Caleres
Annual Report 2007

Plain-text annual report

Annual Report 2007 C a p i t a l & R e g i o n a l A n n u a l R e p o r t 2 0 0 7 Section 1 Section 2 Section 3 Section 4 Section 5 14 Joint venture and other interests 16 Responsible business Business review 01 Capital & Regional… our philosophy 02 Business review 04 The Mall 06 The Junction 08 X-Leisure 10 FIX UK 12 German portfolio Results 19 Chairman’s statement 20 Operating review 22 Financial review Governance 26 Directors 27 Directors’ report 30 Statement of directors’ responsibilities 31 Directors’ remuneration report 37 Corporate governance report Accounts 40 Consolidated income statement 41 Consolidated balance sheet 42 Consolidated statement of recognised income and expense 42 Reconciliation of movement in equity shareholders’ funds 43 Consolidated cash flow statement 44 Notes to the accounts 77 Independent auditors’ report – Group 78 Independent auditors’ report – Company 79 Company balance sheet 80 Notes to the Company accounts 83 Five-year review 84 Glossary of terms Other information 86 Portfolio information 87 Fund portfolio information (100% figures) 88 Advisers and corporate information 89 Shareholder information Capital & Regional… our philosophy • The right property… C&R invests in property sectors with sound fundamentals where active management can make a difference • The right people… we aim to recruit and retain the best specialist talent across the business • The right money… we are structured as a co-investing asset manager, aiming to access the most efficient equity and debt for each of our activities …what we do • C&R is a co-investing property asset manager. This means that we manage property assets for funds in which we hold a significant stake • This enables our equity and management to be leveraged over a large portfolio and enhances returns to shareholders • We aim to build best-of-class specialist management teams for the retail and leisure sectors in which we operate Group structure Earnings businesses Assets businesses SNO!zone CRPM (Property Management) Fund co-investment German portfolio Great Northern Manchester Arena Xscape Braehead Cardiff Post FIX Fund formation in March 2008. Capital & Regional Annual Report 2007 01 Asset management and development opportunities Our portfolios contain many asset management opportunities which will ultimately drive rental growth and investor returns. Most of these are reconfigurations and refurbishments within the existing portfolios and will generate rental growth with low risk relative to new builds. Brands The Company has developed six brands as follows: Brand Use The Mall The Junction X-Leisure Xscape FIX UK SNO!zone Shopping centre portfolio Retail parks portfolio Leisure centre portfolio Leisure destinations anchored by ski slopes and cinemas Trade centres The ski operator at the three Xscapes Key relationships Tenant relationships: our tenant relationships are of great importance to us. Our largest individual relationships are with Cineworld in our leisure division and B&Q in our retail parks. Our shopping centre business has nearly 1,250 retailers, the largest of which is Arcadia which accounts for 3.53% of its rent roll. In Germany the Metro Group is an important tenant with which we are beginning to cultivate a relationship. Fund investors: the institutional investors holding units in our three funds provide two-thirds of the equity on which our business is built. The Mall has 50 such investors, including three from overseas. The Junction has 13 and X-Leisure has 19. Fund managers: our principal fund managers, with whom we operate the three funds on a day-to-day basis, are also important to our business. Morley Fund Management represents investor interests on the Mall and Junction Funds, and Hermes does the same for the X-Leisure fund. The fund manager contracts are coterminous with our management contracts as follows: Manager Termination date Fund Mall Morley Fund Management Junction Morley Fund Management X-Leisure Hermes Investment Management 31 December 2016 with an option for a further five year extension 31 December 2011 with an option for a further five year extension 16 March 2018 Our suppliers, professional firms, banks and joint venture partners also play an important and much appreciated role in our business. Business Review Strategy and objectives C&R is a co-investing asset manager with teams specialising in retail and leisure property. We have three well established funds in which we co-invest and, since the year end, our FIX portfolio became a fund in which C&R now holds 20%. We believe the long-term fundamentals for UK retail and leisure are strong. A growing population with a high propensity to spend is serviced by a restricted supply of retail space, which remains well below other developed economies, particularly the US. In addition to the value of our property assets, we believe that there is significant value in: • Our experienced management teams, which have strength in depth, specialisation and experience. • Our management business with long-term fee income streams which enhances our cash flow and strengthens our business. • Our indoor ski operator, SNO!zone, which generates a significant flow of profit from a low capital base. Description of the business Each of our three principal funds has its own specialist management team. In each case the interests of the fund investors are represented by a fund manager. Our funds Property segment The Mall The Junction X-Leisure Shopping centres Retail parks Leisure property Fund manager Morley Morley Hermes Property manager CRPM* team of 74 CRPM team of 20 CRPM team of 35 * Capital & Regional Property Management Our trade park portfolio, FIX UK, became a fund in March 2008. During 2007, whilst under C&R ownership, it consisted of a team of nine. A further portfolio, our German big box retail business, has been created over the last few years, delivering good cash returns and can potentially be developed into a fund or realised for value. In addition we have a number of wholly-owned properties and joint ventures. We try to restrict ourselves to ventures where our management expertise can add value. Head office, London 02 Capital & Regional Annual Report 2007 Our people Our most important resource by far. We have three largely independent divisions, each with its own CEO supported by leasing, financial and marketing expertise. Business development (including the German portfolio), tax, corporate accounting and IT are the main functions run by the central corporate division. Matters of common interest are discussed at weekly meetings of the executive committee and through specialist cross divisional committees. Capital & Regional plc Executive Committee Shopping centres division Retail parks division The Mall Junction team FIX team Leisure division X-Leisure Xscape SNO!zone Corporate division Finance IT Germany We have 1,073 people employed on three payrolls: Capital & Regional Property Management for our property management teams; Mall People for the At Mall teams; and SNO!zone for the people employed by our ski operator at the Xscapes. Staff numbers 2007 2006 Shopping centres Retail Parks including FIX UK Leisure Corporate CRPM employees Employed at the Malls Employed at the leisure centres SNO!zone employees Total 74 29 35 57 195 309 23 546 1,073 62 32 32 45 171 274 25 466 936 Property exposure by market segment (see through basis) Risks Any business has risks and it is our responsibility to manage them. We have identified seven specific risk areas of which shareholders should be aware. Property market risks: small changes in property market yields can have a significant effect on the value of our portfolios. These issues are monitored regularly by our executive committee, and the results of monthly valuations are published monthly with our unit price announcements. As a Company with retail and leisure tenants we are also exposed to a downturn in consumer spending. This would reduce the profitability of our occupiers, which could lead to an increase in vacancies. It would also reduce spending at our three SNO!zone locations. We manage this risk by diversification between different market segments and by deliberately targeting properties with strong defensive characteristics, where retailers are making profits. Changes in the tax and regulatory environment: our business could be affected by tax law changes, particularly those directed at offshore structures through which we operate or by the increasing burden of regulation. These risks are monitored by the Finance Director and Chief Executive. Loss of key management: our property management business is dependent on the skills of a few key individuals whose departure could adversely impact on the business. The risk is mitigated by the development of a next generation of management and through the Company’s long-term remuneration schemes, which defer payments by two to three years and align shareholder and management interests. Development risks: we have a substantial development programme both inside and outside our funds. This activity is subject to significant market, construction and commercial risk, which we mitigate by pre-letting a high proportion of the space and negotiating fixed price building contracts. Treasury risks: interest rate or currency movements can have an impact on our cash flow and net assets. We normally offset between 50% and 100% of these risks through interest rate swaps or forward exchange contracts. Germany 21.8% Trade parks 8.2% Leisure 17.0% Shopping centres 36.5% There is also a risk of further decline in the credit markets which could make it difficult to renew our debt when it falls due for repayment. We handle this risk by locking in our debt for significant periods ahead, and planning renewals well ahead of expiry. Retail parks 16.5% Fund investors: the institutional investors who invest in our funds are important to the continued success of our business. Our relationships are documented in long-term management contracts, but these can be terminated under certain circumstances. We work closely with our fund managers, Morley and Hermes, to maintain their support, keeping them fully informed through regular briefings and listening to their input on strategy. Internet retailing and hypermarket diversification: there are well publicised fears about trade diversion from traditional retail outlets to the internet and major supermarkets. We monitor these trends carefully and actively manage our centres to keep them up to date and competitive. Capital & Regional Annual Report 2007 03 The Mall “The adverse effects of the financial market on The Mall business have, in part, been mitigated by the continuing operational and financial outperformance of our centres.” Kenneth Ford, Chief Executive, The Mall The Mall Executive team From left: Kenneth Ford, Gaynor Gillespie, Mark Bourgeois, John Wood, Richard Stubbs What is The Mall? The Mall is the UK’s Community Shopping Centre Brand. The Mall Fund owns and operates approximately 10% of the UK’s covered retail space making it the largest portfolio of branded shopping centres in the UK. It is managed by a dedicated team of 74 from Capital & Regional’s Mall Corporation. The Fund was formed in March 2002 with just two investors – the Capital & Regional Group and clients of Morley Fund Management. New investors have come in as the portfolio has expanded. The fund now has 50 investors, including three overseas institutions. Our Malls have all been acquired under the following investment criteria: • Town centre locations. • Dominant in localised town catchments or strong in metropolitan catchments. • Minimum 150,000 sq ft lettable area. • Car park or public transport facilities. • Covered, or able to be. • Tenant profile “mass market” or “value” retail. • Revenue and capital growth potential. • Value adding management opportunities. Our management approach Is direct and accessible. There are no barriers between our shoppers, retailers, business partners or suppliers. Each Mall has its own At Mall based management team which has access to retail marketing, financial, HR, IT, property management and valuation expertise located at our London and Glasgow offices. Our objective is to provide and promote a clean, safe and stimulating shopping environment, with the retail mix relevant to each local community. We create the right space for retailers, and create, manage and market an exciting branded retail environment for our shoppers. The success of this management approach has been recognised by our retailers through The Mall being awarded the “Best Service Charge Provider 2007” award. The Mall has also been included in the Sunday Times 100 Best Places to work list (59th position) 2008. There are scale benefits in terms of financing, branding, ancillary incomes and co-operation with retailers and other commercial partners on a portfolio basis. When we buy an extra centre we have a distinct competitive edge – we can immediately link it to our management system, and take steps to improve the retail offer. The retailer market In the current competitive climate we believe our relatively low unit rental (average unit rent £69,000 pa) coupled with the cost effective Mall direct management approach, enables retailers to trade profitably at Mall locations. Top five Mall tenants by rental income (2007) Our performance pipeline There are many asset management opportunities within the portfolio – our performance pipeline. Even the centres we have owned the longest, at Aberdeen (first acquired by C&R in 1993) and Wood Green (1996), are still generating new opportunities. These opportunities are driven by continuing changes in retail formats. Some chains are growing with new formats, others declining and willing to give up space. Changes in supply chain management have meant that traditional service yards and storage areas are becoming redundant and can be converted to revenue generating space. Expansion opportunities can also arise through the acquisition of neighbouring properties. The capital expenditure envisaged is relatively low risk. Where possible we build to demand with a substantial element of pre-letting. Our construction contracts are in the main fixed price. In consultation with The Mall Fund Manager, our appraisal regime estimates the required returns before the expenditure is undertaken. Fund debt In May 2005 The Mall issued £1,066 million of Mall Bonds which were rated AAA by all three rating agencies. In September 2006 a further £375 million were issued. The interest rates payable on these issues were Libor + 0.18% and + 0.19% respectively. In addition The Mall has an acquisition and capital expenditure facility of £300 million of which £263 million was drawn at year end. The Fund has also used interest rate swaps to fix its interest on £1,460 million (£200 million of this was fixed after 30 December 2007) of its debt until 2012. At 30 December 2007 it had a weighted average cost of debt of 5.48%. The Mall Bonds were issued by Mall Funding plc which lends the proceeds on to the LP on a back-to-back basis. The Mall Bonds are quoted on the Irish Stock Exchange. The remaining fund debt is provided by the Royal Bank of Scotland. Both the bonds and bank facility are due for repayment in 2012. Corporate structure Mall investors hold units in a Jersey Property Unit Trust (JPUT). In comparison with direct property investment, unitised investment via a fund, allows investors to access a diversified property portfolio, an ability to diversify risk, and access to specialist property management expertise. In addition, these JPUT units can be bought without incurring SDLT, a significant advantage over direct property investment where 4% must be paid. The JPUT is the limited partner in a Limited Partnership (LP) which owns the properties. The LP is managed by its General Partner, which in turn is advised by Morley Fund Management and Capital & Regional Property Management. The Mall key statistics At 30 December At 30 December 2006 2007 £3,016m 24 2,504 4.84% 5.69% 24.2% £1,698m £3,125m 23 2,404 4.56% 5.21% 24.2% £1,504m Arcadia Boots Clinton Cards Superdrug New Look 04 No of units % of rent 41 21 34 19 17 3.53 3.28 2.44 2.05 2.02 Gross property asset value Number of properties Number of units Initial property yield Equivalent yield C&R share Total debt (excl. amortised costs) Capital & Regional Annual Report 2007 The Mall locations Aberdeen Barnsley Bexleyheath Blackburn Bristol Camberley Chester Edgware Epsom Falkirk Gloucester Ilford Luton Maidstone Middlesbrough Norwich Preston Romford Southampton Sutton Coldfield Uxbridge Walthamstow Wood Green The Mall properties Retail park Description Size (sq ft) Car park spaces Principal occupiers Number of lettable units 49 58 Valued at £40 million to £100 million Broadway Square, Bexleyheath The Mall, Aberdeen The Mall, Barnsley Leasehold hybrid retail warehouse scheme. 135,000 345 Sainsbury’s, TK Maxx, Wilkinson, Peacocks 8 Freehold single level covered shopping centre. 190,000 400 Debenhams, Argos, HMV, Superdrug and Ottakars 37 Leasehold covered shopping centre on two floors. 180,000 519 TK Maxx, Wilkinson, Next, Primark and Woolworths The Mall, Edgware Freehold single level covered shopping centre. 192,000 1,100 Marks & Spencer, Sainsbury’s, WHSmith, Boots and New Look The Mall, Falkirk Freehold covered shopping centre, on two floors. 170,000 400 Marks & Spencer, Debenhams Desire, Argos, 74 Woolworths, River Island, Boots and HMV The Mall, Gloucester Leasehold covered shopping centre, on two floors. 187,000 400 H&M, Marks & Spencer, Woolworths, USC, The Mall, Romford Leasehold covered shopping centre on three floors. 180,000 1,000 Republic, Sports Soccer, Market and MK One Asda, Wilkinson, Peacocks, McDonalds, Toni & Guy and Superdrug The Mall, Southampton Freehold covered shopping centre on two floors. 202,000 810 Matalan, Poundland and MK One The Mall, Walthamstow Freehold covered shopping centre on two floors. 260,000 870 Asda, BHS, Boots, Dixons, HMV, Top Shop and Top Man Valued at £100 million to £150 million The Mall, Bexleyheath Freehold single level covered shopping centre. 420,000 800 M&S, BHS, Woolworths, WHSmith, Boots, HMV and Next The Mall, Epsom Leasehold single level covered shopping centre with 55,000 sq ft of offices. 374,000 800 House of Fraser, Marks & Spencer, Waitrose, Superdrug, WHSmith, H&M and HMV The Mall, Ilford Freehold covered shopping centre on three floors. 294,000 The Mall, Preston Freehold covered shopping centre on three floors. 287,000 1,200 Marks & Spencer, Debenhams, HMV, TK Maxx, WHSmith and Woolworths 400 Marks & Spencer, H&M, Superdrug, New Look, Wallis, Vision Express and WHSmith 73 56 95 72 92 93 108 117 The Mall, Uxbridge Leasehold single level covered shopping centre with 40,000 sq ft of offices. 482,000 1,150 Marks & Spencer, Tesco, TK Maxx, Peacocks 123 and Wilkinson Valued at £150 million plus The Mall, Blackburn Leasehold partially covered shopping centre on three floors. 609,000 1,078 Debenhams, Tesco, Boots, Argos, BHS and Woolworths The Mall, Bristol Leasehold covered shopping centre on three floors. 350,000 1,000 The Mall, Camberley Part leasehold covered shopping centre on one floor. 398,000 1,040 TK Maxx, Boots, Argos, Woolworths, WHSmith, Waterstones and Zavvi Argos, Army & Navy, Boots, Littlewoods, Sainsbury’s and Woolworths 141 165 188 The Mall, Chester Leasehold single level covered shopping centre. 307,000 521 Debenhams, River Island, H&M, Laura Ashley, 153 The Mall, Luton The Mall, Maidstone Leasehold covered shopping centre on two floors, offices extending to over 65,000 sq ft. Freehold covered shopping centre, on three floors with offices extending to 40,000 sq ft. Principles, Top Shop, Top Man and The Pier 956,000 2,300 Debenhams, Boots, Primark, Next, Top Shop 163 and Top Man, Marks & Spencer 553,000 1,050 Boots, BHS, TJ Hughes and Wilkinson The Mall, Middlesbrough Freehold single level covered shopping centre with offices extending to over 50,000 sq ft. 424,000 550 Boots, BHS, WHSmith, Top Shop, New Look and H&M The Mall, Norwich Freehold covered shopping centre on six floors. 371,000 800 Argos, Boots, H&M, TK Maxx, Mothercare, New Look, Zavvi and Vue Cinemas The Mall, Sutton Coldfield The Mall, Wood Green Freehold partially open shopping centre on a single level 550,000 with offices extending to approximately 30,000 sq ft. 960 House of Fraser, BHS, Marks & Spencer, Woolworths, Boots, Argos and WHSmith Freehold, partially open shopping centre, on two floors with nearly 40,000 sq ft of offices. 590,000 1,500 Cineworld, TK Maxx,Wilkinson, Peacocks, Woolworths, HMV, Boots, Argos and WHSmith Capital & Regional Annual Report 2007 122 95 132 132 158 05 05 The Junction “Although Retail Warehousing saw a significant repricing in 2007, the Junction Fund continued to create new space for our tenants, made progress with our key developments, refurbished existing parks and focused on further improving our low vacancy rates” John Gatley, Managing Director, The Junction The Junction team From left: John Gatley, James Boyd-Phillips, Jo Lord, Graham Inglis, Ian Harris What is the Junction? The Junction Fund is a specialist retail warehouse fund with a dedicated in house management team. It owns a retail park portfolio which includes significant development opportunities. The investment criteria are: • At least 80,000 sq ft multi-let retail park, freehold or long leasehold. • Planning consent for open A1, bulky goods or a mix thereof. • Value enhancement opportunities. • Either the dominant scheme in local catchment, or ability to become so. Our Management Approach Our specialist retail warehouse team focuses on performance through asset management, new space development and our excellent tenant relationships. The strategy is to grow the Fund and leverage returns from portfolio scale, whilst also recycling capital from the sale of properties where business plans have been completed. Market segments Retail warehousing can be split into four categories: Fashion parks: these properties have open A1 planning (this consent allows any sort of retailing), are occupied predominately by typical high street fashion retailers and are a dominant retail destination. Prime retail parks: these properties have open A1 or bulky goods planning (or a mixture of the two). Bulky goods consent generally allows the sale of goods that cannot easily be carried away by the customer with occupiers typically including DIY chains such as B&Q and Homebase, furniture and carpet retailers and electrical outlet stores. Retail parks with open A1 planning often have a mixture of bulky goods and open A1 retailers, with the latter including operators who only tend to trade out of town. The properties are also well located and are dominant within their catchment area or capable of dominance. Secondary retail parks: these properties in most cases have a bulky goods consent, have vacant space and are dominated by competing schemes. Solus units: These properties are single let properties and tend to have a bulky goods consent. The Junction specialises in prime mixed use retail parks. Our portfolio is currently split broadly 50/50 between properties with Open A1 and bulky goods use. 06 Capital & Regional Annual Report 2007 Top five tenants by rental income (2007) B&Q DSG Retail Home Retail Group Comet Wickes Units 6 11 6 9 3 % 14.81 7.49 6.25 5.19 3.96 Development and reconfiguration opportunities The Junction actively manages its portfolio, and in 2007 it completed 85,000 sq ft of new space and refurbished 211,000 sq ft of existing space. In addition it has two major developments: Oldbury: the scheme comprises 400,000 sq ft covering retail warehousing, food and beverage, leisure and offices. Further prelets have been secured with others in legals. Site assembly progressed in the year and a CPO for the remainder of the site has now been entered. An amendment to the existing planning consent was achieved at the end of 2007. Thurrock: during 2007 the Junction Thurrock partnership acquired further development land and an additional 94,000 sq ft of income- producing properties, adding to the 462,000 sq ft of existing space. This major redevelopment opportunity is supported by the Thurrock Local Development Framework and Development Corporation masterplan, but still remains subject to support within the over- arching East of England plan which is expected in spring 2008. Corporate structure Junction investors hold units in a Jersey Property Unit Trust (JPUT). In comparison with direct property investment, unitised investment via a fund, allows investors to access a diversified property portfolio, diversify risk, and access to specialist property management expertise. In addition, these JPUT units can be bought without incurring SDLT, a significant advantage over direct property investment where 4% must be paid. The JPUT is the limited partner in a Limited Partnership (LP) which holds the properties either directly or through a subsidiary holding structure. The LP is managed by its General Partner, which in turn is advised by Morley Fund Management and Capital & Regional Property Management. The LP’s interest in the Thurrock Retail Park is 65%, held through a similar holding structure. The Junction key statistics Properties at market value Number of properties (core) Number of units Initial property yield Equivalent yield C&R share Bank debt At 30 December At 30 December 2006 2007 £1,223m 14 223 4.37% 5.32% 27.32% £649m £1,590m 16 233 3.29% 4.45% 27.32% £696m The Junction locations Aberdeen Aylesbury Bristol Glasgow Hull Leicester Maidstone Oxford Paisley Portsmouth Slough Swansea Telford Forge Thurrock The Junction properties Retail park Description Size (sq ft) Car park spaces Principal occupiers Number of lettable units Valued at below £50 million Renfrew Retail Park, Renfrewshire Broadwell Industrial Estate, Oldbury Valued at £50 million to £100 million The Junction Abbotsinch Retail Park, Paisley Mixed bulky retail warehouse and industrial scheme. 57,089 n/a Pets at Home Mixed use development site with consent for bulky and open A1 non-food retail and leisure. 37,065 n/a – Bulky retail warehouse park. 184,581 694 B&Q, DFS, Comet, Land of Leather The Junction Great Western Retail Park, Glasgow Bulky retail warehouse park, adjacent to a Sainsbury’s supermarket. 184,785 1,518 B&Q, DSG, JJB, SCS The Junction St Georges Retail Park, Leicester Open A1 retail warehouse park. 169,441 512 DSG, Next, Toys R Us, Mothercare The Junction Ocean Retail Park and Victory Industrial Estate, Portsmouth Bulky retail warehouse park with adjacent industrial estate. 234,218 705 Homebase, DSG, Halfords, Toys R Us The Junction Kittybrewster Retail Park, Aberdeen Open A1 non-food retail warehouse park. 141,578 626 TK Maxx, Halfords, Sportsworld, DFS The Junction Cambridge Close Retail Park, Bulky retail warehouse park. Aylesbury 191,668 650 Wickes, Comet, Argos, Sportsworld The Junction Slough Retail Park, Slough Mixed bulky and open A1 non-food retail warehouse park. 152,929 546 Homebase, Wickes, DFS, Land of Leather The Junction Templars Retail Park, Oxford Open A1 non-food retail warehouse park. 142,391 485 B&Q, Halfords, Comet, TK Maxx The Junction South Aylesford Retail Park, Bulky retail warehouse park. Maidstone 166,784 551 Homebase, Comet, BHS, Halfords, Currys The Junction Morfa Retail Park, Swansea Mixed bulky and open A1 non-food retail warehouse park, adjacent to a Morrisons supermarket. 339,568 1,042 B&Q, TK Maxx, Next, New Look, Sportsworld Valued at £100 million to £150 million The Junction St Andrew’s Quay, Hull The Junction Telford Forge Retail Park, Telford Bulky retail warehouse park. 350,521 1,315 B&Q, DFS, Comet, DSG Open A1 non-food retail warehouse park. 312,962 1,343 Next, Tesco Home Plus, Arcadia , TK Maxx, Boots 19 The Junction Imperial Park, Bristol Mixed bulky and open A1 non-food retail warehouse park. 338,667 1,200 B&Q, Woolworths, Tesco Home Plus, Next, JJB, Argos Valued at above £150 million The Junction West Thurrock Retail Park, Essex Open A1 non-food & leisure retail park. 555,868 2,398 Decathlon, M&S Outlet, Asda Living, TK Maxx, Furniture Village 21 31 Capital & Regional Annual Report 2007 07 4 6 6 10 12 19 13 14 7 7 10 20 24 X-Leisure “Leisure property as an asset class is demonstrating resilience in the current market. This is underpinned by strong occupational trading levels and very active asset management initiatives which maximise portfolio performance and capitalises on our key industry partnerships. These partnerships give us a vital advantage in current market conditions” PY Gerbeau, Chief Executive, X-Leisure Top ten largest leisure fund tenants/partners (2007) Number of units Net income % Cine UK Vue Entertainment Limited Virgin Active (including Holmes Place) Sainsbury’s Supermarkets Ltd SNO!zone Limited UCI (including Odeon) City Centre Restaurants (UK) Ltd t/a Frankie and Benny’s J D Wetherspoon plc Spirit Group Retail Ltd Pizza Hut (UK) Ltd 12 4 5 1 2 2 16 8 5 13 16.0 6.9 3.7 3.3 2.6 2..5 2.2 2.1 2.1 2.0 Corporate structure X-Leisure investors hold units in a Jersey Property Unit Trust (JPUT). In comparison with direct property investment, unitised investment via a fund, allows investors to access a diversified property portfolio, an ability to diversify risk, and access to specialist property management expertise. In addition, these JPUT units can be bought without incurring SDLT, a significant advantage over direct property investment where 4% must be paid. The JPUT is the limited partner in a Limited Partnership (LP) which holds the properties either directly or through a subsidiary holding structure. The LP is managed by its General Partner, which in turn is advised by Hermes Investment Management and Capital & Regional Property Management. X-Leisure key statistics Gross property asset value Number of properties Number of units Initial property yield Equivalent yield C&R share Bank debt At 30 December At 30 December 2006 2007 £947m 19 365 5.06% 5.78% 19.37% £485m £917m 18 350 4.86% 5.58% 20.0% £444m The X-Leisure team From left: PY Gerbeau, Pierre Hardy, Robert Warner, Polly Farrell, Alastair Bell What is the X-Leisure Fund? The X-Leisure Fund is the largest UK specialist fund investing in leisure property. It has been built up using the following investment criteria: • 50% or more of rental income generated from leisure operators. • Either is, or is able to be, anchored by a cinema. • Potential to become the major park in the catchment. • Active management opportunities or latent performance potential to deliver required performance. The Fund was created in 2004 through the amalgamation of three leisure funds previously set up and managed by Marylebone Warwick Balfour. Capital & Regional Property Management was appointed Property and Asset Manager and Hermes Investment Management Limited Fund Manager. Our management approach With a top of class specialist leisure team at C&R, X-Leisure is well placed to continue to be the dominant leisure provider in the UK. X-Leisure is a recognised business to business and investor brand. The X-Leisure Fund, managed by C&R, and with Hermes as the fund manager, has developed a strong track record in both financial performance and in inclusive corporate governance. It is also responsible for the design, construction and management/operation of the award winning Xscape destinations and SNO!zone operating business, both very profitable and successful consumer brands. X-Leisure has now fully implemented its business model of attracting quality footfall, increasing customers’ length of stay and delivering higher profits for our tenants/partners, which in turn increase our returns to our fund investors and C&R shareholders. Xscapes There are three multi award winning Xscape destinations: Xscape Milton Keynes and Xscape Castleford became part of the X-Leisure Fund in February 2007. Xscape Braehead is the newest of the three, and is a joint venture between C&R and Capital Shopping Centres. See page 14. SNO!zone SNO!zone is the UK’s premier real indoor snow slope operating business. With virtually no capital requirements, and with very strong cash flows and profits since 2001, SNO!zone Holdings is making a substantial contribution to C&R earnings business. See page 14. C&R wholly-owned leisure assets X-Leisure also manages Manchester Great Northern Warehouse and Hemel Hempstead see page 14. 08 Capital & Regional Annual Report 2007 X-Leisure locations Aberdeen Ashford Birmingham Boldon Braehead Brighton Cambridge Castleford Croydon Edinburgh Leeds London Maidstone Manchester Milton Keynes North Finchley Norwich Poole West India Quay London Wolverhampton X-Leisure properties Valued at below £25 million Lockmeadow, Maidstone Description Size (sq ft) Principal occupiers Number of lettable units This destination is home to the 700 year old Maidstone Lockmeadow Market. 139,780 Odeon Cinema, Luminar Leisure, David Lloyd 10 Queens Links, Aberdeen This leisure park, adjoining The Beach Esplanade, features a cinema and numerous restaurants. 128,081 Cine UK, Gala Bentley Bridge, Wolverhampton Comprises a multiplex cinema, restaurants and canal-side pub. 108,843 Cine UK Boldon Leisure Park, Tyneside Cinema & restaurant complex adjacent to Asda. 56,777 Cine UK 9 9 4 Valued at £25 million to £50 million Cardigan Fields, Leeds This scheme is approximately 1.5 miles from Leeds city centre. It comprises a cinema, bowl, health club and numerous restaurants. Included within the 14 units are two industrial units. 230,606 Vue, Hollywood Bowl, Virgin Active, Spirit Group 14 Fiveways, Birmingham In central Birmingham, Fiveways comprises a cinema, casino, restaurants and late night bars. 186,345 Cine UK, Grosvenor Casino West India Quay, Docklands London (50%) This listed building contains bars, restaurants, multiplex cinema, health and fitness centre and the Museum of Docklands. 70,857 Cine UK, LA Fitness, Tattersall Castle Group Grants, Croydon Parrs Wood, Manchester Eureka Park, Ashford Tower Park, Poole This modern urban entertainment centre is constructed behind a restored listed façade and contains a multiplex cinema, health club, bars, nightclubs and restaurants. 149,002 Vue Cinema, Virgin Active, Tiger Tiger, Mitchells & Butler This centre has a mixture of facilities, including family restaurants, 234,286 Cine UK, Holmes Place, Ten Pin health and fitness, bowling, multiplex cinema, bingo, children’s entertainment and a hotel. This centre comprises multiplex cinema, family restaurants, health 101,826 Cine UK, Travelodge, Living Well and fitness, nightclub, hotel, children’s nursery and free parking. Comprises a range of attractions, including a multiplex cinema, bowling, bingo, health club, water park and family restaurants. 199,452 Empire, Bowlplex, LA Fitness Cambridge Leisure Park, Cambridge This centre has a nine screen multiplex cinema, health club, bowling, a hotel and range of international bars and restaurants. 