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

26 Business review continued Capital investment on estate 41.9m Help desk calls 108,093 Employees 132 The agreements with Abbey and HMRC both provide for annual indexation, with a 3% per annum increase in amounts payable by Abbey and an RPI-linked increase on payments by HMRC. As a result, 70% (2006: 76%) of the income Mapeley receives is subject to annual uplifts, with virtually all of the balance of the income being subject to five-yearly upward-only rent reviews. To 31 December 2007, on a like for like and mark to market basis, the annual growth in rental liabilities paid by Mapeley since acquiring these leases has been 2.0% per annum as compared with an increase in income of 3.2%. Services a. Property services Mapeley provides a wide range of facilities management ( FM ) services through its wholly-owned subsidiary Mapeley Estates Limited, to approximately 100,000 of its tenants' employees in 759 buildings. Examples of these services include maintenance and life cycle replacement, security and cleaning, catering and childcare. Mapeley provides FM services to HMRC and IPS under its outsourcing contracts. During 2007 Mapeley s procurement team won two awards in respect of services procured in respect of the procurement of water point of use and childcare services on behalf of HMRC for its estate. The service provision is coordinated through Mapeley s 24-hour help desk. In 2007, the help desk received 108,093 calls (2006: 107,609). Mapeley s ability to offer such services provides it with two important advantages: the ability to pursue other similar transactions where such a service requirement might exist and real time access to and insight into its tenants' changing occupational needs. This means that the Group is well positioned to provide its tenants with appropriate solutions and to manage the estate better through being able to anticipate and predict their occupational requirements. In the year ended 31 December 2007, Mapeley provided services with a value of 47.6 million (2006: 45.2 million). b. Construction and fit-out projects services Mapeley has an extensive in-house projects team who are responsible for carrying out requested capital works projects to the HMRC and IPS estates such as refurbishments, fit-out, space planning and life cycle works. When providing these services Mapeley earns a margin in addition to the unitary charge receivable from HMRC and IPS for its professional services. In addition, Mapeley manages the delivery of refurbishment projects for Mapeley funded projects and for third-party clients. Its proven project management capabilities enables Mapeley to influence and add value to the way its clients use and refurbish their space. In the year ended 31 December 2007, Mapeley carried out repair, refurbishment and construction projects with a value of approximately 41.9 million (2006: 36.8 million). Mapeley Limited Annual Report

27 Our people Mapeley continues to recruit and retain the highest calibre of employees. Mapeley is dedicated to building, rewarding and retaining a diverse, highly skilled and motivated workforce. As at 31 December 2007, Mapeley had 132 employees (2006: 131). Mapeley is committed to providing effective and appropriate learning and development opportunities for all employees. This year, Mapeley successfully rolled out a management development programme which is predominantly aimed at senior managers in the organisation. This is a bespoke programme which focuses on developing leadership and management skills such as coaching, managing performance and personal effectiveness. In recognising that a good induction for new staff is of fundamental importance to the success of the organisation, Mapeley has developed a new induction programme which provides employees with role specific training at an early stage in their career at Mapeley. In addition, the company supports a number of staff to gain professional qualifications through further education. Mapeley continues to review and develop a reward and recognition management strategy. Remuneration and reward packages are externally benchmarked against companies of a similar size and industry. Regear of London asset A key characteristic of our acquisition strategy is occupier inertia our estimation of the probability that our target tenants will remain in occupation of a particular asset. An excellent example of this is a re-gear of a lease within our DPI Portfolio. A year before the lease was due to expire and following extensive negotiations we were able to agree and complete a new 25 year lease with the tenant. We acquired this asset in The property provides good quality office accommodation, located in London and is occupied under a lease due to expire in September Prior to acquisition, we undertook comprehensive underwriting including a detailed assessment of the risk around the shorter income stream and the likelihood that the tenant would wish to remain in the building. Situated close to Westminster and representing economical central London office accommodation we believed the potential occupier inertia to be high. The downside risk was underpinned by excellent redevelopment potential for residential use. This investment opportunity satisfied our other underwriting and financial criteria. Through our regular contact and the excellent relationship we had built with the tenant we agreed a new 25 year lease with a tenant break in 2013 and mutual breaks every five years thereafter. The new lease was secured at no cost to Mapeley and at the same initial rent of 1.8 million per year rising to 2 million per year from September This reflected a net initial yield of 7.3% rising to 8% and an increase in valuation of 4.5 million from the last valuation date. Mapeley Limited Annual Report

28 Corporate Responsibility At Mapeley, we recognise our responsibility to manage the impact of our activities in a socially responsible manner, balancing the needs of our stakeholders with those of the communities in which we work. Committed to CSR Mapeley s commitment to CSR first received external recognition by FTSE4Good in Sustainability and Corporate Responsibility (CR) are also a prime focus for our clients. We work in close partnership with each client to support their sustainability objectives and to influence our supply partners to ensure environmental and socio-economic factors are taken into account in day to day operations. To achieve this goal we follow the core principles in our corporate responsibility policy, focusing on four key areas: workplace, environment, community and marketplace. Mapeley s CR committee comprises senior representatives from relevant areas of the business and is chaired by the Chief Operating Officer of Mapeley. The committee seeks to provide a framework for the range of CR initiatives undertaken in all areas of our business. The objectives of the CR Committee are to: _ Manage and reduce our environmental impacts to support a sustainable future _ Provide our staff with a safe and healthy environment within which to work and build and maintain a positive culture where employee welfare is respected _ Understand the impact our operation has on the local community and identify ways of providing support to communities impacted _ Ensure our business is conducted and goods and services are procured in a fair and ethical way _ Measure our CR performance and benchmark against external benchmarks _ Comply with existing and new legislation where relevant _ Strive to meet good practice in nonregulated areas, integrating biodiversity considerations into our activities, working in partnership with clients, tenants and suppliers The members of Mapeley s CR committee have responsibility for the following stakeholders: _ Investors Head of Investor Relations _ Employees Head of Human Resources _ Clients Head of Customer Services _ Supply chain Head of Procurement _ Environment Environment and Utilities Manager _ Community Head of Business Assurance, Marketing Manager The General Counsel, the Heads of Health and Safety Business Assurance and the Group Financial Reporting Manager have additional responsibility on the CR Committee for areas of health and safety, risk management and internal audit, all of which Mapeley view as key and complementary to sound CR practice. Mapeley has a number of established accredited management systems, which are externally assessed, including: _ Quality (ISO9001) _ Health and Safety (OHSAS 18001) _ Environmental Management (ISO14001) Mapeley Limited Annual Report

29 Overview of 2007: Workplace: 2007 has been a successful year for managing Health and Safety at Mapeley. We have achieved and exceeded our objectives and the OHSAS registration was successfully retained. We have established family friendly policies such as maternity and flexible work policy to enable employees to properly balance work and home life. We offer enhanced maternity provisions with a view to supporting employees who take maternity leave. Our achievements were acknowledged by receipt of the ROSPA Gold Award for a third successive year. In this area our aim has been to embed the principles and practices of good Health and Safety management into our culture and to achieve a more co-ordinated approach to promote continuous improvement. The areas of greatest risk in Health and Safety have received the most significant focus for development. We have continued to develop and deliver our own training packages based on the varied risks that our clients and staff face in the day to day delivery of their responsibilities. The programme of site visits by our Head of Health and Safety and other managers within the service management team continues to internally monitor our effectiveness against legislative and company requirements. Mapeley s Chief Operating Officer has overall responsibility for Health and Safety. We ensure we keep up-to-date with legislation and best practice, to encourage continuous improvement by focusing on the areas of highest risk and to fostering a positive safety culture. We recognise that it is essential to provide equal opportunities to all employees without discrimination. Mapeley s equal opportunity policy sets out the organisation's position on equal opportunity in all aspects of employment, including recruitment and promotion, and provides guidance and encouragement to employees at all levels to act fairly and prevent discrimination on the grounds of sex, race, marital status, disability as defined by the Disability Discrimination Act Mapeley s Head of Human Resources is an active member of both the Executive Committee and the Management Committee. Environment: We have continued to take steps to understand and manage our environmental impacts over the past 12 months. The table below shows highlights of some of the baseline data we have collected in 2007 and the targets we have set ourselves for We recognise the importance of supporting and partnering with our clients to develop and provide sustainable solutions. In 2007 we completed a number of sustainable projects in partnership with our clients, highlights of which included: DPI Portfolio we developed and delivered a sustainable development benchmarking tool which has been trialled at four sites. As a result one of those sites has been awarded a Bronze Envibe Award by Croydon Council in recognition of their compliance with waste management legislation. HMRC Portfolio through the appointment and management of a contractor to manage the billing and consumption of electricity and gas, a saving of approximately 2.4 million over three years has been achieved. Together with our service partners we have produced a Carbon Footprint that applies to every building in the HMRC Portfolio. Nautical Nurses _ Mapeley supports chosen charities in geographical areas in which we operate and impact. Great Ormond Street Hospital is a charity supported by Mapeley on account of it being local to our London office _ Mapeley staff helped sponsor two Great Ormond Street Hospital nurses, known as the Nautical Nurses, to row non stop across the Atlantic _ The Nautical Nurses targeted raising 250,000 for metabolic research _ Despite having never rowed before the nurses went from La Gomera in the Canary Islands to Antigua in the West Indies; the equivalent of crossing the English Channel 128 times, completing the task in 78 days (2,936 miles) _ There are over 1,300 serious metabolic conditions, some of them life-threatening, affecting thousands of children in the UK. This challenge will provide vital funding for two research projects which will offer these children a lifeline Community Gardening Project _ St Mungos helps over 10,000 homeless and vulnerable people to make life changes each year _ Putting Down Roots (PDR) gardening project works in more than 30 public spaces and St Mungo s projects across London _ Mapeley volunteers spent a day each developing a landscaped garden at the St Mungo s shelter in Clapham and Kilburn _ The estates house many permanent residents who were present on the day interacting and assisting with our staff and the gardening Mapeley Limited Annual Report

30 Corporate Responsibility continued Painting a school _ Kids Company provides practical and emotional support to lone children who experience significant psychosocial difficulties because their parent is unable to function as a caring adult _ The lack of a functioning adult has an adverse impact on the child s ability to access education, health, housing and meaningful employment _ Mapeley volunteers spent a day painting 3 murals, fencing and an outdoor shed at Riverly Primary School _ An artist from Kids Company drew the mural and Mapeley volunteers were responsible for the painting _ As many of these children only travel from their home to school every day, it is important that school brightens their day and provides visual stimuli We take all reasonable steps to be legally compliant and to prevent pollution and harm to the environment. We strive to meet good practice in non-regulated areas, integrating biodiversity considerations into our activities, working in partnership with clients, agents, contractors and other suppliers. During 2007 Mapeley committed to a carbon management strategy to support our overall carbon reduction target. A key Mapeley objective is to reduce our Carbon emissions by 60% by 2050 benchmarked on baseline data collected in Mapeley selected a baseline data set which includes key information such as energy use and business miles travelled (train, car, taxi and aeroplane) to develop a carbon footprint. Mapeley s carbon management strategy consists of a number of elements: _ Calculation and benchmarking Mapeley s indirect and direct carbon emissions _ Identifying Mapeley s carbon footprint within the supply chain _ Analysis of carbon footprint data _ Reduction of carbon emissions within the workplace, with supply chain partners, tenants and landlords within our property portfolios _ Setting a carbon reduction target of 2.5% year on year. Mapeley s carbon footprint is currently being verified by C-Level, an external validator. We intend to balance our 2007 carbon emissions through climate-friendly independently verified projects; the selected project is Fuel Wood Saving with Improved Cook-Stoves in Cambodia. We recognise the importance of reducing our carbon emissions. We believe that carbon balancing should be treated as a last resort and will strive to reduce the amount of carbon produced. Community: In 2007, Mapeley partnered with a number of charities, focusing on supporting the geographical areas in which the business operates and has the greatest impact on. We undertook a range of activities that benefited local communities including: _ painting an underprivileged school in London _ improving the home of an underprivileged family in London _ Putting Down Roots Programme which involves work in London s open spaces, aiming to engage homeless people and to provide them with skills which they can use for employment and/or to take control of their lives _ Great Ormond Street Hospital assisting with the Christmas party for over 1,000 children and _ Falconhurst School, Milton Keynes gardening project to create an area the pupils could use for planting and wildlife classes. We have developed long-term relationships with Kids Company, St Mungo s and Great Ormond Street Hospital, all of which are located in London, the area most impacted by the operation of our principal office in the UK. We will continue to grow these relationships in We also remain focused on building relationships with local charities in Milton Keynes, site of our second office. We also continued to work with Business in the Community. Marketplace: Mapeley has the ability to influence a large number of organisations and individuals through the operation of its estate, particularly with regard to its relationships with suppliers and contractors in the provision of facilities management, life cycle and project services. Mapeley Limited Annual Report

31 Key Performance Indicator Baseline Performance Indicator 2007 Result 2008 Target Energy Used (Kwh/m 2 ) 98.4 Kwh/m Kwh/m 2 Carbon Dioxide (energy used and business mileage) 561 tonnes 547 tonnes Carbon Dioxide (kg/m 2 ) produced Reams of paper used per person 19.2 Reams/person 18.7 Reams/person Volume of paper recycled per person 29.4 Reams/person 30.1 Reams/person Disabling injury rate 0 0 RIDDOR (Reporting of Injuries, Disease and Dangerous Occurrence Regulations) 0 0 Work related sickness rate 0 0 Number of female employees 48% 50% Health and safety and environmental training hours 360 hours /employee spent on training Our procurement policy addresses sustainable procurement. We launched our Green Procurement Policy in May 2007 which aims to provide a procurement framework that will advance the sustainable use of resources. Mapeley ensures that its supply chain adheres to its sustainability requirements by influencing their business operations. Contractors terms and conditions reflect Mapeley s sustainability requirements and incorporate a requirement for the provision of management information to enable these to be monitored, for example, green energy, waste recycling and catering. We encourage innovation from our supply chain to ensure opportunities for sustainable procurement are captured. We procure goods and services from suppliers that operate sound environmental policies and whose national and international practices are ethically sound. It is our goal to create long-term shareholder value. We are focused on providing our investors with transparency into our operational performance. We encourage an open and active dialogue with all investors and are keen to develop long-term relationships of trust built on a sound understanding of Mapeley, its strategy, objectives and performance. We aim to communicate in a clear, open and timely way with investors and all our stakeholders. During 2007 we continued our programme of explaining the Company s business and financial performance and taking feedback from investors. The CEO, CFO and Head of Investor Relations attended 81 investor presentations throughout the year. Performance In 2006 we identified the following key performance indicators which we would use to measure our CR performance. The 2007 data below provides a baseline in which to measure ourselves going forward. The table on the left also displays the targets for these KPIs for Mapeley Limited Annual Report

32 Financial Highlights Funds from operations +23.4% Revenue +8.4% EBITDA +23.4% Dividend +11.9% Year ended Year ended 31 December 31 December m m Funds from operations (FFO) (refer to note 29) Dividends declared during the year Dividend per share (pence/share)* 188p 168p FFO per share (pence/share)** (refer to note 29) 192p 170p Income Statement Revenue Property operating expenses (288.4) (283.5) EBITDA (refer to note 28) (Loss)/profit before tax (129.0) 42.8 As at As at 31 December 31 December m m Balance Sheet Property assets *** 2, ,044.4 Total non-current assets 2, ,078.6 Net assets Gearing (refer to note 30) 257% 169% * Dividend per share calculations aggregate the coupon rates of dividends declared for each year as disclosed in note 8 to the financial statements. ** FFO per share calculations for the year ended 31 December 2007 are based on the weighted average number of ordinary shares in issue during the period of 29,417,876 shares. FFO per share calculations for the year ended 31 December 2006 are based upon the weighted average number of ordinary shares in issue during the period of 26,887,700. *** Property assets are defined as total non-current assets plus non-current assets held for sale, less non-current trade and other receivables, financial instruments, deferred tax assets and plant and equipment held within property, plant and equipment. Mapeley Limited Annual Report

33 Financial Review Funds from operations ( FFO ) FFO is a non-gaap financial management measure used to demonstrate the underlying operating performance of real estate businesses, its definition is set out in note 29 to the financial statements. It provides investors with information regarding the Group s ability to service debt and make capital expenditure. The measure eliminates from EBITDA items that are non-cash in nature such as the movement in the onerous lease provision and includes cash items such as asset management receipts and net finance costs and income leaving a measure that is more representative of the operating performance of the underlying business. FFO was 56.4 million for the year ended 31 December 2007, compared with 45.7 million for the year ended 31 December The increase in FFO of 10.7 million was primarily driven by increases in net operating income as a result of property purchases in the period, disposal proceeds and asset management receipts. These increases were offset by an increase in finance costs due to the financing of new asset purchases. The Group separately discloses organic FFO, being the FFO generated after the first 12 months after an asset has been purchased or an outsourcing contract has commenced. Organic FFO in the year ended 31 December 2007 was 50.2 million compared to 32.2 million in Dividends At a meeting held on 14 March 2008, the Board of the Company declared a dividend for the quarter of 13.8 million, equating to 0.47 per share (quarter ending 31 December million, equating to 0.45 per share) based on the number of shares in issue on an undiluted basis during the period. This brings the total cumulative dividends declared for the year ending 31 December 2007 to 1.88 per share (2006: 1.68), representing an increase of 11.9%. The record date for the dividend declared on 14 March 2008 is 28 March 2008 and the payment date is 11 April Result for the year The Group recognised a loss for the year ended 31 December 2007 of million compared to a profit of 53.7 million for the year ended 31 December This was due mainly to the impact of the revaluation movements arising from the investment property portfolios. In the year ended 31 December 2007 the Group recorded a revaluation deficit of 148.6million compared to a revaluation surplus of 40.8 million in the year ended 31 December Excluding the effects of the revaluation movements, the Group s profit after tax increased from 12.9 million in 2006 to 23.7 million in The main reason for this increase is an increase in net contract, rental and related income of 27.5 million offset by an increase in net finance costs of 6.3 million. This is further offset by a decrease in gains on disposal of 3.2 million in the year ended 31 December 2006 compared to gains of 0.3 million in the year ended 31 December In addition the Group recognised a deferred income tax credit of 4.1 million in 2007 compared to 10.9 million in Revenue Group revenue for the year ended 31 December 2007 was million, an increase of 32.4 million (8.4%) over the same period last year. Revenue consists of the following items: _ Rental revenue rental revenue is derived from tenants in the Direct Property Investments (DPI) portfolio, as well as any third party tenants occupying space in the HMRC and Abbey portfolios. There has been an increase of 19.6 million in rental revenue due to purchases of investment property in the DPI portfolio and the full year effect of 2006 property acquisitions. _ Contractual revenue Contractual revenue has increased by 12.1 million. This is due to: _ An increase in the contractual revenue from the HMRC contract due to the indexation uplift in the facility unitary charge, which incorporates all elements of the HMRC contract such as the contractual rents, the facilities management income and the lifecycle income. _ An increase in contractual revenue from the IPS contract as a result of increases in both the capital works income from the ongoing refurbishment of properties, and from the facility unitary charge. The facility unitary charge covers the rental and facilities management income which commences as properties are completed. The increase in capital works income is offset by a corresponding increase in capital works costs as included within other direct property and contract expenditure. _ These are offset by decreases in contractual rents under the Abbey contract due to vacations. Property operating expenses The property operating expenses of the Group in the year to 31 December 2007 were million (of which million was rents payable) compared to million (of which million was rents payable) during the same period in the previous year, an increase of 1.7%. The increase was primarily driven by 5.3 million of costs associated with the IPS contract, increases in facilities management and life cycle expenditure of 4.3 million and 0.9 million of refurbishment expenditure. This was offset by decreases in rentals payable of 2.6 million due to vacations, and decreases in dilapidations costs of 3.0 million. Net valuation deficit on investment property The Group recognised a deficit of million (2006: surplus 40.8 million) on revaluation of investment property. See the Business Review and below for further details. Gain on disposal of non-investment property During the year ended 31 December 2007 the Group disposed of two properties from property, plant and equipment. The Group recorded a loss on disposal of 0.7 million as the proceeds received of 7.5 million (net of disposal costs of 0.4 million) were lower than the carrying value in the balance sheet of 8.2 million. However this had a positive impact on FFO of 4.9 million since the properties were originally purchased for 2.6 million. In addition the Group disposed of two properties from non-current assets held for sale. Proceeds were received of 4.0 million and the properties were carried at 3.0million and therefore the Group realised a gain of 1.0 million. The impact on FFO of these disposals was a positive impact of 3.7 million since the properties had been purchased for 0.3 million. Mapeley Limited Annual Report

