policy can be found on page 44. ROLES OF THE CHAIRMAN, CHIEF EXECUTIvE Industry OFFICER AND SENIOR INDEPENDENT DIRECTOR Experience The roles and responsibilities of the Non-Executive Chairman, Chief Executive Officer and Senior Independent Other Director are separate and the division of responsibilities has been clearly established. Media The Chairman is primarily responsible for leadership of the Board, ensuring its effectiveness on all aspects of its Retail role and that it operates in the interests of shareholders. The Chairman facilitates the effective contribution of Finance the Non-Executive Directors and ensures all Directors receive accurate, timely and clear information. he is also Property, responsible for effective communication between the Real Estate and Infrastructure Board and shareholders. The Chairman is not involved in an executive capacity in any of the Group’s activities. 0 1 2012 AGM During the year the Chairman held a number of meetings with the Non-Executive Directors, without the Executive Directors being present. The discussions largely revolved around succession planning. 31 March 2012 The Chief Executive Officer has direct charge of the Group on a day-to-day basis and is accountable to the Board for the financial and operational performance of the Group and the determination of the strategy and achievement of its objectives. Bernard Cragg, as the Senior Independent Director, is responsible for chairing the meeting of the Non-Executive Directors for the purpose of evaluating the Chairman’s performance and to provide an alternative communication channel for shareholders if required. INDEPENDENCE OF NON-EXECUTIvE DIRECTORS Following the 2013 AGM, Bernard Cragg will have served as a Board Director for ten years. The Board recognises that his tenure will have reached a threshold at which his independence could be called into question by some shareholders under the criteria set by the UK Corporate Governance Code. The Board has considered the independence of all of the Non-Executive Directors, and in particular that of Bernard Cragg. The Board concluded that each of the Non-Executive Directors is considered to be independent of the executive management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. All Non-Executive Directors act in a robustly independent manner and bring constructive challenge to Board discussions and independent decision-making to their Board and Committee duties. 4 3 2 Number of Directors The Board believes that no long-standing relationship which may be deemed to compromise independence has been formed with any of the Executive Directors or senior executives at Workspace. Furthermore, the longest-standing professional relationship between Bernard Cragg and any existing Executive Directors is no more than six years. 39 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013corPorate governance rePort CONTINUED The Board accepts that some shareholders take a robust view of independence, in particular the tenure of Non-Executive Directors. The Board is committed to actively refresh its membership and that of its committees in line with its succession planning process which has been evident during the last 12 months with the appointment of Maria Moloney, Chris Girling and Damon Russell as Non-Executive Directors. COMPANY SECRETARY Carmelina Carfora is the Company Secretary to the Board of Workspace. her biography can be found on page 31. Carmelina is responsible for ensuring good information flows within the Board and its committees and between senior management and Non-Executive Directors. She is also responsible for advising the Board, through the Chairman on all governance matters. As explained last year, Bernard Cragg will remain as a Board Director until the Annual General Meeting in 2014. We have been mindful to ensure that a certain level of continuity is retained given the Board changes last year and of course the experience and skills required in performing the role of Chair of the Audit Committee and Senior Independent Director. however, the intention is that Chris Girling will succeed Bernard Cragg as Chairman of the Audit Committee in due course given his background, knowledge and in-depth experience within finance which are essential in order to perform the role of Chair of the Audit Committee. We continue to review and monitor Board and Board Committee composition against our skills and experience requirements. INDUCTION, TRAINING AND DEvELOPMENT A tailored induction programme is provided for each new Director. Overall, the aim of the induction programme is to introduce new Directors to the Group’s business and its governance arrangements. Such inductions typically include meetings with senior management, site visits and presentations of key business areas and other relevant documentation. In addition, Directors are encouraged to update their skills, knowledge and familiarity with the Group by attending external seminars and briefings, through participation at meetings and through visits to estates, meetings with senior management and advisers. We recognise that our Directors have a diverse range of experience, and so we encourage them to attend external seminars and briefings that will assist them individually. The Directors are regularly updated on new legislation and corporate governance issues as they arise. Directors have access to independent professional advice at the Company’s expense where they judge this to be necessary to discharge their responsibilities as Directors. This is in addition to the access that every Director has to the advice and services of the Company Secretary, who is responsible to the Board for ensuring that Board procedures are complied with. BOARD PERFORMANCE EvALUATION The Board annually evaluates its own performance and that of its Committees and Directors. In 2012 the annual evaluation of the Board and Committee performance was conducted through an independent external consultancy. The results of last year’s evaluation were positive. A number of actions were identified to improve and maintain the effectiveness of the Board. The actions, together with progress are identified below: 2012 BOARD EvALUATION actions Progress strategy and risk management succession planning and implementation skills, experience and performance communication – Annual Board strategy day held. – Actions from strategy day formally recorded in a plan which is monitored and updated by the Board. – Risk Management process reviewed and monitored. – Two Non-Executive Directors appointed to the Board during the year under review. – Two Non-Executive Directors appointed with diverse skills and experience, one with in-depth financial skills in order to assume the role of Chair of the Audit Committee in due course. – Non-Executive Directors have continued their interaction with the Executive Committee members and visited sites to gain an enhanced understanding of the challenges and opportunities they face in the business environment. Additional Board Meetings have also been included in the Board timetable. 40 Workspace Group PLC Annual Report and Accounts 2013For the year under review, the process comprised the Company Secretary issuing detailed questionnaires covering the Board and its Committees to Board members. The questionnaires covered those areas as detailed in the diagram below: BOARD AND COMMITTEE EvALUATION l s l S k i r i e n c e f e e o p x c n B ala a n d E i g n n n a n o i s s e c c u l P S R i s k C o r C M p o a o r a n nagement trols and te G overnance Inductio Trainin n a n g d O n g o i o f n g S t r a t e g y D e v e l o p m e nt g I n ternal x t e r n al hip s t i o s n M a n a g i n a n d R e l a E The responses to the questionnaires were collated independently by the Company Secretary who prepared reports for the Company Chairman and the Chairman of each committee. These reports were discussed at the relevant Committee meetings and the Board discussed the results at its meeting in March 2013. The results of this year’s evaluation were positive. The following themes were noted for action: – Ongoing review of Board composition and succession planning; – Continued focus on testing and development of strategy; – Conscious of the ever-changing legislation and regulations, presentations and updates will be made during the course of the year on both potential and impending legal and regulatory changes across areas of the Group’s operations to ensure the potential impacts on the Group are appropriately addressed on a timely basis. The review includes the assessment of individual Directors’ performance, which in the case of the Executive Directors is undertaken as part of the wider performance appraisal process applied to staff across the Group. The review of the Chairman’s performance is undertaken by the Non-Executive Directors, led by Bernard Cragg in his capacity as the Senior Independent Director, taking into account the views of the Executive Directors. Following the review, Bernard Cragg met with the Chairman to discuss his performance. ELECTION AND RE-ELECTION OF DIRECTORS The Articles of Association of the Group require that Directors should submit themselves for election at the first opportunity after their appointment and thereafter for re-election at least every three years. however, at the 2011 AGM the Group had adopted the requirements of the UK Corporate Governance Code (June 2010) in relation to Directors’ appointments and in particular the annual re-election of all Directors. Therefore, in accordance with provision B.7.1 of the UK Corporate Governance Code, all the Directors will retire at the AGM and being eligible, offer themselves up for election and re-election. The Board considers that all of the Directors have the necessary skills and experience needed to effectively lead the business. In addition, the Non-Executive Directors are considered to bring independent objectivity in order to safeguard and promote the interest of shareholders. The Board has considered the outcome of the Board effectiveness review as well as the performance of each individual Director, including how they operate as a collective in fulfilling their duties on the Board or as members of the Board’s Committees. The Board has accepted the recommendations provided by the Nominations Committee and is of the opinion that the Directors seeking re-election at the AGM have continued to give effective counsel and commitment to the Company and accordingly should be reappointed by the Group’s shareholders at the upcoming AGM. Jamie hopkins and Graham Clemett have service contracts and details can be found on page 49. None of the Non-Executive Directors have service contracts. The appointment of Daniel Kitchen may be terminated by either he or the Company giving six months’ notice in writing. The appointment of John Bywater and Bernard Cragg may be terminated by any one of them or the Company giving six months’ notice in writing. 41 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013 corPorate governance rePort CONTINUED Maria Moloney’s appointment may be terminated by either the Company or by her giving three months’ notice in writing. During the year, the Committee met in private sessions with its external auditors, PricewaterhouseCoopers LLP (‘PwC’), in the absence of management at least twice. Chris Girling was appointed as a Non-Executive Director on 7 February 2013 and was invited to join the Remuneration, Audit and Nominations Committees. he therefore stands for election at the forthcoming Annual General Meeting. Mr Girling’s appointment may be terminated by either the Company or by him giving three months’ notice in writing. Damon Russell was appointed as a Non-Executive Director on 29 May 2013. he also stands for election at the forthcoming Annual General Meeting. Mr Russell’s appointment may also be terminated by either the Company or by him giving three months’ notice in writing. Biographies for the Directors can be found on pages 30 and 31. ACCOUNTABILITY AUDIT COMMITTEE BERNARD CRAGG BSC ACA Senior Independent Non-Executive Director The Audit Committee ensures the integrity of financial reporting and audit processes and the maintenance of a sound internal control and risk management system, details of which are described on pages 43 and 44. The full terms of reference for the Audit Committee are available for inspection on the Company’s website at www.workspace.co.uk. The Committee comprises all the Non-Executive Directors, except the Chairman, and is chaired by Bernard Cragg. The Group audit partner from the external auditor attends the Committee Meeting at least twice a year. Maria Moloney, was appointed as a member on 31 May 2012. It was stated last year that the Company intended to recruit an additional Non-Executive Director with the necessary skills and experience required to become a member of the Audit Committee. Consequently, Chris Girling was appointed as a Non-Executive Director and member of the Audit Committee. Chris Girling was previously Group Finance Director of Carillion PLC. Bernard Cragg, the Chairman of the Audit Committee, is a Chartered Accountant and the Board is satisfied that he has the required and relevant financial experience. The Audit Committee collectively has the skills and experience required to fully discharge its duties, and it has access to independent advice at the Company’s expense. 42 MEETINGS Meetings of the Audit Committee coincide with key dates in the financial reporting and audit cycle. The Committee Chairman reports the outcome of meetings to the Board. During the year under review the Committee met four times. The Committee has a rolling agenda that ensures that the Committee receives appropriate information far enough in advance to enable it to fulfil its responsibilities. This includes not only information from management but also detailed reports from the external auditor. The Chairman of the Company, the Chief Executive Officer, the Chief Financial Officer and other members of the senior management team together with senior representatives of the external auditor are invited to attend all or part of meetings as appropriate. REvIEW OF THE YEAR During the year the Committee was responsible for reviewing, and reporting to the Board, on a range of matters including: – The interim and annual financial statements; – The appropriateness of the Group’s accounting policies and practices; – The valuations of the Group’s property portfolio; – The review of the Group’s internal control and risk management systems; – The external auditor’s management letter; – The Group’s compliance with REIT legislation; – The Company’s approach to compliance with legislation and regulations, including arrangements for staff to raise concerns in confidence; – The relationship with the external auditor, the external audit process, the audit and non-audit fee and independence; – The need and use for an internal audit function; and – The review of fraud risk. Due to its size and structure, the Group does not have an internal audit function, a matter which is kept under review by the Committee. however, management instructs the undertaking of a programme of financial, operational and health and safety internal audits at its estates. These are carried out by qualified senior head Office personnel on a rotational basis. Significant findings are reported to the Audit Committee. EXTERNAL AUDITORS The Audit Committee recognises that the independence of the Group’s external auditor is of paramount importance to shareholders and the Audit Committee terms of reference establish a process for monitoring and approving the nature and the level of related fees for non-audit services (e.g. accounting, tax or due diligence work) paid to the Group external auditors. Workspace Group PLC Annual Report and Accounts 2013 The Group uses the external auditor for relevant financial work for a variety of reasons, including their knowledge of the Group, the audit-related nature of the work and the need to maintain confidentiality. At each meeting, the Committee will be advised of any significant non-audit work awarded to the external auditor since the previous meeting and the related fees. At the annual May meeting, the Committee receive a report of fees, both audit and non-audit from PwC for the past financial year. The Committee has considered in detail the nature and level of non-audit services provided by PwC and the related fees. The Committee may challenge and in some instances refuse proposals in respect of non-audit work to be performed by the external auditor. In addition, the Committee will assess the threats of self review by the external auditors, self interest, advocacy and familiarity – these are set out below and considered in relation to PwC’s services: 1. A self review threat – this is where, in providing a service, the PwC audit team could potentially evaluate the results of a previous PwC service. The Committee specifically will not allow the auditors to: – Do anything that is a management responsibility (e.g. such as setting performance targets or determining employees’ actual compensation). – Provide accounting or book-keeping services. – Prepare financial statement disclosure items. 2. A self interest threat – where a financial or other interest (of an individual or PwC) will inappropriately influence an individual’s judgement or behaviour. The Committee will specifically perform the following: – If the external auditor is to be considered for the provision of non-audit services, their scope of work and fees must be approved in advance by the Chief Financial Officer and the Committee Secretary and, in the case of fees in excess of £50,000 for a single project, by the Committee (or if approval is required before the next meeting, by the Committee Chairman). For larger assignments in excess of £100,000 this would involve a competitive tender process unless there are compelling commercial or timescale reasons to use the external auditor or another specific accountancy firm. – It does not accept significant contingent fee arrangements with the external auditors. 3. An advocacy threat – this is where PwC or PwC personnel promote an audit client’s position to the extent where PwC’s objectivity as auditor is compromised. – The Group will not use PwC in an advocacy role. 4. A familiarity threat – this is where, because of a too long or too close a relationship, the external auditor’s independence is affected. – The Committee will prohibit the hiring of former employees of the external auditor associated with the Group’s audit into management roles with significant influence within the Group within two years following their association with the audit, unless the Chairman of the Audit Committee gives prior consent. Annually, the Committee will be advised of any new hires caught by this policy. however, there have been no instances of this occurring. In addition, PwC will rotate their lead audit partner every five years. – The Committee will monitor on an on-going basis the relationship with the external auditor to ensure its continuing independence, objectivity and effectiveness. Fees paid to PwC can be found in note 2 on page 71. ACCOUNTABILITY AND AUDIT In its financial reporting to shareholders and other interested parties, by means of Annual and half-Yearly Financial Reports, Interim Management Statements and other periodic statements, the Board aims to present a balanced and understandable assessment of the Group’s position and prospects. INTERNAL CONTROL AND RISK MANAGEMENT The Board has ultimate responsibility for the Group’s system of internal control and for reviewing its effectiveness. The Board has reviewed the Group’s system of controls including financial, operational, compliance and risk management on a regular basis throughout the year. however, any such system can only provide reasonable and not absolute assurance against any material misstatement or loss. The Group has established a risk management framework and procedures necessary to enable the Directors to report on internal controls in compliance with the Code. The risk management procedures involve the analysis, evaluation and management of the key risks to the Group. The other key elements of the Group’s system of internal control include: – A comprehensive system of financial reporting; – An organisational and management Board structure with clearly defined levels of authority and division of responsibilities; – A Risk Committee, which is chaired by the Chief Executive Officer and is attended by representatives from senior management and operational staff. The Risk Committee meets monthly and formally reports to the Audit Committee twice a year; – A programme of site audit visits, covering a significant proportion of the sites each year. Although the Group does not have a dedicated internal audit function, an operational, finance and health and safety audit are carried out at the estates by qualified head Office personnel. The results of the audits are reported to and reviewed by the Risk and Audit Committees and appropriate action taken as required. 