147,024 Cine UK, LA Fitness, Tenpin Great North Leisure Park, North Finchley, London Comprising a multiplex cinema, bowling, restaurants and a local authority swimming pool. 88,185 Vue Cinema, Hollywood Bowl Valued at above £50 million 02, Finchley Road, London This modern urban entertainment centre contains a multiplex cinema, health club, a mix of bars and restaurants and retail. 271,620 Vue Cinema, Sainsbury’s, Homebase, Habitat, Esporta Brighton Marina, Brighton The marina combines a mix of retail, leisure and residential, a working harbour and yacht moorings. 339,325 Cine UK, Bowlplex, David Lloyd Riverside, Norwich This entertainment centre comprises bars, restaurants, nightclubs, multiplex cinema and bowling. 197,638 UCI, Hollywood Bowl, Luminar Leisure Fountain Park, Edinburgh Scotland’s largest entertainment destination. 232,997 Cine UK, Tenpin, Virgin Active, Mecca Bingo, Stanley Casinos Xscape Castleford Xscape Milton Keynes This destination is anchored by one of the UK’s largest indoor real snow slopes. 370,809 SNO!zone, Cine UK, Bowlplex, Ellis Brigham This destination is anchored by one of the UK’s largest indoor real snow slopes. 423,698 SNO!zone, Cineworld, Virgin Active, Spirit Group, Ellis Brigham 11 17 10 11 9 16 20 7 23 75 13 12 50 45 Capital & Regional Annual Report 2007 09 FIX UK “This new fund offers the potential for greater scale and presence in the market.” Xavier Pullen, Deputy Chief Executive Top five tenants by rental income (2007) Tenant Wolseley Centres Limited Multi Tile Limited MKM Building Supplies Howden Joinery Properties Limited Selco Trade Centres Ltd Number of units Percentage of rental income 14 10 6 9 1 7.21% 5.77% 5.31% 4.62% 3.50% Corporate structure During 2007 we changed the holding structure towards our standard: we invest in a Jersey Property Unit Trust with a second unit trust which is the limited partner in a UK Limited Partnership. In March 2008 the new investors bought 80% of the units in the Jersey Property Unit Trust. FIX UK key statistics At 30 December At 30 December 2006 2007 £170m 49 241 5.26% 6.26% 100% £119.5m £110m 24 166 4.51% 5.72% 100% £70m FIX UK Xavier Pullen What is FIX UK FIX UK is the brand name for a portfolio of trade centres. It became a Fund with new investors on 6 March 2008 led by Paradigm Real Estate Managers Ltd and the Bank of Scotland Corporate. C&R now holds 20%, whereas during the 2007 financial year it held 100%. Trade centres A trade centre is generally made up of a number of units, occupied by tenants mainly servicing trade buyers such as builders, plumbers, joiners and electricians. The majority of the occupiers require a standard industrial consent. However, a number of others require a slight widening of consents to allow counter sales. The investment criteria agreed for the acquisition programme are: • A multi-let industrial / trade centre. • Minimum area of 20,000 sq ft. • Catchments of no less than 50,000 people within a 20 minute drive time. • Strategically strong location – e.g. adjacent to main road. • Planning for an industrial or trade centre use. Active management During 2007 we employed nine people focused on growing and managing the portfolio. They also worked hard to develop key relationships by working with nationwide tenants such as Travis Perkins, Wolseley, Kingfisher, Howden Joinery, the Grafton Group, Magnet, HSS Hire and the BSS Group. Gross Property Asset Value Number of Properties Number of Units Initial Property Yield Equivalent Yield C&R Share Bank Debt On 6 March 2008 we agreed to pass the day-to-day management to Paradigm Real Estate Managers Ltd who are able to handle the portfolio more efficiently alongside an existing portfolio. C&R retains significant influence through its 20% remaining holding and representation on the GP board. 10 Capital & Regional Annual Report 2007 FIX UK locations Aberdeen Alnwick Bedford Berwick Braintree Bridlington Bristol Buckingham Cannock Canterbury Cardiff Chepstow Doncaster Dudley Evesham Falkirk Gloucester Goole Grantham Greenock Hartlepool Hemel Hempstead Huddersfield Huntingdon Ipswich Irlam Liverpool Livingston Milton Keynes Newcastle Northampton Norwich Plymouth Poole Ramsgate Reading Scarborough Sheffield South Shields Stevenage Sunderland Swindon Truro Waltham Cross Whitby Witney Wrexham FIX-UK properties Trade centres Description 32 properties valued at below £4 million Various Size (sq ft) Principal occupiers 804,887 Various Number of lettable units 109 Valued at £4 million to £8 million Miller Street, Aberdeen Well located scheme on the inner ring road with tenant engineering opportunities during 2008 & 2009. 68,163 Keyline Builders Merchant, Dulux, Chubb, William Wilson Kingfisher Business Park, Bedford Purpose built trade centre. 38,012 Wolseley, Jewson, British Red Cross Broad Oak Trading Estate, Canterbury Well located scheme which has been refurbished. 40,201 Benchmark, Nationwide Auto Centres, Plumbase, Nationwide Crash repairs Wheatley Hall Trade Park, Doncaster Purpose built trade centre located adjacent to Wheatley Retail Park. 49,303 Topps Tiles, Carpetright, Formula One, Jewsons, GSF, Bathstore.com, Rexel Senate, Al Murad, Tile Giant & Victoria Bathrooms Davies Road, Evesham Development site. Woodrow Way, Gloucester Scheme offers a significant redevelopment and refurbishment to provide c. 72,000 sq ft. New Houstoun BP, Livingston Purpose built trade centre. 48,545 Pre-lets to Buildbase, Topps Tiles, City Electrical Factors, BSS Group, IMO 66,535 Dulux, BSS Group, Teledyne, Topps Tiles 42,488 Cupa Natural Materials, Tile It All, HSS Hire, Screwfix Cabot Lane, Poole Purpose built trade centre. 42,120 Trade Depot, Screwfix, Shore Floors Portman Road, Reading New scheme located opposite the proposed Battle Hospital redevelopment site. 64,860 Selco and Rodmatic Sheffield Stevenage Located on a prime arterial road, the scheme requires refurbishment. 55,873 Newey & Eyre, Al Murad, BSS Group, Howden Joinery, Tile Giant Located on a prime arterial road with potential for extension. 33,655 Safe Store, Kwik Fit and HSS Hire Inkerman Street, Sunderland Well located scheme, which will be refurbished and units reconfigured. 78,486 Magnet, Goodyear, Screwfix , BSS Group, , Hagemeyer, Ashtead Plant Hire, Plumbase Barnfield Road, Swindon Wren Units, Truro Well located scheme opposite the new B&Q which will be refurbished and units reconfigured. 43,893 HSS Hire, Multi Tile, Tile Giant Well located scheme adjacent to the prime retail warehouse scheme in Truro. 47,648 Autoglass, City Electrical factors, Kalon, Plumbase, Hewden Hire x2, Magnet, Jewson Waltham Cross Scheme has been refurbished to provide a modern trade centre offer. 28,107 Multi Tile, Wolseley Centres, Magnet x2 Valued at above £8 million Trade Centre, Bletchley Purpose built trade centre. Enterprise Trade Park, Bristol Purpose built trade centre. 47,889 Kalon, BSS Group, Howden Joinery, Multi Tile, Floors 2 Go, City Electrical Factors, HSS Hire 68,163 Motor World, Multi Tile, Mays Carpets, Tile Giant, Derwent Flooring Forward commitments Hemel Hempstead Forward commitment to purchase. 20,626 Four units under offer Irlam Forward commitment to purchase. 50,630 DSG Retail Limited 8 15 5 12 10 7 4 11 3 6 4 14 5 11 4 12 11 9 9 Capital & Regional Annual Report 2007 11 German portfolio “We are delighted with the performance of our German investments which are producing strong cash returns. In addition, they offer ongoing asset management opportunities which will drive future returns.” Xavier Pullen, Deputy Chief Executive Top five tenants by floorspace (2007) Principal tenants % floorspace Metro Group (including logistics) Edeka Group Rewe group Praktiker Coop eG 38.0 8.9 7.3 6.3 6.2 Management initiatives We are working with our German Partners to improve returns through active asset management. This includes extending existing units and negotiating several lease extensions. We are also working with tenants to refurbish or redevelop locations prior to lease expiry. Corporate structure Our investment in Germany is held through a series of Jersey companies, which either hold the properties directly, or through interests in KGs. Germany key statistics Gross property asset value Number of properties Number of units Initial property yield Equivalent yield C&R share Bank debt At 30 December At 30 December 2006 2007 €668m 50 193 5.99% n/a 91.4% €485m €567m 44 143 6.01% n/a 92.2% €419m The Germany team From left: Xavier Pullen, Wilhelm zu Wied, Christoph Friedrich Our German portfolio: We acquired our first German assets in 2005 and have significantly expanded the portfolio since then. We added a further six properties in 2007. We now have 50 properties with a total floor space of 469,000 sq m. Our investment criteria have been: • Established out-of-town retail locations. • Large stand-alone hypermarkets and retail parks with sales area of more than 3,500 sq m (current average 9,380 sq m) with substantial land and car parking. • Strong covenants. • Shorter leases preferred leading to asset management opportunities. Why Germany? Our expansion into Germany has been management led and focused on a specific market segment. We identified the expertise of the Hahn Group and this led to the focus on big box edge-of-town retail, which has the following attractions: • severe restrictions on further out-of-town development; • good tenant covenants and long leases; and • index linked rents. We are also attracted by the high yields, secure income profile and low interest rates available in this market segment. Our main tenants Our German out-of-town retail investments differ markedly from our UK portfolio. We have concentrated on stand-alone retail units with the emphasis mainly on food stores and some DIY. We are seeing continued strong tenant demand in the out of town sector and we expect that this is unlikely to change. Germany locations Aachen-Brand Balingen Bremen Bremen (Haferwende) Bochum Bochum Wattenscheid Bonn-Beuel Brühl Cottbus-Gallinchen Dortmund Elchingen Hameln Heide Herne Hoesbach Ingelheim Krefeld Kirchheimbolanden Köln Gremberg Kreuztal Lauchhammer Leipheim Leverkusen Lübeck Magdeburg Marl Mörfelden Oschersleben Rangsdorf Selm Sinzheim Sobernheim Stadthagen Taufkirchen Tönisvorst Trier-Kenn Velten 12 Capital & Regional Annual Report 2007 German properties 25 properties with individual values less than €10 million Various Description Valued at €10 million to €20 million Balingen Bochum Langendreer Elchingen Herne Hösbach Ingelheim Koln Gremberg Kreuztal Lauchhammer Marl Oschersleben Sobernheim Stadthagen Valued at €20 million to €50 million Bremen Haferwende Brühl Cottbus Hameln Krefeld Moerfelden Rangsdorf Sinzheim Trier – Kenn Valued at €50 million to €100 million Dortmund Lübeck Toenisvorst DIY Hypermarket Hypermarket Hypermarket DIY Hypermarket Hypermarket Hypermarket Retail park Retail park Retail park Hypermarket DIY Logistics Supermarket Retail park Retail park DIY Retail park Furniture store Hypermarket Hypermarket Retail park Hypermarket Retail park Size (sq m) 74,952 7,457 6,388 7,433 7,412 12,955 10,245 8,300 6,369 17,675 8,795 10,484 7,387 10,913 54,391 17,525 29,884 16,893 11,697 12,140 18,506 16,536 11,634 32,978 29,077 20,603 Principal occupiers C&R share Various Toom Kaufland Real Toom Globus Real Real Extra Marktkauf Kaufland Marktkauf Real Hagebau MGL Real Praktiker Kaufland Praktiker REWE Roller Real Real Real Plaza Real Greater than 84% 85% 76% 100% 90% 90% 90% 90% 80% 85% 90% 81% 84% 90% 100% 85% 100% 85% 100% 90% 100% 90% 90% 85% 90% 100% Capital & Regional Annual Report 2007 13 Joint venture and other interests C&R continues to invest in properties on its own account and in joint ventures. These ventures are strictly screened to ensure that we have the management capability and also to ensure that they do not fall within the fund investment criteria. Where there is a potential conflict of interest, the properties are offered first to the relevant fund. Joint venture and other interests Partners Xscape Braehead, Glasgow Glasgow Fort Manchester Arena Capital Retail Park, Cardiff Gt. Northern Warehouse, Manchester Leisure World, Hemel Hempstead SNO!zone, ski slope operator Capital Shopping Centres British Land GE Real Estate PMG Estates Limited – – – C&R share 50% 50% 30% 50% 100% 100% 100% The Xscapes Three Xscapes have now been built, and the first two, at Milton Keynes and Castleford, were acquired by the X-Leisure fund in February 2007. The Xscape in Braehead opened in April 2006. It is 95.4% let and the retail and catering units are trading well. Glasgow Fort This highly successful fashion park was developed in partnership with Pillar Property, now part of the British Land Group. It was sold to the Hercules Fund in 2004 but C&R has a financial interest in further phases. Manchester Arena In July 2006, we acquired 30% of the Manchester Arena in a co-venture with GE Real Estate. The property is located on an eight acre site in the heart of Manchester city centre and comprises the 20,000 seat MEN Arena, 120,000 sq ft of offices, a 1,075 space car park and ancillary retail space. For C&R it is an opportunity to exploit some asset management opportunities and to use its leisure and co-venturing expertise alongside a major investor. Capital Retail Park, Cardiff The Capital Retail Park Partnership is a 50:50 joint venture with PMG Estates Ltd, a Welsh developer based in Cardiff. The project involves the construction of a 280,000 sq ft retail park in Cardiff, with a land sale of part of the site to Asda for a 90,000 sq ft foodstore. Practical completion is expected in August 2008. The project is now 53% prelet. Cardiff Council is constructing a new football stadium for Cardiff City Football Club on an adjacent site, due for completion in summer 2009. Great Northern Warehouse, Manchester We are nearing completion of our active management programme for this building. When we first took a stake in 2003 the building had significant vacant space, and needed to be brought to life. Our leisure team let 44,673 sq ft to London Clubs International and this is now trading successfully as a casino called Manchester 235. We have also obtained the planning permissions and licensing for a nightclub occupying 38,110 sq ft of the space, and are in advanced negotiations with a major nightclub operator. Leisure World, Hemel Hempstead We bought this leisure property through our contacts with Luminar Leisure, and have a number of ideas for adding value in the medium term. Earnings businesses In addition to the assets businesses on the previous pages, which are held in the balance sheet at valuation, the Group has two earnings businesses which generate substantial income which is not available to many other property companies. SNO!zone SNO!zone is the ski operator which rents the real snow slopes in the three Xscapes. It is wholly owned by C&R, which built it up out of the bankruptcy of Leisurenet in 2001. It is the largest and most profitable indoor ski operator in the UK, but expects more competition from new operators and venues in the future. The strength of SNO!zone within the market has attracted professional and successful businesses to align themselves with the Company through sponsorships and other agreements. Capital & Regional Property Management (CRPM) CRPM is the company which employs our specialist property management teams. It also holds long-term management contracts with each of the three funds. It earns a regular stream of fee income, which covers the cost of the specialist teams, and also the corporate overheads. In addition it earns performance fees which are calculated as a proportion of the fund’s outperformance over a rolling three year period. In years of poor performance the formula can produce negative fees capped at the amount paid for the previous two years. 14 Capital & Regional Annual Report 2007 Joint ventures and other property interests Property Description C&R share Size (sq ft) Principal occupiers Number of lettable units Valued at £10 million to £25 million Leisure World; Jarman Fields, Hemel Hempstead Valued at £25 million to £70 million Manchester Evening News Arena Valued at £70 million to £100 million Great Northern, Manchester First generation leisure park acquired in 2005 for redevelopment or refurbishment. 100% 156,000 Luminar Leisure, Odeon Cinema Largest indoor arena in the country with additional mixed use and retail space. 30% 154,769 SMG (UK) Limited, Network Rail, JD Williams & Co Limited Located in Manchester city centre, this converted Victorian warehouse includes bars, restaurants, a health and fitness centre, shops and multiplex cinema. 100% 366,382 AMC Cinema, Virgin Active, London Clubs International 2 5 47 Xscape Braehead, Glasgow This newest Xscape has all the extreme sports of Xscape Leeds and MK but also includes golf and football attractions. 50% 374,112 Odeon, SNO!zone, Bowlplex, Ellis Brigham 37 Capital & Regional Annual Report 2007 15 Responsible business Overview At Capital & Regional, we believe that the long-term success of our business depends on the ability to build sustainable relationships with investors, customers, suppliers, local community stakeholders, and our own people. This can only be done by behaving in a responsible manner towards them, and towards the natural environment; and by being aware and responsive to their needs and points of view. Being a responsible business means that all of the business’ activities and operations must be carried out in a responsible manner, down to every decision that we take as a business; and every interaction that we have. Two years ago we began to map out our approach to Responsible Business (RB), in order to provide a framework for measuring performance and improvements, and identify the key areas where we have an impact. These are: the managing of responsible business; marketplace (customers & suppliers); the environment; workplace; and local communities, which are discussed in more detail below. This year we have made progress across divisions in all areas, but particularly in measuring and managing our environmental impacts and developing a more strategic approach to community investment. Next year the challenge will be to ensure continued improvements in these areas, to develop our measurement frameworks, and to develop our approach to engaging with occupiers and suppliers in our RB agenda. Below we outline our group-wide approach to these areas, and highlight some activities that took place over the last year showing how this approach is implemented in practice. Further information on specific leisure, retail park, and shopping centre activities can be found on those divisions’ websites. We acknowledge that there is more that we can do to improve our RB practice, and to this end we have identified some priorities for the coming year within each key area. Managing Responsible Business In order to deliver value to all our stakeholders, we believe that our RB programme must be action-oriented and tailored to the relevant business divisions. Capital & Regional manages Responsible Business in the same way as it does other operating areas, by allowing our operating divisions autonomy to develop an approach that is suitable for them; whilst providing broad strategic direction and a forum for supporting one another and encouraging progress through a Responsible Business Committee. The Responsible Business Committee meets three times a year and includes three main Board directors: Alan Coppin (Chairman), Xavier Pullen and William Sunnucks, as well as divisional representatives who are responsible for delivering RB activities within the funds, and who report on progress at each meeting. The group has developed certain broad policies within which the divisions must work to enable consistent progression across all divisions and to allow the RB committee to ensure activities are aligned with good practice. The committee reports regularly to the Board. Marketplace – Customers and Suppliers As a group, our policy is to treat those who occupy, use and supply our properties with respect, and to engage with them as partners. We aim to work closely with our occupiers to respond to their needs, and their customers’ needs; for example through marketing and safety initiatives at our centres. We also look to form strong relationships with suppliers, who are local to our activities wherever 16 Capital & Regional Annual Report 2007 practical, and to engage with them on responsible business activities, as they support us in the delivery of a successful RB programme. We measure the success of these relationships on a divisional level. The Junction, The Mall and FIX UK commission independent tenant satisfaction surveys on an annual basis, and SNO!zone conducts regular customer surveys, the results of which are published internally on a monthly basis. The aim is to maintain or improve satisfaction each time; and we have so far managed to do this. We strive to continuously build and improve on our existing relations by listening to the feedback we receive from customers and tenants at both head office and ground level. 2007 Highlights • Our trade park division, FIX UK, improved their customer satisfaction by almost 20% in 2007, their second year of trading, bringing average satisfaction to a rating of 6.35 out of 10. • For the second year running, The Mall received the accolade of being the “Best Service Charge Provider” in 2007 by the Property Managers Association, the representative body of retail occupiers. 2008 Priorities • Develop a procurement policy for head office which will include social and environmental considerations. • Continue to maintain or improve customer satisfaction across our divisions. • Increase engagement with tenants on social and environmental issues. Case Study: The Junction’s “Park Mark” accreditation Over the course of 2007, The Junction’s operations team worked hard to further improve safety standards in the car parks and shared areas of our sites in order to reduce crime and anti-social behaviour. CCTV has been installed on all parks, as well as other crime prevention initiatives, often in conjunction with the local police force. Our aim over recent years has been to achieve a “Park Mark” accreditation for our schemes, awarded by the police, in order to show tenants and customers that our parks are well managed and safe environments. Determining factors include lowering the crime statistics, good and effective lighting, regular tenant liaison, and cleanliness. During 2007 and early 2008, we underwent the assessment process and achieved the “Park Mark” accreditation at all of our parks. This makes us the first Retail Park landlord to achieve this across the whole portfolio. Environment We believe the property industry has a significant role to play in combating environmental degradation; and strive to continuously improve the environmental sustainability of our investments. To this end, we developed an Environmental Policy during the year to provide a framework for managing the group’s impact on the environment across the portfolio. The policy is made available to all interested parties through our website, and directs that, as a minimum, Capital & Regional group, and its businesses will: • Comply with all relevant environmental legislation and regulations • Identify and measure the most significant environmental impacts • Set targets to improve environmental performance in these areas • Include environmental criteria when choosing services and goods to purchase, and communicate objectives to supplier • Communicate the policy, targets and environmental activities to all staff and interested parties All divisions are expected to identify their own key environmental impacts, and develop their own environmental management systems to respond to these. In all cases, this will include the use of energy, water and other natural resources; and the production and disposal of waste. This policy was approved by the Board in September 2007, and we have set a target to implement it across all our operations by June 2008. Our divisions are already making significant progress to this end; and have begun the process of identifying and measuring their most significant environmental impacts, and setting targets to improve. The Mall and X-Leisure take part in the annual Upstream property benchmarking survey, which enables them to assess their environmental performance on a property by property basis. Upstream is also working with The Junction to measure their performance and develop an Environmental Management System for the division, as well as looking at the Group’s environmental impact at head office and identifying ways of reducing these. Additionally, The Mall and X-Leisure are working with the Carbon Trust to develop a Carbon Management programme for their business, as this has been identified as one of their key impact areas. They have already implemented numerous improvements to their energy efficiency and environmental impacts at their destinations. Further details of X-Leisure’s activities can be found in their Responsible Business summary report 2008. The Mall have developed the EnviroMall initiative, a comprehensive programme, implemented across all 23 shopping centres, designed to take a lead in the environmental management of covered shopping centres in the UK. The initiative has its own website, www.enviromall.co.uk, where further information can be found. 2007 Highlights • A group-wide environmental policy was developed and approved by the Board • The first EnviroMall week was held in August 2007 to raise awareness amongst shoppers and retailers about what they could do to reduce their impact on the environment. More than 13,000 pledges to make a difference within their own homes had been received by shoppers by the end of the week. • X-Leisure reduced their CO2 emissions by 24%, and increased recycling by 57% across the portfolio from the previous year. 2008 Priorities • Ensure the environment policy is fully implemented throughout our activities by June 2008, and communicate the policy to our staff. • Continue to monitor our energy use across our divisions, and look at ways of reducing these. X-Leisure are aiming to reduce energy use by a further 10% across their portfolio. • Continue to monitor and roll out recycling programmes at head office and in our divisional operations. The Mall are aiming to recycle 70% of all waste in their shopping centres. Case Study: Slope lighting at SNO!zone Milton Keynes At our Milton Keynes slope we have replaced our slope lighting system, at the suggestion of one our maintenance team members. Graham Hunter worked on his own initiative to source a more energy-efficient lighting system which uses a high pressure fluorescent lamp. We estimate there will be a saving of around 347,000 Kwh per year from the lighting system alone which, based on Defra conversion factors, is a reduction of around 40 tonnes of carbon. Furthermore, one of the by-products of lighting is the heat produced; with this system, much less heat will be emitted, meaning we can also turn the cooling system down and save even more energy. There’s also a cost benefit – in monetary terms, we conservatively expect the total savings to be over £42,000 a year on our energy bills and the payback for the capital investment will be 1-2 years. Finally, the new lamps have an average lamp life of 50,000 hours, compared with the average lamp life of only 3,000 hours for the old type. So thanks to Graham, we’re lightening the maintenance load for the team as well as saving money and reducing our carbon footprint. Workplace Capital & Regional wants to recruit and retain the best talent available, to reflect the communities we serve, and to help the business to continue to perform as well as it can. To do this, we believe it is important to provide fair pay, conditions, and health and safety standards; to treat staff fairly and equally; and to encourage our staff to grow through training and development opportunities. We also strongly believe in fostering a working culture that is professional but enjoyable, where a team sprit prevails, and where all individuals’ contributions are valued. We believe that the diversity of our people is an asset to the business, and have an equal opportunities policy which encourages and promotes diversity. At the end of 2007, the business had grown to employ 1,073 people across the group, 52% of which were male and 48% of which were female. During 2007, we took time to improve our workplace processes, and as a result of this launched “C&R People”, a web based employee toolkit. We also introduced several new schemes at head office including a “Give as you Earn” scheme to enable staff to donate to charity directly through their payroll, and a “Bike2Work” scheme. This enables staff to buy bicycles in a cost-effective way for commuting into work, and supports our environmental aims. Capital & Regional Annual Report 2007 17 Responsible business continued The Mall and SNO!zone have their own HR teams to support the significant number of employees employed on-site (309 at the Mall, and 546 at SNO!zone), and they also continued to develop their people processes during the year. The Mall have been accredited as “Investors in People” since 2002, and have a wide ranging training and development programme under the banner of “M Power”. SNO!zone spent time strengthening its HR processes during the latter part of 2007, and recently launched the first of its branded "REAL SNOW REAL PEOPLE" initiatives, via an interactive handbook. SNO!zone also have a range of workplace initiatives including providing free or part-funded places on an ongoing basis for unskilled employees to re-train as ski or snowboard instructors. This year 36 members of staff benefited from the training course, and a further 8 instructors were able to go to Switzerland to complete their Adaptive coaching award which enables them to teach individuals with a range of disabilities. them as positive assets to their area, and we try to ensure that this is the case by being responsive to the communities of which we are a part – by listening and responding to the views of a wide range of local people, and demonstrating our long-term commitment to them. We also believe that our responsibility to local communities goes beyond just providing high-quality work, leisure or shopping destinations; by actively participating in activities that bring sustainable support and benefit to the local area where we can, and supporting the causes that are important to our customers, visitors and neighbours. This allows us to build ongoing positive relationships with local people and communities, and we believe this contributes to the long-term prosperity of our business. Part of this work is through fundraising for, or donating to, local charitable causes, which is done at a divisional level. 2007 Highlights • Launched “C&R People”, our web based staff information tool • Progressed our approach to health and safety, and developed our Health and Safety Committee, which will now be chaired by Xavier Pullen. • The Mall has been awarded a prestigious two star status as an “outstanding” Company to Work for by “Best Companies”, the process supported by Sunday Times. 2008 Priorities • Expansion of the web-based “C&R People” information system to include a line manager toolkit as well as an employee toolkit. • Launch a monthly e-newsletter for head office staff to share information between divisions, and continue to engage people in Responsible Business issues. As a group, we also believe in the ability of shopping and leisure destinations to contribute to the regeneration of local areas, economically, socially and environmentally. We actively pursue opportunities to develop sites that will contribute to local regeneration, and at the moment have schemes underway at Oldbury and Cardiff. 2007 Highlights • £899,863 raised through the Mall Cares Heart Strings programme, and individual fundraising activities, with monies donated to over 50 local charities. • The Junction developed a community policy which focuses on long-term social and economic development of communities to guide their local investments, and funded a range of community projects within this criteria. Case Study: The Mall is No. 59 in The Sunday Times Best Companies to Work for 2008 Over 850 companies registered to take part in the 2008 Sunday Times Best Companies to Work for, and The Mall is very proud to have been placed at Number 59, following a very high response rate from staff. We were rated highly across all of the topics surveyed, including leadership, personal growth, well being, “my team”, “my company” and “my manager”. We also received some positive personal comments from over 200 staff, for example: “I have never known a company give as much training as The Mall. They are fully committed to helping all departments reach their full potential. I am proud to represent The Mall brand.” “You feel your opinion counts and therefore you are able to influence business decisions. The passion for the business is easy to see right through the company, even to visitors, and you get a positive buzz when you come into work.” The result is a fantastic achievement for The Mall – and it’s all thanks to Mall people. Local communities We aim to provide local communities with safe, clean and attractive centres in which to shop, work and spend leisure time, and recognise that our businesses can be integral parts of those communities. One of our key objectives is that local people see 2008 Priorities • To organise at least one community programme or event at each retail and leisure destination within our portfolio. • To measure the amount given to, and raised for, charitable causes during 2008 across all of the group’s businesses. • To raise £1 million for local charities through the Mall Cares programme. Case Study: BTCV Scotland Green Gym In October 2007, SNO!zone and X-Leisure launched in conjunction with Braehead Shopping Centre a £15,000 three- year co-funding of a BTCV Scotland “Green Gym” near to their Braehead destination. The initiative is about creating healthy people and healthy places by transforming waste ground into community recreational space where wildlife can flourish. Local people of all ages volunteer to “work out” in the open air through local, practical environmental work. On average, around six volunteers attend each session, and each month we get six new volunteers register their interest and become members of the green gym. Since the project commenced, they have spent 89 days outdoors in various projects from creating wildlife gardens, woodland management, and repairing and restoring fences and paths. The programme will be further rolled out over the coming years. 