Mapeley. Run to run property

Transcription

1 Mapeley Run to run property Annual Report 2007

2 Run to run property The size and diversity of our property portfolio enables us to develop significant property management expertise, first-hand knowledge of regional markets, relationships and contacts with local owners, brokers and occupiers and an understanding of the needs and behaviours of public and private sector tenants. Contents 01 Financial and operational highlights 02 What we do 03 How we do it 10 Chairman s and Chief Executive Officer s statement 14 Finding value and adding quality 16 Business review 26 Corporate Responsibility 30 Financial Highlights 31 Financial Review 37 Board of Directors 38 Directors Report 42 Directors Responsibility Statement 43 Corporate Governance 47 Remuneration Report 51 Independent Auditors Report 52 Consolidated income statement 53 Consolidated statement of changes in equity 54 Consolidated balance sheet 55 Consolidated cash flow statement 56 Notes to the audited consolidated financial statements 94 Additional Information 96 Company details

3 Financial and operational highlights FFO ( m) FFO growth 23.4% 0 Dividend (p) Dividend growth 11.9% EBITDA ( m) EBITDA growth 23.4% Revenue ( m) Revenue growth 8.4% _ Total asset value of 2.3 billion _ Total portfolio value of 2.1billion _ million of acquisitions _ Loss before tax of million Mapeley Limited Annual Report

4 What we do 1. Own and manage a diverse portfolio of properties 2. Facilities management services running buildings smoothly 3. Lifecycle works investing in and protecting the value of our estate 4. Projects changing the working environment of our clients 1. Own and manage a diverse portfolio of properties We own freehold assets and we also manage leaseholds occupied by our tenants. Freehold properties exist in both our Outsourcing and Direct Property Investment Portfolios. With our leasehold assets, our clients occupy the assets as tenant but we carry out all interaction with third-party landlords on their behalf and also carry principal risk on the financial impacts of the lease. 2. Facilities management services running buildings smoothly We provide a full range of accommodation-related services to tenants in our portfolio ranging from catering and cleaning to childcare and security services. We do not self-deliver these services, they are provided by our facilities management partners. Servicing our outsourcing clients estates gives us valuable insight into their occupational strategies and enables us to mitigate vacancy risk. 3. Lifecycle works investing in and protecting the value of our estate Lifecycle refers to the fabric of the building and lifecycle works range from boiler replacements to roofing and cladding works. Lifecycle works are carried out to maintain and where possible to enhance the value of our assets by ensuring they are fit for their purposes. We are required to carry out planned maintenance, reactive maintenance and lifecycle replacement to the HMRC estate under our outsourcing contract. 4. Projects changing the working environment of our clients From refurbishment works to modernise space, to feasibility studies to increase space capacity and provide sustainable property solutions, we adapt and fit-out our tenant s space in response to their changing occupational needs. Most of the project works we perform are as a result of our obligations to HMRC under the outsourcing contract, however we also provide project services to new tenants taking space in our estate and to our existing tenants in the DPI Portfolio. 5. Customer services meeting customers needs We operate a 24 hour client help desk for our outsourcing clients and receive over 9,000 calls per month in relation to the provision of facilities management and projects services. Our clients benefit from a quality assured service answered by specialist call handlers who are accustomed to dealing with our diverse estate and familiar with our clients building-related issues. Through excellent customer service we aim to build and maintain strong relationships with our clients to secure their long-term occupation of our assets. 6. Acquire new assets growing Mapeley s platform Be it through winning new outsourcing contracts or acquiring assets on a direct basis in the investment market, we aim to increase our scale and coverage. Our regional operating platform which gives us a presence in every major town and city in the UK is easily leveraged to support growth by acquisition of new assets freehold or leasehold, to generate shareholder value. Mapeley Limited Annual Report

5 How we do it 5. Customer services meeting customers needs 6. Acquire new assets growing Mapeley s platform Freehold assets We acquire freehold assets either as part of bundled outsourcing contracts or directly in the investment market. We are focused on acquiring good quality assets let to strong credit tenants. We have a proprietary database of over 10,000 assets, with approximately 4,500 potential targets, which enables us to make direct approaches to landlords to acquire these assets. Our reputation as being one of only a few providers of real estate outsourcing solutions, enables us to gain insight into new outsourcing deals ahead of our competitors. Leasehold assets We operate leasehold assets occupied by our clients on a principal basis. Rents payable to third-party landlords represent a cost to Mapeley which we strive to keep as low as possible. Our specialist team carried out 258 rent reviews and lease renewals in 2007 on the leasehold estate. We aim to keep our rental payments lower than the contractual annually indexing income we receive from our clients to generate profits. Facilities management services We currently use one facilities management provider to deliver facilities management services to our outsourcing clients, HMRC and IPS. By using one provider we benefit from pricing advantages through scale. We aim to keep these costs as low as possible to generate a profitable spread between the income we receive from our clients and what we pay to the facilities management partner. Construction and fit-out We use a framework of contractors and suppliers to carry out the construction and fit-out services hence benefiting from further economies of scale. These services are provided for a small margin to our outsourcing tenants. We also leverage our capabilities and in-house expertise in this area by providing services to tenants in our DPI Portfolio and new third-party tenants at market prices. Portfolio Freehold Property Leasehold Property FM Service Construction and Fit-out HMRC Abbey Identity and Passport Service Direct Property Investment Mapeley Limited Annual Report