43 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013corPorate governance rePort CONTINUED The Risk Committee reviews and identifies risks facing the Group and ensures that appropriate controls are in place to review each issue raised. Each identified risk is assigned a ‘Risk Owner’. The Risk Committee have also devised an annual plan of work where a review is undertaken of particular areas of the business. Depending on the nature of the project, a third party consultant may be appointed to assist in the review. The Group has continued to develop its risk management framework and has reappraised its risks in the light of the changes in the external environment during the last year. The Group has also considered the requirements of the Bribery Act 2010 and taken steps to ensure that it has adequate procedures as set out by the Act. The Group continues to strengthen its risk management processes to ensure these are embedded as part of the Group’s culture. The Turnbull Guidance sets out best practice on internal control to assist companies in applying the Code’s principles with regards to internal control. The Board, with advice from the Audit Committee continues to review the effectiveness of internal control with no significant failings or weaknesses identified. The joint venture of the Group are excluded from the Turnbull Guidance. Further information on the Group’s risks is detailed on pages 22 to 25. WHISTLEBLOWING The Group has ‘whistleblowing procedures’ under which staff may report any suspicion of fraud, financial irregularity or other malpractice. There is also a process in place for staff to report operational risks and issues to the Risk Committee. DIvERSITY Workspace employs enthusiastic, committed and well-trained people, whose diversity reflects that of London itself. The Board is fully committed to an active Equal Opportunities Policy from recruitment and selection, through training and development, performance reviews and promotion. All decisions relating to employment practices are objective, free from bias and based solely upon work criteria and individual merit. Workspace has a good record of promoting and appointing women to senior positions. The employee gender profile is fairly evenly split with a total of 45% female and 55% male employees. The Board does not consider it appropriate at this time to set quotas for Board representation, but will monitor developments in best practice. TAKEOvER DIRECTIvE Share capital structures are included in the Report of the Directors on page 33. GOING CONCERN Going Concern disclosures are included in the Report of the Directors on page 32. RELATIONS WITH SHAREHOLDERS Communications with shareholders is given a high priority and the Company undertakes a regular dialogue with major shareholders and fund managers. An analyst and investor event was held in October 2012 which provided an overview of the portfolio including, a property breakdown, examples of asset management initiatives and refurbishment and redevelopment schemes, along with appraisals and valuation methodology. The Executive Directors are the Company’s principal representatives with investors, analysts, fund managers, press and other interested parties. Frequent discussions with institutional shareholders are held on a range of issues throughout the year affecting the Group’s performance, which include meetings following the announcements of the annual and interim results. Other ad hoc meetings, presentations and site visits are arranged for shareholders throughout the year. ANNUAL GENERAL MEETING The Annual General Meeting provides the Board with an opportunity to communicate with, and answer questions from, private and institutional shareholders and the whole Board is available after the meeting, in particular, for shareholders to meet new Directors. Details of the resolutions to be proposed at the Annual General Meeting on 25 July 2013 can be found in the Notice of Meeting. The Chairmen of the Audit, Remuneration and Nominations Committees normally attend the Annual General Meeting and are available to answer any questions. All Directors normally attend the meeting. A copy of the Annual Report and Accounts is sent to shareholders and is also available on the Group’s website, which additionally contains up-to-date information on the Group’s activities and published financial results and presentations. The Board recognises the benefits of diversity of skills, gender, knowledge and independence. Consequently, diversity will form part of considerations afforded to the search and selection process for Directors and staff. By order of the Board CARMELINA CARFORA COMPANY SECRETARY 11 June 2013 44 Workspace Group PLC Annual Report and Accounts 2013directors’ remuneration rePort OvERvIEW FROM JOHN BYWATER, CHAIRMAN OF THE REMUNERATION COMMITTEE Remuneration for Executive Directors for 2013 reflects a year of strong results, as shown in the table below: JOHN BYWATER Chairman of the Remuneration Committee “Transformational year drives performance.” On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for the year ended 31 March 2013. While the new regulations governing the shareholder approval and reporting of executive reward do not come into force until Workspace’s 2014 financial year, we have incorporated a number of changes this year in both content and structure of this report. Section A outlines Workspace’s forward-looking remuneration policy, sets out the components of pay, how they are linked to the business strategy, and potential reward opportunities for the Executive Directors. Section B reviews how the policy was implemented for the year under review and includes changes to existing executive remuneration arrangements and a table showing a single figure of total remuneration for each Executive Director and their outstanding share awards. During the year the Committee reviewed the remuneration structure in place at Workspace to ensure it remains aligned with our business strategy and helps reinforce success. As part of its review, the Committee identified some modifications for future long-term incentive arrangements aimed at providing improved performance measurement and extended time horizons for long-term incentives. We have also taken the opportunity to increase the shareholding requirement for Executive Directors and introduce a minimum time horizon to achieve these. The outcomes of the review are listed on page 53 and these were discussed with the Company’s largest shareholders. I am also delighted to report that, during the year, all employees were able to participate in the Approved Share Incentive Plan (‘SIP’). This is an exciting opportunity for all employees to share in the future success of the Company. ACTUAL PERFORMANCE OF STRATEGIC AND FINANCIAL MEASURES 2013 2012 +13% net asset value per share Up 13% to £3.48 +8% net asset value per share Up 8% to £3.08 capital return of 13.8% vs 3.2% for iPd quarterly universe capital return of 13.4% vs 6.4% for iPd quarterly universe +12% trading Profit after interest Up 12% to £17.9m +13% trading Profit after interest Up 13% to £16.0m +10% dividend per share for full year Up 10% to 9.67p +10% dividend per share for full year Up 10% to 8.79p 82% customer satisfaction 51.1% total shareholder return 84% customer satisfaction -7.6% total shareholder return We continually keep all aspects of remuneration under review and listen to the views of shareholders. We believe our current approach to remuneration is responsible and appropriate as it: – Is structured to drive execution of our business strategy; – Aligns reward with the creation of shareholder value; – Allows the Company to recruit and retain talent; and – Incentivises the delivery of long-term, sustainable business growth and shareholder value. The Committee recognises that the business has been through a transitional year with the delivery of a strong set of results. The focus has remained on driving value by growing income through increased rent and occupancy while adding to the value of our assets through focused refurbishment and redevelopment. We have been delighted with the performance of the management team through this period of transition. We are pleased to be able to reward them for both the shareholder return which they have delivered and in the way they have developed the Company creating a platform for further sustainable growth. To conclude, the Committee believes that the structure of remuneration remains appropriate. Incentives are weighted towards long-term variable pay; executive share ownership is strongly encouraged; management incentives have stretching performance targets; the annual bonus focuses on our annual business priorities, and the LTIP aligns the interests of participants with those of our shareholders. Details of the remuneration policy can be found in the policy table on page 47. JOHN BYWATER ChAIRMAN OF ThE REMUNERATION COMMITTEE 11 June 2013 45 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013directors’ remuneration rePort CONTINUED COMPLIANCE STATEMENT This Remuneration Report has been prepared on behalf of the Board by the Remuneration Committee (the ‘Committee’). The Committee adopts the principles of good governance as set out in the UK Corporate Governance Code and complies with the UKLA Listing Rules and relevant requirements of Section 421 to the Companies Act 2006. The structure of this report has been modified from previous years based on the proposed regulations put forward by the Department for Business, Innovation and Skills (BIS). REMUNERATION COMMITTEE THE MEMBERS OF THE REMUNERATION COMMITTEE The Remuneration Committee is composed of four independent Non-Executive Directors, together with the Chairman of the Company. The Remuneration Committee met seven times during the year. Attendance at meetings by individual members is detailed in the Corporate Governance Report on page 37. The Committee consulted with the Chief Executive Officer and Chief Financial Officer and invited them to attend meetings when appropriate. No Director is present when their own remuneration is being discussed. In the reporting year the Committee consisted of the following Non-Executive Directors: John Bywater (Chairman) Bernard cragg daniel Kitchen maria moloney (from 22 May 2012) chris girling (from 7 February 2013) The Committee’s principal function is to determine Workspace’s policy on executive remuneration and to approve specific remuneration packages for its Executive Directors and members of the Executive Committee. It also considers the remuneration of senior managers. The full terms of reference for the Committee are available in the Investor section of the Company’s website www.workspace.co.uk. The key responsibilities of the Committee are summarised as follows: – Recommending the Company policy on remuneration for the Executive Directors and senior managers that ensures talented people are recruited, retained and motivated to deliver results; Reviewing the effectiveness of remuneration policy with regard to its impact and compatibility with the policy and arrangements throughout the rest of the organisation; - – Determining the terms of employment and remuneration for Executive Directors including recruitment and termination terms; – Reviewing incentive plans annually to ensure they remain appropriate to the Company’s current circumstances and prospects and that, in particular, the policies adopted are aligned and based on the creation of value for shareholders and provide appropriate incentives for management to achieve this objective; – Reviewing the subsequent achievement of the performance targets relating to any share incentive plan; – Making a recommendation to the Board in respect of the remuneration of the Company Chairman; and – Reviewing the overall remuneration levels of the broader employee population. A) POLICY REPORT PRINCIPLES OF OUR EXECUTIvE REMUNERATION POLICY It is intended that the remuneration policy framework as set out to the right, which has applied throughout the reporting year, will continue to apply for FY 2014. REMUNERATION POLICY The Company’s remuneration policy reinforces the Company’s goals, providing effective incentives for exceptional Company and individual performance. REMUNERATION PACKAGE DESIGN Remuneration packages are designed to attract, retain and motivate Executives of the highest calibre who have the experience, skills and talent to manage and develop the business successfully. PERFORMANCE LINKED A significant part of executive remuneration is variable and is determined by the Group’s success and directly links reward with Group and individual performance. SHAREHOLDERS’ INTERESTS The Committee strives to ensure that shareholders’ interests are served by creating an appropriate balance between fixed and performance-related pay. A considerable part of the reward package is linked to share price performance, is delivered in shares that have to be retained until minimum shareholding requirements have been met, and requires Executives to invest their own funds in Company shares. 46 Workspace Group PLC Annual Report and Accounts 2013 SUMMARY OF WORKSPACE’S REMUNERATION POLICY FOR EXECUTIvE DIRECTORS AND EXECUTIvE COMMITTEE MEMBERS THIS SECTION OF OUR REPORT SUMMARISES THE KEY COMPONENTS OF REMUNERATION FOR EXECUTIvE DIRECTORS operation opportunity Performance metrics changes for 2013/14 Purpose and link to strategy Base salary To reflect market value of the role and individual’s performance and contribution. Reviewed on an annual basis, with any increase taking effect from 1 April. Base salary increases are applied in line with the outcome of the review. The Committee reviews base salaries with reference to: – the individual’s role, performance and experience; – business performance and the external economic environment; – salary levels for similar roles at relevant comparators; and – salary increases across the Group. Payable in cash. Pension and other benefits To provide market competitive benefits. Executives participate in a defined contribution pension scheme. Other benefits include car allowance, private health insurance, and death in service cover. annual Bonus To reinforce and reward delivery of annual strategic business priorities, based on a scorecard of KPIs relating to both Group and individual performance. Bonus deferral and LTIP investment provide further alignment with shareholder interests. ltiP To reinforce delivery of sustained long-term sector out-performance, and align the interests of participants with those of shareholders. Executives may also participate in the SAYE scheme. KPIs are reviewed prior to the start of the year to ensure they remain appropriate and reinforce the business strategy. Stretching targets are set. At the end of the year the Committee determines the extent to which these were achieved. The Committee may vary the mix of cash and deferred bonus shares from year to year. For 2013, the minimum deferral requirement has been set at 25% of bonus earned. The Committee retains the discretion to mandate deferral of a percentage of bonus earned (which will normally vest after two years, subject to continued employment) or allow Executives to make an equivalent investment in the LTIP. The Committee may grant awards of performance shares and matching shares (subject to participant investment). The award levels and performance conditions are reviewed in advance of grant to ensure they remain appropriate. Awards are in the form of nominal priced options which vest after three years, subject to performance conditions. Non pensionable. Company contribution of 15% of salary for the CEO and 16.5% for the CFO. Other benefits values vary by role and are reviewed periodically. The maximum bonus for Executive Directors is 120% of salary. Up to 90% of salary can be earned on Group performance. The Group outcome can then be adjusted by a factor in the range 0.67 to 1.33 based on individual performance. In the event there is no bonus for Group performance, the Committee has discretion to award a bonus of up to 20% of salary for exceptional individual performance. Non Pensionable. Plan provides for annual awards of: – performance shares of up to 100% of salary (200% in exceptional circumstances); and – matching share awards of up to 2 for 1 on investments in Workspace shares of up to 50% of net salary. Business and individual performance are considerations in setting base salary. No change to the process. Salaries effective from 1 April 2013 are set out on page 51. Not performance related. No change. KPIs selected and their respective weightings may vary from year to year depending on strategic priorities. The Group performance measures used for 2013 annual bonuses were: – Trading profit before tax; – Capital return from the portfolio versus a defined comparator index compiled by IPD; – Customer satisfaction which is based on survey results. The Group performance outcome can then be adjusted based on individual performance as described opposite. Awards usually vest after 3 years, subject to Company performance and continued employment. Measures for 2012 awards were relative Net Asset Value growth (1/3), relative TSR (1/3) and absolute TSR (1/3). TSR is underpinned by Committee discretion; absolute TSR is subject to a relative TSR underpin. No change. For 2013 LTIP awards, changes to the performance conditions and introduction of a holding period are described on page 53 of the implementation report. 47 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013directors’ remuneration rePort CONTINUED THE CHAIRMAN AND NON-EXECUTIvE DIRECTORS The Board determines the remuneration policy and level of fees for the Non-Executive Directors, within the limits set out in the Articles of Association. The Remuneration Committee recommends the remuneration policy and level of fees for the Chairman of the Board. Remuneration comprises an annual fee for acting as a Chairman or Non-Executive Director of the Company. Additional fees are paid to Non-Executive Directors in respect of service as Chairman of the Audit and Remuneration Committees. When setting these fees, reference is made to information provided by remuneration surveys, the extent of the duties performed, and the size of the Company. The Chairman and Non-Executive Directors are not eligible for bonuses, retirement benefits or to participate in any share scheme operated by the Company. The current fees are: role Chairman fee Non-Executive Director base fee Committee Chairman additional fee Fee £125,000 £40,000 £5,000 PERFORMANCE SCENARIOS The graphs below provide estimates of the potential future reward opportunity for each of the two current Executive Directors, and the potential split between the different elements of remuneration under three different performance scenarios: ‘Minimum’, ‘On Target’ and ‘Maximum’. Potential reward opportunities illustrated above are based on the remuneration policy, applied to the base salary as at 1 April 2013. For the annual bonus, the amounts illustrated are those potentially receivable in respect of performance for 2013/14. For the LTIP, the award opportunities are based on those LTIP awards which are expected to be granted in June 2013. It should be noted that LTIP awards granted in a year normally vest on the third anniversary of the date of grant. The projected value of LTIP amounts excludes the impact of share price movement. In illustrating potential reward opportunities the following assumptions have been made: component ‘minimum’ ‘on-target’ ‘maximum’ Base salary Latest known salary Fixed Pension Contribution rate applied to latest known salary Other benefits Benefits as provided in the single figure table on page 51 annual Bonus No bonus payable Target bonus (50% of max) Maximum bonus ltiP No LTIP vesting Assumes full take-up of investment opportunity, and Threshold vesting (20% of max) Maximum vesting WIDER GROUP REMUNERATION The Group’s wider people policies are reported separately on page 33. Following probationary periods, all staff in the Company are eligible to participate in the Company’s bonus scheme, SAYE, SIP, pension scheme, life assurance arrangements and medical insurance benefits. Some senior staff are also eligible to participate in the Company’s long-term incentive plan together with all members of the Executive Committee. £1,795k £896k £487k Workspace operates a number of share schemes available to all employees, the details of which are provided on pages 86 to 88. In making remuneration decisions, the Committee also considers the pay and employment conditions elsewhere in the Group. In particular, the Committee considers the range of base pay increases across the Company as a factor in determining the base salary increases for Executives. CEO Maximum 27% 27% 46% On-target 55% 27% 18% Minimum CFO 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 Fixed Annual bonus LTIP £000s Maximum 28% 27% 45% On-target 55% 27% 18% Minimum £1,133k £571k £316k 0 200 400 600 800 1,000 1,200 Fixed Annual bonus LTIP £000s 48 Workspace Group PLC Annual Report and Accounts 2013The increase to the base salaries of the Chief Executive Officer and Chief Financial Officer with effect from 1 April 2013 of 2.2% is in line with the average salary increase across the Group. The Remuneration Committee does not specifically consult with employees over the effectiveness and appropriateness of the remuneration policy and framework, although as members of the Board they receive updates from the Executive Directors on their discussions and consultations with employees. DETAILS OF EXECUTIvE DIRECTORS’ SERvICE CONTRACTS The Executive Directors are employed under contracts of employment with Workspace Group PLC. The principal terms of the Executive Directors’ service contracts are as follows: Executive Director Position Effective date of contract From Company Jamie hopkins Graham Clemett Chief Executive Officer Chief Financial Officer 3 February 2012 31 July 2007 12 months 12 months From Director 12 months 12 months CHAIRMAN AND NON-EXECUTIvE DIRECTORS Letters of appointment are provided to the Chairman and Non-Executive Directors. Dates of the Non-Executive Directors’ letters of appointment and the unexpired period of their appointments (where appropriate after extension by re-election) are set out below: Notice Period Name Daniel Kitchen Bernard Cragg John Bywater Maria Moloney1 Chris Girling2 Damon Russell3 Date of Letter 6 June 2011 22 May 2012 27 July 2010 22 May 2012 7 February 2013 29 May 2013 Unexpired term as at 31 March 2013 15 months 16 months 4 months 26 months 34 months – Date of Appointment/Last reappointment at AGM 2012 2012 2012 2012 – – Notice Period 6 months 6 months 6 months 3 months 3 months 3 months 1. Maria Moloney was appointed on 22 May 2012. 2. Chris Girling was appointed on 7 February 2013. 3. Damon Russell was appointed on 29 May 2013. The Directors are subject to annual re-election at the AGM. EXIT PAYMENTS POLICY Termination payments are limited to the Directors’ basic salary, annual incentives and benefits for the unexpired portion of the notice period subject to performance and Committee discretion. The Committee will aim to minimise the level of payments to that Director, however, having regard to all circumstances, including the Company’s contractual obligations to the Director, the reason for the departure, and the Company’s policy to apply mitigation in the case of severance. In the event of termination of any Director, the Company reserves the right to make phased payments which are paid in monthly instalments and subject to mitigation. In the event that an Executive Director leaves, LTIP awards will normally lapse, unless the individual is considered a ‘good leaver’. Good leavers retain an interest in LTIP grants and awards are normally pro-rated for time based on the proportion of the vesting period served and for performance to the end of the relevant three-year performance period. An individual would normally be considered a good leaver if they leave for reasons of death, ill-health, injury, redundancy, retirement with the agreement of the Company, or such event as the Remuneration Committee determines. Similarly, in respect of Annual Bonus, if an Executive leaves he would normally lose any entitlement for bonus, unless a good leaver. Good leavers retain an interest in the bonus and the award is normally pro-rated for time and performance. 