18 Capital & Regional Annual Report 2007 Chairman’s statement Capital & Regional has seen a marked fall in the valuation of many of its property interests in 2007, a year in which there have been exceptional stresses in the world’s financial markets. Although net rental income and management fees were resilient, contributing to recurring pre-tax profits of £32.7 million (2006: £32.3 million), the weakness of UK property valuations, the impact of gearing in a falling market and the claw-back of performance fees led to a reduction in triple net NAV per share to £10.04 per share (December 2006: £12.72 per share). The pre-tax loss for the year, which under IFRS includes the unrealised valuation deficit, was £167 million (2006: £251 million profit). A final dividend of 17p per share is being recommended, the same level as last year. When combined with the increased interim dividend of 10p per share already paid, shareholders will enjoy 4% higher dividend income than in respect of 2006. 2008 promises a continuation of the challenging conditions seen in 2007, with a market consensus of further downward movements in UK valuations during the course of the year. The Company is prepared for these conditions and the release of capital arising from the formation of a trade parks fund since the year end has further strengthened our position. Turbulence in the financial markets is outside the Company’s control, whereas the active management of the £6 billion of properties for which we are responsible is our constant focus. We have continued to work on our tenant mix, grow footfall and concentrate on what the visitors to our centres and parks want. The attractiveness of our properties to our tenants is consequently strengthened; and, in turn, looking through the volatility of current conditions, their ultimate value should be enhanced. This can only be achieved through the efforts of all of our employees and, in such a testing year, their performance has been exemplary and deserves our thanks. They will be led from 1 April 2008 by a new Chief Executive, Hugh Scott-Barrett, who was from 2000 to 2007 a member of the managing board of ABN AMRO, most recently as chief financial officer. He succeeds the Company’s founder Martin Barber, whose extraordinary contribution to the Company over the past thirty years provides the base from which future growth can be built. On behalf of shareholders, the Board thanks him warmly for everything he has done for the Company. Tom Chandos Chairman 10 April 2008 Capital & Regional Annual Report 2007 19 Operating review Occupier markets Our occupier markets have been generally stable, and as yet we have not seen any tangible signs of the long anticipated downturn. Market conditions in our five portfolios are described below: Our shopping centres enjoyed “business as usual” during 2007. Estimated Rental Values (ERVs) grew by 5.5% (1.9% excluding major developments) and net rental income increased by 6.3% (2.8% on a like-for-like basis). The annualised rental income lost through bankruptcies in January and February 2008 was 1.3% of the total, compared to 2.1% in Q1 2007. Our average occupancy level throughout 2007, including space under development, was 94.9%, down from a 95.3% average in 2006. This reflects increased development activities principally at our Malls in Blackburn and Wood Green. Net space available to let at the year end represented 2% of ERV compared with 2.1% in 2006. Our retail parks saw an increase in net rental income of 5.0% and a fall in retail warehouse vacancies from 5.3% to 4.5%. However, rental growth prospects for bulky goods retail parks were adversely affected in early 2007 as a result of “big-box DIY” market rent reviews and declining demand for space from other bulky goods operators. The Junction portfolio has six B&Qs whose estimated rental values (ERVs), on a like-for-like basis, fell by 7.6%. ERVs in the remainder of the portfolio remained stable with a nominal fall of 0.9%. Our leisure portfolio has seen the best cinema trading for the past decade. Overall, Leisure has been very resilient as an asset class and is confirming our previous experience that consumer spending continues in leisure throughout the economic cycle, but with a shift to quality and good value for money offers in tougher times. We believe that our properties are well positioned for this market. 2007 saw rental growth of 2.0% and occupancy stable at 96.7%. Our FIX trade centres portfolio has shown rental growth of 3.3% for the year on a like-for-like basis. Vacancies which were not backed by rental guarantees fell from 7.6% to 5.2%. There is strong tenant demand for these properties which offer occupiers the potential for substantial profit on moderate rents. Our German portfolio is producing a strong and stable cash flow, contributing £9.6 million to our recurring pre-tax profit from 22% of the portfolio. The German economy is performing well, and fears that the 3% increase in VAT in January 2007 would dampen the recovery of consumer spending appear to have been misplaced. Property investment market After a five year run in which our properties substantially increased in value, we saw a sharp correction in 2007, driven by a drop in confidence and tightening of credit conditions in the wider financial markets. Transactions were scarce, but valuers rapidly raised the yields in their valuations in line with market sentiment. Our portfolios have been affected by yield shift as follows: Portfolio Equivalent* yield Dec 2007 C&R yield shift in 2007 Equivalent* yield Dec 2005 Equivalent* yield Dec 2006 Mall Junction X-Leisure FIX UK weighted average Germany** 5.69% 5.32% 5.78% 6.26% 5.69% 5.99% 0.48% 0.87% 0.09% 0.54% 0.55% (0.02)% 5.73% 4.86% 6.32% 6.60% 5.21% 4.45% 5.69% 5.72% 5.14% 6.01% * All equivalent yields are quoted on a nominated basis. This produces a lower figure than the true equivalent yield. **Initial rather than equivalent yield. 20 Capital & Regional Annual Report 2007 Overall our UK portfolios fell in value by 10% in line with the IPD retail property index for the year. The German market showed slight yield compression in the first half of 2007, and largely stable yields in the second half. Our German portfolio, which now accounts for 22% of our total exposure, has shown a £9.6 million revaluation surplus for the year. Portfolio performance Almost all UK property portfolios will have had negative returns in 2007 due to adverse yield shift. Our portfolios have also suffered. The Mall’s direct management model once again outperformed the IPD shopping centre index by 1.0% (IPD quarterly total return) at ungeared level, adding to its five year track record of out performance. The Junction underperformed the IPD retail parks index, partly because of the concentration of big box DIY anchors such as B&Q in its portfolio. It has also seen more adverse yield shift than the sector as a whole. Geared return (IRR) Ungeared return (IRR) Benchmark return (IRR) 22.8% 26.3% (13.2)% 34.1% 18.3% (34.0)% 28.3% 30.4% (3.0)% 34.2% 16.2% 37.6% (32.9)% 16.5% 17.6% (3.3)%** 16.3% 12.7% (4.3)%** 22.1% 14.7% (9.6)% 12.0% 12.0% 12.0% 23.3% 15.0% (16.8)% 15.3% 19.7% 2.1% 15.2% 7.5% 20.8%* (9.8)%* Portfolio performances Mall 2005 Mall 2006 Mall 2007 Junction 2005 Junction 2006 Junction 2007 X-Leisure 2005 X-Leisure 2006 X-Leisure 2007 German portfolio 2006 German portfolio 2007 FIX UK 2006 FIX UK 2007 * LFL Return. ** IPD quarterly (total return). Recognising market concerns Over recent months we have been asked questions on the following issues, and we feel it is appropriate to address them within our results statement. • Fund redemptions: some open ended property funds are suffering from equity redemptions which are forcing them to sell. All three Capital & Regional Funds are closed end and have long lives and therefore don’t suffer this problem. • Defensive qualities of our portfolios: we aim to invest in property which is dominant in its local market and where there is a ready market for tenants and customers. We manage it intensively and believe that such property is likely to trade relatively well in an economic downturn. • Performance fees: the performance fee formula has earned us £161 million over the past five years to 30 December 2006 and we are expecting to repay up to £53 million as a result of the recent downturn in values. • Banking arrangements: we are well aware of the potential impact of tightening credit conditions and falling property prices on our bank covenants. However at 30 December 2007 we had undrawn core revolving facilities of £114 million and were in compliance with all the financial covenants in our banking agreements. More information is given on page 25. Outlook The property market is expecting further downward movement in property values over the next few months, and stabilisation followed by moderate growth thereafter. The extent of this will depend on whether credit conditions ease and whether the problems in financial markets have a significant impact on consumer spending. Our co-investing business model is capable of delivering enhanced returns throughout the property cycle. Valuations will rise and fall and with them the opportunity for earning performance fees. We have base fee and rental income which generates a recurring profit, and our specialist teams focused on well ordered portfolios have every chance of outperforming. Capital & Regional Annual Report 2007 21 Financial review This section considers: • The 2007 results, focusing on our key performance indicators. • Balance sheet, debt and hedging. • Corporate structure and share buybacks. Investment returns Our revaluation deficit in 2007 was nearly identical to the surplus in 2006, supporting the view that 2006 was “a year too far”. However, crucially for the future, our underlying profitability continues with recurring pre-tax profit of £32.7 million and has been further diversified due to the growth of our German portfolio. The 2007 results We lay out below the key performance indicators we use to monitor our financial performance, and explain them in the paragraphs that follow. Total returns Recurring pre-tax profit Revaluation change Performance fees Other non-recurring items Tax and reserves movements Total returns 2005 £m 23.1 153.9 50.9 (29.2) 4.4 203.1 2006 £m 32.3 166.7 62.6 (10.7) (27.0) 223.9 2007 £m 32.7 (164.4) (52.8) 17.5 1.9 (165.1) As % of opening equity 41% 32% (18)% The other non-recurring items are shown in detail in note 2 on pages 48 and 49. They include the mark to market of our interest rate swaps and the share of performance fee which we bear as investors in the funds. During the same two year period our triple net NAV per share increased from £9.85 to £10.04. Our 2007 £167 million loss follows a four year period in which we made gains of £664 million. Profitability Our recurring pre-tax profit has remained stable at just under £33 million. Recurring pre-tax profit Property investment UK Property investment Germany Managing property funds SNO!zone Recurring pre-tax profit 2005 £m 10.3 0.9 10.2 1.7 23.1 2006 £m 11.3 5.8 13.4 1.8 32.3 2007 £m 10.2 9.6 10.8 2.1 32.7 The German portfolio contributed £9.6 million, up from £5.8 million in 2006 due to the full-year effect of the Weigelt portfolio acquisition in 2006 and further investment in 2007. The UK property investment business bore larger interest charges on borrowings to fund the equity we have invested in Germany as well as share buybacks. We estimate the impact of these two items at £2.9 million. Excluding these factors the profits from the UK portfolio grew during the year. Dividend Our dividend has tripled over the past four years in line with our recurring profits. This year’s dividend distributes about 59% of our recurring pre-tax profits. Key performance indicators 2005 2006 2007 Scale of business: Property under management £5.1bn £6.5bn £6.1bn Investment returns Triple net diluted NAV per share Total return on equity Year end share price Total shareholder return Profitability Recurring pre-tax profit Dividend per share Profit/(loss) before tax £9.85 41% £8.68 28% £23.1m 18p £199m £12.72 32% £15.42 81% £32.3m 26p £251m £10.04 (18)% £3.92 (73)% £32.7m 27p £(167)m Scale of the business There were no major acquisitions during 2007. There was however significant asset management activity and recycling of capital as follows: • The Mall acquired three neighbouring properties in order to advance asset management schemes, and spent £66 million on reconfigurations and redevelopments. • Two significant disposals in the Junction Fund (at Wembley and Worcester) reduced the Fund’s gearing. • The completion of the sale of Star City by the X-Leisure Fund financed the acquisition of Cardigan Fields in Leeds and a commitment to buy a completed development in Bournemouth. • X-Leisure acquired two of the three Xscapes from the partnerships that developed them. C&R’s interest in the Fund increased from 10.6% to 19.4%. • We acquired 25 properties in the FIX portfolio bringing the total to 49 properties valued at £170 million. • We acquired six properties in Germany for £63 million increasing our portfolio to 50 properties, valued at £490 million, with total floor space of 469,000 sq m. Portfolio movements 2007 Acquisitions Disposals Revaluation Exchange movements difference £m £m £m £m PUM at Jan 2007 Mall Junction X-Leisure FIX UK portfolio German portfolio Joint ventures Movement in 2007 PUM at Dec 2007 145 68 243 84 63 42 645 – (130) (86) (1) – (192) (409) (254) (305) (17) (24) 10 (3) (593) – – – – 35 – 35 Total £m 6,457 (109) (367) 140 59 108 (153) 6,135 22 Capital & Regional Annual Report 2007 Dividend profile Interim Final Total Increase % of recurring pre-tax profit Actual 2005 pps Actual 2006 pps Actual 2007 pps 7 11 18 29% 55% 9 17 26 44% 58% 10 17 27 4% 59% Earnings businesses SNO!zone SNO!zone is the UK’s premier real indoor snow slope operating business. With virtually no capital requirements, it has been generating strong cash flows and profits since 2001. During 2007 it traded from three locations in Milton Keynes, Castleford and Braehead and generated profit as follows: SNO!zone Profit and loss account Income Operating expenses Cash profit Tenant incentives Accounting profit 2005 £m 13.1 (10.4) 2.7 (0.9) 1.8 2006 £m 9.3 (7.6) 1.7 – 1.7 2007 £m 14.3 (11.5) 2.8 (0.7) 2.1 Capital & Regional Property Management (CRPM) This company earns fees from managing our Funds and joint ventures and employs all our staff. Costs related to our own investment portfolio are allocated to the property investment business. The profitability of the fund management business (excluding the £6.5 million cost related to managing our own assets) can be summarised as follows: Property management business Profit and loss account Fixed fees Service charge fees Other fees Fixed management expenses* Profit from management fees Performance fees Variable overhead – bonuses, CAP, LTIP Other non-recurring items CRPM (loss)/profit before tax 2005 £m 15.3 3.9 3.6 (12.6) 10.2 50.9 (18.6) – 42.5 2006 £m 17.0 4.6 5.8 (14.0) 13.4 62.6 (18.3) (2.1) 55.6 2007 £m 18.6 4.4 3.0 (15.2) 10.8 (52.8) 7.9 – (34.1) * 30% (25% in 2005 and 2006) of overhead allocated to property investment business reflecting growth in FIX and Germany portfolios. The profit from our Property Management business relates to long-term management contracts on The Mall, Junction and X-Leisure funds, expiring in 2016, 2011 and 2018 respectively. CRPM profit, from management fees, fell in 2007 for several reasons: the level of transactions fell, there were no major acquisitions or new Funds created and our management expenses were geared towards a growing portfolio. Performance fees CRPM receives performance fees from the Funds it manages on a complex formula designed to give us a share of the Fund’s out performance over a three-year period compared to a defined IPD index and an absolute 12% hurdle return. Fees can be positive or negative, but negative fees are subject to a maximum amount. Over the five years to 30 December 2006 we earned £161 million in performance fees. We took credit for the fees in the third and final year of each performance period and no credit was taken for the contribution positive past performance would make to performance periods ending in future years. Despite this carry forward, the unexpected and rapid drop in property values in the last quarter of 2007 resulted in a negative calculation for 2007, driven by a substantial gap between the 12% absolute performance hurdle and the negative geared returns in the Funds. The amount to be repaid is restricted to the amount paid in the previous two years. We have accounted for the full amount up to this maximum for both The Mall and The Junction. • The Mall: we earned £36 million in 2006 which was paid by the Fund in December 2007. We expect to pay back £4 million in December 2008. A portion of the remainder will be repayable in December 2009 dependent on 2008 performance; the maximum amount will only be reached if there is more than 70bps further adverse yield shift. We have provided in full on this basis, although such a big shift is at the outer end of market expectations. • The Junction: we earned £16.6 million during 2006, but when it was due in December 2007 we postponed payment because it was becoming clear that much of it would be repayable – £14 million in December 2008 – and the balance in December 2009. We do not expect to make any further payments. • X-Leisure: we earned a performance fee of £5.3 million for 2007, but no credit has been taken for this amount due to the likelihood of clawback. Please see contingent liability note 36 on page 75. Performance fee history 2002 £m 2003 £m 2004 £m 2005 £m 2006 £m 2007 £m Recognised in 2007 £m Mall Junction X-Leisure Total 3 – – 3 11 2 – 13 23 7 1 31 30 17 4 51 36 17 10 63 (4) (14) – (18) Less backcharge – C&R share as investor Less net adjustment to management incentives NAV effect £m NAV effect £ per share (36) (17) – (53) 18 8 (27) (0.38) The impact on C&R is mitigated by the benefit it receives from claw back as an investor and by the adjustment to management incentives. The net impact on NAV is shown above at 38p per share. Capital & Regional Annual Report 2007 23 Financial review continued Balance sheet, debt and hedging Three balance sheet presentations We look at our balance sheet in three ways: • The enterprise balance sheet shows everything we manage. • The “see through” balance sheet shows our share of each portfolio. • The statutory balance sheet net of fund and JV debt, as required by the accounting rules. Three balance sheets at 30 December 2007 Funds Mall Junction X-Leisure Other portfolios Trade Parks Germany Joint ventures Xscape Braehead Manchester Arena Cardiff Wholly owned Hemel Hempstead Great Northern Enterprise £m See through £m Statutory £m 3,111 1,197 945 169 490 72 67 29 17 95 754 327 183 169 452 36 19 14 17 95 344 166 90 169 490 5 5 (1) 17 95 Total property 6,192 2,066 1,380 Working capital etc. Debt Net assets C&R shareholders Fund investors Total equity Leverage (LTV) 45 (3,586) 2,651 703 1,948 2,651 (29) (1,334) 703 703 703 (52) (625) 703 703 703 58% 65% 45% Note: This table shows accounting figures, which treat head leases and tenant incentives differently. They differ from the valuation figures shown in note 13b on page 58. The key judgements in our balance sheet relate to: • Property valuations: all of which are carried out by independent valuers. • Development issues: it often takes some years after a development is completed before all commercial issues are resolved. • Tax provisioning: judgement is needed on the correct level of provisioning for tax payable over “open” years where the final figures have not yet been agreed with the tax authorities. • Performance fee accounting: where events over a five-year period can affect the amount earned in any one year, and some judgement about future performance is required. Debt Our Group debt was £625 million at the year end. The formation of the FIX Fund reduces this to £472 million. In addition our £709 million share of non-balance sheet debt is disclosed in the table below. Debt at 30 December 2007 Debt £m Average interest rate % % Fixed Duration Duration to of fixing loan expiry (months) (months) Core revolving credit facility 61 69 Great Northern debt 12 Hemel Hempstead debt 8 Victoria debt 120 FIX UK 355 Germany Group debt* JV debt (our share) German minorities Mall (24.2% share) Junction (27.3% share) X-Leisure (19.4% share) 625 55 (29) 412 177 94 Off balance sheet debt 709 Total see through debt 1,334 * Before loan amortisation costs. 5.69 5.70 5.52 7.48 6.49 4.68 5.28 6.38 4.68 5.48 5.35 6.06 5.63 5.46 107% 100% 100% – 72% 100% 94% 68% 100% 74% 90% 81% 77% 85% 24 34 9 – 39 44 39 45 44 52 49 33 49 44 38 34 21 22 83 44 49 51 44 52 39 46 51 50 The main reason for the increase in our balance sheet debt from £457 million to £625 million is the building up of the FIX and German portfolios. • Our German portfolio supports £355 million of debt, which is non-recourse to the UK Group. This portfolio has strong cash flows secured on good covenants and values have been stable. The cash flows are fully able to support the debt, which stands at 72% LTV. • The FIX portfolio has become a Fund since the year end, removing £120 million of debt from our balance sheet and adding £33 million of cash for the sale of 80% of the equity. We remain exposed to 20% of the bank debt on a see through basis. The remaining £150 million is supported mainly by the recurring cash flows from Great Northern, fund units, CRPM and SNO!zone. We have very little debt falling due for refinancing over the next two years, although we plan to extend the £8.4 million debt secured on 10 Lower Grosvenor Place, London, SW1, this year. Treasury statistics Treasury statistics (see through basis) Year-end debt • Balance sheet debt* • C&R share of all debt % of debt with fixed or swapped interest rates Weighted average duration of hedge (months) Weighted average interest rate % Weighted average interest margin % Interest cover (Recurring PBIT/I) % of net Euro denominated assets hedged Fair value of interest rate swaps (before tax) Fair value of fixed loans (before tax) 2005 2006 2007 £396m £892m £457m £1,138m £625m £1,334m 75% 52 5.10% 0.74% 1.54 75% (6.5) 0.5 82% 48 5.23% 0.67% 1.58 75% 17.0 3.1 85% 44 5.46% 0.71% 1.48 66% 11.8 4.4 24 Capital & Regional Annual Report 2007 * Before loan amortisation costs. Corporate structure and share buybacks Tax Our corporate structure remains tax efficient under current legislation. During 2007 we have minimal UK tax payable. We have tax losses arising from the negative performance fees of around £40 million which may be available for offset against future profits, but we haven’t carried a deferred tax asset for this. In Germany we currently pay minimal cash tax but provide deferred tax at about 16% on tax depreciation allowances and revaluations. Returning capital During summer 2007 we returned £28 million of capital through the repurchase of 1,575,000 CULS and 1,442,598 shares. This continued the Company’s long track record of buying back shares when the opportunity arises. Since 2000, we have spent £198 million on share and CULS buybacks, while expanding the property under management from £1.1 billion to £6.1 billion. In September 2007, we served notice on the holders of the last 0.1 million CULS to force conversion into C&R shares. At the year end no CULS were outstanding. William Sunnucks Group Finance Director 10 April 2008 We continue to hedge a large portion of our exposure to interest rate and currency movements. Interest rate swaps cover 85% of our borrowings for an average duration of 44 months on a see through basis. A forward exchange contract covers 66% of the net asset exposure of the German portfolio which is denominated in euros. Average interest costs rose slightly at the year end due to a short-term rise in LIBOR, reflecting tight credit conditions in the banking market. Cash and debt management At the year end, we had £37 million in cash and £114 million available in undrawn core revolving credit facilities. This availability or “headroom” increased with the formation of the FIX Fund, which generated cash of about £33 million. Our wholly-owned properties are financed with conventional secured debt. We use our central revolving credit facility to fund fluctuations or shortfalls. If there is a shortage of cash or covenants are tight in these portfolios, we have the option of injecting equity. Joint ventures normally have their own debt. The owners (including C&R) give limited guarantees for cost over-runs and interest shortfall but not for the principal owing. Fund cash is managed entirely separately from C&R’s own money. Fund banks rely on the portfolios to support the debt rather than the property manager (C&R) or the Fund Manager (Morley Fund Management/Hermes). Financial covenants At the year end we complied with all our financial covenants. The most important covenants relate to the interest cover ratio (ICR) which should not fall below a certain level. This level ranges from 100% to 160% depending on the characteristics of the portfolio. We also have covenants relating to the Loan to Value ratio, (LTV covenants) which must not be allowed to rise above a certain level. Our LTV covenants were met without difficulty at the year end. Fund debt The three Funds each have their own financial covenants. More significant than the bank covenants however, is the desire of the institutional investors who invest in our Funds to limit leverage to 60% LTV in the case of The Mall and Junction funds and 70% in the case of X-Leisure. Further decreases in asset values will put pressure on these covenants. The funds have a number of options including realisation of assets to ensure they remain within the agreed covenants. The Mall Fund has issued £1.4 billion in Mall bonds, which have an ICR covenant at 130% but no direct LTV covenant. The ICR is currently 170-180%, comfortably over the limit. The interest rate on these bonds is advantageous in current market conditions, and it is a priority not to breach any of the covenants associated with it. Capital & Regional Annual Report 2007 25 Directors Executive Directors Non-executive Directors Hugh Scott-Barrett, Chief Executive, 49 Hugh has been Chief Executive since 1 April 2008. He was previously a member of ABN AMRO’s managing board and served as Chief Operating Officer between 2003 and 2005 and Chief Financial Officer from 2006 to July 2007. Hugh brings over 25 years’ banking experience having also worked at SBC Warburg and Kleinwort Benson prior to joining ABN AMRO. He was educated both in Paris and at Oxford University. Martin Barber, Chief Executive, 63 (retired 31 March 2008) Member of Nomination Committee Martin was a founder director of the Company in 1979 and has been involved in commercial property as a developer and investor for over 30 years. Martin was, until March 2006, co-Chairman of CenterPoint Properties Trust, a real estate investment trust, listed on the New York Stock Exchange and formerly a subsidiary of Capital & Regional. On 31 March 2008, Martin stepped down as Chief Executive and retired from the Board. William Sunnucks MA ACA, Finance Director, 51 Member of Responsible Business Committee William was appointed Group Finance Director in October 2002. He has been Finance Director of a number of large companies, including Securum International and English, Welsh and Scottish Railways. He is a chartered accountant and has an MBA from the London Business School. William has responsibility for the Group’s finances, including funding, reporting and financial control. Xavier Pullen, Deputy Chief Executive, 57 Member of Responsible Business Committee Xavier was a founder director of the Company in 1979 and has been active in the property industry for over 30 years. Xavier focuses primarily on the supervision of the Group’s fund management business together with the co-ordination of all property matters and the development of new business initiatives including Germany. He also has responsibility at Board level for The Junction and FIX UK. Kenneth Ford BSc FRICS, Managing Director of Shopping Centres, 54 Ken has been a director of Capital & Regional since 1997 and, as Chief Executive of The Mall, is responsible for the fund’s shopping centre portfolio. Ken has been involved in commercial property for over 30 years. PY Gerbeau, Managing Director of Leisure, 42 PY was appointed to the Board in 2003, and as Chief Executive of X-Leisure in the same year. He has over 15 years’ experience in the leisure industry. PY’s career to date has included Vice President of Park Operations at Disneyland Paris and Chief Executive of the Dome. PY has an MBA from one of France’s leading business schools, teaches on the MBA programme at the London Business School and has a Chair of Entrepreneurship at the Imperial College, running a module on the Experienced Economy and Corporate Rescue. 26 Capital & Regional Annual Report 2007 Tom Chandos, Chairman, 55 Chairman of Nomination Committee Tom is Chairman of Invista European Real Estate Trust and Queen’s Walk Investment. He is also on the board of a number of private companies. In addition to his board positions, he has worked in investment banking and alternative investment areas such as venture capital and hedge funds. He is a Labour member of the House of Lords. He was appointed as a director of the Company in 1993 and as Chairman in 2000. Hans Mautner, Non-executive, 70 Member of Nomination Committee Hans is President of the International Division of Simon Property Group (SPG), the world’s largest publicly traded retail real estate company. In addition, Hans is Chairman of Simon Global Limited, SPG’s London-based entity. He is also a director of a number of Dreyfus Corporation managed funds and a member of Lehman Brothers’ European Real Estate Private Equity Advisory Council. Hans was appointed as a director of the Company in 2003. Paul Stobart, Non-executive, 50 Chairman of Audit Committee and member of Remuneration and Nomination Committees After qualifying as a chartered accountant with Price Waterhouse, Paul spent five years in corporate finance with Hill Samuel before joining Interbrand, an international marketing services consultancy, in 1988. He joined The Sage Group plc in 1996 as Business Development Director, becoming Chief Executive Officer, UK and Ireland, in 2003. Paul was appointed as a director of the Company in 2003. Alan Coppin, Non-executive, 57 Chairman of Responsible Business Committee and member of Audit Committee Alan is currently Chairman of Redstone plc, the telecoms and IT solutions provider and a non-executive director of both Berkeley Group Holdings plc, the urban regenerator and residential developer, and Air Command (Royal Air Force). His previous positions have included being Chief Executive of Wembley plc and, in the charity sector, Chairman of The Prince’s Foundation for the Built Environment. Alan was appointed a director of the Company in 2004. Philip Newton, Non-executive, 59 Member of Remuneration Committee Philip is the former CEO of Merchant Retail Group plc, owners of The Perfume Shop, a 150-store chain that he developed from its beginnings. He is Chairman of Windsor Vehicle Leasing Ltd, a vehicle finance and fleet management company, and Cornish Kitchen, a fast food retail business with 20 stores. His early career was in the District Valuer’s Office and then the property development industry. Philip was appointed as a director of the Company in 2006. Manjit Wolstenholme, Non-executive, 43 Chairman of Remuneration Committee and member of Audit and Nominations Committees After qualifying as a Chartered Accountant with Coopers & Lybrand (now part of PricewaterhouseCoopers) Manjit spent 13 years at Dresdner Kleinwort Wasserstein, latterly as co-Head of Investment Banking, where she was responsible for managing the division as well as advising clients on a wide range of transactions. She is now a consultant to Gleacher Shacklock, a privately-owned investment banking firm specialising in high level mergers, acquisitions and strategic advice. Manjit was appointed as a director of the Company in 2006. Directors’ report Introduction The directors present their report together with the audited financial statements for the year ended 30 December 2007. Results and proposed dividends The consolidated income statement is set out on page 40 and shows a loss on ordinary activities after taxation of £166.8 million (2006: £222.3 million profit). The directors recommend the payment of a final dividend of 17p per ordinary share on 13 June 2008 to members on the register at the close of business on 18 April 2008, which together with an interim dividend of 10p per ordinary share, paid in 2007, makes a total dividend of 27p per share for the year. Principal activities, trading review and future developments The principal activity of the Group is that of a co-investing asset manager. A review of the activities and prospects of the Group is given in the Chairman’s statement, on page 19 and the operating and financial review on pages 20 to 25. Business review The information that fulfils the requirements of the Business Review including key performance indicators can be found on pages 2 to 18 which is incorporated in this report by reference. Post balance sheet events are set out in note 37 on page 75. More detail on the financial risks facing the Company is set out in note 25 on page 67. The purpose of this annual report is to provide information to the members of the Company. The annual report contains certain forward-looking statements with respect to the operations, performance and financial condition of the Group. By their nature, these statements involve uncertainty since future events and circumstances can cause results and developments to differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this annual report and the Company undertakes no obligation to update them. Nothing in this annual report should be construed as a profit forecast. Directors The directors of the Company during the period were: M Barber (retired 31 March 2008), T Chandos, A Coppin, K Ford, PY Gerbeau, A Lewis-Pratt (retired 28 June 2007), H Mautner, X Pullen, P Stobart, W Sunnucks, P Newton and M Wolstenholme. H Scott-Barrett was appointed to the Board on 1 April 2008. In accordance with the Articles of Association, A Coppin, K Ford and X Pullen will retire from the Board by rotation and offer themselves for re-election. H Scott-Barrett, who having been appointed by the Board would vacate office at the conclusion of the AGM also offers himself for re-election. The Company maintains insurance for the directors in respect of liabilities arising from the performance of their duties. Directors’ interests The directors and, where relevant, their connected persons (within the meaning of Section 252 of the