6 It s about know-how... Mapeley Limited Annual Report

7 &... it s about relationships Market capability We are present in every major town and city in the UK and own or operate a diverse estate of some 1,689 assets. We carried out 339 rent reviews and lease renewals in 2007 as both landlord and tenant. The operational aspects of our business provide us with unrivalled, in-depth specialist local market knowledge which enables us to drive superior returns through our regional operating platform. From finding creative solutions to a client s catering requirements, to using rent review information to make an off-market acquisition approach to a third-party landlord, our diversely skilled team work tirelessly to leverage our operating capability to find solutions for our clients, mitigate risks and drive returns. We are run to run property. Customer relationships Understanding our clients needs is at the core of what we do. Our acquisition strategy of occupier inertia our belief that chosen clients will remain in occupation of their buildings requires strong day to day relationships. 93% of our income is generated from UK Government and investment grade corporate clients. We focus on these high quality clients as we perceive them to have significant and complex real estate requirements which we can service, creating value for both parties. We employ a partnership approach to secure and build strong and trusting relationships with our clients. Run to run property Our diversely skilled team work tirelessly to find solutions for our clients. Mapeley Limited Annual Report

8 It s about balance... Asset management Owning and operating a diverse estate of some 1,689 assets creates numerous opportunities for generating value. We refer to this as optionality. From disposing of assets which become vacant to securing upfront cash payments for extending leases with third-party landlords, we deploy pro-active asset management strategies to generate recurring revenue streams, often working with our clients and sharing in the profits created. We have a controlled pipeline of asset management opportunities an excellent source of organic growth. & Balanced business We are different to a lot of property companies. As well as acting as landlord, we also act as tenant through our leasehold portfolio. This gives us a competitive advantage as we see both sides of the property market. Our target markets are the UK regions which tend to be more stable compared to London. Our portfolio is balanced and defensive. We generate 93% of our income from UK government and investment grade tenants, we have a 10 year average lease length and one of the lowest vacancy rates in the sector at 3.5%. Mapeley Limited Annual Report

9 ... it s about performance Working with our clients We deploy pro-active asset management strategies to generate recurring revenue streams. Mapeley Limited Annual Report

10 Because of our truly portfolio, unique kno of our markets, strong with tenants and our platform and capabil well placed to deliver shareholder returns. Mapeley Limited Annual Report

11 nationwide wledge relationships operating ity, we are sustainable Mapeley Limited Annual Report

12 Chairman s and Chief Executive Officer s statement Overview Mapeley had solid 2007 operating results. Our underlying business performed well. Funds from operations (FFO), our key measure of underlying performance, grew by 23%. Milestones _ FFO growth of 23% from 45.7 million to 56.4 million _ Dividend growth of 12% from 168 pence per share to 188 pence per share _ Investment property acquisitions of million _ Occupier inertia strategy proving successful with lease extensions and roll-overs _ Refinancing of our 257 million revolving credit facility due April 2008 Jamie Hopkins Chief Executive Officer Creating a sustainable business to provide our shareholders with a secure income stream and long-term value is at the core of everything we do. During the first half of the year we acquired 180 million of high quality assets let to strong credit tenants all located throughout the UK. The second half of the year saw us take a more cautious approach to acquisitions, given the changes in the capital markets and the knock-on effects to UK real estate. We benefited from asset management opportunities arising from the scale and diversity of our estate of some 1,689 assets covering 2.4 million square metres. We were able to enhance returns through rigorous management of our leasehold portfolio and through our asset management strategies by either disposing of vacant assets or securing new third party income. Mapeley Limited Annual Report

