2005 Preliminary Results

10th Mar 2006 07:15

Mapeley Limited10 March 2006 Not for release before 0700, 10 March 2006 MAPELEY LIMITED Preliminary results for the year ended 31 December 2005 Mapeley Limited (LSE: MAY), the property investment and outsourcing company,announces today its preliminary results for the year ended 31 December 2005. 2005 FINANCIAL HIGHLIGHTS - Revenue up 8.1% to £339.4 million (2004: £314.1 million) driven both by growth from existing outsourcing contracts and new acquisitions. - Loss before tax of £56.5 million (2004: Profit before tax of £43.2 million) resulted principally from a one-off exceptional charge of £72.7 million resulting from refinancing £642.9 million of debt, reducing the rate of interest payable by 130 basis points. - EBITDA increased by 26.6% to £64.8 million (2004: £51.2 million). - Funds from operations increased 143.1% to £25.5 million, equating to 130 pence per share, based on the weighted average number of shares in issue for the period on an undiluted basis (2004: £10.5 million and 69 pence per share). - Dividends have increased 23% from 30 pence per share for the second quarter 2005 to 37 pence per share for the fourth quarter 2005. - Dividends paid and proposed for the period of £25.4 million equating to 130 pence per share, based on the weighted average number of shares in issue for the period on an undiluted basis (2004: £Nil and Nil pence per share). - Total asset value up 38.3% to £1,800.1 million (2004: £1,301.6 million). - Initial Public Offer completed in June 2005, raising net proceeds of £132.4 million. - Freehold investment property acquisitions in the year of £507.2 million with a weighted average net yield of 7.2%. Commenting on the results, Jamie Hopkins, Chief Executive of Mapeley said: "I am extremely pleased with Mapeley's performance in 2005. The Company successfully built on its existing operations and expanded significantly into direct property investments throughout the UK. Our progress has allowed Mapeley to continue to deliver on its strategy and to increase its dividend." Management will host an earnings conference call at 3:00 P.M. London time (10:00A.M. New York time) on Friday, 10 March 2006. All interested parties are welcometo participate on the live call. You can access the conference call by dialling+1-866-323-3742 (from within the U.S.) or +1-706-643-0550 (from outside theU.S.) ten minutes prior to the scheduled start of the call; please reference"Mapeley Fourth Quarter 2005 Earnings Call." A webcast of the conference call will be available to the public on alisten-only basis at www.mapeley.com. Please allow extra time prior to the callto visit the site and download the necessary software required to listen to theinternet broadcast. A replay of the webcast will be available for three monthsfollowing the call. A replay of the conference call will be available until 11:59 P.M. New York timeon Friday, 24 March 2006 by dialling +1-800-642-1687 (from within the U.S.) or+1-706-645-9291 (from outside the U.S.); please reference access code "6188838". For further information, please contact:Tim McCall MJ2 Business Communications 020 7491 7794 Financial Highlights Income Statement 31 December 2005 31 December 2004 £million £million Revenue 339.4 314.1Property operating expenses (268.3) (260.2)Net valuation surplus on investment property 18.0 48.1Administrative and other expenses (19.7) (17.6)EBITDA * 64.8 51.2Finance costs (129.7) (49.4)Exceptional finance charge included in finance costs (refer to note 6) (72.7) -(Loss) / profit for the year (56.5) 43.3Funds from operations (FFO) 25.5 10.5Interim dividends declared 25.4 -Dividend per share (pence / share) ** 130p -FFO per share (pence / share) ** 130p 69p Balance Sheet As at As at 31 December 2005 31 December 2004 £million £million Portfolio value 1,643.2 1,103.1Total non-current assets 1,650.2 1,110.8Bank loans gross of deductions for loan finance costs 1,086.6 670.0Financial derivatives liability 28,000 63,652Net assets 457.0 354.2Gearing (refer to note 31) 220% 168% * EBITDA is defined by the Group as profit before tax, finance costs, depreciation and amortisation, valuation surplus / deficit on investment property and impairment / impairment reversal of non-investment property. ** Undiluted per share calculations for the year ended 31 December 2005 are based on the weighted average number of ordinary shares in issue during the period of 19,510,770 shares (31 December 2004: 15,100,000 shares). To aid comparability, the weighted average number of ordinary shares for the year ended 31 December 2004 has been restated to reflect the share for share exchange that took place on 2 June 2005, in which existing shareholders were offered 100 ordinary shares in the Company for each share held in MUKCO. Chairman's Statement 2005 was a tremendously exciting year for all of us at Mapeley. One source of excitement was, of course, the Company's initial public offering on 21 June 2005, when we listed our shares on the London Stock Exchange under the symbol MAY. In addition, we are just as proud of the many other accomplishments that led to this listing. We have built a dynamic real estate operating business with an exceptional management team. With over 1,650 properties totalling over 23 million square feet of office space, leased primarily to central and local governments and large corporate tenants, we operate with a truly national footprint. We control assets in virtually every city and town in the UK which gives us great access to critical information in the most relevant markets. We believe this gives us a competitive advantage in acquisitions, which is a key component of our business plan. Another critical element of our business plan is transparency. I believe that the best proxy for earnings is dividends, which provide a clear window into operating performance. Distributing out substantially what one earns also imposes a terrific investment discipline with respect to new acquisitions, as periodically we must return to the capital markets to finance our new investments. Like many businesses I invest in, Mapeley will pay out substantially all of its earnings. Our objective is to deliver stable and growing dividends to stockholders. Growth for Mapeley will primarily come in two forms - first, growing our revenues faster than our expenses and second, making new asset investments at yields higher than our cost of capital. Although it is early in Mapeley's life as a public company, we have already seen tangible results from this strategy. Our annualised dividend at the time we went public in June was 120 pence per share. We increased our annualised dividend in the third quarter to 132 pence per share and further increased it to 148 pence per share in the fourth quarter. This represents a 23% increase in just the last six months. I believe the business prospects for Mapeley are truly excellent and we are all focused on the growth and stability of this business. We will continue our quest to build Mapeley into the best publicly traded UK real estate owner and operator. With a solid investment portfolio and excellent prospects for new investments, we believe that our disciplined business model and focus on long-term profitability will continue to attract investor interest and set us apart in the years to come. Thank you for your continued commitment and support. Wesley R. Edens, Chairman Note: Annualised dividend is the dividend declared in the quarter multiplied by four. Chief Executive's Statement It is with great pleasure that I introduce Mapeley Limited's annual report for 2005. This is our first annual report as a public company and it covers an exceptional year for the business. In June 2005, we listed on the main market of the London Stock Exchange, raising over £140 million. At the time of the IPO we laid out a very simple strategy for Mapeley: to pay a stable and growing dividend to our shareholders by creating attractive, sustainable returns through a strategy of investing in commercial real estate and maximising the return from our property portfolio. We have delivered this strategy through retaining our focus on driving growth in our current portfolio and expanding our real estate outsourcing business while continuing our drive into the direct property investment market. The money raised from the IPO has helped us to deliver on this strategy and I amdelighted to report that, for 2005, we have paid and proposed dividends totalling 130 pence per share*. The dividends have provided investors with an annualised dividend yield of 5.5% (based on a closing share price of £26.85 on 30th December 2005), significantly outperforming the FTSE All-Share Real Estate Index's dividend yield of 2.4%. Mapeley is a major investor in the property market and now owns and manages adiverse portfolio of real estate in the UK of over 1,650 properties with avalue in excess of £1.6 billion. During 2005, a year in which the marketexperienced extensive yield compression, our direct property investment businessacquired £507.2 million of assets, producing a weighted average yield of 7.2%.The performance from our two major outsourcing contracts was in line withexpectations and we continue to provide a range of property related services toour main clients, HM Revenue & Customs and Abbey National plc, and work closely with them regarding their accommodation requirements. Although we believe that 2006 will see further yield compression as capitalcontinues to flow into the UK property market, Mapeley is extremely well placedto continue its strategy. We have had the advantage that many of the direct investment opportunities we sourced during 2005 were not acquired through a competitive bidding process and our proprietary database of target assets now in place will allow us to continue to identify opportunities not readily available to the open market and hence retain a competitive advantage. We also continue to seek further real estate outsourcing transactions and are currently evaluating a number of opportunities in both the public and private sectors. We believe that the operational platform Mapeley has in place to service the needs of HM Revenue & Customs and Abbey National plc positions us strongly to take advantage of these opportunities. Already in 2006 we have signed a contract with the UK Passport Service for the provision of accommodation and services. This success strengthens Mapeley's experience and credentials in this area and gives us a real step up in confidence that similar new deals will follow in the future. I beleive Mapeley is well positioned to continue to improve returns from the existing portfolio. This will be underpinned by the impact of two recently implemented key cost improvement initiatives and the exploitation of the remaining asset management opportunities in the estate. Asset management performance is currently in line with expectations and the Group will see benefits from this area beyond 2006. At the end of the day, Mapeley's most valuable asset is its people. I would like to personally thank all of the staff at Mapeley who have worked so hard to get us where we are today. We must remain focused on providing attractive returns for our investors by building on the strength of our pipeline and keeping a tight control on operations. I very much look forward to the year ahead at Mapeley. Jameson Hopkins, Chief Executive * Undiluted per share calculations for the year ended 31 December 2005 are based on the weighted average number of ordinary shares in issue during the period of 19,510,770 shares (31 December 2004: 15,100,000 shares). Business Review Mapeley OverviewMapeley Limited is the Guernsey incorporated holding company of a group whosecore business is the acquisition, ownership and management of a diverseportfolio of commercial property throughout the UK. This property is primarilylet to strong credit quality tenants with large property portfolio managementneeds such as central and local government and large corporations. The Group was established in March 1999 to invest in UK real estate byparticipating in the growing trend of UK Government and corporate occupiersseeking to sell their property portfolios and outsource the management of theirleasehold estates and accommodation related services. In December 2000, theGroup acquired substantially all of the UK occupational portfolio of Abbey National plc ("Abbey"), totalling 422 freehold and 884 leasehold properties, and signed a 20 year agreement involving a leaseback with Abbey. In April 2001, the Group purchased the estate of HM Revenue & Customs ("HMRC") in the UK, totalling 147 freehold and 454 leasehold properties. As with Abbey, the Group signed a 20 year agreement involving a leaseback to HMRC, and the Group agreed to provide comprehensive property and facilities management services to the majority of the estate. The Group has used the acquisition and subsequent management of these two largecontracts to develop into a fully serviced real estate group, actively investingin and managing real estate throughout the UK. Mapeley's Strategy The Group's strategy is to target regional assets let to strong credit qualitytenants where, through active management, the Group believes the tenant willremain in occupation on a long-term basis. Mapeley places great value on bothits private and public sector customers and is aiming to become the marketleader in the ownership and management of regional commercial property of thistype. There are three key elements to the strategy: 1) Growing the real estate outsourcing business The Group has been successful in entering the high barrier-to-entry real estate outsourcing market with the completion of the HMRC and Abbey transactions. The Group can leverage its established platform in the pursuit of new outsourcing transactions with both the public and private sector and is currently in the process of bidding on a number of new outsourcing transactions. 2) Growing the direct investment business The expertise that the Group has developed through its outsourcing activities has allowed it to pursue a successful strategy of acquiring individual office properties on a direct basis rather than through outsourcing arrangements. The Group will focus on purchasing property primarily with low credit risk tenants, especially the UK Government, who are likely to stay in the property long-term. Since November 2004, the Group has invested £531.6 million in acquiring individual properties and has identified a significant target pool of property it may consider acquiring in the future. 3) Continuing to increase returns from the current portfolio The Group will actively manage, predict and absorb its tenants' future accommodation requirements by leveraging its experience of the operational estate and intimate knowledge of the UK commercial real estate market. The Group will also seek to exploit the remaining asset management opportunities in the rack rented leases of its portfolio and continue to expand on its accommodation related service capability. The Group is able to deliver on this strategy by capitalising on its significantcompetitive advantages: 1) In-depth local market knowledge The Group's significant market presence throughout the United Kingdom gives it an advantage over more traditional real estate companies to exploit the increase in demand for regional office space from central and local government. The Group's existing estate extends over the majority of the United Kingdom's secondary and tertiary cities. With the UK Government's recent drive to increase its exposure in the regions, the Group is ideally placed to take advantage of this increased demand from the public sector. 