34 Financial Review continued Administrative and other expenses Administrative and other expenses were 20.2 million for the year ended 31 December 2007 compared to 20.7million for the year ended 31 December 2006, a decrease of 2.5%. In the prior year the Group incurred significant costs in respect of a bid for a potential outsourcing contract. This was non-recurring in 2007, however this reduction has been partially offset by increases in staff and accommodation costs. EBITDA EBITDA (see note 28) was million for the year ended 31 December 2007, compared to 93.5 million for the year ended 31 December 2006, an increase of 23.4%. As described above this was primarily a result of total revenue growth of 8.4% outstripping property operating expenditure growth of 1.7%. Finance costs and finance income Finance costs in the year ended 31 December 2007 were 98.4 million (31 December million). The prior year finance costs included exceptional break costs of 19.8 million relating to the refinancing of the HMRC portfolio. Excluding exceptional break costs finance cost have increased from 69.8million to 98.4million, an increase of 28.6 million. The following items have contributed to the underlying movement: _ Additional finance costs in the DPI portfolio of 13.8 million due to the financing of asset purchases in 2007 and the full year effect of the financing of 2006 asset purchases. _ An increase of 3.0 million in the amortisation of loan finance fees. This increase has been primarily driven by the amortisation of the costs of raising finance on the Delta revolving facility. _ These increases are partially offset by a decrease of interest costs of 1.6 million on the HMRC portfolio which benefited from better terms as a result of the refinancing of this facility in _ Swap valuation losses of 12.9 million were incurred on swaps held under the Delta revolving facility. Finance income has increased in the period from 6.8 million in 2006 to 9.3 million in the year ended 31 December This is primarily due to a 2.1 million increase in swap valuation gains. Swap gains and losses are recorded on the cash flow hedges entered into to fix interest rates on the property acquisitions in the Delta portfolio. At 31 December 2007 the Group had swaps with a total notional value of 257.6million (2006: 20.7million) outstanding on the Delta revolving facility. Since these swaps do not qualify for hedge accounting all gains and losses from revaluation to fair value are recorded in the income statement. The Group also has a long-term interest swap on the Abbey term loan to fix the interest rate. This swap qualifies for hedge accounting and therefore all movements in the fair value of the swap are recorded through equity and do not impact the loss for the year. Taxation Certain Group companies are resident in Bermuda and are classified as UK Nonresident Landlords for tax purposes. Taxable profits in these companies are subject to UK income tax and are exempt from local Bermuda taxes. In the year ended 31 December 2007 the Group and its subsidiaries recorded a current tax charge of 0.1 million in 2007 (2006: nil) relating to UK income tax and withholding tax. The Group has not paid any other income or corporation tax in either 2007 or 2006 in any of the jurisdictions in which it operates due to its tax residence and the availability of current and prior year tax losses and other tax deductible allowances. As at 31 December 2007 the Group has recorded a deferred tax asset of 15.1 million (2006: 10.9 million) in respect of losses not utilised, decelerated capital allowances and asset management receipts. This resulted in a deferred tax credit in the year ended 31 December 2007 of 4.2 million (2006: 10.9 million). The recognition of this asset has been based upon an assessment of the probability of future profits of Group companies. The Group has additional tax losses and deductions that would be available indefinitely for offset against future taxable profits of the companies in which the losses and deductions arose. The Group has not recognised a deferred income tax asset in respect of these losses and deductions due to the degree of uncertainty over both the amount and timing of utilisation. In the year ended 31 December 2007 the Group recognised a deferred tax credit of 0.8 million (2006: expense 4.6 million) directly in equity on unrealised valuation surpluses in respect of derivative financial instruments and certain property assets domiciled in the United Kingdom. These deferred tax liabilities are unlikely to be realised due to the availability of prior year tax losses. Non-current assets Non-current assets comprise property, plant and equipment, investment property, premiums on operating leases, long-term trade receivables, financial instruments and deferred tax assets. Total non-current assets at 31 December 2007 have increased by 67.9 million from 2,078.6 million at 31 December 2006 to 2,146.5 million, an increase of 3.3%. Property, plant and equipment Property, plant and equipment comprises assets held under the HMRC portfolio. HMRC Portfolio The HMRC portfolio comprises 136 freehold or long leasehold properties (31 December 2006: 138) and 371 rack-rented leasehold properties (31 December 2006: 380). Portfolio occupancy (based upon area) was 98.1% (31 December 2006: 98.9%). As at 31 December 2007, the HMRC portfolio (see note 10) was valued by external valuers at million (31 December 2006: million) million (2006: 39.2 million) of assets included in this valuation are held as premiums under operating leases. In addition properties valued by the external valuers at 14.4 million are held within non-current assets held for sale at book value of 9.1million. During the period the Group disposed of two vacant properties from the portfolio and transferred four properties to non-current assets held for sale, these properties are being actively marketed and will be disposed of early in Valuation assumptions are set out in note 10 to the financial statements. The properties are valued by capitalising income at an appropriate property yield. The valuations also take into account the risk of the tenants exercising break options in addition to an allowance applied to the capital value to account for the obligation to provide services under the terms of the contract of HMRC. Mapeley Limited Annual Report

35 Investment property Investment property increased from 1,483.1 million as at 31 December 2006 to 1,558.0 million as at 31 December Investment property includes assets held under the Abbey portfolio and under the Direct Property Investments Portfolio. The split of the movements in the two portfolios is as follows: Abbey DPI Investment portfolio portfolio Property m m m Valuation at 31 December 2006 by external valuers ,479.4 Valuation at 31 December 2006 of finance leases Assets held as non-current asset for sale (0.5) (0.5) Total investment property at 31 December ,483.1 Additions Revaluations (19.0) (129.6) (148.6) Valuation at 31 December 2007 by external valuers ,552.7 Valuation at 31 December 2007 of finance leases Total investment property at 31 December , ,558.0 External valuations are based upon income streams capitalised at an appropriate yield; further assumptions are set out in note 11 to the financial statements. The decrease in the valuation during the year is consistent with the shift in yields across the property sector. The Abbey portfolio As at 31 December 2007, the Abbey portfolio (see note 11) had a value of million (31 December 2006: million). It comprised 367 freehold or long leasehold properties (31 December 2006: 367) and 656 rack rented leasehold properties with nil capital value (31 December 2006: 698 properties). Portfolio occupancy (based on area) was 89.7% at 31 December 2007 (31 December 2006: 90.3%). Direct Property Investments ( DPI ) Portfolio As at 31 December 2007, the DPI Portfolio (see note 11) comprised 92 properties (31 December 2006: 69) with a value of million (31 December 2006: million). The current yield on this portfolio as at 31 December 2007 was 7.7% (31 December 2006: 6.9%). The properties were 98.5% let on fully repairing and insuring leases to central and local Government and investment grade tenants (31 December 2006: 97.9%) with an average unexpired lease length of 8.2 years (31 December 2006: 7.8 years). Non-current assets held for sale Non-current assets held for sale increased to 9.1 million (2006: 3.0 million) as a result of the transfer of four assets from property, plant and equipment. These properties have become or will become vacant and are being actively marketed and it is anticipated that they will disposed of early in Prior year non-current assets held for sale of 3.0 million were disposed of in early 2007 yielding proceeds of 4.0 million. Mapeley Limited Annual Report

36 Financial Review continued Financing The Group s financial strategy is to maintain an optimal gearing ratio to ensure that shareholders benefit from maximum leveraged returns. The Group seeks to finance its property investments with long-term debt facilities that reflect the long-term nature of its property investments and on which the interest rates have been fixed by utilising a mixture of fixed rate debt and floating rate debt with matching interest rate swap agreements. Mapeley seeks to finance new outsourcing contracts in line with this strategy at up to 80% Loan To Value ( LTV ). Purchases of direct investment properties are financed on a similar basis but initially using a short-term revolving facility for 100% of purchase costs. This is subsequently refinanced at up to 80% LTV. The Group strives to eliminate the effect of interest rate fluctuations on its earnings and in order to achieve this, hedges its anticipated long-term financial liabilities using interest rate swaps or fixed rate debt at the earliest opportunity, normally on the purchase of a property. Although the Group has arrangements in place that hedge its interest rate exposure on substantially all of its borrowings, not all of these arrangements are eligible for hedge accounting. Bank loans At 31 December 2007, 1,496.0 million had been drawn under the Group s loan facilities (31 December 2006: 1,278.3 million). The Group drew down funds of million in the period and repaid loans of 3.3 million following the disposal of properties. Amounts drawn down are as follows: 31 December 31 December Facility Interest terms m m Term loan under HMRC portfolio facility Fixed rate loan Term loan under Abbey portfolio facility Variable rate loan with 100% matching interest rate swap Acquisition term loan Fixed rate loan Term loan under Beta portfolio facility Fixed rate loan Term loan under Gamma portfolio facility Fixed rate loan Revolving Delta acquisition facility Variable rate loan with associated interest rate swaps , ,278.3 At 31 December 2007 swaps with a notional value of were in place against the Delta revolving facility (31 December 2006: 20.7 million). Refinancing The Group has continued to finance the acquisition of direct property investments using its three-year million revolving facility (the Delta Acquisition facility). At 31 December million was drawn down under this facility. The facility expires in April 2008 and is therefore held within current liabilities. This facility has since been refinanced with a 152 million seven year term loan, a 60 million loan repayable in April 2009 and cash from within the business. Further details on this is given in note17 to the financial statements. Cash flow The following table summarises the Group s cash flows for the years ended 31 December 2007 and 2006: m m Net cash flows from operating activities Net cash flows used in investing activities (211.8) (359.9) Net cash flows from financing activities Net increase/(decrease) in cash and short-term deposits 14.4 (4.8) In the year ended 31 December 2007, the Group generated strong operating cash flows driven by operating profits. The largest non-operating cash outflow has been the acquisition of property of million financed by the drawdown of debt. Mapeley Limited Annual Report

37 Risks Risk management Mapeley s Risk Management Policy is based upon three principles: _ Business risks are identified, quantified, prioritised and managed to an acceptable level using a risk register, _ An adequate and effective system of internal control is established and maintained, and _ The risk register and system of internal control is reviewed regularly by the Board resulting in specific actions to improve risk management. The Group undertakes assessments and identifies the principal risks that affect it and its activities. These are recorded in a risk register and responsibility for management of each key risk is delegated by the Board to the Chief Executive Officer and other members of senior management. The senior management team has close involvement with the day to day operational matters of the Group. Operational teams have responsibility for the following specific areas of the Group s activities: _ Property investment and management, _ Management of property outsourcing activities, _ Group management and operations, and _ Financing, taxation and regulation. The main business risks that the Group faces are set out below together with relevant mitigating factors and risk management strategies. Property investment and management Market Principal risks Commercial property markets are cyclical. Rental levels are determined by the supply of suitable space in a market and occupiers demand. The value of a commercial property depends upon the characteristics of the lease, the credit worthiness of the tenant, the prospects of rental growth and the stage of the property market cycle. Vacancy levels are impacted by occupier demand and can have a significant impact on rental income. Control of risks A dedicated in-house team supplemented by external advisors monitor current and future market trends. This includes considering current and future yield prospects (which forms an integral part of business planning), forecasting and the capital allocation decision making process. Asset management Principal risks Property values may decline and returns not be optimised. Uneconomic investments may be made or under-performing properties retained. Significant tenant defaults may reduce income and property values. Control of risks The teams that comprise the Mapeley operating platform review the performance of each property at least monthly. Key performance measures such as voids, lease expiry profiles and progress on rent reviews are reported on a monthly basis and actively managed to mitigate risks. Tenants are principally of low credit risk, either Government departments or large corporations, thereby maintaining the level of tenant defaults to which the Group is exposed at a low level. Investment performance and returns Principal risks Decisions about the allocation and investment of capital and other resources may not deliver the anticipated returns, or may fail to maximise their potential value for the Group. Control of risks An Investment Committee has been established to monitor and mitigate this risk. The senior management team monitors actual performance against targets, recommending corrective actions as appropriate. Property outsourcing Principal risks Outsourcing contracts typically require the Group to provide accommodation and certain associated services to an occupier in return for an indexed unitary charge. Outsourcing clients may transfer significant elements of the risks in their property portfolio to the Group including management of leasehold liabilities and a certain degree of flexibility in occupational commitment. The ability of Mapeley to manage these risks creates profit for the Group. Mapeley is exposed to a loss if the unitary charge set at the outset of the contract does not reflect the operational risks involved, or if the Group does not deliver the contracted services to the required standard. Control of risks Rigorous financial models and systems to measure performance against contract requirements have been developed, which together with Mapeley s financial performance, are reviewed weekly by senior management. The Mapeley operating platform facilitates a rigorous approach to management of both outsourcing portfolios and the individual assets within those portfolios. In many cases risks relating to changing occupational requirements can be converted into opportunities for example to dispose of properties at a profit. The Group has also placed its facility management contractor on a back-to-back arrangement with its own terms under the contract with HMRC. Information and experience gained from this monitoring process is, in turn, used to develop the pricing of new contracts. Group management and operations Management Principal risks The Group is reliant on its high-calibre senior management team. Control of risks Knowledge of all processes and projects is shared by at least two employees and the Group recruits and develops high-calibre employees. Remuneration is strongly linked to performance via a formal appraisal system which also feeds into a regular succession planning process. Mapeley Limited Annual Report

38 Financial Review continued Disaster planning Principal risks The Group has developed complex IT and other systems to manage its business. Without sufficient recovery planning, there is an increased risk that the business may fail to recover from a disaster and potentially suffer long-term damage. Control of risks Disaster recovery plans are in place, which include the use of off-site facilities. The plans are regularly updated. IT integrity and performance Principal risks The Group s ability to meet its obligations under outsourcing contracts is reliant on the continuing performance of its IT systems. A major failure in these IT systems could result in financial and reputation loss. Control of risks The IT back up plan is a key element of the Group s disaster recovery plans. The Group makes use of an outsourced, third party, IT service provider which provides a fully managed desktop and application support service. Taxation and regulation Taxation Principal risks The Group is exposed to financial risks from increases in tax rates and changes to the basis of taxation including corporation tax, VAT and stamp duty land tax. The Group s financial returns are also dependent on it retaining non-uk tax residence status for certain of its subsidiaries. Control of risk The Group regularly monitors legislative proposals and consults external advisors to understand, and if possible, mitigate the impact of any changes. The Group has specific procedures in place in connection with the management and control of its non-uk resident subsidiaries. Financing Funding Principal risks The Group is exposed to a risk of not having sufficient funding secured in order to maintain its desired levels of growth and acquisition. It is also exposed to the risk of refinancing certain funding upon maturity. Control of risk The Group has dedicated resources involved in managing the Group s financing activities. The Group has established relationships with major financial institutions and has flexible funding arrangements in place. Fluctuating market conditions Principal risks Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political conditions and other factors beyond Mapeley s control. The Group is exposed to these prevailing market rates on both current drawn-down borrowings and on any refinancing of debt in the future. Any movements in the interest rate could result in the Group s interest expense exceeding the income from its property portfolio. Control of risk The Group aims to reduce its exposure to such fluctuations on current facilities using a mixture of fixed and floating date debt and hedging instruments. The Group aims to keep 100% of its long term borrowings at fixed rates except for debt raised for direct property investment, where property is initially funded on a short term basis before being refinanced through long term borrowing facilities. The Group enters into interest rate swaps either in advance of property acquisitions or on the date an asset is purchased in order to fix the interest rate payments. Further details on the Group s financial risk management objectives and policies are set out in note 23 to the financial statements. Mapeley Limited Annual Report

39 Board of Directors Wesley R Edens (46) Chairman Mr Edens is Chairman of Mapeley and founding principal, Chairman and Chief Executive Officer of Fortress Investment Group LLC (NYSE: FIG), the first NYSE listed private equity and hedge fund manager. Mr Edens has primary investment oversight of Fortress s private equity and publicly traded alternative businesses. He began his career at Lehman Brothers, where he ran the mortgage trading area as a partner and managing director. He then joined BlackRock Financial Management to form his first private equity fund, BlackRock Asset Investors. He spent a year at UBS as managing director in the principal finance group, and stayed until 1998, when he and two principals founded Fortress. Mr Edens serves on numerous corporate boards, including Aircastle, Brookdale Senior Living, GAGFAH, Eurocastle Investment, GateHouse Media, Mapeley and Newcastle Investment. He also serves on the board of the U.S. Ski and Snowboard Team Foundation. Jameson Hopkins (39) Chief Executive Officer Mr Hopkins is the Chief Executive Officer of Mapeley and has been involved with the Group since its formation in He is responsible for all areas of business, including day to day operations, future growth opportunities and long-term strategy. He joined Mapeley from Delancey Estates, where he was the acquisitions director. Prior to that he was a director of Savills. He is a chartered surveyor. Roger Carey (63) Mr Carey is the senior independent Non- Executive Director of Mapeley. He was a director of Slough Estates plc from 1983 to 1996 and was chief executive of Saville Gordon Estates plc from 1997, leading a management buyout in The company, renamed Industrious, was subsequently sold to Brixton plc in Mr Carey is currently the non-executive chairman of Ibis Project Services Ltd and Protego Industrial Ltd and a non-executive director of Bassett Trust Ltd, Safestore Holdings PLC and of residual Industrious companies. He is a past President of the British Property Federation. He is a chartered surveyor. Michael Fascitelli (51) Mr Fascitelli is a Non-Executive Director of Mapeley. He is President of Vornado Realty Trust, a real estate investment trust based in New York. He also serves on the board of Trustees of Vornado, Alexander's, Inc. and GMH Communities Trust. He was formerly a partner at Goldman Sachs & Co. Charles Parkinson (54) Mr Parkinson is a Non-Executive Director of Mapeley. He practised as an accountant in Guernsey between 1981 and 2004, when he retired as chairman of PKF (Guernsey) Limited. He is now a Deputy in the States of Guernsey, and is a resident of Guernsey. Mr Parkinson is chairman of the M & G Income Investment Company Limited and of the Eastern European Property Fund Limited and a non-executive director of Dexion Equity Alternative Limited and Teesland Advantage Property Income Trust Limited. He is a chartered accountant and is a qualified barrister. John Harris (60) Mr Harris is a Non-Executive Director of Mapeley. He is the president of Lincoln Harris LLC, a full service corporate real estate services firm based in Charlotte, North Carolina. He was formerly president of the Bissell Companies, Inc, a major commercial real estate and investment management company. Mapeley Limited Annual Report