49 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013 directors’ remuneration rePort CONTINUED EXTERNAL APPOINTMENTS It is the Board’s policy to allow Executive Directors to take up one Non-Executive position on the Boards of other companies, subject to the prior approval of the Board. Any fee earned in relation to outside appointments is retained by the Executive Director. No such positions were taken and no fees were paid during the financial year. CONSIDERATION OF SHAREHOLDER vIEWS The Committee is committed to on-going dialogue with shareholders and welcomes feedback on Directors’ remuneration. It is the Remuneration Committee’s policy to consult with major shareholders prior to any major changes to its Executive remuneration structure. B) IMPLEMENTATION REPORT The following section provides details of how the remuneration policy was implemented during the year. The Committee met seven times during the year under review. Attendance by individual Committee members at meetings is detailed in the Corporate Governance Report on page 37. AGENDA DURING 2012/13 – Approval of the Directors’ Remuneration Report for 2011/12 and review of the outcome of AGM voting for the report; – Annual review of all Executive Directors’ and senior managers’ remuneration arrangements. For Executive Directors, salaries and total remuneration were benchmarked against a comparator group of other UK-listed property companies and companies of similar market capitalisation; – Review of annual bonus outcomes for 2011/12 and approval of the performance conditions for 2012/13 annual bonuses; – Approval of vesting levels for the 2009 Long Term Incentive Plan Awards (‘LTIP’) or (the ‘Plan’); – Review of share plan performance measures; – Review and approval of all awards under the LTIP, taking into account the total value of all awards under this Plan; – Review and approval of 2012 LTIP award for CEO; – Review of the LTIP performance conditions in advance of making 2013 awards in June; – Consulted major shareholders on potential changes to 2013 LTIP awards; – Review and approval of the Approved Share Incentive Plan; – Review of developments in Corporate Governance and the proposals issued by the Business Secretary to the UK Government; – Review of Executive Director shareholding guidelines; – Agreement to propose the renewal of the Savings Related Share Option Plan at the 2012 AGM; – Review of Committee Performance in 2012/13; and – Review of Committee Terms of Reference. During the year, the Committee sought internal support from the Chief Executive Officer and Chief Financial Officer who attended Committee meetings by invitation from the Chairman, to advise on specific questions raised by the Committee and on matters relating to the performance and remuneration of senior managers. The Chief Executive Officer and Chief Financial Officer were not present for any discussions that related directly to their own remuneration. The Company Secretary attended each meeting as Secretary to the Committee. ADvISERS In undertaking its responsibilities, the Committee seeks independent external advice as necessary. To this end, for the year under review, the Committee continued to retain the services of Kepler Associates as the principal external advisers to the Committee. During the year, Kepler Associates provided independent advice on a wide range of remuneration matters including current market practice, benchmarking of executive pay and incentive design and provides no other services to the Company. Grant Thornton was engaged by the Company Secretary to advise the Committee and the Company generally on the administration of the Company’s share plans. Slaughter and May LLP was also engaged by the Company Secretary to provide legal advice to the Committee and employment law advice concerning senior executives of the Company. The Company continually assesses on-going advice provided by its advisers on remuneration matters. The fees paid to advisers in respect of work carried out for the year under review are shown in the table below: Kepler Associates Grant Thornton Slaughter and May LLP Remuneration Committee Support Other Support £86,832 – – £60,360 – £14,500 50 Workspace Group PLC Annual Report and Accounts 2013SUMMARY OF REMUNERATION FOR YEAR ENDED 31 MARCH 2013 The table below sets out a single figure for the total remuneration received by each Executive Director for the year ended 31 March 2013 and the prior year: Salary1 Fees1 Benefits2 Pension Annual bonus3 total ltiP 2009 Award4,5 2010 Award4 Jamie hopkins1 Graham Clemett 2013 £000 400.0 – 17.1 60.0 480.0 957.1 2012 £000 23.1 37.7 0.9 3.4 – 65.1 2013 £000 250.0 – 18.1 41.2 300.0 609.3 2012 £000 221.6 – 17.8 36.6 249.4 525.4 – – – – – 645.4 475.1 – Notes: 1. Jamie hopkins was appointed as an Executive Director with effect from 12 March 2012. The remuneration reported is that received for qualifying services as an Executive Director (and, fees for services as a Non-Executive Director up to 12 March 2012). Jamie hopkins served as an Executive Director for only part of 2012 and therefore figures reported for 2012 do not reflect a 12-month period in this role. The figures have been calculated as follows: 2. Taxable value of benefits received in the year which includes items such as car allowance and private health insurance. 3. Annual bonus: this is the total bonus earned in respect of performance during the relevant year. For 2013 the Committee set a minimum deferral requirement of 25% of the bonus earned, equivalent to £120,000 for Jamie hopkins and £75,000 for Graham Clemett. 4. LTIP: this is the market value of shares that vested on performance to 31 March of the relevant year. (2013: 98.9% of the 2010 LTIP grant vested on performance, 2012: 66.5% of the 2009 LTIP grant vested on performance). The share price is the trailing three month average on 31 March 2013 of 333p for the 2010 LTIP and the share price at vesting of 2009 LTIP awards on 12 June 2012 was 226.5p. 5. Pursuant to the Workspace Long Term Equity Incentive Plan, share awards (conditional on three separate performance conditions for a period of three years from grant) were made to the Directors on 12 June 2009. Prior to the vesting date of 12 June 2012, these were converted to nil cost options to ease administration. This does not increase the overall cost to the Company. The period in which the nil cost option may normally be exercised started on the vesting date 12 June 2012 and will end on 12 June 2017, which is five years after the date of vesting of the award. REMUNERATION COMPONENTS FOR EXECUTIvES BASE SALARY AND BENEFITS The Committee reviews base salaries annually with any changes normally taking effect from 1 April. Individual pay levels are determined by reference to the external economic environment, individual performance, experience and rates of salary for similar jobs in companies of a similar sector and size. Consideration is also given to salary increases across the Company. In April 2013, the Committee reviewed the base salary of the Chief Executive Officer and the Chief Financial Officer. The Committee considered it appropriate that an increase of 2.2% be made to the Executive salaries which is in line with the average salary increase across the Group. The next salary review date for Executives will be 1 April 2014. All Executive Directors are provided with a Company mobile phone, a car allowance, private health insurance, death in service cover and an employer’s contribution to a defined contribution (money purchase) scheme. Executives may also join the SAYE scheme. Jamie hopkins and Graham Clemett receive an employer’s pension contribution equal to 15% and 16.5% of basic salary respectively, which is made to a defined contribution (money purchase) scheme. 51 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013 directors’ remuneration rePort CONTINUED ANNUAL BONUS SCHEME The Group operates an annual bonus scheme which provides for a capped variable (performance related) bonus. The maximum bonus potential for the Executive Directors is set at 120% of basic annual salary. The Committee sets a minimum deferral or investment each year into Workspace shares. For 2012/13 the Committee set a minimum deferral requirement of 25% of the bonus earned. The preferred mechanism for meeting this requirement is participant investment in the LTIP. however, the Committee will retain the discretion to mandate deferral of 25% of bonus earned (which will vest after two years, subject to continued employment) or allow executives to make an equivalent investment in the LTIP. For 2012/13 the Committee has allowed Executives to make an equivalent investment in the LTIP. The Corporate performance measures and their weightings for 2012/13 Executive Director annual bonuses are illustrated below. 1. Trading profit before tax (50%) 2. Capital Return from portfolio versus a defined comparator index compiled by IPD (30%) 3. Customer satisfaction (10%) 4. Personal objectives The performance measures applicable for the year ended 31 March 2013 and performance against them are detailed below: measure Proportion Bonus Performance targets Corporate 50% Personal Maximum Bonus (% of salary) 120% Trading profit before tax Capital return from the portfolio versus a defined comparator index compiled by IPD Customer satisfaction (based on survey results) 30% 10% Corporate performance bonus may be adjusted by a factor in the range of 0.67 to 1.33 (with factors greater than 1.0 reflecting superior performance) Performance achieved (% of bonus earned) Jamie hopkins 50% Graham Clemett 50% 30% 10% 30% 10% 1.33 1.33 Total Bonus Earned (% of salary) 120% 120% Against each measure the bonus starts to be paid on the achievement of a threshold performance, increasing on a straight line basis until stretch performance is achieved, at which point the full bonus potential for that measure is earned. The Committee assessed performance and was pleased to note that during the year the Company outperformed on every measure. The results of the quantitative measures were: FINANCIAL AND CORPORATE – Trading profit after interest up 12% to £17.9m. – The Company delivered a capital return of 13.8%, significantly outperforming the relevant IPD benchmark which had a capital return of 3.2%. – Customer satisfaction survey confirming 82%. 52 Workspace Group PLC Annual Report and Accounts 2013 The Committee considered performance during the year against personal and strategic objectives and noted the following achievements in particular: – An increased focus on improving the quality of our investor relations and clear communication of our strategy. – Successful launch of Retail Bond in October 2012. – Successful execution of targeted acquisitions and disposals. In the event of a change of control, LTIP awards would normally be pro-rated for time and performance, in line with best practice. Participation in the Plan extends to members of the Executive Committee and the Group’s senior managers. Full details of the awards made to the Executive Directors under the Plan are shown on page 59. – Good progress made on development projects with £29m invested on capital expenditure projects for significant income and capital growth. – Good performance against key operational and financial metrics: – Rental Income growth. Underlying net rental income, excluding disposals, up 6% to £46.5m. – Underlying property valuation excluding disposals and capital expenditure up 7.7% to £830m. – Dividend for year up 10% to 9.67p per share. – Net asset value per share up 13% to £3.48. As part of its review of remuneration arrangements during the year, the Committee identified some modifications for the Company’s long-term incentive arrangements which are summarised below. The Committee consulted with the Company’s largest shareholders, the ABI and RREV on the proposals during Spring 2013. In total, the holders of more than 50% of Workspace’s shares were consulted on the changes as part of the review. The Committee believes that the changes are in the interests of shareholders and will assist the Company in continuing to motivate and retain the talent it needs to reinforce long-term success.  Following consideration of the above, the Committee awarded Jamie hopkins and Graham Clemett a bonus of 120% of salary. 2013 LTIP AWARD Summary of changes to LTIP grants for 2013: For 2013/14, the structure of the Annual Bonus will remain as described above. LONG-TERM EQUITY INCENTIvE PLAN (‘LTIP’) The Plan provides for annual awards of performance shares of up to 100% of salary (200% in exceptional circumstances) and matching share awards of up to 2 for 1 on investments in Workspace of up to 50% of net salary. The maximum matching share award that may be granted to the Executive Directors is 100% of their annual basic salary. The Company awards matching shares in respect of an amount equivalent to two times the grossed up (for income tax and National Insurance) amount invested by the participant in Invested Shares. Vesting of performance shares and matching shares is based 1/3, 1/3, 1/3 on three-year relative NAV growth, relative TSR and absolute TSR. Relative performance is measured against the constituents of the FTSE 350 Real Estate Index. In addition, for any shares to vest on TSR, the Committee must satisfy itself that the recorded TSR is a genuine reflection of the underlying business performance of Workspace. For awards granted in 2010, 2011 and 2012, for any shares to vest on absolute TSR, the Company’s TSR must exceed the median TSR of the Comparator group by over +1.5% p.a. over the performance period. The TSR and NAV performance conditions have been selected to ensure a balanced portfolio of measures which are well aligned with shareholder interests. The Committee believes a blend of relative and absolute performance is most appropriate for Workspace and that use of absolute TSR underpinned by relative TSR provides transparency for executives and shareholder alignment (as this element will only vest if there is outperformance of sector peers). – Calibrate relative TSR performance under the LTIP using a simple ranking (rather than % outperformance) to provide a more consistent level of stretch for future cycles. Under this approach, the relative TSR element of LTIP awards will start to vest if Workspace’s three year TSR percentile rank is 51st centile (20% vesting), rising on a straight-line basis to full vesting at upper quartile. – Extend the LTIP time horizon by introducing a 1-year holding period, with clawback. The Committee reviewed whether the time horizon of the LTIP should be lengthened to reflect current thinking on best practice. The Committee concluded that at this time it would be appropriate to retain the three year performance period, in line with our closest peers to aid the recruitment of senior hires. however, the Committee decided to require net vested LTIP shares to be held for one year, with clawback, before the shares can be sold to provide additional alignment with shareholders. – Modify the LTIP absolute TSR performance zone for future awards to a range of 8% p.a. to 17% p.a. These remain above the targets originally approved by shareholders. The Committee believes the resulting targets will be appropriately stretching for the next three years. Vesting of the absolute TSR element of 2013 LTIP awards will continue to be underpinned by relative TSR to ensure this element can only vest if Workspace outperforms its sector peers (as well as Committee discretion). – To further encourage share ownership and strengthen alignment with shareholders, the Committee increased the share ownership guideline for Executive Directors from 100% to 150% of salary and introduced a time horizon of five years from appointment by which to attain the guideline. 53 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013directors’ remuneration rePort CONTINUED In summary, the 2013 LTIP grant will be subject to the following performance conditions: Performance condition level of performance one-third Growth in Net Asset Value plus dividends relative to companies in the FTSE 350 Real Estate Index Company’s percentile rank % of award vesting one-third Relative TSR (share price growth plus reinvested dividends) relative to companies in the FTSE 350 Real Estate Index Company’s percentile rank % of award vesting one-third Absolute TSR1 Company’s performance % of award vesting awards to be made in June 20131,2 threshold maximum 51st percentile 20% 51st percentile 20% 75th percentile 100% 75th percentile 100% 8% p.a. 17% p.a. 20% 100% Net vested LTIP shares are required to be held for a one-year holding period before the shares can be sold. For any shares to vest on absolute TSR, the Company’s TSR must exceed the median TSR of the comparator group over the performance period. 1. 2. There is straight line vesting between the threshold and maximum performance levels. For the Executive Directors, the Committee intends to make the awards following the release of the Company’s preliminary results announcement on 11 June 2013 and the anticipated size of awards is detailed below. Director CEO CFO Performance Award 100% of salary 100% of salary Maximum potential Matching Award 100% of salary 100% of salary In order to participate in the matching element of the plan, the Director must use his own funds to purchase ordinary shares, up to a maximum of 50% of net annual basic salary. RECAP OF PERFORMANCE CONDITIONS FOR EXISTING AWARDS Performance condition: level of performance one-third Growth in Net Asset Value relative to companies in the FTSE 350 Real Estate Index Company’s percentile rank % of award vesting one-third TSR (share price growth plus reinvested dividends) relative to companies in the FTSE 350 Real Estate Index Company’s performance % of award vesting one-third Absolute TSR1 Company’s performance % of award vesting awards made in 2010, 2011 and 20121,2 51st percentile 20% threshold maximum 75th percentile 100% Median Median + 7.5% p.a. 20% 100% 11% p.a. 20% p.a. 20% 100% 1. For any shares to vest on absolute TSR, the Company’s TSR must exceed the median TSR of the comparator group by +1.5% p.a. over the performance period. 2. There is straight-line vesting between the ‘threshold’ and ‘maximum’ performance levels. CEO 2012 LTIP AWARD As described in last year’s Remuneration Report, the Company granted its new CEO a special one-off award to enable his recruitment. Jamie hopkins then went on to invest £300k from his own funds, acquiring 112,525 Workspace shares, following which the Company granted Jamie hopkins a one-off award of 112,525 restricted shares (based on 1x the number of shares acquired), which may vest subject to the achievement of an absolute TSR underpin of 4% p.a. The Company also granted the new CEO an award under the current LTIP of 164,117 in performance shares (equal to 125% of salary), which will vest subject to the same performance conditions as for other executives, i.e. 1/3, 1/3, 1/3, on three year relative NAV, relative TSR and absolute TSR (subject to a relative TSR underpin). These awards were necessary to secure the services of the new CEO, and have been structured to require the new CEO to make a substantial investment in Workspace shares, as well as provide alignment with shareholder interests from the outset. The performance period is the three years to 31 March 2015, and the awards may vest three years from the date of grant, namely 19 November 2015. 54 Workspace Group PLC Annual Report and Accounts 2013 2010 LTIP vESTING The three year performance period of 2010 LTIP awards ended on 31 March 2013. Workspace’s three-year NAV growth (plus dividends) of 12.9% p.a. was 79th percentile against the FTSE 350 Real Estate which warranted 100% of this element vesting (equivalent to 33.3% of LTIP shares awarded). Over the three years from 1 April 2010 to 31 March 2013, Workspace’s TSR outperformed the median TSR of the FTSE 350 Real Estate by 8.1% p.a. which warranted 100% of this element vesting (equivalent to 33.3% of LTIP shares awarded). Workspace’s absolute TSR of 19.6% p.a., warranted 96.5% of the absolute TSR element vesting (equivalent to 32.2% of LTIP shares awarded). The Committee considered this together with the underlying business performance of Workspace, and concluded that 98.9% of the 2010 LTIP shares awarded to Executives would vest. JOINTLY HELD LTIP AWARDS In 2009 the Company offered participants the opportunity to restructure their 2009 LTIP awards and future awards so that they acquired shares jointly with the Company’s Employee Share Ownership Trust (‘ESOT’), with the effect that the growth in value of the shares creates a capital gain (taxed currently at 18%). Individuals were required to pay appropriate income tax and National Insurance as part of their upfront acquisition. If the awards vest, the participants keep their part-interest in the shares and the ESOT also transfers its part-interest to the participant at that stage, so that they receive the full value of the shares as intended under the terms of the Plan. This restructuring has generated ongoing savings for the Company and participants. For the 2009 and 2010 awards Graham Clemett accepted the joint ownership awards as part of his total awards, taking half of his awards as joint ownership awards, with the remainder in the original conditional shares structure. Under the rules of the SAYE Scheme, a requirement exists to renew the terms of the scheme every 10 years. At the Annual General Meeting in 2012, shareholders authorised the Company to amend the SAYE Scheme to allow options to continue to be granted until the 20th anniversary of the original date of adoption of the SAYE Scheme by the Company on 29 July 2003. SHARE INCENTIvE PLAN (SIP) The Company implemented a SIP in March 2013. The SIP is an all employee share plan that is tax approved by hM Revenue & Customs. The share awards granted under the SIP constituted a one-off offer to employees in 2013 (although the SIP rules are flexible enough to accommodate subsequent offers) where up to £1,000 of free shares were granted per employee. 