Companies Act 2006) are interested in 4,328,323 issued shares representing 6.09% of the issued ordinary share capital of the Company as detailed in the directors’ remuneration report on page 36. There were no contracts of significance subsisting during or at the end of the year in which a director of the Company was materially interested. No director had a material interest in the share capital of other Group companies during the year. Share options Details of outstanding share options granted to the directors under the 1998 Share Option Schemes, are disclosed in the directors’ remuneration report on page 36. Substantial shareholdings In addition to the interests of the directors, the Company has been notified pursuant to Section DTR5 of the FSA Disclosure & Transparency Rules of the following notifiable interests in its issued share capital as at 31 March 2008 (the latest practicable date prior to the issue of this report): Fund Manager Number of shares 6,527,683 Morgan Stanley Investment Management 3,963,828 Neuberger & Berman 3,736,528 Fidelity Investments 3,394,551 Legal & General Investment Management 3,293,467 RMB Asset Management 3,270,000 United Nations Pensions 2,453,658 Barclays Global Investors 2,385,367 Martin Barber Dimensional Fund Advisors 2,364,455 Algemene Pensioen Groep (formerly ABP Investments) 2,324,656 % 9.19 5.58 5.26 4.78 4.64 4.60 3.45 3.36 3.33 3.27 Purchase of own shares The Company undertook a limited share buyback programme in June and July 2007, under the authority granted by the shareholders at the Annual General Meeting on 11th June 2007, at which the Company was given authority to purchase up to 10,785,920 of its ordinary shares of 10p each. During the year ended 30 December 2007, the Company made on-market repurchases totalling 1,442,598 of its own ordinary shares, representing 1.99% of the issued share capital, for an aggregate consideration of £16,993,325.79. The repurchased shares were cancelled. The present authority for the Company to purchase its own shares will expire at the Annual General Meeting to be held on 2 June 2008. The directors will seek fresh authority for the Company to purchase its own ordinary shares. Capital structure The Company has one class of ordinary shares with equal voting rights. In addition, the trustees of the Long Term Incentive Share Scheme have the right to vote on behalf of the Company’s employees. The Company has agreements in place which alter upon a change of control of the Company as follows: The asset management agreements the Company has in respect of its three funds can be terminated by the fund partnerships if there is a change of control of the Company, which is defined to be either 50% of its issued share capital being held by or on behalf of a single entity or group or 30% or more of its issued share capital being held by or on behalf of a single entity or group if, in addition, one half or more of its executive directors over the previous 12 months cease to be the executive directors. Capital & Regional Annual Report 2007 27 Directors’ report continued A similar definition applies to the £175 million bank facility with HBOS. The 30% change of control provision differs and requires that more than 50% of the directors at February 2006 cease to be directors, or to constitute 50% of the Board. If this occurs the loan would be repayable. Use of financial derivatives The use of financial derivatives is set out in note 25 on page 67. Charitable donations The main thrust of our charitable support is at local level through our fund investments as described on page 18. At Group level we have made small donations during the year totalling £18,364 (2006: £12,500). Payment of suppliers The policy of the Company is to settle supplier invoices within the terms of trade agreed with individual suppliers. Where no specific terms have been agreed, the Company endeavours to make payment within one month of the receipt of the goods or service. At the year end, the Company had an average of 14 days (2006: 28 days) purchases outstanding. Compliance with combined code A statement on corporate governance is set out on pages 37 to 39. Responsible business The responsible business statement is set on page 16 to 18. Employees The Company is committed to a policy that treats all of its employees and job applicants equally. No employee or potential employee receives less favourable treatment or consideration on the grounds of race, colour, religion, nationality, ethnic origin, sex, sexual orientation, marital status, or disability. Nor is any employee or potential employee disadvantaged by any conditions of employment or requirements of the Company that cannot be justified as necessary on operational grounds. During the year, the Company maintained arrangements to provide employees with information on matters of concern to them, to regularly consult employees for views on matters affecting them and to make all employees aware of financial and economic factors affecting the performance of the Company. Stakeholder pensions As a result of the Government’s introduction of stakeholder pensions in April 2001, employers must provide their employees with access to a stakeholder pension scheme. The Company appointed consultants, who put such a scheme in place, and also nominated a stakeholder pension provider at that time. Employees have been able to join this scheme since May 2001. Dividend Reinvestment Plan The Company operates a Dividend Reinvestment Plan, under which shareholders can use their cash dividends to buy more shares in the capital of the Company. The plan is available to all shareholders. Details of the terms and conditions of the Dividend Reinvestment Plan can be obtained by contacting the Company Secretary at the registered office. The timetable for the 2007 final dividend is set out on page 89. Registered office The Company’s registered office address is 10 Lower Grosvenor Place, London SW1W 0EN. 28 Capital & Regional Annual Report 2007 Auditors’ information Each of the persons who is a director at the date of approval of this annual report confirms that: • So far as the director is aware, there is no relevant audit information of which the company’s auditor is unaware; and • The director has taken all the steps that he/she ought to have taken as a director in order to make himself/herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. Explanation of business to be conducted at the Annual General Meeting Resolutions 1 to 9 are proposed as ordinary resolutions. This means that for each of those resolutions to be passed, more than half of the votes cast must be in favour of the resolution. Resolutions 10 to 13 are proposed as special resolutions. This means that for each of those resolutions to be passed, at least three-quarters of the votes cast must be in favour of the resolution. The directors consider that all the resolutions to be put to the meeting are in the best interests of the Company and its shareholders as a whole. Your Board unanimously recommends that you vote in favour of the resolutions. Ordinary resolutions Resolution 1 – Accounts and reports Company law requires the directors to present to the meeting the audited annual accounts and the directors’ and auditors’ report for the year ended 30 December 2007. Resolution 2 – Declare a dividend The resolution proposes to declare a final dividend of 17p per share on the ordinary shares of the Company for the year ended 30 December 2007. This is proposed to be paid on 13 June 2008 to members on the register at the close of business on 18 April 2008, which together with an interim dividend of 10p per ordinary share, paid in 2007, makes a total dividend of 27p per share for the year. Resolutions 3 to 6 – Re-appointment of directors In accordance with the Articles of Association, A Coppin, K Ford and X Pullen will retire from the Board by rotation and offer themselves for re-appointment. In accordance with the Articles of Association H Scott-Barrett, who having been appointed by the Board would vacate office at the conclusion of the AGM also offers himself for re-appointment. The Chairman has confirmed that A Coppin’s performance continues to be effective and he demonstrates commitment to the role and that he should therefore be put forward for re-appointment at the AGM. Biographical details of all the directors standing for election appear on page 26 of the report. The Board recommends that you support the election of each of the retiring directors standing for election. Resolution 7 – Re-appointment of auditors The Company must appoint auditors at each general meeting at which accounts are presented to shareholders to hold office until the conclusion of the next such meeting. This resolution seeks shareholder approval to re-appoint Deloitte & Touche LLP as the Company’s auditors and seeks authority for the Company’s directors to fix their remuneration. Resolution 8 – Directors’ remuneration report The resolution proposes that the directors’ remuneration report for the year ended 30 December 2007 be approved by the meeting. The report is set out in pages 31 to 36 of this report. Resolution 9 – Directors’ authority to allot securities Section 80 of the Companies Act 1985 requires shareholders’ authority for the directors to allot new shares or convertible securities, other than shares which may be allotted under employee share schemes. Under resolution 9, which is proposed as an ordinary resolution, the directors seek authority to allot shares up to an aggregate nominal value of £2,372,464, representing one-third of the nominal value of the Company’s share capital in issue at 9 April 2008 (being the last practicable date prior to the publication of this report). The authority will expire at the conclusion of the Company’s AGM in 2009. This authority complies with guidelines issued by institutional investors. The directors have no immediate plans to make use of this authority. As at the date of this report the Company does not hold any ordinary shares in the capital of the Company in treasury. Special resolutions Resolution 10 – Pre-emption rights Under section 89 of the Companies Act 1985, when new shares are allotted or treasury shares are sold for cash, they must first be offered to existing shareholders pro rata to their holdings. This special resolution renews, for the period ending on the date of the next Annual General Meeting, the authorities previously granted to the directors to: (a) allot shares of the Company in connection with a rights issue or other pre-emptive offer; and (b) otherwise allot shares of the Company, or sell treasury shares for cash, up to an aggregate nominal value of £355,870 (representing in accordance with institutional investor guidelines, approximately 5% of the share capital in issue as at 9 April 2008 (being the last practicable date prior to the publication of this report)) as if the pre-emption rights contained in section 89 did not apply. The directors have no immediate plans to make use of these authorities. Resolution 11 – Authority to purchase own shares At the last AGM in 2007, the Company was granted authority to make purchases in the market of its own shares, subject to specified limits. This authority, which has not as yet been fully exercised, expires at the conclusion of the Company’s 2008 AGM. Therefore by resolution 11, it is proposed as a special resolution that this authority in respect of the Company is renewed. The power is limited to a maximum aggregate number of 10,604,916 ordinary shares (representing 14.9% of the issued share capital as at 9 April 2008 (being the latest practicable date prior to publication of this report)) and details the minimum and maximum prices that can be paid, exclusive of expenses. This resolution authorises the Company to pay a maximum price for an ordinary share that is an amount equal to the higher of: (i) 105% of the average market price for an ordinary share for the five dealing days preceding any such purchase; or (ii) the higher of the last independent trade for an ordinary share and the highest current independent bid for an ordinary share as derived from the trading venue where the purchase is carried out. The authority conferred by this resolution will expire at the conclusion of the 2009 AGM or 15 months from the passing of this resolution, whichever is the earlier. The shares repurchased by the Company under the renewed authority would either be cancelled or held as treasury shares. No dividends may be paid on shares which are held as treasury shares and no voting rights are attached to them. Once held in treasury, treasury shares may be cancelled, sold for cash or used for the purpose of employee share schemes. The Company currently holds no shares in treasury. The directors have no present intention of exercising the authority to purchase the Company’s ordinary shares. The directors would only purchase shares if, in their opinion, the expected effect would be to result in an increase in asset value per share and would benefit shareholders generally. The total number of options to subscribe for new ordinary shares in the Company as at 9 April 2008 was 315,000 representing 0.44% of the Company’s issued share capital as at 9 April 2008. Such number of options to subscribe for new ordinary shares would represent approximately 0.52% of the reduced issued share capital of the Company assuming full use of the authority to make market purchases sought under resolution 11. Resolution 12 – Amendments to the Company’s Articles of Association – Conflicts of interest The Companies Act 2006 sets out directors’ general duties which largely codify the existing law but with some changes. Under the Companies Act 2006, from 1 October 2008 a director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict with the Company’s interests. The requirement is very broad and could apply, for example, if a director becomes a director of another company or a trustee of another organisation. The Companies Act 2006 allows directors of public companies to authorise conflicts and potential conflicts, where appropriate, where the Articles of Association contain a provision to this effect. The Companies Act 2006 also allows the Articles of Association to contain other provisions for dealing with directors’ conflicts of interest to avoid a breach of duty. Resolution 12, proposed as a special resolution, will, if passed, amend the Articles of Association of the Company to include such provisions. The amended Articles of Association will give the directors authority to approve such situations and will include other provisions to allow conflicts of interest to be dealt with in a similar way to the current position. There are safeguards which will apply when directors decide whether to authorise a conflict or potential conflict. Firstly, only directors who have no interest in the matter being considered will be able to take the relevant decision, and secondly, in taking the decision the directors must act in a way they consider, in good faith, will be most likely to promote the Company’s success. The directors will be able to impose limits or conditions when giving authorisation if they think this is appropriate. It is also proposed that the amended Articles of Association should contain provisions relating to confidential information, attendance at Board meetings and availability of Board papers to protect a director from being in breach of duty if a conflict of interest or potential conflict of interest arises. These provisions will only apply where the situation giving rise to the potential conflict has previously been authorised by the directors. It is the Board’s intention to report annually on the Company’s procedures for ensuring that the Board’s powers to authorise conflicts are operated effectively. Resolution 13 – Electronic and web communications Provisions of the Companies Act 2006 which came into force in January 2007 enable companies to communicate with members by electronic and/or website communications. Resolution 13, which is proposed as a special resolution, will allow the Company to take advantage of the new provisions relating to website communications and permit the Company to use website communication as the Capital & Regional Annual Report 2007 29 Directors’ report continued default position without sending documents to shareholders. Before the Company can communicate with a member by means of website communication, the relevant member must be asked individually by the Company to agree that the Company may send or supply documents or information to him by means of a website, and the Company must either have received a positive response or have received no response within the period of 28 days beginning with the date on which the request was sent. The Company will notify the member (either in writing, or by other permitted means) when a relevant document or information is placed on the website and a member can always request a hard copy version of the document or information. By order of the Board F Desai Company Secretary 10 April 2008 Statement of directors’ responsibilities The directors are responsible for preparing the annual report, directors’ remuneration report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. The directors are required by the IAS Regulation to prepare the Group financial statements under International Financial Reporting Standards (IFRS) as adopted by the European Union. The Group financial statements are also required by law to be properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. International Accounting Standards require that IFRS financial statements present fairly for each financial year the Company’s financial position, financial performance and cash flows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the International Accounting Standards Board’s framework for the preparation and presentation of financial statements. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable IFRS. However, directors are also required to: • properly select and apply accounting policies; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; and • provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance. The directors have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). The parent company financial statements are required by law to give a true and fair view of the state of affairs of the Company. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; and • state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements. The directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the parent company financial statements comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 30 Capital & Regional Annual Report 2007 Directors’ remuneration report Unaudited information Remuneration Committee The Company has a Remuneration Committee appointed by the Board, consisting entirely of non-executive directors. Throughout the year, the members were M Wolstenholme (Chairman), P Newton and P Stobart. The terms of reference of the Remuneration Committee are available for inspection on the Company’s website. The Committee is responsible for setting the remuneration policy for the executive directors and senior employees. The Committee determines the terms of the service agreements, salaries and discretionary bonus payments, as well as deciding on the awards to be made to all participants in the Long Term Incentive Plan and Capital Appreciation Plan. Advice from independent external advisers is obtained when required but none was considered necessary during 2007. Since the year end, the Committee has sought advice from PricewaterhouseCoopers in respect of the Company’s incentive schemes going forward as the current schemes expire at this year’s AGM. Remuneration policy The Committee seeks to ensure that the total remuneration received by the executive directors under their contracts is competitive within the property industry and will motivate them to perform at the highest level. In order to align the interests of executive directors with the interests of shareholders, a significant proportion of directors’ remuneration is performance related through the use of annual bonus and incentive schemes. Performance-related payments are deferred to aid retention, but are uncapped in line with practice in the private equity and property fund management industry. In addition, the Committee aims to achieve an appropriate balance between directors’ remuneration packages and those of other key management. Basic salaries The Committee’s policy is to set the basic salaries of executive directors at levels which reflect their roles, experience and the practices in the employment market. The basic salaries are set with reference to the FTSE 350 Real Estate comparative group. The executive directors have not received a salary increase since 2005 as there has been a focus on performance pay and not a fixed base rate. Annual bonus scheme The Committee may award cash bonuses to executive directors up to 100% of salary based on the Committee’s independent assessment of the Company’s financial performance during the year and the individual contribution made by each executive director. Individual contributions are assessed on business building (success in growing the business), financial results (total return and return on equity), team building (indicated by low staff turnover and progress in developing key individuals) and financial control (adequate reporting, systems and procedures). No bonuses were awarded to the executive directors for 2007 due to the poor financial performance. Incentive schemes The Company has three incentive schemes under which awards currently subsist: • The 1998 Share Option Schemes (the “1998 Schemes”) • The Long Term Incentive Plan ( the “LTIP”) • The Capital Appreciation Plan (the “CAP”). No options have been granted under the Closed Schemes following the expiry of the shareholder approval for that plan in May 1998. In addition, no further awards will be made under the 1998 Schemes which have been supplanted by the LTIP and CAP plans. The terms of the LTIP permit the Committee to make conditional awards of shares to participants annually with a market value not exceeding 100% of the participants’ basic salary. All the executive directors together with other key executives of the Company are participants in the LTIP. 200,794 shares were conditionally awarded to the participants in 2007. All LTIP awards are subject to meeting performance conditions in order to incentivise and retain key executives to increase the return on capital by aligning their interests with those of the shareholders of the Company. Details of the awards made in 2007 and a summary of the performance conditions are set out under the heading “Long Term Incentive Plan” below. All key executives including the executive directors are participants in the CAP. The terms of the CAP permit the Committee to make awards to the participants annually that will entitle them to receive payments in aggregate of up to 30% of the performance fees receivable by the Company from The Mall, Junction and X-Leisure Funds. The performance fees are subject to rigorous performance conditions and thus the CAP payments are indirectly subject to the performance fee. To the extent that awards ultimately vest, the individual entitlements are reduced by 80% of the initial value of the shares awarded under the LTIP. No CAP awards were made for 2007 to any participants. Pension arrangements The Company makes contributions, at proportional rates to basic salary, to defined contribution pension schemes of each executive director’s choice, except in the cases of M Barber, X Pullen and A Lewis-Pratt, where salary supplements of £56,738; £48,404 and £17,452, in lieu of pension contributions, were paid to them respectively. Other benefits Benefits consist of private medical insurance cover, permanent health insurance cover, critical illness cover and additional salary in lieu of a company car. Service contracts Each of the present executive directors has a rolling service agreement which can be terminated on one year’s notice by either party, except in the case of W Sunnucks who can terminate his service agreement by giving six months’ notice. In the event of early termination of an executive director’s agreement, the Committee will determine the amount of compensation (if any) to be paid by reference to the circumstances of the case at the time. It is the Committee’s policy not to reward poor performance and to take account of the executive director’s duty to mitigate loss. The dates of the executive directors’ service agreements are as follows: M Barber X Pullen K Ford A Lewis-Pratt W Sunnucks PY Gerbeau H Scott-Barrett 28 October 1993 28 October 1993 17 May 1996 20 January 1998 15 October 2002 14 April 2003 9 March 2008 Capital & Regional Annual Report 2007 31 Directors’ remuneration report continued The Company allows executive directors to take up external positions outside the Company, providing they do not involve a significant commitment and do not cause conflict with their duties to the Company. Directors are allowed to retain all remuneration arising from any external position. W Sunnucks is the Chairman of Land Management Limited, a family-run company. X Pullen is a non-executive director for Brandeaux, a privately owned fund management group. The Company does not consider that these appointments involve significant commitment nor that the roles conflict with their duties to the Company. Any earnings received from these appointments are kept by the individuals concerned and have not been disclosed to the Company. During the year, A Lewis-Pratt took early retirement from the Board on grounds of ill health. He received a compensation payment of £186,000. Andrew Lewis-Pratt was considered to be a “good leaver” for the purposes of the Company’s incentive schemes. Accordingly, he will be eligible to receive awards that vest in respect of the LTIP and CAP schemes for 2005 and 2006, subject to the attainment of the relevant performance conditions. On 31 March 2008, M Barber retired as Chief Executive. He received a compensation payment of £732,000. Martin Barber was considered to be “good leaver” for the purposes of the Company’s incentive schemes. Accordingly, he will be eligible to receive a time pro-rated vesting of the awards under the LTIP scheme for 2005, 2006 and 2007. He will also be eligible to receive awards under the CAP for 2005 and 2006. Both awards are subject to the attainment of the relevant performance conditions. One-off award to H Scott-Barrett As announced to the Stock Exchange on 10 March 2008 the Company has recruited H Scott-Barrett to take up the position of Chief Executive. H Scott-Barrett took up this appointment on 1 April 2008. As part of the negotiation to secure H Scott-Barrett’s appointment and also for H Scott-Barrett to demonstrate his commitment to the Group, H Scott-Barrett agreed to purchase shares in the Company on condition that he was provided with certain matching shares. Accordingly, H Scott-Barrett was granted an award of matching shares in accordance with Rule 9.4.2 of the Listing Rules. The principal terms of the incentive arrangement are set out below. Summary of the terms of the Matching Share Agreement (the “Agreement”) General The Agreement was entered into by the trustee of the Capital & Regional plc Employee Share Ownership Trust 2002 (the “Trustee”) and H Scott-Barrett on 9 March 2008. Acquisition of shares Under the Agreement, H Scott-Barrett agreed to acquire between 100,000 and 200,000 shares in the Company (“Acquired Shares”) within 30 days of the announcement of the Company’s results for the period ended 30 December 2007. H Scott-Barrett acquired 150,000 shares on 11 March 2008. 32 Capital & Regional Annual Report 2007 For every Acquired Share, the Trustee agreed to provide a maximum of three matching shares (“Matching Shares”) at the end of a three year vesting period (the “Vesting Period”), as follows: • One share in the company without a performance condition, (“Match 1”); plus • Up to one further share in the Company subject to the performance condition described below (“Match 2”); plus • Up to one further share in the Company subject to a tougher performance condition described below (“Match 3”). Conditions The vesting of all Matching Shares is subject to H Scott-Barrett remaining in employment with the Group during the Vesting Period (subject to the specified exceptions referred to below) and not transferring or otherwise disposing of the Acquired Shares during that period. 100% of Match 2 will vest if the Company’s total shareholder return (“TSR”) is at least equal to the upper quartile of the TSR performance of the constituent companies of the FTSE Real Estate sector. 20% of Match 2 vests for median performance and between median and upper quartile vesting is on a straight-line basis. In addition, none of Match 2 will vest unless the Company’s TSR is at least 8% per annum over the Vesting Period. 100% of Match 3 will vest if the Company’s TSR is at least equal to the upper decile of the TSR performance of the constituent companies of the FTSE Real Estate sector. Match 3 does not vest for performance below upper decile. In addition, none of Match 3 will vest unless the Company’s TSR is at least 15% per annum over the Vesting Period. Rights over shares H Scott-Barrett retains the right to vote the Acquired Shares and to receive any dividends or other distributions which may be made in respect of the Acquired Shares. H Scott-Barrett has no rights over Matching Shares unless and until they vest. Dividend equivalents are not paid on Matching Shares which vest. Cessation of employment If H Scott-Barrett dies before the end of the Vesting Period, his personal representatives are entitled to the Matching Shares in full. If H Scott-Barrett ceases to be employed within the Group by reason of injury, disability, redundancy, retirement, or because the business for which he works ceases to be part of the Group, or if he is dismissed without cause or constructively dismissed the Matching Shares shall vest as follows: • Match 1 – in full, regardless of when the cessation of employment occurs. • Match 2 and Match 3 – if the cessation occurs before 9 March 2009, up to one third may vest but subject to the relevant performance target. If cessation occurs on or after 9 March 2009, the vesting level will taking into account the time elapsed since award and the extent to which the relevant performance target has been met. If H Scott-Barrett leaves employment before the end of the Vesting Period for any other reason the Matching Shares will lapse although the Trustee may, at its discretion (with the written consent of the Board), determine that some or all of the Matching Shares shall vest. Takeover, reconstruction and demerger In the event of a takeover, reconstruction or winding-up of the Company during the Vesting Period, the Matching Shares will vest on the same basis as would apply on a cessation of employment by reason of injury, disability and redundancy. The non-executive directors are not entitled to bonuses, benefits, pension contributions or to participate in any incentive schemes. None of the non-executive directors has a service agreement, and they are all appointed for three-year fixed terms. In the case of a demerger the Trustees can determine that the Vesting Period ends for some or all of the Matching Shares and determine the extent to which those shares vest. General Benefits under the Agreement are not pensionable. If there is a rights issue or similar variation of capital the Trustee can take up the rights attaching to the Matching Shares as H Scott-Barrett may direct. Any additional shares are held and released with the corresponding Matching Shares. Non-executive directors – remuneration Each non-executive director currently receives fees of £36,000 per annum. The Chairman receives additional fees of £89,000 per annum and the Chairman of each of the Audit, Remuneration and Responsible Business Committees receives an additional fee of £6,000 per annum. Their remuneration comprises a standard director’s fee and a fee for additional responsibilities. The remuneration provided takes into account the level of responsibility, experience and abilities required and the marketplace for similar positions in comparable companies. In certain circumstances, if there is a requirement for extra work to be carried out by a non-executive director, an additional fee is paid by the Company to that director from time to time. Details of the non-executive directors’ fees are set out on page 35. Performance graph The graph below is prepared in accordance with the Directors’ Remuneration Report Regulations 2002 and illustrates the Company’s performance compared to a broad equity market index. As the Company is a constituent of the FTSE Real Estate Index, this index is considered by the Board to be the appropriate comparator for this purpose. Performance is measured by total shareholder return (share price growth plus dividends paid). . . 