40 Directors Report The Directors present their annual report together with the audited financial statements of the Group for the year ended 31 December Principal activities The principal activities of the Group continue to be the acquisition, ownership and management of a diverse portfolio of commercial property throughout the UK. The property is primarily let to strong credit quality tenants with large property portfolio management needs such as central and local Government and large corporations. The Group reports these business activities under two main segments, Outsourcing Contracts and Direct Property Investments. The outsourcing contract segment includes the results from the purchase and leaseback of the HMRC and Abbey property portfolios and also the results from the Identity and Passport Service ( IPS ) contract which comprises a contract for the acquisition, fit-out and delivery of serviced office accommodation. The Direct Property Investments segment includes the results from the purchasing of individual or small portfolios of office property which are let to strong credit quality tenants. Further information on the Group s activities is set out in the Business Review. Review of business The consolidated income statement for the year is set out on page 52. A review of the development and performance of the business has been set out in the Chairman s and Chief Executive s statement, the Business Review and in the Financial Review which are incorporated by reference into this report. This includes an analysis of the key performance indicators used to measure the development, performance and position of the business and a discussion of the significant events during The principal risks and uncertainties facing the business are set out in the risk management section of the Financial Review. Dividends On 14 March 2008, the Board of Directors declared a dividend of 0.47 per share for the quarter ended 31 December 2007 (Quarter ended 30 September 2007: 0.47). The record date for this dividend is 28 March 2008 and the payment date is 11 April The Group has declared dividends for the year with an aggregate coupon of 1.88 per share (2006: 1.68 per share), an increase of 11.9%. The total aggregate dividends paid and declared for the year ended 31 December 2007 amounted to 55.2 million (2006: 45.8 million). The Directors do not propose a final dividend in respect of the year ended 31 December Directors and Directors interests The Directors who held office throughout the year and up to the date of this report are shown on page 37. There have been no changes to the composition of the Board in the year and Mr Carey and Mr Parkinson offer themselves for re-election at the Company s AGM. Details of Directors service contracts, remuneration and pension rights are included in the Remuneration Report. Particulars of the Directors interests in the Company s shares at the end of the financial year are set out below: At 31 December 2007 At 31 December 2006 Number of shares Number of shares Jameson Hopkins 159, ,280 Wesley R Edens* 117, ,901 Charles Parkinson 16,000 10,000 John Harris 38,998 33,998 Roger Carey 25,000 15,000 Michael Fascitelli 23,100 18,100 * In addition to shares held by the Fortress Investment Fund, and Long Dated Fund as set out on page 39, other funds managed by affiliates of Fortress Investment Group LLC hold 587,826 ordinary shares. All Directors interests are in the ordinary share capital of the Company and are beneficial, unless otherwise stated. There have been no further changes in the interests of any Director between 1 January and the date of this report. Except as noted no Director had any other holding or beneficial interest in the share capital of the Company or any other Mapeley Group companies. The Company and its subsidiaries have not entered into any significant contracts in which any of the Directors have a material interest, except as disclosed in note 26 to the financial statements. Mapeley Limited Annual Report

41 Share capital The Company has not issued any shares during the year ended 31 December 2007 for the purposes of raising funds. On 2 May ,000 shares in total were issued to the four independent Non-Executive Directors as the final tranche of an award made to the Directors upon appointment to the board in Share performance data Closing share price on 31 December 2007 Dividends declared for the twelve months ended 31 December 2007 Dividends paid in the twelve months ended 31 December per share 1.88 per share 1.86 per share Debt financing Information on the Group s borrowings and financial risk management objectives and policies is set out in note 23 to the financial statements. Property valuation The valuations of all the properties in the Group as at 31 December 2007 were carried out by CB Richard Ellis Limited and Knight Frank LLP, or in certain limited cases by the Company s Directors and have been incorporated in the financial statements. Further details concerning property held at fair value are set out on in notes 2, 10, 11 and 13 of the financial statements. Substantial shareholding At 28 February 2008 the following substantial interests (3% or more) in the ordinary share capital of the Company had been notified to the Company: Shares % Fortress Investment Fund V (including Fortress Investment Fund V Coinvestment Fund) 15,131, Long Dated Fund 1,691, Pamet Capital Management LLC 1,300, Health and Safety policy The Group has a formal health and safety policy in place and complies with the Health and Safety at Work Act 1974 and associated legislation to ensure the highest possible standards of safety for its employees. It is a primary concern of the Board that the Group manages its activities in such a manner as to ensure that the health and safety of its employees, tenants, advisors, contractors and the general public is not compromised. Environmental policy Mapeley has a formal environmental policy. Mapeley is committed to the identification of all areas of environmental impact. Mapeley will strive to minimise or prevent any negative environmental impacts from its activities. Mapeley Limited Annual Report

42 Directors Report continued Employees The Group recognises the contribution its employees make to its continued success. It acknowledges the need to attract and retain employees of a high calibre and operates an equal opportunities policy. It believes in continuous development, and supports its employees to achieve their self improvement goals which are set and approved annually and intended to benefit both the Group and the individuals. The Group is an equal opportunities employer and strict codes of conduct are set out in the staff handbook to ensure that this policy is pursued. During the year, the Group directly employed an average of 132 (2006: 135) permanent staff (excluding Non-Executive Directors), comprising: % % Gender: Women Men All staff are clerical and professional. In addition, through its contractors, the Group contributes to the employment of over 3,500 people. Supplier payment policy The Group s suppliers are divided into two categories, landlords of the Group s leasehold properties and other suppliers. In respect of obligations payable to landlords of the Group s leasehold properties, most require payment of one quarter s rent and service charges in advance. In respect of other suppliers the Group agrees payment terms when it enters into binding purchase contracts which are usually to pay within 30 days. The Group also includes within the agreed terms and conditions that its suppliers pay their sub-contractors within 30 days too. The Group seeks to abide by the payment terms with other suppliers whenever it is satisfied that the supplier has provided the goods or services in accordance with the agreed terms and conditions. At 31 December 2007, the Group had an average of 42 days owed to other suppliers (2006: 31 days). Political and charitable donations The Group made no political donations during the years ended 31 December 2007 and Charitable donations of 71,911 were made during the year ended 31 December 2007 (2006: 7,078). Directors liability insurance The Group holds Directors liability insurance and has public offering of securities insurance which are both in place with AIG Europe Limited. Authority to purchase own shares The Company may from time to time, subject to the provisions of Guernsey law and the Listing Rules, purchase its own shares (including any redeemable shares) in any manner authorised by Guernsey law. Mapeley Limited Annual Report

43 Post balance sheet events On 13 March 2008 the refinancing of the 257 million Revolving Delta acquisition facility was successfully completed. This debt was due to mature in April 2008 and has been replaced with a 152 million seven year term facility and a 60 million loan repayable in April The balance of the refinancing was provided by cash from within the business. Further details of the new loans are given in note 17 to the financial statements. Annual general meeting The Annual General Meeting ( AGM ) of the Company will be held on 7 May 2008 in Guernsey. At the AGM, investors will be given the opportunity to question the Board and to meet with them afterwards. They are encouraged to participate in the meeting. Disclosure of information to auditors The Directors who held office at the date of approval of this Directors report confirm that: _ so far as they are each aware, there is no relevant audit information of which the Company s auditors are unaware; and _ each Director has taken all steps that he ought to have taken as a Director to make himself aware of any relevant audit information and to establish that the Company s auditors are aware of that information. Auditors A resolution concerning the re-appointment of Ernst & Young LLP as auditors and to authorise the Directors to determine their remuneration will be proposed at the forthcoming Annual General Meeting. By order of the Board Director 14 March 2008 Mapeley Limited Annual Report

44 Directors Responsibility Statement Directors responsibilities for the financial statements The Directors are responsible for preparing the Group financial statements in accordance with applicable Guernsey law and those International Financial Reporting Standards as adopted by the European Union. Guernsey company law requires the Directors to prepare Group financial statements for each financial year which give a true and fair view of the state of affairs of the Group and of the profit or loss of the Group for that period. In preparing those Group 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 _ prepare the Group financial statements on the going-concern basis unless it is inappropriate to presume that the Group will continue in business. The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies (Guernsey) Law, They are also responsible for safeguarding the assets of the Group and the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Mapeley Limited Annual Report

45 Corporate Governance Statement of compliance with code of best practice The Financial Services Authority requires all UK incorporated listed companies to disclose how they have applied the principles and complied with the provisions of the Combined Code. The Company, as a Guernsey incorporated company, is not currently required to comply with the Combined Code. The Directors believe, however, that it is important for the Company, as a public company, to maintain a high standard of corporate governance, and as such, the provisions set out in the Combined Code which they consider applicable have been adopted during the year and are summarised below. Throughout 2007, except as otherwise explained below, the Company complied with the recommendations of the Combined Code in relation to the management of the Company. Role of the Board The Board sets strategy and monitors the Group s operational and financial performance. A schedule of matters reserved for the Board was approved on admission of the Company to the Official List, and is reviewed on an annual basis. It includes those matters that are most significant to the Group, based on the nature and size of the matter, both in terms of financial impact and risk. As part of its collective responsibility for the management of the Group, the Board must ensure that adequate resources are in place to achieve its strategic aims and that its obligations to its shareholders and other stakeholders are met. The Board is responsible to shareholders for the management and control of the Group s activities and good corporate governance. The Board met 10 times during the period and intends to meet at least seven times a year. The Board objectively sets and monitors Group strategy, reviews performance, ensures adequate funding, examines major potential acquisitions and disposals, formulates policy on key issues and reports to shareholders. To enable the Board to discharge its duties fully, all Directors receive appropriate and timely information, including briefing papers distributed in advance of Board meetings. Management regularly makes presentations on business and operational issues to the Board and its Committees. All Directors have access to the advice and services of the Company Secretary and his team, who are responsible to the Chairman on matters of corporate governance. Board balance and independence The Board is satisfied that no individual or group of Directors has unfettered powers of discretion and that an appropriate balance exists between the executive and Non-executive members of the Board. During the year, the Board comprised of the Chairman, one executive Director and four Non-Executive Directors. The roles of Chairman and Chief Executive Officer are split. The Chairman is responsible for the effectiveness of the Board, and the Chief Executive Officer for the day to day management of the Company. The Board considers that all four Non- Executive Directors are independent (notwithstanding their entitlements to free Ordinary Shares under their letters of appointment). Mr Carey is the senior independent Non-Executive Director. Mr Edens, the Chairman, may not be regarded as independent since he is the chief executive officer and chairman of the board of directors of Fortress Investment Group LLC, affiliates of which manage the major shareholders of the Company. However the Board considers that the experience and independent judgment of its other Non-Executive Directors provides an appropriate and effective balance between the executive and non-executive and independent and non-independent members. Throughout the period and to the date of this report, more than half of the Board, including the Chairman, comprised independent Non-Executive Directors. As well as being the Chairman of the Company, Mr Edens, holds numerous directorships in a professional capacity. The Board is satisfied that these appointments do not adversely affect his commitment as the Company s Chairman. Non-Executive Directors The Non-Executive Directors bring independent views to the Board and have diverse experience in chartered surveying, accountancy, law and finance to add to the Board s effectiveness, particularly in the areas of corporate strategy, governance and risk. Non-Executive Directors take an active part in debate, not being afraid to challenge proposals, ensuring the robustness of Board decisions. Remuneration for the Non-Executive Directors is determined by the Board. They do not participate in the Company s bonus or pension schemes but as part of the terms of their initial appointment to the Board they have been given shares in the Company. The Non-Executive Directors are appointed for an initial period of three years subject to renewal for further periods. Board appraisal The Board and its Committees undertake a formal annual evaluation of their own performance and that of individual Directors. The performance evaluation consists of each Director completing a wide-ranging appraisal questionnaire based on the process and questions outlined in the Higgs Report s recommendations for good practice. The Non-Executive Directors also discuss the performance of the Chairman annually, or more frequently as necessary. The appraisal process revealed a high level of satisfaction with the operation and functioning of the Board and Committees. Board Committees The Board has established Nomination, Remuneration, Investment and Audit Committees which deal with specific aspects of the Group s affairs, each of which has written terms of reference which are reviewed annually and which deal clearly with their authorities and duties. Copies of these are available on request from the Company Secretary. Mapeley Limited Annual Report

46 Corporate Governance continued The Nomination Committee and the Remuneration Committee are chaired by Mr Edens. The Board believes that the interests of the Company are better served with Mr Edens as a member of these respective Committees, notwithstanding the requirement of the Combined Code that all members should be independent. The Audit Committee is chaired by Mr Parkinson. Nomination Committee The Nomination Committee is appointed by the Board and chaired by Mr Edens. Its other members are Mr Carey and Mr Parkinson. Their experience is detailed on page 37. Other Board members, together with other individuals, attend if invited, for all or part of any meeting, as and when appropriate. The Committee met once during the year with full attendance. The Committee is responsible for: _ considering the size, structure and composition of the Board; _ considering the retirement of Directors and appointment of additional and replacement Directors; and _ making appropriate recommendations to the Board. Remuneration Committee The Remuneration Committee is appointed by the Board and chaired by Mr Edens. Its other members are Mr Carey, Mr Fascitelli and Mr Parkinson. The Chief Executive Officer, the Chief Finance Officer and others attend by invitation. The Committee aims to meet at least once a year and during the period met once with full attendance. The main role and responsibilities of the Remuneration Committee are set out in written terms of reference, which are reviewed annually. During the year, the Remuneration Committee carried out its responsibilities in accordance with the terms of reference and its activities are described in the Directors Remuneration Report. In accordance with the Committee s terms of reference, no Director participated in discussions relating to his terms and conditions of service or remuneration. Audit Committee Membership The Audit Committee is appointed by the Board. It comprises of Non-Executive Directors. The Committee is chaired by Mr Parkinson. Its other members are Mr Carey and Mr Harris. The members of the Committee have no links with the Company s external auditors and are independent of the Company s management. The Board considers that collectively the Audit Committee has significant recent and relevant financial experience as detailed on page 37 and the ability to discharge its duties properly, gained from managing businesses of a similar or greater size, and through extensive service on the Boards and Audit Committees of other listed companies. The Committee meets at least three times a year, and where appropriate meetings coincide with key dates in the Company s financial reporting and audit cycle. The Chief Financial Officer, the Chief Executive Officer and others attend by invitation. During the period, the Audit Committee met five times. Responsibilities The role and responsibilities of the Audit Committee are set out in written terms of reference, which have been reviewed annually as part of the Committee s evaluation process. Copies of these are available on request from the Company Secretary. The main responsibilities are: _ considering and making recommendations regarding the appointment and removal of the external auditors; _ recommending the audit fee to the Board and pre-approving fees in respect of non-audit services provided by the external auditors; _ reviewing the nature and scope of the external audit and monitoring the external auditor s independence and objectivity; _ monitoring the integrity in relation to the interim and annual financial statements and financial announcements and significant reporting judgments therein before submission to the Board; _ ensuring effective systems of internal financial control, financial reporting and risk management are maintained; _ reviewing and challenging, where necessary, the actions and judgment of management in relation to the quarterly, interim and annual financial statements before submission to the Board; and _ reviewing the Company s procedures for handling allegations from whistleblowers. The Company has procedures whereby staff may, in confidence, raise concerns about matters of possible impropriety, fraud, financial irregularity or other malpractice. Financial Reporting The Audit Committee has reviewed the significant financial reporting issues and judgments made in connection with the preparation of the Group s financial statements including significant accounting policies, any changes to them and any significant estimates and judgments. The Audit Committee has also reviewed the clarity and completeness of disclosures in the financial statements and considered whether the disclosures made were set properly in context. The review of the annual report included a review of the business and financial review and corporate governance relating to audit and risk management. Internal audit The Audit Committee reviewed the requirement for an internal audit function during the year on behalf of the Board and considered there was no necessity for an internal audit function, as the Group has a small management team operating from two locations and the Board and senior management team exercise close control over the Group s activities. This enables the close involvement of the Executive Director and the Chief Financial Officer in the day to day operational matters of the Group. The Audit Committee expects to review this decision annually. Mapeley Limited Annual Report

47 Auditors The Committee s terms of reference require the Audit Committee to carry out an annual review of the independence of the Group s auditors, Ernst & Young LLP. Senior members of the audit team are rotated on a regular basis. The Company has a policy on the provision of non-audit services by the auditors. The implementation of the policy is continually monitored by the Audit Committee. The Committee has considered the provision of non-audit services performed by the auditors and was satisfied they were and continue to be objective and independent of the Group. Investment Committee The Company has clearly defined guidelines for capital expenditure. An Investment Committee reporting to the Board and chaired by Mr Edens is responsible for reviewing and approving all significant individual property transactions proposed by the Group. The Committee includes, in addition to the Chairman, Mr Fascitelli, Mr Harris, Mr Hopkins and Mr Parkinson. The Committee also monitors the disposals of surplus property, rent reviews, lease renewals, development opportunities, dilapidations settlements, and freehold and leasehold acquisitions. The Committee evaluates, considers and makes recommendations to the Board in relation to proposals for new business in terms of the type, fit with the Company s strategic plan, its profitability and the resources required. In addition, the Committee considers and makes recommendations to the Board in relation to customer requests, invitations to tender/bid, market research, networking information, risk evaluation and major expenditure on life cycle and other projects in relation to the Group s properties. Table of attendance for the year to 31 December 2007 Full Board Remuneration Audit Nomination Investment Director Meeting Committee Committee Committee Committee Roger Carey n/a Wesley R Edens 2 1 n/a 1 1 Michael Fascitelli 6 1 n/a n/a 6 John Harris 8 n/a 2 n/a 10 Jameson Hopkins 9 n/a n/a n/a 11 Charles Parkinson Total meetings Internal control There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group. The Executive Director and senior operational management are responsible for identifying key risks and assessing their probable impact through formal processes at both Group and subsidiary levels. During 2007, the Board discharged its responsibility for internal control through the following key procedures: _ the maintenance of an organisational structure with clearly defined levels of authority and divisions of responsibilities; _ a comprehensive system of budgeting, planning and reporting, which is approved by the Board and against which performance is regularly monitored; _ the formulation of policies and of approval procedures in a number of key areas such as treasury operations and capital expenditure. These are reviewed from time to time by the Board to confirm their adequacy; and _ the provision of a code of conduct for employees and the monitoring of the quality of personnel through an annual performance appraisal process. The Group is committed to the highest standards of business conduct and seeks to maintain these standards across all of its operations. The Group has what it believes to be an appropriate organisational structure for planning, executing, controlling and monitoring business operations in order to achieve its objectives. The Group has designed and implemented procedures to ensure complete and accurate accounting and to limit the potential exposure to loss of assets or fraud. Control measures undertaken include physical controls, segregation of duties and reviews by management. Mapeley Limited Annual Report

48 Corporate Governance continued Internal control (continued) In accordance with the Combined Code, the effectiveness of the Group s system of internal control was kept under review during the year by the Board. This review included financial, operational and compliance issues. A formal evaluation was carried out in 2006 and the Audit Committee has been requested to keep the matter under review. The Board considers its policies and procedures to be robust, whilst recognising that such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide reasonable but not absolute assurance against material misstatement or loss. Relations with shareholders The Chairman, Chief Executive Officer, Head of Investor Relations and designated members of senior management are the Company s principal spokespersons with investors, fund managers, the press and other interested parties. The Board is fully informed on the information provided to shareholders and their reactions. Annual General Meeting At the Annual General Meeting, investors will be given the opportunity to question the Board and to meet with them afterwards. They are encouraged to participate in the Meeting. At the Annual General Meeting the Company complies with the provisions of the Code relating to the disclosure of proxy votes, the attendance of Committee chairmen and the separation of resolutions. The Company arranges for the annual report and notice of the meeting to be posted to shareholders in good time to allow for full consideration prior to the Annual General Meeting. Going Concern After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. As part of the Company s effort to increase effective communication with both investors and potential investors, Mapeley executed a continual programme of meetings and presentations during Management met with institutional shareholders as and when requested. The Company works continually to improve the understanding of its objectives, strategy and performance and in the year 81 presentations were made by the Chief Executive Officer, Chief Financial Officer and Head of Investor Relations. These presentations provide an opportunity to explain the Company s business and financial performance and to answer questions from investors. All such meetings are conducted within the guidance provided by the UKLA Listing and Disclosure Rules on the dissemination of price sensitive information. The Board is regularly updated as to the views of investors, analysts and the media and reports are made available to the Board on feedback received on an unattributable basis from investors. Mapeley Limited Annual Report