2) Strong relationships with tenants The Group looks to enter into a partnering relationship with its tenants by maintaining consistent and constructive communication with them, as opposed to what the Group believes is often an adversarial landlord - tenant relationship in the United Kingdom. The Group has daily contact with its two major tenants through either scheduled management meetings or ongoing property and asset management efforts. This ongoing dialogue between the Group and its tenants assists the Group in its management of the real estate outsourcing contracts, including the purchase of additional assets to fill new space requirements or otherwise adapting to its tenants' changing needs for space. 3) Operational capability and capacity The Group has the operational capability and capacity to integrate both large and small property transactions, including real estate outsourcing contracts, into its existing portfolios. Real estate outsourcing can be a cost effective solution for large space users who want to raise capital and reduce costs, especially within central and local government, and Mapeley believes that the ability to take on further contracts will provide additional opportunities beyond the Group's direct property acquisition programme. 4) Access to capital resources In many of the regional markets where the Group is targeting acquisitions, it has an advantage over local investors who cannot match the Group's access to capital resources, both debt and equity. Successful execution of this strategy will enable the Group to continue toincrease earnings through: - organic growth from its current real estate portfolio leading to a higher level of stable long-term income. - further acquisitions of predominantly office properties throughout the United Kingdom that are accretive to earnings. An increase in earnings will enable payment of stable and growing dividends. TheCompany is a tax exempt vehicle in Guernsey and thus there is no withholding taxon such distributions at the parent level. Mapeley's structure offers investorsan opportunity to invest directly in the UK commercial real estate market in atax efficient manner. Portfolio Review The Group's real estate portfolio is split into two distinct segments, namelyoutsourcing contracts and investment property. Outsourcing ContractsWithin the outsourcing contracts segment, the Group holds two major portfolios,as described below: The HMRC PortfolioThe original HMRC portfolio, comprising 147 freehold and long leaseholdproperties and 454 rack-rented leasehold properties, was purchased for anaggregate consideration of £220 million under a purchase and leaseback agreement. This portfolio totalled 1.5 million square metres, representing themajority of HMRC's total UK property, including offices, customer contactcentres and other facilities located in 279 towns and cities across the UnitedKingdom. 527 of the properties initially acquired by the Group continue to be occupied byHMRC for terms of up to 20 years commencing from April 2001. In addition, theGroup provides comprehensive property and facilities management services toHMRC. These services include maintenance, lifecycle replacement, cleaning, helpdesk, security, catering, childcare, health and safety, utilities, equipmentmanagement, management of removals (churn), vending and landscaping. HMRC paysthe Group a monthly facilities payment which covers, not only the charge for theaccommodation, but also all services that are provided, other than thoseprovided on a pass-through basis (such as utilities). The Group has retainedresponsibility for, but sub-contracted, the performance of all of itsobligations (other than property management services) to provide services onterms that reflect and are consistent with the Group's underlying obligations toHMRC. The facilities payment is subject to deductions for failure to meetspecified performance standards and the property being unavailable for use. The Abbey PortfolioThe Abbey portfolio of 1,306 properties, comprising 422 freehold and longleasehold properties and 884 rack-rented leasehold properties was purchased foran aggregate consideration of £457 million under a purchase and leasebackarrangement. At the time of acquisition, the portfolio totalled 595,000 squaremetres of accommodation, representing substantially all of Abbey's UKoccupational portfolio. The properties included bank branches, offices(including Abbey's headquarters) and call centres located in 520 towns andcities across the United Kingdom. At 31 December 2005, 940 of the properties acquired by the Group continue to beoccupied by Abbey, (or another member of the Abbey group with the support of anAbbey guarantee) for terms of up to 20 years commencing from December 2000. Direct Investment PortfolioThe Group commenced its drive into the direct property investment market in2004, targeting specific properties to purchase throughout the United Kingdom.The Group had acquired 38 freehold or long leasehold properties at 31 December2005, investing £531.6 million in aggregate, making its first purchase inNovember 2004. The initial net yield on this portfolio at 31 December 2005 was7.2%. At the year end, these properties were 99% let and income producing onfully repairing and insuring leases to central and local government and majorcorporate tenants. The average unexpired lease length was 8.4 years and in 200539% of the income from these properties was derived from Government tenants. Operating Review Portfolio status at 31 December 2005As at 31 December 2005, the Group's property portfolio had a value of £1,645.9million (2004: £1,104.8 million), generating total revenue of £339.4 millionduring the year (2004: £314.1 million). Of this, £255.3 million of rental incomewas generated from the Group's property portfolio of 1,685 properties (2004:£235.6 million from 1,704 properties). Over 90% of income was generated fromGovernment and investment grade tenants. Of the total portfolio, 854 of the properties are primarily office or othercommercial premises, whilst the remaining 831 are primarily retail premises. Theportfolio totals approximately 3 million square metres and is located in 593towns and cities across the United Kingdom, with significant concentrations inthe South East, London, the South West, the West Midlands and Scotland. Thegeographic spread of the portfolio at 31 December 2005 as per the InvestmentProperty Databank ("IPD") division of UK regions is shown below: Number of % of TotalIPD Regions Properties Area (sq m) Portfolio East Midlands 69 124,506 4Eastern 165 190,677 7London - City 16 28,527 1London - Inner 120 186,492 6London - Mid-Town 6 28,182 1London - Outer 158 136,021 5London - West End 16 28,377 1North East 74 121,509 4North West & Merseyside 175 204,568 7Northern Ireland 54 42,005 1Scotland 134 224,916 8South East 257 694,418 24South West 127 384,455 13Wales 84 105,728 4West Midlands 102 234,816 8Yorkshire & Humberside 128 176,365 6 --------------------------------------Total 1,685 2,911,562 100 -------------------------------------- At 31 December 2005, 553 properties of the portfolio were freehold propertiesor long leaseholds with at least 20 years unexpired at the time of acquisitionand with negligible or peppercorn rents. The balance of 1,132 propertiescomprised rack-rented leasehold properties. The property portfolio, as valued by Savills Commercial Limited, CB RichardEllis Limited and the Company's Directors (see note 10 and 11 to the financial statements for classification of these assets), increased to £1,642.3 million at 31 December 2005 from £1,097.0 million at 31 December 2004. The increase in the portfolio was due to: - Abbey Portfolio: The value increased by 3.9% to £546.5 million (2004: £526.0 million) - HMRC Portfolio: The value increased by 3.6% to £566.6 million (2004: £546.7 million) These increases were principally attributable to favourable market conditions,including yield compression and the appetite in the market for high-qualityinvestment grade assets. - Direct Investment Portfolio: The value of this portfolio at 31 December 2005 was £529.2 million (2004: £24.3 million) This increase arose largely from the acquisition of properties during the yearin line with the Group's business strategy. Property Management Currently, the Group's property management team comprises 23 people (2004: 27)who have been with the Group on average more than 2.8 years (2004: 2.4 years).The team is responsible for both the strategic and day-to-day management of allof the Group's properties. National and regional estate strategies are regularlyreviewed in order to take advantage of opportunities to match the Group'sproperty interests to the accommodation requirements of the Group's tenants.Day-to-day management activities include, among other things, negotiating rentreviews and lease renewals in order to maximise rental income and to mitigatelease liabilities. During 2005, the Group settled 230 rent reviews (2004: 213) on rack-rentedproperties in the portfolio with an annual rent roll of £35.0 million (2004:£26.8 million). The average increase was 1% per annum. During the year the Group also completed lease renewals for 53 properties (2004:70) with an annual rent roll of £3.6 million (2004: £5.6 million). The averageannual increase in 2005 was 2.2%. The Group let 29 (2004: 30) vacant properties during the year, generating £0.9million (2004: £2.0 million) of additional income. 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 onpayments by HMRC. As a result, 87% (2004: 89%) of the income that the Groupreceives is subject to annual uplifts, with virtually all of the balance ofincome being subject to 5 yearly upward only rent reviews. As part of the transactions with Abbey and HMRC, the Group acquired therack-rented leasehold as well as the freehold and long leasehold properties ofits tenants. The Group sub-leases space to Abbey, HMRC and other third partytenants, benefiting from differences in the annually indexed amounts it receivesfrom Abbey and HMRC and the open market rent it pays to its landlords. To date,the growth in rental liabilities paid by the Group since acquiring these leases has been 1.85% per annum. Over the same period, the amounts paid by Abbey have increased by 3% per annum and receipts from HMRC have increased by 2.3% perannum on average. By actively managing its lease obligations and matching the lease terms to itstenants' occupational requirements, Mapeley has been able to generate assetmanagement receipts to date of £89.0 million, which partly offset operatingcosts. There are some further opportunities to generate such asset management receipts within the existing portfolio. Mapeley expects that future real estate outsourcing contracts that the Group enters into will bring additional opportunities of this nature. Property Services The Group's dedicated facilities management team comprises 50 people (2004: 47)who principally serve the Group's outsourcing contracts segment and who havebeen with the Group on average more than 3 years (2004: 2.2 years). The team isresponsible for managing every element of the Group's service delivery. Thisincludes client relations, overseeing the Group's integrated help desk andmanaging the Group's facilities management providers. In addition, the Groupmanages the delivery of all refurbishment projects. In the year ended 31 December 2005, the Group provided services with a value of£51.0 million (2004: £46.9 million) and carried out repair, refurbishment andconstruction work with a value of approximately £34.2 million (2004: £48.7million). The Group provides services to approximately 100,000 of its tenants'employees in 639 buildings with over 1.5 million square metres of real estate.The services provided range from (but are not limited to) maintenance andlifecycle replacement, security and cleaning, catering and childcare. The Groupsub-contracts responsibility for the actual service delivery to the Group'spreferred property and facilities management providers. The service provision iscoordinated through the Group's integrated 24-hour help desk which isresponsible for managing services requests from the Group's tenants andmonitoring the performance of the sub-contractors. In 2005, the help deskreceived 128,037 calls (2004: 115,450). In addition, the ability to offer suchservices provides the Group with two important advantages: the ability to pursueother similar transactions where such a service requirement might exist, andreal time access to its tenants' changing occupational needs so that the Groupis well positioned to provide them with an appropriate solution. Financial Review Revenue Revenue for the year ended 31 December 2005 was £339.4 million compared to£314.1 million for the year ended 31 December 2004, an increase of 8.1%. Theincrease was primarily due to incremental rental income of £16.0 million earnedfrom the investment property acquired since 31 December 2004 and a net increasein income of £14.2 million in accordance with the terms of the Group's contractswith Abbey and HMRC, partially offset by a decrease in third party rental incomeof £2.6 million from the Abbey and HMRC portfolios and a fall in other income of£1.8 million. The principal component of revenue is the Group's contractual revenue of £321.0million (2004: £310.0 million) which comprises income earned by its propertyoutsourcing business, rentals and service charges received from tenants. HMRC PortfolioRevenue from the HMRC portfolio accounted for 68% of total revenue in the yearended 31 December 2005 (2004: 70%). Of this, 93% (2004: 92%) represented amountspaid by HMRC under its agreement with the Group. These amounts are indexedannually by reference to RPI. The balance of 7% (2004: 8%) of the revenue derived from the Governmentportfolio represented rental income from sub-letting properties to third partytenants. Abbey PortfolioRevenue from the Abbey portfolio accounted for 28% (2004: 30%) of total revenuein the year ended 31 December 2005. Of this, 87% (2004: 86%) represented amountspaid by Abbey under its agreement with the Group. These amounts are subject to afixed uplift of 3% per annum. 