51,800 ordinary shares were purchased by the Company on the market to grant the free shares and are held in a UK resident trust. The free shares are to be held in the Trust for a minimum period of three years before they can be withdrawn by the employees. SHARE-BASED AWARDS AND DILUTION The Company’s share schemes are funded through a combination of shares purchased in the market and new-issue shares, as appropriate. The Company monitors the number of shares issued under these schemes and their impact on dilution limits. The Company’s usage of shares compared to the relevant dilution limits set by the Association of British Insurers (ABI) in respect of all shares plans (10% in any rolling ten-year period) and executive share plans (5% in any rolling ten-year period) as at 31 March 2013 is detailed below. As of 31 March 2013, around 4.3m (3.0%) and 3.6m (2.5%) shares have been, or may be, issued to settle awards made in the previous 10 years in connection with all share schemes and executive share schemes respectively. Awards that are made but then lapse or are forfeited are excluded from the calculations. For the 2011 and 2012 awards the Executive Directors did not participate in joint ownership awards. ALL SHARE PLANS EXECUTIvE SHARE OPTIONS Details of outstanding grants made to the Executive Directors under the Executive Share Option Scheme and the performance targets that have to be satisfied for the options to become exercisable are shown on pages 59 and 60. No grants of options were made during the year under the Executive Share Option Scheme and no further grants will be made. Actual Limit 0 1 2 3 4 SAvINGS RELATED SHARE OPTION PLAN Executive Directors can participate in the Savings Related Share Option Plan (the ‘SAYE Scheme’) which is open to all employees. The scheme is subject to hMRC rules which limit the maximum monthly savings to £250. Under the SAYE Scheme, options are granted to acquire the number of shares that the total savings will buy when the contract matures, at a discounted price set at the start of the scheme. The details of the options granted to Executive Directors are shown on page 59. EXECUTIvE SHARE PLANS Actual Limit 0 1 2 3 4 5 % 5 % 6 7 8 9 10 6 7 8 9 10 55 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013 directors’ remuneration rePort CONTINUED EXIT PAYMENTS DURING THE YEAR harry Platt retired from office as Chief Executive on 31 March 2012 but remained employed by the Company until the end of June 2012 to facilitate an orderly handover. Salary and other benefits (cash in lieu of pension and private health insurance), were paid to harry Platt until the end of June 2012 totalling £105,428. As described in last year’s Remuneration Report, harry Platt did not participate in FY 2013 annual bonus and did not receive an LTIP award. he received 2009 LTIP shares which vested in June 2012. he also retained an interest in the 2010 and 2011 LTIP grants, although awards are pro-rated for time based on the proportion of the vesting period served and for performance to the end of the relevant three-year performance period. No termination payments were made to harry Platt in respect of his notice period upon his retirement from the Board. EXECUTIvE DIRECTOR SHARE OWNERSHIP The Committee has adopted guidelines for Executive Directors and other senior executives to encourage substantial long-term share ownership. During the year, the minimum guideline was 100% of salary for the Executive Directors. however, as part of the review of remuneration policy, the Remuneration Committee agreed that shareholding guidelines would be increased to 150% of salary to be achieved within five years of appointment from 1 April 2013. The table below shows the Executive Directors’ interests in shares and the extent to which Workspace’s shareholding guidelines are achieved. Graham Clemett Jamie hopkins Number of shares held as at 31 March 2013 120,823 117,706 Value of shares held at 31 March 20131 £414,664 £403,966 Current shareholding (% salary) Shareholding guideline (as % of salary) 166% 101% 100% 100% Guideline met Yes Yes Notes: 1. Value of shares is based on a price of £3.432 as at 28 March 2013. The table below shows the Executive Directors’ interests in shares which includes all shares owned beneficially together with those interests in shares which have vested and are no longer subject to deferral or performance conditions and may be included as an interest in shares under Workspace’s shareholding guidelines. Executive Director Graham Clemett Jamie hopkins Type Owned or vested outright Unvested and subject to deferral Shares Nil cost options1 Market value options2 Shares Nil-cost options1 Market value options2 120,823 226,869 Nil 117,706 Nil Nil Nil Nil 4,663 Nil Nil 4,663 Subject to performance3 542,046 Nil Nil 276,642 Nil Total 662,869 226,869 4,663 394,348 Nil Nil 4,663 1. Interests in shares under awards made in the form of nil-cost options and market value options are stated before the operation of any applicable withholdings for tax and social security which would typically arise when a vested award is exercised. Further details can be found on page 60 of this report. 2. Market value options include SAYE options outstanding and not yet matured as at 31 March 2013. The exercise price of these was set at 80% of the market value of a share at the invitation date. 3. For Graham Clemett, the interest in shares of 542,046 consists of the total LTIP awards made in 2010, 2011 and 2012, details of which can be found on page 59 of this report. Similarly, for Jamie hopkins, the interest in shares of 276,642 consists of the performance and matching share awards made under the LTIP Plan in November 2012 details of which can be found on page 59 of this report. 56 Workspace Group PLC Annual Report and Accounts 2013PERFORMANCE REvIEW Figure 1: Value of £100 invested on 31 March 2008 Workspace Group FTSE All-Share Index FTSE SmallCap Index FTSE 250 FTSE 350 Real Estate n o d e t s e v n i 0 0 1 £ f o e u l a V ) £ ( 8 0 0 2 h c r a M 1 3 180 160 140 120 100 80 60 40 20 0 31 Mar 2008 31 Mar 2009 31 Mar 2010 31 Mar 2011 31 Mar 2012 31 Mar 2013 Figure 2: Value of £100 invested on 31 March 2009 Workspace Group FTSE All-Share Index FTSE SmallCap Index FTSE 350 Real Estate FTSE 250 n o d e t s e v n i 0 0 1 £ f o e u l a V ) £ ( 9 0 0 2 h c r a M 1 3 400 350 300 250 200 150 100 50 0 31 Mar 2009 31 Mar 2010 31 Mar 2011 31 Mar 2012 31 Mar 2013 Figure 3: Value of £100 invested on 31 March 2010 n o d e t s e v n i 0 0 1 £ f o e u l a V ) £ ( 0 1 0 2 h c r a M 1 3 180 160 140 120 100 80 60 40 20 0 Workspace Group FTSE All-Share Index FTSE SmallCap Index FTSE 250 FTSE 350 Real Estate 31 Mar 2010 31 Mar 2011 31 Mar 2012 31 Mar 2013 Figure 1 above compares the total shareholder return performance (TSR) of the Group with benchmark indices over the last five years. Given the differing benchmarks used for such performance measurement your Board has decided to undertake this comparison against all of the FTSE 250, FTSE All Share, FTSE Small Cap and FTSE 350 Real Estate indices. In the opinion of the Directors, these indices are the most appropriate against which the total shareholder return of Workspace Group PLC should be measured. Figure 2 above compares the TSR performance of the Group against benchmark indices over the last four years. Figure 3 above compares the TSR performance of the Group against benchmark indices over the last three years. 57 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013 directors’ remuneration rePort CONTINUED THE FOLLOWING SECTIONS OF THE REMUNERATION REPORT ARE SUBJECT TO AUDIT: DIRECTORS’ EMOLUMENTS Fees 2013 £000 Base salary 2013 £000 Performance bonus 2013 £000 Other benefits 2013 £000 total emoluments 2013 £000 Pension scheme contributions 2013 £000 Total emoluments 2012 £000 Pension scheme contributions 2012 £000 executive directors Jamie hopkins1,4 Chief Executive Officer Graham Clemett2,4 Chief Financial Officer Prior executive directors harry Platt5 non-executive directors Daniel Kitchen (Chairman) Bernard Cragg3 John Bywater3 Maria Moloney Chris Girling Prior non-executive directors Jamie hopkins1 Antony hales – – – – 125.0 45.0 45.0 34.6 5.8 – – 255.4 255.4 400.0 480.0 250.0 300.0 17.1 18.1 897.1 60.0 24.0 568.1 41.2 488.8 3.4 36.6 – – 650.0 780.0 – 35.2 – 1,465.2 – 101.2 716.7 1,229.5 – 40.0 – – – – – – – – – – – – – – – – – – – – – – – – 650.0 780.0 35.2 125.0 45.0 45.0 34.6 5.8 – – 255.4 1,720.6 – – – – – – – – 101.2 98.8 45.0 45.0 – – 37.7 32.7 259.2 1,488.7 – – – – – – – – 40.0 Notes: 1. Jamie hopkins was appointed as an Executive Director with effect from 12 March 2012. Consequently, he received a fee for services as a Non-Executive Director up to 12 March 2012 and then a salary from this date. 2. During the year, Graham Clemett sacrificed part of his basic pay so that pension contributions equal to the amount sacrificed were made into a pension plan for the benefit of his dependants. 3. Messrs Cragg and Bywater received a fee of £5,000 for acting as Chairman of the Audit and Remuneration Committee respectively. 4. For 2012/13 the Committee set a minimum deferral requirement of 25% of the bonus earned. Equivalent to £75,000 for Graham Clemett and £120,000 for Jamie hopkins. 5. harry Platt retired from office as Chief Executive on 31 March 2012. No employer pension contributions were made to harry Platt, but he received, instead, a cash allowance of £55,600 per annum in lieu of pension at no additional cost to the Company. DIRECTOR INTERESTS IN SHARES AT 31 MARCH 2013 The following table shows the beneficial interests of the Directors in the shares of the Company as required by the listing rules: Daniel Kitchen1 Jamie hopkins Graham Clemett John Bywater Bernard Cragg Maria Moloney2 Chris Girling3 1. Daniel Kitchen acquired 1,000 6% sterling Bonds on 2 October 2012 at a price of £100 per Bond. 2. Maria Moloney was appointed to the Board on 22 May 2012. 3. Chris Girling was appointed to the Board on 7 February 2013. Damon Russell did not hold any shares on date of appointment on 29 May 2013. Directors’ interests in Incentive Plans and Share Options are disclosed on pages 59 and 60. There have been no changes in the interests in the period between 31 March 2013 and 11 June 2013. 58 31 march 2013 31 March 2012 37,500 117,706 120,823 3,899 66,590 nil nil 37,500 4,889 99,464 3,899 66,590 Nil Nil Workspace Group PLC Annual Report and Accounts 2013SUPPLEMENTARY INFORMATION ON DIRECTORS’ REMUNERATION LONG-TERM EQUITY INCENTIvE PLAN 2008 Details of current awards outstanding to the Executive Directors are as follows: at 1 April 2012 Lapsed during the year Vested during the year at 31 March 2013 Performance Invested Matching Performance Matching Performance Invested Matching Performance Invested Matching Jamie hopkins 19/11/2012 graham clemett 12/06/2009 06/07/2010 04/08/2011 18/06/2012 harry Platt 12/06/2009 06/07/2010 04/08/2011 – – – – – – – – 164,117 112,525 112,525 175,175 98,057 73,882 – 40,064 23,282 17,732 – 140,139 98,057 73,882 – (58,624) – – – (46,900) – – – (116,551) – – – (40,064) (93,239) – – – – – – – 98,057 73,882 99,084 – 23,282 17,732 23,780 – 98,057 73,882 99,084 213,306 149,252 112,455 60,982 35,438 26,989 213,306 149,252 112,455 (71,386) (49,750) (74,970) (71,386) (49,750) (74,970) (141,920) (60,982) (141,920) – – – – – – – 99,502 37,485 – 35,438 26,989 – 99,502 37,485 Notes: 1. 2. Performance Awards were made to the Executive Directors: In June 2009 in respect of 100% and 125% of annual salary for harry Platt and Awards will vest subject to the satisfaction of performance conditions detailed on page 54 over the three-year performance period. Graham Clemett respectively based on a share price at date of award of 16 pence. In July 2010 in respect of 90% of annual salary based on a share price at date of award of 20.58 pence; In July 2011 in respect of 90% of annual salary based on a share price at date of award of 27 pence. In June 2012 in respect of 90% of annual salary for Graham Clemett based on a share price at date of award of £2.2708. No LTIP awards were made to harry Platt in 2012. For Jamie hopkins, Performance Share Awards were made in respect of 125% of gross salary in November 2012 based on a share price of £3.0466 and Matching Share Awards of 112,525 (subject to overall cap of 1x salary at grant) made in November 2012 based on a share price of £3.0466. 3. Any shares purchased by the Executive Directors during and since the Rights Issue were allowed to count towards investments for the Invested Shares subject to the normal cap on individual participation of 50% of net salary. 4. Matching Awards were granted to participants who purchased Invested Shares or who used shares acquired during and since the Rights Issue as Invested Shares. In 2010, 2011 and 2012, Executive Directors invested an amount equal to 45% of their net annual basic salary in invested shares. Matching awards were granted to participants who purchased invested shares. 5. Participants are entitled to dividends payable on the Invested Shares. The Invested Shares which are beneficially owned by participants are included in the table detailing Ordinary Shares held by Directors on page 58 of this Report. 6. 2009 awards were initially granted as conditional award of shares. On 8 December 2009 the Executive Directors elected to convert part of the awards into a combination of interest in shares beneficially held, and linked options over the same total value. Whilst the 2009 conditional share awards vested on 12 June 2012, Graham Clemett elected to convert his awards of 209,789 into nil cost options prior to the date of vesting. For the 2010 awards, the Executive Directors elected to convert part of the awards into a combination of interest in shares beneficially held, and linked options over the same total value. 7. SHARE OPTIONS (AUDITED) The following table shows the interests of the Directors who served during the year in Savings Related Share Option Plan which is subject to hMRC rules. Director At 01/04/2012 Granted during the year Lapsed during the year Exercised in year At 31/03/2013 Exercise price From To Normal exercise date Jamie hopkins graham clemett total – 4,6631 7,8691 7,869 – 4,6631 9,326 – – – – – 4,663 £1.93 01.09.2015 01.03.2016 (7,869) (7,869) – 4,663 9,326 £1.15 £1.93 01.09.2012 01.09.2015 01.03.2013 01.03.2016 1. Relate to options granted under the rules of the SAYE Scheme and exercised in full in accordance with SAYE Scheme rules. 59 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013 directors’ remuneration rePort CONTINUED The table below shows the interests of harry Platt, a former Executive Director in the Savings Related Share Option Plan and the 2000 Approved Executive Share Option Plan. Director At 01/04/2012 harry Platt Granted during the year Lapsed during the year Exercised in year At 31/03/2013 Exercise price From To Normal exercise date 56,2991 37,4861 18,9491 11,2771 7,8692 131,880 – – – – – – (56,299) (37,486) (18,949) (11,277) – (124,011) – – – – (7,869) (7,869) – – – – – – £8.66 £8.25 £13.16 £17.81 £1.15 29.07.2005 29.07.2012 30.06.2006 30.06.2013 30.06.2007 30.06.2014 17.06.2015 17.06.2008 01.03.2013 01.09.2012 total Notes: 1. Under the rules of the Executive Share Option Plan, if an option holder ceases to be a Director or employee of the Company on account of injury, ill health, disability, redundancy or retirement the Option may be exercised within a period of six months after cessation. Given that the exercise price of all options that potentially could have been exercised were greater than the mid-market closing share price of Workspace ordinary shares on 31 December 2012 (six months from date of cessation of harry Platt) no profit would have arisen upon exercise of any of these options. Consequently, these Options have been lapsed in full. The closing mid-market price of Workspace Group PLC ordinary shares at 31 December 2012 was £3.02 and 28 March 2013 was £3.432. During the year, the price of the Company’s shares varied between £2.13 and £3.63. 2. Relate to Options granted under the rules of the SAYE Scheme and exercised in full in accordance with the SAYE Scheme rules. There have been no changes in Directors’ interests over options in the period between the balance sheet date and 11 June 2013. NIL COST OPTIONS Graham Clemett holds the following nil cost options. Name Graham Clemett Number of nil cost options 226,869 Pursuant to the Workspace Long Term Equity Incentive Plan 2008, share awards (conditional on three separate performance conditions for a period of three years from grant) were made to the Directors on 12 June 2009. Prior to the vesting date, 12 June 2012, these were converted to nil cost options to ease administration. This does not increase the overall expected cost to the Company. The period in which the 209,789 nil cost options may normally be exercised commenced on the vesting date, 12 June 2012 and will end on 12 June 2017, which is five years after the date of vesting of the award. As part of the bonus arrangements, share awards (conditional on continuous employment for a period of two years from grant) were made to Mr Clemett on 12 June 2009. Prior to the vesting date, 12 June 2011, these were converted into nil cost options. The period in which the 17,080 nil cost options may normally be exercised commenced on the vesting date, 12 June 2011 and will end on 12 June 2019, which is 10 years after the date of the original award. By Order of the Board JOHN BYWATER ChAIRMAN OF ThE REMUNERATION COMMITTEE 11 June 2013 60 Workspace Group PLC Annual Report and Accounts 2013 directors’ resPonsiBilities STATEMENT OF DIRECTORS’ RESPONSIBILITIES The Directors are responsible for preparing the Annual Report, the Directors’ Remuneration Report and the Group and the Parent Company financial statements in accordance with applicable law and regulations. The Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Each of the current Directors, whose names and functions are listed on pages 30 and 31 and 35 to 44 of the Annual Report, confirm that, to the best of their knowledge: – The Group financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and – The Business Review on pages 16 to 25 includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and the Parent Company financial statements in accordance with applicable law and United Kingdom Generally Accepted Accounting Standards (United Kingdom Accounting Standards and applicable law). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing those financial statements, the Directors are required to: – Select suitable accounting policies and then apply them consistently; – Make judgements and estimates that are reasonable and prudent; and – State whether IFRSs as adopted by the European Union and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and Parent Company financial statements respectively. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the financial statements and the Directors’ Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 61 Review of operations 01-26 Governance 27-61 Financial statements 62-95 Shareholder information 96-100Workspace Group PLC Annual Report and Accounts 2013INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF WORKSPACE GROUP PLC We have audited the Group financial statements of Workspace Group PLC for the year ended 31 March 2013 which comprise the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Statement of Changes in Equity, Consolidated Statement of Cash Flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union. OPINION ON FINANCIAL STATEMENTS In our opinion the Group financial statements: – give a true and fair view of the state of the Group’s affairs as at 31 March 2013 and of its profit and cash flows for the year then ended; – have been properly prepared in accordance with IFRSs as adopted by the European Union; and – have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As explained more fully in the Statement of Directors’ Responsibilities set out on page 61, the Directors are responsible for the preparation of the Group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion: – the information given in the Report of the Directors for the financial year for which the Group financial statements are prepared is consistent with the Group financial statements. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: – certain disclosures of Directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit; or Under the Listing Rules we are required to review: – the Directors’ statement, set out on page 32, in relation to going concern; – the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the UK Corporate Governance Code specified for our review; and – certain elements of the report to shareholders by the Board on Directors’ remuneration. OTHER MATTER We have reported separately on the Parent Company financial statements of Workspace Group PLC for the year ended 31 March 2013 and on the information in the Directors’ Remuneration Report that is described as having been audited. BOWkER ANDREWS (SEnIOR STATUTORy AUDITOR) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 11 June 2013 62 Workspace Group PLC Annual Report and Accounts 2013CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 MARCH Revenue Direct costs Net rental income Administrative expenses (Loss)/profit on disposal of investment properties Loss on disposal of property, plant and equipment Change in fair value of investment properties Operating profit Finance income Finance costs Change in fair value of derivative financial instruments Gains from share in joint ventures Profit before tax Taxation Profit for the year after tax and attributable to owners of the parent Basic earnings per share (pence) Diluted earnings per share (pence) EPRA earnings per share (pence) CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 MARCH Profit for the financial year Total comprehensive income attributable to owners of the parent The notes on pages 67 to 90 form part of these financial statements. notes 1 1 1 2 3 10 2 4 4 4 12 6 8 8 8 2013 £m 69.5 (22.4) 47.1 (11.0) 36.1 (2.2) – 59.0 92.9 0.2 (19.5) 1.1 1.7 76.4 – 76.4 2012 £m 67.3 (22.5) 44.8 (10.2) 34.6 0.9 (0.1) 35.6 71.0 0.2 (19.3) (4.6) 1.2 48.5 0.5 49.0 53.3p 52.1p 12.2p 36.3p 35.5p 11.9p 2013 £m 76.4 76.4 2012 £m 49.0 49.0 63 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100 CONSOLIDATED BALANCE SHEET AS AT 31 MARCH Non-current assets Investment properties Intangible assets Property, plant and equipment Investment in joint ventures Trade and other receivables Current assets Trade and other receivables Cash and cash equivalents Corporation tax asset Current liabilities Derivative financial instruments Trade and other payables Net current liabilities Non-current liabilities Borrowings Other non-current liabilities Net assets Shareholders’ equity Ordinary shares Share premium Investment in own shares Other reserves Retained earnings Total shareholders’ equity notes 10 11 12 13 13 14 16(d) & (e) 15 16(a) 20 21 23 22 2013 £m 825.9 0.5 1.7 20.7 6.1 854.9 13.0 11.8 0.8 25.6 (11.1) (31.3) (42.4) (16.8) (337.7) – (337.7) 500.4 144.9 58.8 (8.9) 15.3 290.3 500.4 2012 £m 759.3 0.3 1.1 12.3 4.6 777.6 10.6 26.5 0.6 37.7 (14.2) (27.5) (41.7) (4.0) (337.3) (0.9) (338.2) 435.4 144.1 59.2 (8.7) 13.9 226.9 435.4 EPRA net asset value per share 9 £3.48 £3.08 The notes on pages 67 to 90 form part of these financial statements. The financial statements on pages 63 to 90 were approved and authorised for issue by the Board of Directors on 11 June 2013 and signed on its behalf by: J HOPkINS G CLEMETT Directors 64 Workspace Group PLC Annual Report and Accounts 2013 CONSOLIDATED STATEMENT OF CHANGES IN EqUITy Balance at 1 April 2011 Profit for the year Release of revaluation of owner occupied property Total comprehensive income Transactions with owners: Share issues Own shares purchase Dividends paid Share based payments Balance at 31 March 2012 Profit for the year Total comprehensive income Transactions with owners: Share issues Own shares purchase Dividends paid Share based payments Balance at 31 March 2013 Attributable to owners of the Parent notes Share capital £m 115.3 Share premium £m Investment in own shares £m 25.0 (8.0) 22 21 23 7 24 21 23 7 24 – – – 28.8 – – – 144.1 – – 0.8 – – – 144.9 – – – 34.2 – – – 59.2 – – (0.4) – – – 58.8 – – – – (0.7) – – (8.7) – – – (0.2) – – (8.9) Other reserves £m 15.0 – (1.9) (1.9) Retained earnings £m 186.5 49.0 1.9 50.9 – – – 0.8 13.9 – – – – – 1.4 – – (10.5) – 226.9 76.4 76.4 – – (13.0) – Total £m 333.8 49.0 – 49.0 63.0 (0.7) (10.5) 0.8 435.4 76.4 76.4 0.4 (0.2) (13.0) 1.4 15.3 290.3 500.4 The notes on pages 67 to 90 form part of these financial statements. 