13 Our financial performance was reinforced by the resilience of our income stream which was maintained throughout % of our income continued to be derived from government and investment grade corporates such as Microsoft and British Telecom with 70% of our income being subject to fixed contractual uplifts. We also have a 10 year average lease length across the portfolio and our vacancy rate, one of the lowest in the sector, continues to remain stable at just 3.5%. Our strategy Our aim is to be the leading owner and operator of regional UK real estate let to strong credit quality tenants such as the UK Government. We enter into property outsourcing contracts with high quality counterparties, which usually involve the acquisition of freehold assets, the management of their leasehold interests and often the provision of property-related services, such as facilities management (cleaning, security, maintenance). We also acquire property on a direct basis from the investment market. Our investment strategy is not predicated on strong rental growth but on owning assets let to tenants who we believe will remain in our buildings, which we refer to as occupier inertia. This applies to both our outsourcing contracts as well as our direct property acquisitions. Our objective is to secure high quality income and maintain it. Our occupier inertia strategy was further proven during By fully understanding our tenants occupational strategy and delivering focused and pro-active asset management we are able to keep tenants in our buildings. For example, over the year, 32 leases in our DPI portfolio were subject to a break clause or a lease expiry. 25 of the 32 leases, representing 95% of rent roll, were extended by tenants. We continue to exploit the competitive advantage we have built by acting as both landlord and tenant in every major town and city in the UK. We manage the leasehold assets, occupied by our clients, on a principal basis with the aim of ensuring the rents we are responsible to pay to third party landlords do not grow faster than the indexed contractual income our clients pay us. In addition this insight provides us with real data points to best position our property interests in each of these towns whether as landlord or tenant and also provides us with further acquisition opportunities. Performance review We have a presence in every major town and city in the UK, and, for the most part, operate outside London. We have a profitable operating business which runs in tandem with an integrated real estate investment business. Given our geographic diversification, we are less impacted by the changes in occupier property demand seen in Central London. Rents in the UK regions tend to be more stable with only modest rental growth. The stable nature of these markets works to our advantage in operating our leaseholds as where we are negotiating with third party landlords our goal is to hold rents down in order to minimise our costs. Our aim is to produce a profitable income over cost spread between the amounts our clients pay us for occupation of a property, versus what we pay out to the landlords. For the period since we started operating the HMRC and Abbey contracts to 31 December 2007 on a like for like, mark to market portfolio basis, we have managed to maintain an average increase in rental costs of only 2% while receiving a corresponding increase in income of 3.2% per annum. Revenue from Government and investment grade tenants 93% Average lease length 10 years Occupancy 96.5% Assets under management 1,689 Office rental value growth (annual %) Central London South East Rest of UK Forecast Source: IPD, CB Richard Ellis Mapeley Limited Annual Report

14 Chairman s and Chief Executive Officer s statement continued Re-letting of Elphinstone House, Glasgow, to new government tenant _ A six storey modern office with 15 car parking spaces, a leasehold asset in the Abbey portfolio _ Lease due for expiry in 2015 with annual rent of 615,000 _ Abbey exercised its right to vacate this asset early by serving the requisite 12 months notice, to take effect from August 2007 _ Mapeley promptly let the 3,133 sq m of office space to the Government of Scotland upholding the strong tenant credit of the asset _ Financial effect of the deal was enhanced income over the term of the lease totalling 1,298,212 Abbey Outsourcing contract _ Outsourcing contract closed in 2000 _ Transaction included freehold and long leasehold properties as well as rack-rented leasehold properties _ Portfolio spread across 520 towns and cities throughout the UK _ Purchase and leaseback agreement of 20 years _ 595,000 sq m of accommodation including bank branches, offices and call centres IPD s analysis of our performance in respect of 2006 rent reviews on our leasehold estate once again demonstrates that we have beaten the market by experiencing only 1.4% rental growth on our leasehold portfolio versus the IPD benchmark of 2.1%. This continued out-performance creates organic growth for Mapeley and is generated by our specialist and dedicated in-house property team. Our tenacity and focus on chasing down and minimising every penny of cost continues to drive returns across our business. During 2007 we generated capital receipts of 20.6 million which comprised of 9.1 million of asset management receipts and 11.5 million of disposal proceeds, in line with our budgeted expectations. Asset management receipts are generated from our leasehold portfolio where we typically receive upfront cash premia from third party landlords in exchange for extending leases. Disposals are made when freehold properties become vacant, either due to our clients occupational strategies or through an asset management initiative by Mapeley. Typically, under the contractual arrangements of the outsourcing transaction, when a notice to vacate an asset is served we receive 12 months notice. This allows sufficient time to implement our strategy. We have a large degree of visibility into our clients occupational requirements given our day to day relationships and the assistance and advice we contribute to their estate management strategies. To this extent we have a two to three year pipeline of potential opportunities for capital receipt generation. These capital receipts are visible and predictable and provide a solid and recurring source of organic growth. From the commencement of our outsourcing contracts in 2001 to 31 December 2007, we have generated million (2006: million) from capital receipts. The benefit of the inherent flexibility in our outsourcing contracts enables us to create and manage flows of returns in this way. Since our last valuation at 30 September 2007 we have experienced a decline in values of 4.3% across our portfolios with the largest fall coming from the DPI Portfolio which fell by 7.7% and experienced an adverse yield shift of 56 basis points in line with IPD s price index. In 2007 we acquired 23 assets totalling million at an average net initial yield of 6.4%. This brings the total Direct Property Investment Portfolio to million with an average net initial yield of 6.9%. A significant purchase during the year was the 62 million acquisition of Elinia House in Cardiff, one of three key data centres occupied by BT. This lease contains fixed annual uplifts in rent and runs until Mapeley Limited Annual Report