11% (2004: 12%) of the revenue derived from theAbbey portfolio represented rental payments from third party tenants and 2%(2004: 2%) was from the sale of assets designated as trading property. Direct Investment PortfolioThe Group commenced the implementation of its strategy to acquire directinvestment properties in early 2004. Since then the Group has acquired 38freehold or long leasehold assets, investing in aggregate £531.6 million sincemaking its first purchase in November 2004. Revenue from these properties in theyear ended 31 December 2005 was £16.2 million (2004: £0.2 million). Theseproperties were acquired throughout the year. These properties are expected togenerate a full year annual revenue of £39.0 million in 2006. Property operating expenses The Group's property operating expenses consist of property rental, lifecycleand facilities management costs, depreciation of property, plant and equipmentand the costs of trading property disposals. The property operating expenses of the Group in the year ended 31 December 2005were £268.3 million compared to £260.2 million for the year ended 31 December2004, an increase of 3.1% This increase was primarily caused by an increase of£4.1 million in facilities management costs due to indexation in the facilitiesmanagement providers' contracts, an increase of £3.6m in services charges andadditional costs of £0.5 million incurred on property management resulting fromincreased activity in negotiating rent reviews and lease renewals. The most significant element of property operating expenses during the yearended 31 December 2005 was rental payments in respect of rack rented leaseholdproperties. Rental payments accounted for more than 63% of total propertyoperating expenses in the year (2004: 67%), before taking account of assetmanagement receipts. Rental payments (excluding service charges) of £167.7 million (2004: £174.6million) included within property operating expenses are stated net of theamortisation of deferred asset management receipts, which amounted to £4.6million over the year ended 31 December 2005 (2004: £3.3 million). The increasein the amount of amortised deferred asset management expense reflects the firstfull year of benefit to the Group of significant asset management transactionscompleted during 2004. Facility management costs of £51.0 million (2004: £46.9 million) relate tofacility management services provided to HMRC and accounted for 19% of propertyoperating expenses in the year ended 31 December 2005 (2004: 18%). Thecontracted price with the facility management suppliers increases annually inline with RPI adjusted by indexation factors that vary by contract, region andyear. The Group receives regular income under its outsourcing contracts, however itslifecycle activity does not arise in such a regular manner. In the year ended 31December 2005 a further £2.1 million of lifecycle expenditure has been deferredand classified as work in progress bringing the aggregate amount deferred to £17.7 million (2004: £15.5 million). Net valuation surplus on investment property Investment property is held at fair value and the deficit or surplus on itsrevaluation is reported under this line item. No depreciation is provided inrespect of investment property. The Group recognised a surplus of £18.0 million on revaluation of investmentproperty in the year ended 31 December 2005 compared to a surplus of £48.1million in the year ended 31 December 2004 reflecting favourable marketconditions including yield compression and the appetite for high-quality realestate investment assets and after writing down certain acquisition costs ondirect property investments, where at 31 December 2005, the value of theproperty had not increased sufficiently to cover these costs. Profit on disposal of investment property The Group sold no investment properties in 2005 and hence realised no gains.Investment property sales in 2004 realised a gain of £0.2 million. Gain on disposal of subsidiaries During the year and prior to its acquisition by Mapeley Limited, MUKCO, sold the shares of three subsidiaries, Mapeley Milton Keynes Limited, Willen Lake Limited and Mapeley Services Limited to Mapeley Holding Company Limited, a company outside the Group owned by Fortress Investment Group LLC and the former parent of MUKCO resulting in a gain of £599,000 for the year ended 31 December 2005. Administrative and other expenses Administrative and other expenses comprise primarily staff costs, depreciationrelating to operating assets and other administrative costs. Staff costs consistmainly of wages paid to employees of the Group. Other administrative costsconsist mainly of IT, travel, accommodation related expenditure and legal andprofessional fees. Administrative and other expenses were £19.7 million for the year ended 31December 2005 compared to £17.6 million for the year ended 31 December 2004, anincrease of 11.9% The increase was primarily caused by a share benefit expenseof £1.7 million (2004: £0.7 million) in connection with shares offered toemployees and Non-executive Directors under the Group's Employee Share Plan(implemented at the time of the Company's Initial Public Offer in June 2005) andan increase in professional fees of £0.4 million reflecting the Group's publiccompany status. EBITDA EBITDA was £64.8 million for the year ended 31 December 2005 compared to £51.2million for the year ended 31 December 2004, an increase of 26.6%. This increaseis attributable to all the factors discussed within the above sections. Finance costs Finance costs consist primarily of interest paid on bank loans, costs associatedwith the termination of loans and related interest rate swap agreements, and theunwinding of discounts on provisions. In the year ended 31 December 2005, theGroup incurred a £72.7 million exceptional charge arising on the termination ofloans and related interest rate swap contracts on the refinancing of certainborrowings. At 31 December 2005, the Group had total gross debt outstanding of £1,086.6million (2004: £670.0 million). With the exception of the Revolving AcquisitionFacility which has a fixed coupon rate and is more fully described in the"Current Financing Arrangements" section, the costs of these borrowings werefixed at the outset either using interest rate swaps that match the full term ofthe underlying committed variable rate loan or fixed term debt. The Group'saverage cost of debt at 31 December 2005 was 6.0% (2004: 6.7%). Aggregate finance costs increased to £129.7 million for the year ended 31December 2005 compared to £49.4 million for the year ended 31 December 2004, anincrease of £80.3 million. Of this increase, £72.7 million was attributable toexceptional costs associated with refinancing certain parts of the Group'sprincipal debt facilities. This amount comprised swap breakage costs of £63.9million, loan termination costs of £2.0 million and expensing of relatedunamortised loan issue costs of £6.8 million. The remaining component of theincrease of £7.6 million is primarily attributable to additional debt drawn downon acquisition of new investment property in the year and a loss on the Group'sremaining interest rate swaps. The swaps entered into in connection with theRevolving Acquisition Facility do not meet the criteria required for hedgeaccounting. A charge of £1.4 million due to the change in the market value ofthese swaps has been expensed in the Income Statement. The Group's refinancing activities have resulted in a reduction in the rate ofinterest payable, which fell from an average of 6.8% per annum to 5.45% perannum (realising an annualised cost saving of approximately £6.8 million peryear). Finance income Finance income consists of bank interest receivable by the Group. Finance incomewas £3.8 million for the year ended 31 December 2005, compared to £3.5 millionfor the year ended 31 December 2004, an increase of 8.6% This increase wasprimarily attributable to interest earned on funds held in reserve accounts,prior to the refinancing in June, together with operating cash generated by thebusiness and held on short term deposit. (Loss)/profit before tax The loss for year ended 31 December 2005 was £56.5 million compared to profit of£43.3 million for the same period last year. The results were adversely affectedby the following major points: - The £72.7 million exceptional charge arising on the refinancing of the original Abbey Facility, repaid during the year. - Net valuation surplus on investment property was £18.0 million (2004: £48.1 million). The principal reason for the lower surplus was the write off of costs of £19.8 million related to the acquisition of direct property investments and much of the yield compression experienced in the market on high quality tenant properties having arisen prior to the current year. - Reversal of impairment of non-investment property was £nil (2004: £4.6 million). Excluding the above mentioned effects, the Group's underlying loss decreasedfrom £9.3 million to £1.9 million for the year ended 31 December 2005. The mainreason for this decrease was the contribution from the direct propertyinvestments and stronger performance from the Group's existing outsourcingcontracts. Taxation The Group and its subsidiaries have not paid income or corporation tax in either2005 or 2004 in any of the jurisdictions in which they operate due to their taxresidence status, current year losses and the availability of losses broughtforward from prior years. Certain Group companies are resident in Bermuda andare classified as UK Non-resident Landlords for tax purposes. Taxable profits inthese companies are subject to UK Income Tax and are exempt from local Bermudataxes. The Group has significant tax losses available for carry forward tofuture years. In many cases these losses are only available to offset againstfuture taxable profits in the entity in which the losses arose. Given theuncertainty over the generation of future taxable profits in those entities, nodeferred tax asset has been recorded. Funds from operations, FFO Funds from operations is a non-GAAP financial measure as defined in note 30 to the financial statements and represents a cash-based measure of thenet earnings from the business. The funds from operations were £25.5 million in the year ended 31 December 2005against £10.5 million in the year ended 31 December 2004. The increase in FFO of£15.0 million was due to an increase in EBITDA primarily driven by incomegenerated by investment properties acquired in the year and stronger performancefrom the Group's existing outsourcing contracts. Dividends For the 12 months ended 31 December 2005, Mapeley has paid and proposeddividends equating to 130 pence per ordinary share, including an interimdividend of 37 pence per share which was declared on 5 January 2006 payable toall shareholders on the register at 13 January 2006. This represents anannualised dividend yield of 5.5%. The Company's balance sheet is set out in note 33 to the financial statements,illustrating that it has distributable reserves to pay the proposed interim dividend. Non-current assets Non-current assets comprising investment property, property plant and equipment,premiums paid for operating leases and non-current trade and other receivablesincreased by £539.4 million between 31 December 2004 and 31 December 2005. Investment property increased to £1,077.4 million from £549.3 million at 31December 2004. This reflects the acquisition of new investment property in theyear to 31 December 2005 (excluding property classified as finance leases) of£507.2 million, of which £211.1 million was acquired in the fourth quarter.Revaluation gains reflecting the strong UK property market were £18.0 million,restricted after charging certain acquisition costs of £19.8 million incurred onnew investment properties acquired in 2005 where the valuation at the year endhad not increased sufficiently to cover these costs. Over the same period, property, plant and equipment increased by £15.0 millionto £527.9 million at 31 December 2005 (2004: £512.9 million), principally due tothe revaluation of certain of the Group's freehold and long leaseholdproperties. Capitalised premiums on operating leases of £56.1 million (2004: £57.7 million)are carried at amortised cost. The book value of capitalised premiums decreasedby £4.0 million from £42.4 million at 31 December 2004 to £38.4 million at 31December 2005 principally as a result of the disposal of a leasehold interestand the regular amortisation charge for the period. Liquidity and capital resources Liquidity requirements arise primarily from the need to fund lease commitments,facility management services, central costs, debt service costs and capitalexpenditure. To date, these requirements have been funded through cash flow fromoperations, bank borrowings and equity funding. The Group expects to continue to meet short-term liquidity requirements throughcash generated from operations. In the year to 31 December 2005, the Groupgenerated £55.8 million (2004: £8.5 million) of "net cash flows from operatingactivities". Future acquisitions will be funded from the Group's existingfacilities (described in the financing section), from facilities to be arrangedand from further equity offerings. The Group receives stable and predictable cash flows from its tenants. Outgoingsunder these agreements are timed to follow receipts from HMRC and Abbey. Liquidity and cash flow The following table summarises the Group's cash flows for the years ended 31December 2005 and 2004: 2005 2004 £ million £ million Net cash flows from operating activities 55.8 8.5Net cash flows used in investing activities (507.5) (24.0)Net cash flows from financing activities 458.0 23.6Net increase in cash and cash equivalents 6.3 8.1 In the year ended 31 December 2005, the Group generated strong operating cashflows driven by operating profits together with cash released from workingcapital management. The substantial reduction in working capital compared with2004 was due to a considerable decrease in trade and other receivables followingthe receipt of HMRC monthly contractual amounts in December 2005. The largestnon-operating cash outflows have been the acquisition of property at £507.2million (2004: £24.4 million), costs paid of £65.9 million (2004: £nil) onbreaking interest rate swaps and relatated loan termination charges and interestpaid of £48.8 million (2004: £44.6 million). The acquisition of property hasbeen funded by equity and debt, and interest paid has been funded from operatingcash flows. Acquisitions of investment property in line with the Group's long-term businessstrategy were partly funded from the proceeds of the Company's Initial PublicOffering in June 2005 and partly funded by long and short term debt. Critical accounting policies and estimates Mapeley reports its results in conformity with International Financial ReportingStandards adopted for use in the EU ("IFRS"). Its principal accounting policesare presented in the notes to the consolidated financial statements. The application of these policies requires Mapeley to make assumptions and estimates that can affect the reported amounts of assets and liabilities. The Directors believe the accounting principles chosen are appropriate under the circumstances and that the estimates, judgements and assumptions involved in its financial reporting are reasonable. Accounting estimates made by Mapeley's management are based on accumulatedhistorical experience and information on current events that is available tomanagement at the time each estimate is made. Accordingly, actual results maydiffer materially from current expectations under different assumptions andconditions. Mapeley's critical accounting policies that are subject tosignificant estimates and assumptions are summarised below. Property valuations and depreciation Investment propertyThe Abbey portfolio and the properties acquired or to be acquired as directinvestments since November 2004 are held for long-term investment. Investmentproperties are accounted for in the Group's accounts at fair value, rather thanat historical cost, as of the date of the annual or interim financial statements(i.e. at the year end and at each quarter). The Group has exercised the optionin IAS 40 to carry investment property at fair value. Any surplus or deficit onrevaluation is recognised in the Income Statement. No depreciation is providedagainst freehold property and property acquired under finance leases exceptwhere the lease term has less than 20 years remaining. Property, plant and equipmentUnder the relevant provisions of IFRS, the properties in the HMRC portfolio areconsidered to be property, plant and equipment rather than investment propertybecause of the significant levels of facilities management services provided toHMRC. Such freehold and long leasehold property is revalued as at the date ofthe annual and interim financial statements and depreciated. Surpluses ordeficits on individual properties are transferred to the revaluation reserve,except for deficits below depreciated historical cost, which are taken to theprofit and loss account unless value in use can be demonstrated to be higher. Tothe extent that the fair value at any balance sheet date exceeds depreciatedfair value, such depreciation is reversed through the revaluation reserve. Short leasehold property is defined as leasehold property with less than 20years of the lease term remaining. Short leasehold property is stated at costless depreciation and any additional provision for impairment which may berequired. Long leasehold properties are transferred to short leaseholdproperties at their book value when only 20 years of the lease term remains andthe book value is depreciated over the remaining lease term. Basis of depreciationDepreciation is provided on all property, plant and equipment, at ratescalculated to write off the cost or valuation, less estimated residual value, ofeach asset on a straight line basis over its expected useful life. The fabric of freehold property, and leasehold property with more than 50 yearsunexpired, is depreciated over 50 years. Leasehold buildings with less than 50years unexpired are depreciated