49 Remuneration Report Introduction This report sets out the Group s remuneration policy and also gives details of the salaries, incentives, shares and pensions received by all Directors and members of senior management of the Company for the year ended 31 December Although a Guernsey incorporated company, Mapeley Limited s Remuneration Report has been prepared to provide voluntary disclosures in line with the requirements of the UK Companies Act 1985 (as amended) and the UK Directors Remuneration Report Regulations 2002 (the Regulations), together with the Listing Rules of the Financial Services Authority. The Remuneration Committee (the Committee ) The Committee s objective is to ensure that the Company continues to be able to attract and motivate individuals with the skills and experience required to operate its business competitively. The Committee is responsible for setting the remuneration policy for the Executive Director and senior management. This includes determining the terms of service agreements, salaries and discretionary bonus payments and long-term incentive awards. The Committee comprises the Non-Executive Directors, Roger Carey and Charles Parkinson and Michael Fascitelli and is chaired by Wesley Edens. While the Company considers Mr Edens to be independent, it is aware that he may not be regarded as independent for the purposes of the Combined Code. The Chief Executive Officer and others attend by invitation. No individual attends when their own remuneration is under discussion. Further information is given in the Corporate Governance Report. As referred to below, the Committee consulted New Bridge Street Consultants LLP ( NBSC ) to advise on Directors remuneration for the year. NBSC did not provide any other services to the Company or the Group during the year. Remuneration policy The Committee seeks to ensure that the total remuneration received by the executive Director and members of the Group s senior management team under their contracts is competitive within the property industry and set so as to motivate them to perform at the highest level. In order to align the interests of the executive Director and members of the Group s senior management team with the interests of shareholders, a significant proportion of that Director s or those employees remuneration comprises performance-linked pay. While the levels of variable pay are higher than typical in the sector, levels of fixed pay are significantly below market, ensuring that total target pay is around market levels. During the year, the Committee instructed NBSC to assist it in a review of the remuneration policy, with particular reference to the executive Director and senior management team. The main conclusions of this review were that: _ In line with the Combined Code, annual bonus potential for this population should be capped at 200% of basic salary (bonus potential was previously uncapped); and _ A long-term incentive policy should be developed, including the introduction of: (i) a maximum annual long-term incentive award limit; and (ii) challenging prevesting performance conditions linked to the Company s long-term strategy. Further details of these changes are set out on page 49. The remuneration of Non-Executive Directors is reviewed and determined by the Board. Components of executive remuneration Base salary and benefits (Non-Performance-related) The Committee s policy is to set the basic salaries of the executive Director and senior managers at levels which reflect their role, experience and practices in the employment market. Base salaries are reviewed annually as at 1 January. Other benefits consist of private medical insurance cover, permanent health insurance, critical illness cover, additional salary in lieu of a company car and pension contributions. Mapeley Limited Annual Report

50 Remuneration Report continued Performance-related remuneration The executive Director and senior managers are eligible to participate in an annual bonus plan based on a combination of challenging corporate financial goals and personal performance which include financial performance measures based on Funds From Operations and total shareholder return against the Company s peers, and personal performance. The maximum level of bonus that may be awarded for the 2008 financial year is 200% of basic salary. The Committee intends to review this level annually to ensure that it remains appropriate. The actual bonus paid to the Chief Executive is set out in the emoluments table on page 49. During the year ended 31 December 2007, the apportionment of remuneration between performance related and non-performance related elements was as follows: Non- Performance performance Director related related Jameson Hopkins 44% 56% Wesley R Edens Nil 100% Charles Parkinson Nil 100% John Harris Nil 100% Roger Carey Nil 100% Michael Fascitelli Nil 100% Share plan The executive Director and senior management team participate in the Company s Employee Share Plan (the Plan ). To date, the awards granted under the Plan vest over a 3 to 5 year period from the date of grant subject to continued employment but no performance conditions. During the vesting period, the participants receive dividends and the shares may be sold, but the cash proceeds of any sale are subject to the same vesting terms as the shares. Following the review carried out by NBSC detailed above, the Committee has concluded that future awards under the Plan in respect of performance for the years commencing after 1 January 2008 should be capped at 500% of basic salary p.a. and that challenging pre-vesting performance conditions linked to the Company s long-term strategy for the business will apply. The Committee is currently in the process of selecting appropriate performance metrics and formulating performance targets for awards to be made in respect of performance in the twelve months to 31 December Full details of Directors interests in the share capital of the Company are set out in the Directors report. Policy on service contracts The executive Director of the Company has a service contract in force. There is no provision for contractual termination payments, save those payments normally due under employment law. In accordance with best practice, Non-executive Directors are not appointed on service contracts, but there are letters of appointment in place for each Non-executive Director. All of the Non-executive Directors are appointed for an initial term of three years following which they may serve up to a further two three-year terms if re-elected. If they fail to be re-elected their terms of appointment cease. Details of the service contracts and letters of appointment of those who served as Directors during the year are as follows: Annual fee Duration of Director ( 000) Contract date appointment Notice period Jameson Hopkins months Wesley R Edens years 1 month Charles Parkinson years 1 month John Harris years 1 month Roger Carey years 1 month Michael Fascitelli years 1 month Mapeley Limited Annual Report

51 Information regarding senior managers below Board level The Group currently employs four senior managers in positions below Board level. None of these senior managers are paid at a rate higher than the Executive Director and the structure of their remuneration package, including bonuses, is consistent with that of the executive Director. Directors remuneration For the year ended 31 December 2007, the remuneration received by the Directors was as set out in the table below: Director Dividends received under Defined Total *Total Fee as Employee Benefits Annual Total contribution remu- remu- Director Salary share in kind bonus emoluments scheme neration neration scheme Jameson Hopkins Wesley R Edens Charles Parkinson John Harris Roger Carey Michael Fascitelli *In the prior year total remuneration included a share-based payment charge in respect of the Executive and Non-Executive Directors share awards as set out below. Mr Hopkins annual bonus of 200,000 reflects the strong financial performance of the Company and his personal contribution during the 2007 financial year. Mr Edens does not receive a fee for his role as Chairman of the Company. Employee share plan Mr Hopkins has been awarded shares under the Group s employee share plan as described above. The total cost to the Group of providing this benefit is spread over the period over which the awards become unconditional. The expense recognised in the income statement and recorded in total emoluments in 2006 in respect of these shares is set out below: Number of Number of Market Total cost to shares under shares under value of the Group of Expense Expense award at award at shares providing recognised recognised 1 January 31 December on grant the award Date of award June ,957 86, , December ,123 13, These awards become unconditional over the following periods, none became unconditional during the period (2006: none): Year in which awards become unconditional Date of award Number of shares under award at 31 December June ,957 26,087 26,087 34, December ,123 3,937 3,937 5,249 Mapeley Limited Annual Report

52 Remuneration Report continued Non-Executive Directors shares The four independent Non-Executive Directors were each awarded 5,000 ordinary shares on appointment to the Board. The shares are not conditional on a qualifying vesting period. The Company committed to making awards of 5,000 shares to each of the independent Non-Executive Directors at each of the first two AGMs following their date of appointment providing those Directors remain in office at the conclusion of the relevant meetings. The award of these shares, which have now been issued under the letters of appointment currently in force, reflected the time committed to the Company in the period running up to, and following, the IPO in The total cost to the Group of providing this benefit has been spread over the period over which the awards were made. The expense recognised in the income statement and recorded in total emoluments in 2006 in respect of these shares is set out below: Number of Number of Total cost shares shares to the under Number of under Group of Expense Expense award at shares award at providing recognised recognised 1 January issued in 31 December the award Charles Parkinson 10,000 5,000 15, John Harris 10,000 5,000 15, Roger Carey 10,000 5,000 15, Michael Fascitelli 10,000 5,000 15, Directors pension entitlements The executive Director is entitled to participate in a defined contribution scheme. The Group contributes up to 20% of the Director s monthly salary to this scheme and during 2007, contributions paid or payable by the Group were 52,112 (2006: 32,373). Performance graph This graph illustrates the performance of the Company measured by total shareholder return (share price growth plus dividends paid) against broad equity market indices over the period since 15 June As the Company is a constituent of the FTSE 250 Index, the FTSE 350 Real Estate Index and the FTSE EPRA Index, these indices are considered to be the most appropriate benchmark for the purposes of the graph. % 80 June August October December February April June August October December February April June August October December February Key: Mapeley EPRA FTSE 250 FTSE 350 Real Estate This graph illustrates the value, at 6 March 2008 of 100 invested in Mapeley Limited on 15 June 2005 compared with that of 100 invested in the FTSE 250 Index, the FTSE 350 Real Estate Index and the FTSE EPRA Index. By order of the Board Director Mapeley Limited Annual Report

53 Independent Auditors Report Independent auditors report to the members of Mapeley Limited on the annual Group financial statements for the year ended 31 December 2007 Introduction We have audited the Group financial statements of Mapeley Limited for the year ended 31 December 2007 which comprise the Consolidated Income Statement, the Consolidated Statement of Changes in Equity, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement and the related notes 1 to 31. These Group financial statements have been prepared under the accounting policies set out therein. This report is made solely to the Company's members, as a body, in accordance with Section 64 of The Companies (Guernsey) Law Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditors' report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors The Directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable Guernsey Law and International Financial Reporting Standards (IFRSs) as adopted by the European Union as set out in the Statement of Directors Responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with The Companies (Guernsey) Law We also report to you if, in our opinion, the Directors Report is not consistent with the financial statements, if the Company has not kept proper accounting records, or if we have not received all the information and explanations we require for our audit. We read other information contained in the Annual Report and consider whether it is consistent with the audited Group financial statements. The other information comprises only, the Chairman s and Chief Executive Officer s Statement, the Business Review, the Corporate Responsibility Report, the Financial Review, the Directors Report, the statement concerning Corporate Governance and the Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the Directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements. Opinion In our opinion the Group financial statements: _ give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group s affairs as at 31 December 2007 and of its loss for the year then ended; and _ have been properly prepared in accordance with The Companies (Guernsey) Law, Ernst & Young LLP Registered auditor London 14 March 2008 Mapeley Limited Annual Report

54 Consolidated income statement for the year ended 31 December Note m m Revenue Property operating expenses 4 (288.4) (283.5) Net contract, rental and related income Net valuation (deficit)/surplus on investment property 4,11 (148.6) 40.8 (Impairment)/reversal of impairment of non-investment property 4,10 (0.4) 0.8 Gain on disposal of non-investment property Administrative and other expenses 4 (20.2) (20.7) Operating (loss)/profit (39.9) Finance costs 6 (98.4) (89.6) Finance income (Loss)/profit before tax (129.0) 42.8 Income tax credit (Loss)/profit for the year attributable to equity holders of the parent company (124.9) 53.7 Dividends _ paid _ proposed and declared Pence/share Pence/share Dividends per share _ paid _ proposed and declared (Loss)/earnings per share _ basic 9 (424) 200 _ diluted 9 (424) 200 Mapeley Limited Annual Report

55 Consolidated statement of changes in equity for the year ended 31 December 2007 Net unrealised Asset Issued Share gains/ Retained revaluation Other Total capital premium (losses) losses reserve reserves equity m m m m m m m At 1 January (49.9) Revaluation surplus Depreciation written back on revaluation of non-investment property Transfer of excess revaluation depreciation 2.9 (2.9) Transfer of revaluation surplus on asset disposals 5.8 (5.8) Loss on cash flow hedges (2.9) (2.9) Tax on items taken directly to equity Total profit/(loss) for the year recognised directly in equity (2.3) Loss for the year (124.9) (124.9) Total income/(expense) for the year (2.3) (116.2) 6.7 (111.8) Cost related to issue of new ordinary shares (0.3) (0.3) Issue of shares to Non-executive Directors Issue of shares to employees under the Employee Share Plan Equity dividends (54.6) (54.6) At 31 December (220.7) (547.8) At 1 January (26.6) (68.5) Revaluation deficit (2.8) (2.8) Depreciation written back on revaluation of non-investment property Transfer of excess revaluation depreciation 5.2 (5.2) Transfer of revaluation surplus on asset disposals 0.6 (0.6) Gains on cash flow hedges Realised gain on cash flow hedge recognised in income statement Tax on items taken directly to equity (4.2) (0.4) (4.6) Total profit/(loss) for the year recognised directly in equity (3.4) 43.7 Profit for the year Total income/(expense) for the year (3.4) 97.4 Issue of new ordinary shares Cost related to issue of new ordinary shares (6.7) (6.7) Issue of shares to Non-executive Directors Issue of shares to employees under the Employee Share Plan Equity dividends (40.9) (40.9) At 31 December (49.9) Mapeley Limited Annual Report

56 Consolidated balance sheet at 31 December Note m m Assets Non-current assets Property, plant and equipment Investment property 11 1, ,483.1 Premiums on operating leases Trade and other receivables Derivative financial instruments Deferred tax asset Total non-current assets 2, ,078.6 Current assets Trade and other receivables Cash and short-term deposits _ in controlled accounts _ for operational purposes Total current assets Non-current assets held for sale Total assets 2, ,232.7 Equity and liabilities Equity attributable to equity holders of Mapeley Limited Issued capital (net of treasury shares) 16 Share premium Net unrealised gains Retained losses (220.7) (49.9) Asset revaluation reserve Other reserves Total equity Non-current liabilities Trade and other payables Interest and non-interest bearing loans and borrowings 17 1, ,268.7 Provisions Deferred asset management receipts Deferred tax liability Total non-current liabilities 1, ,388.9 Current liabilities Trade and other payables Interest and non-interest bearing loans and borrowings Provisions Derivative financial instruments Deferred asset management receipts Total current liabilities Total liabilities 1, ,520.0 Total equity and liabilities 2, ,232.7 Approved by the Board of Directors on 14 March 2008 and signed on its behalf by: C Parkinson Director J Hopkins Director Mapeley Limited Annual Report

57 Consolidated cash flow statement for the year ended 31 December Note m m Cash flows from operating activities (Loss)/profit before tax (129.0) 42.8 Adjustment for: Net finance costs Impairment/(reversal) of impairment on non-investment property 4, (0.8) Net valuation deficit/(surplus) on investment property 4, (40.8) Depreciation and amortisation Gain on disposal of non-investment property 4 (0.3) (3.2) Share benefit expense Operating profit before changes in working capital Decrease/(increase) in trade and other receivables 2.9 (6.1) Increase in trade and other payables Increase in provisions Increase in deferred asset management receipts Cash generated from operations Interest paid (74.0) (65.4) Interest received Net cash flows from operating activities Cash flows from investing activities Proceeds from disposal of investment property 4.1 Proceeds from disposal of non-investment property Purchase of property, plant and equipment 10 (1.1) (0.1) Purchase of investment property 11 (222.3) (366.4) Net cash flows used in investing activities (211.8) (359.9) Cash flows from financing activities Costs of raising finance 17 (1.3) (14.2) Payment of finance lease liabilities (0.7) (0.6) Swap and loan termination fees 6 (13.4) Receipt of new bank loans Repayment of bank loans 17 (3.3) (764.6) Proceeds from issue of ordinary shares Costs related to issue of ordinary shares (0.3) (6.7) Dividend paid to equity holders 8 (54.6) (40.9) Net cash flows from financing activities Net increase/(decrease) in cash and short-term deposits 14.4 (4.8) Cash and short-term deposits at 1 January Cash and short-term deposits at 31 December Mapeley Limited Annual Report

58 Notes to the audited consolidated financial statements for the year ended 31 December General information Mapeley Limited ( the Company ) is a public limited company incorporated and domiciled in Guernsey under the provisions of The Companies (Guernsey) Law, The Company s registered office is located at Regency Court, Glategny Esplanade, St Peter Port, Guernsey, GY1 1WW. The nature of the Group s operations and its principal activities are set out in the business review. The consolidated financial statements of the Group for the year ended 31 December 2007 comprise the Company and its subsidiaries and were authorised by the Board for issue on 14 March Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards adopted for use in the European Union ( IFRS ) and The Companies (Guernsey) Law 1994 on the historical cost basis, except for investment property, non-investment property held as part of property, plant and equipment and derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in pounds sterling and all values are rounded to one decimal place to the nearest million ( m) except where otherwise indicated. The functional currency of the parent is pounds sterling. Basis of consolidation The consolidated financial statements comprise the financial statements of Mapeley Limited and its subsidiaries for the year ended 31 December Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred from the Group. The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. All intra-group transactions are eliminated as part of the consolidation process. Statement of compliance The consolidated financial statements of Mapeley Limited have been prepared in accordance with IFRS. This is consistent with IFRS as adopted for use in the EU as it applies to the financial statements of the Group for the year ended 31 December In preparing the annual financial statements, the accounting principles applied reflect the amendments to IFRS and the adoption of those new IFRS which have become effective since 1 January 2007 as described below. 2.2 Changes in accounting policy and disclosures The accounting policies adopted are consistent with those of the previous financial year except as follows: IFRS amendments effective in 2007 The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards and interpretations did not have any effect on the financial performance or position of the Group. They did however give rise to additional disclosures. Standard Impact IFRS 7 Financial Instruments: Disclosures Additional disclosures relating to the Group s financial instruments and the nature and extent of risks arising from those financial instruments have been incorporated throughout the financial statements. IAS1 (para 124A 124C) Presentation of Financial Statements Additional disclosures relating to the Group s objectives, policies and processes for managing capital have been incorporated throughout the financial statements. IFRIC 8 Scope of IFRS 2 This interpretation is applied to arrangements in which the entity cannot specifically identify some services received in exchange for equity instruments. This interpretation had no impact on the Group s results. IFRIC 9 Reassessment of embedded derivatives As the Group has no embedded derivative requiring separation from the host contract, the interpretation had no impact on the Group s results. IFRIC 10 Interim financial reporting and impairment As the Group has no impairment losses previously reversed, the interpretation had no impact on the Group s results. IFRIC 11 IFRS 2 Group and Treasury Shares This standard is applicable for periods commencing on or after 1 March The Group has adopted this standard early but this has no impact on reported results at a consolidated level. Mapeley Limited Annual Report

59 2.2 Changes in accounting policy and disclosures (continued) IFRS issued but not yet effective The Group has not adopted the following standards in the preparation of financial statements as they were either not effective at 31 December 2007 or not applicable to the Group s business: Standard Effective Date IFRS 8 Operating Segments Periods commencing on or after 1 January 2009 IAS 1 Presentation of Financial Statements Periods commencing on or after 1 January 2009 IAS 23 Borrowing Costs Periods for which commencement date for capitalisation is on or after 1 January 2009 IFRIC 12 Service Concession Arrangements Periods commencing on or after 1 January 2008 IFRIC 13 Customer Loyalty Programmes Periods commencing on or after 1 July 2008 IFRIC 14: IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Periods commencing on or after 1 January 2008 The Group is still evaluating the impact that these standards will have on the Group s financial statements, if any, but expect that there will be no material impact to the results of the Group when implemented. Reclassification of Work in Progress The Directors have reconsidered the treatment for work in progress since the annual report for the year ended 31 December 2006 and have concluded that it is more appropriate to treat this item as accrued income under the terms of IAS 18 Revenue. The effect of this change is as follows: _ Work in progress of 15.7 million as at 31 December 2006 has been reclassified in the balance sheet as unbilled revenue which is included in trade and other receivables and the amount recorded increased by 0.5 million. _ In the period to 31 December 2006 revenue has decreased by 2.0 million and property operating expenditure has decreased by 1.9 million. Retained losses brought forward at 31 December 2006 have been adjusted by 0.5 million. _ References to work in progress in Funds from Operations in note 29 have been changed to unbilled revenue. 2.3 Summary of significant accounting policies Revenue Revenue recognised in the income statement represents amounts receivable in respect of contractual income (which incorporates property rental income and income from the rendering of services as described below), property rental income and interest income earned in the normal course of business, net of VAT and other sales-related taxes. Contractual revenues The Group s gross contractual revenue comprises income earned by its property outsourcing businesses, and rentals and service charges received from tenants. Contracts entered into as part of the Group s property outsourcing business for which payment is received through a facility unitary price are unbundled, either at inception or on any reassessment of the arrangement. Income from the embedded leases, principally contractual and third-party rents, is distinguished from income from the other contract elements. Amounts receivable in respect of the provision of property to customers are treated in accordance with the provisions of IAS 17 Leases (with the minimum lease payments being spread on a straight-line basis over the life of the lease). However, the cost and revenue profiles of the portion of the contract concerned with the provision of property related services are treated as arising from service contracts in accordance with IAS 18 Revenue. Revenues earned from property outsourcing businesses are subject to variation due to the flexible occupational rights conferred by those contracts. Income from service contracts where payment is received by a fixed unitary charge is recognised and accounted for according to the stage reached in the contract by reference to the costs of work completed. An appropriate estimate of the revenue attributable to the work undertaken is recognised once the outcomes of contracts can be assessed with reasonable certainty. Mapeley Limited Annual Report