0 0 1 = 1 0 2 1 5 2 t a x e d n I R S T Capital & Regional FTSE Real Estate Index FTSE All Share Index 700 600 500 400 300 200 100 0 25.12.01 25.12.02 31.12.03 31.12.04 30.12.05 30.12.06 29.12.07 Financial year end Capital & Regional Annual Report 2007 33 Directors’ remuneration report continued Audited information Long Term Incentive Plan Shares have been conditionally awarded to the directors under the Long Term Incentive Plan as set forth below: M Barber X Pullen W Sunnucks K Ford PY Gerbeau A Lewis-Pratt LTIP awards outstanding as at 30 December 2006 55,0001 39,702 28,700 20,500 52,0001 33,871 24,484 17,489 40,0001 26,055 18,834 13,453 50,0001 32,568 23,542 16,816 45,0001 32,568 23,542 16,816 45,0001 32,568 23,542 – Date of award 20/04/04 08/07/05 28/04/06 23/04/07 20/04/04 08/07/05 28/04/06 23/04/07 20/04/04 08/07/05 28/04/06 23/04/07 20/04/04 08/07/05 28/04/06 23/04/07 20/04/04 08/07/05 28/04/06 23/04/07 20/04/04 08/07/05 28/04/06 23/04/07 Market price on date of award (p) 500.0 806.0 1,115.0 1,561.0 500.0 806.0 1,115.0 1,561.0 500.0 806.0 1,115.0 1,561.0 500.0 806.0 1,115.0 1,561.0 500.0 806.0 1,115.0 1,561.0 500.0 806.0 1,115.0 1,561.0 Market price on date of vesting (p) 1,530.0 1,530.0 1,530.0 1,530.0 1,530.0 1,530.0 End of qualifying period 31/12/06 31/12/07 31/12/08 31/12/06 31/12/07 31/12/08 31/12/06 31/12/07 31/12/08 31/12/06 31/12/07 31/12/08 31/12/06 31/12/07 31/12/08 31/12/06 31/12/07 31/12/08 LTIP awards outstanding as at 30 December 2007 – 39,702 28,700 20,5002 – 33,871 24,484 17,4892 – 26,055 18,834 13,4532 – 32,568 23,542 16,8162 – 32,568 23,542 16,8162 – 32,568 23,542 _ 1 Awards vested and exercised during 2007 2 Shares awarded in 2007 A total of 417,335 shares awarded in 2004 vested during the year. All directors exercised their 2004 award. In addition, during the year 115,720 shares were awarded to key executives at 1561.0p; total conditional awards held by key executives at 30 December 2007 amounted to 365,609 shares. The outstanding LTIP awards are summarised in note 26. funds on the first day of the relevant year, adding the results for the three years, dividing by three and multiplying the result by 100. Adjustments to the amount of equity shareholders’ funds will be made to reflect changes in the amount of the issued share capital, share premium account or capital reserves occurring during the relevant financial year. The Company’s policy is to make conditional awards to executive directors of shares with a market value equivalent to up to 100% of salary at the discretion of the Remuneration Committee. The Remuneration Committee makes the maximum award in the knowledge that none of the shares will vest unless the Company performs strongly. TSR: The other 50% of the shares conditionally awarded in 2007 will vest according to total shareholder return (TSR) over the three-year performance period relative to the FTSE Real Estate Index whereby: i) If TSR is below the median, no shares in an award will vest; The qualifying (“vesting”) conditions for all awards under the plan can be summarised as follows: ii) If TSR is above the median, 25% of the shares in an award will vest; ROE: The extent to which 50% of the shares conditionally awarded in 2007 will vest is determined by reference to the level of the Group’s average post-tax return on equity (ROE) for the financial years ended 30 December 2007, 2008 and 2009 (the performance period). None will vest if the ROE is less than 10%; 20% of the shares will vest if the ROE is 10%; 100% of the shares will vest if the ROE is 18% or above. If the ROE falls between 10% and 18% the percentage of shares will vest at an incremental rate. ROE is calculated by dividing the total of profit attributable to shareholders and all other gains and losses included in the consolidated statement of recognised income and expense for the relevant year by the amount of the equity shareholders’ 34 Capital & Regional Annual Report 2007 iii) If TSR is in the upper quartile, 100% of the shares in an award will vest; and iv) If TSR is between median and upper quartile the shares will vest pro rata. The Remuneration Committee has been independently advised on the above TSR vesting conditions. The Board has had advice that measurement against TSR provides significant performance incentive and is in line with best market practice. In addition, vesting of the TSR portion of the scheme will be conditional on post-tax return on equity for the Company averaging 5% per annum or higher over the relevant three-year performance period. Any awards made prior to 2005 will only have to satisfy the ROE performance condition. Awards made in 2005, 2006 and 2007 have to satisfy both the ROE and TSR performance conditions. The Remuneration Committee has exercised discretion to adjust the total return calculation to eliminate the effect of the CULS premium write-off because, in their view, the CULS buybacks enhanced shareholder value at that time. The potential value of the awards made is the number of shares multiplied by the current share price. The purpose of the scheme is to enable executive directors and other key employees to build up long-term shareholdings in the Company and thereby further align their interests with those of the Company’s shareholders. Capital Appreciation Plan The Remuneration Committee decides the total amount of the CAP awards based on a proportion of the performance fees earned from the fund management contracts. Under these contracts CRPM is paid a performance fee based on a share of the out-performance over and above certain benchmarks as described on page 23. The allocation of the CAP award between executive directors and other senior management is also decided by the Remuneration Committee based on the contribution of each individual to the total performance of the Group assessed following consultation with the Chairman and Chief Executive. No awards have been made to the directors and senior management in respect of the performance fees receivable by the Group in respect of the financial year 2007. Value of initial award* £000 Maximum Maximum offset carried forward from previous year Note 2 amount of offset Note 1 1,742 1,742 1,742 1,505 1,411 1,461 256 218 210 210 168 210 – – – – – – Interest awarded % 2.79 2.79 2.79 2.41 2.26 2.34 2006 M Barber X Pullen K Ford A Lewis-Pratt W Sunnucks PY Gerbeau Note 1 The amount of the potential offset represents 80% of the LTIP award made in 2006 on the initial value; it will be reduced pro rata to the extent that the shares conditionally awarded under the LTIP do not vest in full. Note 2 If the finally determined amount of the offset exceeds the value of the CAP award in any one year, the excess will be carried forward to be offset against future awards under the CAP. Where participants have offset carried forward from previous years this is aggregated with the maximum offset. * The actual amount paid is subject to performance fee clawback and other minor adjustments. Salary and fees £000 Discretionary Compensation payment £000 bonus £000 Pension contributions £000 Other benefits £000 (a) Executive Directors M Barber X Pullen K Ford A Lewis-Pratt W Sunnucks PY Gerbeau Non-executive directors T Chandos P Stobart H Mautner A Coppin P Newton M Wolstenholme Total 320 273 263 131 210 263 125 42 36 42 36 47 1,788 – – – – – – – – – – – – – – – – 186 – – – – – – – – 57* 48** 39 17*** 32 – – – – – – – 27 21 21 12 21 21 – – – – – – 2004 CAP payment £000 (b) 970 903 1,068 990 700 479 – – – – – – 2007 Total £000 1,374 1,245 1,391 1,336 963 763 125 42 36 42 36 47 2006 Total £000 1,101 977 1,176 879 574 587 125 42 40 38 18 14 186 193 123 5,110 7,400 5,571 a)Other benefits include the taxable value of private medical insurance and company car, or if a director has opted out of the company car scheme, a salary supplement in lieu of a company car. b)In respect of 2004 awards. c)The following amounts are expected to be paid in 2008 in connection with the 2005 CAP award: M Barber £1,369,000; X Pullen £1,299,000; K Ford £1,480,000; W Sunnucks £1,237,000; PY Gerbeau £1,128,000; and A Lewis-Pratt £1,304,000, once they cease to be subject to the risk of clawback. * £56,738 was paid to M Barber as salary in lieu of pension contributions (2006: £56,738). ** £48,404 was paid to X Pullen as salary in lieu of pension contributions (2006: £48,404). *** £17,452 was paid to A Lewis-Pratt as salary in lieu of pension contributions (2006: £34,906). Capital & Regional Annual Report 2007 35 Directors’ remuneration report continued Interests in shares The directors and, where relevant, their connected persons (within the meaning of Section 252 of the Companies Act 2006) were beneficially interested in the ordinary share capital of the Company at the dates shown in the table below. Interests in ordinary shares and CULS M Barber X Pullen W Sunnucks K Ford PY Gerbeau A Lewis-Pratt T Chandos P Stobart H Mautner A Coppin M Wolstenholme P Newton Ordinary shares Ordinary shares of 10p each 30 December 2006 shares of 10p each 30 December 2007 shares 2,385,367 1,147,062 76,204 534,986 92,992 2,131 40,071 – 38,083 3,350 3,477 4,600 2,365,897 1,101,910 56,204 500,649 66,667 95,138 40,071 – 38,083 3,350 3,477 4,600 In addition, M Barber held £553 in convertible unsecured loan stock on 30 December 2006. By 30 December 2007, these had been converted into shares. There have been no changes to the directors’ interests in shares since 30 December 2007 except for Xavier Pullen who acquired 30,310 ordinary shares on 2 April 2008 following the exercise of share options and H Scott-Barrett who acquired 150,000 shares on 11 March 2008 as detailed on page 32. Interests in share options M Barber X Pullen K Ford As at 30 December 2006 As at 30 December 2007 Exercise price (p) Earliest exercise date Latest exercise date Exercise condition met Exercised 50,000 50,000 – 211.5 13/09/03 13/09/10 100,000 50,000 150,000 175,000 50,000 225,000 – – – – – 100,000 50,000 150,000 175,000 50,000 225,000 279.5 211.5 18/05/01 13/09/03 18/05/08 13/09/10 279.5 211.5 18/05/01 13/09/03 18/05/08 18/09/10 Yes Yes Yes Yes Yes During the year M Barber exercised 50,000 share options. The gain on exercise of the options was £661,750. On 2 April 2008, Xavier Pullen exercised 100,000 share options. The gain on exercise was £292,000. During the year, the share price ranged from a high of 1695p to a low of 391.75p. The share price as at 30 December 2007 was 391.75p. No share options were granted during 2007 and no further awards will be made under these schemes to participants of the LTIP. Approval This report has been prepared in accordance with the Directors’ Remuneration Report Regulations 2002 and was approved by the Board of Directors and signed on its behalf by: F Desai Company Secretary 10 April 2008 36 Capital & Regional Annual Report 2007 Corporate governance report Introduction The Board of Directors is accountable to the Company’s shareholders for the management and control of the Company’s activities and is committed to high standards of corporate governance. This report and the directors’ remuneration report set out on pages 31 to 36 describe how the Company complies with the provisions of the June 2006 Financial Reporting Council Combined Code on Corporate Governance (“the Combined Code”). Statement of compliance The Company has complied throughout the year ended 30 December 2007, except where otherwise explained, with the provisions set out in Section 1 of the Combined Code issued by the Financial Reporting Council in June 2006. Application of the principles The Board of Directors Details of the directors are set out on page 26. The Company is controlled through the Board of Directors which comprised the Chairman, six executive and five non-executive directors until 29 June 2007, and comprised the Chairman, five executive and five non-executive directors thereafter. The Board recognises that from the beginning of the year until 29 June 2007, its balance did not comply with the requirements of the Code in respect of Section A.3.2 which requires at least half the Board, excluding the Chairman, to comprise independent non-executive directors. The Board and Nomination Committee are satisfied that the current Board composition provides an appropriate balance of power and authority within the Company. The Nomination Committee will however continue to review this position. All the Company’s non-executive directors act independently of management and the Board considers that all the non-executive directors are independent. The terms and conditions of appointment of non-executive directors are available for inspection at the Company’s registered office. P Stobart continued to serve as the Senior Independent Director as required by the Combined Code for the year ended 30 December 2007. The Company has well established differentiation between the roles of Chairman and Chief Executive, and has written terms of reference which have been approved by the Board. In the Company’s view, the breadth of experience and knowledge of the Chairman and the non-executive directors’ detachment from the day-to-day issues within the Company provide a sufficiently strong and experienced balance with the executive members of the Board. The breadth of experience attributed to the non-executive directors, allied to the management information provided by the Company, enables them to assess and advise the full Board on the major risks faced by the Company. In accordance with the Combined Code the Company considers all its non-executive directors are independent. The Board has adopted a schedule of matters reserved for its decision and a schedule of matters delegated to committees, both of which are reviewed at least annually. The Board reserves approval for all significant or strategic decisions including major acquisitions, disposals and financing transactions. The directors are entitled to take independent professional advice as and when necessary. The responsibilities, which the Board has delegated, are given to committees that operate within specified terms of reference and authority limits, which are reviewed annually or in response to a change in circumstances. An Executive Directors’ Committee meets on a weekly basis and deals with all major decisions of the Group not requiring full Board approval or authorisation by other Board committees. The Executive Directors’ Committee is quorate with four executive directors in attendance; if decisions are not unanimous the matter is referred to the Board for approval. Minutes from the Executive Directors’ Committee meetings are circulated to the Board. The Audit Committee and Remuneration Committee consist solely of non-executive directors and meet at least twice a year. The Company recognises that the Nomination Committee did not comprise a majority of independent non-executive directors as required by Section A.4.1 of the Code until December 2007. The Company appointed Manjit Wolstenholme to the Nominations Committee on 10 December 2007. The Board schedules five meetings each year, as a minimum, and arranges further meetings as the business requires. Prior to each Board meeting, each member receives up-to-date financial and commercial information in respect of the divisions, and specifically, management accounts budgets and forecasts, details of acquisitions and disposals and relevant appraisals (prior Board approval being required for large transactions) and cash flow forecasts and details of funding availability. All members of the Board are subject to the re-election provisions in the Articles which require them to offer themselves for re-election at least once every three years and at the first AGM after appointment, if appointed after the last AGM. Details of those directors offering themselves for re-appointment are set out in the directors’ report on page 27. A performance evaluation of the Board and the committees is conducted each year with each director giving detailed input. The Chairman meets as necessary, but at least once each year, with the non-executive directors without the executive directors present. The non-executive directors meet annually without the Chairman in order to appraise his performance. This meeting is chaired by the Senior Independent Director. The Chairman evaluates the performance of the remaining directors and the results of the appraisals are analysed and summarised by the Senior Independent Director and discussed with the Chairman. Subsequently, the results are discussed by the Board and relevant consequential changes are made. Induction training is given to all new directors appointed in the Company and consists of an introduction to the Board, onsite visits to properties managed by the Group, introduction to the divisional teams, an induction pack and access to independent advisers. The ongoing training requirements of the directors are reviewed on a regular basis and undertaken individually, as necessary, although it is recognised that all members of the Board experience continuous professional development from working together. This is achieved by virtue of the dynamic and diverse mix of the Board members, and their sharing of knowledge and experiences gained from a range of commercial backgrounds. Nomination Committee The Committee comprises T Chandos (Chairman), P Stobart, M Barber, H Mautner and M Wolstenholme (appointed 10 December 2007). Capital & Regional Annual Report 2007 37 Corporate governance report continued The Nomination Committee meets as required to select and recommend to the Board suitable candidates for both executive and non-executive appointments to the Board. On an annual basis, the Nomination Committee also considers succession planning for the Board. During the year, the Committee considered the succession of the Chief Executive. M Barber was a member of the Committee but stood aside for the consideration of the new Chief Executive. The Board members are given an opportunity to meet the individual concerned prior to any formal decision. The terms of reference of the Nomination Committee are available for inspection on the Company’s website. There were three Responsible Business Committee meetings during the year. Responsible Business Committee meetings A Coppin X Pullen W Sunnucks A Lewis-Pratt Attendance 3 3 3 1 Board and committee meetings The number of meetings of the Board and of the Audit, Remuneration and Nomination Committees, and individual attendance by directors, is set out below: There were six full Board meetings during the year, five of which were scheduled meetings and one was an ad-hoc meeting. Directors’ remuneration The Remuneration Committee makes recommendations to the Board, within existing terms of reference, on remuneration policy and determines, on behalf of the Board, specific remuneration packages for each executive director. The statement of remuneration policy and details of each director’s remuneration are set out in the directors’ remuneration report on pages 31 to 36. Board meetings attendance T Chandos M Barber X Pullen W Sunnucks H Mautner K Ford PY Gerbeau P Stobart A Lewis-Pratt A Coppin P Newton M Wolstenholme Scheduled meetings Ad hoc meetings Total attendance 5 5 5 5 3 5 5 5 0 4 5 5 1 1 1 1 0 1 1 1 0 0 1 1 6 6 6 6 3 6 6 6 0 4 6 6 There were five Audit Committee meetings during the year. Audit Committee meetings P Stobart A Coppin M Wolstenholme Attendance 5 3 5 There were four Remuneration Committee meetings during the year. Remuneration Committee meetings M Wolstenholme P Stobart P Newton Attendance 4 3 4 There was one Nomination Committee meeting during the year. Nomination Committee meetings T Chandos P Stobart M Barber H Mautner M Wolstenholme (appointed 10 December 2007) Attendance 1 1 0 1 0 Shareholder relations The Company has always encouraged regular dialogue with its institutional shareholders and private investors at the AGM, and through corporate functions and property visits. The Company also attends roadshows in the US and Europe, and participates in sector conferences. In addition, following the announcement of preliminary and interim results, and throughout the year, as requested, the Company holds update meetings with institutional shareholders. All the directors are accessible to all shareholders, and queries received verbally or in writing are immediately addressed. The directors are introduced to shareholders at the AGM each year and the non-executive directors and committee chairmen are clearly identified. Announcements are made to the London Stock Exchange and the business media concerning business developments to provide wider dissemination of information. In particular, monthly announcements of fund unit valuations provide a regular update on the progress of the business. Registered shareholders are sent copies of both the annual report and accounts and the interim report. The Company is proposing a resolution at the AGM to permit the Company to use website communication as a means of communication with shareholders. Accountability and audit Financial reporting The Company’s annual report and accounts includes detailed reviews of the activities of each division, together with a detailed review of their financial results and financing position. In this way, and as required by the Combined Code, the Board seeks to present a balanced and understandable assessment of the Company’s position and prospects. Internal control The Board is responsible for maintaining a sound system of internal control and risk management, to safeguard shareholders’ investment and for reviewing its effectiveness. Such a system is designed to manage, but not eliminate, the risk of failure to achieve business objectives. There are inherent limitations in any control system and, accordingly, even the most effective system can provide only reasonable, and not absolute, assurance against material misstatement or loss. The key risks identified are set out on page 3 of the business review. 38 Capital & Regional Annual Report 2007 In accordance with the guidance of the Turnbull Committee on internal control, an ongoing process has been established for identifying, evaluating and managing risks faced by the Company. This process has been in place for the year under review to the date of approval of these financial statements. Each year the Board conducts a review of the effectiveness of the current system of internal control. The Group has undertaken a comprehensive risk and controls review for the year involving interviews with each divisional management team, which has identified the principal risks facing the Group and its individual divisions. BDO, a major auditing firm, assisted the Group in carrying out the review. An updated risk map and internal control matrix have been produced for each division in the Group, clearly outlining the principal risks and the actions being taken to manage those risks to the desired level. Each risk has been evaluated in terms of its impact on the business and the likelihood of it occurring, and responsibility for the management of each risk has been clearly identified. Other key features of the Company’s system of internal control are as follows: • Defined organisational responsibilities and authority limits throughout the Group. The day-to-day involvement of the executive directors in the running of the business ensures that these responsibilities and limits are adhered to. • Financial reporting to the Board including regular reports from the Fund Manager of The Mall, The Junction and X-Leisure Funds and for the Group as a whole, including the preparation of budgets and forecasts, cash management, variance analysis, property, taxation and treasury reports and a report on financing. The Company has established a whistleblowing policy to enable employees to raise issues of concern in relation to dishonesty or malpractice on an entirely confidential basis. Steps are continuously being taken to embed internal control and risk management further into the operations of the business and to deal with areas of improvement which come to management’s and the Board’s attention. Audit Committee The Audit Committee consists of three non-executive directors, P Stobart (Chairman), A Coppin and M Wolstenholme. The terms of reference of the Audit Committee are available for inspection on the Company’s website. The role of the Audit Committee is to maintain a relationship with the Group’s external auditors and to review, in depth, the Company’s financial statements, internal financial control and risk management systems and circulars to shareholders in order to monitor financial integrity within the Group. The Audit Committee is also responsible for reviewing the cost-effectiveness and the volume of non-audit services provided to the Group by its external auditors. The Company does not impose an automatic ban on the Group’s external auditors undertaking non-audit work, and details of fees paid to the Group’s external auditors are detailed on page 53 in note 8 to the accounts. The Group’s aim is always to have any non-audit work involving audit firms carried out in a manner that affords value for money. The Company’s policy is that the audit firm must not be in a position of conflict in respect of the work in question and must have the skill, competence and integrity to carry out the work in the best interests of the Group. The Audit Committee reviews and makes recommendations to the Board for the re-appointment of the Group’s external auditors. In order to maintain independence the audit partner of the Group’s external auditors is subject to rotation at regular intervals. The Audit Committee normally meets five times a year; there is one meeting to approve the audit plan and two for each of the interim and final announcements. The first of the pre-announcement meetings is held early enough to allow the Committee members to have real input into the presentation of the accounts. The Chairman of the Audit Committee reports back to the Board on the key conclusions. The Committee discharged its obligations in respect of the financial year as follows: • Financial reporting: during the year the Committee reviewed the interim and annual financial statements. The Committee received a report from the external auditors setting out accounting or judgemental issues which required its attention. The auditors’ reports were based on a full audit (annual report) and a high level review (interim report) respectively. The Committee also advised the Board on a number of other matters. • Internal Controls and Risk Management: the Audit Committee meets with the external auditors and deals with any significant internal control matter. In the year under review the Committee met with the external auditors on five occasions. The Audit Committee received a paper from BDO on the internal controls of the Company. • Internal Audit: The Group does not have an internal audit function. It has employed BDO, as explained earlier, to carry out a Group risks and control review. In addition, it also employed IRS, an experienced firm of risk surveyors, to review cash and security controls at selected locations. This falls short of a full internal audit function as the Company believes that a need for such a function does not currently exist. The Audit Committee will continue to review the position, but the belief at present is that the current size and complexity of the Group does not justify establishing an internal audit function. Going concern In compliance with the Listing Rules of the Financial Services Authority the directors can report that, based on the Group’s budgets and financial projections, they have satisfied themselves that the business is a going concern. The Board has a reasonable expectation that the Company and Group have adequate resources and facilities to continue in operational existence for the foreseeable future and therefore the accounts are prepared on a going concern basis. F Desai Company Secretary 10 April 2008 Capital & Regional Annual Report 2007 39 Consolidated income statement For the year ended 30 December 2007 Rents, management fees and other revenue Performance fees Revenue Cost of sales Gross profit Administrative costs Share of (loss)/profit in joint ventures and associates (Loss)/gain on revaluation of investment properties Profit on sale of properties and investments (Loss)/profit on ordinary activities before financing Finance income Finance costs (Loss)/profit before taxation Current tax Deferred tax Tax credit/(charge) (Loss)/profit for the year Basic (loss)/earnings per share Diluted (loss)/earnings per share All results derive from continuing activities Notes 4 4,5 4 18 13a 13c 6 7 8 10a 10a 8 12 12 2007 £m 86.8 (52.8) 34.0 (19.1) 14.9 (13.7) (119.2) (14.8) 1.8 (131.0) 3.5 (39.5) 2006 £m 69.5 62.6 132.1 (15.5) 116.6 (39.0) 164.6 26.0 6.3 274.5 2.0 (25.6) (167.0) 250.9 3.9 (3.7) 0.2 (16.5) (12.1) (28.6) (166.8) 222.3 (236)p (236)p 317p 311p 40 Capital & Regional Annual Report 2007 Consolidated balance sheet As at 30 December 2007 Non-current assets Investment property Interest in long leasehold property Goodwill Plant and equipment Investments Receivables Investment in associates Investment in joint ventures Total non-current assets Current assets Trading property assets Receivables Tax recoverable Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Current tax liabilities Non-current liabilities Bank loans Convertible subordinated unsecured loan stock Other payables Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Called-up share capital Share premium account Revaluation reserve Other reserves Capital redemption reserve Own shares held Retained earnings Equity shareholders’ funds Triple net, fully diluted net assets per share EPRA diluted net assets per share Notes 13a 13a 14 15a 15b 16 18b 18d 13a 17 17 19 20 23a 24 21 10c 26 27 27 28 27 27 27 30 30 2007 £m 678.5 15.6 12.2 1.5 0.3 7.2 599.4 12.0 2006 £m 511.4 16.0 12.2 1.0 0.2 – 685.4 67.6 1,326.7 1,293.8 95.9 19.9 1.6 37.1 94.4 87.9 1.1 35.5 154.5 218.9 1,481.2 1,512.7 (102.4) (18.4) (120.8) (622.4) – (17.5) (17.5) (657.4) (778.2) 703.0 7.1 219.7 2.4 10.9 4.4 (8.7) 467.2 703.0 (69.4) (25.5) (94.9) (456.8) (1.3) (32.8) (13.8) (504.7) (599.6) 913.1 7.2 219.5 2.7 9.6 4.3 (6.9) 676.7 913.1 £10.04 £10.08 £12.72 £12.75 These financial statements were approved by the Board of Directors, authorised for issue and signed on their behalf on 9 April 2008 by: W Sunnucks Group Finance Director 10 April 2008 Capital & Regional Annual Report 2007 41 Consolidated statement of recognised income and expense For the year ended 30 December 2007 Foreign exchange translation differences Revaluation (loss)/gain on owner occupied property Net investment hedge (Loss)/profit for the year Total recognised income and expense Attributable to: Equity shareholders 2007 £m 7.6 (0.3) (5.6) 1.7 (166.8) (165.1) 2006 £m (0.7) 2.3 – 1.6 222.3 223.9 (165.1) 223.9 Reconciliation of movement in equity shareholders’ funds For the year ended 30 December 2007 Opening equity shareholders’ funds Issue of shares Acquisition of own shares Share buy back and cancellation LTIP credit in respect of LTIP charge Arising on conversion/repurchase of CULS Amortisation of IFRS 1 reserve Total recognised income and expense Dividends paid Closing equity shareholders’ funds 2007 £m 913.1 0.2 – (17.2) 0.2 (9.0) (0.1) 887.2 (165.1) 722.1 (19.1) 703.0 2006 £m 707.7 2.7 (8.3) – 2.1 (0.8) (0.1) 703.3 223.9 927.2 (14.1) 913.1 42 Capital & Regional Annual Report 2007 Consolidated cash flow statement For the year ended 30 December 2007 Net cash generated from operations Distributions received from joint ventures and associates Interest paid Interest received Income taxes paid Cash flows from operating activities Investing activities Acquisitions of investment properties Capital expenditure on investment properties Acquisitions and disposals of other fixed assets Acquisitions of companies Cash acquired in business combinations Proceeds from sale of investment and trading properties Proceeds from sale of investments Investment in joint ventures Loans to joint ventures Loans repaid by joint ventures Disposal of units in associated entity Acquisitions and disposals Cash flows from investing activities Financing activities Proceeds from the issue of ordinary share capital Purchase of own shares Share buy backs and cancellation Repurchase of CULS Bank loans draw down Bank loans repaid Loan arrangement costs Settlement of foreign exchange forward Dividends paid to minority interests Equity dividends paid Cash flows from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year Notes 29 2007 £m 62.6 25.6 (30.7) 2.7 (3.8) 56.4 (62.8) (15.2) (1.1) (39.4) 1.0 1.0 0.2 (3.3) (6.1) 0.7 – – (125.0) 0.1 (1.3) (17.2) (10.5) 172.3 (48.5) (0.9) (4.6) (1.4) (19.1) 68.9 0.3 35.5 1.3 37.1 2006 £m 89.5 21.9 (22.1) 1.9 (3.8) 87.4 (251.4) (2.0) – – – 111.0 – (8.1) (0.7) – 30.0 (14.4) (135.6) 0.4 (8.3) – – 639.4 (575.0) – – (0.6) (14.1) 41.8 (6.4) 40.1 1.8 35.5 Capital & Regional Annual Report 2007 43 Notes to the accounts For the year ended 30 December 2007 1 Significant accounting policies General information Capital & Regional plc is a company incorporated in the United Kingdom under the Companies Act 1985. The address of the registered office is given on page 88. The nature of the Group’s operations and its principal activities are set out in note 2 and in the operating and financial review on pages 2 to 25. These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates. Foreign operations are included in accordance with the accounting policies set out below. Adoption of new and revised standards At the date of authorisation of these financial statements, the following Standards and interpretations which have not been applied in these financial statements were in issue but not yet effective: Amendments to IFRS 2 – Share-based Payment IFRS 3 Business Combinations IFRS 7 Financial instruments: Disclosures; and the related amendment to IAS1 on capital disclosures IFRS 8 Operating segments Amendments to IAS 1 – Presentation of Financial Statements Amendments to IAS 23 – Borrowing Costs Amendments to IAS 27 – Consolidated and Separate Financial Statements IFRIC 11 IFRS 2 – Group and Treasury Share Transactions IFRIC 12 Service Concession Agreements IFRIC 13 Customer Loyalty Programmes IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding requirements and their interaction The directors anticipate that the adoption of these Standards and interpretations in future periods will have no material impact on the financial statements of the Group except for additional disclosure requirements when IFRS 7 comes into effect for periods commencing on or after 1 January 2007. Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). The financial statements have also been prepared in accordance with IFRS adopted by the European Union and therefore the Group financial statements comply with Article 4 of the EU IAS regulations. Basis of preparation The financial statements are presented in sterling. They are prepared on the historical cost basis except that investment and development properties, owner-occupied properties and derivative financial instruments are stated at fair value. The accounting policies have been applied consistently to the results, other gains and losses, assets, liabilities, income and expenses. The preparation of financial statements requires management to make judgements, estimates and assumptions that may affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group's accounting policies, described below, management are required to make judgements, estimates and assumptions that have the most significant effect on the amounts recognised in the financial statements. Critical accounting judgements include the estimation of performance fees, tax assets and liabilities, fair values of investment properties and derivative financial instruments, the assessment of estimated useful lives and residual values of property and the vesting assumptions relating to management incentive schemes. Management believes that the estimates and associated assumptions used in the preparation of the financial statements are reasonable. However, actual outcomes may differ from those anticipated. The Group's critical judgements and their effect on the financial statements in relation to performance fees are described in note 5, the narrative in the financial review on page 23 and in note 36, contingent liabilities. Management has considered in detail and made judgements on the possible further adverse yield shift that is likely to occur over the next two years in connection with shopping centres, retail parks and the leisure market, based on a wide range of available market information. The net impact of these judgements (after the benefit the Group receives as an investor and the adjustment to management incentives) has been estimated at a loss of £27million or reduction in net asset value of 38p per share. Note 36 shows that this loss could potentially increase by a further £6.7 million or 9.5p per share if certain outcomes prevail. Management has reviewed the non-market based vesting assumptions in relation to the LTIP. Given the Group's performance over the last three years and the Group's estimated performance over the next two years, management has concluded that no shares will vest under the non-market conditions for 2006 and 2007. The effect of this is a credit to the income statement of £0.5 million. Management has relied upon the work undertaken at 30 December 2007 by independent professional qualified valuers, as disclosed in note 13b, in assessing the fair value of the Group's investment and owner occupied properties. Management has relied upon the work undertaken at 30 December 2007 by independent third party experts in assessing the fair value of the Group's derivative financial instruments. 