65 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE yEAR ENDED 31 MARCH Cash flows from operating activities Cash generated from operations Interest received Interest paid Tax paid net cash inflow from operating activities Cash flows from investing activities Capital expenditure on investment properties Proceeds from disposal of investment properties (net of sale costs) Purchase of intangible assets Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment (net of sale costs) Investment in joint ventures Movement in short-term funding balances with joint ventures Distributions received from joint ventures net cash outflow from investing activities Cash flows from financing activities Proceeds from issue of ordinary share capital Fees paid on share issue Finance costs for new/amended borrowing facilities Settlement and re-couponing of derivative financial instruments Repayment of bank borrowings Drawdown of bank borrowings Retail Bond issue Payment of priority fee Outflow on bank facility rental income accounts Own shares purchase Dividends paid net cash (outflow)/inflow from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at start of year Cash and cash equivalents at end of year The notes on pages 67 to 90 form part of these financial statements. notes 18 12 12 19 19 7 18 18 2013 £m 38.6 0.3 (16.6) (0.2) 22.1 (27.3) 16.7 (0.3) (1.0) – (7.7) – 0.9 (18.7) 0.4 – (1.1) (2.1) (68.0) 10.0 57.5 (0.9) (0.7) (0.2) (13.0) (18.1) 2012 £m 35.8 0.1 (18.5) (0.1) 17.3 (18.3) 8.8 (0.1) (0.7) 3.8 (4.8) (0.1) 0.4 (11.0) 66.3 (3.3) (2.2) (1.3) (25.5) – – – (1.7) (0.7) (10.5) 21.1 (14.7) 27.4 26.5 11.8 (0.9) 26.5 66 Workspace Group PLC Annual Report and Accounts 2013NOTES TO THE FINANCIAL STATEMENTS Workspace Group PLC (‘the Company’) and its subsidiaries (together ‘the Group’) are engaged in property investment in the form of letting of business accommodation to new and growing enterprises across London. The Company is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the UK. The registered number of the Company is 2041612. BASIS OF PREPARATION These financial statements are presented in sterling, which is the Company’s functional currency and the Group’s presentation currency and have been prepared on a going concern basis, in accordance with International Financial Reporting Standards (IFRS) and IFRIC interpretations as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention as modified by the revaluation of investment properties and financial liabilities (including derivative financial instruments) at fair value through profit or loss. SIGNIFICANT JUDGEMENTS, kEY ASSUMPTIONS AND ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and judgements that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management’s best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. The Group’s significant accounting policies are stated below. not all of these accounting policies require management to make subjective or complex judgements. The following is intended to provide an understanding of the policies that management consider critical because of the level of judgement or estimation involved in their application and their impact on the consolidated financial statements. INVESTMENT PROPERTY VALUATION The Group uses the valuation performed by its independent valuers as the fair value of its investment properties. The valuation is based upon assumptions including estimated rental values, future rental income, anticipated maintenance costs, future development costs and the appropriate discount rate. The valuers also make reference to market evidence of transaction prices for similar properties. TRADE RECEIVABLES The Group is required to judge when there is sufficient objective evidence to require the impairment of individual trade receivables. It does this on the basis of the age of the relevant receivables, external evidence of the credit status of the receivable entity and the status of any disputed amounts. COMPLIANCE WITH THE REAL ESTATE INVESTMENT TRUST (REIT) REGIME The Group is a Real Estate Investment Trust (Group REIT). In order to achieve and retain Group REIT status, several entrance tests had to be met and certain ongoing criteria must be maintained. The main criteria are as follows: – At the start of each accounting period, the assets of the tax exempt business must be at least 75% of the total value of the Group’s assets – At least 75% of the Group’s total profits each year must arise from the tax exempt business – At least 90% of the taxable profit of the property rental business must be distributed – The Group must take reasonable steps to avoid payment of dividends to an entity controlling (directly or indirectly) 10% or more of the voting rights of Workspace Group PLC. The Directors intend that the Group should continue as a Group REIT for the foreseeable future, with the result that deferred tax is no longer recognised on temporary differences and valuations relating to the property rental business and relevant property rental income is treated as exempt from taxation. SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented unless stated otherwise: BASIS OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and all its subsidiary undertakings up to 31 March 2013. Subsidiaries are entities over which the Group has the power to govern the financial and operating policies. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences to the date control ceases. Inter company transactions, balances and unrealised gains from intra group transactions are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. 67 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED INVESTMENT PROPERTIES Investment properties are those properties owned or leased by the Group that are held either to earn rental income or for capital appreciation, or both, and are not occupied by the Company or subsidiaries of the Group. Investment property is measured initially at cost, including related transaction costs. After initial recognition investment property is held at fair value based on a valuation by an independent professional external valuer at each reporting date. Changes in fair value of investment property at each reporting date are recorded in the income statement. Assets acquired under finance leases are capitalised at the lease’s commencement at the lower of the fair value of the leased property and the net present value of the minimum lease payments. The investment properties acquired under finance leases are subsequently carried at fair value. The corresponding rental obligations, net of finance charges, are included in current and non current borrowings. Each lease payment is allocated between liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to the income statement. Properties are treated as acquired at the point the Group assumes the significant risks and rewards of ownership and are treated as disposed when these are transferred outside of the Group’s control. Existing investment properties which undergo redevelopment and refurbishment for continued future use remain in investment property where the purpose of holding the property continues to meet the definition of investment property as defined above. Subsequent expenditure is charged to the asset’s carrying amount only when it is probable that future economic benefits associated with the expenditure will flow to the Group, and the cost of each item can be reliably measured. Certain internal staff costs directly attributable to capital/ redevelopment projects are capitalised. All other repairs and maintenance costs are charged to the income statement during the period in which they are incurred. Capitalised interest on the redevelopment expenditure is added to the asset’s carrying amount. Borrowing costs capitalised are calculated by reference to the actual interest rate payable on borrowings, or if financed out of general borrowings by reference to the average rate payable on funding the assets employed by the Group and applied to the direct expenditure on the property undergoing redevelopment. Interest is capitalised from the date of commencement of the redevelopment activity until the date when substantially all the activities necessary to prepare the asset for its intended use are complete. Investment properties are recognised as ‘assets held for sale’ when it is considered highly probable that sale completion will take place. Income from the sale of assets is recognised when the significant risks and returns have been transferred to the buyer. In the case of sales of properties this is generally taken on completion. In the case of a part disposal agreement, the part of the asset being disposed will be derecognised from investment property when completion is reached or when a finance lease agreement is signed. Any profit or loss on disposal is taken to other operating income/expense. Where part of the consideration is in the form of the return to Workspace of a new commercial building, this element is fair valued and included in investment property. Where any aspect of consideration is conditional then the revenue associated with that conditional item is valued and included as deferred consideration. The fair value of deferred consideration is assessed at each period end and changes in fair value are taken to other operating income/expense. INTANGIBLE ASSETS Intangible assets are stated at historical cost, less accumulated amortisation. Acquired computer software licences and external costs of implementing or developing computer software programmes and websites are capitalised. These costs are amortised over their estimated useful lives of five years on a straight line basis. Costs associated with maintaining computer software programmes are recognised as an expense as they fall due. PROPERTY, PLANT AND EQUIPMENT LAnD AnD BUILDInGS Land and buildings within property, plant and equipment related to the owner occupied building of Magenta House which was sold last year. The Group had adopted the revaluation model to show this asset category at fair value less subsequent depreciation for buildings. EqUIPMEnT AnD FIxTURES Equipment and fixtures (including motor vehicles) are stated at historical purchase cost less accumulated depreciation. Historical cost includes the original purchase price of the asset and the costs attributable to bringing the asset to its working condition for its intended use. Subsequent expenditure is charged to the asset’s carrying amount or recognised as a separate asset only when it is probable that future economic benefits associated with the expenditure will flow to the Group and the cost of each item can be reliably measured. All other repairs and maintenance costs are charged to the income statement during the period in which they are incurred. 68 Workspace Group PLC Annual Report and Accounts 2013Depreciation is provided using the straight line method to allocate the cost less estimated residual value over the asset’s estimated useful lives which range from 4-10 years. The assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at least at each financial year end. An asset’s carrying amount is written down immediately to its recoverable amount if its carrying amount is greater than its estimated recoverable amount. JOINT VENTURES Joint ventures are those entities over which the Group, either directly or indirectly, is in a position to jointly control the financial and operating policies of the entity. Joint ventures are accounted for under the equity method whereby the consolidated financial statements include the Group’s investment in and contribution from the joint venture. TRADE AND OTHER RECEIVABLES Trade and other receivables are recognised initially at fair value and subsequently measured at cost less provision for impairment where it is established there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivable. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows. The provision is recorded in the income statement. Deferred consideration on the disposal of investment properties is included within trade and other receivables. It is fair valued on recognition and at each year end with any movement taken to other operating income and expense. Other receivables include bank facility rental income accounts from which interest to lenders is paid. TRADE AND OTHER PAYABLES Trade and other payables are initially recognised at fair value and subsequently held at amortised cost. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash in hand, restricted cash in the form of tenants’ deposits and deposits held on call with banks. Bank overdrafts are included in current liabilities but within cash and cash equivalents for the purpose of the cash flow statement. BORROWINGS Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost, with any difference between the initial amount (net of transaction costs) and the redemption value being recognised in the income statement over the period of the borrowings, using the effective interest method, except for interest capitalised on redevelopments. Transaction costs are amortised over the effective life of the amounts borrowed. DERIVATIVE FINANCIAL INSTRUMENTS The Group enters into derivative transactions such as interest rate caps and swaps in order to manage its interest rate risk. Financial derivatives are recorded at fair value calculated by valuation techniques based on market prices, estimated future cash flows and forward interest rates. Movements in fair value are recognised in the Income Statement within total finance costs. Amounts payable or receivable under such arrangements are included within interest payable or receivable, recognised on an accruals basis. SHARE CAPITAL Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. INVESTMENT IN OWN SHARES The Group operates an Employee Share Ownership Trust (ESOT) and a trust for the Share Incentive Plan (SIP). When the Group funds these trusts in order to purchase Company shares, the loan is deducted from shareholders’ equity as investment in own shares. OPERATING SEGMENTS Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker is the person or group that allocates resources to and assesses the performance of the operating segments of an entity. The Group has determined that its chief operating decision maker is the Executive Committee of the Company. The Group considers that it has only one operating segment being a single portfolio of commercial property providing business accommodation for rent in London. Discrete financial information is provided to the chief operating decision maker on a property by property basis, including rental income and direct costs and valuation gains or losses. 69 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED REVENUE RECOGNITION Revenue comprises rental income, service charges and other sums receivable from the Group’s investment properties. Other sums comprise insurance charges, supplies of utilities, premia associated with surrender of tenancies, commissions, fees and other sundry income. All the Group’s properties are leased out under operating leases and are included in investment property in the balance sheet. Rental income from operating leases is recognised in the income statement on a straight line basis over the lease term. Rent received in advance is deferred in the balance sheet and recognised in the period to which it relates to. When the Group provides incentives to its customers the incentives are recognised over the lease term on a straight line basis. Service charges and other sums receivable from tenants are recognised on an accruals basis by reference to the stage of completion of the relevant service or transactions at the reporting date. These services generally related to a 12 month period. DIRECT COSTS Direct costs comprise service charge and other costs directly recoverable from tenants and non recoverable costs directly attributable to investment properties and other revenue streams. SHARE BASED PAYMENTS The Group operates a number of share schemes under which the Group receives services from employees as consideration for equity instruments of the Group. The fair value of the employee services received in exchange for the grant of share awards and options is recognised as an expense over the vesting period. Fair value is measured by the use of Black-Scholes and Binomial option pricing models. The expected life used in the models has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. PENSIONS The Group operates a defined contribution pension scheme. Contributions are charged to the income statement on an accruals basis. INCOME TAX Current income tax is tax payable on the taxable income for the year and any prior year adjustment, and is calculated using tax rates that have been substantively enacted by the balance sheet date. DIVIDEND DISTRIBUTIONS Final dividend distributions to the Company’s shareholders are recognised as a liability in the Group’s financial statements in the period in which the dividends are approved, while interim dividends are recognised when paid. 70 NEW ACCOUNTING STANDARDS, AMENDMENTS AND GUIDANCE a) During the year to 31 March 2013 the Group adopted the following accounting standards and guidance. These either had no material impact on the Group’s financial statements or resulted in changes to presentation and disclosure only: Standard or interpretation Amendment: IFRS 7 Content Financial instruments: disclosures on transfers of financial assets b) The following accounting standards and guidance are not yet effective or not yet endorsed by the EU, and are either not expected to have a significant impact on the Group’s financial statements or will result in changes to presentation and disclosure only. They have not been adopted early by the Group: Standard or interpretation IFRS 9 Amendment: IAS 12 Amendment: IAS 1 IFRS 10 IFRS 11 IFRS 12 Amendment: IFRS 10, 11 and 12 IFRS 13 IAS 27 (revised) IAS 28 (revised) Amendment: IFRS 7 Amendment: IAS 32 Content Financial instruments: classification and measurement Income taxes on deferred tax Financial statement presentation regarding other comprehensive income Consolidated financial statements Joint arrangements Disclosures of interest in other entities On transition guidance Fair value measurement Separate financial statements Associates and joint ventures Financial instruments: disclosures, on offsetting financial assets and liabilities Financial instruments: presentation, on offsetting financial assets and liabilities Annual improvements 2011 Changes to IFRS 1/IAS 1/ IAS 16/IAS 32/IAS 34 Workspace Group PLC Annual Report and Accounts 2013 1. ANALYSIS OF NET RENTAL INCOME AND SEGMENTAL INFORMATION Rental income Service charges Empty rates and other non recoverables Services, fees, commissions and sundry income 2013 Direct costs £m (0.2) (16.0) (3.4) (2.8) (22.4) Net rental income £m Revenue £m 51.2 (1.9) (3.0) 0.8 47.1 50.2 13.7 0.6 2.8 67.3 2012 Direct costs £m (0.1) (16.2) (4.1) (2.1) (22.5) net rental income £m 50.1 (2.5) (3.5) 0.7 44.8 Revenue £m 51.4 14.1 0.4 3.6 69.5 All of the properties within the portfolio are geographically close to each other and have similar economic features and risks and all information provided to the Executive Committee is aggregated and reviewed in total as one portfolio. As a result management have determined that the Group operates a single operating segment providing business accommodation for rent in London. 2. OPERATING PROFIT The following items have been charged in arriving at operating profit: Depreciation1,2 Staff costs (including share based costs)1,2 Repairs and maintenance expenditure on investment properties1 Trade receivables impairment Amortisation of intangibles2 Operating lease rentals payable1 Audit fees payable to the Group’s auditors3 1. Charged to direct costs. 2. Charged to administrative expenses. 3. Services provided by the Group’s auditors – PricewaterhouseCoopers LLP. Auditor’s remuneration: Services provided by the Company’s auditors and its associates Audit fees: Audit of parent company and consolidated financial statements Audit of subsidiary financial statements Non-audit fees: Audit related assurance services Reporting work on Rights Issue Reporting work on Retail Bond issue Tax advisory, tax compliance and legal services Other services Total administrative expenses are analysed below: Staff costs Cash settled share based costs Equity settled share based costs Other 2013 £m 0.4 11.9 3.3 0.3 0.1 0.1 0.2 2013 £000 129 29 158 33 – 30 78 31 172 2013 £m 6.0 0.4 1.4 3.2 11.0 2012 £m 0.4 10.7 3.2 0.4 0.1 0.1 0.2 2012 £000 125 28 153 32 200 – 158 70 460 2012 £m 5.8 0.2 0.8 3.4 10.2 71 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 3. (LOSS)/PROFIT ON DISPOSAL OF INVESTMENT PROPERTIES Proceeds from sale of investment properties (net of sale costs) Book value at time of sale (note 10) Unrealised profit on sale of properties to joint ventures Revaluation of deferred consideration Pre-tax (loss)/profit on sale 2013 £m 19.6 (21.7) (2.1) (0.1) – (2.2) 2012 £m 8.8 (7.6) 1.2 – (0.3) 0.9 £6.2m (2012: £nil) of the proceeds for the year were in the form of deferred consideration, of which £2.9m is outstanding at 31 March 2013 and is included in the Consolidated Balance Sheet under non-current and current trade and other receivables. 4. FINANCE INCOME AND COSTS Interest income on bank deposits Finance income Interest payable on bank loans and overdrafts Amortisation of issue costs of bank loans Interest payable on finance leases Capitalised interest on property refurbishments (note 10) Finance costs Change in fair value of financial instruments through the income statement Net finance costs 5. EMPLOYEES AND DIRECTORS Staff costs for the Group during the year were: Wages and salaries Social security costs Defined contribution pension plan costs (see note 29) Cash settled share based costs (see note 24) Equity settled share based costs (see note 24) The monthly average number of people (including Executive Directors) employed during the year was: Executive Directors Head office staff Estates and property management staff 2013 £m 0.2 0.2 (17.9) (2.0) (0.2) 0.6 (19.5) 1.1 (18.2) 2013 £m 8.6 1.0 0.5 0.4 1.4 11.9 2012 £m 0.2 0.2 (18.3) (1.2) (0.2) 0.4 (19.3) (4.6) (23.7) 2012 £m 8.3 1.0 0.4 0.2 0.8 10.7 2013 Number 2012 number 2 68 100 170 2 66 96 164 The emoluments and pension benefits of the Executive Directors is determined by the Remuneration Committee of the Board and are set out in detail in the Directors’ Remuneration Report on pages 45 to 60. These form part of the financial statements. 