15 Livingston, Scotland, Acquisition _ DPI Portfolio acquisition for 23.5 million _ Net internal area of 9,504 sq m _ Net initial yield of 6.9% _ Let to Scottish Water with lease expiry in 2015 _ Annual rent of 1,620,000 Results and dividend During 2007 we achieved growth in funds from operations of 23.4% enabling an increase in our dividend of 11.9%. For the fourth quarter, we announced a dividend of 47 pence per share. Our loss before tax of million was directly affected by non-cash revaluation losses of million. However revaluation losses taken to the income statement do not impact our cash flows. People We would like to thank all the staff at Mapeley for their continued hard work and focus during It is a tremendous achievement that we were able to produce these results given the challenging macro environment. We put this down to the combined efforts and creativity of our people. Current trading and outlook In March 2008 we completed the refinancing of our 257 million Revolving Delta acquisition facility. This has been replaced with a new 152 million seven-year term facility and a separate 60 million facility maturing in April The balance of the repayment was made with cash from within the business. Following this refinancing the average total cost of borrowing across the Group is 5.7%. We expect the strong credit worthiness of our tenants to support our cashflows and expect our vacancy rate to remain stable. We also expect to continue to enhance the performance of our portfolio by asset management initiatives and through a continuation of high success rates for achieving lease roll-overs and re-gears. With regard to new acquisitions we are continually reappraising new opportunities and sources of capital to drive growth. We will also continue to build our database of assets and have a strong pipeline of acquisition opportunities to exploit, when we feel the opportunity is right. We look forward to Wes Edens Chairman Jamie Hopkins Chief Executive Officer Mapeley Limited Annual Report

16 Finding value and adding quality 01 Aberdeen, refurbishment project The third floor of this asset in the HMRC Portfolio had become vacant and Mapeley had successfully let the vacant space to a third-party tenant. Mapeley was completing a refurbishment of the space and the tenant requested that Mapeley undertake the fit-out of the office for them for an additional revenue of 30,000. This saved the tenant both time and money and demonstrates the added value that Mapeley is able to offer tenants and the additional income which can be leveraged from ordinary course activities. 02 Glasgow, advertising hoarding Portcullis House, Glasgow is a leasehold property within the HMRC Portfolio. The building adjacent to Portcullis House had been demolished exposing a party wall gable that faces the M8 motorway. Mapeley secured a contract to display an advertising banner whilst the gable is exposed in this highly visible location. 03 Galashiels acquisition The Maxwell, Galashiels is a 846 sq m office building occupied by Scottish Enterprise, a Government tenant, until The property was added to our DPI Portfolio at a purchase price of 1,470,000. Rental income is 100,000 per year equating to a net initial yield of 6.8%. 04 Peterlee, acquisition Occupier inertia is a key strategy for Mapeley. EDS occupy a building within the DPI Portfolio located in Peterlee. The property was purchased with a lease expiring in 2019, with a tenant break option in EDS has a good relationship with Mapeley and occupy several buildings on our estate. In 2007 EDS did not exercise their break option effective in 2009 resulting in the lease rolling-over and continuing until The result of this roll-over was both an increase in term certain income and value. 05 Liverpool acquisition The Triad, Bootle was purchased as an addition to Mapeley s DPI Portfolio. The tenant is the Secretary of State, a UK government client. The lease is due for expiry in 2027 giving Mapeley an annual rent of 1,700,000 for the next 20 years. The cost of the property which covers 19,536 sq m was 24,460,000 with a net initial yield of 6.9%. 06 Notting Hill, London, disposal This disposal involved a partial sale of a freehold asset in Mapeley s Abbey Portfolio located in Notting Hill in London. The asset consisted of both residential and retail parts. Mapeley kept the Abbey retail unit but disposed of the remaining retail and residential parts to a developer, creating a net cash profit of 1.1 million. This disposal was in Mapeley s pipeline of potential disposal opportunities for two years. 07 London, chiller replacement Mapeley is responsible for replacing and maintaining the plant and services installations within Euston Tower, a 35 storey tower in Central London. This leasehold asset is part of the HMRC Portfolio. Although only two chiller units are required to provide a suitable level of cooling in the office areas it is important to provide additional units to meet peak seasonal demands and system resilliance. Mapeley replaced one of the existing chiller units and extensively refurbished a second. 08 Southampton, project services Grenville House, Southampton is a freehold property within Mapeley s DPI Portfolio. Mapeley converted the ground floor redundant pub to two new retail units and refurbished and extended the upper office floors. The building extension increased the net lettable area by 12.7% increasing the total building size by 161 sq m. Two pre-let opportunities were in place prior to works commencing; one for Costa Coffee in one of the ground floor retail units and one to BPP Holdings Plc (a professional education company) on the ground and first floor. 09 Jersey acquisition 22 Colomberie, Jersey was acquired in PwC are tenants and this is their only office in Jersey. The lease runs until 2019 with a break option in Rental income for the 1,560 sq m area is 350,000 per annum. The purchase price was 4,880,000 with a net initial yield of 7%. 6.9% Initial yield Mapeley Limited Annual Report