60 Notes to the audited consolidated financial statements continued for the year ended 31 December Summary of significant accounting policies (continued) Revenue (continued) Contractual revenues (continued) In addition to service charges, as part of certain property outsourcing contracts, the Group is also responsible for procuring certain additional goods and services supplied to its customers. The direct costs of supplying these goods are invoiced to the Group and recharged to customers in full. As the Group receives a pre-determined fee for managing such activity on behalf of its customers and the risks in relation to the provision of these goods and services are primarily borne by the Group s customers, revenue for this activity recorded by the Group comprises the net income earned by the Group from this activity in each financial reporting period. Interest income Interest income is the interest earned on cash held in bank accounts and is recognised in the accounts on an accruals basis. Rental income receivable under operating leases Rental income receivable under operating leases is recognised on a straight-line basis over the term of the lease, except for contingent income which is recognised when it arises. Incentives for lessees to enter into lease agreements are spread evenly over the term of the lease, even if the payments are not made on such a basis. The term of the lease is defined as the non-cancellable period of the lease plus any further terms for which the lessee has the option to continue to lease the asset when at the inception of the lease it is reasonably certain that the lessee will exercise the option. Premiums received to terminate leases are recognised in the income statement when they arise, any premiums received to amend leases are spread over the remaining lease term. Rentals payable under operating leases Rentals payable under operating leases are charged on a straight-line basis over the lease term. Incentives given by lessors to enter into lease agreements, including asset management receipts, are spread evenly over the term of the lease as a reduction of rental expense, even if the payments are not made on such a basis. The term of the lease is defined as the non-cancellable period of the lease plus any further terms for which the lessee has the option to continue to lease the asset when at the inception of the lease it is reasonably certain that the lessee will exercise the option. Premiums paid to terminate leases are recognised in the income statement as they arise. Exceptional items The Group presents as exceptional items on the face of the income statement, those material items of income and expense which, because of the nature and expected infrequency of the events giving rise to them, merit separate presentation to allow shareholders to understand better the elements of financial performance in the year, so as to facilitate comparison with prior periods and to assess better trends in financial performance. Investment property Freehold property held to earn rent or for capital appreciation or both is classified as investment property in accordance with IAS 40 Investment Property. Property held under finance leases for similar purposes is also classified as investment property. Investment property is measured initially at cost, including transaction costs, and thereafter is stated at fair value, which reflects market conditions at the balance sheet date. Gains or losses arising from changes in the fair value of investment property are included in the income statement in the year in which they arise. Property, plant and equipment Property Where the Group provides significant levels of ancillary services to the occupiers of its property, this property is not classified as investment property. Such freehold property and property held under finance leases are revalued to fair value annually and depreciated in accordance with IAS 16 Property, Plant and Equipment. Surpluses or deficits on individual properties are transferred to the revaluation reserve, except that deficits including impairment adjustments below historical cost are taken to the income statement. Any revaluation surplus is credited to the revaluation reserve in equity except to the extent that it reverses a decrease in the carrying value of the same asset previously recognised in the income statement, in which case the increase is recognised in the income statement. A revaluation deficit is recognised in the income statement, except to the extent of any existing surplus in respect of that asset in the revaluation reserve. A transfer is made from the revaluation reserve to retained earnings for the difference between depreciation based on the carrying amount of the assets and that based on the asset s original cost. Additionally, accumulated depreciation as at the revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. Plant and equipment Plant and equipment is stated at cost less depreciation and any additional provision for impairment which may be required. Premiums on operating leases Premiums on operating leases are stated at cost less amortisation and any additional provision for impairment which may be required. Mapeley Limited Annual Report

61 2.3 Summary of significant accounting policies (continued) Depreciation and amortisation Depreciation is provided on property, plant and equipment at rates calculated to write off the cost or valuation, less the estimated residual value, of each asset on a straightline basis over its expected useful life. _ Buildings are classified according to their condition and date of construction, and are depreciated over periods between 20 and 50 years according to this classification. Buildings held under finance leases are depreciated over the terms of the leases if shorter. _ Premiums paid for operating leases are amortised on a straight-line basis over the remaining lease terms. _ Plant and equipment, excluding information systems equipment, are depreciated over four years. _ Information systems equipment, including computer equipment and telecommunications apparatus is depreciated over two to four years. _ No depreciation charge is applied to land. The useful economic life and residual values of all property, plant and equipment is reassessed annually. Pre-contract costs Pre-contract costs are expensed as incurred until it is virtually certain that a contract will be awarded, from which time further pre-contract costs are recognised as an asset and charged as an expense over the life of the contract. Acquisitions of corporate interests in property Where properties are acquired through the acquisition of corporate interests the directors have regard to the substance of the assets and activities of the acquired entity in determining whether the acquisition represents the acquisition of a business. Where such acquisitions are not judged to be an acquisition of a business the transactions are accounted for as if the Group had acquired the underlying property directly. Accordingly no goodwill arises. Rather the cost of the corporate entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values at the acquisition date. Otherwise corporate acquisitions are accounted for as business combinations. Non-current assets held for sale Items of property, plant and equipment are transferred to non-current assets held for sale when it is expected that their carrying amount will be recovered principally through sale rather than from continuing use in the business in accordance with IFRS 5 Non current assets held for sale. On re-classification any depreciation of the assets ceases (even if the assets are still being used by the Group), and in the case of investment property each asset is carried at its fair value less cost of realisation and in the case of other assets, each asset is carried at the lower of its previous carrying value and fair value. Any impairment adjustment below historical cost is charged to the income statement. Finance leases The determination of whether an arrangement is, or contains a finance lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether the arrangement conveys a right to use the asset. Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and the reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged to the income statement as they arise. Impairment of assets The Group assesses, at each reporting date, whether there is any indication that an asset may be impaired. If the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows of the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised in the income statement. An assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in the income statement unless the asset is carried at revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. Asset management receipts Asset management receipts, which represent premiums given by lessors or received from landlords in return for the Group extending its existing lease terms or removing break clauses from existing leases, are deferred and released as a credit to operating costs evenly over the shorter of the lease term and the first break, even if payments are not made on such a basis. Mapeley Limited Annual Report

62 Notes to the audited consolidated financial statements continued for the year ended 31 December Summary of significant accounting policies (continued) Trade and other receivables Trade and other receivables are recognised and carried at the lower of their original invoiced value and recoverable amount. A provision for impairment of trade receivables is established where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables concerned. Balances are written off when the probability of recovery is assessed as being remote. Trade and other receivables includes unbilled revenue receivable under service contracts. Long-term service contracts are accounted for by reference to the stage of completion. Where costs incurred plus recognised profits less recognised losses exceed progress billings, the balance is shown as unbilled revenue. Where the progress billings exceed costs incurred plus recognised profits less recognised losses the balance is held within trade and other payables. Cash and short-term deposits Cash and short-term deposits in the balance sheet comprise cash at bank, short-term deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement. Trade and other payables Trade and other payables are stated at cost. Provisions Provision is made in respect of costs incurred on vacant leasehold properties or for leasehold properties sublet at a level which renders a property loss-making over the length of the lease, being the net cash outflow committed to be incurred over the lives of the leases. The cash flows for each such lease are discounted back to the balance sheet date, representing the Group s best estimate of the impact of the time value of money and the risks inherent in its obligations. Any increase or decrease in the provision is taken to the income statement each financial period. The unwinding of the discount in the provision is charged to the income statement each year within finance costs. The basis of the provision, the discount rate applied and amounts provided are reviewed quarterly. Share-based payments The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which shares are granted. Fair value, in the case of shares issued at the date of the Company s IPO and the two further equity raises, is the offer price. Fair value at all other dates is determined as the bid price quoted on the London Stock Exchange at the date of the grant. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ( the vesting date'). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. Where the terms of an equity-settled award are modified, as a minimum, an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any modification, which increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee as measured at the date of modification. Where an equity-settled award does not meet the vesting conditions, the expense recognised in the income statement is reversed, as if it had not vested, on the date of cancellation. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new awards are treated as if they were a modification of the original award, as described in the previous paragraph. Share premium Costs related to the issue of ordinary shares are charged against share premium. Financial instruments Interest and non-interest bearing loans and borrowings All loans and borrowings are initially recognised at the fair value of consideration received less directly attributable transactions costs. After initial recognition, interest and non-interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs and any discount or premium on settlement. Borrowing costs are recognised in the income statement using the effective interest rate method. Gains and losses arising on the repurchase, settlement or otherwise cancellation of liabilities are recognised in finance income and finance expense respectively. Derivative financial instruments The Group uses derivative financial instruments, such as interest rate swaps, to hedge its risks associated with interest rate fluctuations. In accordance with its treasury policy, the Group does not hold or issue derivatives for trading purposes. Such derivative financial instruments are initially recognised at fair value on the date at which a derivative contract is entered into and are subsequently remeasured at fair value. Mapeley Limited Annual Report

63 2.3 Summary of significant accounting policies (continued) Financial instruments (continued) Derivative financial instruments (continued) Fair value for a swap is market value, as determined by a break cost quote prepared by an experienced, independent broker, which is estimated by applying current yields to anticipated future cash flows. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. For those derivatives with the characteristics of a hedge and for which hedge accounting is desired, the hedging relationship is documented at its inception and designated as a hedge. This documentation identifies the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how effectiveness will be measured throughout its duration. Such hedges are expected at inception to be highly effective. For the purpose of hedge accounting, interest rate swaps are designated as cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a forecast transaction. For derivatives that do not qualify for hedge accounting, any gains or losses arising from changes in fair value are taken directly to the income statement for the year. For derivatives that qualify for hedge accounting, any gains or losses arising from changes in fair value are recognised in equity under net unrealised gains or losses. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecast transaction occurs. If a hedged transaction is sold, terminated or exercised, or no longer qualifies for hedge accounting, the net cumulative gain or loss recognised in equity is transferred to the income statement for the year. Current taxation Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted by the balance sheet date. The Company is a limited company registered in Guernsey, Channel Islands and was exempt from local taxation for the year ended 31 December Certain Group undertakings are subject to foreign taxes in respect of foreign source income, including UK income tax on rental income. With effect from 1 January 2008, Guernsey abolished the exempt company regime. Thereafter, the Company will be taxed at the company standard rate of 0%. The Company will be required to deduct tax at the difference between the tax suffered by the Company and the shareholders individual rate of 20% in respect of actual dividends and deemed distributions and pay that tax to the Administrator of Income Tax, on behalf of any Guernsey resident shareholders. Tax paid by the Company in respect of deemed distributions is accounted for as a debit balance on the shareholders loan accounts. Deemed distributions include investment income as it arises and any undistributed trading income of a company if a trigger event, such as death, sale of shares, migration of Company or Guernsey resident shareholder should occur. No deductions need to be made in respect of distributions made wholly from income that arose before 1 January 2008 and in respect of holdings of less than 1%. Deferred taxation Deferred income tax is provided using the liability method on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax is recognised for all temporary differences arising between the tax base of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions: _ where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; _ in respect of taxable temporary differences associated with investments in subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and _ deferred income tax assets are recognised only to the extent that it is probable that taxable profit will be available against which deductible temporary differences, carried forward tax credits or tax losses can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date. Income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Retirement benefit schemes The Group operates a defined contribution pension scheme. The amount charged to the income statement in respect of pension costs and other post-retirement benefits is the contributions payable for the year. Differences between contributions payable for the year and contributions actually paid are shown as either accruals or prepayments in the balance sheet. Mapeley Limited Annual Report

64 Notes to the audited consolidated financial statements continued for the year ended 31 December Significant accounting judgements, estimates and assumptions The preparation of the financial statements in accordance with IFRS requires the use of estimates and assumptions that affect the value at which certain assets and liabilities are held at the balance sheet date and also the amounts of revenue and expenditure recorded in the period. The Directors believe the accounting policies chosen are appropriate to the circumstances and are based on historical experience and information available to them at the time each estimate is made. Actual outcomes may differ materially from current expectations under different assumptions and conditions. The accounting policies that are subject to significant estimates and assumptions are set out below. Property valuations Investment property and property held under property, plant and equipment is held at fair value and revalued at each balance sheet date. The valuations are carried out by the Group s property valuers based upon estimates and subjective judgements that may vary from the actual values and sales prices that may be realised by the Group upon ultimate disposal. The critical assumptions made relating to valuations have been disclosed in notes 10 and 11 to the financial statements. Rental income Rental income receivable under operating leases is recognised on a straight-line basis over the term of the lease, except where income is contingent in which case it is recognised as it arises. The Group s outsourcing contracts with Abbey and HMRC are subject to annual uplifts in rental income. Receipts from HMRC are considered contingent as they are subject to annual uplifts related to RPI and uncertainty of income due to the vacation rights that exist within the HMRC contract. On the Abbey contract the considerable flexibility of occupation conferred by Abbey s vacation rights also makes contract revenue contingent. Onerous lease provision Provision is made in respect of costs incurred on vacant leasehold properties or for leasehold properties sublet to tenants at a level of rent that would cause the properties to realise losses over the remaining terms of leases as set out in note 18. The annual projections of cash flows for onerous leases are based upon estimates and subjective judgements and they may vary from the actual costs incurred on such onerous leases. These estimates are driven from the Group s core business management systems and property databases which reflect the Director s best expectations of the likely outcome of each property at any point in time. The forecast cash flows are discounted to the annual discount rate at a rate estimated to reflect the Group s time value of money. Long-term service contracts The Group receives regular income under its outsourcing contracts, however its life cycle activity does not arise in such a regular manner. Accordingly, revenue receivable under the service contract element of outsourcing contracts is accrued and classified as unbilled revenue. The amounts accrued are estimates from the Group s financial forecasting models and expectations of future occupancy which reflect the Directors best expectations of the likely outcome under these contracts at any point in time million of unbilled revenue had been accrued in respect of lifecycle activity as at 31 December 2007 (31 December 2006: 16.2 million). 3. Revenue and segmental information For management purposes, the Group is currently organised into two segments in line with the Group s business model Outsourcing contracts and Direct Property Investments. These divisions are the basis on which the Group reports its primary segment information. The segments are described below: Outsourcing contracts This segment consists of activities arising from the purchase and subsequent leaseback of the HMRC and Abbey property portfolios and the fit-out and delivery of serviced accommodation under the IPS contract. The main characteristics of these arrangements are listed below: _ long-term contracts (the contracts run over periods from 3 to 20 years); _ agreements are tailored in accordance with the client s accommodation requirements (from simple purchase and lease back to fully serviced accommodation); _ the HMRC and Abbey agreements allow them to exercise flexibility to vacate properties within defined parameters; and _ under the HMRC and Abbey agreements the revenue earned is subject to annual increases. Direct Property Investments The Group has embarked on a separate strategy of acquiring individual and portfolios of office property. The Group s activities within this segment focuses on purchasing property primarily let to strong credit quality tenants, who are likely to stay in the properties for a minimum term of five years. The Group has a single geographical segment, being the UK commercial property market. Mapeley Limited Annual Report

65 3. Revenue and segmental information (continued) Year ended 31 December December 2006 Direct Direct Property Outsourcing Total Property Outsourcing Total Investments contracts operations Investments contracts operations Business segments m m m m m m Rental revenue Other income _ Facility unitary charge _ Contractual rents Contractual revenue Segment revenue Rentals payable (0.7) (170.6) (171.3) (0.3) (173.6) (173.9) Other direct property and contract expenditure * (3.7) (113.4) (117.1) (1.2) (108.4) (109.6) Net contract, rental and related income (Impairment)/reversal of impairment of non-investment property (0.4) (0.4) Net valuation (deficit)/surplus of investment property (129.6) (19.0) (148.6) Gain on disposal of non-investment property Segment result (64.4) 44.7 (19.7) Gain on disposal of subsidiaries Unallocated expenses (20.2) (20.7) Operating (loss)/profit (39.9) Net finance costs (89.1) (82.8) Income tax credit (Loss)/profit for the year (124.9) 53.7 Assets and liabilities Segment assets 1, , , , ,156.3 Unallocated assets Total assets 2, ,232.7 Segment liabilities Unallocated liabilities 1, ,328.9 Total liabilities 1, ,520.0 Other segment information Depreciation and amortisation charged to segments (6.1) (6.1) (9.0) (9.0) Acquisition of investment property * Other direct property and contract expenditure includes depreciation. Mapeley Limited Annual Report

66 Notes to the audited consolidated financial statements continued for the year ended 31 December Expenses m m Property operating expenses Rentals and service charges payable Other direct property and contract expenditure Depreciation and amortisation Net valuation gains on property Net valuation (deficit)/surplus on investment property (note 11) (148.6) 40.8 (Impairment)/reversal of impairment of non-investment property (0.4) 0.8 Gain on disposal of non-investment property (148.7) 44.8 Administrative expenses Staff costs (note 5) Depreciation and amortisation Audit fees Non-audit fees paid to auditors Other administrative expenses Depreciation, amortisation and costs of inventories included in property operating expenses and administrative expenses above Depreciation and amortisation A more detailed analysis of auditors remuneration is provided as follows: Fees payable to the Company s auditors for the audit of the Company s annual accounts Fees payable the Company s auditors and its associates for other services _ audit of the Company's subsidiaries _ interim and quarterly reviews _ other assurance work _ tax services Other services not covered above _ equity raise* 416 * in ,000 was paid to the Group s auditors for services provided in connection with the listing of new shares in the Company and which has been charged against share premium. Mapeley Limited Annual Report

67 5. Employee benefits expense Staff costs m m Wages and salaries Social security costs Pension costs (see note 21) Share benefit expense The share benefit expense comprises the following: m m Employee share benefit expense Non-Executive Directors share benefit expense Employee share benefit expense During 2005, the Group established its Employee Share Plan (the Plan ). On the Group s admission to the Official List of the London Stock Exchange on 21 June 2005, 291,308 ordinary shares were granted and issued in the names of Plan members subject to certain vesting conditions. A further 13,059 new shares were granted and issued on 17 March Vesting takes place over periods of three to five years from the date of issue and is conditional on employees remaining in employment; there are no performance conditions. During the vesting period, the participants receive dividends and the shares may be sold, but the proceeds of any sale are subject to the same vesting terms as the shares. Two further awards of 2,173 shares and 45,740 shares were granted on 8 May 2006 and 14 December 2006 respectively and were issued out of shares that had been returned to the Company as a result of members withdrawing from the Plan. Following these issues, 19,686 shares remained having been returned to the Company (2006: 698 shares). The total cost to the Group of shares issued under the Plan of 8.8 million (2006: 8.8 million) is to be spread over the relevant vesting periods; 30% will vest on each of the third and fourth anniversaries of the date of grant and the remaining 40% will vest on the last business day before the fifth anniversary of the date of grant. Non-executive Director share benefit expense During 2005 four Non-executive Directors were each awarded 15,000 ordinary shares. 5,000 shares each vested on the date of grant and after each of the first two annual general meetings following the date of appointment. The final tranche was issued in June The total cost to the Group of shares issued or granted to Non-executive Directors during the year ended 31 December 2005 of 1,438,000 has been fully expensed as at 31 December Staff numbers The average monthly number of employees (excluding Non-executive Directors) of the Group were: Number Number Operations Executive and business support Mapeley Limited Annual Report