44 Capital & Regional Annual Report 2007 1 Significant accounting policies continued Management has assessed changes in recent legislation, case law and accounting standards, along with future projections for the Group, in determining the Group's current and deferred tax assets and liabilities and credit to the income statement. Details are described in note 10 to the accounts. The judgements, estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The principal accounting policies adopted are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries), joint ventures and associates made up to 31 December each year. Subsidiaries Subsidiaries are those entities controlled by the Group. Control is assumed when the Group has the power to govern the financial and operating policies of an entity, or business, to benefit from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The reporting period for subsidiaries ends on 31 December and the financial statements of subsidiaries are consolidated from this date. Joint ventures and associates In accordance with IAS 28 “Investments in Associates” and IAS 31 “Interests in Joint Ventures”, associates and joint ventures are accounted for under the equity method, whereby the consolidated balance sheet and income statement incorporate the Group’s share of the net assets and profit after tax. The profits include revaluation movements on investment properties. The reporting period for joint ventures and associates ends on 31 December and the financial statements of joint ventures and associates are consolidated from this date. Goodwill Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the acquired entity over the Group’s interest in the fair value of the assets, liabilities and contingent liabilities acquired. Goodwill which is recognised as an asset is reviewed for impairment at least annually. Any impairment is recognised immediately in the income statement and is not subsequently reversed. Where the fair value of the assets, liabilities and contingent liabilities acquired is greater than the cost, the excess, known as negative goodwill, is recognised immediately in the income statement. Foreign currency Foreign currency transactions Transactions in foreign currencies are translated into sterling at exchange rates approximating to the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to sterling at the exchange rate ruling at that date and, unless they relate to the hedging of the net investment in foreign operations, differences arising on translation are recognised in the income statement. Financial statements of foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into sterling at the exchange rates ruling at the balance sheet date. The operating income and expenses of foreign operations are translated into sterling at the average exchange rates for the period. Significant transactions, such as property sales, are translated at the foreign exchange rate ruling at the date of each transaction. The principal exchange rate used to translate foreign currency denominated amounts in the balance sheet is the rate at the end of the year, £1 = €1.365 (2006: £1 = €1.484). The principal exchange rate used for the income statement is the average rate, £1 = €1.462 (2006: £1 = €1.467). Plant and equipment Plant and equipment are stated at the lower of cost or valuation, net of depreciation and any provision for impairment. Depreciation is provided on all tangible fixed assets, other than investment properties and land, over their expected useful lives: Fixtures and fittings Motor vehicles – over three to five years, on a straight-line basis. – over four years, on a straight line-basis. Property portfolio Investment properties Investment properties are stated at fair value, being the market value determined by professionally qualified external values, with changes in fair value being included in the income statement. In accordance with IAS 40 “Investment Property”, no depreciation is provided in respect of properties. Leasehold properties Leasehold properties that are leased out to tenants under operating leases are classified as investment properties or development properties, as appropriate, and included in the balance sheet at fair value. Capital & Regional Annual Report 2007 45 Notes to the accounts continued For the year ended 30 December 2007 1 Significant accounting policies continued Owner-occupied long leasehold properties Owner-occupied long leasehold properties are included in the financial statements stated at fair value with changes in fair value recognised directly in equity. The cost of owner-occupied property is depreciated through the income statement over the period to the end of the lease on a straight-line basis having due regard to its estimated residual value. Properties under development Attributable internal and external costs incurred during the period of development are capitalised. Interest is capitalised gross in the associates and joint ventures before deduction of related deferred tax relief. There is no interest capitalised in the Group. Interest is calculated on the development expenditure by reference to specific borrowings where relevant. A property ceases to be treated as being under development when substantially all activities that are necessary to get the property ready for use are complete. Refurbishment expenditure Refurbishment expenditure in respect of major works is capitalised. Renovation and refurbishment expenditure of a revenue nature is expensed as incurred. Property transactions Acquisitions and disposals are accounted for at the date of legal completion. Properties are transferred between categories at the estimated market value on the transfer date. Current property assets Properties held with the intention of disposal are valued at the lower of cost and net realisable value. Head leases Where an investment property is held under a head lease, the head lease is initially recognised as an asset at the sum of the present value of the minimum lease ground rent payable. The corresponding rent liability to the leaseholder is included in the balance sheet as a finance lease obligation. Tenant leases and incentives Management has exercised judgement in considering the potential transfer of risks and rewards of ownership in accordance with IAS 17 “Leases” for all properties leased to tenants and have determined that all such leases are operating leases. Lease incentives and costs associated with entering into tenant leases are amortised over a straight-line basis over the term of lease. Borrowings and derivatives Borrowings Borrowings are held at amortised cost. They are recognised initially at fair value, after taking into account of any discount on issue and attributable transaction costs. Subsequently, such discounts and costs are charged to the income statement over the term of the borrowing at a constant return on the carrying amount of the liability. Convertible unsecured loan stock (“CULS”) CULS are regarded as compound instruments, consisting of a liability component and an equity component. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of the issue of the convertible loan notes and the fair value assigned to the liability component, representing the option to convert the liability into equity of the Group, is included in equity. The interest expense on the liability component is calculated by applying the prevailing market interest rate for similar non-convertible debt at the time of the issue of the CULS to the liability component of the instrument. The difference between this amount and the interest paid is added to the carrying value of the CULS. Derivative financial instruments and hedge accounting As defined by IAS 39 “Financial Instruments: Recognition and Measurement”, derivatives are carried at fair value in the balance sheet. Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and the ineffective portion is recognised immediately in the income statement. If the cash flow hedge of a firm commitment or forecasted transaction results in the recognition of an asset or liability, then, at the time the asset or liability is recognised, the associated gains or losses on the derivative that had previously been recognised in equity are included in the initial measurement of the asset or liability. For hedges that do not result in the recognition of an asset or a liability, amounts deferred in equity are recognised in the income statement in the same period in which the hedged item affects net profit or loss. Changes in the fair value of derivative financial instruments that do not qualify for hedge accounting are recognised in the income statement in finance cost line as they arise. Minority interest The minority interest, arising from the Group's German operations, is classified as a liability and held at fair value in the balance sheet. Under the terms of the contract the minority has a put option to sell their share back to the Group typically after five years from acquisition. The minority interests' share of income and expenses is treated as a non-recurring finance charge in the income statement. Cash and cash equivalents Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. 46 Capital & Regional Annual Report 2007 1 Significant accounting policies continued Tax Tax is included in the Group income statement except to the extent that it relates to items recognised directly in equity, in which case the related tax is recognised in equity. Current tax is based on the taxable profit for the year and is calculated using tax rates that have been enacted or substantially enacted. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are never taxable or tax deductible (permanent differences) or will be taxable at a later date (temporary differences). Temporary differences principally arise from using different balance sheet values for assets and liabilities from their respective tax base values. Deferred tax is provided using the balance sheet liability method on these temporary differences with the exception of: goodwill not deductible for tax purposes; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates applicable at the balance sheet date. A deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying temporary differences can be deducted. Operating leases Annual rentals under operating leases are charged to profit or loss as incurred. Employee benefits Pension costs Pension liabilities, all of which relate to defined contribution schemes, are charged to the income statement as incurred. Long-term incentive plan (LTIP) The Group has applied the arrangements of IFRS 2 "Share-based Payments". Equity settled share-based payments are measured at fair value at the date of grant. The fair value of share-based employee remuneration is calculated using a normal distribution model, which the directors consider not to be materially different from the binominal model. The fair value is expensed on a straight-line basis over the vesting period. Own shares Own shares held by the Group and shown as a deduction from shareholders’ funds, and included in other reserves. The cost of own shares is transferred from the own shares held reserve to the retained earnings reserve systematically over the LTIP performance period. The shares are held in an Employee Share Ownership Trust. Trade receivables and payables Trade receivables and payables are initially measured at fair value and subsequently measured at amortised cost and discounted to reflect the time value of money. Revenue Performance fees Performance fees are recognised, in line with the property management contracts, at the end of the performance period to which they relate. The performance period is normally three years. CRPM earns performance fees for The Mall and Junction Funds on the outperformance relative to the greater of 12% and the appropriate IPD index. For The X-Leisure Fund the benchmark is only 12%. Where performance falls short of these benchmarks, fees are repayable, up to the amount received for the previous two years. Where there is a reasonable likelihood that part of a performance fee will be repaid the estimated repayment will not be recognised as income until the outcome can be reliably estimated. This policy has been clarified as a result of the expected clawback of performance fees. Management fees Management fees are recognised, in line with the property management contracts, in the period to which they relate. Management fees include income in relation to services provided by CRPM to both the joint ventures and the associated Funds for asset management, rent reviews, lettings, project co-ordination, procurement, service charges and directly recoverable expenditure. Net rental income Net rental income is equal to gross rental income, recognised in the period to which it relates, including tenant incentives, less property expenses directly related to letting and holding the properties. Interest and dividend income Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. Dividend income from investments is recognised when the shareholders’ right to receive payment have been established. Inter segment transactions All transactions between segments are accounted for on an arm’s length basis. Capital & Regional Annual Report 2007 47 Notes to the accounts continued For the year ended 30 December 2007 2 Segmental analysis – non-statutory see through basis 2a Business segments on a see through basis The Group operates in two main business segments, an assets business and an earnings business. The assets business consists of property investment activities and the earnings business consists of property management activities and the ski slope business of SNO!zone. The businesses are the basis on which the Group reports its primary business segments. 2007 Non-statutory information Net rents Net interest Contribution Management fees SNO!zone income SNO!zone expenses Management expenses Recurring pre-tax profit Performance fees/(clawback) (Cost)/benefit of performance fees Variable overhead Revaluation of investment properties Profit on disposals (Loss)/gain on financial instruments Other non-recurring items (Loss)/profit before tax Tax (Loss)/profit after tax Note 2b 2b 2b 4 4 4,5 18c Property investment UK £m 70.0 (54.2) 15.8 – – – (5.6) 10.2 – 18.1 – (174.0) 1.6 (8.8) – (152.9) Assets Earnings Property Property investment management UK £m Germany £m Year to 30 December 2007 Total £m SNO!zone £m 24.9 (14.4) 10.5 – – – (0.9) 9.6 – – – 9.6 – 1.8 (3.1) 17.9 – – – 26.0 – – (15.2) 10.8 (52.8) – 7.9 – – – – (34.1) – – – – 14.3 (12.2) – 2.1 – – – – – – – 2.1 94.9 (68.6) 26.3 26.0 14.3 (12.2) (21.7) 32.7 (52.8) 18.1 7.9 (164.4) 1.6 (7.0) (3.1) (167.0) 0.2 (166.8) Net assets/(liabilities) at 30 December 2007 613.3 123.8 (34.0) (0.1) 703.0 2b Contribution 2007 Non-statutory information – see through basis Mall (C&R share: 24.2%)1 Junction (C&R share: 27.3%)1 X-Leisure (C&R share: 19.4%)1 Total associates Xscape Braehead (C&R share 50%)1 Manchester Arena (C&R share 30%)1 Others (C&R share: 50%)1 Total joint ventures Statutory information Other UK FIX UK Germany Total rental income investment property Great Northern2 Total wholly owned rental income Total on a see through basis Note 18c 18e 4 2a Gross Rent £m 44.2 15.7 9.9 69.8 2.0 1.6 0.9 4.5 1.0 9.5 29.6 40.1 6.4 46.5 Property Costs £m (10.1) (2.9) (2.1) (15.1) (0.4) (0.3) (0.4) (1.1) – (1.2) (4.6) (5.8) (0.3) (6.1) Void Costs £m (1.8) (0.3) (0.3) (2.4) (0.1) (0.1) (0.1) (0.3) – (0.4) (0.1) (0.5) (0.4) (0.9) Net rent £m 32.3 12.5 7.5 52.3 1.5 1.2 0.4 3.1 1.0 7.9 24.9 33.8 5.7 39.5 Contribution Year to 30 December 2007 Total £m 12.7 3.0 2.4 18.1 (0.4) 0.3 – (0.1) (5.1) 1.2 10.5 6.6 1.7 8.3 Net interest £m (19.6) (9.5) (5.1) (34.2) (1.9) (0.9) (0.4) (3.2) (6.1) (6.7) (14.4) (27.2) (4.0) (31.2) 120.8 (22.3) (3.6) 94.9 (68.6) 26.3 Associates and Joint Ventures are all held within the United Kingdom. 1 Capital & Regional’s share at end of year. 2 Great Northern is carried as a trading property in the balance sheet. 48 Capital & Regional Annual Report 2007 2 Segmental analysis – non-statutory see through basis continued 2a Business segments on a see through basis continued Assets Earnings 2006 Non-statutory information Net rents Net interest Contribution Management fees SNO!zone income SNO!zone expenses Management expenses Recurring pre-tax profit Performance fees (Cost)/benefit of performance fees Variable overhead Revaluation of investment properties Profit on disposals Gain on interest rate swaps Other non-recurring items Profit before tax Tax Profit after tax Note 2b 2b 2b 4 4 4,5 18c Property investment UK £m 65.5 (49.6) 15.9 – – – (4.6) 11.3 – (20.1) – 149.5 11.1 23.5 (2.0) 173.3 Property Property investment management UK £m Germany £m Year to 30 December 2006 Total £m SNO!zone £m 11.5 (5.7) 5.8 – – – – 5.8 – (0.3) – 17.2 – – (2.5) 20.2 – – – 27.4 – – (14.0) 13.4 62.6 – (18.3) – – – (2.1) 55.6 – – – – 13.1 (11.3) – 1.8 – – – – – – – 1.8 77.0 (55.3) 21.7 27.4 13.1 (11.3) (18.6) 32.3 62.6 (20.4) (18.3) 166.7 11.1 23.5 (6.6) 250.9 (28.6) 222.3 913.1 Net assets/(liabilities) at 30 December 2006 774.9 103.5 35.0 (0.3) 2b Contribution continued 2006 Non-statutory information – see through basis Mall (C&R share: 24.2%)1 Junction (C&R share: 27.3%)1 X-Leisure (C&R share: 10.6%)1 Total associates Xscape (C&R share)2 Others (C&R share: 30-50%)1 Total joint ventures Statutory information Other UK FIX UK Germany Total rental income investment property Great Northern3 Total wholly owned rental income Total Note 18c 18e 4 2a Gross rent £m 45.1 14.5 4.9 64.5 6.6 0.3 6.9 4.6 4.7 14.3 23.6 5.3 28.9 Property costs £m (11.5) (3.1) (0.8) (15.4) (1.2) (0.1) (1.3) 1.3 (1.1) (2.8) (2.6) (0.5) (3.1) Void costs £m (1.5) (0.4) (0.2) (2.1) (0.4) – (0.4) – (0.4) – (0.4) (0.6) (1.0) Net rent £m 32.1 11.0 3.9 47.0 5.0 0.2 5.2 5.9 3.2 11.5 20.6 4.2 24.8 Contribution Year to 30 December 2006 Total £m 14.1 1.8 1.4 17.3 0.2 0.1 0.3 (2.3) 0.2 5.8 3.7 0.4 4.1 Net interest £m (18.0) (9.2) (2.5) (29.7) (4.8) (0.1) (4.9) (8.2) (3.0) (5.7) (16.9) (3.8) (20.7) 100.3 (19.8) (3.5) 77.0 (55.3) 21.7 Associates and Joint Ventures are all held within the United Kingdom. 1 Capital & Regional’s share at end of year. 2 Capital & Regional’s share consists of Xscape Milton Keynes 50% (2006: 50%), Xscape Castleford 66.67% (2006: 66.67%) and Xscape Breahead 50% (2006:50%). 3 Great Northern is carried as a trading property in the balance sheet. Capital & Regional Annual Report 2007 49 Notes to the accounts continued For the year ended 30 December 2007 3 Segmental analysis – statutory basis 3a Primary business segments – statutory basis 2007 Revenue from external sources Transactions with other segments Total segment revenue Cost of sales Transactions with other segments Property and administration costs Gain on sale of properties and investments (Loss)/gain on revaluation of investment properties Segment result Share of (loss) in joint ventures and associates Net finance costs (Loss)/profit before tax Segment assets Interest in joint ventures and associates Tax assets Consolidated total assets Segment liabilities Interest bearing liabilities Tax liabilities Consolidated total liabilities Capital expenditure Depreciation Significant other non cash expenses Aggregate investment in joint ventures and associates 3b Secondary business segments – statutory basis Revenue Segment gross assets Capital expenditure Note 4 Property investment UK £m 16.9 1.0 17.9 (2.2) (1.0) (5.6) 1.8 (24.4) (13.5) (119.2) (21.6) (154.3) 323.6 Property Property investment management UK £m Germany £m 29.6 – 29.6 (4.7) – (0.9) – 9.6 33.6 – (14.4) 19.2 510.0 (26.8) 1.1 (25.7) – (1.0) (7.2) – – (33.9) – – (33.9) 28.8 Year to 30 December 2007 Total £m SNO!zone £m 14.3 – 14.3 (12.2) (0.1) – – – 2.0 – – 2.0 5.8 34.0 2.1 36.1 (19.1) (2.1) (13.7) 1.8 (14.8) (11.8) (119.2) (36.0) (167.0) 868.2 611.4 1.6 1,481.2 (21.0) (24.2) (68.8) (5.9) (119.9) (622.4) (35.9) (778.2) 150.1 0.6 (10.3) 611.4 0.8 0.3 – – Germany £m 29.6 510.0 63.0 Total £m 34.0 868.2 150.1 86.2 0.1 – 611.4 63.0 – – – Note 4 0.1 0.2 (10.3) – United Kingdom £m 4.4 358.2 87.1 50 Capital & Regional Annual Report 2007 3 Segmental analysis – statutory basis continued 3a Primary business segments – statutory basis continued 2006 Revenue from external sources Transactions with other segments Total segment revenue Cost of sales Transactions with other segments Property and administration costs Gain on sale of properties and investments Gain on revaluation of investment properties Segment result Share of profit in joint ventures and associates Net finance costs Profit before tax Segment assets Interest in joint ventures and associates Tax assets Consolidated total assets Segment liabilities Interest bearing liabilities Tax liabilities Consolidated total liabilities Capital expenditure Depreciation Significant other non-cash expenses Aggregate investment in joint ventures and associates 3b Secondary business segments – statutory basis continued Revenue Segment gross assets Capital expenditure Property Property investment management UK £m Germany £m Year to 30 December 2006 Total £m SNO!zone £m Note 4 Property investment UK £m 14.7 1.0 15.7 (1.4) (1.5) (4.6) 6.3 8.8 23.3 164.6 (15.4) 172.5 253.2 14.3 – 14.3 (2.8) – – – 17.2 28.7 – (8.2) 20.5 405.9 90.0 1.6 91.6 – (1.0) (34.4) – – 56.2 – – 56.2 95.5 13.1 – 13.1 (11.3) (0.1) – – – 1.7 – – 1.7 4.0 (16.5) (20.9) (60.5) (4.3) 40.8 0.1 – 753.0 234.1 – – – Note 4 0.2 0.1 11.6 – United Kingdom £m 117.8 352.7 41.6 0.6 0.2 – – Germany £m 14.3 405.9 234.1 132.1 2.6 134.7 (15.5) (2.6) (39.0) 6.3 26.0 109.9 164.6 (23.6) 250.9 758.6 753.0 1.1 1,512.7 (102.2) (458.1) (39.3) (599.6) 275.7 0.4 11.6 753.0 Total £m 132.1 758.6 275.7 Capital & Regional Annual Report 2007 51 Notes to the accounts continued For the year ended 30 December 2007 4 Revenue Assets business Wholly-owned investment property gross rents Wholly-owned trading property gross rents Wholly-owned total gross rents Earnings business Property management – management fees SNO!zone Other revenue Revenue per consolidated income statement Property management – performance fees Property management – estimated future repayment Net revenue Finance income Total revenue 5 Performance fees Property manager – payable to C&R Property manager – payable by C&R to others* Fund manager – payable to others Performance fees included in associates accounts Property manager future estimated repayment of performance fees Fund manager future estimated repayment of performance fees Total performance fees included in associates adjusted accounts Property manager future estimated repayment of performance fees to others* Total future estimated repayment of performance fees C&R’s share of future estimated repayments of performance fees Property manager future estimated repayment of performance fees Property manager future estimated repayment of performance fees to others* Total C&R share of future estimated repayment of performance fees Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m 40.1 6.4 46.5 26.0 14.3 – 86.8 – (52.8) 34.0 3.5 37.5 23.6 5.3 28.9 27.4 13.1 0.1 69.5 62.6 – 132.1 2.0 134.1 Note 2b 2b 2b 2a 2a 2a, 5 2a, 5 3a 6 The Junction LP £m The X-Leisure LP £m Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m The Mall LP £m – – – – Note 2a, 4 18c – – – – (36.9) (17.3) (12.3) (5.5) 18c (49.2) (22.8) 1.4 (47.8) – (22.8) (36.9) (17.3) 1.4 – 4 (35.5) (17.3) – – – – – – – – – – – – – – – – (54.2) (17.8) (72.0) 1.4 (70.6) (54.2) 1.4 (52.8) 62.6 1.5 20.3 84.4 – – – – – – – – * C&R’s share of the Mall performance fee is reduced by an amount of (£1.4m) receivable from others. The overall effect of the repayment of performance fees is reduced as a result of C&R’s share as an investor in the Funds and reduction in management incentive payments. Further disclosure relating to performance fees can be found in the financial review on page 23 and in the contingent liability note 36 on page 75. 52 Capital & Regional Annual Report 2007 6 Finance income Interest receivable Other income Total finance income 7 Finance costs Interest on bank loans and overdrafts Interest receivable on swaps Interest on other loans Interest payable Amortisation of loan issue costs Unwinding of discounting of CAP awards Share of income attributable to minority interest classified as a liability Other interest payable Loss/(gain) in fair value of financial instruments Fair value gains on interest rate swaps transferred from equity Total finance costs 8 (Loss)/profit before taxation This is arrived at after charging/(crediting): Depreciation – owned assets Depreciation of owner occupied property Net exchange (losses)/gains (Loss)/gain on revaluation of investment properties Staff costs Auditors’ remuneration (see below) Auditors’ remuneration Fees payable to the Company’s auditors for the audit of the Company annual accounts Fees payable to the Company’s auditors and their associates for other services to the group – The audit of the companies’ subsidiaries and joint ventures pursuant to legislation – Audit fees for IFRS conversion Total audit fees Non-audit fees (see below) Total fees paid to auditors Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m 3.5 – 3.5 1.9 0.1 2.0 Note 4 Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m Note 31.4 (0.4) 0.4 31.4 0.8 2.0 1.9 1.9 1.6 (0.1) 39.5 22.1 (0.6) 0.3 21.8 0.9 2.2 2.6 1.3 (3.1) (0.1) 25.6 22 Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m Note 9 0.5 0.1 (2.0) (14.8) 7.8 0.5 0.2 0.3 – 0.5 0.1 0.6 0.3 0.1 0.2 26.0 33.5 0.7 0.2 0.3 0.1 0.6 0.1 0.7 Included in non-audit fees are amounts for services supplied pursuant to legislation £60,000 (2006: £82,000), services relating to tax £13,000 (2006: £10,000) and other services £nil (2006: £21,000). Fees payable to Deloitte and Touche LLP and their associates for non-audit services to the Company are not required to be disclosed because the consolidated financial statements are required to disclose such fees on a consolidated basis. Capital & Regional Annual Report 2007 53 Notes to the accounts continued For the year ended 30 December 2007 9 Staff costs, including directors All remuneration is paid by Capital & Regional Property Management Ltd (a subsidiary company of Capital and Regional plc) and the SNO!zone companies. Salaries Discretionary bonuses Capital appreciation plan2 Share-based employee remuneration1 Wages and salaries Social security Other pension costs Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m Note 15.7 0.5 (9.3) 0.2 7.1 0.6 0.1 7.8 13.7 4.9 7.9 2.1 28.6 4.8 0.1 33.5 1 Details of fair value assumptions are disclosed in note 26. 2 CAP credit relates to the effect of the clawback of performance fees Except for the directors, Capital & Regional plc has no employees. The costs of directors are borne by CRPM and shown in the directors’ remuneration report. Staff numbers The monthly average number of persons including directors employed by the Group during the year was as follows: 2007 Number 2006 Number 183 300 483 168 311 479 Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m 0.1 (4.0) – (3.9) 6.9 – (3.2) 3.7 (0.2) 6.6 9.7 0.2 16.5 9.7 0.3 2.1 12.1 28.6 Central management Snow slope business Total 10 Tax 10a Tax (credit)/charge Current tax (credit)/charge UK corporation tax Adjustments in respect of prior years Foreign tax Total current tax Deferred tax charge/(credit) On net income before revaluations and disposals On revaluations and disposals Adjustments in respect of prior years Total deferred tax Total taxation (credit)/charge 54 Capital & Regional Annual Report 2007 10 Tax continued 10b Tax charge reconciliation (Loss)/profit before tax (Loss)/profit multiplied by the UK corporation tax rate of 30% Non-allowable expenses and non-taxable items Utilisation of tax losses Tax on revaluation gains Unrealised losses/(gains) on investment property not deductible/taxable Prior year adjustments Total tax (credit)/charge 10c Deferred tax movements UK As at 30 December 2006 Recognised in income As at 30 December 2007 Germany As at 30 December 2006 Recognised in income As at 30 December 2007 Total deferred tax at 30 December 2007 Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m (167.0) 250.9 (50.1) 8.6 (4.2) 0.1 52.6 (7.2) (0.2) Capital gains net of capital losses £m Capital allowances £m Other timing differences £m 0.5 (0.7) (0.2) 5.2 (0.1) 5.1 4.9 8.7 (1.7) 7.0 1.7 1.1 2.8 9.8 (2.3) 5.1 2.8 – – – 2.8 17.5 75.3 (6.1) (3.9) (3.5) (45.0) 11.8 28.6 Total £m 6.9 2.7 9.6 6.9 1.0 7.9 At the balance sheet date, the Group has unused tax losses of £47.5 million (2006: £0.7 million) available for offset against future profits. Unused tax losses United Kingdom Overseas Total 30 December 2007 £m 30 December 2006 £m 42.1 5.4 47.5 0.7 – 0.7 No deferred tax asset has been recognised in respect of such losses (2006: £nil). The tax losses have not been recognised due to the unpredictability of future profit streams. With effect from 1 April 2008 the mainstream corporation tax rate was reduced from 30% to 28%. The German Government has reduced the corporate income tax rate from 26.375% to 15.875%, effective from 1 January 2008. Consequently, the rate at which deferred tax is provided on UK deferred tax items is now 28% and the rate applied to German deferred tax items is 15.825%. The effect of these rate adjustments is a reduction in the total deferred tax liability brought forward at 31 December 2006 of £3.2 million. This amount is shown as a deferred tax prior year adjustment in the income statement. The calculation of the Group’s tax charge necessarily involves a degree of estimation and judgement in respect of certain items whose tax treatment cannot be finally determined until a formal resolution has been reached with the relevant tax authorities. In such cases, the Group has reserved on the basis that these provisions are required. If all such issues are resolved in the Group’s favour, provisions of up to £17.7 million could be released in future periods. A significant part of the Group’s property interests is held offshore. The Group has also undertaken a restructuring of its activities to separate legally its income and earnings businesses, in line with its business model. The Group has been advised that no capital gains tax liability arises on these transactions and that certain tax deductions and losses will be available following the restructuring, although the relevant computations have yet to be agreed. Capital & Regional Annual Report 2007 55 Notes to the accounts continued For the year ended 30 December 2007 11 Dividends Amounts recognised as distributions to equity holders in the year: Final of 17p per share paid on 15 June 2007 (2006: 11p per share) Interim of 10p per share paid on 12 October 2007 (2006: 9p per share) Proposed final of 17p payable on 15 June 2008 (2006: 17p per share) Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m 12.1 7.0 19.1 11.9 31.0 7.7 6.4 14.1 11.9 26.0 The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. 12 Earnings per share 12a The European Public Real Estate Association (“EPRA”) has issued recommended bases for the calculation of certain earnings per share information and these are shown in the following tables. 2007 Weighted average number of shares Own shares held Basic Dilutive share options Conversion of Convertible Unsecured Loan Stock Diluted Revaluation movements on investment properties, development properties and other investments Profit on disposal of investment properties (net of tax) Movement in fair value of financial instruments Deferred tax charge EPRA diluted Performance fee clawback (net of back charge and management incentives) – see page 23 Adjusted EPRA diluted Note Earnings £m Weighted average number of shares Pence per share (166.8) – – (166.8) 164.4 (1.1) 7.0 (3.0) 0.5 26.8 27.3 12b 12b 12b 71.7 (0.9) 70.8 – – 70.8 (236)p (236)p 232p (1)p 10p (4)p 1p 38p 39p The Group has 439,970 share options that could potentially dilute basic earnings per share in the future, but were not included in the calculation of diluted earnings per share because they are antidilutive for the current period presented. 