in equal instalments over the unexpired term ofthe lease. Plant and machinery, excluding information systems equipment, isdepreciated over four years. Information systems equipment, including computerequipment and telecommunications apparatus is depreciated over two to fouryears. Basis of valuationIn the case of both investment properties and fixed assets, the annualvaluations are based upon estimates and subjective judgements that may vary fromthe actual values and sales prices that may be realised by the Group uponultimate disposal of portfolio properties. The critical assumptions maderelating to valuations have been disclosed in notes 10 and 11 to the financialstatements. Rental income and rental obligations Rental income receivable under operating leases is recognised on a straight-linebasis over the term of the lease, except where income is contingent in whichcase it is recognised on an arising basis. The Group's outsourcing contractswith Abbey and HMRC are subject to annual uplifts in rental income. Receiptsfrom HMRC are considered contingent as they are subject to annual upliftsrelated to RPI and uncertainty of income due to the vacation rights that existwithin the HMRC contract. A similar situation also exists on the Abbey contractwhere vacation allowances also make contract revenue contingent. The componentsof contractual revenue not contingent on future events have been recognised on astraight line basis over the life of the contracts. Other components ofcontractual revenue are recognised on a receivable basis due to the flexibilityarrangements within the contracts where income generation can be terminated withminimal notice. The Group treats any incentives for tenants to enter into lease agreements as areduction to revenue and accounts for rental income from the commencement dateof any rent free period. The net rental income is spread evenly over the shorterof the period to the first break of the lease and the lease term. Similarly, theGroup treats any incentives given by landlords on the Group's leaseholdproperties as an offset to the rental cost and accounts for such rentalreductions from the commencement date of any rent free period over the shorterof the period to the first break of the lease or lease expiry. The net rentalincentive is spread evenly over the shorter of the period to the first break ofthe lease and the lease term. The so-called "straight-lining" of rent may causerental income or rental expense to be recognised as income or expense in amanner that does not conform to rental receipts or payments. As at 31 December2005, accrued rent payable of £2.0 million (2004: £1.0 million) and accrued rentreceivable of £7.3 million (2004: £6.9 million) was included within "Trade andother payables" and "Trade and other receivables" respectively. These accruedrents will be recognised over the next 15 years. Incentives for lessees to enter into lease agreements are spread evenly over thenon-cancellable period of the lease, even if the payments are not made on such abasis. Accounting for the cost of onerous leases Provision is made in respect of costs incurred on onerous leases, being vacantleasehold properties, or leasehold properties sub-let at a level of rent thatwould cause the properties to realise losses over the remaining terms of leases.The forecast cash flows of each lease are discounted to the annual balance sheetdate at a rate reflecting the time value of money applicable to the Group'scircumstances. Any annual increase or decrease in the provision for onerousleases is taken to the profit and loss account. The imputed interest on thecosts of onerous leases is recognised as interest expense and is charged to theprofit and loss account each year. The basis of the provision and amountsprovided are reviewed semi-annually. The annual projections of cash flows for onerous leases are based upon estimatesand subjective judgements that may vary from the actual costs incurred relativeto such onerous leases. These estimates are driven from the Group's corebusiness management systems and property databases which reflect the Directors'best expectations of the likely outcome of each property at any point in time.The selection of an appropriate discount rate also requires the exercise ofjudgement. Although risk-free rates of return have generally fallen over 2005, agreater range of data was available at 31 December 2005 than at 31 December 2004which has enabled the Group to determine what it believes to be a risk-free ratethat more closely reflects the circumstances of the Group at the current yearend. Work in progress The Group receives regular income under its outsourcing contracts, however itslifecycle activity does not arise in such a regular manner. Accordingly, certaincosts incurred under the service contract element of outsourcing contracts aredeferred and classified as work in progress. The amounts deferred are estimatedfrom the Group's financial forecasting models which reflect the Directors' bestexpectations of the likely outcome under these contracts at any point in time.In arriving at the amount of costs deferred in the balance sheet, the Directorshave had regard to those factors most likely to influence the levels of cost andincome over the remaining life of the contract. Financing Overview The Group seeks to finance its property investments with long-term debtfacilities that reflect the long-term nature of its property investments and onwhich the interest rates have been fixed by utilising a mixture of fixed ratedebt and floating rate debt with matching interest rate swap agreements. At 31December 2005, Mapeley had five borrowing facilities which totalled nearly £1.2billion. Mapeley purchases direct investment properties in accordance with its strategy.These investment properties have been purchased using short term, revolvingfacilities for 100% of purchase costs. These were subsequently refinanced at a70 - 75% Loan To Value ratio ("LTV") using long-term debt with a lower interestrate, with the balance of the cost of acquisition funded by new equity raised.The Directors' intend to fund future acquisitions in the same manner. The Grouptherefore expects continuing growth in the level of debt and its gearing ratioover the coming years as it pursues its strategy of investing in directinvestment property. The Group strives to eliminate the effect of interest rate fluctuations on itsearnings and in order to achieve this, hedges its anticipated long-termliabilities using interest rate swaps or fixed rate debt at the earliestopportunity, normally on the purchase of a property. Group Financing At 31 December 2005, £1,086.6 million (2004: £670.0 million), had been drawndown under the Group's loan facilities to fund its property acquired underoutsourcing contracts, to acquire additional properties and to refinance certainexisting indebtedness. The Group drew down funds of £1,060.0 million in the yearand repaid loans of £642.9 million, further described in "Current FinancingArrangements" below. In addition, at 31 December 2004, the Group had total outstanding loans fromshareholders of £7.1 million. A further £0.7 million was drawn down in February2005. All shareholder loans including interest accrued to that date, £8.1million in total, was capitalised in equity in May 2005 as part of the groupreorganisation. Current Financing Arrangements HMRC portfolio facilityThe HMRC portfolio is financed by means of a 20-year term loan for £210.0million. At 31 December 2005, £177.3 million had been drawn down under thisfacility. The facility is split into two tranches. Tranche A was originally for £80.0 million and is scheduled to be repaid overthe term of the facility. At 31 December 2005, £53.6 million was outstandingunder tranche A. The interest rate on tranche A is currently LIBOR plus a marginof 85 basis points plus mandatory costs if applicable. Tranche B was originally for £130.0 million with no repayment of principalrequired prior to maturity, other than repayments when properties are sold.Additional voluntary repayments are permitted when properties are sold. As at 31December 2005, £123.7 million was outstanding under tranche B. The interest rateon tranche B is LIBOR plus a margin of 100 basis points. In order to eliminate the risk of interest rate fluctuations, the Group hashedged the interest cost of the facility through two interest rate swapcontracts. The Abbey portfolio facilityThe Abbey Portfolio has been re-financed under a £455.0 million senior loanwhich was entered into in June 2005 and matures in July 2012. As at 31 December2005, the facility was fully drawn. The Group has an interest rate swap contract with an original notional value of£455.0 million which fully hedges the interest rate risk on the underlying loan.The swap results in the Group paying fixed base rate interest at 4.5% The costs associated with refinancing the original Abbey portfolio facilityresulted in an exceptional charge of £72.7 million being recognised in 2005,including £63.9 million to close interest rate swaps at that date. The revolving acquisition facilityThe Group entered into a £200.0 million 3-year committed acquisition facility inJune 2005, which matures in July 2008. On 2 December 2005, the facility wasincreased to £300.0 million, with the maturity date remaining unchanged. As at31 December 2005, £283.4 million had been drawn under this facility. The purpose of the facility is to fund property acquisitions at 100% of valueplus acquisition costs. The facility is in the form of a revolving loan whichprovides the Group with operational flexibility to acquire direct investmentproperty in accordance with its strategy. This facility can be repaid andredrawn as assets are acquired and then subsequently refinanced with lower costand longer term debt (such as the Investment Facility described below). The loanhas an interest margin of 1.5% per annum over LIBOR. However, in order toeliminate the risk of interest rate fluctuations, the Group has hedged theinterest rate cost of the facility through a series of interest rate swaps eachof which become effective on completion of the acquisition of the asset to whichthey relate. The swaps in place as at 31 December 2005 are for £188.9 million,representing the Group's estimate of the long-term debt principal expected to bedrawn on refinancing of these borrowings. The Group does not consider suchinterest rate swaps to be eligible for hedge accounting until completion of theanticipated refinancing. The swaps result in the Group paying annual fixedinterest on £188.9 million at 4.55% with the balance at LIBOR plus 1.5% at 31December 2005. The investment facilityMapeley's direct investment portfolio, which was acquired using the AcquisitionFacility raised during 2004 was refinanced with a 10-year, £150.0 million loanfacility in June 2005 which matures in July 2015. This facility was increased to£175.0 million in August 2005 with no change to the maturity date. As at 31December 2005, £170.9 million was drawn down under the facility. The interestrate payable on the facility is fixed at 4.95% plus 0.75% margin and anymandatory costs if applicable. The working capital facilitiesThe £25.0 million 1-year Working Capital Facility was entered into in June 2005and has a cost of 2% over LIBOR per annum on drawn amounts and 0.25% per annumon undrawn amounts. As at 31 December 2005, £nil has been drawn down. It maturesin June 2006, although there are options to extend the facility for up to afurther 2 years. A £30.0 million working capital facility relating to the HMRCportfolio is available to the Group for drawdown until 7 April 2021. At 31December 2005, £nil was drawn down (2004: £nil). Security and covenants All of the above borrowing facilities are secured against all of the propertyassets and investments of the relevant subsidiary undertakings within the Group.These borrowings are subject to covenant tests and during the year ended 31December 2005, the Group was fully compliant with all these tests. Future financing In relation to those assets acquired with funds drawn down under the RevolvingAcquisition Facility since the year end, the Group has negotiated revised termsand converted the Revolving Acquisition Facility into a 10 year, 4.55% fixedrate term loan. The rates of interest payable reflect the cost of the underlyingswap agreements in place which were terminated at no cost to the Group on thesame date. It is also intended that the financing arrangements relating to the HMRCportfolio will be refinanced by repaying the existing 20 year, £178.0 millionloan and replacing it with a 7 year £200.0 million senior loan arranged byMerrill Lynch International. The terms of this facility have been agreed inoutline with Merrill Lynch International and the Directors currently anticipatethat the facility will have a loan to value ratio of 55% (with Merrill Lynchhaving a second charge after the Government's secured first charge). Entry intothis new facility is dependent on the Group obtaining consents from HMRC and itis therefore possible that this refinancing will not proceed or, if it does,that it does so on terms that are different from those currently anticipated. It is also currently anticipated that the Group would enter into fixed interestrate agreements at the start of the loan to fix the interest payable and that itwould be required to write off unamortised loan finance costs on the currentborrowings. The cost will depend upon the market rates at the relevant times,but if the transaction had occurred on 31 December 2005 the loan finance coststo be written off and the swap breakage costs would have been £4.3 million and£20.8 million respectively. Consolidated income statementfor the year ended 31 December 2005 Note 2005 2004 £000 £000 Revenue 3 339,402 314,093Property operating expenses 4 (268,303) (260,222) ------------ ------------ Net contract, rental & related income 71,099 53,871 Net valuation surplus on investment property 4,11 18,037 48,072Profit on disposal of investment property - 204Impairment of non-investment property 4,10 (589) -Reversal of impairment of non-investment property 4 - 4,645Gain on disposal of subsidiaries 4 599 -Administrative and other expenses 4 (19,708) (17,601) ------------ ------------ Operating profit 69,438 89,191 Finance costs 6 (129,718) (49,393)Finance income 6 3,805 3,496 ------------ ------------ (Loss) / profit before tax (56,475) 43,294 Income tax expense - Guernsey 7 - - - UK 7 - - - Overseas 7 - - ------------ ------------(Loss) / profit for the year attributable to equity holders of the parent company (56,475) 43,294 ============ ============Dividends- paid 8 17,052 -- proposed 8 8,312 - ============ ============ £/share(Loss) / earnings per share £/share restated- basic 9 (2.9) 2.9- diluted 9 (2.9) 2.8 ============ ============ Consolidated statement of changes in equityfor the year ended 31 December 2005 Net Asset Issued Share unrealised Retained revaluation Other Total capital premium losses earnings reserve reserves equity £000 £000 £000 £000 £000 £000 £000 ------- ------- ------- ------- -------- ------- --------At 1 January 2004 - - (56,023) (50,950) 277,247 119,437 289,711 Revaluation surplus - - - - 25,413 - 25,413 Depreciation reversed on revaluation of non-investment property - - - - 6,644 - 6,644 Reversal of impairment of non-investment property - - - - (4,645) - (4,645) Transfer of excess revaluation depreciation - - - 5,745 (5,745) - - Losses on cash flow hedges - - (7,600) - - - (7,600) ------- ------- ------- ------- -------- ------- --------Total (loss) / profit for the year recognised directly in equity - - (7,600) 5,745 21,667 - 19,812 Profit for the year - - - 43,294 - - 43,294 ------- ------- ------- ------- -------- ------- --------Total (expense) / income for the year - - (7,600) 49,039 21,667 - 63,106 Issue of shares to employees under the Employee Share Plan - - - - - 280 280 Repaid otherreserves - - - - - (146) (146) Investment in own shares - - - - - 1,237 1,237 ------- ------- ------- ------- -------- ------- --------At 31 December 2004 - - (63,623) (1,911) 298,914 120,808 354,188 ======= ======= ======= ======= ======== ======= ======== Net Asset Issued Share unrealised Retained revaluation Other Total capital premium losses earnings reserve reserves equity £000 £000 £000 £000 £000 £000 £000 ------- ------- ------- ------- -------- ------- --------At 31 December 2004 - - (63,623) (1,911) 298,914 120,808 354,188 Impairment of non-investment property reclassified to non-current assets held for sale - - - - (255) - (255) Revaluation surplus - - - - 19,437 - 19,437 Depreciation written back on revaluation of non-investment property - - - - 6,870 - 6,870 Transfer of excess revaluation depreciation - - - 6,344 (6,344) - - Loss on cash flow hedges - - (26,818) - - - (26,818) Realised loss on cash flow hedge - - 63,880 - - - 63,880 ------- ------- ------- ------- -------- ------- -------- Total profit for the year recognised directly in equity - - 37,062 6,344 19,708 - 63,114 Loss for the year - - - (56,475) - - (56,475) ------- ------- ------- ------- -------- ------- -------- Total income / (expense) for the year - - 37,062 (50,131) 19,708 - 6,639 Capitalised shareholder loans - - - - - 8,086 8,086 Repaid other reserves - - - - - (29,000) (29,000) Issue of ordinary shares on listing of Company - 140,800 - - - - 140,800 Cost related to issue of ordinary shares on listing of Company - (8,411) - - - - (8,411) Issue of shares to Non-executive Directors - - - - - 805 805 Issue of shares to employees under the Employee Share Plan - - - - - 899 899 Equity dividends - - - (17,052) - - (17,052) ------- ------- ------- ------- -------- ------- -------- At 31 December 2005 - 132,389 (26,561) (69,094) 318,622 101,598 456,954 ======= ======= ======= ======= ======== ======= ======== Consolidated balance sheet at 31 December 2005 2005 2004 £000 £000 NoteASSETSNon-current assetsProperty, plant and equipment 10 527,945 512,923Investment property 11 1,077,429 549,324Premiums on operating leases 12 38,432 42,391Trade and other receivables 15 6,405 6,207 ------------- -------------Total non-current assets 1,650,211 1,110,845 ------------- -------------Current assetsInventories 14 18,509 17,273Trade and other receivables 15 48,889 98,665Cash and short-term deposits - in controlled accounts 16 25,704 57,438 - for operational purposes 16 55,452 17,406 ------------- -------------Total current assets 148,554 190,782 ------------- ------------- Non-current assets held for sale 13 1,376 - TOTAL ASSETS 1,800,141 1,301,627 ============= =============EQUITY AND LIABILITIESEquity attributable to equity holders ofMapeley LimitedIssued capital (net of treasury shares) 17 - -Share premium 17 132,389 -Net unrealised losses 17 (26,561) (63,623)Retained earnings (69,094) (1,911)Asset revaluation reserve 17 318,622 298,914Other reserves 17 101,598 120,808 ------------- -------------Total equity 456,954 354,188 ------------- -------------Non-current liabilitiesTrade and other payables 21 5,413 7,155Interest and non-interest bearing loans andborrowings 18 797,792 668,411Provisions 19 28,235 29,822Financial instruments 25 26,561 63,623Deferred asset management receipts 20 74,011 64,016 Current liabilitiesTrade and other payables 21 108,764 97,810Interest and non-interest bearing loans andborrowings 18 285,422 3,472Provisions 19 10,366 9,030Financial instruments 25 1,439 29Deferred asset management receipts 20 5,184 4,071 ------------- -------------Total liabilities 1,343,187 947,439 ------------- ------------- TOTAL EQUITY AND LIABILITIES 1,800,141 1,301,627 ============= ============= Approved by the Board of Directors on 10 March 2006 and signed on its behalf by: J P Hopkins, Director Consolidated cash flow statement for the year ended 31 December 2005 2005 2004 Note £000 £000 Cash flows from operating activitiesOperating profit 69,438 89,191Adjustment for:Reversal of impairment on non-investment property 4 - (4,645)Impairment of non-investment property 4 589 -Net valuation surplus on investment property 4,11 (18,037) (48,072)Depreciation and amortisation 4 13,420 14,712Profit on disposal of investment property - (204)Gain on disposal of subsidiaries (599) -Share benefit expense 5 1,704 - ------------- -------------Operating profit before changes in working capital 66,515 50,982Increase in inventories (1,236) (14,580)Decrease / (increase) in trade and other receivables 21,177 (21,328)Increase in trade and other payables 5,547 18,601Decrease in provisions (2,224) (5,830)Increase in deferred asset management receipts 11,108 21,745 ------------- -------------Cash generated from operations 100,887 49,590Interest paid (48,848) (44,626)Interest received 6 3,805 3,496 ------------- -------------Net cash flows from operating activities 55,844 8,460 ------------- ------------- Cash flows from investing activitiesProceeds from disposal of investment property - 1,193Purchase of property, plant and equipment 10 (333) (817)Purchase of investment property 11 (507,161) (24,406) ------------- -------------Net cash flows used in investing activities (507,494) (24,030) ------------- ------------- Cash flows from financing activitiesCosts of raising finance 18 (8,185) (1,015)Payment of finance lease liabilities (589) (159)Receipt of shareholder loans 27 675 1,000Swap and loan termination fees 6 (65,931) -Receipt of new bank loans 18 1,059,595 25,694Repayment of bank loans 18 (642,940) (1,873)Receipt of other reserves 29,000 -Repaid other reserves (29,000) -Proceeds from issue of ordinary shares on IPO 17 140,800 -Costs related to issue of ordinary shares on IPO 17 (8,411) -Dividend paid to equity holders 8 (17,052) - ------------- -------------Net cash flows from financing activities 457,962 23,647 ------------- ------------- Net increase in cash and short-term deposits 6,312 8,077Cash and short-term deposits at 1 January 16 74,844 66,767 ------------- -------------Cash and short-term deposits at 31 December 16 81,156 74,844 ============= ============= Notes to the audited consolidated financial statementsat 31 December 2005 1. General information Mapeley Limited was registered in Guernsey on 26 April 2005 under the provisionsof the Companies (Guernsey) Law, 1994 and issued two shares on incorporation. On2 June 2005, the Company issued 16,037,098 shares to the shareholders of MapeleyUK Co Limited ("MUKCO"), the former parent company of the Group, to acquire itsissued share capital, assets, liabilities and business. On 21 June 2005, throughits initial public offering, the Company issued 6,121,739 ordinary shares toinvestors at a price of £23 each. At the same time, the Company issued 291,308ordinary shares under the Group's Employee Share Plan ("the Plan") for employeesand 5,000 ordinary shares each to J W Harris, R W Carey and C N K Parkinson intheir capacity as Non-executive Directors of the Company. The shares issuedunder the Plan and to the Non-executive Directors were issued for £nilconsideration. Amounts stated in the consolidated balance sheet and consolidated statement ofchanges in equity have been adjusted to reflect the adoption of mergeraccounting as set out below. The consolidated financial statements of the Group for the year ended 31December 2005 comprise the Company and its subsidiaries and were authorised bythe Board for issue on 10 March 2006. The address of the Company's registeredoffice and the principal activities of the Group are set out in the Introduction. 2.1 Basis of preparation The financial information is abridged and does not constitute the Group's full statutory financial statements for the years ended 31 December 2005 and 31 December 2004. Financial statements for the year ended 31 December 2005 will be presented to the Members at the forthcoming Annual General Meeting; the auditors have indicated that their report on these financial statements will be unqualified. The consolidated financial statements of the Group have been prepared inaccordance with International Financial Reporting Standards adopted for use inthe European Union ("IFRS") and the Companies (Guernsey) Law 1994 on thehistorical cost basis, except for investment property, non-investment propertyheld as part of property, plant and equipment, derivative financial instrumentsand available for sale financial assets that have been measured at fair value.The consolidated financial statements are presented in pounds sterling and allvalues are rounded to the nearest thousand (£000) except where otherwiseindicated. The functional currency of the Group is pounds sterling. After making appropriate enquires, the Directors have a reasonable expectationthat the Group has adequate resources to continue in operation for theforeseeable future. For this reason, they continue to adopt the going concernbasis in preparing the financial statements. The Directors have described below how, in preparing these financial statements,they have applied accounting standards as adopted for use in the EU under thefirst-time adoption provisions set out in IFRS 1 and the assumptions they havemade about the standards and interpretations expected to be effective. However, certain of the requirements and options in IFRS 1 relating tocomparative financial information presented on first time adoption may result ina different application of accounting policies in the 2005 comparative financialinformation to that which would apply if the 2005 financial statements were thefirst financial statements of the company prepared in accordance with accountingstandards as adopted for use in the EU and, if there are subsequent changes tothe Standards or Interpretations applicable to the 2006 financial statements,the 2005 financial information may require adjustment before constituting thecomparative financial information to be included in those 2006 financialstatements. In the preparation of these financial statements the Group has adopted thefollowing revised standards: IAS 1 Presentation of Financial StatementsIAS 2 InventoriesIAS 7 Cash Flow StatementsIAS 8 Accounting Policies, Changes in Accounting Estimates and ErrorsIAS 10 Events after the Balance Sheet DateIAS 12 Income TaxesIAS 16 Property, Plant and EquipmentIAS 17 LeasesIAS 18 RevenueIAS 24 Related Party DisclosuresIAS 32 Financial Instruments: Disclosure and PresentationIAS 33 Earnings per ShareIAS 37 Provisions, Contingent Liabilities and Contingent AssetsIAS 39 Financial Instruments: Recognition and MeasurementIAS 40 Investment PropertyIFRS 2 Share based paymentsIFRS 5 Non current assets held for sale and discontinued operationsIFRIC 4 Determination whether an Arrangement contains a Lease The Directors have not taken advantage of any of the first time adoptionexemptions available in IFRS 1 First Time Adoption of IFRS. The consolidated financial statements of Mapeley Limited have been prepared inaccordance with IFRS. In preparing annual financial statements, the accountingprinciples applied reflect the amendments to International Accounting Standards("IAS") and the adoption of the new IFRS which became effective from 1 January2005. Other than in respect of these changes, explained further below, theannual financial statements have been prepared under the same accountingprinciples and methods of computation as in the special purpose conversionfinancial statements prepared under IFRS for MUKCO for the year ended 31December 2004 from which the comparative figures for the year ended 31 December2004 have been extracted and adjusted as set out in the basis of consolidationbelow. IFRS 2 Share-based paymentIFRS 2 Share-based payment became effective from 1 January 2005 and has beenapplied to the preparation of these financial statements. It requires an expenseto be recognised where the Group receives goods or services in exchange forshares or rights over the shares of Mapeley Limited ("equity-settledtransactions"), or in exchange for other assets equivalent in value to a givennumber of shares of Mapeley Limited or rights over shares ("cash-settledtransactions"). The main impact of IFRS 2 on the Group is the expensing ofemployees' shares issued under the Group's employee share plan, shares issuedand committed to be issued to Non-executive Directors and other share basedincentives. Straight line recognition of rental income under IAS 17The Directors have followed the latest IFRIC announcement, in line with emergingbest practice, clarifying the income and expense recognition profile of anoperating lease in which the payments rise by a fixed annual percentage over thelife of the lease. Certain of the Group's outsourcing contracts provide for pre-determined upliftsin rental income. The components of rents not contingent on future events havebeen recognised on a straight line basis over the life of the contracts. Othercomponents of rental income are recognised on a receivable basis. Prior year comparativesCertain comparative figures have been adjusted or extended to conform to thepresentation adopted in respect of the year ended 31 December 2005. Theadjustments are explained below: - There has been a change in the definition of business segments. Since presenting the special purpose financial statements for the year ended 31 December 2004, the Directors have refined the definition of their business segments in accordance with the Group's strategy of placing a greater focus on acquiring outsourcing contracts and investment property. In prior years' financial statements the investment property segment was not sufficiently material to be presented separately. The Directors consider the current year's presentation to be better aligned to the Company's business model. Further information on business segments is set out in note 3; - The other change has been to adjust the earnings per share calculation to reflect the Group reorganisation during 2005 as further described in note 9; - Trade and other receivables and trade and other payables have been reclassified between current and non-current assets and liabilities respectively. The impact of this reclassification has increased non-current assets by £6.2 million (current assets reduced by the same amount) and increased non-current liabilities by £7.2 million (current liabilities reduced by the same amount); and - Financial derivatives have been reclassified between current and non-current liabilities. The impact of this reclassification has increased non-current liabilities by £63.6 million (current liabilities reduced by the same amount). - Provisions have been reclassified between current and non-current liabilities. The impact of this reclassification has increased current liabilities by £9.0 million (non-current liabilities reduced by the same amount). Basis of consolidationThe consolidated financial statements comprise the financial statements ofMapeley Limited and its subsidiaries for the year ended 31 December 2005. MUKCO's special purpose consolidated IFRS financial statements were prepared forthe year ended 31 December 2004 in readiness for Listing on the London StockExchange. The subsequent restructuring of the Group during the year involved a share forshare exchange, which introduced a new holding company, Mapeley Limited. At thetime of reorganisation both companies were under common control. The relative rights of the former shareholders of MUKCO were not altered andthis restructuring has been accounted using the merger method of accounting, inline with guidance from UK Generally Accepted Accounting Principles ("UK GAAP")a similar, principles based GAAP to IFRS. UK FRS 6 Acquisition and Mergersstates that the merger method of accounting on group restructuring is allowableprovided the relative rights of the shareholders were not altered. This basis ofconsolidation has been adopted as best practice by the Group as no guidancecurrently exists on group restructuring under IFRS 3 Business Combinations. Although Mapeley Limited was only formed on 26 April 2005 and acquired MUKCO on2 June 2005, the accounting information, in line with the merger method ofaccounting, has been prepared as if the Group had always been in existence inits current form. The prior year comparatives are accordingly presented withappropriate adjustments being made to the MUKCO special purpose consolidatedfinancial statements to reflect the Group's reorganisation and its accounting inaccordance with the merger method of accounting. Except as noted above in connection with the formation of the Mapeley Limitedgroup, subsidiaries are consolidated from the date on which control istransferred to the Group and cease to be consolidated from the date on whichcontrol is transferred from the Group. The financial statements of thesubsidiaries are prepared for the same reporting year as the parent company,using consistent accounting policies. All intra-group transactions areeliminated as part of the consolidation process. Statement of complianceThe consolidated financial statements of Mapeley Limited have been prepared inaccordance with IFRS. This is consistent with IFRS as adopted for use in the EUas it applies to the financial statements of the Group for the year ended 31December 2005. In preparing the annual financial statements, the accounting principles applied reflect the amendments to IFRS and the adoption of those newIFRS which have become effective since 1 January 2005. 