72 Workspace Group PLC Annual Report and Accounts 20136. TAXATION Current tax: UK corporation tax Adjustments to tax in respect of previous periods Total taxation charge/(credit) 2013 £m (0.2) 0.2 – 2012 £m (0.5) – (0.5) The tax on the Group’s profit for the period differs from the standard applicable corporation tax rate in the UK (24%). The differences are explained below: Profit on ordinary activities before taxation Adjust gains from share in joint ventures Tax at standard rate of corporation tax in the UK of 24% (2012: 26%) Effects of: REIT exempt income Changes in fair value not subject to tax as a REIT Chargeable gains adjustments Share scheme adjustments Contaminated land relief Adjustments to tax in respect of previous periods Losses brought forward Total taxation charge/(credit) 2013 £m 76.4 (1.7) 74.7 17.9 (2.8) (14.4) – (0.1) (0.3) 0.2 (0.5) – 2012 £m 48.5 (1.2) 47.3 12.3 (3.8) (8.0) 0.8 0.2 (0.5) – (1.5) (0.5) The Group is a Real Estate Investment Trust (REIT). The Group’s UK property rental business (both income and capital gains) is exempt from tax. The Group’s other income is subject to corporation tax. The Group currently has £4.2m (2012: £4.4m) of tax losses carried forward calculated at a corporation tax rate of 23% (2012: 24%) which is the rate substantively enacted at the Balance Sheet date. These have not been recognised as an asset as they are unlikely to be utilised in the foreseeable future. Further reductions, already announced, in the main rate of corporation tax to 21% by 1 April 2014 and 20% by 1 April 2015 are expected to be enacted in the future. If the 20% rate had been applied to tax losses at the Balance Sheet date it would have reduced losses by £0.5m. 7. DIVIDENDS Ordinary dividends paid For the year ended 31 March 2011: Final dividend For the year ended 31 March 2012: Interim dividend Final dividend For the year ended 31 March 2013: Interim dividend Dividends for the year Payment date Per share August 2011 5.33p February 2012 August 2012 2.93p 5.86p February 2013 3.22p 2013 £m – – 8.4 4.6 13.0 2012 £m 6.3 4.2 – – 10.5 In addition the Directors are proposing a final dividend in respect of the financial year ended 31 March 2013 of 6.45p per ordinary share which will absorb an estimated £9.3m of revenue reserves and cash. If approved by the shareholders at the AGM, it will be paid on 2 August 2013 to shareholders who are on the register of members on 12 July 2013. The dividend will be paid as a normal distribution (non-PiD). 73 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED 8. EARNINGS PER SHARE Earnings used for calculating earnings per share: Basic and diluted earnings Change in fair value of investment property Loss/(profit) on disposal of investment properties Loss on disposal of property, plant and equipment Movement in fair value of derivative financial instruments Group’s share of EPRA adjustments of joint ventures EPRA adjusted earnings 2013 £m 76.4 (59.0) 2.2 – (1.1) (0.6) 17.9 2012 £m 49.0 (35.6) (0.9) 0.1 4.6 (0.7) 16.5 Earnings have been adjusted and calculated on a diluted basis to derive an earnings per share measure as defined by the European Public Real Estate Association (EPRA). Number of shares used for calculating earnings per share: Weighted average number of shares (excluding own shares held in trust) Dilution due to share option schemes Weighted average number of shares for diluted earnings per share In pence: Basic earnings per share Diluted earnings per share EPRA earnings per share 9. NET ASSETS PER SHARE Net assets used for calculating net assets per share: net assets at end of year (basic) Derivative financial instruments at fair value EPRA net assets Number of shares used for calculating net assets per share: Shares in issue at year-end Less own shares held in trust at year-end number of shares for calculating basic net assets per share Dilution due to share option schemes number of shares for calculating diluted adjusted net assets per share EPRA net assets per share 2013 Number 2012 number 143,404,929 3,351,045 134,902,483 3,183,215 146,755,974 138,085,698 2013 53.3p 52.1p 12.2p 2013 £m 500.4 11.1 511.5 2013 Number 2012 36.3p 35.5p 11.9p 2012 £m 435.4 14.2 449.6 2012 number 144,936,155 (1,270,602) 143,665,553 3,448,522 147,114,075 144,091,418 (1,218,802) 142,872,616 3,304,176 146,176,792 2013 £3.48 2012 £3.08 net assets have been adjusted and calculated on a diluted basis to derive a net asset per share measure as defined by the European Public Real Estate Association (EPRA) to derive a net asset value (EPRA nAV) measure. 74 Workspace Group PLC Annual Report and Accounts 201310. INVESTMENT PROPERTIES Balance at 1 April Capital expenditure Capitalised interest on refurbishments (note 4) Disposals during the year Change in fair value of investment properties Balance at 31 March 2013 £m 759.3 28.7 0.6 (21.7) 59.0 825.9 2012 £m 713.4 17.5 0.4 (7.6) 35.6 759.3 Capitalised interest is included at a rate of capitalisation of 5.0% (2012: 5.2%). The total amount of capitalised interest included in investment properties is £4.2m (2012: £3.6m). Investment property includes buildings under finance leases of which the carrying amount is £3.5m (2012: £3.5m). Investment property finance lease commitment details are shown in note 16(f). VALUATION The Group’s investment properties were revalued at 31 March 2013 by the external valuer, CBRE Limited, a firm of independent qualified valuers. The valuation is on the basis of market value, by reference to recent market evidence of transactions for similar properties and is undertaken in accordance with the Royal Institution of Chartered Surveyors Valuation – Professional Standards 2012. The reconciliation of the valuation report total to the amount shown in the Consolidated Balance Sheet as non-current assets, investment properties, is as follows: Total per CBRE valuation report Deferred consideration on sale of property (note 13) Head leases treated as finance leases under IAS 17 Total investment properties per balance sheet 11. PROPERTY, PLANT AND EQUIPMENT Cost or valuation Balance at 1 April 2011 Additions during the year Disposals during the year Balance at 31 March 2012 Additions during the year Balance at 31 March 2013 Accumulated depreciation Balance at 1 April 2011 Charge for the year Balance at 31 March 2012 Charge for the year Balance at 31 March 2013 Net book amount at 31 March 2013 net book amount at 31 March 2012 2013 £m 829.9 (7.5) 3.5 825.9 2012 £m 760.4 (4.6) 3.5 759.3 Owner occupied land £m Owner occupied buildings £m Equipment and fixtures £m 2.9 – (2.9) 1.0 – (1.0) – – – – – – – – – – – – – – – – – – – – 4.5 0.9 (0.1) 5.3 1.0 6.3 3.8 0.4 4.2 0.4 4.6 1.7 1.1 Total £m 8.4 0.9 (4.0) 5.3 1.0 6.3 3.8 0.4 4.2 0.4 4.6 1.7 1.1 75 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED 12. JOINT VENTURES The Group’s investment in joint ventures represents: Balance at 1 April Cash investment Unrealised surplus on sale of properties to joint venture Share of gains Distributions received Balance at 31 March The Group has the following joint ventures: 31 March 2013 £m 31 March 2012 £m 12.3 7.7 (0.1) 1.7 (0.9) 20.7 6.7 4.8 – 1.2 (0.4) 12.3 BlackRock Workspace Property Trust Enterprise House Investments LLP BlackRock UK Property Fund Polar Properties Ltd Partner Established February 2011 April 2012 Ownership 20.1% 50% BlackRock Workspace Property Trust is a Jersey property unit trust whose aim is to build a £100m fund of office and industrial property in and around London. The Group holds a 20.1% interest but is property manager with significant delegated powers including responsibility for asset management and recommending acquisitions and disposals. As a result there is shared control and so the joint venture has been equity accounted in the consolidated financial statements. Enterprise House Investments LLP has been established to obtain mixed use planning consent and redevelop Enterprise House, Hayes, UB3 for new residential and commercial space. The Group sold this property to the joint venture in April 2012. The Group’s share of the joint ventures’ assets and liabilities is shown below: Investment properties Current assets Current liabilities net assets Unrealised surplus on sale of properties to joint venture Investment in joint venture The Group’s share of the joint ventures’ revenues and expenses is shown below: Revenue Direct costs net rental income Administrative expenses Change in fair value of investment properties Profit before tax Taxation Profit after tax 76 31 March 2013 £m 31 March 2012 £m 20.8 1.2 (0.8) 21.2 (0.5) 20.7 12.4 0.7 (0.4) 12.7 (0.4) 12.3 year ended 31 March 2013 £m year ended 31 March 2012 £m 1.7 (0.5) 1.2 (0.1) 0.6 1.7 – 1.7 0.9 (0.3) 0.6 (0.1) 0.7 1.2 – 1.2 Workspace Group PLC Annual Report and Accounts 2013 13. TRADE AND OTHER RECEIVABLES Non-current trade and other receivables Deferred consideration on sale of investment property 2013 £m 6.1 2012 £m 4.6 The non-current receivable relates to deferred consideration arising on the sale of investment properties. The value of this receivable has been fair valued by CBRE Limited on the basis of market value as at 31 March 2013, using appropriate discount rates, and will be revalued on a regular basis. The change in value is charged/credited to operating profit in the income statement. Current trade and other receivables Trade receivables Less provision for impairment of receivables Trade receivables – net Prepayments and accrued income Bank facility rental income accounts Deferred consideration on sale of investment property 2013 £m 2.5 (0.4) 2.1 2.1 7.4 1.4 13.0 2012 £m 2.5 (0.6) 1.9 2.0 6.7 – 10.6 There is no material difference between the above amounts and their fair values due to the short-term nature of the receivables. Trade receivables are impaired when there is evidence that the amounts may not be collectable under the original terms of the receivable. All the Group’s trade and other receivables are denominated in sterling. Movements on the provision for impairment of trade receivables are shown below: Balance at 1 April Provision for receivables impairment Receivables written off during the year Balance at 31 March As at 31 March 2013, the ageing of trade receivables past due but not impaired was as follows: 2013 £m 0.6 0.3 (0.5) 0.4 2012 £m 0.5 0.4 (0.3) 0.6 Up to 3 months past due 3 to 6 months past due Over 6 months past due Total 2013 £m 2.1 0.1 0.3 2.5 Impaired 2013 £m (0.1) (0.1) (0.2) (0.4) Not impaired 2013 £m 2.0 – 0.1 2.1 Total 2012 £m 1.8 0.3 0.4 2.5 Impaired 2012 £m (0.2) (0.1) (0.3) (0.6) not impaired 2012 £m 1.6 0.2 0.1 1.9 The trade receivables balance is deemed to be all past due as rental payments are due on demand. Trade receivables that are not impaired are expected to be fully recovered as there is no recent history of default or indications that debtors will not meet their obligations. Impaired receivables are provided against based on expected recoverability. 77 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED 14. CASH AND CASH EQUIVALENTS Cash at bank and in hand Restricted cash – tenants’ deposit deeds 2013 £m 10.1 1.7 11.8 2012 £m 24.5 2.0 26.5 Tenants’ deposit deeds represent returnable cash security deposits received from tenants and are ring-fenced under the terms of the individual lease contracts. Bank overdrafts are included within cash and cash equivalents for the purpose of the cash flow statement. 15. TRADE AND OTHER PAYABLES Trade payables Other tax and social security payable Tenants’ deposit deeds (see note 14) Tenants’ deposits Accrued expenses and deferred income Amounts due to related parties Deferred income – rent and service charges 2013 £m 2.1 1.5 1.7 8.7 14.0 0.5 2.8 31.3 2012 £m 1.9 1.5 2.0 8.0 10.4 0.5 3.2 27.5 There is no material difference between the above amounts and their fair values due to the short-term nature of the payables. 16. BORROWINGS (A) BALANCES Current Bank loans and overdrafts due within one year or on demand (secured) Non-current Bank loans (secured) 6% Retail Bond (unsecured) Finance lease obligations (part secured) 2013 £m – – 277.8 56.4 3.5 337.7 337.7 2012 £m – – 333.8 – 3.5 337.3 337.3 The secured loans and overdraft facility are secured on investment properties with balance sheet values totalling £652.4m (2012: £741.1m). 78 Workspace Group PLC Annual Report and Accounts 2013(B) MATURITY Repayable between two years and three years Repayable between three years and four years Repayable in five years or more Less cost of raising finance Finance leases Repayable in five years or more (C) INTEREST RATE AND REPAYMENT PROFILE 2013 £m 280.0 – 57.5 337.5 (3.3) 334.2 3.5 337.7 2012 £m 68.0 270.0 – 338.0 (4.2) 333.8 3.5 337.3 Current Bank overdraft due within one year or on demand Non-current Loan – Bayern LB Loan – Royal Bank of Scotland (RBS) 6% Retail Bond (D) DERIVATIVE FINANCIAL INSTRUMENTS The following interest rate derivatives are held: Interest rate swap* Interest rate swap Interest rate swap Interest rate cap Principal £m Interest rate Interest payable Repayable – Base +2.25% Variable On demand 200.0 80.0 57.5 LIBOR +2.25% LIBOR +2.5% 6% quarterly quarterly Half yearly June 2015 June 2015 October 2019 Amount hedged £m 140.0 40.0 30.0 7.0 Rate payable (or cap strike rate) % 3.23% 2.46% 2.03% 5.00% Rate Receivable % 3 month LIBOR 3 month LIBOR 3 month LIBOR – Term/expiry June 2015 June 2015 June 2015 June 2015 * These swaps comprise three derivatives with different providers but with identical rates, payment dates and end dates. The above instruments are treated as financial instruments at fair value with changes in value dealt with in the income statement during each reporting period. (E) FAIR VALUES OF FINANCIAL INSTRUMENTS Financial liabilities not at fair value through profit or loss Bank loans 6% Retail Bond Finance lease obligations Financial liabilities at fair value through profit or loss Derivative financial instruments: Liabilities 2013 Book Value £m 2013 Fair Value £m 2012 Book Value £m 2012 Fair Value £m 277.8 56.4 3.5 337.7 277.8 59.0 3.5 340.3 333.8 – 3.5 337.3 333.8 – 3.5 337.3 11.1 11.1 14.2 14.2 The total change in fair value of derivative financial instruments recorded in the income statement was a profit of £1.1m (2012: loss of £4.6m). This is net of £2.1m (2012: £1.3m) paid in the year to settle/re-coupon some instruments. 79 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED 16. BORROWINGS continued The fair value of the Retail Bond has been established from the quoted market price at 28 March 2013 and is thus a Level 1 valuation as defined by IFRS7. The fair values of all the Group’s financial derivatives have been determined by reference to market prices and discounted expected cash flows at prevailing interest rates and are Level 2 valuations as defined by IFRS 7. The total fair value calculated equates to 7.5p per share (31 March 2012: 9.7p). The different levels of valuation hierarchy as defined by IFRS 7 are set out below: Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 – Use of a model with inputs (other than quoted prices included in Level 1) that are directly or indirectly observable market data. Level 3 – Use of a model with inputs that are not based on observable market data. (F) FINANCE LEASES Finance lease liabilities are in respect of leased investment property. Minimum lease payments under finance leases fall due as follows: Within one year Between two and five years Beyond five years Future finance charges on finance leases Present value of finance lease liabilities 17. FINANCIAL RISk MANAGEMENT OBJECTIVES AND POLICY The Group has identified exposure to the following financial risks: Market risk Credit risk Liquidity risk Capital risk 2013 £m 0.2 0.9 21.5 22.6 (19.1) 3.5 2012 £m 0.2 0.9 21.5 22.6 (19.1) 3.5 The policies for managing each of these risks and the principal effects of these policies on the results for the year are summarised below: (A) MARkET RISk Market risk is the risk that changes in market conditions will affect the Group’s interest rates. Borrowings at variable rates expose the Group to cash flow interest rate risk. Borrowings at fixed rates expose the Group to fair value interest rate risk. The Group finances its operations through a mixture of retained profits and borrowings. The Group borrows at both fixed and floating rates of interest and then uses interest rate swaps and caps to generate the desired interest and risk profile. At 31 March 2013 79% (2012: 77%) of Group borrowings were fixed through the use of interest rate swaps. All transactions entered into are approved by the Board and are in accordance with the Group’s treasury policy. The Board also monitors variances on interest rates to budget and forecast rates to ensure that the risk relating to interest rates is being sufficiently safeguarded against. Based upon year end variable rate loan balances, a reasonably possible interest rate movement of +/-0.5% would have increased or decreased net interest payable and equity by £0.4m (2012: £0.4m). 80 Workspace Group PLC Annual Report and Accounts 2013(B) CREDIT RISk The Group’s main financial assets are cash and cash equivalents, deposits with banks and financial institutions and trade and other receivables. Credit risk is the risk of financial loss if a tenant or a counterparty to a financial instrument fails to meet its contractual obligations. The Group’s exposure to this risk principally relates to the receivables from tenants, deferred consideration on the sale of investment property and cash and cash equivalent balances held with counterparties. The Group’s exposure to credit risk in relation to receivables from tenants is influenced mainly by the characteristics of individual tenants occupying its rental properties. The Group has approximately 4,000 tenants over approximately 100 properties. The largest 10 single tenants generate around 6% of net rent roll. As such, the credit risk attributable to individual tenants is low. The Group’s credit risk in relation to tenants is further managed by requiring that tenants provide a deposit equivalent to three months rent on inception of lease as security against default. Total tenant deposits held are £10.4m (2012: £10.0m). The Group monitors aged debt balances and any potential bad debts every week, the information being reported to the Executive Committee every month as part of the performance monitoring process. The Group’s debtor recovery is consistently high and as such is deemed a low risk area. Deferred consideration on the sale of investment property is contractual and valued regularly by the external valuer based on current and future market factors. Cash and cash equivalents and financial derivatives are held with major UK high street banks or building societies and strict counterparty limits are operated on deposits. The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Cash and cash equivalents (note 14) Trade receivables – current (note 13) Deferred consideration – current (note 13) Deferred consideration – non current (note 13) 2013 £m 11.8 2.4 1.4 6.1 21.7 2012 £m 26.5 2.5 – 4.6 33.6 (C) LIQUIDITY RISk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure it will always have sufficient funds to meet obligations as they fall due. This is performed via a variety of methods including daily cash flow review and forecasting, monthly monitoring of the maturity profile of debt and the regular revision of borrowing facilities in relation to the Group’s requirements and strategy. To ensure it can effectively manage its liquidity risk, the Group has an overdraft facility of £4m, a revolving loan facility of £55m and term loans. At 31 March 2013 headroom excluding overdraft was £45m (31 March 2012: £55m). Cash flow is monitored formally on a monthly basis as part of internal performance monitoring with regular daily monitoring and forecasting undertaken to manage day-to-day cash flows and any balances which are ring-fenced by lenders. The Board reviews compliance with loan covenants which include agreed interest cover and loan to value ratios, alongside review of available headroom on loan facilities. 81 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED 17. FINANCIAL RISk MANAGEMENT OBJECTIVES AND POLICY continued The following is an analysis of the contractual undiscounted cash flows payable under financial liabilities, derivative financial instruments and trade and other payables existing at the balance sheet date. Contracted cash flows are based upon the loan balances and applicable interest rates payable on these at each year end. 31 March 2013 Financial Liabilities Secured bank loans (note 16b) 6% Retail Bond Interest payable on secured bank loans Interest payable on 6% Retail Bond Derivative financial instruments Finance lease liabilities Trade and other payables 31 March 2012 Financial Liabilities Secured bank loans (note 16b) Interest payable on secured bank loans Derivative financial instruments Finance lease liabilities Trade and other payables Bank priority fee Carrying Amount £m 280.0 57.5 – – 11.1 3.5 27.0 379.1 Carrying Amount £m 338.0 – 14.2 3.5 22.8 0.9 379.4 Due within 1 year £m Due between 1 and 2 years £m Due between 2 and 3 years £m Due 3 years and beyond £m Total contracted cash flows £m – – 7.9 3.5 5.0 0.2 27.0 43.6 – – 7.9 3.5 5.0 0.4 – 16.8 280.0 – 1.6 3.5 1.1 0.5 – 286.7 – 57.5 – 12.0 – 21.5 – 91.0 280.0 57.5 17.4 22.5 11.1 22.6 27.0 438.1 Due within 1 year £m Due between 1 and 2 years £m Due between 2 and 3 years £m Due 3 years and beyond £m Total contracted cash flows £m – 10.7 7.2 0.2 22.8 – 40.9 – 10.7 7.1 0.4 – – 18.2 68.0 10.7 5.5 0.5 – 0.9 85.6 270.0 2.8 3.5 21.5 – – 297.8 338.0 34.9 23.3 22.6 22.8 0.9 442.5 (D) CAPITAL RISk MANAGEMENT The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, and monitor an appropriate mix of debt and equity financing. Equity comprises issued share capital, reserves and retained earnings as disclosed in the consolidated statement of changes in equity. Debt comprises drawings against revolving and term loan facilities from banks, the Retail Bond less cash at bank and in hand. At 31 March 2013 Group equity was £500.4m (2012: £435.4m), and Group net borrowings (debt less cash at bank and in hand) were £327.6m (2012: £312.8m). Group gearing at 31 March 2013 was 65% (2012: 72%). Actions taken in the last few years in relation to borrowings and capital raising have enabled the Group to have sufficient headroom on financing and to ensure it is comfortably within all applicable loan to value covenants applied on borrowings which range between 65% to 75%. 