68 Notes to the audited consolidated financial statements continued for the year ended 31 December Finance costs and finance income m m Finance costs Bank loans and overdrafts Finance charges payable under finance leases Loss on interest swap 12.9 Loss on breaking interest rate swap 13.4 Loan termination costs Unwinding of discount on provisions (see note 18) Finance income Bank interest receivable Gain on interest rate swap Bank loans and overdraft charges include a charge of 4.1 million (2006: 7.7 million) relating to loan financing fees recognised under the effective interest rate method. Of this amount nil million ( million) relates to exceptional charges as outlined below. In 2006 the Group incurred the following exceptional charge relating to the refinancing of certain Group borrowings: 2006 m Loss on breaking interest rate swap 13.4 Loan termination costs Finance charge resulting from a change in the timing of the repayment of the original loan Income tax expense The major components of income tax for the years ended 31 December 2007 and 2006 are: a) Tax on profit on ordinary activities Tax charged in the income statement m m Current income tax Guernsey income tax UK income tax 0.1 Current income tax charge 0.1 Amounts overprovided in previous years Total current income tax 0.1 Deferred tax Origination and reversal of temporary differences (5.0) (10.9) Effect of change in tax rate 0.8 Total deferred tax (4.2) (10.9) Tax credit in the income statement (4.1) (10.9) Mapeley Limited Annual Report

69 7. Income tax expense (continued) b) Reconciliation of income tax charge % m % m (Loss)/profit before income tax (129.0) At the weighted average income tax rate for the Group 28.1 (36.2) Revaluation gains on investment properties not taxable (25.3) 32.6 (21.8) (9.4) Expenses not deductible for tax purposes and excluded income (0.2) Unutilised current year tax losses (0.9) 1.1 (0.7) (0.3) Utilisation of previously unrecognised losses 1.2 (1.5) (14.2) (6.0) Capital allowances in excess of depreciation 1.9 (2.5) (4.2) (1.8) Other (1.6) 2.1 (1.1) (0.5) At effective income tax rate of 3.2% (2006: 25.4%) 3.2 (4.1) (25.4) (10.9) The weighted average income tax rate for the year of 28.1% (2006: 10.8%) is based on the weighted average tax rate applicable across the Group s operations. This has been calculated by dividing (1) Group companies' profits before tax multiplied by the tax rate applicable for each Group company by (2) the Group's profit before tax, given that the Group operates in various different tax jurisdictions. During the year the enacted UK income tax and corporation rates applicable from 1 April 2008 were reduced to 20% and 28% respectively. c) Deferred income tax The movement in deferred tax was as follows: Deferred tax assets Impact of 1 January change in Recognised 31 December 2007 tax rate in income 2007 m m m m Losses not utilised 6.5 (0.5) Decelerated capital allowances 3.5 (0.2) (2.7) 0.6 Asset management receipts 0.9 (0.1) (0.8) Impact of 1 January change in Recognised 31 December 2006 tax rate in income 2006 m m m m Losses not utilised Decelerated capital allowances Asset management receipts Mapeley Limited Annual Report

70 Notes to the audited consolidated financial statements continued for the year ended 31 December Income tax expense (continued) c) Deferred income tax (continued) Deferred tax liabilities Impact of 1 January change in Recognised 31 December 2007 tax rate inequity 2007 m m m m Revaluation of interest rate swaps to fair value 4.2 (0.6) 3.6 Deferred tax asset recoverable in the event of sale of revalued properties at market value 0.4 (0.2) (0.8) 3.8 Impact of 1 January change in Recognised 31 December 2006 tax rate inequity 2006 m m m m Revaluation of interest rate swaps to fair value Deferred tax asset recoverable in the event of sale of revalued properties at market value The Group has additional tax losses and deductions that will be available indefinitely for offset against future taxable profits of the companies in which the losses and deductions arose. The Group has not recognised deferred income tax assets in respect of some of these losses (as stated above). In addition, the Group has the following unrecognised deferred tax assets. The assets have not been recognised due to the degree of uncertainty over both the amount and the timing of utilisation Deductible temporary differences, unutilised losses and other timing differences for which no deferred tax asset is recognised and the tax effect of such items is shown below. Timing Unrecognised Timing Unrecognised difference deferred tax difference deferred tax 2007 asset asset 2006 m m m m Losses not utilised Decelerated capital allowances Movement in the provision for onerous leases Movement in the deferral of asset management receipts Other temporary differences Total unrecognised deferred tax asset balance On 21 March 2007, the Chancellor announced that with effect from 1 April 2008, the standard rate of UK Corporation Tax and Income Tax will reduce from 30% to 28% and 22% to 20% respectively. The reduced tax rate was included in the Finance Bill The Finance Bill passed through the House of Commons on 27 June 2007 and is therefore considered substantively enacted by the Balance Sheet date. As a result, where applicable, deferred tax balances have been calculated at 28% or 20% in respect of UK incorporated companies or other Group companies with UK businesses. Mapeley Limited Annual Report

71 8. Dividends paid and proposed m m Declared and paid during the period: Equity dividends on ordinary shares: Fifth interim dividend for 2005: 0.37 per share 8.3 First interim dividend for 2006: 0.39 per share 10.3 Second interim dividend for 2006: 0.41 per share 10.9 Third interim dividend for 2006: 0.43 per share 11.4 Fourth interim dividend for 2006: 0.45 per share 13.2 First interim dividend for 2007: 0.47 per share 13.8 Second interim dividend for 2007: 0.47 per share 13.8 Third interim dividend for per share Declared and approved at the Board meeting on 14 March 2008 (to be deducted from retained earnings in the year ending 31 December 2008) Equity dividends on ordinary shares: Fourth interim dividend for 2007: 0.47 per share (2006: Fourth interim dividend for 2006: 0.45 per share) Earnings per share The calculation of basic and diluted earnings per share figures is based on the following: _ Net loss attributable to equity holders of the Company for the year of million (year ended 31 December 2006: profit of 53.7 million). _ Weighted average number of ordinary shares (after deducting 19,686 treasury shares relinquished by members of the employee share plan during the year) for basic earnings per share: 29,417,876 (year ended 31 December 2006: 26,887,700 after deducting 698 treasury shares relinquished by members of the employee share plan). _ Weighted average number of ordinary shares (after deducting 19,686 treasury shares relinquished by members of the employee share plan during the year) for diluted earnings per share: 29,417,876 (year ended 31 December 2006: 26,903,833 after deducting 698 treasury shares relinquished by members of the employee share plan). The difference between the number of shares used for the basic and diluted earnings per share calculation in 2006 of 16,133 represented the weighted average number of shares awarded but not yet issued to Non-Executive Directors. All shares awarded under this scheme have now been issued. There have been no other transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of completion of the financial statements. Mapeley Limited Annual Report

72 Notes to the audited consolidated financial statements continued for the year ended 31 December Property, plant and equipment Property Freehold acquired under Plant and property finance lease equipment Total m m m m Cost or valuation: At 1 January Additions Disposals (2.0) (2.0) Reversal of impairment Revaluations (6.9) 4.1 (2.8) At 31 December Accumulated depreciation: At 1 January 2006 (2.2) (15.7) (17.9) Provided during the year (5.3) (0.5) (0.5) (6.3) Written back on revaluation At 31 December 2006 (2.4) (16.2) (18.6) Net book value: At 31 December At 31 December Property Freehold acquired under Plant and property finance lease equipment Total m m m m Cost or valuation: At 1 January Additions Disposals (8.2) (0.2) (8.4) Impairment (0.4) (0.4) Revaluations 12.4 (0.2) 12.2 Transfers to non-current assets held for sale (9.1) (9.1) At 31 December Accumulated depreciation: At 1 January 2007 (2.4) (16.2) (18.6) Provided during the year (2.8) (0.3) (0.2) (3.3) Written back on Revaluation At 31 December 2007 (2.5) (16.2) (18.7) Net book value: At 31 December At 31 December Mapeley Limited Annual Report

73 10. Property, plant and equipment (continued) Freehold property and property acquired under finance leases are included in property, plant and equipment where the Group provides significant ancillary services to tenants, and are carried at fair value. During the year, certain of the Group s non-investment properties have been written down by an amount of 0.4 million (2006: nil). The impairment adjustment has been charged to the current year s income statement reflecting the amount of the impairment below their historical cost values. Freehold property held at 31 December 2007 of million (2006: million) and the majority of the property acquired under finance leases at 31 December 2007 of 41.5 million (2006: 41.7 million) were valued at 31 December 2007 by CB Richard Ellis Limited ( CBRE ), a valuer external to the Group, as part of the valuation of all the valuable properties held by the Group under the HMRC contract. At 31 December 2006 the valuation was performed by Savills Commercial Limited ( Savills ). During the period the contract for the valuation of the HMRC Estate was re-tendered through a competitive process. The preferred bidder was selected to ensure best value and a consistent scope of methodology across the portfolios. These valuations have been incorporated into the annual financial statements. CBRE have consented to the use of their name in these financial statements. The total of this valuation at 31 December 2007 was million (2006: million) and an analysis of where the assets valued are recorded in the financial statements is shown in the table below: 31 December 31 December m m Freehold property Property acquired under finance leases Minimum payments under head leases Recorded in property, plant and equipment Properties held within premiums on operating leases at amortised cost of 32.2 million (2006: 35.2 million) Properties held as non-current assets held for sale at net book value on transfer of 9.1 million Total valuation of property, plant and equipment Represented by: Total valuation of Group s assets by CBRE/Savills Minimum payments under head leases Four properties with a valuation of 14.4 million (2006: nil million) and a carrying value of 9.1 million included within this valuation are being marketed for sale and as such are classified as non-current assets held for sale. They are carried at the lower of carrying value and fair value of 9.1 million (2006: nil) (see note 13). Long leasehold properties with a valuation of 33.6 million (2006: 39.2 million) are classified as premiums on operating leases and are recorded at historical cost less amortisation of 32.2 million (2006: 35.2 million) (see note 12). The valuation at 31 December 2007 has been carried out in accordance with The Royal Institution of Chartered Surveyors' ( RICS ) Valuation Standards, Sixth Edition (the Red Book ). At 31 December 2006 the valuation was carried out in accordance with the Fifth Edition of the Red Book. The valuations have been prepared in accordance with the Red Book on the basis of Market Value, which is defined as follows: The estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm's-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. Mapeley Limited Annual Report

74 Notes to the audited consolidated financial statements continued for the year ended 31 December Property, plant and equipment (continued) The following assumptions were used in determining the valuations which were specific to the Group: _ For the purpose of the valuations, the properties have been valued as part of a portfolio. The valuations assume that the contract is freely assignable in the open market. _ No allowances have been made for any expenses of realisation nor for taxation which might arise in the event of a disposal of a property. The valuations are, however, net of purchase costs (if any). _ Purchasers' costs have been deducted in arriving at the valuations. These are based on 1% agents fees, 0.5% legal fees (fees include VAT at 17.5%) and stamp duty land tax at the relevant rate, dependent upon the value of each property. _ Under the terms of the contract with HMRC, it is entitled to bring a proportion of its leases to an end earlier than the 20-year term and vacate the premises subject to (i) 12 months' notice; and (ii) agreed limits on the amount and type of space that can be vacated each year. The possibility of HMRC exercising these break provisions has been accounted for in each respective part of the portfolio (i.e. core, flexible and intermediate property). The risk of the tenant s ability to break any leases is then factored on each individual component part by assessing the average income at risk in the event of the tenant breaking such lease. _ The annual at risk income is then capitalised at an appropriate rate over a term of three years (to include marketing and incentive void, an amount for letting fees, minor refurbishment costs and void rates) and amortised for a number of years until either the space in that component part has been exhumed or until 2019 (i.e. two years from expiry when the tenant no longer has an ability to break). _ HMRC pays the Group amounts under the contract which cover the charge both for the accommodation provided and the related services. The payment is subject to deductions for failures to meet specified performance standards and unavailability for use. Services provided to HMRC include maintenance, life cycle replacement, cleaning, help desk, security, catering, childcare, health and safety, utilities, equipment management, churn, vending and landscaping. The valuations rely upon the Group for its assessment of the cost of providing these services, the level of deductions and how they will vary over time. An allowance has been applied to the portfolio capital value to account for this obligation to provide services and the nature of the contract. _ The valuations have been carried out by taking account of the benefit of the contract with HMRC and the various occupational leases and the subsequent sale of the property at expiry of these arrangements. In assessing the future sales proceeds, CBRE have estimated the vacant possession yields and have taken into account void periods for marketing and incentives. Certain other properties held under finance leases and included within property, plant and equipment were valued in accordance with the Red Book by the Directors at a Market Value of 2.1 million (2006: 2.2 million) having taken advice from a suitablyqualified employee (a member of The Royal Institution of Chartered Surveyors). If freehold property and property acquired under finance leases were measured using the historical cost model, the carrying amounts would be as follows: m m Freehold Cost Accumulated depreciation (3.4) (3.5) Net book value Acquired under finance leases Cost Accumulated depreciation (2.6) (2.4) Net book value All leased assets are pledged as security for the related finance lease obligation. As set out in note 17, freehold property and property acquired under finance leases have been secured against external borrowings. Mapeley Limited Annual Report

75 11. Investment property Property Freehold acquired under property finance lease Total m m m At valuation: At 1 January , ,077.4 Additions Revaluations Transfer to non-current assets held for sale (3.0) (3.0) At 31 December , ,483.1 Additions Revaluations (149.2) 0.6 (148.6) At 31 December , ,558.0 It is the Group s policy to carry investment property at fair value in accordance with IAS 40 Investment Property. Investment property was valued at 31 December 2007 by CB Richard Ellis Limited ( CBRE ) and Knight Frank LLP ( Knight Frank ), valuers external to the Group. These valuations have been incorporated into the annual financial statements. Both Knight Frank and CBRE have consented to the use of their names in these financial statements. Investment property comprises the Group s Abbey portfolio and its direct property investments. CBRE s valuation of the Abbey portfolio of properties was million (2006: million). Knight Frank and CBRE both carried out valuations of the Group s other properties held within investment property, which were valued at 77.9 million (2006: 53.1 million), and million (2006: million) respectively as at 31 December At 31 December 2006 the properties valued by Knight Frank were valued by Savills Commercial Limited. During the period the contract for the valuation of these properties was re-tendered through a competitive process. The remaining properties held under Property acquired under finance leases were valued by the Directors at a Market Value of 5.3 million (2006: 4.2 million), having taken advice from a suitably-qualified employee (a member of The Royal Institution of Chartered Surveyors). These valuations are summarised below: 31 December December 2006 m m Valuation of Abbey portfolio by CBRE Valuation of asset held for sale by the Directors 2.5 Transfer to non-current assets held for sale (3.0) Valuation of direct property investments by Knight Frank Valuation of direct property investments by CBRE Minimum payments under head leases , ,483.1 The valuations at 31 December 2007 have been carried out in accordance with The Royal Institution of Chartered Surveyors' Valuation Standards, Sixth Edition (the Red Book ). The valuation as at 31 December 2006 was carried out in accordance with the Fifth Edition. The valuations have been prepared in accordance with the Red Book on the basis of Market Value, which is set out in note 10. Mapeley Limited Annual Report

76 Notes to the audited consolidated financial statements continued for the year ended 31 December Investment property (continued) The following assumptions were used in determining the valuations which were specific to the Group: _ The Abbey properties have been valued as part of a portfolio, the Direct Property Investments properties have been valued on an individual basis. _ No allowances have been made for any expenses of realisation or for taxation which might arise in the event of a disposal of a property. The valuations are, however, net of acquisition costs (if any). _ Purchasers' costs have been deducted in arriving at the valuations. These are based on 1% agent s fees, 0.5% legal fees (fees include VAT at 17.5%) and stamp duty land tax at the relevant rate, dependent upon the value of each property. _ The valuations have been undertaken assuming that in the case of the Abbey properties, each property is subject to a standard-form lease agreed between the Group and Abbey and that these leases commenced on 1 January 2001 without options to break on the part of either the tenant or the landlord. There are overriding provisions for Abbey to terminate occupational leases earlier than the original lease-end date. These are set out within a master agreement entered into with Abbey. In the case of the DPI properties, the valuation for each of the properties has been undertaken determined by the specific terms of the individual leases. _ Abbey's ability to exercise its right to end leases and vacate property early is constrained by the fact that the aggregate rent payable by Abbey in the following years of the master agreement's 20-year term cannot fall below the following percentages of the projected aggregate rents for those years: Years 5 to 6 95% Years 7 to 11 85% Years 12 to 15 80% Years 16 to 20 90% Constraints over the remaining investment properties are determined by the specific term of the individual leases. _ In return for the flexibility in the Abbey portfolio, there are compensation mechanisms provided within the master agreement which are intended broadly to leave the Group in a neutral position. Whilst invariably the computation on a property by property basis may result in some properties being under compensated or vice versa, the valuations consider that overall the position is indeed likely to remain neutral. _ It should also be noted that the rental increments broadly hold the rental flow at a similar level even on the presupposition that Abbey exercises maximum flexibility. Income and expenditure derived from investment properties relates to the Direct Property Investments Portfolio and also those long leaseholds and freeholds held under the Abbey portfolio as investment property as follows: 31 December December 2006 m m Revenue Revenue from Direct Property Investments Portfolio Revenue from Abbey investment property Total revenues from investment property Property operating expenditure Expenditure from Direct Property Investments Portfolio Expenditure from Abbey investment property 0.2 Total property operating expenditure from investment property Property operating expenditure from investment property that has not generated revenue in the period is 2.2 million (2006: 2.1 million). Mapeley Limited Annual Report

77 12. Premiums on operating leases Cost At 1 January and 31 December Accumulated amortisation At 1 January 2006 (17.7) Provided during the year (3.2) Disposals At 31 December 2006 (20.9) Net book value: At 31 December At 31 December m Cost At 1 January and 31 December Accumulated amortisation At 1 January 2007 (20.9) Provided during the year (3.0) At 31 December 2007 (23.9) Net book value: At 31 December At 31 December m 13. Non-current assets held for sale m m At 1 January Transfers Disposals (3.0) (1.4) At 31 December As at 31 December 2007 the Group had decided to dispose of four properties. All such properties are being actively marketed and it is anticipated that these disposals will take place in early All non-current assets held for sale at 31 December 2007 had previously been recorded within Property, Plant and Equipment and carried at fair value. At 31 December 2006 non-current assets held for sale comprised two properties that had previously been recorded within investment property. All assets were disposed of in 2007 and gains of 1.0 million were recorded in the income statement. Mapeley Limited Annual Report

78 Notes to the audited consolidated financial statements continued for the year ended 31 December Trade and other receivables m m Non current Other receivables Accrued income Current Trade receivables Unbilled revenue Other debtors Prepayments and accrued income Trade receivables are non-interest bearing. Amounts receivable from HMRC are received one month in arrears. Amounts receivable on all other contracts and leases are receivable quarterly in advance. Prepayments and accrued income includes 11.1million (2006: 9.6 million) in respect of accrued income. At 31 December 2007 trade receivables with a nominal value of 0.4 million (2006: 0.4 million) were individually impaired and fully provided for. Movements in the provisions for impairment of receivables were as follows: m At 1 January Charge for the year 0.2 Utilised At 31 December Charge for the year 0.3 Utilised (0.1) Unused amounted reversed (0.2) At 31 December As at 31 December, the ageing analysis of trade receivables is as follows: Past due but not impaired Neither past due nor Total impaired days days > 90 days m m m m m Mapeley Limited Annual Report