2.2 Summary of significant accounting policies Revenue Revenue recognised in the income statement represents amounts receivable in respect of contractual income, property rental income, other property and trading activity and interest income earned in the normal course of business, net of VAT and other sales-related taxes, as follows: Contractual revenue 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 under the UK government's private finance initiative ("PFI") scheme 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 under PFI contracts 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. Income from service contracts is recognised and accounted for according to the stage reached in the contract by reference to the value of work completed. An appropriate estimate of the profit attributable to the work undertaken is recognised once the outcome of the contract can be assessed with reasonable certainty. In addition to service charges, as part of the property outsourcing contract, 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. Property trading income Income earned from property trading consists of proceeds from the sale of trading properties. Sales are recognised on completion of sale contracts. 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 non-cancellable period of the lease, even if the payments are not made on such a basis. Premiums received to amend or terminate leases are recognised in the income statement when they arise. Rentals payable under operating leases Rentals payable under operating leases are charged on a straight-line basis over the lease term or the period to the first break, if shorter. Incentives given by lessors to enter into lease agreements, including asset management receipts, are spread evenly over the shorter of the lease term or the period to the first break as a reduction of rental expense, even if the payments are not made on such a basis. Premiums paid to amend or terminate leases are recognised in the income statement on as they arise. 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 at 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 values of investment property are included in the income statement in the year in which they arise. Property, plant and equipment PropertyWhere 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 deprecation 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 equipmentPlant and equipment is stated at cost less depreciation and any additional provision for impairment which may be required. Premiums on operating leasesPremiums on operating leases are stated at cost less amortisation and any additional provision for impairment which may be required. Depreciation and amortisationDepreciation 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 straight line 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. Acquisitions of corporate interests in propertyAcquisition of a corporate interest in property is accounted for on consolidation as if the Group had acquired the underlying property directly. Accordingly, no goodwill arises on such acquisitions. Any difference between the fair values of the property and the acquisition consideration are allocated to the investment property asset, which is subject to subsequent revaluation to its market value under IAS 40 Investment Property. Non-current assets held for saleItems 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, depreciation of the assets ceases (even if the assets are still being used by the Group), and each asset is carried at the lower of its previous carrying value and fair value less expected costs of sale. Any impairment adjustment below historical cost is charged to the income statement. Finance LeasesThe 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. The Company's investments in subsidiaries The Company recognises its investments in subsidiaries at cost less any provision for impairment which may be required. Any impairment is charged to the income statement. Impairment of assetsThe 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 Inventories Trading propertyProperty acquired and held with the intention of being sold, is included in inventories at the lower of cost and net realisable value, being the market value less expected costs of sale. Work in progressThe costs of service contracts not yet taken to the income statement, less any foreseeable losses and payments on account, are shown within inventories as work in progress. Asset management receiptsAsset 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 operating costs evenly over the shorter of the lease term and the first break, even if payments are not made on such a basis. Trade and other receivablesTrade 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. Cash and short-term depositsCash 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 liabilitiesA 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 dereognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in income statement. Trade and other payablesTrade and other payables are stated at cost less any provisions for amounts considered irrecoverable. ProvisionsProvision is made in respect of costs incurred on vacant leasehold properties or for leasehold properties sublet at a level which renders the properties 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 semi-annually. Share-based paymentsThe 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 is the offer price. Fair value at all other dates is determined on 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 is cancelled, 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 Treasury sharesTreasury shares acquired are deducted from equity at their cost of acquisition. Share premiumCosts 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. 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 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 taxationCurrent 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 is not subject to local taxation. Certain Group undertakings are subject to foreign taxes in respect of foreign source income, including UK income tax on rental income within UK Group undertakings. Deferred taxationDeferred 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 schemesThe 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. IFRS issued but not yet effectiveThe Group has not adopted the following standards in the preparation of financial statements as they were not effective at 31 December 2005. IFRS 7 IFRS 7 Financial Instruments: DisclosuresIAS 1 Amendments to IAS 1 Presentation of Financial Statements Capital DisclosuresIAS 19Amendment to IAS 19 Employee Benefits Actuarial Gains and Losses, Group Plans and DisclosuresIAS 39Amendments to IAS 39 Financial Instruments: Recognition and Measurement The Fair Value OptionIAS 39Amendment to IAS 39 Financial Instruments: Recognition and Measurement Cash Flow Hedge Accounting of Forecast Intragroup TransactionsIFRIC 4Determining whether an Arrangement contains a LeaseIFRIC 8Scope of IFRS 2IFRIC 9Reassessment of Embedded Derivatives 3. Revenue and segmental information The Directors continue to keep the accounting polices and presentation of thefinancial statements under review as required by IAS 8 Accounting policies,changes in accounting estimates and errors. Since presenting the special purposefinancial statements for the year ended 31 December 2004, the Directors haverefined the definition of their business segments in accordance with thestrategy of acquiring property related outsourcing contracts and investmentproperty not acquired under outsourcing contracts. The effect of the investmentproperty segment was not material enough to be presented separately in previousyears accounts. The Directors now consider this presentation to be more alignedto the Company's business model. The segments are described below: Outsourcing contracts This segment consists of activities arising from the sale and subsequentleaseback of the HMRC and Abbey property portfolios. The main characteristics ofthese arrangements are listed below: - long-term contracts (both contracts run over a period of 20 years); - agreements are tailored in accordance with the client's accommodation requirements (from simple purchase and lease back to fully serviced accommodation); - the agreements allow HMRC and Abbey to exercise flexibility to vacate properties within defined parameters; and - the revenue earned is subject to annual increases. Investment property The Group has embarked on a separate strategy of acquiring individual andportfolios of office property. The Group's activities within this segment willfocus on purchasing property primarily let to strong credit quality tenants, whoare likely to stay in the properties for a minimum term of 5 years. The segments previously reported as "Property investment" and "Outsourcingcontracts" have been merged to become the "Outsourcing contracts" segment withthe small amount of investment property held at 31 December 2004 and reported inthe former "Property investment" segment being reported in the "Investmentproperty" segment at 31 December 2005. The effect of redefining business segments resulted in revenue derived from theOutsourcing contracts segment in 2005 increasing by £93.0 million, SegmentResult increasing by £80.3 million at 31 December 2005, segment assetsincreasing by £579.3 million and segment liabilities increasing by £75.4million, with a corresponding decrease on the "Property investment" segment,which is now reported within the "Investment property" segment. Segmentinformation for 2004 has been restated accordingly. The Group has a single geographical segment, being the UK commercial propertymarket. Year ended 31 December 2005 Business segments Investment Outsourcing Total property contracts operations £000 £000 £000 Rental revenue 15,880 - 15,880Property trading 330 2,176 2,506 ------------- ------------- ------------- Facility unitary charge - 213,779 213,779 Contractual rents - 81,152 81,152 Third party rents - 26,085 26,085 ------------- ------------- -------------Contractual revenue - 321,016 321,016 Segment revenue 16,210 323,192 339,402Rentals payable (19) (167,676) (167,695)Other direct property and contract expenditure * (424) (100,184) (100,608) ------------- ------------- -------------Net contract, rental & related income 15,767 55,332 71,099Impairment of non-investment property - (589) (589)Net valuation (deficit) / surplus on investment property (2,289) 20,326 18,037 ------------- ------------- -------------Segment result 13,478 75,069 88,547 ============= ============= Gain on disposal of subsidiaries 599Unallocated expenses (19,708) -------------Operating profit 69,438Net finance costs (125,913) -------------Loss for the year (56,475) ============= Assets and liabilitiesSegment assets 534,038 1,184,129 1,718,167 ============= =============Unallocated assets 81,974 -------------Total assets 1,800,141 ============= Segmentliabilities 12,666 184,154 196,820 ============= =============Unallocated liabilities 1,146,367 -------------Total liabilities 1,343,187 =============Other segment informationDepreciation and amortisation - (12,670) (12,670)Expenditure on purchase of investment property 507,161 - 507,161 =========================================== * Other direct property and contract expenditure includes depreciation. Year ended 31 December 2004 (Restated) Business segments Investment Outsourcing Total property contracts operations £000 £000 £000 Rental revenue 182 - 182Property trading - 3,950 3,950 ------------- ------------- ------------- Facility unitary charge - 201,512 201,512 Contractual rents - 79,697 79,697 Third party rents - 28,752 28,752 ------------- ------------- -------------Contractual revenue - 309,961 309,961 Segment revenue 182 313,911 314,093Rentals payable - (174,577) (174,577)Other direct property and contract expenditure* (343) (85,302) (85,645) ------------- ------------- ------------- Net contract, rental & related income (161) 54,032 53,871Net valuation surplus on investment property - 48,072 48,072Profit on disposal of investment property - 204 204Reversal of impairment of non-investment property - 4,645 4,645 ------------- ------------- -------------Segment result (161) 106,953 106,792 ============= ============= Unallocated expenses (17,601) -------------Operating profit 89,191Net finance costs (45,897) -------------Profit for the year 43,294 ============= Assets and liabilitiesSegment assets 24,813 1,200,373 1,225,186 ============= =============Unallocated assets 76,441 -------------Total assets 1,301,627 ============= Segment liabilities 1,004 213,219 214,223 ============= =============Unallocated liabilities 733,216 -------------Total liabilities 947,439 =============Other segment informationDepreciation and amortisation - (13,183) (13,183)Expenditure on purchase of investment property 24,406 - 24,406 =========================================== *Other direct property and contract expenditure includes depreciation. 4. Expenses 2005 2004 £000 £000 Property operating expensesRentals and service charges payable 182,322 185,598Other direct property and contract expenditure 73,311 61,441Depreciation and amortisation 12,670 13,183 ------------- ------------- 268,303 260,222 ============= ============= Net valuation gains on propertyNet valuation surplus on investment property (note 11) 18,037 48,072Impairment of non-investment property (589) -Reversal of impairment of non-investment property - 4,645 ------------- ------------- 17,448 52,717 ============= ============= Gain on disposal of subsidiaries 599 - Administrative expensesStaff costs (note 5) 11,606 10,613Depreciation and amortisation 750 1,529Audit fees 965 200Non-audit fees paid to auditors 103 275Other administrative expenses 6,284 4,984 ------------- ------------- 19,708 17,601 ============= ============= Depreciation, amortisation and costs of inventories included in property operating expenses and administrative expenses above. Depreciation and amortisation 13,420 14,712 ============= =============Costs of trading properties 910 961 ============= ============= The non-audit fees paid relate to advisory services provided in relation totaxation, bid support and other advice. In addition to the audit and non-auditfees paid, £848,014 (2004: £nil) was paid to the Group's auditors for servicesprovided in connection with the listing of the Company' shares and which hasbeen charged against share premium. 