17 sq m of office space Mapeley Limited Annual Report

18 Business review With 1,689 assets spread over 2.4 million sq m of UK real estate our options for creating value are many and varied. Through rigorous management of our estate, asset management strategies, re-lettings, extensions and renewals of leases, Mapeley drives longterm returns. Total portfolio value 2.1bn Milestones 2007 _ Continued to outperform IPD on the leasehold estate, driving organic growth _ 8.6 million of disposal profits generated from the sale of vacant assets _ 266 rent reviews carried out on estate _ 41.9 million spent on estate enhancement Overview Mapeley Limited (Mapeley, the Company or the Group) is a Guernsey-based property investment and outsourcing company which owns, manages and operates a portfolio of properties located throughout the entire UK, covering some 2.4 million square metres and with a presence in every major town and city. Mapeley Estates Limited, a wholly owned subsidiary of Mapeley, provides a complete range of management services to Mapeley s portfolio and its asset-owning subsidiaries. Mapeley drives returns through managing property risks and owns 2.1 billion of real estate. In addition to owning real estate Mapeley also has an operating business. As part of its outsourcing contracts it manages leasehold assets occupied by its clients, provides facilities management services and project construction services. Mapeley s portfolio is split between its Outsourcing and Direct Property Investment Portfolios ( DPI ). Mapeley acquires freehold assets either as part of bundled outsourcing contracts or directly in the investment market, and is focused on acquiring good quality assets let to strong credit tenants. With leasehold assets, Mapeley s clients commit to and pay for the benefit of occupation of these buildings and Mapeley has the corresponding financial exposure to the underlying landlord through the lease. Mapeley negotiates rent reviews and lease renewals as principal with third party landlords in order to manage costs. Mapeley has created a spread of income received from clients over costs paid to landlords through the management of these leasehold assets. The unique insight into the markets the business operates in, gained by acting as both landlord and tenant, enables the maximisation of returns. Mapeley provides a full range of facilities management services, ranging from catering and cleaning to childcare and security services, to the HMRC and IPS estates as part of the bundled outsourcing contracts. One facilities management provider delivers these services on behalf of Mapeley. By consolidating the provision of the services to one partner Mapeley benefits from pricing benefits through scale. Servicing the outsourcing clients estates gives valuable insight into their occupational strategies and enables the mitigation of vacancy risk. Funds From Operations 56.4m Q Q Q Q Mapeley Limited Annual Report

19 The Group s aim is to become the leading owner and operator of UK regional commercial real estate let to Government and investment grade tenants. The credit quality of tenants is of fundamental importance. A list of top 10 tenants and their contribution to total revenue is set out below. Save for the UK Government and Abbey, Mapeley does not have any significant exposure to any one client or sector. These clients are targeted as their occupational requirements are often complex and Mapeley estimates that they will remain in occupation of their assets for the long-term. 93% of the portfolio income is from government or investment grade tenants and the portfolio vacancy rate of only 3.5% is low and stable. The geographic spread of the portfolio as at 31 December 2007 as per IPD regions is as follows: In total, the estate covers 2.4 million square metres and 1,689 assets. Through the flexibility inherent in the outsourcing contracts, a portfolio of this size creates many opportunities for creating value through asset management, disposals, relettings and contract and lease extensions. Percentage of Tenant total group revenue HMRC 50.1% Abbey 20.8% Other government and local authorities 5.9% Identity and Passport service (Government) 5.6% British Telecommunications plc 2.0% Microsoft Ltd 1.7% Diligenta Ltd* 1.0% Zurich Assurance Ltd 1.0% WS Atkins 0.9% KPMG LLP 0.6% * Subsidiary of Tata Consulting. By value By value By value of office of retail of other Number of By area assets assets assets Total Location properties sq m m m m m City of London 12 25,493 41,354,545 41,354,545 East Midlands , ,717,273 13,429, ,146,473 Eastern , ,151,727 19,676, , ,564,391 Inner London ,158 30,475,000 38,552, ,091 70,026,791 London-Mid Town 6 28,182 London West-End 14 27,364 26,000,000 6,241,000 32,241,000 North East , ,762,364 5,844, ,606,464 North West and Merseyside , ,488,182 28,863, ,351,782 Northern Ireland 53 42,359 16,956,364 3,634,700 20,591,064 Outer London ,913 99,099,091 37,714, ,813,491 Scotland , ,195,000 22,482, , ,786,491 South East , ,813,182 41,265, ,078,182 South West , ,472,091 21,354, , ,926,091 Wales , ,778,818 13,058, , ,618,836 West Midlands , ,795,273 21,957, ,752,373 Yorkshire and Humberside ,340 96,224,818 13,999, ,224,218 Total 1,689 2,379,263 1,825,283, ,072,100 2,726,364 2,116,082,192 Mapeley Limited Annual Report

