■ Non-core assets sold at a 35 per cent premium to book value
■ Deal with Telford Homes at Poplar Business Park
■ Strong demand for building land continues
The core business of Workspace (WKP) is to provide office space for small and medium-sized businesses in and around London. But it has substantially boosted its returns over the past couple of years by redeveloping its better located sites. This typically involves gaining planning consent for housing and then signing a deal with a housebuilder. The sale of the first element of its Poplar Business Park scheme in East London to Telford Homes (TEF) is a good example.
It works as follows: Telford gets to build 170 apartments, while Workspace receives a cash payment of £16.3m once vacant possession has been achieved (expected in February 2015), as well as 8,000 square feet of new industrial space at no extra cost. On top of that, Workspace can claim 35 per cent of profits on any private residential sales in excess of £730 per sq ft.
Offloading non-core assets has also proved lucrative. Last month Workspace disposed of a portfolio of industrial estates for £44.3m. Comprising 281,500 sq ft of space across 10 sites in places like Lewisham, Barking and Ilford, the portfolio was sold at a 35 per cent premium to the March 2014 valuation.
Investec says...
Buy. The sale of 10 non-core sites added nearly 8p to net asset value per share. The sale is marginally earnings dilutive in the short term, but higher returns can be generated by recycling capital into Workspace's core business-centre portfolio over the longer term. In fact, we are assuming capital investment of £64m by March 2016. Following the disposals, the net loan-to-value ratio should fall from 30 to 27 per cent by the year-end in March 2015. Expect adjusted net assets of 585p for the coming year-end and 649p for March 2016.
Liberum says...
Buy. Workspace has a strong pipeline of properties, and has already shown its ability to improve both pricing (rents) and density. At the March year-end, committed developments had a weighted average rental value (ERV) of £27 per sq ft. The company says it can achieve investment returns of 12-14 per cent off those rents, but there is evidence to suggest that new lettings are being signed at levels more than 25 per cent higher. We are nonetheless forecasting only 8 per cent growth in rental values for the current year, which gives adjusted NAV of 602p by March 2015, rising to 707p the year after.