2006 Weighted average number of shares Own shares held Basic Dilutive share options Conversion of Convertible Unsecured Loan Stock Diluted Revaluation movements on investment properties, development properties and other investments Profit on disposal of investment properties (net of tax) Movement in fair value of interest rate swaps Deferred tax charge EPRA diluted 56 Capital & Regional Annual Report 2007 Note Earnings £m Weighted average number of shares Pence per share 222.3 0.2 222.5 (166.7) (10.8) (23.5) 11.7 33.2 12b 12b 12b 71.5 (1.3) 70.2 0.5 0.9 71.6 317p – – 311p (233)p (15)p (33)p 16p 46p 12 Earnings per share continued The 2006 basic earnings per share has been restated to include the effect of 1,322,240 of own shares held at 30 December 2006. The effect is to increase basic earnings per share by 6p from 311p to 317p. The calculation includes the full conversion of the Convertible Unsecured Loan Stock where the effect on earnings per share is dilutive. The Convertible Unsecured Loan Stock charge added back to give the diluted earnings figures is net of tax at the effective tax rate for the year. 12b Reconciliation of earnings figures included in EPS calculation to the income statement Share of profits of associates Share of profits of joint ventures Wholly owned Tax effect Total per EPS calculation 13 Property assets 13a Wholly-owned property assets Cost or valuation As at 31 December 2005 Exchange adjustments Acquisitions Additions Depreciation Disposals Revaluation movement recognised in income Revaluation movement recognised in equity As at 31 December 2006 Exchange adjustments Acquisitions Additions Properties acquired in business combinations Depreciation Disposals Revaluation movement recognised in income Revaluation movement recognised in equity 2007 Revaluation movements £m 2007 Profit on disposal £m 2007 Movement in fair value of interest rate swaps £m (146.5) (3.1) (14.8) – (164.4) (2.7) 2.4 1.8 (0.4) 1.1 (5.1) (0.3) (1.6) – (7.0) Note 18c 18e 12a 2006 Revaluation movements £m 133.9 6.8 26.0 – 166.7 2006 Movement in fair value of interest rate swaps £m 20.2 1.4 1.9 – 23.5 2006 Profit on disposal £m 2.1 2.7 6.3 (0.3) 10.8 Freehold investment property assets £m Leasehold investment property assets £m Sub-total investment property assets £m Long leasehold owner occupied building £m Freehold trading property asset £m 204.9 (5.8) 272.1 2.0 – (5.1) 25.9 – 494.0 38.4 70.6 13.0 60.9 – (1.0) (14.1) – 113.4 – – – – (96.1) 0.1 – 17.4 – – – – – – (0.7) – 318.3 (5.8) 272.1 2.0 – (101.2) 26.0 – 511.4 38.4 70.6 13.0 60.9 – (1.0) (14.8) – 13.8 – – – (0.1) – – 2.3 16.0 – – – – (0.1) – – (0.3) 93.7 – 0.7 – – – – – 94.4 – – 1.5 – – – – – Total property assets £m 425.8 (5.8) 272.8 2.0 (0.1) (101.2) 26.0 2.3 621.8 38.4 70.6 14.5 60.9 (0.1) (1.0) (14.8) (0.3) 790.0 As at 30 December 2007 661.8 16.7 678.5 15.6 95.9 The owner-occupied building represents the Group’s head office, which was independently valued at 30 December 2007. The historical cost of the owner-occupied building, which is a long leasehold land and building, after depreciation is £12.9 million (2006: £13.0 million). At 30 December 2007 the gross carrying value of the owner occupied building is £15.6 million (2006: £16.0 million) and the accumulated depreciation is £0.6 million (2006: £0.5 million). The lease has more than 50 years remaining. The Group has pledged land and buildings having a carrying amount of £787.5 million (2006: £621.8 million) to secure banking facilities granted to the Group. This includes amounts relating to trading properties of £95.9 million (2006: £94.4 million). Capital & Regional Annual Report 2007 57 Notes to the accounts continued For the year ended 30 December 2007 13 Property assets continued 13b Property assets Group properties Plus: head leases treated as finance leases Less: unamortised tenant incentives Total investment properties Other fixed assets Trading property asset Total wholly-owned property assets Properties held by joint ventures Xscape Milton Keynes Partnership Xscape Castleford Partnership Xscape Braehead Partnership Manchester Evening News Arena Capital Retail Park Partnership Valuer DTZ Debenham Tie Leung CB Richard Ellis Directors’ valuations King Sturge Basis of valuation Fair value Fair value Fair value Fair value DTZ Debenham Tie Leung n/a Fair value Historic cost DTZ Debenham Tie Leung DTZ Debenham Tie Leung DTZ Debenham Tie Leung CB Richard Ellis King Sturge Fair value Fair value Fair value Fair value Fair value Plus: head leases treated as finance leases Less: unamortised tenant incentives Total investment properties held by joint ventures Properties held by associates The Mall Limited Partnership The Junction Limited Partnership X-Leisure Limited Partnership Plus: head leases treated as finance leases Less: unamortised tenant incentives DTZ Debenham Tie Leung King Sturge Jones Lang LaSalle Fair value Fair value Fair value 2007 Valuation £m 2006 Valuation £m Note 13a 13a 13a 13a 18e 492.3 169.9 0.2 16.7 679.1 – (0.6) 678.5 15.6 95.9 790.0 – – 79.6 64.0 28.9 172.5 3.3 (8.2) 167.6 402.5 – 0.2 109.8 512.5 – (1.1) 511.4 16.0 94.4 621.8 109.5 73.8 78.8 66.5 – 328.6 3.5 (11.4) 320.7 3,015.7 1,223.0 947.1 5,185.8 124.9 (57.7) 3,125.0 1,590.0 807.0 5,522.0 89.0 (43.9) Total investment properties held by associates 18c 5,253.0 5,567.1 The fair value of the Group’s investment and owner occupied properties at 30 December 2007 has been arrived at on the basis of a valuation carried out at that date by independent qualified professional valuers working for DTZ Debenham Tie Leung, Chartered Surveyors, CB Richard Ellis Limited, Chartered Surveyors, Jones Lang LaSalle, Chartered Surveyors and King Sturge, Chartered Surveyors. These independent valuers are not connected with the Group. The valuation, which conforms to International Valuation Standards, was arrived at by reference to market evidence of transaction prices for similar properties. 58 Capital & Regional Annual Report 2007 13 Property assets continued 13c Profit on sale of properties and investments Profit on sale of investment property Profit/(loss) on sale of units in joint ventures and associates Other writedowns, impairments and release of provisions 14 Goodwill As at 30 December 2006 and 30 December 2007 Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m – 2.6 (0.8) 1.8 6.1 (0.8) 1.0 6.3 £m 12.2 The goodwill carried in the Group balance sheet relates to the acquisition of the MWB fund management business, by CRPM, in 2003, which included MWB’s 13.29% interest in Leisure Fund 1, 5.72% interest in Leisure Fund IIa and 7.09% interest in Leisure Fund IIb. This goodwill is tested annually for impairment or more frequently if there are indications that the goodwill might be impaired. Impairment is tested by discounting the expected cash flows generated by the leisure division of CRPM over the life of the property management contract, which is coterminous with the life of the X-Leisure Fund. The expected life of the property management contract assumes that the life of the X-Leisure Fund is extended to 31 December 2023. The rate used to discount the expected cash flows is 8.5% which is considered to be the Groups weighted average cost of capital. Management fees receivable, as well as both fixed and variable administration costs, are assumed to grow by 2% per annum. No account is taken of any future performance fees apart from where there is an expectation of performance fees being repaid in the next two years. Capital & Regional Annual Report 2007 59 Notes to the accounts continued For the year ended 30 December 2007 15 Other non-current assets 15a Plant and equipment Cost or valuation As at 31 December Additions Disposals As at 30 December Depreciation As at 31 December Provided for the year Released on disposal As at 30 December Carrying amounts: As at 30 December 15b Investments Cost or valuation As at 31 December Increase in fair value Disposals As at 30 December Plant and equipment 2007 £m Plant and equipment 2006 £m 3.1 0.9 (0.1) 3.9 2.1 0.5 (0.2) 2.4 1.5 2.3 0.8 – 3.1 1.8 0.3 – 2.1 1.0 Investments 2007 £m Investments 2006 £m 0.2 0.2 (0.1) 0.3 0.2 – – 0.2 The investments comprise of the following: 4.5% Treasury Stock 2007 £nil (2006: £150,000). £241,200 (2006: £50,055) being the fair value of units in the Paddington Central III Unit Trust. £10,000 (2006: £10,000) – representing the fair value of a 49.99% interest in Best Park Investments Limited acquired in 2006. Capital & Regional treats this as an investment, rather than as an associate, as it does not exercise any significant influence or control over the entity. 60 Capital & Regional Annual Report 2007 16 Non-current receivables Prepayments and accrued income Amounts owed by joint ventures 17 Current receivables Trade receivables Amounts owed by joint ventures Amounts owed by associates Other receivables Fair value of interest rate swaps Prepayments and accrued income Total current receivables Tax recoverable 18 Associates and joint ventures 18a Share of results Associates Joint ventures 30 December 2007 Total £m 30 December 2006 Total £m 1.1 6.1 7.2 – – – 30 December 2007 Total £m 30 December 2006 Total £m 3.3 0.1 6.2 2.3 1.9 6.1 19.9 1.6 21.5 4.2 0.8 66.2 8.4 3.4 4.9 87.9 1.1 89.0 Note 18b, c 18d, e Year to 30 December 2007 £m Year to 30 December 2006 £m (118.1) (1.1) (119.2) 153.4 11.2 164.6 Capital & Regional Annual Report 2007 61 Notes to the accounts continued For the year ended 30 December 2007 18 Associates and joint ventures continued 18b Investment in associates At the beginning of the year Investment in X-Leisure Fund Disposal of Mall units Dividends and capital distributions received Share of results At the end of the year 18c Analysis of investment in associates Income statement (100%) Revenue Property expenses Management expenses Net rents Net interest payable Contribution Performance fees C&R accounting policy adjustment2 (Loss)/gain on revaluation of investment properties (Loss)/profit on sale of investment properties Fair value of interest rate swaps (Loss)/profit before and after tax (100%) Balance sheet (100%) Investment property Current assets Current liabilities Non-current liabilities Net assets (100%) C&R interest at year end C&R interest at start of year C&R average interest during the year Group share of Revenue Net rents Net interest payable Contribution Performance fees C&R accounting policy adjustment2 (Loss)/gain on revaluation of investment properties (Loss)/profit on sale of investment properties Fair value of interest rate swaps (Loss)/profit for the year Investment property Current assets Current liabilities Non-current liabilities 30 December 2007 £m 30 December 2006 £m Note 685.4 53.9 – (21.8) (118.1) 599.4 583.7 – (30.7) (21.0) 153.4 685.4 18a, c 18c The Mall LP £m The Junction LP £m X-Leisure1 LP £m Note Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m 5 5 13b 2b 2b 2b 2b 2a 182.5 (33.2) (16.0) 133.3 (81.0) 52.3 5.8 43.4 (257.5) (0.1) (11.5) (167.6) 57.0 (2.6) (9.1) 45.3 (36.2) 9.1 7.4 15.4 (299.8) (16.2) (6.6) (290.7) 52.0 (6.2) (6.4) 39.4 (26.6) 12.8 (6.5) 6.5 (16.6) – (2.3) (6.1) 291.5 (42.0) (31.5) 218.0 (143.8) 74.2 6.7 65.3 (573.9) (16.3) (20.4) (464.4) 275.5 (42.5) (30.9) 202.1 (127.5) 74.6 (84.4) – 559.3 10.7 86.3 646.5 3,111.3 178.6 (179.0) (1,690.8) 1,196.5 90.2 (36.5) (646.0) 945.2 42.5 (42.7) (483.3) 5,253.0 311.3 (258.2) (2,820.1) 5,567.1 293.8 (262.0) (2,665.6) 1,420.1 604.2 461.7 2,486.0 2,933.3 24.24% 24.24% 24.24% 27.32% 27.32% 27.32% 19.39% 10.59% 18.77% 44.2 32.3 (19.6) 12.7 1.4 10.5 (59.3) – (2.8) (37.5) 754.2 43.2 (43.4) (409.8) 344.2 (0.3) 343.9 15.7 12.5 (9.5) 3.0 2.0 4.2 (82.0) (2.7) (1.8) (77.3) 326.9 24.6 (9.9) (176.5) 165.1 0.9 166.0 9.9 7.5 (5.1) 2.4 (1.2) 1.2 (5.2) – (0.5) (3.3) 183.3 8.2 (8.3) (93.7) 89.5 – 89.5 69.8 52.3 (34.2) 18.1 2.2 15.9 (146.5) (2.7) (5.1) (118.1) 1,264.4 76.0 (61.6) (680.0) 598.8 0.6 599.4 64.5 47.0 (29.7) 17.3 (20.1) – 133.9 2.1 20.2 153.4 1,286.8 68.0 (58.8) (611.2) 684.8 0.6 685.4 Associate net assets Unrealised profit on sale of property to associate Group share of associate net assets 18b 1 X-Leisure is accounted for as an associate as Capital & Regional has significant influence arising from its membership of the General Partner Board. The X-Leisure results have been adjusted, to conform to Group accounting policies, to include the sale of Star City which did not complete until after the prior year end. 2 The results of the three associates above have been adjusted to ensure the consistency of accounting in relation to the estimated repayment of performance fees between the Group and its associates. 62 Capital & Regional Annual Report 2007 18 Associates and joint ventures continued 18d Investment in joint ventures At the beginning of the year Net assets disposed of on sale of Xscape Milton Keynes and Xscape Castleford to X-Leisure Fund Investment in joint ventures Dividends and capital distributions receivable Share of results 30 December 2007 £m 30 December 2006 £m Note 67.6 (51.3) 3.3 (6.5) (1.1) 12.0 49.8 – 8.1 (1.5) 11.2 67.6 18a, e 18e At end of the year 18e Analysis of investment in joint ventures Income statement (100%) Revenue Property expenses Management expenses Net rents Net interest payable Contribution (Loss)/gain on revaluation of investment properties Income and fair value movements on financial assets Fair value of interest rate swaps (Loss)/profit before and after tax (100%) Balance sheet (100%) Investment property Current property assets Current assets Other financial assets Current liabilities Non-current liabilities Net assets (100%) C&R interest at year end C&R interest at start of year C&R average interest during the year Group share of Revenue Net rents Net interest payable Contribution (Loss)/gain on revaluation of investment properties Income and fair value movements on financial assets Fair value of interest rate swaps (Loss)/profit before and after tax Investment property Current property assets Current assets Other financial assets Current liabilities Non-current liabilities Group share of joint venture net assets 18d Xscape Braehead Partnership3 £m Manchester Arena £m Note Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m Others1,2 £m 13b 2b 2b 2b 2b 4.0 (0.7) (0.2) 3.1 (3.8) (0.7) (5.7) – (0.4) (6.8) 71.4 – 13.3 – (8.0) (67.0) 9.7 5.3 (1.2) – 4.1 (3.1) 1.0 (2.5) – (0.3) (1.8) 67.3 – 4.5 – (5.3) (47.5) 19.0 1.5 (0.6) (0.1) 0.8 (0.7) 0.1 0.1 4.8 – 5.0 28.9 – 9.7 0.4 (9.8) (26.4) 2.8 50.00% 50.00% 50.00% 30.00% 50-66.67% 30.00% 50-66.67% 30.00% 50-66.67% 2.0 1.5 (1.9) (0.4) (2.9) – (0.2) (3.5) 35.7 – 6.7 – (4.0) (33.5) 4.9 1.6 1.2 (0.9) 0.3 (0.8) – (0.1) (0.6) 20.2 – 1.4 – (1.6) (14.3) 5.7 0.9 0.4 (0.4) – 0.6 2.4 – 3.0 14.4 – 4.8 0.2 (4.9) (13.1) 1.4 10.8 (2.5) (0.3) 8.0 (7.6) 0.4 (8.1) 4.8 (0.7) (3.6) 167.6 – 27.5 0.4 (23.1) (140.9) 31.5 4.5 3.1 (3.2) (0.1) (3.1) 2.4 (0.3) (1.1) 70.3 – 12.9 0.2 (10.5) (60.9) 12.0 Capital & Regional Annual Report 2007 13.2 (2.8) (0.3) 10.1 (8.8) 1.3 13.8 5.5 2.9 23.5 320.7 0.5 42.9 – (29.6) (198.0) 136.5 6.9 5.2 (4.9) 0.3 6.8 2.7 1.4 11.2 158.3 0.3 21.5 – (16.1) (96.4) 67.6 63 Notes to the accounts continued For the year ended 30 December 2007 18 Associates and joint ventures continued 1 Principally the other joint ventures are at Glasgow Fort with British Land plc (C&R share 50%) and at Cardiff, but also includes the results of Xscape Milton Keynes and Xscape Castleford up to the date of sale to the X-Leisure Fund (23 February 2007). 2 Since the date of sale in 2004 of its interest in Glasgow Fort the Group has received a total of £8.4 million further profits from its remaining interest in the joint venture. Further profits are potentially receivable and are largely dependent upon planning consent being obtained for future phases of the development and the letting of units at above target rents. We have also given certain rental guarantees for a five year period and have made provision for the amounts which we expect to pay in respect of these. We have estimated our share of the fair value of the right to receive these future profits at 30 December 2007 at £0.2 million. The value reflects our assessment of the considerable uncertainty surrounding the receipt of further amounts and the fact that there is no ready market for such assets. In accordance with current accounting standards we have recognised this right as a financial asset in our 30 December 2007 balance sheet. In prior years we have disclosed the right as a contingent asset. We estimate that the value of the asset at 30 December 2006 would have been £1.2 million. The effect of this accounting change in our 2007 financial statements is not considered material to our prior year results. 3 The Braehead centre was opened in April 2006 but problems were encountered with the cinema’s ceiling, which have required significant repair work. The cinema opened in October 2007. Some of the costs associated with the additional repair works are being sought from the main contractors and the possibility of claiming other costs from the arising delay is also being pursued. 19 Cash and cash equivalents Cash at bank Security deposits held in rent accounts Analysis by currency Sterling Euro 20 Current payables Bank loans – secured Trade payables Accruals and deferred income Payable to joint ventures and associates Other payables Other taxation and social security 21 Non-current payables Other payables Minority interest classified as a liability Accruals and deferred income 64 Capital & Regional Annual Report 2007 30 December 2007 £m 30 December 2006 £m 36.5 0.6 37.1 34.1 1.4 35.5 30 December 2007 £m 30 December 2006 £m 22.0 15.1 37.1 15.4 20.1 35.5 Note 23a 30 December 2007 £m 30 December 2006 £m 0.2 3.6 32.6 42.3 14.9 8.8 102.4 0.2 10.2 30.0 2.3 12.0 14.7 69.4 Note 22 30 December 2007 £m 30 December 2006 £m 2.0 13.0 2.5 17.5 0.8 9.3 22.7 32.8 22 Minority interest The minority interest, arising from the Group’s German operations, is classified as a liability. Under the terms of the contract the minority has a put option to sell their share back to the Group typically after five years from acquisition. 30 December 2007 Total £m 30 December 2006 Total £m Note As at 31 December 2006 at closing rate Exchange movement As at 31 December 2006 Financing income Dividend received Arising on acquisition As at 30 December 23a Borrowings 7 32 21 Note Bank loans £m 30 December 2007 Total £m CULS £m Bank loans £m Unsecured Secured Fixed and swapped bank loans Variable rate bank loans Total borrowings before costs Less unamortised issue costs Total borrowings after costs Analysis of total borrowings after costs Current Non-current Total borrowings after costs 60.8 522.6 41.4 624.8 (2.2) 622.6 0.2 622.4 622.6 23 b,d,e 20,23b – – – – – – – – 60.8 17.0 522.6 41.4 624.8 (2.2) 622.6 0.2 622.4 622.6 382.5 59.6 459.1 (2.1) 457.0 0.2 456.8 457.0 Security for secured borrowings as at 30 December 2007 is provided by charges on property. 10.1 (0.8) 9.3 1.9 (1.4) 3.2 13.0 CULS £m 1.3 – – 1.3 – 1.3 – 1.3 1.3 4.1 – 4.1 2.6 (0.7) 3.3 9.3 30 December 2006 Total £m 18.3 382.5 59.6 460.4 (2.1) 458.3 0.2 458.1 458.3 23b Maturity After five years From two to five years From one to two years Due after more than one year Current 23c Undrawn committed facilities Expiring within one year Expiring between one and two years Expiring after more than two years Note 23a 23 a,d,e Bank loans £m 159.8 444.6 20.2 624.6 0.2 624.8 30 December 2007 £m 30 December 2006 £m CULS £m – – – – – – 159.8 444.6 20.2 624.6 0.2 624.8 38.3 270.9 151.0 460.2 0.2 460.4 30 December 2007 £m 30 December 2006 £m – – 135.2 135.2 – 2.3 118.5 120.8 65 Capital & Regional Annual Report 2007 Notes to the accounts continued For the year ended 30 December 2007 23d Interest rate and currency profile 2007 Sterling Euro 2006 Sterling Euro 23e Rates at which interest is charged on borrowings Up to 5% 5% to 6% Over 6% Variable rates Note 23 a,b,e Note 23 a,b,e % 85 100 % 66 100 90 Fixed and swapped rate borrowings £m Floating rate borrowings £m 30 December 2007 Total £m 228.3 355.1 583.4 41.4 – 41.4 269.7 355.1 624.8 Fixed and swapped rate borrowings £m Floating rate borrowings £m 30 December 2006 Total £m 118.3 282.5 400.8 59.6 – 59.6 177.9 282.5 460.4 Years 2 5 Years 2 5 4 30 December 2007 £m 30 December 2006 £m Note 213.4 277.7 92.3 583.4 41.4 624.8 188.0 211.5 1.3 400.8 59.6 460.4 23 a,b,d Floating rate borrowings bear interest based on three month LIBOR. 24 Convertible Subordinated Unsecured Loan Stock In 1996 the Company issued £26 million of Convertible Unsecured Loan Stock ("CULS"). Under IFRS these are accounted for as part debt and part equity. Interest is charged on the debt at an effective rate of 11.25%, being the prevailing market interest rate for similar non-convertible debt at the date of issue of the CULS, of which 6.75% is paid as a coupon and the balance rolled up in to the value of the debt. Since 1996 all of the CULS have either been converted or bought back in the market by the Group. At 30 December 2007 and at the date of this report, CULS with a nominal value of £nil (2006: £1.7 million) remained. The balance sheet contains the following balances relating to CULS: Nominal value of CULS Equity component (net of deferred tax) Deferred tax liability Net interest Liability component at balance sheet date 30 December 2007 £m 30 December 2006 £m Note – – – – – – 1.7 (0.5) (0.1) 1.1 0.2 1.3 23 a,b The CULS were convertible by the holders of the stock into 51.42 (2006: 51.42) ordinary shares per £100 nominal value CULS in any of the years 1997 to 2015 inclusive, representing a conversion price of 194p (2006: 194p) per ordinary share. The Company had the right to redeem at par the CULS in any year from 2006 to 2016. The CULS were unsecured and were subordinated to all other forms of unsecured debt but ranked in priority to the holders of the ordinary shares in the Company. 66 Capital & Regional Annual Report 2007 25 Financial instruments and risk management Exposure to credit, interest rate and currency risks arise in the normal course of the Group’s business. Derivative financial instruments are used to manage exposure to fluctuations in foreign currency exchange rates and interest rates but are not employed for speculative purposes. The Group’s risk management policies and practices are as follows: Debt management The Group normally raises bank debt on a floating rate basis and fixes a substantial portion of the interest payments by entering into interest rate swaps. Borrowings are arranged to ensure an appropriate maturity profile and to maintain short term liquidity. Short-term funding is raised principally through syndicated revolving credit facilities from a range of banks and financial institutions. The Group is exposed to fair value risk from its fixed rate debt and interest rate risk from its floating rate debt and cash. Interest rate management Interest rate swaps are used to alter the interest rate basis of the Group’s debt, allowing changes from fixed to floating rates or vice versa. Clear guidelines exist for the Group’s ratio of fixed to floating rate debt and management regularly reviews the interest rate profile against these guidelines. The Group has interest rate swaps of £460 million (2006: £281 million) maturing within the next five years. Under these swaps the Company pays interest at a fixed rate of 4.76% (2006: 4.84%) and receives interest at variable rates linked to LIBOR. At 30 December 2007, the fair value of these swaps was an asset of £1.9 million (2006: £3.4 million). The Group does not hedge account its interest rate swaps and states them at fair value with changes in fair value included in the income statement. Cash management Cash levels are monitored to ensure sufficient resources are available to meet the Group’s requirements. Short-term money market deposits are used to manage liquidity whilst maximising the rate of return on cash resources, giving due consideration to risk. Credit risk The Group’s principal financial assets are bank and cash balances, short-term deposits, trade and other receivables and investments. The Group’s credit risk is primarily attributable to its trade and other receivables. These amounts are presented net of all allowances for doubtful receivables, and allowances for impairment are made where appropriate. The credit risk on short-term deposits and derivative financial instruments is limited because the counterparties are banks with high credit ratings assigned by international credit-rating agencies. The Group has no significant concentration of credit risk, with exposure spread over a large number of counterparties and tenants. Foreign exchange risk The Group uses net investment hedging to hedge its exposure to the Euro and its German operations. The Group has entered into a foreign exchange forward contract to hedge its German net assets. Effective interest rates and financial maturity analysis In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and shows a maturity analysis of individual elements. 2007 Fixed and swapped bank loans Variable rate bank loans Interest rate swaps (floating) CULS 2006 Fixed and swapped bank loans Variable rate bank loans Interest rate swaps (floating) CULS Effective interest rate % Note 4.76 5.94 – 11.25 24 23 a,b,d,e Effective interest rate % Note 4.84 6.16 – 11.25 24 23 a,b,d,e Total £m 583.4 41.4 – – 624.8 Total £m 399.5 59.6 – 1.3 460.4 Less than one year £m One to two years £m Two to five years £m – 0.2 – – 0.2 12.0 8.2 – – 20.2 444.6 – – – 444.6 Less than one year £m One to two years £m Two to five years £m – 0.2 – – 0.2 92.0 59.0 – – 151.0 270.5 0.4 – – 270.9 Capital & Regional Annual Report 2007 2007 More than five years £m 126.8 33.0 – – 159.8 2006 More than five years £m 37.0 – – 1.3 38.3 67 Notes to the accounts continued For the year ended 30 December 2007 25 Financial instruments and risk management continued The following table indicates the dates of contractual repricing of the Group’s fixed and swapped bank loans. Fixed and swapped bank loans 2007 2006 Total £m 583.4 399.5 Less than one year £m 81.5 – One to two years £m – 75.0 Two to five years £m 419.6 270.5 More than five years £m 82.3 54.0 The bank loans except for the £61 million (2006: £17 million) working capital facility are secured on specific properties owned by the Group. Fair values of financial instruments The fair values of borrowings together with their carrying amounts in the balance sheet are as follows: Financial liabilities not at a fair value through profit or loss CULS On balance sheet euro denominated fixed rate loans On balance sheet sterling denominated loans On balance sheet euro denominated swaps Total on balance sheet financial liabilities Group share of associates (our share) Group share of joint ventures (our share) Total borrowings Financial derivatives at fair value through profit or loss Interest rate euro swaps (our share) Interest rate sterling swaps (our share) Foreign exchange contract Notional principal £m 2007 Book value £m 2007 Fair value £m 2006 Book value £m 2006 Fair value £m – 129.0 269.7 226.1 624.8 683.1 54.8 – 124.6 269.7 226.1 620.4 683.1 54.8 1.3 118.6 176.7 163.8 460.4 597.8 95.7 1.6 115.5 176.7 163.8 457.6 597.8 95.7 1,362.7 1,358.3 1,153.9 1,151.1 208.9 808.1 84.3 3.2 8.6 – 3.2 8.6 – 1.2 15.8 – 1.2 15.8 – The fair value of the Group’s long-term borrowings have been estimated on the basis of quoted market prices. The fair value of the Group’s outstanding interest rate swaps have been estimated by calculating the present value of future cash flows, using market discount rates. Details of the Group’s cash and deposits are set out in note 19. Their fair values and those of other financial assets and liabilities equate to their book values. All other financial assets and liabilities are non interest bearing and their fair value equals their book value. 68 Capital & Regional Annual Report 2007 26 Called up share capital Ordinary shares of 10p each At beginning of year Repurchase and cancellation of shares Issued on exercise of share options Issued on conversion of CULS At end of year Ordinary shares of 10p each Number of shares issued and fully paid 2007 Number 2006 Number Nominal value of shares issued and fully paid 2007 £000 2006 £000 72,388,723 71,000,465 (1,442,598) – 163,151 50,000 1,225,107 52,838 71,048,963 72,388,723 7,239 (144) 5 5 7,105 7,100 – 16 123 7,239 Authorised 2007 Number 2006 Number 150,000,000 150,000,000 Share Options The options to subscribe for new ordinary shares of 10p each under the share option schemes that were outstanding at 30 December 2007 are as follows: Period within which options are exercisable: 15 May 2001 to 15 May 2008 22 May 2001 to 22 May 2008 23 February 2002 to 23 February 2009 22 February 2003 to 22 February 2010 13 September 2003 to 13 September 2010 30 December 2007 Number of shares Subscription price 30 December 2006 Number of shares Subscription price 289,500 10,470 40,000 – 100,000 439,970 279.5p 286.5p 191.5p 201.5p 211.5p 289,500 10,470 40,000 – 150,000 489,970 279.5p 286.5p 191.5p 201.5p 211.5p During the year 50,000 share options were exercised (2006:163,151), with a weighted average exercise price of £2.115 (2006: £2.22). The weighted average share price at exercise was £15.34 (2006: £8.13). No options expired or were forfeited during the year (2006: nil). The weighted average fair value of the outstanding share options was £2.56 (2006: £2.52). Long-Term Incentive Plan Outstanding LTIP awards 2002 awards 2003 awards 2004 awards 2005 awards 2006 awards 2007 awards Opening Awarded Exercised Lapsed Closing Number of shares 79,459 498,750 466,335 333,854 267,785 – – – – – – 200,794 (79,459) (462,500) (417,335) – – – – (36,250) (49,000) – – – – – – 333,854 267,785 200,794 1,646,183 200,794 (959,294) (85,250) 802,433 At 30 December 2007, 904,905 (2006: 1,322,240) shares were held by an Employee Share Ownership Trust (“ESOT”), to enable the Group to meet the above outstanding LTIP shares awarded. The market value of these shares was £3,547,228 (2006: £20,388,940). The rights to receive dividends on these shares has been waived. The weighted average fair value of the LTIP awards at grant was £10.98 (2006: £6.52). Capital & Regional Annual Report 2007 69 Notes to the accounts continued For the year ended 30 December 2007 26 Called up share capital continued ESOT shareholding At 31 December Purchased in year Exercised/vested in year At 30 December Number of shares 2007 Number of shares 2006 1,322,240 – (417,335) 1,244,771 619,428 (541,959) 904,905 1,322,240 In calculating the charge in the income statement for the LTIP award the following key assumptions were used: 1. 50% Total return which vests in line with historic out performance and low staff turnover 2. 50% Total shareholder return which was derived by using the normal distribution of performance relative to the FTSE real estate index. Calculation inputs are shown in the following table: 1st quartile 2nd quartile 3rd quartile 4th quartile Total 27 Reserves Probability 11 39 39 11 Vesting % – – 0 – 50 50 Share premium account £m Revaluation reserve £m Other reserves £m Capital redemption reserve £m Own shares held £m As at 31 December 2005 Exchange differences Shares issued at premium Revaluation of owner-occupied property Purchase of own shares Arising on CULS conversion/repurchase Amortisation and other movement Credit in respect of LTIP charge Amortisation of cost of own shares Dividends paid Profit for the year As at 31 December 2006 Exchange differences Shares issued at premium Share buy back and cancellation Revaluation of owner-occupied property Arising on CULS conversion Amortisation of IFRS 1 reserve Credit in respect of LTIP charge Amortisation of cost of own shares Dividends paid (Loss) for the year As at 30 December 2007 216.9 – 0.3 – – 2.3 – – – – – 219.5 – 0.2 – – – – – – – – 219.7 0.4 – – 2.3 – – – – – – – 2.7 – – – (0.3) – – – – – – 2.4 11.2 (0.7) – – – (0.8) (0.1) – – – – 9.6 2.0 – – – (0.6) (0.1) – – – – 10.9 4.3 – – – – – – – – – – 4.3 – – 0.1 – – – – – – – 4.4 70 Capital & Regional Annual Report 2007 Value % – – 12.0 5.0 17.0 Total £m 700.6 (0.7) 0.3 2.3 (8.3) 1.5 (0.1) 2.1 – (14.1) 222.3 905.9 2.0 0.2 (17.1) (0.3) (9.0) (0.1) 0.2 – (19.1) (166.8) 695.9 Retained earnings £m 469.2 – – – – – – 2.1 (2.8) (14.1) 222.3 676.7 – – (17.2) – (8.4) – 0.2 1.8 (19.1) (166.8) (1.4) – – – (8.3) – – – 2.8 – – (6.9) – – – – – – – (1.8) – – (8.7) 467.2 28 Other reserves As at 31 December 2005 Amortisation Arising on CULS conversion Exchange differences As at 31 December 2006 Amortisation Arising on CULS conversion Exchange differences As at 30 December 2007 CULS equity reserve1 £m 1.4 – (0.8) – 0.6 – (0.6) – – Acquisition reserve2 £m IFRS reserve3 £m Foreign currency reserve £m Net investment hedging reserve £m 9.5 – – – 9.5 – – – 9.5 0.3 (0.1) – – 0.2 (0.1) – – 0.1 – – – (0.7) (0.7) – – 7.6 6.9 – – – – – – – (5.6) (5.6) Total £m 11.2 (0.1) (0.8) (0.7) 9.6 (0.1) (0.6) 2.0 10.9 1 CULS equity reserve – CULS are regarded as compound instruments, consisting of a liability component and an equity component. At the date of issue the fair value of the liability component is estimated using the prevailing market interest rate for similar non-convertible debt. The difference between the proceeds of the issue of the convertible loan notes and the fair value assigned to the liability component, representing the option to convert the liability into equity of the Group is included in equity. 2 The acquisition reserve relates to the acquisition of the remaining 50% of Morrison Merlin in 2005. Prior to the 2005 acquisition Morrison Merlin was a joint venture in which Capital & Regional had a 50% interest. The acquisition reserve arose from the difference between the fair value of the Company’s existing 50% interest and the carrying value of that interest at the date of acquisition of the outstanding 50%. The reserve which will remain in the balance sheet until Morrison Merlin is sold. 3 IFRS reserve relates to the requirements of IFRS 1. Where cash flow hedge accounting was being applied under a previous GAAP, IFRS 1 requires reserves are debited with the fair value of hedging derivatives at the date of transition for the Group to IFRS (31 December 2004). The entire gain or loss has been taken to equity and will be recycled to the income statement when the hedged transaction impacts profit or loss or as soon as the hedged transaction is no longer expected to occur. As the hedged transactions are still expected to occur, amounts remain in the reserve. 