79 15. Cash and short-term deposits Cash and short-term deposits earn interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and one month depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. The fair value of cash and short-term deposits at 31 December 2007 was 90.8 million (2006: 77.3 million). For the purposes of the consolidated cash flow statement, cash and short-term deposits comprise the following at 31 December: m m Cash at bank _ in controlled accounts _ for operational purposes Cash and short-term deposits Bank overdrafts (note 17) (0.9) Total cash and short-term deposits net of bank overdrafts The amounts held in controlled accounts comprise tenant deposits, property sale proceeds and other capital receipts which will be held in controlled accounts until the next interest payment date in accordance with the terms of the relevant loan facility agreements. 16. Issued capital and reserves No. of ordinary Authorised shares m Ordinary shares at par value of nil unlimited Issued and fully paid As at 1 January 2006 (net of 1,460 shares held by the employee share trust) 22,463,687 Issued on 27 January ,036,697 Issued on 17 March 2006 under the Employee Share Plan (note 5) 13,059 Issued on 17 March 2006 to Non-Executive Directors (note 5) 5,000 Issued on 26 September 2006 to Non-Executive Directors (note 5) 20,000 Issued on 11 October ,876,923 Movement in shares held by the Employee Share Trust 762 At 31 December ,416,128 Issued on 2 May ,000 Movement in shares held by the Employee Share Trust (18,988) At 31 December ,417,140 On 27 January 2006, through an additional public offering, the Company issued 4,036,697 ordinary shares to investors at a price of each. On 11 October 2006 a further 2,876,923 ordinary shares were issued at a price of per share. The Company also issued 13,059 new shares to employees under the employee share plan and 25,000 ordinary shares to the Non-Executive Directors during During the year ended 31 December ,000 further shares were issued to Non-Executive Directors. The ordinary shares issued to the Employee Share Plan and to the Non-Executive Directors were issued for nil consideration. Ordinary shares have no restrictions attached and entitle all shareholders to one vote for each share held and to the assets of the Company on any winding up after settlement of all liabilities. At 31 December 2007, 19,686 shares (2006: 698 shares) had been returned to the Group following withdrawal of members from the Plan. These shares are held for the benefit of the Group under trust. 47,913 shares were issued in 2006 to employees under the Employee Share Plan out of shares that had been returned by Plan members leaving the Company prior to shares vesting. Mapeley Limited Annual Report

80 Notes to the audited consolidated financial statements continued for the year ended 31 December Issued capital and reserves (continued) Share premium Share premium represents the excess of proceeds raised on the issue of shares over the nominal value of those shares. Costs incurred in issuing shares of 3.9 million and 2.8 million in respect of the new share issues on 25 January 2006 and 11 October 2006 respectively have been deducted from share premium during the year ended 31 December 2006 from both the Company and the Group. A further 302,000 of costs relating to the share issue on 11 October 2006 were deducted from the share premium account during the year ended 31 December Net unrealised gains/(losses) This reserve records movements in the fair value of financial instruments held as cash flow hedges net of deferred taxes. Asset revaluation reserve The asset revaluation reserve is used to record increases in the fair value of non-investment properties and decreases to the extent that such decrease relates to an increase on the same asset previously recognised in equity and is recognised net of deferred taxes. Any decrease below historical costs is recognised in the income statement. Other reserves Other reserves include contributed surplus and share benefits expense. Contributed surplus The contributed surplus represents the excess of proceeds raised on the issue of shares over the nominal value of those shares on the restructuring of the Group in During the restructuring Mapeley Limited acquired the contributed surplus of Mapeley UK Co Limited in a share for share exchange. Contributed surplus is available for distribution to the members of the Company provided that following any distribution the Company continues to have net assets and is able to meet its liabilities as they fall due. Share benefits expense Other reserves includes a credit of 1,725,000 for the year ended 31 December 2007 (2006: 1,369,000) in respect of shares issued under the Plan to employees and charged to the income statement. The total estimated cost to the Group of 8.8 million (2006: 8.8 million) is to be spread over the relevant vesting periods. Other reserves also include a credit of 0.1 million (2006: 0.5 million) which relates to a share benefits expense for shares issued to the four Non-Executive Directors and charged to the income statement. These Directors were awarded 15,000 shares on IPO or appointment to the board which have now fully vested. The total estimated cost to the Group has been spread over the period from the date of grant to the date at which the benefits vested. Further details are set out in note 5. Mapeley Limited Annual Report

81 17. Interest and non-interest bearing loans and borrowings The table below sets out the Group s interest and non-interest bearing loans and borrowings as at 31 December 2007 and 2006: Effective interest rate % Maturity m m Non-current Obligations under finance leases 8.1% Bank loans: Term loan under the HMRC portfolio facility 6.4% Apr Term loan under the Abbey portfolio facility 5.6% Jun Acquisition term loan 5.8% Jul Term loan under the Beta portfolio facility 5.4% Apr Term loan under the Gamma portfolio facility 5.0% Jan Revolving Delta acquisition facility 6.4% Apr , ,268.7 Current Obligations under finance leases 8.1% Bank loans: Overdraft Term loan under the HMRC portfolio facility 6.4% Revolving acquisition facility 5.9% Apr Bank loans The table below sets out the Group s bank loans (excluding overdrafts) net of financing costs and accrued interest as at 31 December 2007 and 2006: Principal Finance Net Accrued amount costs loan interest Total m m m m m At 1 January ,086.6 (9.7) 1, ,088.7 Receipt of bank loans (14.2) Repayment of bank loans (764.6) 7.5 (757.1) (757.1) Finance costs At 31 December ,278.3 (16.4) 1, ,274.2 At 1 January ,278.3 (16.4) 1, ,274.2 Receipt of bank loans (1.3) Repayment of bank loans (3.3) (3.3) (3.3) Finance costs At 31 December ,496.0 (13.5) 1, ,499.1 All of the Group s properties, as valued by Knight Frank LLP and CBRE (see note 10, 11, 12 and 13), have been secured against the Group s loan facilities. The loan balances above represent the amounts outstanding at 31 December 2007 on the following facilities: Term loan under the HMRC portfolio facility The HMRC portfolio is financed by a 15 year, million fixed rate loan secured on properties held under the HMRC portfolio. The interest rate payable on this facility is a fixed rate of 4.5% plus a margin of 0.65% for the first seven years of the loan increasing to 2.25% for the remainder of the loan, plus mandatory costs (if any). Term loan under the Abbey portfolio facility The Abbey portfolio is financed by a million, seven year loan which is secured against all investment property held in the Abbey portfolio and by a charge over the investments of Mapeley Columbus Holdings Limited. The loan is repayable in Interest on the loan is paid quarterly at a rate of LIBOR plus 0.95% plus mandatory costs (if any). The borrowers have entered into separate interest rate agreements to fix the interest payable. Mapeley Limited Annual Report

82 Notes to the audited consolidated financial statements continued for the year ended 31 December Interest and non-interest bearing loans and borrowings (continued) Acquisition term loan Mapeley s direct investment portfolio is partly financed with a 10-year, million term loan. At inception the loan had a loan to value ratio of 70%. There is no amortisation during its term and the loan is repayable in July The interest payable on this loan is fixed at 4.95% plus a 0.75% margin. Beta Acquisition term loan Mapeley s direct investment portfolio is further financed with another 10-year, million term loan. At inception the loan had a loan to value ratio of 75%. There is no amortisation during its term and the loan is repayable in April The interest payable on this loan is fixed at 4.53% plus a 0.85% margin. Gamma Acquisition term loan Mapeley s direct investment portfolio is further financed with another 10-year, million term loan. At inception the loan had a loan to value ratio of 75%. There is no amortisation during its term and the loan is repayable in January The interest payable on this loan is currently fixed at 4.28% plus a 0.67% margin, however a 52.0 million tranche incorporates 0.2% increases in the margin over the term. Revolving Delta acquisition facility As at 31 December 2007 the Group has a three-year, million Revolving acquisition facility to finance further property investments, of which million was drawn down. The facility was repayable in April The interest rate payable on the facility was LIBOR plus a margin of between 1.0% and 1.15 % plus mandatory costs (if any). The Group has also put in place ten swap agreements totalling million to fix its anticipated long-term exposure to interest rate risk on this facility. On 13 March 2008 the Revolving Delta acquisition facility was refinanced with a combination of cash and two new loan facilities which incorporate a proportion of the existing swap arrangements. The Delta investment portfolio has been financed with a new seven year 152 million term loan. At inception the loan had a loan to value ratio of 70%. Amortisation of 0.4 million per quarter is payable from April 2009 and the loan is repayable in March The interest payable on this loan is fixed at 5.30% plus a 1.35% margin which incorporates four existing swaps from the previous Revolving Delta acquisition facility. The remaining swaps have been extinguished. The second new facility is a 60 million corporate loan made to Mapeley Limited repayable in April The interest payable on this loan is at three month LIBOR plus a 5.0% margin. Working capital facility The Group has a 25.0 million working capital facility which was due to mature in June At 31 December 2007, nil (2006: nil) was drawn down. The interest rate payable on the facility was LIBOR plus 2.0% plus mandatory costs (if any). The loan was guaranteed by Mapeley Limited. Following the refinancing of the Delta Revolving acquisition facility the working capital facility has been cancelled. Finance leases Certain of the Group s investment properties, properties held within property, plant and equipment and properties held under short-term leases are accounted for as finance leases. These leases have no terms of renewal or purchase options or escalation clauses other than periodic reviews to increase rents payable to market rates as required. Future minimum lease payments under finance leases together with the present value of the net minimum lease payments are as follows: Minimum payments PV of payments Minimum payments PV of payments m m m m Within one year After one year but not more than five years More than five years Total minimum lease payments Less: amounts representing finance charges (38.0) (30.0) Present value of minimum lease payments Mapeley Limited Annual Report

83 18. Provisions Provisions for onerous leases m At 31 December 2006 _ current 13.5 _ non-current 31.5 Total provision 45.0 New provisions in the year 22.8 Utilised (13.5) Released unutilised (6.6) Unwinding of discount 2.4 Change in interest rate (0.6) At 31 December 2007 _ current 15.2 _ non-current 34.3 Total provision 49.5 The onerous lease provision is made in relation to onerous leases on properties which are vacant or sublet at a level which renders the properties loss-making over the remaining life of the lease. The provision represents the Directors estimate of the net cash flows on the properties over the shorter of the period over which the property is expected to remain vacant and the remaining lease term being periods up to and including 2021, discounted at a rate of 6.5% (2006: 6.0%), being the mean yield of high quality real estate backed bonds with similar maturities to the Group s Abbey and HMRC portfolios. 19. Deferred asset management receipts Group m At 31 December 2006 _ current 5.9 _ non-current 78.9 Total deferred asset management receipts 84.8 Movement in year Received in year 8.9 Released to income statement in year (6.1) At 31 December 2007 _ current 6.5 _ non-current 81.1 Total deferred asset management receipts 87.6 Asset management receipts, which represent premiums given by lessors in return for the Group extending its existing lease terms or removing break clauses from existing leases, are deferred and released as a credit to property operating expenses evenly over the shorter of the lease term or the period to the first break, even if the payments are not made on such a basis. Mapeley Limited Annual Report

84 Notes to the audited consolidated financial statements continued for the year ended 31 December Trade and other payables m m Non current Other payables Accruals Current Trade payables Other payables Net sales tax and social security Accrued interest Accruals and deferred income Trade payables are non-interest bearing and are generally divided into two categories; lease obligations, which in most cases are payable one quarter in advance; and all other trade creditors which are payable on average within 42 days at 31 December 2007 (2006: 31 days). Accruals and deferred income include an amount of 45.0 million (2006: 41.6 million) in respect of deferred income. 21. Pension costs The Group operates a defined contribution pension scheme. The pension charge for the year amounted to 0.4 million (2006: 0.3 million). The assets of the scheme are held separately from those of the Group in an independently administered fund. The Group does not operate any defined benefit schemes. 22. Commitments and contingencies Operating lease commitments Group as lessee The Group leases a number of commercial properties under operating leases. Typically the leases provide for upwards-only rent reviews during the lease term and last 20 years from inception. Future minimum rentals payable under non-cancellable operating leases as at 31 December analysed by the period in which they fall due are as follows: m m Less than one year Between one and five years More than five years , ,436.0 Operating lease commitments Group as lessor The Group s portfolio of receivable operating leases comprises a block of leases purchased in December 2000, together with another block of leases, embedded within outsourcing contracts purchased in 2001 (which also provide for the supply of other property-related services) and some subsequent additions. These leases are non-cancellable and have remaining lease terms of up to 20 years. The Group s leases typically include a clause either to enable upward revision of the rental charge on an annual basis based on prevailing market conditions or a fixed annual uplift of 3% or RPI and provide for the lessee to pay all insurance, maintenance and repair costs. Mapeley Limited Annual Report

85 22. Commitments and contingencies (continued) Operating lease commitments Group as lessor (continued) Future minimum rentals receivable under other non-cancellable operating leases as at 31 December, analysed by the period in which they fall due are as follows: m m Less than one year* Between one and five years More than five years , ,665.1 * Operating leases embedded in the Group s outsourcing contracts entered into with HMRC provide for flexibility for the Government to relinquish space by serving notice of not less than twelve months. The non-cancellable portion of operating leases therefore only relates to receipts within the next twelve months. Beyond twelve months the operating leases are cancellable and therefore are not included within the analysis above. The prior year disclosure above has been adjusted to include the operating lease rentals in respect of the HMRC operating leases as they fall due within less than one year, this amounts to million. Total future minimum sub-lease payments expected to be received under non-cancellable sub-leases in respect of properties acquired under finance leases at 31 December 2007 were 78.0 million (2006: 65.8 million). Where a premium was paid on properties held under operating leases, the premiums are carried at their purchase cost and amortised on a straight-line basis over the remaining minimum lease term within premiums on operating leases see note 12. Capital commitments m m At 31 December, the Group had the following commitments: Contracted but not provided The capital commitments set out above relate to the commitments under the terms of the contract with HMRC to provide lifecycle works to the buildings within the estate, these are primarily maintenance, refurbishment and replacement works. Except as disclosed the Group had no further commitments relating to repairs, maintenance or enhancements in respect of investment properties or property, plant and equipment as at 31 December 2006 or The Group has no commitments to purchase, construct or develop investment property or property, plant and equipment. Contingent rents Due to the uncertainty of income under the HMRC and Abbey portfolios as a result of the vacation rights that exist within the contracts all contractual revenue under the outsourcing segment is considered to be contingent. No contingent rents were received under the DPI portfolio during 2007 (2006: nil). No contingent rents were received in respect of finance lease during the year (2006: nil). Contingent rents expensed during 2007 in respect of operating leases amounted to 0.2 million (2006: 1.1 million). Contingent rents expensed during 2007 in respect of finance leases amounted to 0.5 million (2006: 0.5 million). Contingent rents represent the difference between current passing rents and those rents anticipated and accrued as rent review dates have passed and is determined through analysis of the movement in rent review accruals. 23. Financial risk management objectives and policies The Group's principal financial instruments comprise bank loans, finance leases and cash. The main purpose of these financial instruments is to finance the Group's property portfolio. The Group has various other financial instruments such as trade receivables and trade payables, which arise directly from its operations. Derivative financial instruments are used in accordance with the terms of the loan agreements with the principal providers of finance to hedge exposure to fluctuations in interest rates. It is, and has been throughout the year under review, the Group s policy that no trading in financial instruments shall be undertaken. The main risks arising from the Group's financial instruments are interest rate risk, liquidity risk and credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. The Group s accounting policies in relation to derivatives are set out in note 2.3. The Group also monitors the market price risk arising from all financial instruments through assessment of current interest rates and through monthly valuations of all derivative products. Mapeley Limited Annual Report

86 Notes to the audited consolidated financial statements continued for the year ended 31 December Financial risk management objectives and policies (continued) Interest rate risk The Group has an exposure to interest rate risk arising on changes in sterling interest rates on long-term borrowings. To manage this interest rate risk the Group monitors and manages the proportions of fixed and variable rate debt. The Group s policy is to keep 100% of its long-term borrowings at fixed rates of interest except for short-term debt raised for the purchase of properties under the Direct Property Investments portfolio. Properties purchased under this portfolio are initially financed on a short-term basis before being refinanced through long-term borrowing facilities. A target gearing ratio of up to 80% has been set for these long-term borrowings on direct property investments. Mapeley also seeks to finance new outsourcing contracts in line with this strategy at up to 80% Loan To Value ( LTV ). To manage the interest rate exposure on this initial short-term funding the Group enters into interest rate swaps on the date an asset is purchased under which the Group agrees to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount expected to be equivalent to the related long-term borrowings to be used to finance the asset on its refinancing. At 31 December 2007, after taking into account the effect of interest rate swaps, substantially all of the Group s non-current borrowings were at a fixed rate of interest. The following table sets out the drawn down balances of the Groups financial liabilities that are interest bearing and the sensitivity of such liabilities to changes in interest rates: 31 December 31 December Facility Interest terms m m Term loan under HMRC portfolio facility Fixed rate loan no interest rate risk Term loan under Abbey portfolio facility Variable rate loan 100% effectively hedged no interest rate risk Acquisition term loan Fixed rate loan no interest rate risk Term loan under Beta portfolio facility Fixed rate loan no interest rate risk Term loan under Gamma portfolio facility Fixed rate loan no interest rate risk Revolving Delta acquisition facility Variable rate loan with associated interest rate swaps Overdraft Variable interest rate 0.9 1, ,279.2 At the end of 2007 the Revolving Delta acquisition facility has swaps totalling 100% of the nominal value and therefore there is no exposure to fluctuating interest rates. Credit risk The Group trades only with recognised and creditworthy third parties. It is the Group's policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the Group's exposure to bad debt is not significant. The maximum exposure is as disclosed in note 14. With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents and certain derivative instruments, the Group's exposure to credit risk arises from any default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. In the year ended 31 December 2007, 82% (2006: 86%) of the Group s total turnover was derived from contractual payments made to the Group by Government Agencies (i.e. HMRC and the Home Office), rated AAA (by Standard & Poor s) and Abbey, rated A+ (by Standard & Poor s). Except for these contracts, there are no significant concentrations of credit risk within the Group. Mapeley Limited Annual Report

87 23. Financial risk management objectives and policies (continued) Liquidity risk The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of its overdraft facility. The Group seeks to limit borrowings maturing within twelve months of the balance sheet date. At 31 December 2007 the Group has a million (2006: million) revolving acquisition facility to finance the purchase of properties under the Direct Property Investments portfolio which matures in April At 31 December million (2006: 36.4 million) was drawn under this facility. The Group has negotiated terms to refinance this debt as set out in note 17. The Group has drawn, long-term secured facilities totalling 1,238.4 million (2006: 1,241.6 million). The table below summarises the maturity profile of the Group s financial liabilities as at 31 December based upon contractual undiscounted payments: Less than 3 to 12 1 to 5 On demand 3 months months years > 5 years Total m m m m m m Year ended 31 December 2007 Interest bearing loans and borrowings ,496.0 Interest obligations Swap gains (1.2) (1.8) (8.4) (11.4) Finance lease liabilities Trade and other payables Year ended 31 December 2006 Interest bearing loans and borrowings , ,278.3 Overdrafts Interest obligations Swap losses Finance lease liabilities Trade and other payables The above analysis is based upon contractual undiscounted payments. Trade and other payables excludes accruals and deferred income and interest accruals. Capital Management The Group considers its capital to include long- and short-term borrowings and matching derivative financial instruments in addition to all share capital and premium arising from the issuance of its own equity instruments. The primary objective of the Group s capital management is to ensure that the Group s property portfolio is appropriately supported by capital that is efficient and that seeks to reduce fluctuations in interest payments due to changes in external interest rates. The Group manages and makes adjustments to its capital structure through refinancing or the issuance of shares in order to maximise the returns to shareholders and to enable growth. No changes were made to these objectives, policies or processes during the years ending 31 December 2006 or 31 December The Group monitors capital compared to this objective through the ratio of hedged debt to total debt and seeks to maintain this ratio as close to 100% as possible as follows: m m Total debt held at fixed interest rates Total debt held with matched interest rate swaps Total hedged debt 1, ,262.4 Total drawn external loan facilities* 1, ,279.2 Ratio total debt to hedged debt 100.0% 98.7% * Total external loan facilities are shown gross of financing costs. Mapeley Limited Annual Report