5. Employee benefits expense Staff costs 2005 2004 £000 £000 Wages and salaries 8,621 8,955Social security costs 1,082 687Pension costs (see note 22) 199 243Share benefits expense 1,704 728 ------------- ------------- 11,606 10,613 ============= ============= The share benefit expense includes an employee share benefit expense of £899,000for the year ended 31 December 2005 (31 December 2004: £728,000 in respect ofprevious schemes). The share benefit expense also includes a charge of £805,000 which relates to ashare benefit expense for four Non-executive Directors who were each awarded15,000 ordinary shares during the year (2004: £nil). The Group established its Employee Share Plan (the "Plan") during the year,which replaced the Group's Leveraged Co-investment Plan ("LCIP") and PerformanceOption Plan, both of which were wound up during 2004. On the Group's admissionto the Official List of the London Stock Exchange on 21 June 2005, 291,308ordinary shares were granted and issued in the names of Plan members subject tocertain vesting conditions. At 31 December 2005, 1,460 shares had been returnedto the Company on withdrawal of members from the Plan (and are held as treasuryshares). Vesting takes place over periods of up to 5 years from the date ofissue and is conditional on employees remaining in employment; there are noperformance conditions. During the vesting period, the participants receivedividends and the shares may be sold, but the proceeds of any sale are subjectto the same vesting terms as the shares. The total cost to the Group of shares issued under the Plan during the yearended 31 December 2005 of £6,700,000 is to be spread over the relevant vestingperiods; 30% will vest on each of the third and fourth anniversaries ofadmission and the remaining 40% will vest on the last business day before thefifth anniversary of admission. Shares awarded to Non-executive Directors vest on the date of grant and aftereach of the first two annual general meetings following the date of appointment.The total cost to the Group of shares issued or granted to Non-executiveDirectors during the year ended 31 December 2005 of £1,438,000 is to be spreadover the relevant vesting periods, being one third on grant, one third over theperiod to the first annual general meeting and one third over the period to thesecond annual general meeting. 6. Finance costs and finance income 2005 2004 £000 £000Finance costsBank loans and overdrafts 59,996 44,788Shareholder interest payable 13 75Finance charges payable under finance leases 395 399Loss on interest swap 1,410 29Loss on breaking interest rate swap 63,880 -Loan termination costs 2,051 -Unwinding of discount on provisions (see note 20) 1,973 4,102 ------------- ------------- 129,718 49,393 ============= ============= Finance incomeBank interest receivable 3,805 3,496 ------------- ------------- 3,805 3,496 ============= ============= Bank loans and overdraft charges include amortisation of loan finance fees of£8,804,000 (2004: £671,000). The Group incurred an exceptional loss in 2005 on refinancing certain borrowingscomprising the following amounts which are included above. £000 Loss on breaking interest rate swap 63,880Loan termination costs 2,051Accelerated amortisation of loan finance fees included in finance costs on bank loans and overdrafts 6,800 ------------- 72,731 ============= Since the swap arrangements were entered into, interest rates have changed andconsequently an exceptional cost of £63,880,000 was incurred in breaking theseagreements which was charged to the income statement in the year ended 31December 2005. The Group also incurred termination costs of £2,051,000 inbreaking the existing loan, which was charged in the same period. Accelerated amortisation of loan finance fees comprises accelerated amortisationcharges of £6,800,000 in respect of loan finance fees on certain of the Group'sborrowings. In accordance with IAS 39 Financial Instruments: Recognition andMeasurement, unamortised loan finance fees at 31 December 2004, incurred inconnection with those terminated borrowings, have been charged over the periodfrom 31 December 2004 to the expected revised date of repayment of theborrowings. 7. Income tax expense No income tax is chargeable to the income statement or the statement of changesin equity in the current year in respect of Guernsey, UK or other overseastaxation. The major components of income tax for the years ended 31 December 2005 and 2004are: a) Tax on profit on ordinary activities 2005 2004 £000 £000 Tax charged in the income statementCurrent income taxGuernsey income tax - -UK income tax - -Other overseas tax - - ------------- -------------Current income tax charge - -Amounts overprovided in previous years - - ------------- -------------Total current income tax - - ------------- ------------- Deferred taxOrigination and reversal of temporary differences - - ------------- -------------Total deferred tax - - ------------- ------------- Tax charge / (credit) in the income statement - - ============= ============= Deferred tax relating to items charged or credited to equity 2005 2004 £000 £000 Net gain on revaluation of cash flow hedges - -Net gain on revaluation of properties - -Net gain on hedge of net investment - - ------------- -------------Tax charge/(credit) in the statement of changes in equity - - ============= ============= b) Reconciliation of income tax charge 2005 2005 2004 2004 % £000 % £000(Loss) / profit before income tax 100.0 (56,475) 100.0 43,294 ======== ======== ======== ======== At the weighted average income tax rate for the Group 24.5 (13,833) 19.9 8,603 Revaluation gains on investment properties not taxable (0.6) 315 (26.8) (11,601)Expenses not deductible for tax purposes and excluded income (4.9) 2,795 (0.9) (382)Unutilised current year tax losses (23.1) 13,200 7.7 3,335Utilisation of previously unrecognised losses 3.2 (1,793) (14.9) (6,450)Depreciation in excess of capital allowances 1.5 (849) 2.6 1,122Other (0.3) 165 12.4 5,373 -------- -------- -------- --------At effective income tax rate of 0% - - - - ======== ======== ======== ======== The weighted average income tax rate for the year of 24.5% (2004: 19.9%) isbased on the weighted average tax rate applicable across the Group's operations.This has been calculated by dividing (1) Group companies' profits before taxmultiplied by the tax rate applicable for each Group company by (2) the Group'sprofit before tax. c) Deferred income tax The Group has tax losses arising in 2005 that would be available indefinitelyfor offset against future taxable profits of the companies in which the lossesarose. The Group has not recognised any deferred income tax asset as theDirectors do not consider there is sufficient certainty in the timing and amountof future taxable profits that would allow reversal of the asset arising in therelevant Group companies. The unrecognised deferred tax asset balances are as follows: 2005 2004 £000 £000 Revaluation of interest rate swaps to fair value 6,687 15,266Losses not utilised 34,479 23,071Decelerated capital allowances 3,240 5,025Movement in the provision for onerous leases 3,461 2,704Movement in the deferral of asset management receipts 17,741 15,751Other temporary differences 1,736 1,440Deferred tax asset recoverable in the event of sale of revalued properties at market value (48) - ------------- -------------Total unrecognised deferred tax asset balance 67,296 63,257 ============= ============= There would be no material tax liability if the Group's properties were to besold at the valuation at which they are stated in the balance sheet. 8. Dividends paid and proposed 2005 £000Between incorporation and 31 December 2005, the following dividends were declared and paid:Equity dividends on ordinary shares:First interim dividend for 2005: £0.30 per share * 4,615Second interim dividend for 2005: £0.27 per share 4,275Third interim dividend for 2005: £0.03 per share 748Fourth interim dividend for 2005: £0.33 per share 7,414 --------- 17,052 ========= * The first interim dividend was paid by MUKCO prior to the Group reorganisation on 2 June 2005 following which Mapeley Limited became the parent company of the Group. Proposed and approved at the Board meeting on 5 January 2006(To be deducted from retained earnings in the year ending 31 December 2006)Equity dividends on ordinary shares: Fifth interim dividend for 2005: £0.37 per share 8,312 ========= No dividends were declared, proposed or paid during the year ended 31 December 2004. 9. (Loss) / earnings per share The calculation of basic and diluted earnings per share figures is based on thefollowing: - Net loss attributable to equity holders of the Company for the year of £56.5 million (year ended 31 December 2004: profit of £43.3 million)- Weighted average number of ordinary shares (after deducting 1,460 treasury shares relinquished by members of the employee share plan during the year) for basic earnings per share 19,510,770 (year ended 31 December 2004: 15,100,000)- Weighted average number of ordinary shares (after deducting 1,460 treasury shares relinquished by members of the employee share plan during the year) for diluted earnings per share 19,527,249 (year ended 31 December 2004: 15,322,600) The weighted average number of ordinary shares for the year ended 31 December2004 has been restated to reflect the share for share exchange that took placeon 2 June 2005, in which existing shareholders were offered 100 ordinary sharesin the Company for each share held in MUKCO. The effect of this was to reducethe basic earnings per share from £287.0 per share to £2.9 per share and dilutedearnings per share from £283.0 per share to £2.8 per share. 10. Property, plant and equipment Property acquired Freehold under finance Plant and property leases equipment Total £000 £000 £000 £000 Cost or valuation:At 1 January 2004 444,521 42,270 15,153 501,944Additions - - 817 817Revaluations 26,683 (1,270) - 25,413 --------- --------- --------- ---------At 31 December 2004 471,204 41,000 15,970 528,174 ========= ========= ========= ========= Accumulated depreciation:At 1 January 2004 - (846) (10,614) (11,460)Provided during the year (6,129) (515) (3,791) (10,435)Written back on revaluation 6,129 515 - 6,644 --------- --------- --------- ---------At 31 December 2004 - (846) (14,405) (15,251) ========= ========= ========= ========= Net book value:At 31 December 2004 471,204 40,154 1,565 512,923 ========= ========= ========= ========= At 1 January 2004 444,521 41,424 4,539 490,484 ========= ========= ========= ========= Property acquired Freehold under finance Plant and property leases equipment Total £000 £000 £000 £000 Cost or valuation:At 31 December 2004 471,204 41,000 15,970 528,174Additions - 63 333 396Transfer to non-current assets held for sale (1,631) - - (1,631)Impairment (589) - - (589)Revaluations 18,287 1,150 - 19,437 --------- --------- --------- ---------At 31 December 2005 487,271 42,213 16,303 545,787 ========= ========= ========= ========= Accumulated depreciation:At 31 December 2004 - (846) (14,405) (15,251)Provided during the year (6,610) (1,537) (1,314) (9,461)Written back on revaluation 6,610 260 - 6,870 --------- --------- --------- ---------At 31 December 2005 - (2,123) (15,719) (17,842) ========= ========= ========= ========= Net book value:At 31 December 2005 487,271 40,090 584 527,945 ========= ========= ========= ========= At 31 December 2004 471,204 40,154 1,565 512,923 ========= ========= ========= ========= Freehold property and property acquired under finance leases is included inproperty, plant and equipment where the Group provides significant ancillaryservices to tenants, and is carried at fair value. During the year, certain of the Group's non-investment properties have beenwritten down by an amount of £589,000. The impairment adjustment has beencharged to the current year's income statement reflecting the amount of theimpairment below their historical cost values. Freehold property held at 31 December 2005 of £487,271,000 (2004: £471,204,000)and the majority of the property acquired under finance leases at 31 December2005 of £37,660,000 (2004: £36,510,000) were valued at 31 December 2005 bySavills Commercial Limited ("Savills"), a valuer external to the Group as partof the valuation of all the valuable properties held by the Group under the HMRCcontract. These valuations have been incorporated into the annual financialstatements. Savills have consented to the use of their name in these financialstatements. The total of this valuation at 31 December 2005 was £566,613,000(2004: £546,720,000) and an analysis of where the assets valued are recorded inthe financial statements is shown in the table below: 31 December 2005 18 April 2005 £000 £000 Freehold property 487,271 471,204Property acquired under finance leases 37,660 36,510 ------------ ------------Recorded in property, plant and equipment 524,931 507,714 Properties held within premiums on operating leases 38,628 39,006Properties held as non-current assets held for sale 3,054 - ------------ ------------Total valuation of the Group's assetsvalued by Savills 566,613 546,720 ============ ============ Long leasehold properties with a valuation of £38,628,000 (2004: £39,006,000)are classified as Premiums on operating leases and are recorded at historicalcost less amortisation (see note 12). Five properties with a valuation of£3,054,000 (2004: £nil) became vacant during the year and are being activelymarketed for sale in 2006. These have been re-classified as "non current assetsheld for sale" in 2005. The valuations at 31 December 2004 were undertaken by Savills at 18 April 2005on a basis consistent with that applied at 31 December 2005. The Directors,having taken advice from a suitably qualified employee (a member of The RoyalInstitution of Chartered Surveyors), were of the opinion that the value of theseproperties at 31 December 2004 was not materially different from that at 18April 2005 and, therefore incorporated those valuations prepared by Savills at18 April 2005 in the balance sheet at 31 December 2004. The valuation at 31 December 2005 has been carried out in accordance with TheRoyal Institution of Chartered Surveyors' ("RICS") Appraisal and ValuationStandards published in February 2003 (the "Red Book") and the CESR Guidance onproperty valuations. The valuation as at 31 December 2004 was carried out usingthe discounted cash flow method of valuation. Under this method the estimatedfuture income stream from each property and the estimated residual value of eachproperty have been capitalised at appropriate discount rates that reflect thetenure, location, age, size and quality of buildings, the terms of theoutsourcing contract and the potential risk that some of the properties may fallvacant either during or at the end of the contract. The valuations have been prepared in accordance with the Red Book on the basisof Market Value, which is defined as follows:"The estimated amount for which a property should exchange on the date ofvaluation between a willing buyer and a willing seller in an arm's-lengthtransaction after proper marketing wherein the parties had each actedknowledgeably, prudently and without compulsion." The following assumptions were used in determining the valuations which werespecific to the Group: - For the purpose of the valuations, each Property has been valued individually and not as part of a portfolio notwithstanding the overriding terms of the Group's contract with HMRC and the non-assignable nature of this contract. 