20 Business review continued HMRC Portfolio 563.4m Portfolio acquired in 2001 as part of a bundled 20-year outsourcing contract containing freeholds, leaseholds and the provision of facilities management and project fit-out services. _ 136 freehold or long leasehold properties _ 371 leasehold properties _ Portfolio occupancy: 98.1% Abbey Portfolio 556.2m Portfolio acquired in 2000 as part of a 20-year outsourcing contract comprising freehold and leasehold assets. _ 367 freehold or long leasehold properties _ 656 leasehold properties _ Portfolio occupancy: 89.7% Portfolio review The Group s real estate portfolio is split into two distinct segments, namely Outsourcing Contracts and Direct Property Investments ( DPI ), however the characteristics of the assets in both portfolios are very similar. As at 31 December 2007, Mapeley owned and managed 1,689 properties with a property portfolio value* of 2.1 billion. This valuation covers only the 595 freehold and valuable long leasehold properties which Mapeley owns. Of these 1.8 billion, by value, and 237, by number, are office assets and 0.3 billion (358) are retail and other. The remaining 1,094 are rack-rented occupational leasehold interests where Mapeley acts as tenant on behalf of its clients through its outsourcing contracts (see Outsourcing Contracts below for further detail on these portfolios). These rack-rented leaseholds do not carry any value in Mapeley s financial statements, they are short leases where the rent reserved under the lease is close to the market rent for the property and are typically subject to regular, five-yearly, upwardonly rent reviews. The geographic spread of the portfolio by value and by area as at 31 December 2007 as per IPD regions is given on page 17. a) Outsourcing Contracts Real estate outsourcing involves the transfer of an organisation s property and the risks associated with occupying, managing and servicing that property. Entering into a real estate outsourcing contract with Mapeley provides occupiers with real estate platform solutions which enable: 1 Transfer of all risks relating to real estate, leaving the occupier better placed to focus on its core business 2 Price certainty at pre-agreed costs 3 Release of capital where asset transfer occurs 4 Occupational flexibility through pre-paid vacation rights 5 Improved customer service. There is a degree of additional activity in the Outsourcing Contracts versus the DPI Portfolio, given the existence of leasehold assets, facilities management and project construction services. In the case of HMRC and Abbey, these are 20 year agreements with cost certainty and limited pre-paid rights to vacate, allowing the clients flexibility in their occupational requirements over the term of the contracts. Mapeley benefits from any difference between the income it receives from its outsourcing clients and its outgoing costs to third parties, such as rent and payment for facilities management and project construction services. Rental payment obligations, which reflect the open market rent it pays to its landlords, are by far the most significant of these costs. Mapeley s income rebases upwards each year whereas the outgoing rental costs which Mapeley pays out to third party landlords are reviewed typically on a five-yearly basis. Mapeley generates returns to the extent it minimises rental uplifts on rents payable to a lower level than contracted rental income growth of either 3% or RPI (in the case of Abbey and HMRC respectively). In 2007, on a like for like and mark to market basis, the annual growth in outgoing rental liabilities paid by Mapeley since acquiring these leases was 2.0% compared with average income increases of 3.2% per annum. * property portfolio value is defined as the Group s property assets as valued by one of the Group s valuers, CBRE or Knight Frank, or one of the Directors Mapeley Limited Annual Report

21 IPS Portfolio 68 sites Portfolio acquired in Contract includes the acquisition, fit-out and servicing of properties throughout the UK. _ Portfolio includes only leasehold assets DPI Portfolio m IPD has analysed the Group s performance on the leasehold portfolio for 2005 and 2006 rent reviews relative to its benchmark of performance. For 2005 and 2006 rent reviews Mapeley continued to outperform the IPD benchmarks of 2.9% and 2.1% respectively by incurring only 0.9% and 1.4% annual rental growth on the leasehold portfolio. As 2008 progresses the performance of further 2006 rent reviews will be reported whilst a meaningful number of 2007 rent reviews settle. The effective management of the leasehold portfolio and a consistent focus on limiting, and where possible, reducing costs such as rent, service charge, other property-related expenditure and facilities management services costs (in the case of HMRC only) are key drivers of FFO growth for the Outsourcing Contracts. Real estate outsourcing deals are difficult to predict due to the scale and complex nature of outsourcing transactions, Mapeley is one of very few operators currently in the UK with the capacity, specialist knowledge and ability to undertake such large deals. So far in the UK the majority of outsourcing deals have been transacted with either public sector or major corporates. The likelihood of corporate outsourcing transactions could potentially increase in times of economic difficulty when corporates seek to become more efficient and shed non-core risk, such as property. Catering service tender for HMRC estate _ Mapeley is responsible for leading and implementing tenders in relation to the procurement of services across HMRC s estate _ Procurement of national catering contractor for the HMRC Portfolio to incorporate standardisation across the estate including core products, branding signage, menus and tariffs _ Procurement of a contractor who could comply with the Public Sector Food Procurement Initiative and demonstrate their commitment to the environment, healthy eating, local suppliers and waste reduction _ No capital investment required by Mapeley or HMRC _ Subsidy payments envisaged to be completely eliminated within the first year of the contract saving the client approximately 300,000 per year Portfolio consists of assets acquired directly in the investment market. _ 92 freehold or long leasehold properties _ Portfolio occupancy: 98.5% Mapeley Limited Annual Report