88 Notes to the audited consolidated financial statements continued for the year ended 31 December Financial instruments Fair values The table below sets out the Group s accounting classification of each class of financial assets and liabilities, and their fair values as at 31 December 2006 and 31 December Carrying amount Fair value m m m m Financial assets Cash Trade and other receivables (see note 14) Interest rate swaps Financial liabilities Non-current Trade and other payables (see note 20) Current Trade and other payables (see note 20) Interest rate swaps Interest and non-interest-bearing loans and borrowings Variable rate borrowings Overdraft Obligations under finance leases Borrowings held at amortised cost under the effective interest rate method Fixed rate borrowings Borrowings held at amortised cost under the effective interest rate method Certain of the Group s bank debts are subject to floating interest rates, the majority of which has been exchanged for fixed interest rates under interest rate exchange agreements. The Group s criteria for an interest rate swap are that the instrument must be related to an asset or a liability and that it must change the character of the interest rate by converting a floating rate to a fixed rate. Interest rate swaps are revalued to fair value and shown on the Group balance sheet at the year-end. The fair value for a swap is the mid-market value, estimated using a break cost quote from an experienced, independent broker, which is estimated by applying current yields to anticipated future cash flows. The key assumptions used in the swap valuations are listed below: _ The valuations represent the Net Present Value of the cash flows from the valuation date until expiry of the instrument at the contracted rate and at the valuation rate; and _ The valuation rate is compiled from prevailing market futures rates and swap rates on the date of the valuation. Mapeley Limited Annual Report

89 24. Financial instruments (continued) Hedging activities Cash flow hedges At 31 December 2007, the Group held four interest-rate swap contracts which have been designated as hedges of floating rate loans with the purpose of reducing the exposure to interest rate risk. The interest rate contracts have been assessed to be highly effective and a net unrealised loss of 2.9 million (2006: 23.7 million) is included in equity. The terms of these contracts are as follows: As at 31 December 2007 Hedged amount Fair value Trade date Fixed rate Swap start date Swap end date 29 June % 92,359 3, /06/ /07/ June % 2, /06/ /07/ June % 349,991 12, /06/ /01/ June % 10, /06/ /01/ ,000 16,075.7 As at 31 December 2006 Hedged amount Fair value Trade date Fixed rate Swap start date Swap end date 29 June % 92,359 3, /06/ /07/ June % 2, /06/ /07/ June % 349,991 14, /06/ /01/ June % 10, /06/ /01/ ,000 18,972.0 Other derivatives At 31 December 2007 the Group also held the following interest rate swap contracts which cannot be designated as hedges for accounting purposes as the arrangements will not meet the hedge effectiveness criteria set out in IAS 39 until such time as the Group s short-term borrowings are refinanced. All movements arising on the revaluation of these swaps are recognised in the income statement. As at 31 December 2007 Notional amount Fair value Trade date Fixed rate Swap start date Swap end date 23 January % 20, /02/ /07/ , January % 30,825 (788.8) 22/01/ /04/ January % 9,258 (128.6) 20/01/ /01/ March % 44,175 (1,766.2) 02/03/ /01/ July % 17,500 (1,205.5) 20/07/ /07/ July % 12,214 (832.0) 03/07/ /07/ July % 27,600 (1,840.9) 03/07/ /07/ September % 6,327 (210.9) 12/09/ /10/ September % 25,000 (996.3) 21/09/ /10/ November % 63,965 (40.0) 21/01/ /04/ ,864 (7,809.2) As at 31 December 2006 Notional amount Fair value Trade date Fixed rate Swap start date Swap end date 23 January % 20,731 1, /02/ /07/2016 The net fair value loss on the above interest rate swaps of 8.0 million (2006 gains 0.1 million) has been recognised in the income statement during the period. Mapeley Limited Annual Report

90 Notes to the audited consolidated financial statements continued for the year ended 31 December Financial instruments (continued) Market Risk Interest rate swaps are held at fair value with the fair value being determined with reference to prevailing market futures rates and swap rates on the date of the valuation. As a result the Group is exposed to market risk in respect of these financial instruments. Changes in the valuation rates of other interest rate swaps would affect the Group s loss before tax and equity. The following table demonstrates the sensitivity to a reasonably possible change in valuation rate, with all other variables held constant, of the Groups profit before tax and equity (through the impact on the valuation of the interest rate swaps) Effect on loss Effect on before tax of a equity of a Notional Fair value at 50bp increase 50bp increase amount of swap 31 December in interest rates in interest rates Trade date January , (720) January ,825 (788.8) (1,140) 1, January ,258 (128.6) (335) March ,175 (1,766.2) (1,995) 1, July ,500 (1,205.5) (665) July ,214 (832.0) (465) July ,600 (1,840.9) (1,045) 1, September ,327 (210.9) (245) September ,000 (996.3) (965) November ,965 (40.0) (80) June ,000 16, , Effect on profit Effect on before tax of a equity of a Notional Fair value at 50bp change 1bp change amount of swap 31 December in interest rates in interest rates Trade date January ,731 1, June ,000 18, ,700 Mapeley Limited Annual Report

91 25. Main subsidiaries The main subsidiaries of the Group are as follows: Country of Holding Principal activity incorporation % Mapeley U.K. Co. Limited Intermediate holding company Bermuda 100% Mapeley Estates Limited Management and services company United Kingdom 100% Mapeley STEPS Holdings Limited Holding company Bermuda 100% Mapeley STEPS Contractor Limited Property and services company United Kingdom 100% Mapeley STEPS Limited Property investment Bermuda 100% Mapeley Columbus Holdings Limited Holding company Bermuda 100% Mapeley Columbus Limited Property investment Bermuda 100% Mapeley Columbus II Limited Property management United Kingdom 100% Mapeley ABI Provider Limited Property and services company United Kingdom 100% Mapeley Management Services Limited Management company United Kingdom 100% Mapeley Acquisition Holding Company Holding company Bermuda 100% Mapeley Beta Acquisition Holding Company Holding company Bermuda 100% Mapeley Gamma Acquisition Holding Company Holding company Bermuda 100% Mapeley Delta Acquisition Holding Company Holding company Bermuda 100% Mapeley Acquisition Company (Hercules) Limited Property investment Bermuda 100% Mapeley Acquisition Company (2) Limited Property investment Bermuda 100% Mapeley Acquisition Company (3) Limited Property investment Bermuda 100% Mapeley Acquisition Company (4) Limited Property investment Bermuda 100% Mapeley Acquisition Company (5) Limited Property investment Bermuda 100% Mapeley Acquisition Company (6) Limited Property investment Bermuda 100% Mapeley Acquisition Company (7) Limited Property investment Bermuda 100% Mapeley Beta Acquisition Company (1) Limited Property investment Bermuda 100% Mapeley Beta Acquisition Company (2) Limited Property investment Bermuda 100% Mapeley Beta Acquisition Company (3) Limited Property investment Bermuda 100% Mapeley Beta Acquisition Company (4) Limited Property investment Bermuda 100% Mapeley Beta Acquisition Company (5) Limited Property investment Bermuda 100% Mapeley Beta Acquisition Company (6) Limited Property investment Bermuda 100% Mapeley Gamma Acquisition Company (1) Limited Property investment Bermuda 100% Mapeley Gamma Acquisition Company (2) Limited Property investment Bermuda 100% Mapeley Gamma Acquisition Company (3) Limited Property investment Bermuda 100% Mapeley Gamma Acquisition Company (4) Limited Property investment Bermuda 100% Mapeley Delta Acquisition Company (1) Limited Property investment Bermuda 100% Mapeley Delta Acquisition Company (2) Limited Property investment Bermuda 100% Mapeley Delta Acquisition Company (3) Limited Property investment Bermuda 100% Mapeley Delta Acquisition Company (4) Limited Property investment Bermuda 100% Mapeley Limited Annual Report

92 Notes to the audited consolidated financial statements continued for the year ended 31 December Related party disclosures Identity of related parties Transactions between the parent company and its subsidiaries are eliminated in these consolidated financial statements. A list of the main subsidiaries is provided in note 25. Transactions with shareholders and Directors are shown separately below. Compensation of key management personnel Emoluments for key management, who are employed by a subsidiary, Mapeley Estates Limited, are set out below: m m Short-term employee benefits Post-employment benefits In addition key management have been awarded shares in the parent company, Mapeley Limited, which are contingent upon the employees remaining in employment with Mapeley Estates over a period of three to five years. A total of 115,707 shares (2006: 115,707) have been issued to key management under this scheme. The total cost to the Group of the shares issued under this plan to key management of 3.0 million is being spread over the relevant period over which these awards are contingent. During 2007 a total expense of 0.8 million (2006: 0.6 million) was recorded in respect of this award. No shares have yet to become unconditional. Post employment benefits represent defined pension contributions into personal pension schemes. Directors Compensation Emoluments for Directors of the Group are set out below: m m Short-term employee benefits Post-employment benefits In addition, as set out in the remuneration report the Directors have been awarded shares in the parent company, Mapeley Limited, under two schemes. A total of 100,080 shares have been awarded to the Executive Director and are contingent upon his continuous employment with Mapeley Estates Limited over a period of three to five years. The total cost to the Group of these shares of 2.5 million is being spread over the relevant period over which these awards are contingent. During 2007 a total expense of 0.6 million (2006: 0.5 million) was recorded in respect of this award. No shares have yet to become unconditional. 15,000 shares were awarded to each of the four Non-Executive Directors in These awards vest on the date of grant and after each of the two first annual general meetings following the date of appointment. The market value of the shares on the date of the grant of the award was 23 per share in respect of the shares awarded to Mr Harris, Mr Carey and Mr Parkinson and in respect of the shares issued to M Fascitelli. During the year, 0.1 million (2006: 0.5 million) has been charged to the income statement relating to share benefits expense for the Non-Executive Directors. The final 5,000 shares each have been issued in Post-employment benefits represent defined pension contributions into personal pension schemes. Mapeley Limited Annual Report

93 26. Related party disclosures (continued) Amounts owed by shareholders The Group had entered into an agreement to provide property management services in respect of 135 property interests owned by Pinnacle Towers Limited, a subsidiary of Crown Castle International Corp., in turn a company in which funds managed by an affiliate of Fortress Investment Group LLC indirectly held interests. In return for the provision of these services, the Group received 100,000 per annum and payable in arrears in 12 monthly instalments. During 2007, 100,000 (2006: 100,000) had been received and at 31 December 2007, nil (2006: nil) was outstanding. During 2007, funds managed by an affiliate of Fortress Investment group LLC sold their entire shareholdings in Crown Castle International Corp. and therefore as at 31 December 2007 this should no longer be considered to be a related party transaction. During 2007 the Group managed a fit out project in Luxembourg on behalf of certain Luxembourg based companies in which affiliates of Fortress Investment Group LLC hold direct or indirect voting or management rights. The total income received in respect of this project amounted to 25,500 of which nil was outstanding as at 31 December During 2006 the Group provided consultancy services for the benefit of Eurocastle Investment Limited, a company managed by affiliates of Fortress Investment Group LLC. Total services provided amounted to 97,532 of which 68,988 was outstanding as at 31 December 2006 (31 December 2007: nil). In addition, in 2006, the Group managed a refurbishment project on behalf of Fortress Investment Group (UK) Ltd., an affiliate of Fortress Investment Group LLC. The fees received in respect of this project amounted to 140,666 of which nil was outstanding as at 31 December 2006 (31 December 2007: nil). All related party transactions were carried out on an arm s-length basis based upon normal market prices. 27. Subsequent events Dividend declared At a Board meeting held on 14 March 2008 the Board of the Company declared a dividend of 13.8 million (31 December 2006: 13.2m) representing 0.47 per share based on the number of shares in issue on 26 March Loan refinancing On 13 March 2008 the refinancing of the 257 million Revolving Delta acquisition facility was successfully completed. This debt was due to mature in April 2008 and has been replaced with a 152 million seven year term facility and a 60 million loan repayable in April The balance of the refinancing was provided by cash from within the business. Further details of the new loans are given in note 17 to the financial statements. 28. Earnings before interest, tax, depreciation and amortisation Earnings before interest, tax, depreciation and amortisation or EBITDA is defined by the Group as profit before tax, finance costs, depreciation and amortisation, valuation surplus/deficit on investment property, gain on disposal of subsidiaries and impairment/ impairment reversal of non-investment property. EBITDA for the year is computed as follows: m m (Loss)/Profit before tax (129.0) 42.8 Add back: Finance cost net of finance income Depreciation and amortisation Net valuation deficit/(surplus) on investment properties (40.8) Impairment of non-investment properties 0.4 Reversal of impairment of non-investment properties (0.8) EBITDA Mapeley Limited Annual Report

94 Notes to the audited consolidated financial statements continued for the year ended 31 December Funds from operations Funds from operations or FFO is a management measure used to demonstrate the underlying operating performance of real estate businesses such as the Company. It provides investors with information regarding the Group s ability to service debt and make capital expenditure. FFO does not represent cash generated from operating activities in accordance with IFRS, therefore it should not be considered an alternative to cash flow as a measure of liquidity, and is not necessarily indicative of cash funds available. This calculation of FFO may be different from the calculation used by other companies and, therefore, comparability may be limited. The Group defines FFO as Group EBITDA less net finance costs less the movement in the onerous lease provision less the movement in unbilled revenue plus the movement in net asset management receipts plus the charge in respect of employee shares plus realised revaluation gains. More detailed definitions of these adjustments to EBITDA are given below: Net finance costs comprise finance costs less finance income as set out in the Group income statement, adjusted to exclude amortisation of loan finance fees, gains or losses on interest rate swaps, loan termination costs and the unwinding of discounts on provisions. The Movement in the onerous lease provision This is the net release (or charge) to the Group income statement as a result of the change in the Group onerous lease provisions, excluding interest charged on the unwinding of the provision. Although these amounts offset rental costs in the income statement, they do not represent cash movements and are therefore excluded from the computation of FFO. The Movement in unbilled revenue is the year on year change in Group accrued revenue. The amount represents the increase or decrease in life cycle revenue accrued by the Group so as to allocate revenue in the period in which work is performed. This caption has been renamed from movement in work in progress (see note 2). Net asset management receipts These are the total cash receipts in the year less amounts amortised in the financial period. The accounting treatment of asset management receipts is set out in the accounting policies. Employee shares Under IFRS 2, costs are charged to the Group income statement when share based payments are made. This is a non-cash expense and is therefore excluded from the measure. Organic FFO is defined as the FFO contribution from property assets or services following the first anniversary of their acquisition or commencement of the contract, net of central overhead costs. Acquisition FFO is defined as the FFO contribution from property assets or services in the first year of ownership in the case of property assets and contract commencement in the case of new services. Realised profit on disposal for FFO is defined as the difference between the profit on disposal as per the income statement and the profit in disposal calculated upon the historical cost basis Organic Acquisition Total Organic Acquisition Total m m m m m m EBITDA Net finance costs (62.4) (12.1) (74.5) (43.5) (19.1) (62.6) Movement in the onerous lease provision Movement in unbilled revenue Movement in long-term accrued costs (1.1) (1.1) Asset management receipts Share benefit expense Realised profit on disposal for FFO FFO FFO per share 192 pence 170 pence Mapeley Limited Annual Report

95 29. Funds from operations (continued) The calculation of FFO per share is based on the following: _ FFO for the year of 56.4 million (2006: 45.7 million); and _ Weighted average number of ordinary shares of 29,417,876 (2006: 26,887,700). FFO per share calculated using a diluted weighted average number of shares of 29,417,876 (2006: 26,903,833) is 192 pence per share (2006: 170 pence per share). 30. Gearing ratio Gearing is defined as Group net debt (total debt less cash and short-term deposits) as a proportion of total consolidated equity attributable to the equity holders of the parent. Total debt is defined as actual current and non-current loan balances together with any overdrafts owed to lenders and excludes any finance costs or adjustments to apply the effective interest rate method. Equity is as set out in the consolidated balance sheet. Gearing is computed as follows: m m Total debt 1, ,279.2 Less: Cash and short-term deposits (90.8) (77.3) Net debt 1, ,201.9 Equity Gearing ratio 257% 169% 31. Net assets per share Basic net assets per share Diluted net assets per share The calculation of basic and diluted net asset value per share figures is based on the following: _ Consolidated net assets (equity) attributable to the equity holders of the Company as at 31 December 2007 of million (as at 31 December 2006: net assets of million) _ Number of ordinary shares for basic net asset value per share 29,417,140 (2006: 29,416,128) _ Number of ordinary shares for diluted net asset value per share 29,417,140 (2006: 29,436,128). Mapeley Limited Annual Report

96 Additional Information for the year ended 31 December 2007 Quarterly information for the consolidated income statement and consolidated balance sheet are set out on the following pages. Information for the quarters ended 31 March 2007, 30 June 2007 and 30 September 2007 has been extracted from the Group s interim financial statements. Consolidated income statement Quarter ended Quarter ended Quarter ended Quarter ended 31 December September June March 2007 Unaudited Unaudited Unaudited Unaudited m m m m Revenue Property operating expenses (79.0) (69.3) (71.2) (68.9) Net contract, rental and related income Net valuation (deficit)/surplus on investment property (102.8) (51.6) 7.8 (2.0) Reversal of impairment/(impairment) of non-investment property (0.5) 0.1 (Loss)/profit on disposal of assets held for sale (0.7) 1.0 Administrative and other expenses (5.6) (4.6) (5.2) (4.8) Operating profit (80.6) (21.6) Finance costs (31.2) (28.2) (20.4) (18.6) Finance income (Loss)/profit before tax (110.4) (48.8) Income tax credit/(charge) 5.8 (1.7) (Loss)/profit for the period attributable to shareholders (104.6) (48.8) Dividends _ paid _ proposed FFO pence/share pence/share pence/share pence/share (Loss)/earnings per share _ basic (355) (166) _ diluted (355) (166) Mapeley Limited Annual Report

97 Consolidated balance sheet 31 December September June March 2007 Unaudited Unaudited Unaudited Unaudited m m m m Assets Non-current assets Property, plant and equipment Investment property 1, , , ,585.5 Premiums on operating leases Trade and other receivables Financial instruments Deferred tax asset Total non-current assets 2, , , ,194.0 Current assets Trade and other receivables Cash and short-term deposits _ in controlled accounts _ for operational purposes Total current assets Non-current assets held for sale Total assets 2, , , ,359.4 Equity and liabilities Equity attributable to equity holders of Mapeley Limited Issued capital Share premium Net unrealised losses Retained earnings (220.7) (101.3) (45.8) (50.4) Asset revaluation reserve Other reserves Total equity Non-current liabilities Trade and other payables Interest and non-interest bearing loans and borrowings 1, , , ,369.5 Provisions Financial instruments Deferred asset management receipts Deferred tax liability Current liabilities Trade and other payables Interest and non-interest bearing loans and borrowings Provisions Financial instruments Deferred asset management receipts Total liabilities 1, , , ,633.5 Total equity and liabilities 2, , , ,359.4 Mapeley Limited Annual Report

98 Company details Chairman W R Edens Chief Executive Officer J Hopkins Non-Executive Directors R Carey J Harris C Parkinson M Fascitelli Administrator, Secretary and Registered office International Administration (Guernsey) Limited Regency Court, Glategny Esplanade St Peter Port, Guernsey GY1 1WW Mapeley UK office Blue Fin Building 110 Southwark Street, London SE1 0TA Tel: +44 (0) Website Auditors to the Company and Reporting Accountants Ernst & Young LLP 1 More London Place London SE1 2AF Registrar Anson Registrars Limited PO Box 426 Anson Place Mill Court St Peter Port Guernsey GY1 3WX UK Transfer Agent Anson Administration (UK) Limited Enterprise House, Ocean Village Southampton, Hampshire SO14 3XB Public Relations Brunswick Group LLP 16 Lincoln s Inn Fields London WC2A 3ED Listing details Mapeley Limited is listed on the London Stock Exchange under the ticker symbol MAY Legal advisors to the Company Linklaters One Silk Street, London EC2Y 8HQ Legal advisors to the Company as to Guernsey law Carey Olsen 7 New Street, St Peter Port Guernsey GY1 4BZ For shareholder related queries please contact Investor Relations [email protected] Tel: +44 (0) Mapeley Limited Annual Report

99 Printed on material manufactured from 50% recovered fibre and 50% virgin fibre product with FSC certification. The Forest Stewardship Council (FSC) is an international network which promotes responsible management of the world s forests. Forest certification is combined with a system of product labelling that allows consumers to readily identify timberbased products from certified forests. Designed and produced by Carnegie Orr +44(0)

100