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 acquisition 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 valuations assumed a hypothetical weighted average lease term for the leases with HMRC to reflect these termination rights, and taking into account HMRC's stated intentions. These hypothetical weighted average lease terms are as follows: o Properties designated "Core" by the HMRC contract - leased until 31 March 2021; o Properties designated "Intermediate" by the HMRC contract - leased until the contractual lease expiry date; and o Properties designated "Flexible" by the HMRC contract - leased until 30 September 2011. - HMRC pays the Group amounts under the contract which cover the charge for both 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, lifecycle 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. - 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, Savills have estimated the current vacant possession value of the properties and assumed that these decline in real terms at rates between 0.5% and 1.25% per annum. In order to arrive at their valuation, Savills discounted net annual rents receivable at a weighted average rate of 6.3% and residual sales values were discounted at a weighted average rate of 10.4%. Certain other properties held under finance leases and included within property,plant and equipment were valued in accordance with the Red Book by the Directorsat a Market Value of £2,430,000 (2004: £3,644,000) having taken advice from asuitably-qualified employee (a member of The Royal Institution of CharteredSurveyors). The valuations for the finance leases were determined by: - taking into account the estimated future income stream from each property; and using - appropriate discount rates that reflect the incremental borrowing rate of the Group at the time the leases were taken out, being 7.5% (2004: 9%). If freehold property and property acquired under finance leases were measuredusing the historical cost model, the carrying amounts would be as follows: 2005 2004 £000 £000 FreeholdCost 190,842 192,465Accumulated depreciation (3,198) (2,696) ------------ ------------Net book value 187,644 189,769 ============ ============ Acquired under finance leasesCost 23,736 23,672Accumulated depreciation (2,286) (997) ------------ ------------Net book value 21,450 22,675 ============ ============ All leased assets are pledged as security for the related finance leaseobligation. As set out in note 18, freehold property and property acquired under financeleases have been secured against external borrowings. 11. Investment property Property acquired Freehold under finance property leases Total £000 £000 £000At valuation:At 1 January 2004 460,310 17,638 477,948Reclassified as premiums paid on operating leases (note 12) - (113) (113)Additions 24,374 32 24,406Revaluations 45,983 2,089 48,072Disposals (989) - (989) ----------- ----------- -----------At 31 December 2004 529,678 19,646 549,324 Additions 507,161 2,907 510,068Revaluations 17,466 571 18,037 ----------- ----------- -----------At 31 December 2005 1,054,305 23,124 1,077,429 =========== =========== =========== It is the Group's policy to carry investment property at fair value inaccordance with IAS 40 "Investment Property". Investment property was valued at31 December 2005 by CB Richard Ellis Limited ("CBRE") and Savills, valuersexternal to the Group. These valuations have been incorporated into the annual financial statements.Both Savills and CBRE have consented to the use of their names in thesefinancial statements. Investment property comprises the Group's Abbey portfolio and its directproperty investments. CBRE's valuation of the Abbey portfolio of properties was£546,503,000 (2004: £526,054,000). Certain properties with a valuation of£1,841,000 (2004: £1,732,000) included within this valuation are being marketedfor sale and as such are classified as trading properties within inventories.These are carried at the lower of cost or net realisable value in the financialstatements (see note 14). Savills and CBRE both carried out valuations of the Group's other propertiesheld within investment property, which were valued at £24,825,000 (2004: £nil),and £504,399,000 (2004: £24,350,000) respectively as at 31 December 2005. The remaining properties held under Property acquired under finance leases werevalued by the Directors at a Market Value of £3,543,000 (2004: £nil) havingtaken advice from a suitably-qualified employee (a member of The RoyalInstitution of Chartered Surveyors). These valuations are summarised below: 31 December 2005 18 April 2005 £000 £000 Valuation of Abbey portfolio by CBRE 546,503 526,054Less properties valued by CBRE held in inventories at lower of cost or net realisable value (1,841) (1,732) ------------ ------------ 544,662 524,322 Valuation of direct property investments by Savills 24,825 -Valuation of direct property investments by CBRE 504,399 24,350Valuation of certain finance leases by the Directors 3,543 652 ------------ ------------ 1,077,429 549,324 ============ ============ The valuations at 31 December 2004 were undertaken by CBRE at 18 April 2005 on abasis consistent with that applied at 31 December 2005. The Directors, havingtaken advice from a suitably qualified employee (a member of The RoyalInstitution of Chartered Surveyors), were of the opinion that the value of theseproperties at 31 December 2004 was not materially different from that at 18April 2005 and, therefore incorporated those valuations prepared by CBRE at 18April 2005 in the balance sheet at 31 December 2004. The valuations at 31 December 2005 and 2004 have been carried out in accordancewith The Royal Institution of Chartered Surveyors' ("RICS") Appraisal andValuation Standards published in February 2003 (the "Red Book") and the CESRGuidance on property valuations. The valuations have been prepared in accordance with the Red Book on the basisof Market Value, which is set out in note 10. Certain properties acquired under finance leases for which the unexpired termbecame less than 20 years during the year ended 31 December 2005 werereclassified to premiums paid on operating leases as set out in the accountingpolicies. The following assumptions were used in determining the valuations which werespecific to the Group: - 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 our 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. The valuations have been undertaken assuming (except as otherwise disclosed tous) that in the case of the Abbey properties, each property is subject to astandard-form lease agreed between the Group and Abbey and that these leasescommenced on 1 January 2001 without options to break on the part of either thetenant or the landlord. There are overriding provisions for Abbey to terminateoccupational leases earlier than the original lease end date. These are set outwithin a master agreement entered into with Abbey. In the case of the DPIproperties, the valuation for each of the properties has been undertakendetermined by the specific term 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 thespecific 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. The Directors valued certain finance leases at 31 December 2005, having takenadvice from a suitably qualified employee (a member of The Royal Institution ofChartered Surveyors), on the following basis: - taking into account the estimated future income stream from each property; and using - appropriate discount rates that reflect the incremental borrowing rate of the Group at the time the leases were taken out, being 7.5% 12. Premiums on operating leases £000CostAt 1 January 2004 57,549Reclassifications * 113 -------------At 31 December 2004 57,662 ============= Accumulated amortisationAt 1 January 2004 (10,994)Provided during the year ( 4,277) -------------At 31 December 2004 (15,271) ============= Net book value:At 31 December 2004 42,391 =============At 1 January 2004 46,555 ============= * Reclassified from investment property (refer to note 11). £000CostAt 31 December 2004 57,662Disposals (1,563) -------------At 31 December 2005 56,099 =============Accumulated amortisationAt 31 December 2004 (15,271)Provided during the year (3,959)Disposals 1,563 -------------At 31 December 2005 (17,667) ============= Net book value:At 31 December 2005 38,432 =============At 31 December 2004 42,391 ============= 13. Non-current assets held for sale At valuation £000At 1 January 2005 -Reclassifications from property, plant and equipment 1,631Write down to lower of carrying and fair value (255) -------------At 31 December 2005 1,376 ============= During 2005, certain freehold properties, which were previously fully occupiedby HMRC and carried at valuation within Property, plant and equipment, becamevacant, and the decision was taken by the Group to dispose of these assetsbecause these assets did not fulfil the Group's criteria of investment property.These properties are being actively marketed and it is anticipated that thesedisposals will take place in 2006. In accordance with the provisions of IFRS 5,these assets are held at the lower of carrying value and fair value lessestimated disposal costs. As a result of this reclassification these assets werewritten down by £255,000. If these properties were measured using the historical cost model, the carryingamounts would be as follows: 2005 £000 Cost 1,032Accumulated depreciation (11) -------------Net book value 1,021 ============= 14. Inventories 2005 2004 £000 £000 Trading properties 822 1,732Work in progress (at cost) 17,687 15,541 ------------- ------------- 18,509 17,273 ============= ============= Work in progress represents costs on long-term contracts not yet taken to theincome statement less any foreseeable losses and payments on account. 15. Trade and other receivables 2005 2004 £000 £000Non currentOther receivables 121 -Accrued income 6,284 6,207 ------------- ------------- 6,405 6,207 ============= ============= 2005 2004 £000 £000CurrentTrade receivables 8,868 28,125Other receivables 70 987Amounts owed by shareholders (refer to note 27) - 29,000Prepayments and accrued income 39,951 40,553 ------------- ------------- 48,889 98,665 ============= ============= Trade receivables are non-interest bearing. Amounts receivable from HMRC arereceived one month in arrears. Amounts receivable on all other contracts andleases are receivable quarterly in advance. Prepayments and accrued income includes £9,652,000 (2004: £9,141,000) in respectof accrued income. 16. Cash and short-term deposits Cash and short-term deposits earn interest at floating rates based on daily bankdeposit rates. Short-term deposits are made for varying periods of between oneday and one month depending on the immediate cash requirements of the Group, andearn interest at the respective short-term deposit rates. The fair value ofcash and short term deposits at 31 December 2005 is £81,156,000 (2004:£74,844,000). For the purposes of the consolidated cash flow statement, cash and short-termdeposits comprise the following at 31 December: 2005 2004 £000 £000Cash at bank- in controlled accounts 25,704 57,438- for operational purposes 55,452 17,406 ------------- -------------Cash and short-term deposits 81,156 74,844 ============= ============= The amounts held in controlled accounts comprise property sale proceeds andother capital receipts which will be held in controlled accounts until the nextinterest payment date in accordance with the terms of the relevant loan facilityagreements. This cash can be accessed within 24 hours of any request by theGroup. 17. Issued capital and reserves 2005 2005 2004 2004 Authorised No. of ordinary No. of ordinary shares £000 shares £000Ordinary shares at par value of £nil 22,465,147 - 15,382,100 - ============ ====== ============ ====== Issued No. of shares £000 No. of shares £000At 1 January 2005 15,382,100 - 15,382,100 - ------------ ------ ------------ ------Issued on 1June 2005 to settle shareholder loans (note 27) 654,998 - - - ------------ ------ ------------ ------ 16,037,098 - 15,382,100 -Issued on 26 April 2005 2 - - -Issued on 21 June 2005 6,121,739 - - -Issued on 21 June 2005 under the Plan (note 5) 291,308 - - -Issued on 21 June 2005 to the Non-executive Directors (note 5) 15,000 - - - Treasury shares (1,460) - - - ------------ ------ ------------ ------At 31 December 2005 22,463,687 - 15,382,100 - ============ ====== ============ ====== The Company issued two subscriber shares at par on incorporation on 26 April2005. On 2 June 2005, the Company issued 16,037,098 ordinary shares to theshareholders of MUKCO to acquire its issued share capital. These shares havebeen treated in these accounts as if they had always been in existence,consistent with the principles of merger accounting. On 21 June 2005, throughits initial public offering, the Company issued a further 6,121,739 ordinaryshares to investors at a price of £23 each. At the same time, the Company issued291,308 ordinary shares under the share Plan for employees and 5,000 ordinaryshares each to J W Harris, R W Carey and C N K Parkinson in their capacity asNon-executive Directors of the Company. The Company also awarded 5,000 ordinaryshares to M Fascitelli who was appointed as a Non-executive Director on 20December 2005. These shares will be issued to M Fascitelli in 2006. The ordinaryshares issued to the Employee Share Plan and to the Non-executive Directors wereissued for £nil consideration. Ordinary shares have no restrictions attached and entitle all shareholders onevote for each share held and to the assets of the Company on any winding upafter settlement of all liabilities. The restructuring of the Group during the year involved a share for shareexchange, which introduced a new holding company, Mapeley Limited. The relativerights of the former shareholders of MUKCO were not altered and this restructuring has been accounted for using the merger method of accounting. Although Mapeley Limited was only formed on 26 April 2005 and acquired MUKCO on 2 June 2005, the accounting information on the Group has been prepared as if the Group had always been in existence in its current form. At 31 December 2005, 1,460 shares had been returned to the Group followingwithdrawal of members from the Plan. These shares are held by a subsidiary astreasury shares. Share premium Share premium represents the excess of proceeds raised on the issue of sharesover the nominal value of those shares. Costs incurred in issuing shares of£8,411,000 have been deducted from share premium during the year from both theCompany and the Group. Net unrealised losses This reserve records movements in the fair value of financial instruments heldas cash flow hedges. Asset revaluation reserve The asset revaluation reserve is used to record increases in the fair value ofnon-investment properties and decreases to the extent that such decrease relatesto an increase on the same asset previously recognised in equity. Any decreasebelow historical costs is recognised in the income statement. Other reserves Other reserves include contributed surplus, capital contribution and sharebenefits expense. Contributed surplus and capital contribution The contributed surplus and capital contribution of MUKCO were reclassified asother reserves as part of the Group restructuring which occurred during theyear. This involved a share for share exchange with shareholders of MUKCO, whichintroduced a new holding company, Mapeley Limited. The contributed surplusrepresents the excess of proceeds raised on the issue of shares over the nominalvalue of those shares. During the year, £29.0 million of contributed surplus wasrepaid to the shareholders. The capital contribution was an irrevocable offer tocontribute capital on demand made by the shareholders of MUKCO in 2002. Thiscontribution was called and received during the year. Share benefits expense Other reserves includes a credit of £899,000 for the year ended 31 December 2005in respect of shares issued under the Plan and charged to the income statement.The total estimated cost to the Group of £6,700,000 is to be spread over therelevant vesting periods. Other reserves also include a credit of £805,000 whichrelates to a share benefits expense for shares issued to the four Non-executiveDirectors and charged to the income statement. These Directors were each awarded15,000 shares during the year and vest on dates ranging between the date ofgrant and the second AGM following the date of appointment to the Board. Thetotal estimated cost to the Group is spread over the periods from the date ofgrant to the date at which the benefits vest. Further details are set out innote 5. MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange

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