82 Workspace Group PLC Annual Report and Accounts 201318. NOTES TO CASH FLOW STATEMENT Reconciliation of profit for the period to cash generated from operations: Profit before tax Depreciation Amortisation of intangibles Loss/(profit) on disposal of investment properties Loss on disposal of property, plant and equipment net gain from change in fair value of investment property Equity settled share based payments Change in fair value of financial instruments Finance income Finance expense Gains from share in joint ventures Changes in working capital: (Increase) in trade and other receivables Increase in trade and other payables Cash generated from operations For the purposes of the cash flow statement, cash and cash equivalents comprise the following: Cash at bank and in hand Restricted cash – tenants’ deposit deeds 19. ANALYSIS OF MOVEMENT IN CASH AND CASH EQUIVALENTS AND BORROWINGS 2013 £m 76.4 0.4 0.1 2.2 – (59.0) 1.4 (1.1) (0.2) 19.5 (1.7) (0.5) 1.1 38.6 2013 £m 10.1 1.7 11.8 2012 £m 48.5 0.4 0.1 (0.9) 0.1 (35.6) 0.8 4.6 (0.2) 19.3 (1.2) (0.7) 0.6 35.8 2012 £m 24.5 2.0 26.5 Cash at bank and in hand Restricted cash – tenants’ deposit deeds Bank loans 6% Retail Bond Less cost of raising finance Finance lease obligations Total At 1 April 2012 £m 24.5 2.0 26.5 (338.0) – 4.2 (3.5) (337.3) (310.8) Cash flow £m non-cash items £m At 31 March 2013 £m (14.4) (0.3) (14.7) 58.0 (57.5) 1.1 – 1.6 (13.1) – – – – – (2.0) – (2.0) (2.0) 10.1 1.7 11.8 (280.0) (57.5) 3.3 (3.5) (337.7) (325.9) 83 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED 20. OTHER NON-CURRENT LIABILITIES Bank priority fee 2013 £m – 2012 £m 0.9 This fee was paid to Bank of Scotland in March 2013 on the repayment of the associated loan. 21. SHARE CAPITAL Issued: Fully paid ordinary shares of £1 each Issued: Fully paid ordinary shares of £1 each Movements in share capital were as follows: number of shares at 1 April Issue of shares Share consolidation number of shares at 31 March Balance at 1 April Issue of shares Balance at 31 March 22. OTHER RESERVES Balance at 1 April 2011 Share based payments Recycled to income statement Balance at 31 March 2012 Share based payments Balance at 31 March 2013 2013 Number 144,936,155 2012 number 144,091,418 2013 £m 144.9 2012 £m 144.1 2012 number 1,152,731,338 288,182,842 (1,296,822,762) 144,091,418 2013 Number 144,091,418 844,737 – 144,936,155 £m 144.1 0.8 144.9 Owner occupied property £m Equity settled share based payments £m Merger reserve £m 1.9 – (1.9) – – – 4.4 0.8 – 5.2 1.4 6.6 8.7 – – 8.7 – 8.7 £m 115.3 28.8 144.1 Total £m 15.0 0.8 (1.9) 13.9 1.4 15.3 The merger reserve was created in 2009 following the raising of equity through a cashbox share placing structure. 23. INVESTMENT IN OWN SHARES The Company has an Employee Share Ownership Trust (ESOT) to purchase shares in the market for distribution at a later date in accordance with the terms of the Executive Share Option Scheme and Long Term Equity Incentive Plan. The shares are held by an independent trustee and the rights to dividends on the shares have been waived except where the shares are beneficially owned by participants. no shares were purchased for the Trust during the year. At 31 March 2013 the number of shares held by the Trust totalled 1,218,802 (2012: 1,218,802). At 31 March 2013 the market value of these shares was £4.2m (2012: £2.9m) compared to a nominal value of £1.2m (2012: £1.2m). The Company has also established in the year an employee Share Incentive Plan (SIP) which is governed by HMRC rules. 51,800 shares were purchased for the Plan at a cost of £0.2m. These are being held in a separate trust. Balance at 1 April Acquisition of ordinary shares Balance at 31 March 84 2013 £m 8.7 0.2 8.9 2012 £m 8.0 0.7 8.7 Workspace Group PLC Annual Report and Accounts 201324. SHARE-BASED PAYMENTS The Group operates a number of share schemes: I) LONG TERM EQUITY INCENTIVE PLAN (LTIP) The LTIP scheme is a performance award scheme whereby shares are issued against three Group performance measures which are assessed over the three year vesting period. These are: – Absolute TSR – Relative TSR – Relative nAV The shares are issued at nil consideration provided the performance conditions are met. Under the 2012 LTIP scheme 886,774 performance and matching shares were awarded in June 2012 and 276,642 in november 2012 to Directors and senior management (2011 LTIP scheme: 953,009). Details of the movements for the LTIP scheme during the year were as follows: At 1 April 2011 Granted Lapsed At 31 March 2012 Granted Exercised Lapsed At 31 March 2013 LTIP number 6,127,951 953,009 (3,216,493) 3,864,467 1,163,416 (515,866) (875,177) 3,636,840 The weighted average share price at the date of exercise of shares exercised during the year was £2.48 (2012: no exercises). A binomial model was used to determine the fair value of the LTIP grant for the Absolute TSR and Relative TSR elements of the LTIP scheme. Assumptions used in the model were as follows: Share price at grant Exercise price (pence) Average expected life (years) Risk free rate Expected dividend yield Average share price volatility Fair value per option – Absolute TSR element Fair value per option – Relative TSR element 2013 (Nov 2012) 2013 (June 2012) 306p Nil 3 0.5% 4% 41% 249p 172p 227p Nil 3 0.5% 4% 41% 125p 128p 2012 270p nil 3 2% 4% 55% 177p 183p The relative nAV is a non-market based condition and the intrinsic value is therefore the share price at date of grant of 229p (18 June 2012) and 305p (19 november 2012). At each balance sheet date, the Directors assess the likelihood of meeting the conditions under this element of the scheme. The impact of the revision to original estimates, if any, is recognised in the income statement with a corresponding adjustment to equity. The assessment at year end was that up to 50% of the relative nAV element will vest. 85 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED 24. SHARE-BASED PAYMENTS continued The expected Workspace share price volatility was determined by taking account of the daily share price movement over a three year period. The respective FTSE 250 Real Estate share price volatility and correlations were also determined over the same period. The average expected term to exercise used in the models has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural conditions and historical experience. The risk free rate has been determined from market yield curves for government gilts with outstanding terms equal to the average expected term to exercise for each relevant grant. The expected dividend yield was determined by calculating the present value of expected future dividend payments to expiry. II) EMPLOYEE SHARE OPTION SCHEMES The Group operates a Save As you Earn (SAyE) share option scheme and an Executive Share Option Scheme (ESOS) for which there have been no grants since 2008. Grants under ESOS were normally exercisable between three and ten years from the date of grant and normally granted at the market price ruling at the date of grant. Grants under the SAyE scheme are normally exercisable after three or five years saving. In accordance with UK practice, the majority of options under the SAyE schemes are granted at a price 20% below the market price ruling at the date of grant. Details of the movements for the ESOS and SAyE schemes during the year were as follows: Options outstanding At 1 April 2011 Options granted Options lapsed At 31 March 2012 Options granted Options exercised Options lapsed At 31 March 2013 ESOS SAyE number 306,172 – (115,001) 191,171 – – (139,656) 51,515 Weighted exercise price £10.46 – £9.49 £11.05 – – £10.34 £12.97 number 444,211 39,475 (85) 483,601 193,992 (328,871) (15,394) 333,328 Weighted exercise price £1.20 £1.91 £8.89 £1.26 £1.93 £1.15 £1.55 £1.74 The exercise of all options, other than those obtained under the Group’s Save As you Earn scheme, was dependent upon the Group achieving specified performance targets. The weighted average share price at the date of exercise for the SAyE options exercised during the year was £2.63 (2012: no exercises). 193,992 SAyE share options were granted in the year. The fair value has been calculated using the Black-Scholes model. Inputs to the model are summarised as follows: Weighted average share price at grant Exercise price Expected volatility Average expected life (years) Risk free rate Expected dividend yield Possibility of ceasing employment before vesting 2013 SAyE 3 year 230p 193p 41% 3 0.5% 4% 25% 2013 SAyE 5 year 230p 193p 41% 5 0.5% 4% 25% 2012 SAyE 3 year 229p 191p 58% 3 2% 4% 25% 2012 SAyE 5 year – – – – – – – The expected life is the average expected period to exercise. The risk free rate of return is the yield on zero-coupon UK government bonds of a term consistent with the assumed option life. The expected dividend yield is based on the present value of expected future dividend payments to expiry. 86 Workspace Group PLC Annual Report and Accounts 2013Fair values per share of these options were: SAyE – 3 year SAyE – 5 year 2013 2013 2012 2012 Grant date 30 July 2012 30 July 2012 Fair value of award 68p 74p Grant date 14 December 2011 – Fair value of award 85p – III) SHARE INCENTIVE PLAN (SIP) On 22 March 2013 all staff were granted £1,000 worth of shares. These shares are held in trust under an HMRC approved SIP. The shares can be exercised following three years of employment but must be held for a further 2 years in order to qualify for tax advantages. 51,800 shares were granted in the year. The fair value of the SIP shares granted during the year has been calculated using the Black-Scholes model. Inputs to the model for the grants during the year are summarised as follows: Weighted average share price at grant Exercise price Expected volatility Average expected life (years) Risk free rate Expected dividend yield Possibility of ceasing employment before vesting Fair value of award (per share) 2013 344p Nil 41% 3 0.5% 4% 25% 79p 2012 – – – – – – – – IV) YEAR END SUMMARY At 31 March 2013 in total there were 4,073,483 (2012: 4,539,239) share awards/options exercisable on the Company’s ordinary share capital. These are analysed below: Date of grant LTIP 12 June 2009 06 July 2010 04 August 2011 18 June 2012 19 november 2012 ESOS 30 June 2003 30 June 2004 17 June 2005 1 September 2005 SAyE 22 July 2008 21 July 2009 20 July 2010 20 July 2010 14 December 2011 30 July 2012 30 July 2012 SIP 22 March 2013 Total Exercise Price – – – – – £8.25 £13.16 £17.81 £19.37 £8.89 £1.15 £1.66 £1.66 £1.91 £1.93 £1.93 Ordinary shares number 657,783 1,035,461 780,180 886,774 276,642 18,950 14,624 9,681 8,260 366 72,272 30,883 2,983 37,026 163,374 26,424 – 51,800 Vested and exercisable 657,783 – – – – Exercisable between 12.06.2012 06.06.2013 04.08.2014 18.06.2015 19.11.2015 12.06.2017* – – – – Exercisable between 18,950 30.06.2006 30.06.2007 14,624 17.06.2008 9,681 01.09.2008 8,260 30.06.2013 30.06.2014 17.06.2015 01.09.2015 Exercisable between – – – – – – – – 01.09.2013 01.09.2014 01.09.2013 01.09.2015 01.02.2015 01.09.2015 01.09.2017 01.03.2014 01.03.2015 01.03.2014 01.03.2016 01.08.2015 01.03.2016 01.03.2018 Exercisable between 22.03.2016 22.03.2018 4,073,483 709,298 * These shares were converted to nil cost options on 12 June 2012 and can be exercised at any time up to 12 June 2017. 87 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED 24. SHARE-BASED PAYMENTS continued The weighted average exercise price for vested and exercisable shares at 31 March 2013 is: LTIP – £nil (2012: £nil), ESOS – £13.22 (2012: £11.05). The share awards/options outstanding at 31 March 2013 had a weighted average remaining contractual life of: LTIP – 1.1 years (2012: 1 year), ESOS – nil years (2012: nil years), SAyE – 2.2 years (2012: 1.1 years), SIP – 3 years. V) CASH SETTLED SHARE BASED PAYMENTS national Insurance payments due on the exercise of non-approved ESOS options and shares from the LTIP are considered cash settled share based payments. The estimated fair value of the national Insurance cash settled share based payments have been calculated using the Black-Scholes model. At each balance sheet date the Group revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision to original estimates, if any, in the income statement. VI) SHARE BASED PAYMENT CHARGES The Group recognised a total charge in relation to share based payments as follows: Equity settled share based payments Cash settled share based payments 2013 £m 1.4 0.4 1.8 2012 £m 0.8 0.2 1.0 The total liability at the end of the period in respect of cash-settled share based schemes was £0.9m (2012: £0.6m). 25. RELATED PARTY TRANSACTIONS Transactions year ended 31 March: net investment into joint ventures (note 12) Sale of property to joint ventures Fee income and recharges to joint ventures Distributions received from joint ventures (note 12) Balances with joint ventures at 31 March: Amounts payable to joint ventures (note 15) 2013 £m 7.7 3.2 0.9 0.9 2012 £m 4.8 – 0.5 0.4 (0.5) (0.5) Key management for the purposes of related party disclosure under IAS 24 are taken to be the Executive Board Directors, the non-Board Executive Directors and the non-Executive Directors. Key management compensation is set out below: Key management compensation: Salaries and short-term employee benefits Pensions and other post-employment benefits Share-based payments 2013 £m 2.9 0.2 0.7 3.8 26. CAPITAL COMMITMENTS At the year end the estimated amounts of contractual commitments for future capital expenditure not provided for were: Funding of joint venture Purchases, construction or redevelopment of investment property 2013 £m 1.7 18.2 2012 £m 2.5 0.1 0.4 3.0 2012 £m 7.9 5.9 88 Workspace Group PLC Annual Report and Accounts 201327. CONTINGENT LIABILITY In December 2009 Workspace acquired full control of its former Workspace Glebe joint venture. The purchase was satisfied by a cash payment of £15m and a debt facility of £68m provided by the former lenders to the joint venture, with further amounts potentially payable under a proceed share arrangement. The proceed share provides for the former lenders to Workspace Glebe to share in net cash proceeds from disposals from the Glebe property portfolio once Workspace has received its priority return. The priority return at 31 March 2013 is £92m. For proceeds up to £170m the lenders share is 50%, from £170m up to £200m it is 30% and nil thereafter. The maximum payable under this proceed share is £48m. All disposals are at the option of Workspace and there are no time limits. Cumulative cash proceeds from disposals to date are £nil. The total valuation of the Glebe portfolio at 31 March 2013 was £164m (March 2012: £136m). While a number of the assets have residential redevelopment potential a substantial part of the portfolio is comprised of investment properties that Workspace has no current plans to sell. These are currently valued at £81m. Properties with redevelopment potential are currently valued at £83m. If the redevelopment properties were sold for cash at the March 2013 valuation, there would be no liability under the proceed share. In the unlikely scenario that all the properties in the Glebe portfolio were sold there would be a potential liability net of costs of £32m (31 March 2012: £22m). 28. PRINCIPAL SUBSIDIARY UNDERTAkINGS Except where indicated otherwise, the Company (incorporated in the UK) wholly owns the following active subsidiary undertakings incorporated in the UK, all of which are consolidated in the Group’s financial statements: name Workspace 11 Limited Workspace 12 Limited* Workspace 13 Limited Workspace 14 Limited* Workspace 15 Limited Workspace 16 (Jersey) Limited† Workspace Glebe Limited Glebe Three Limited* Workspace Holdings Limited LI Property Services Limited Workspace Management Limited Anyspacedirect.co.uk Limited nature of business Property Investment Property Investment Property Investment Property Investment Property Investment Investor in joint venture Holding Company Property Investment Holding Company Insurance Agents Property Management Website Service * The share capital of these subsidiaries is held by other Group companies. † Company registered in Jersey. A full list of subsidiary undertakings at 31 March 2013 will be appended to the Company’s next annual return. 29. PENSION COMMITMENTS The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group in an independently administered fund. The pension cost charge for this scheme in the year was £0.5m (2012: £0.4m) representing contributions payable by the Group to the fund and is charged through operating profit. The Group’s commitment with regard to pension contributions range from 6% to 16.5% of an employee’s salary and employee contributions range from 3% to 15%. The pension scheme is open to every employee after three months’ qualifying service. The number of employees in the scheme at the year end was 91 (2012: 98). 89 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30. OPERATING LEASES The following future minimum lease payments are due under non-cancellable operating leases: Motor vehicles and office equipment: Due within one year Due between two and five years 2013 £m 0.1 0.1 0.2 2012 £m 0.1 0.1 0.2 The Group has determined that all tenant leases are operating leases within the meaning of IAS 17. The majority of the Group’s tenant leases are granted with a rolling three month tenant break clause. The future minimum non-cancellable rental receipts under operating leases granted to tenants are as follows: Within one year Between two and five years Beyond five years 2013 £m 21.2 1.5 0.6 23.3 2012 £m 18.0 1.1 0.9 20.0 31. POST BALANCE SHEET EVENTS In April 2013 the Group completed the sale of Phase 1 of the redevelopment of Bow Enterprise Park to Peabody Enterprises for consideration comprising £11.5m in cash, 15,000 sq. ft. of new industrial space and overage on the residential component. In May 2013 the Group secured two major mixed use planning permissions at Faircharm, Creekside and Tower Bridge Business Complex. The former is for a mixed use redevelopment of 148 apartments and 52,000 sq. ft. of new business space and the latter is for 800 residential units and 60,000 sq. ft. of new business space. On 10 June 2013 the Group agreed the refinancing of £325m of bank debt currently provided by the RBS and Bayern Clubs. On 1 July 2013 the existing secured bank debt will be replaced by £352.5m of unsecured debt provided by the issue of £157.5m private placement notes, £45m provided by a UK Fund and £150m of new bank debt. 90 Workspace Group PLC Annual Report and Accounts 2013INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF WORKSPACE GROUP PLC (PARENT COMPANy) OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion: – the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and – the information given in the Report of the Directors for the financial year for which the Parent Company financial statements are prepared is consistent with the Parent Company financial statements. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: – adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or – the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or – certain disclosures of Directors’ remuneration specified by law are not made; or – we have not received all the information and explanations we require for our audit. OTHER MATTER We have reported separately on the Group financial statements of Workspace Group PLC for the year ended 31 March 2013. BOWkER ANDREWS (SEnIOR STATUTORy AUDITOR) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 11 June 2013 We have audited the Parent Company financial statements of Workspace Group PLC for the year ended 31 March 2013 which comprise the Parent Company Balance Sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS As explained more fully in the Statement of Directors’ Responsibilities set out on page 61, the Directors are responsible for the preparation of the Parent Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the Parent Company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. OPINION ON FINANCIAL STATEMENTS In our opinion the Parent Company financial statements: – give a true and fair view of the state of the Company’s affairs as at 31 March 2013; – have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and – have been prepared in accordance with the requirements of the Companies Act 2006. 91 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100PARENT COMPANy BALANCE SHEET AS AT 31 MARCH Fixed assets Investments Current assets Debtors Cash at bank and in hand Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Capital and reserves Called up share capital Share premium account Investment in own shares Merger reserve Share based payment reserve Profit and loss account Total shareholders’ funds notes C D E F G G G G G G H 2013 £m 268.5 268.5 207.1 1.2 208.3 (88.2) 120.1 388.6 (56.4) 332.2 144.9 58.8 (8.9) 8.7 6.6 122.1 332.2 2012 £m 263.3 263.3 142.0 23.0 165.0 (89.2) 75.8 339.1 – 339.1 144.1 59.2 (8.7) 8.7 5.2 130.6 339.1 The notes on pages 93 and 94 form part of these financial statements. The financial statements on pages 92 to 94 were approved by the Board of Directors on 11 June 2013 and signed on its behalf by: J HOPkINS G CLEMETT Directors Workspace Group PLC Registered number 2041612 92 Workspace Group PLC Annual Report and Accounts 2013NOTES TO THE PARENT COMPANy FINANCIAL STATEMENTS A. ACCOUNTING POLICIES Although the Group consolidated financial statements are prepared under IFRS as adopted by the EU, the Workspace Group PLC Company financial statements are prepared under UK GAAP. The principal accounting policies of the Company which have been applied consistently throughout the year are set out below: B. PROFIT FOR THE YEAR As permitted by the exemption in Section 408 of the Companies Act 2006, the profit and loss account of the Company is not presented as part of these financial statements. The profit attributable to shareholders, before dividend payments, dealt with in the financial statements of the Company was £4.5m (2012: £2.7m). Auditors’ remuneration of £10,000 (2012: £10,000) has been borne by a subsidiary undertaking. Proposed dividends are disclosed in note 7 to the consolidated financial statements. C. INVESTMENTS INVESTMENT IN SUBSIDIARY UNDERTAkINGS Cost Balance at 1 April 2012 Additions in the year Balance at 31 March 2013 Impairment Balance at 1 April 2012 Reversal of impairment loss Balance at 31 March 2013 Net book value at 31 March 2013 net book value at 31 March 2012 £m 310.4 3.0 313.4 £m 47.1 (2.2) 44.9 268.5 263.3 The Directors believe that the carrying value of the investments is supported by their underlying net assets. Refer to note 28 to the consolidated financial statements for the list of subsidiary undertakings. D. DEBTORS Amounts owed by subsidiary undertakings Prepayments and accrued income Corporation tax asset 2013 £m 206.3 – 0.8 207.1 2012 £m 141.5 0.2 0.3 142.0 Amounts owed by subsidiary undertakings are unsecured and repayable on demand. Interest is charged to subsidiary undertakings. (A) BASIS OF ACCOUNTING The financial statements are prepared on a going concern basis under the historical cost convention and in accordance with the Companies Act 2006 and applicable accounting standards in the UK. FRS 29 Financial Instruments – Disclosure (the UK GAAP equivalent of IFRS 7 Financial Instruments – Disclosure) has been adopted by the Company, but the disclosure requirements are met in note 17 of the Group financial statements. (B) CASH FLOW STATEMENT The Company has taken advantage of the convention not to produce a cash flow statement as one is prepared for the Group financial statements. (C) INVESTMENT IN SUBSIDIARY UNDERTAkINGS Interests in subsidiary undertakings are carried in the Company’s balance sheet at cost less impairment. Impairment reviews are performed by the Directors when there has been an indication of potential impairment. Impairment in subsidiaries is taken to the profit and loss account. (D) SHARE BASED PAYMENT AND INVESTMENT IN OWN SHARES Incentives are provided to employees under share option schemes. The Company has established an Employee Share Ownership Trust (ESOT) to satisfy part of its obligation to provide shares when Group employees exercise their options. The Company provides funding to the ESOT to purchase these shares. The Company also established in the year an employee Share Incentive Plan (SIP) which is governed by HMRC rules. The Company itself has no employees. When the Company grants share options to Group employees as part of their remuneration, the expense of the share options is reflected in a subsidiary undertaking, Workspace Management Limited. The Company recognises this as an investment in subsidiary undertakings with a corresponding increase to equity. The disclosure requirements of FRS 20 Share-based payment are met in note 24 of the Group financial statements. (E) BORROWINGS Details of borrowings are described in note F to the Parent Company financial statements. Costs associated with the raising of finance are capitalised, amortised over the life of the instrument and charged as part of interest costs. 