22 Business review continued Sustainable drinking solution to provision of water to HMRC estate _ European tender and subsequent installation of mains fed water units across the HMRC estate _ Problems associated with bottled water eradicated e.g. storage, lifting large bottles, environmental waste _ Financial savings made due to reducing numerous suppliers to one provider _ Reduction in fuel and emissions due to eliminating bottled water deliveries HMRC Outsourcing contract _ Outsourcing contract won in 2001 _ Transaction included freehold and long leasehold properties as well as rack-rented leasehold properties and the provision of facilities management and construction fit-out services to the estate _ Purchase and leaseback agreement of 20 years _ 1.5 million sq m representing offices, customer contact centres and other facilities _ Portfolio spread across 279 towns and cities throughout the UK Within the Outsourcing Contracts segment, the Group holds three portfolios, as described below: i. Her Majesty s Revenue & Customs (HMRC) Portfolio Assets in the HMRC Portfolio are held in the financial statements as Property, Plant and Equipment given the existence of the outsourcing contract which comprises these assets. The HMRC Portfolio was acquired in The transaction involved the acquisition of freehold and long leasehold properties and rack-rented leasehold properties under a purchase and leaseback agreement for a 20-year duration. This portfolio totalled 1.5 million square metres, representing the majority of HMRC's UK property, including offices, customer contact centres and other facilities located in 279 towns and cities across the UK. In addition, the Group provides comprehensive property and facilities management services to HMRC. These services include maintenance, life-cycle replacement, cleaning, help desk, security, catering, childcare, health and safety, utilities, equipment management, management of removals (churn), vending and landscaping. HMRC pays the Group a unitary service charge on a quarterly basis which covers not only the charge for the accommodation, but also all services that are provided. The Group has retained responsibility for, but sub-contracted, the performance of the majority of its obligations to provide services (other than property management services) on terms that reflect and are consistent with the Group's underlying obligations to HMRC. Mapeley has maintained the property risk in the outsourcing contracts but passed on risks relating to the provision of facilities management services, such as wage inflation. ii. The Abbey Portfolio The Abbey Portfolio was acquired in The transaction involved the acquisition of freehold, long leasehold and rack-rented leasehold properties under a purchase and leaseback arrangement for a 20-year duration. At the time of acquisition, the portfolio totalled 595,000 square metres of accommodation, representing substantially all of Abbey's UK occupational portfolio. The properties included bank branches, offices (including Abbey's headquarters) and call centres located in 520 towns and cities across the UK. iii. The Identity and Passport Service (IPS) Portfolio In March 2006, Mapeley won the Identity and Passport Service Authentication by Interview outsourcing contract. The Identity and Passport Service is an Executive Agency of the UK Government s Home Office. This contract includes the acquisition, fit-out and delivery of serviced office accommodation for 68 interview offices throughout the UK. The contract is for an initial term of up to five years. Work commenced on this contract in early As at 31 December 2007, 67 of the 68 assets were operational with the remaining office mobilised during Mapeley Limited Annual Report

23 b) Direct Property Investments Portfolio (DPI Portfolio) Mapeley also acquires single property assets and portfolios into its Direct Property Investments Portfolio (DPI Portfolio). These assets are similar to the individual freehold assets Mapeley has acquired under its outsourcing contracts; they are good quality, regional office buildings located throughout the UK. The key acquisition criteria for these assets is the quality of the building, the type of tenant, the strength of the tenant s covenant, the acquisition yield and Mapeley s assessment of whether the tenant is likely to remain in occupation of the building. Acquisitions during 2007 ranged in cost from 1.0 million to 62.0 million. During 2007, the Group acquired 23 freehold or long leasehold properties at a cost of million, and at an average net initial yield of 6.4%. As at 31 December 2007 the total DPI Portfolio was valued at million and the current yield on the portfolio is 7.7%. Approximately 40% of the acquisitions made in 2007 were sourced from either Mapeley s proprietary acquisition database or by direct approaches to existing owners. At the year-end, properties in the DPI Portfolio were 98.5% let and income producing on fully repairing and insuring leases to central and local Government and major corporate tenants. The average unexpired lease length across the DPI Portfolio was 8.2 years. Re-letting of London asset One of the benefits of entering into an outsourcing contract with Mapeley is the occupational flexibility purchased by clients in respect of their ongoing accommodation requirements and estate strategy. This example involved the letting of an asset in our HMRC Portfolio where we supplemented HMRC income with income from a quasi-governmental client. New Kings Beam House is a leasehold asset in the HMRC Portfolio located in central London on the South Bank. HMRC exercised their right to vacate part of this asset serving the contractually required 12 months notice effective for departure on 31 March Under the terms of the lease Mapeley is responsible to the third party landlord for rental payments until expiry at the end of Given our day to day relationship with HMRC we were aware of their intention to vacate. We targeted a tenant, a quasigovernment organisation, who were interested in taking up the lease but who required occupation of the asset three months before HMRC were due to vacate. As a result of our excellent relationship with HMRC we were able to relocate HMRC out of New Kings Beam House three months early to facilitate the new letting. The letting matches our liability to the third party landlord extinguishing the potential risk created by HMRC s vacation. Mapeley Limited Annual Report

24 Business review continued Rent Reviews 339 Lettings 41 FM services provided 47.6m Portfolio occupancy rate (%) c) Portfolio valuations Mapeley s portfolio is valued on a quarterly basis by independent valuers and 100% of each portfolio is valued at each valuation by either CB Richard Ellis Limited ( CBRE ), Knight Frank LLP ( Knight Frank ) or the Company s Directors (see notes 10 and 11 to the financial statements for classification of these assets). As at 31 December 2007, the Group's total Property Portfolio had a value of 2,123.5 million (2006: 2,046.2 million) generating total revenue of million during the year (2006: million). Of this, million of rental income was generated from the Group's portfolio of 1,689 properties (2006: million from 1,683 properties). Over 93% of the Group s income was generated from Government and investment grade tenants. On a like for like basis the value of the total portfolio fell from 2,031.3 million to 1,920.6 million between 31 December 2006 and 31 December As between 30 September 2007 and 31 December 2007, on a like for like basis the value of the total portfolio fell by 94.7 million from 2,210.8 million to 2,116.1 million, representing an adverse yield shift of 42 basis points applied to the portfolio by the Group s valuers. i) HMRC Portfolio: The value increased by 0.6% to million (2006: million). During 2007 Mapeley retendered for valuers for this portfolio. As a result Savills, who had historically valued the portfolio were replaced by CBRE. As at 31 December 2007, the HMRC Portfolio had a value of million (31 December 2006: million). The current yield on this portfolio at 31 December 2007 was 8.2% (2006: 8.4%). As at 31 December 2007 the HMRC Portfolio comprised 136 freehold or long leasehold properties, (31 December 2006: 138) and 371 rack-rented leasehold properties (31 December 2006: 380). Portfolio occupancy (based on area) was 98.1% at 31 December 2007 (31 December 2006: 98.9%). ii) Abbey Portfolio: The value fell by 3.4% to million (2006: million). As at 31 December 2007, the Abbey Portfolio (see note 11) had a value of million (31 December 2006: million). The Abbey Portfolio fell in value by 20.1million, 3.5% compared to 30 September The reason for the fall in value was an adverse yield shift of 21 basis points applied to the portfolio by the Group s valuers, in line with market expectations. The current yield on this portfolio at 31 December 2007 was 6.6% (2006: 6.3%). As at 31 December 2007 the Abbey Portfolio comprised 367 freehold or long leasehold properties (31 December 2006: 367) and 656 rack-rented leasehold properties (31 December 2006: 698). Portfolio occupancy (based on area) was 89.7% at 31 December 2007 (31 December 2006: 90.3%). Mapeley Limited Annual Report

25 Queens House, St Albans, Hertfordshire re-gear of existing lease _ Freehold asset in the DPI Portfolio occupied by the Government _ Original lease due for expiry September 2009 _ Worked with the tenant to secure the simultaneous surrender of the original lease and grant of a new 15-year lease with five year rent reviews (no breaks) at existing rent levels _ Capital contribution of 275,000 made towards tenant capital works which enhance the value of the asset _ 750,000 valuation increase as a result of the new, longer lease iii) Direct Property Investments Portfolio: The value increased by 10.3% to million (2006: million). The increase of 92.8 million arose largely from the acquisition of 23 properties into the DPI Portfolio during the year in line with the Group s investment strategy. On a like for like portfolio basis, the 69 properties which Mapeley owned at 31 December 2006 and 31 December 2007, fell in value by 102 million, a fall of 11.4%, reflecting an adverse yield shift of 82 basis points applied to the portfolio by CBRE, the Group s valuers. As between 30 September 2007 and 31 December 2007 on a like for like portfolio basis the value of this portfolio fell by 82.6 million, from 1,079.1 million to or 7.7% reflecting an adverse yield shift of 56 basis points. The current yield on this portfolio as at 31 December 2007 was 7.7% (2006: 6.9%). d) 2008 portfolio events During 2008, Mapeley anticipates the following portfolio events: _ 6 lease breaks exerciseable on the DPI Portfolio on a rent roll of 0.8 million _ 11 lease renewals on the DPI Portfolio on a rent roll of 1.8 million _ 118 rent reviews as tenant in properties in the Group s Outsourcing Portfolio on a rent roll of 22.6 million _ 21 rent reviews as landlord in properties in the Group s total Property Portfolio on a rent roll of 0.5 million _ 68 lease renewals as tenant in properties in the Group s Outsourcing Portfolio on a rent roll of 4.0 million _ 35 lease renewals as landlord in properties in the Group s total Property Portfolio on a rent roll of 1.2 million. Property management The Group regularly reviews national and regional estate strategies in order to take advantage of opportunities to match its property interests to the accommodation requirements of its tenants. During 2007: _ Mapeley settled 207 rent reviews on rack-rented properties in the portfolio as tenant (2006: 187) with an annual rent roll of 54.5 million (2006: 30.4 million). The average increase was 1.6% per annum _ Mapeley completed lease renewals for 51 properties as tenant (2006: 39) with an annual rent roll of 3.2 million (2006: 3.5 million). The average annual increase in rent payable in 2007 was 1% _ Mapeley settled 82 rent reviews as tenant with nil increases (2006: 82) _ Mapeley settled 59 rent reviews as landlord (2006: 45) with an annual rent roll of 20.5 million (2006: 1.6 million). The average increase was 0.9% per annum _ Mapeley completed lease renewals for 22 properties as landlord (2006: 10) with an annual rent roll of 2.6 million (2006: 0.2 million). The average annual increase in rent payable in 2007 was 1.7% _ Mapeley let 41 vacant properties during the year (2006: 44), generating 4.3million (2006: 1.6 million) of additional income and maintained a low vacancy rate of 3.5% across the whole portfolio _ Mapeley spent 41.9 million on repair, refurbishment and construction projects (2006: 36.8 million), to enhance the quality of its estate in an efficient and cost effective manner. Mapeley Limited Annual Report