93 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100NOTES TO THE PARENT COMPANy FINANCIAL STATEMENTS CONTINUED E. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR H. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS Profit for the financial year Dividends paid Issue of shares (net of costs) Investment in own shares Share based payments net movement in shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds 2013 £m 4.5 (13.0) 0.4 (0.2) 1.4 (6.9) 339.1 332.2 2012 £m 2.7 (10.5) 63.0 (0.7) 0.8 55.3 283.8 339.1 I. RELATED PARTY TRANSACTIONS The Company has taken advantage of the exemption under FRS 8 Related Party Disclosures not to disclose related party transactions with wholly owned subsidiary undertakings. Related party transactions are the same for the Company as for the Group. For details refer to note 25 of the consolidated financial statements. Amounts owed to subsidiary undertakings Taxation and social security Accruals and deferred income 2013 £m 86.2 0.4 1.6 88.2 2012 £m 88.8 0.4 – 89.2 Amounts owed to subsidiary undertakings are unsecured and repayable on demand. Interest is paid to subsidiary undertakings. F. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR 6% Retail Bond Less cost of raising finance 2013 £m 57.5 (1.1) 56.4 2012 £m – – – The 6% Retail Bond was issued on 9 October 2012. It is unsecured and repayable on 9 October 2019. G. CAPITAL AND RESERVES Movements and notes applicable to share capital, share premium account, investment in own shares, merger reserve and share based payment reserve are shown in notes 21 to 23 and in the consolidated statement of changes in equity of the consolidated financial statements. Profit and loss account: Balance at 1 April 2012 Profit for the year Dividends paid Balance at 31 March 2013 £m 130.6 4.5 (13.0) 122.1 94 Workspace Group PLC Annual Report and Accounts 2013FIVE-yEAR PERFORMANCE 2009 – 2013 Rents receivable Service charges and other income Revenue Profit before interest including share of BWPT net interest payable^ Trading profit after interest Profit/(loss) before taxation Profit/(loss) after taxation Basic earnings per share* Dividends per share* Dividends (total) Investment properties Other assets less liabilities net borrowings Net assets Gearing Gearing on EPRA net assets Basic nAV per share* EPRA nAV per share* 31 March 2013 £m 31 March 2012 £m 31 March 2011 £m 31 March 2010 £m 31 March 2009 £m 51.4 18.1 69.5 37.2 (19.3) 17.9 76.4 76.4 53.3p 9.67p 13.9 825.9 2.1 (327.6) 500.4 65% 64% £3.48 £3.48 50.2 17.1 67.3 35.1 (19.1) 16.0 48.5 49.0 36.3p 8.79p 12.6 759.3 (11.1) (312.8) 435.4 72% 70% £3.05 £3.08 52.0 16.8 68.8 36.3 (22.1) 14.2 52.8 53.5 45.4p 7.99p 9.5 713.4 (12.8) (366.8) 333.8 110% 106% £2.83 £2.86 49.8 16.7 66.5 35.3 (24.5) 10.8 26.0 24.2 21.8p 7.27p 8.6 713.2 (39.5) (386.4) 287.3 134% 125% £2.43 £2.59 54.2 15.6 69.8 38.4 (28.4) 10.0 (360.4) (360.4) (1,304.5)p 15.92p 7.8 664.1 (54.1) (358.1) 251.9 142% 129% £2.34 £2.58 * Earnings per share, dividends per share and net assets per share have been restated to reflect adjustment for the Rights Issue, in July 2011 and share consolidation in August 2011. ^ Excludes exceptional items. KEy PERFORMANCE INDICATORS Workspace Group: number of estates1 Lettable floorspace (m sq. ft.)n 1 number of lettable units1 Average unit size (sq. ft.)1 Rent roll of occupied units1 Average rent per sq. ft.1 Overall occupancy1 Enquiries (number)* Lettings (number)* BlackRock Workspace Property Trust (BWPT): number of estates Lettable floorspace (m sq. ft.)n number of lettable units Average unit size (sq. ft.) Rent roll of occupied units Average rent per sq. ft. Overall occupancy n Excludes storage space 1 Excluding BWPT which is shown separately * Including BWPT 31 March 2010 105 5.5 5,156 1,067 £50.7m £11.22 81.9% 12,109 1,203 31 March 2009 106 5.0 4,546 1,099 £50.8m £12.64 80.3% 10,515 1,035 31 March 2013 31 March 2012 31 March 2011 86 4.7 4,626 1,011 £52.7m £12.98 87.0% 12,440 1,014 31 March 2013 16 0.5 435 1,260 £7.0m £14.20 90.4% 92 5.0 4,668 1,070 £50.2m £11.79 85.3% 12,103 981 96 5.1 4,856 1,049 £48.9m £11.47 83.6% 11,535 1,051 31 March 2012 31 March 2011 11 0.4 313 1,407 £4.7m £11.82 89.8% 8 0.3 281 1,147 £3.1m £10.57 92.1% 95 Workspace Group PLC Annual Report and Accounts 2013Review of operations 01-26 Governance 27-61Financial statements 62-95 Shareholder information 96-100PROPERTy PORTFOLIO 2013 SOUTH AND WEST LONDON Property Name South Canterbury Estate Faircharm Hamilton Road Havelock Terrace Kennington Park – Investment Kennington Park – Refurbishment Lombard Mahatma Ghandi Michael Manley Morie Street Parkhall Pensbury Rainbow Riverside Sundial Court T Marchant Thurston Road The Biscuit Factory The Biscuit Factory (including Tower Bridge Block F) Wandsworth Zennor Road West 2 Cullen Way 10 Cullen Way Acton Centre Arches Artesian Close Artesian Land Barratt Way Canalot Studios Chiswick Studios Grand Union Centre Ladbroke Hall Littleton House Maple Pall Mall Deposit Park Royal Park Royal House q West The Barley Mow Centre The Light Box The Shaftesbury Centre Westbourne Studios 96 Postcode Category Lettable floor area sq. ft.† Net Rent Roll of occupied units £000s SE15 1nP SE8 3Dx SE27 9SF SW8 4AS SW9 6DE SW9 6DE CR0 3JP SE24 0JF SW8 4TU SW18 1SL SE21 8En SW8 4TL SW20 0JK SW18 4Uq KT5 9Rn SE16 3DH SE13 7SH SE16 4DG SE16 4DG SW18 4Jq SW12 0PS Like for like Redevelopment Like for like Like for like Like for like Refurbishment Like for like Like for like Like for like Like for like Like for like Like for like Like for like Like for like Like for like Like for like Redevelopment Like for like Redevelopment Redevelopment Like for like 18,893 106,663 23,531 58,343 336,854 36,384 67,248 16,750 5,800 21,696 119,105 19,971 1,000 99,341 26,107 51,984 0 276,249 276,158 0 66,054 199 399 141 698 4,631 735 459 154 73 310 801 257 410 956 241 332 0 1,944 1,163 0 454 ERV £000s 195 641 210 783 5,048 1,026 598 189 76 333 1,013 278 411 1,001 261 305 561 2,619 1,269 1,320 537 1,628,131 14,357 18,674 Like for like nW10 6JZ Like for like nW10 7JF Like for like nW10 6TD UB2 4AU Like for like nW10 8RW Like for like Like for like nW10 8JP Like for like HA3 5TJ Refurbishment W10 5Bn Like for like W4 5Py Redevelopment W10 5AS Like for like W10 6AZ Like for like TW15 1UU Like for like TW13 7AW Like for like W10 6BL Like for like nW10 7Lq Redevelopment nW10 7JH Like for like TW8 0GP Like for like W4 4PH Like for like W4 5Py Like for like W10 6Bn Like for like W10 5JJ 1,562 10,304 50,361 40,725 15,815 4,500 47,294 48,970 14,253 47,621 15,219 41,716 18,210 49,360 30,347 0 39,980 75,377 70,958 12,608 55,758 17 21 540 310 196 20 338 575 185 244 238 288 233 954 300 0 247 1,393 850 227 1,797 15 59 623 307 197 0 395 1,491 167 632 250 317 241 1,002 357 89 378 1,492 1,060 235 1,857 690,938 8,973 11,164 Workspace Group PLC Annual Report and Accounts 2013CENTRAL LONDON Property Name Central Greville Street Archer Street Baldwins Gardens Clerkenwell Workshops E1 Business Centre Enterprise House Exmouth House Metal Box Factory Holywell Centre Linton House quality Court Southbank House The Leathermarket Westminster Whitechapel NORTH AND EAST LONDON North Atlas Belgravia Workshops Bounds Green ScreenWorks Leroy House Mallard Place Parma House quicksilver Place Spectrum House The Chocolate Factory The Ivories The Wenlock East Stratford Office Village Bow Enterprise Park Bow Exchange Buzzard Creek Cremer Fairways The Pill Box Highway Leyton Mare Street Studios Marshgate Centre Poplar Redbridge Enterprise Centre Uplands Review of operations Governance Financial statements Shareholder information 01-26 27-61 62-95 96-100 Postcode Category Lettable floor area sq. ft.† Net Rent Roll of occupied units £000s EC1n 8SB W1D 7AZ EC1n 7RJ EC1R 0AT E1 6TD SE1 9PG EC1R 0JH SE1 OHS EC2A 4PS SE1 0LH WC2A 1HR SE1 7SJ SE1 3ER SE11 5JH E1 1DU Like for like Like for like Like for like Like for like Like for like Like for like Refurbishment Refurbishment Like for like Like for like Like for like Like for like Like for like Refurbishment Refurbishment 10,961 14,984 43,396 53,127 40,184 72,870 52,907 62,641 21,796 34,783 16,981 62,403 125,291 61,714 38,424 318 678 885 2,461 672 2,291 994 867 408 767 744 1,391 3,145 762 474 ERV £000s 489 722 901 2,827 727 2,352 1,627 1,539 486 780 847 1,584 3,305 856 803 712,462 16,857 19,845 nW2 7HJ n19 4nF n11 2UL n5 2EA n1 3qP n22 6TS n22 6xF n22 6xH nW5 1LP n22 6xJ n1 2Hy n1 7EU E15 4EA E3 3qy E3 3qP IG11 0EL E2 8HD E10 7qT E2 6JL E1 9HR E10 7qP E8 3qE E15 2nH E14 9RL IG1 1Ty E17 5qn Like for like Like for like Like for like Redevelopment Like for like Like for like Like for like Like for like Like for like Like for like Like for like Like for like 152,412 32,324 123,272 0 46,685 10,150 35,040 27,810 46,489 119,256 24,811 27,950 952 311 664 0 809 83 280 135 586 853 346 641 1,142 362 838 1,550 905 83 343 177 564 1,109 469 686 646,199 5,660 8,228 Like for like Redevelopment Like for like Like for like Like for like Like for like Refurbishment Like for like Refurbishment Like for like Redevelopment Like for like Like for like Like for like 52,055 67,178 36,962 45,000 41,364 47,091 0 19,969 87,930 39,442 92,673 74,775 20,020 280,497 570 269 262 285 562 292 0 255 449 392 215 1,072 146 1,551 904,956 6,320 875 626 289 317 609 362 1,030 273 551 443 478 1,271 227 1,580 8,931 97 Workspace Group PLC Annual Report and Accounts 2013PROPERTy PORTFOLIO 2013 CONTINUED OUTSIDE LONDON Property Name Outside London Clyde House Harlow Enterprise Centre BLACkROCk WORkSPACE JOINT VENTURE Baden Place Burford Road Cam Road Charles House Chandelier Building City Road Europa Horton Road Kingsmill Little London Lloyds Avenue Progress Park Rudolph Place Toplin House Union Court Windmill Place Postcode Category SL6 8BR CM20 2HS Like for like Like for like SE1 1yH E15 2ST E15 2Sn UB2 4BD nW10 6RB EC1V 1Jn nW10 6nD UB7 8JD KT1 3AP SE1 2BA EC3n 3Ax CR0 4xD SW8 1RP SW9 6BB SW4 6JP UB2 4nJ Like for like Like for like Like for like Like for like Like for like Like for like Like for like Like for like Like for like Like for like Like for like Like for like Like for like Redevelopment Like for like Like for like Lettable floor area sq. ft.† Net Rent Roll of occupied units £000s 29,654 51,851 81,505 25,472 21,296 38,502 72,097 46,175 31,292 25,826 38,720 40,151 31,101 34,764 31,002 14,712 3,133 67,711 26,171 192 327 519 477 258 733 1,002 429 390 336 246 361 527 793 242 243 85 673 241 ERV £000s 245 315 560 645 289 534 1,093 515 618 341 220 401 631 961 277 314 486 802 287 ENTERPRISE HOUSE INVESTMENTS LLP JOINT VENTURE Enterprise House, Hayes UB3 1DD † Excludes storage area Property statistics as at 31 March 2013 548,125 7,036 8,414 79,518 79,518 191 191 86 86 98 Workspace Group PLC Annual Report and Accounts 2013 INVESTOR INFORMATION Review of operations Governance Financial statements Shareholder information 01-26 27-61 62-95 96-100 REGISTRAR All general enquiries concerning ordinary shares in Workspace Group PLC, should be addressed to: COMPUTERSHARE INVESTOR SERVICES PLC The Pavilions Bridgwater Road Bristol BS99 6ZZ Telephone: +44 (0) 870 707 1413 Alternatively, shareholders can contact Computershare online via their free Investor Centre facility. Shareholders have the ability to set up or amend bank details for direct credit of dividend payments, amend address details, view payment history and access information on the Company’s share price. For more information or to register please visit www.investorcentre.co.uk WEBSITE The Company has a corporate website, which holds, amongst other information, a copy of our latest annual report and accounts, a list of properties held by the Group and copies of all press announcements. The site can be found at www.workspace.co.uk. REGISTERED OFFICE AND HEADQUARTERS CHESTER HOUSE, Kennington Park, 1-3 Brixton Road, London, SW9 6DE. Registered number: 2041612 Telephone: +44 (0) 20 7138 3300 Facsimile: +44 (0) 20 7247 0157 Web: www.workspace.co.uk Email: info@workspace.co.uk COMPANY SECRETARY Carmelina Carfora THE COMPANY’S ADVISERS INCLUDE: INDEPENDENT AUDITORS PRICEWATERHOUSECOOPERS LLP Chartered Accountants and Statutory Auditors 1 Embankment Place London WC2n 6RH JOINT SOLICITORS NORTON ROSE 3 More London Riverside London SE1 2Aq SLAUGHTER AND MAY One Bunhill Row London EC1y 8yy BANkERS THE ROYAL BANk OF SCOTLAND Corporate and Institutional Banking 280 Bishopsgate London EC2M 4RB FINANCIAL ADVISERS N M ROTHSCHILD new Court St Swithins Lane London EC4n 8AL JOINT STOCkBROkERS ESPIRITO SANTO INVESTMENT BANk 10 Paternoster Square London EC4M 7AL INVESTEC 2 Gresham Street London EC2V 7qP 99 Workspace Group PLC Annual Report and Accounts 2013GLOSSARy OF TERMS BWPT BlackRock Workspace Property Trust, a joint venture property fund with the BlackRock UK Property Fund in which the Group holds a 20.1% interest. Loan to value is the current loan balance divided by the current value of properties secured on the loan. Cash rent roll is the current net rents receivable for occupied units. Earnings per share (EPS) is the profit after taxation divided by the weighted average number of shares in issue during the period. Employee Share Ownership Trust (ESOT) is the trust created by the Group to hold shares pending exercise of employee share options. EPRA NAV is a definition of net asset value as set out by the European Public Real Estate Association. It represents net assets after excluding mark to market adjustments of effective cash flow hedges (financial derivatives) and deferred tax relating to revaluation movements, capital allowances and derivatives. Equivalent yield is a weighted average of the initial yield and reversionary yield and represents the return a property will produce based upon the timing of the occupancy of the property and timing of the income receivable. This is approximated by the reversionary yield multiplied by the Group trend occupancy of 90%. Estimated rental value (ERV) or market rental value is the Group’s external valuers’ 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. Exceptional items are significant items of income or expense that by virtue of their size, incidence or nature are shown separately on the Income Statement to enable a full understanding of the Group’s financial performance. Market rental values (see ERV). Net asset value per share (NAV) is net assets divided by the number of shares at the period end. Net bank debt is the amount drawn on bank facilities, including overdrafts, less cash deposits. Net rents are rents excluding any contracted increases and after deduction of inclusive service charge revenue. Occupancy percentage is the area of space let divided by the total net lettable area (excluding land used for open storage). Open market value is an opinion of the best price at which the sale of an interest in the property would complete unconditionally for cash consideration on the date of valuation (as determined by the Group’s external valuers). Profit/(loss) before tax (PBT) is income less all expenditure other than taxation. Property Income Distribution (PID) a dividend generally subject to withholding tax that a UK REIT is required to pay from its tax-exempted property rental business and which is taxable for UK resident shareholders at their marginal tax rate. REIT is a Real Estate Investment Trust as set out in the UK Finance Act 2006 Sections 106 and 107. REITs pay no corporation tax on profits derived from their property rental business. Rent per sq. ft. is the net rent divided by the occupied area. Gearing is the Group’s net debt as a percentage of net assets. Rent roll (see cash rent roll). Gearing on adjusted net assets is the Group’s net debt as a percentage of net assets excluding mark to market derivative adjustments. Initial yield is the net rents generated by a property or by the portfolio as a whole expressed as a percentage of its valuation. Interest cover is the number of times net interest payable is covered by operating profit. IPD is the Investment Property Databank Ltd, a company that produces an independent benchmark of property returns. Reversion/reversionary income 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 to rent arise on rent reviews, letting of vacant space, expiry of rent free periods or rental increase steps. Reversionary yield is the anticipated yield, which the initial yield will rise to once the rent reaches the estimated rental value. It is calculated by dividing the ERV by the valuation. Small and medium sized enterprises (SMEs) are those businesses with a turnover of less than £1m p.a. or staff of less than 50. Most Workspace customers are SME businesses with staffing of up to 20. IPD Universe is the IPD quarterly universe property fund benchmark of approximately 250 (£50bn) UK domestic property funds. Total Shareholder Return (TSR) is the return obtained by a shareholder calculated by combining both share price movements and dividend receipts. LIBOR is the British Bankers’ Association London Interbank Offer Rate. Trading profit after interest is net rental income, joint venture trading income and finance income, less administrative expenses, less finance costs. Like-for-like are those properties that have been held throughout a 12 month period and have not been subject to a refurbishment or redevelopment programme in the last 24 months. Unique web visits is the number of unduplicated (counted only once) visitors to a website over the course of a specified time period. 100 Workspace Group PLC Annual Report and Accounts 2013 OUR BUSINESS MODEL WORKSPACE GROUP ONLINE Workspace’s comprehensive website gives you fast, direct access to a wide range of Company information. To fi nd out more go to www.workspace.co.uk CUSTOMERS Offi ce Light industrial Studios Workshops Serviced offi ces Co-working Investors INVESTORS About us Corporate information Corporate social responsibility RnS announcements Share price and information Publications archive Bonds CO-WORkING Club locations Join Club Our events Hold a meeting About Club CONTENTS REVIEW OF OPERATIONS IFC Our business model 01 2013 highlights 02 Strong momentum 04 Chairman’s Statement 06 Chief Executive Offi cer’s Strategic Review 08 Our strategy 10 Generating value 12 Portfolio potential 14 Corporate Social Responsibility 16 Business Review 26 Key Property Statistics GOVERNANCE 28 Chairman’s Introduction 30 The Board and Executive Committee 32 Report of the Directors 35 Corporate Governance Report 45 Directors’ Remuneration Report 61 Directors’ Responsibilities FINANCIAL STATEMENTS 62 Independent Auditors’ Report to the Members of Workspace Group PLC 63 Consolidated Income Statement 63 Consolidated Statement of Comprehensive Income 64 65 Consolidated Balance Sheet Consolidated Statement of Changes in Equity 66 Consolidated Statement of Cash Flows 67 Notes to the Financial Statements 91 Independent Auditors’ Report to the Members of Workspace Group PLC (Parent Company) 92 Parent Company Balance Sheet 93 Notes to the Parent Company Financial Statements 95 Five-Year Performance 95 Key Performance Indicators SHAREHOLDER INFORMATION 96 Property Portfolio 99 Investor Information 100 Glossary of Terms WHAT WE DO Workspace provides business premises tailored to the needs of new and growing companies across London. HOW WE DO IT Workspace understands the changing needs of these companies and actively adapts and manages its buildings to create an environment for growth. WHERE WE DO IT Workspace owns over 100 properties in London providing 5.2 million square feet of space and is home to some 4,000 businesses employing more than 30,000 people. HOW WE GENERATE VALUE Workspace is growing through deep market knowledge, operational excellence and strong customer relationships. Workspace is enhancing both core operational income and capital values by repositioning specifi c property assets. Workspace provides the right properties to attract its customers and the right services to retain them and help them grow. RELATED INFORMATION OUR STRATEGY P.08 WORkSPAcE WORkSPAcE UNDERSTANDS UNDERSTANDS WORk SPAcE WORk SPAcE ANNUAL REPORT ANNUAL REPORT AND AccOUNTS 2013 AND AccOUNTS 2013 W O R k S P A c E G R O U P P L c A N N U A L R E P O R T A N D A c c O U N T S 2 0 1 3 W O R k S P A c E G R O U P P L c A N N U A L R E P O R T A N D A c c O U N T S 2 0 1 3 WORkSPAcE GROUP PLc WORkSPAcE GROUP PLc Chester house Chester house Kennington Park Kennington Park 1-3 Brixton road 1-3 Brixton road London London SW9 6DE SW9 6DE telephone: +44 (0) 20 7138 3300 telephone: +44 (0) 20 7138 3300 Web: www.workspace.co.uk Web: www.workspace.co.uk Email: info@workspace.co.uk Email: info@workspace.co.uk if you require information regarding if you require information regarding business space in London call business space in London call +44 (0) 20 7369 2390 or visit +44 (0) 20 7369 2390 or visit www.workspace.co.uk. www.workspace.co.uk. this report is printed on materials which are FSc® certifi ed from well-managed forests. this report is printed on materials which are FSc® certifi ed from well-managed forests. these materials contain EcF (Elemental chlorine Free) pulp and are 100% recyclable. these materials contain EcF (Elemental chlorine Free) pulp and are 100% recyclable. Designed by carnegie Orr (a Workspace Group customer) +44 (0)20 7610 6140. www.carnegieorr.com Designed by carnegie Orr (a Workspace Group customer) +44 (0)20 7610 6140. www.carnegieorr.com 

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