29 Reconciliation of net cash generated from operations (Loss)/profit on ordinary activities before financing Adjusted for: Share of profit in joint ventures and associates (Loss)/gain on revaluation of investment properties (Profit)/loss on sale of trading and development properties Profit on sale of investments Depreciation of other fixed assets Amortisation of short leasehold properties Amortisation of tenant incentives Profit on sale of investment properties Decrease/(increase) in receivables Increase in payables Unrealised loss on exchange Non-cash movement relating to the LTIP Net cash generated from operations Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m (130.9) 274.5 119.2 14.8 (0.2) (1.5) 0.5 0.1 0.7 (0.1) 58.4 2.6 (1.2) 0.2 62.6 (164.6) (26.0) 1.5 – 0.3 0.1 (0.9) (6.0) (3.3) 6.9 4.9 2.1 89.5 Capital & Regional Annual Report 2007 71 Notes to the accounts continued For the year ended 30 December 2007 30 Net assets per share The European Public Real Estate Association (“EPRA”) has issued recommended bases for the calculation of certain net asset per share information and this is shown in the following note. Basic Own shares held Fair value of fixed rate loans (net of tax) Fair value of trading properties Dilutive share options Triple net diluted net assets per share Exclude fair value of derivatives not designated as financial instruments (net of tax) Exclude fair value of fixed rate loans (net of tax) Exclude deferred tax on unrealised gains and capital allowances EPRA diluted net assets per share 31 Return on equity Total recognised income and expense attributable to equity shareholders Opening equity shareholders’ funds Return on equity 30 December 2007 Number of shares m Net assets per share £ 30 December 2006 Net assets per share £ 71.1 (0.9) – – 0.4 70.6 – – – 70.6 9.89 12.61 10.04 12.72 10.08 12.75 Net assets £m 703.0 – 3.2 1.6 1.1 708.9 (8.5) (3.2) 14.7 711.9 30 December 2007 Total £m 30 December 2006 Total £m (165.1) 913.1 (18.1)% 223.9 707.7 31.6% 32 Acquisitions During the year the Group acquired, at different dates, the issued share capital of the following entities for a combined cash consideration of £39.4 million. Entity name Lauchhammer KG Kreuztal KG Hameln KG Taufkirchen II KG Landmark Limited All of the above are property investment entities. Date of acquisition % of share capital acquired 15 March 2007 30 April 2007 30 May 2007 3 September 2007 12 January 2007 85.4% 79.8% 85.4% 85.4% 100.0% 72 Capital & Regional Annual Report 2007 32 Acquisitions continued Fair value of assets acquired Investment properties Debtors Cash and cash equivalents Current liabilities Non-current liabilities Net assets acquired Fair value of consideration Cash Repayment of non current liabilities Minority interest Aggregate book values at acquisition £m Note Fair value adjustments £m Fair value acquired £m 36.6 0.3 1.0 (5.0) (31.2) 1.7 24.3 – – – – 24.3 22 60.9 0.3 1.0 (5.0) (31.2) 26.0 39.4 (16.6) 3.2 26.0 Set out below are the aggregated results of all the entities acquired from the dates of acquisition to 30 December 2007. Other Group results for Aggregate results from date of Total results for the Group for acquisition to the year ended the year ended 30 December 30 December 30 December 2007 2007 2007 £m £m £m Revenue per consolidated income statement Profit/(loss) before tax Taxation expense Profit/(loss) after tax 2.1 0.4 – 0.4 84.7 86.8 (167.4) 0.2 (167.0) 0.2 (167.2) (166.8) If the acquisitions above had been completed on the first day of the financial year, Group revenues for the year would have been increased by £0.9 million to £87.7 million and Group loss attributable to equity holders of the parent company would have been decreased by £0.2m to £166.6 million. Capital & Regional Annual Report 2007 73 Notes to the accounts continued For the year ended 30 December 2007 33 Disposals On 23 February 2007 the Group disposed of its 50% interest in Xscape Milton Keynes Partnership and its 66.67% interest in Xscape Castleford Partnership. The net assets of the two Partnerships at the date of disposal and at 30 December 2006 were as follows: Investment property Trade receivables Bank balance and cash Trade payables Non-current payables Attributed goodwill Gain on disposal Total consideration – 100% Group share Satisfied by: Cash Units in X-Leisure Fund Total consideration Net inflow arising on disposal: Cash consideration Cash and cash equivalents disposed of 34 Operating lease arrangements Xscape Milton Keynes Partnership £m Xscape Castleford Partnership £m 23 February 2007 £m 30 December 2006 £m 116.3 0.5 0.6 (1.3) (46.8) 76.0 2.2 0.5 (2.3) (51.1) 69.3 25.3 177.0 9.5 3.0 (12.3) (92.3) – 84.9 192.3 2.7 1.1 (3.6) (97.9) – 94.6 – 94.6 34.6 16.8 51.4 – 53.9 53.9 – 1.1 1.1 The Group as lessee At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows: Within one year In the second to fifth years inclusive After five years Land and buildings 2007 £m 2006 £m Other operating leases 2006 2007 £m £m 0.1 0.2 6.0 6.3 – 0.2 6.1 6.3 2.4 9.1 47.2 58.7 2.4 9.7 50.7 62.8 There were no contingent rents (2006: £nil). During the year the Group made sublease payments of £42,000 (2006:£30,000) and incurred lease payments recognised as an expense of £0.5 million (2006: £0.4 million) Operating lease payments represent rentals payable by the Group for certain of its office properties and equipment. Leases are negotiated for an average of 119 years (2006: 122 years) and rentals are fixed for an average of four years (2006: four years). 74 Capital & Regional Annual Report 2007 34 Operating lease arrangements continued The Group as lessor The Group leases out all of its investment properties under operating leases for average lease terms of 12 years (2006: 13 years) to expiry. The future aggregate minimum rentals receivable under non-cancellable operating leases are as follows: Unexpired average lease term Years 10.2 12.6 17.6 8.7 8.1 100% figures Mall Junction X-Leisure Total associates Joint ventures Germany FIX UK Other wholly owned Total wholly owned Total 35 Capital commitments Less than one year £m Between two to five years £m Between six to ten years £m 173.3 56.3 50.7 280.3 3.2 30.4 9.1 7.2 46.7 555.0 223.4 195.5 973.9 17.2 109.0 35.8 27.7 172.5 405.9 234.1 231.2 871.2 21.2 76.5 26.5 33.5 136.5 Between 11 to 15 years £m 135.0 170.7 214.2 519.9 19.1 33.4 10.3 24.2 67.9 Between 16 to 20 years £m 79.8 62.6 102.4 244.8 14.5 11.4 4.5 5.1 21.0 After 20 years £m 30 December 2007 Total £m 30 December 2006 Total £m 444.0 10.8 46.7 501.5 23.0 1.5 0.5 1.8 3.8 1,793.0 757.9 840.7 1,881.9 835.7 676.0 3,391.6 3,393.6 98.2 262.2 86.7 99.5 448.4 218.9 248.4 35.1 102.1 385.6 330.2 1,163.6 1,028.9 606.9 280.3 528.3 3,938.2 3,998.1 As at 30 December 2007 the Group had capital commitments of £10 million (2006: £13.6 million), relating to the acquisition of two trade parks by FIX UK. As at 30 December 2006 the Group’s share of capital commitments of joint ventures and associates was £14.3 million (2006: £24.2 million). This comprised £11.8 million related to the joint venture at Cardiff and £2.5 million related to the Junction. On 22 January 2008 the X-Leisure Fund exchanged on a conditional contract to purchase land in Bournemouth. 36 Contingent liabilities CRPM’s property management agreements provide that the amount of negative performance fees in any year is limited to the amount paid for the previous two years. The Fund and the Group are jointly seeking clarification on how this limit is applied. On present forecasts and an alternative interpretation of the agreement, CRPM could be exposed to a further £17 million over and above the amount already provided in these accounts. After offsetting the benefit C&R gets as an investor in the Funds and the reduction in management incentives, the net impact would be £6.7 million or 9.5p per share. The Group has given certain guarantees that relate to interest shortfalls and cost overruns in connection with certain subsidiaries and both the joint ventures at Cardiff and Braehead. The fair value of these guarantees is £1.2 million. 37 Events after the balance sheet date On 6 March 2008 the Group sold 80% of the units it owned in the T3 Jersey Property Unit Trust for approximately £35 million gross. The transaction has removed £180 million of investment property and £120 million of debt from the Group’s balance sheet, although it remains exposed to 20% of this amount as a co-investor. Capital & Regional will asset manage the portfolio jointly with Paradigm Real Estate Managers and have a director on the General Partner Board. On 10 March 2008 the Group announced the departure of the current Chief Executive Officer (CEO) Martin Barber and the appointment of a new CEO Hugh Scott-Barrett with effect from 1 April 2008. Details of Martin Barber’s termination agreement are disclosed in the directors’ remuneration report on page 30. On 20 March 2008 the Junction Fund completed on the sale of Great Western Retail Park for £58.5 million. Capital & Regional Annual Report 2007 75 Notes to the accounts continued For the year ended 30 December 2007 38 Related party transactions Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint ventures and associates are disclosed below. During the year, Group companies entered into the following transactions with related parties who are not members of the Group. CRPM Associates The Mall Limited Partnership The Junction Limited Partnership X-Leisure Limited Joint ventures Xscape Milton Keynes Partnership Xscape Castleford Partnership Xscape Braehead Partnership SNO!zone Limited and SNO!zone Braehead limited Joint ventures Xscape Milton Keynes Partnership Xscape Castleford Partnership Xscape Braehead Partnership Management and performance fees receivable from/ (payable to) related parties 2006 £m 2007 £m (22.5) (10.9) 7.0 – – 0.1 50.8 23.1 17.1 0.1 0.1 0.2 Amounts owed by/(to) related parties 2006 £m 37.9 16.1 11.6 – – – 2007 £m (34.4) (0.2) 2.1 – – – Rents payable to related parties 2007 £m 0.7 0.6 0.7 2006 £m 0.7 0.6 0.5 Amounts owed to related parties 2006 2007 £m £m – – – – – – SNO!zone Limited includes both ski slopes at Milton Keynes and Castleford. All rents payable by SNO!zone are payable to the relevant Xscape Partnership. On 23 February 2007 the Group sold its 50% ownership of Xscape Milton Keynes Partnership and 66.67% ownership of Xscape Castleford Partnership to the X-Leisure Fund in exchange for a further 29.1 million units in the X-Leisure Fund. At the date of sale and at 30 December 2006 the Group had interests of 20.5% and 10.6% respectively in the X-Leisure Fund. At 30 December 2007 the Group had loans outstanding to Xscape Braehead of £6.1 million (2006: £1.6 million) and to Capital Retail Park Partnership of £1.5 million (2006: £nil). During 2007 the Group purchased IT and communication equipment from Redstone plc, on normal commercial terms. Alan Coppin was appointed as a director of Redstone plc in June 2006. All the above transactions occurred at normal commercial rates. As per IAS 24 key personnel are considered to be the Executive Directors as they are the persons having the authority and responsibility for planning, directing and controlling the activities of the Group. Their remuneration is detailed below. Short-term employment benefits Post employment benefits Other long-term benefits1 Termination benefits Share-based payments2 Year to 30 December 2007 Total £m Year to 30 December 2006 Total £m 1.5 0.2 (0.9) 0.2 0.1 1.1 3.3 0.2 1.8 – 1.5 6.8 1 Other long-term benefits include those amounts relating to the CAP that were awarded to the directors in 2007 as well as those amounts awarded to the directors in 2006 that are expected to be clawed back in line with the claw back of the 2006 performance fees (as per note 5). 2 Share-based payments include those amounts awarded to the directors relating to the LTIP. In 2007, the non-market vesting conditions were not satisfied and hence the Group has reversed the cumulative expense recognised in 2006 in accordance with the requirements of IFRS 2. 76 Capital & Regional Annual Report 2007 Independent auditors’ report to the members of Capital & Regional plc – Group We have audited the Group financial statements of Capital & Regional plc for the year ended 30 December 2007 which comprise the consolidated income statement, the consolidated balance sheet, the consolidated cash flow statement, the consolidated statement of recognised income and expense, the reconciliation of movement in equity shareholders funds and the related notes 1 to 38. These Group financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the directors’ remuneration report that is described as having been audited. We have reported separately on the parent company financial statements of Capital & Regional plc for the year ended 30 December 2007. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report, the directors’ remuneration report and the Group financial statements in accordance with applicable law and International Financial Reporting Standards (IFRS) as adopted by the European Union are set out in the statement of directors’ responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group financial statements give a true and fair view, whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and whether the part of the directors’ remuneration report described as having been audited has been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the directors’ report is consistent with the Group financial statements. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding director’s remuneration and other transactions is not disclosed. We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the annual report as described in the contents section and consider whether it is consistent with the audited Group financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any further information outside the annual report. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements and the part of the directors’ remuneration report to be audited. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements and the part of the directors’ remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements and the part of the directors’ remuneration report to be audited. Opinion In our opinion: • The Group financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of the Group’s affairs as at 30 December 2007 and of its loss for the year then ended. • The Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. • The part of the directors’ remuneration report described as having been audited has been properly prepared in accordance with the Companies Act 1985. • The information given in the directors’ report is consistent with the Group financial statements. Separate opinion in relation to IFRS As explained in Note 1 to the Group financial statements, the Group in addition to complying with its legal obligation to comply with IFRS as adopted by the European Union, has also complied with the IFRS as issued by the International Accounting Standards Board. In our opinion the Group financial statements give a true and fair view, in accordance with IFRS, of the state of the Group’s affairs as at 30 December 2007 and of its loss for the year then ended. Deloitte & Touche LLP Chartered Accountants and Registered Auditors London, United Kingdom 10 April 2008 Capital & Regional Annual Report 2007 77 Independent auditors’ report to the members of Capital & Regional plc – Company We have audited the parent company financial statements of Capital & Regional plc for the year ended 30 December 2007 which comprise the balance sheet and the related notes A to I. These parent company financial statements have been prepared under the accounting policies set out therein. We have reported separately on the Group financial statements of Capital & Regional plc for the year ended 30 December 2007 and on the information in the directors’ remuneration report that is described as having been audited. This report is made solely to the Company’s members, as a body, in accordance with section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the annual report and the parent company financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the statement of directors’ responsibilities. Our responsibility is to audit the parent company financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the parent company financial statements give a true and fair view and whether the parent company financial statements have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the directors’ report is consistent with the parent company financial statements. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed. We read the other information contained in the annual report as described in the contents section and consider whether it is consistent with the audited parent company financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the parent company financial statements. Our responsibilities do not extend to any further information outside the annual report. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the parent company financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the parent company financial statements, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the parent company financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the parent company financial statements. Opinion In our opinion: • The parent company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company’s affairs as at 30 December 2007. • The parent company financial statements have been properly prepared in accordance with the Companies Act 1985. • The information given in the directors’ report is consistent with the parent company financial statements. Deloitte & Touche LLP Chartered Accountants and Registered Auditors London, United Kingdom 10 April 2008 78 Capital & Regional Annual Report 2007 Company balance sheet Prepared in accordance with UK GAAP As at 30 December 2007 Fixed assets Investments Current assets Debtors Cash and deposits Creditors – amounts falling due within one year Trade and other creditors Short-term bank loans and overdrafts Net current liabilities Creditors – amounts falling due in more than one year Bank loans CULS Net assets Capital and reserves Called-up share capital Share premium account CULS equity reserve Capital redemption reserve Retained earnings Shareholders’ funds These financial statements were approved by the Board of Directors on 9 April 2008. W Sunnucks Group Finance Director 10 April 2008 Notes 2007 £m 2006 £m C D E F F G G G G 845.6 787.0 143.3 0.1 143.4 (251.6) (15.1) (266.7) (123.3) (8.2) – (8.2) 275.0 0.4 275.4 (285.2) (8.9) (294.1) (18.7) (8.4) (1.3) (9.7) 714.1 758.6 7.1 219.7 – 4.3 483.0 714.1 7.2 219.5 0.6 4.3 527.0 758.6 Capital & Regional Annual Report 2007 79 Notes to the Company accounts For the year ended 30 December 2007 A Accounting policies Although the Group consolidated accounts are prepared under IFRS, the Capital & Regional plc company accounts presented in this section are prepared under UK GAAP. The main accounting policies have been applied correctly in the current and prior year. B Profit for the year As permitted by section 230 of the Companies Act 1985, the profit and loss account of the Company is not presented as part of these financial statements. The profit for the year attributable to equity shareholders dealt with in the financial statements of the Company was £0.6 million (2006: £464.7 million). The Company had no direct employees during the year (2006: nil). C Investments As at 31 December 2006 Additions Loan guarantees Impairment of investments As at 30 December 2007 2007 £m 787.0 80.1 1.2 (22.7) 845.6 Investments are stated at cost less provision for impairment. A list of principal subsidiaries and joint venture undertakings is given in note I. D Debtors Amounts owed by subsidiary entities Amounts owed by associates and joint ventures Prepayments and accrued income 2007 £m 137.0 6.2 0.1 143.3 2006 £m 273.4 0.7 0.9 275.0 80 Capital & Regional Annual Report 2007 E Creditors – amounts falling due within one year Amounts owed to subsidiaries Taxation Guarantees Other payables Accruals and deferred income F Creditors – amounts falling due in greater than one year After five years From two to five years Due after more than one year 2007 £m 248.9 0.2 1.2 0.8 0.5 251.6 2007 Total £m – 8.2 8.2 2006 £m 283.6 0.1 – 1.1 0.4 285.2 2006 £m 1.3 8.4 9.7 Bank loans £m – 8.2 8.2 CULS £m – – – Details of the Group’s borrowings are given in note 23. The Company’s borrowings are all secured and comprise sterling denominated bank loans and CULS. G Reserves As at 31 December 2006 Premium on issue of shares Shares bought back and cancelled Arising on conversion of CULS Dividends paid Retained profit for the year As at 31 December 2007 H Fair value of financial liabilities Non-current borrowings Current borrowings Total borrowings Share capital £m 7.2 – (0.1) – – – 7.1 Share premium account £m 219.5 0.2 – – – – 219.7 CULS reserve £m Capital redemption reserve £m 0.6 – – (0.6) – – – 4.3 – – – – – 4.3 Retained earnings £m 527.0 – (17.1) (8.4) (19.1) 0.6 Total £m 758.6 0.2 (17.2) (9.0) (19.1) 0.6 483.0 714.1 2007 Book value £m 2007 Fair value £m 2006 Book value £m 2006 Fair value £m 8.2 16.3 24.5 8.2 16.3 24.5 9.7 9.1 18.8 10.0 9.1 19.1 Capital & Regional Annual Report 2007 81 Notes to the Company accounts continued For the year ended 30 December 2007 I Principal subsidiary, joint venture and associated companies Capital & Regional Property Management Limited2 The Mall Jersey Property Unit Trust3 The Junction Jersey Property Unit Trust3 X-Leisure Jersey Property Unit Trust The Auchinlea Partnership Capital & Regional Abertawe Limited2 Trade Park Unit Trust3 The FIX UK Limited Partnership2 Capital & Regional Hemel Hempstead Limited3 Capital & Regional (Europe LP) Limited3 Capital & Regional (Europe LP 2) Limited3 Capital & Regional (Europe LP 3) Limited3 Capital & Regional (Europe LP 4) Limited3 Capital & Regional (Europe LP 5) Limited3 Capital & Regional Earnings Ltd2 Capital & Regional Income Ltd2 Capital & Regional Holdings Ltd3 Capital & Regional Capital Partner Ltd3 Capital & Regional Overseas Holdings Ltd3 Capital & Regional Units LLP3 Capital & Regional (Jersey) Limited3 Xscape Braehead Partnership2 Manchester Evening News Arena Complex Limited SNO!zone Limited2 SNO!zone (Breahead) Ltd2 Morrison Merlin Limited2 Nature of property business Group effective share of business *Share of voting rights Management Investment Investment Investment Investment Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Investment and management Trading Trading Trading 100% 24.24% 27.32% 19.39% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 30% 100% 100% 100% 100% 24.24%1 27.32%1 19.39%1 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 50%4 100% 100% 100% 1 Capital & Regional is regarded as having significant influence through its membership of and role on the General Partner Board. 2 Incorporated and operates in Great Britain. 3 Incorporated and operates in Jersey. 4 Capital & Regional treats this entity as a joint venture rather than as an associate, despite owning 30%. This is as a result of joint control by means of equal membership of the management committee, which is the main decision making body. This percentage is equivalent to the number of ordinary shares or units held by the Group. * Investment in associates and joint ventures are set out in note 18c and note 18e. The Company has taken advantage of S231(5) and (6) Companies Act 1985 in not listing all of its subsidiary and joint venture undertakings. All of the above principal subsidiaries and joint ventures have been consolidated in the Group financial statements. 82 Capital & Regional Annual Report 2007 Five-year review for the periods 31 December 2003 to 30 December 2007 Balance sheet Property assets Other fixed assets Intangible assets Investment in joint ventures Investment in associates Other current assets/(liabilities) Cash at bank Bank loans greater than one year Convertible Unsecured Loan Stock Other long-term liabilities Net assets Financed by Called up share capital Share premium account Revaluation reserve Other reserves Retained earnings Capital employed Return on equity (%) Return on equity Return on equity before exceptional items (Decrease)/increase in NAV per share + dividend Share price increase/(decrease) + dividend Period end share price Total return Total return Total return before exceptional items Net assets per share (pence) Basic Triple net diluted EPRA diluted Triple net diluted net assets per share growth (%) Gearing (%) Gearing (%) on a see through basis Income statement Group turnover Gross profit Profit/(loss) on ordinary activities before financing Net interest payable Exceptional items Profit on ordinary activities before taxation Taxation Profit after tax Recurring pre tax profit Fully taxed recurring dividend cover (x) Interest cover (x) Earnings per share (pence) Basic Diluted EPRA diluted Dividends per share Dividend cover (x) UK GAAP 31 December 2003 £m UK GAAP 30 December 2004 £m IFRS 30 December 2005 £m IFRS 30 December 2006 £m IFRS 30 December 2007 £m 51.5 12.3 14.5 56.5 372.7 (4.8) 4.5 (110.1) (24.5) (5.5) 367.1 6.3 165.6 145.2 2.5 47.5 367.1 37.6% 37.6% 32.8% 26.0% 403p 101.6 101.6 591p 521p – 32.9% 27.0% 129.0% 39.5 33.0 55.9 (29.6) – 26.3 (6.9) 19.4 – – 1.63 31.4p 27.3p – 9p 3.5 83.0 12.5 12.2 46.7 477.1 8.2 4.4 (117.8) (20.4) (11.4) 494.5 6.4 167.4 247.2 1.1 72.4 494.5 37.0% 39.0% 36.6% 72.1% 695p 136.0 143.2 793p 710p – 36.3% 22.0% 126.0% 62.4 55.4 68.8 (34.5) (8.2) 26.1 (5.9) 20.2 16.6 – 1.63 32.2p 28.4p – 14p 2.2 425.8 0.7 12.2 49.8 583.7 21.7 40.1 (395.7) (3.0) (27.6) 707.7 7.1 216.9 0.4 14.1 469.2 707.7 40.5% 40.5% 40.8% 25.0% 868p 203.1 203.1 997p 985p 1006p 38.7% 50.2% 126.0% 94.2 83.5 216.9 (18.2) – 198.7 4.0 202.7 23.1 1.25 1.86 294p 284p 33p 18p 4.8 Capital & Regional Annual Report 2007 621.8 1.2 12.2 67.6 685.4 (5.9) 35.5 (456.8) (1.3) (46.6) 913.1 7.2 219.5 2.7 7.0 676.7 913.1 790.0 9.0 12.2 12.0 599.4 (99.3) 37.1 (622.4) – (35.0) 703.0 7.1 219.7 2.4 6.6 467.2 703.0 31.6% 31.6% 30.8% 81.0% 1542p (18.1)% (18.1)% (14.2)% (73.0)% 392p 223.9 223.9 (165.1) (165.1) 1261p 1272p 1275p 29.1% 50.0% 125.0% 132.1 116.6 274.5 (23.6) – 250.9 (28.6) 222.3 32.3 1.19 2.14 317p 311p 46p 26p 1.8 989p 1,004p 1,008p (21.1)% 88.0% 190.0% 34.0 14.9 (131.0) (36.0) – (167.0) 0.2 (166.8) 32.7 1.19 1.17 (236)p (236)p 1p 27p – 83 Glossary of terms Capital allowances deferred tax provision In accordance with IAS 12, full provision has been made for the deferred tax arising on the benefit of capital allowances claimed to date. However, in the Group’s experience the liabilities in respect of capital allowances provided are unlikely to crystallise in practice and are therefore excluded when arriving at EPRA NAV. CRPM Capital & Regional Property Management Limited is a subsidiary of Capital & Regional plc and earns the management and performance fees arising from Capital & Regional’s interests in the associated Funds and joint ventures. Contribution comprises Capital & Regional’s share of the net rents less net interest arising from Capital & Regional’s interests in its joint ventures, associates and wholly-owned entities, including foreign exchange forward points movements. CULS is the Convertible Subordinated Unsecured Loan Stock. EPRA adjusted fully diluted NAV per share includes the effect of those shares potentially issuable under the CULS or employee share options and excluding own shares held. The unrealised gains and capital allowances deferred tax provision, the fair value of borrowings net of tax and the fair value of trading properties are added back. EPRA earnings per share (EPS) is the profit after taxation excluding gains on asset disposals and revaluations and their related taxation, movements in the fair value of financial instruments, intangible asset movements and the capital allowance effects of IAS 12 where applicable, less taxation arising on these items, divided by the weighted average number of shares in issue during the year excluding own shares held. EPRA triple net, fully diluted NAV per share includes the effect of those shares potentially issuable under the CULS or employee share options and excluding own shares held. NAV is adjusted for the fair value of debt and the fair value of trading properties. Estimated rental value (ERV) is the Group’s external valuers’ opinion as to the open market rent which, on the date of valuation, could reasonably be expected to be obtained on a new letting or rent review of a property. Equivalent yield is a weighted average of the initial yield and reversionary yield and represents the return a property will produce based upon the timing of the income received. In accordance with usual practice, the equivalent yields (as determined by the Group’s external valuers) assume rent received annually in arrears and on gross values including prospective purchasers’ cost. Loan to value (LTV) is the ratio of net debt excluding fair value adjustments for debt and derivatives, to the aggregate value of properties (including the surplus of the open market value over the book value of trading properties), investments in joint ventures and funds and other investments. Like for like (LfL) figures exclude the impact of property purchases and sales on year-to-year comparatives. Market value is an opinion of the best price at which the sale of an interest in the property would complete unconditionally for cash consideration on the date of valuation (as determined by the Group’s external valuers). In accordance with usual practice, the Group’s external valuers report valuations net, after the deduction of the prospective purchaser’s costs, including stamp duty, agent and legal fees. Net assets per share (NAV) are shareholders’ funds divided by the number of shares held by shareholders at the period end, excluding own shares held. Net rent is Capital & Regional’s share, on a see through basis, of the rental income, less property and management costs excluding performance fees, of the Group, its associates and joint ventures. Net interest is Capital & Regional’s share, on a see through basis, of the interest payable less interest receivable of the Group, its associates and joint ventures. Passing rent is the gross rental income excluding the effects of tenant incentives. Property under management (PUM). Valuation of properties for whom CRPM is the asset manager. Return on equity is the total return, including revaluation gains and losses, divided by opening equity plus time weighted additions to share capital, excluding share options exercised, less reductions in share capital. Recurring pre-tax profit is the sum of Contribution plus management fees, SNO!zone income less SNO!zone expenses, less fixed management expenses. Recurring pre-tax profit per share is the recurring pre-tax profit divided by the weighted average number of shares less own shares held. Reversion is the estimated increase in rent at review where the gross rent is below the estimated rental value. ERV growth is the total growth in ERV on properties owned throughout the year including growth due to development. Reversionary percentage is the percentage by which the ERV exceeds the passing rent. Gearing is the Group’s net debt as a percentage of net assets. See through gearing includes our share of non-recourse net debt in the associates and joint ventures. Initial yield is the annualised net rents generated by the portfolio expressed as a percentage of the portfolio valuation, excluding development properties. IPD is Independent Property Databank Ltd, a company that produces an independent benchmark of property returns. Reversionary yield is the anticipated yield, which the initial yield will rise to once the rent reaches the estimated rental value. See through balance sheet is the pro forma proportionately consolidated balance sheet of the Group, its associates and joint ventures. See through income statement is the pro forma proportionately consolidated income statement of the Group, its associates and joint ventures. 84 Capital & Regional Annual Report 2007 Total return is the Group’s total recognised income for the year as set out in the consolidated statement of recognised income and expense (“SORIE”) expressed as a percentage of opening equity shareholders’ funds, excluding CULS reserve. Total shareholder return is the growth in price per share plus dividends per share. Triple net, fully diluted NAV per share includes the dilutive effect of share options and CULS and adjusts all items to market value, including trading properties and fixed rate debt. SIC 15 “Operating lease – incentives” debtors under accounting rules the balance sheet value of lease incentives given to tenants is deducted from property valuation and shown as a debtor. The incentive is amortised through the income statement. Vacancy rate is the estimated rental value of vacant properties expressed as a percentage of the total estimated rental value of the portfolio, excluding development properties. Variable overhead includes discretionary bonuses and the cost of awards to employees made under the LTIP and CAP and is spread over the performance period. Capital & Regional Annual Report 2007 85 Portfolio information Portfolio under management * † Investment properties Trading property The Mall Fund The Junction Fund X-Leisure Fund Other joint ventures Total 30 December 2007 £m 30 December 2006 £m 30 December 2005 £m 30 December 2004 £m 31 December 2003 £m 679 96 3,016 1,223 947 174 6,135 512 94 3,125 1,590 807 329 6,457 320 94 2,338 1,459 702 226 5,139 83 8 2,099 1,010 597 226 4,023 52 8 1,243 757 501 332 2,893 Properties under management above are shown at valuation, except for trading property which is held at cost. * Accounting for head leases that are deemed to be finance leases are not included in the above figures. † The treatment required by IFRS of rent free periods, capital contributions and leasing costs are not included in the above figures. 86 Capital & Regional Annual Report 2007 Fund portfolio information (100% figures) As at December 2007 Physical data Number of core properties Number of lettable units Lettable space – (sq ft – ’000s) Valuation data Properties at market value (£m)* Revaluation in the year (£m) Initial Yield (%) Equivalent yield (%) Geared returns (%) Property level return (%) Reversionary % Loan to value ratio (%) Lease Data Average lease length to break Average lease length to expiry Passing rent of leases expiring in: 2008 2009 2010-2012 ERV of leases expiring in: 2008 2009 2010-2012 Passing rent subject to review in: 2008 2009 2010-2012 ERV of passing rent subject to review in: 2008 2009 2010-2012 Rental Data Passing rent (£m) Estimated rental value (£m per annum) Rental Increase (ERV) % Vacancy rate (%) Like for like net rental income (100%) Current year net rental income Properties owned throughout 2006/2007 Acquisitions Disposals Total net rental income Prior year net rental income Properties owned throughout 2006/2007 Acquisitions Disposals Total net rental income Other Data Unit Price (£1.00 at inception) C&R Share The Mall The Junction X-Leisure 24 2,504 8,661 3,016 (257.5) 4.84% 5.69% (13.20)% (3.30)% 15.66% 51.67% Years 14 223 3,365** 1,223 (299.8) 4.37% 5.32% (34.00)% (16.78)% 11.67% 53.05% Years 9.87 10.23 £m 19.37 5.50 31.02 21.49 6.24 31.62 31.28 15.56 45.39 33.22 18.49 49.54 11.96 12.58 £m 0.48 0.41 1.82 0.49 0.40 2.24 13.57 12.98 26.95 15.24 14.91 29.64 19 365 3,677 947 (16.6) 5.06% 5.78% (3.00)% 2.10% 4.42% 49.10% Years 16.60 17.60 £m 1.51 0.43 1.86 1.61 0.56 1.91 14.60 2.70 13.77 16.95 2.93 17.57 German Portfolio 50 193 5,044 490 9.6 5.99% n/a 16.20% 7.50% n/a 72.46% Years 8.66 8.66 £m 0.52 2.30 3.99 n/a n/a n/a n/a n/a n/a n/a n/a n/a FIX UK 49 241 1,585 170 (24.1) 5.26% 6.26% (32.99)% (9.84)% 14.44% 70.37% Years 8.05 9.70 £m 1.20 0.63 1.05 1.27 0.84 1.19 1.82 1.36 4.33 2.10 1.60 4.80 £174.5m £201.8m 5.50% 5.86% 56.56 66.93 (1.75)% 5.18% 50.67 58.18 2.02% 3.26% 30.75 n/a n/a 1.29% 9.24 11.02 3.26% 8.46% £m 110.7 22.7 – 133.4 107.7 16.8 0.9 125.4 £m 31.5 – 2.5 34.0 29.9 – 8.6 38.5 £m 36.5 7.0 0.2 43.7 39.1 – 0.3 39.4 £m 10.0 14.9 – 24.9 9.8 1.7 – 11.5 £m 3.7 3.9 – 7.6 3.6 0.6 0.1 4.3 £2.0642 £1.8704 £1.6775 24.2% 27.3% 19.4% n/a 91.4% n/a 100.0% * Excludes IFRS adjustments for tenant incentives and head leases treated as finance leases. ** Excludes 35% of Junction West Thurrock Retail Park. Capital & Regional Annual Report 2007 87 Advisers and corporate information Principal valuers DTZ Debenham Tie Leung One Curzon Street London W1A 5PZ King Sturge 7 Stratford Place London WC1C 1ST Jones Lang LaSalle 22 Hanover Square London W1A 2BN CSR advisers Bureau Veritas Great Guildford House 30 Great Guildford Street London SE1 0ES Registered office 10 Lower Grosvenor Place London SW1W 0EN Telephone: +44 (0)20 7932 8000 +44 (0)20 7802 5600 Facsimile: www.capreg.com Registered number 1399411 Auditors Deloitte & Touche LLP Hill House 1 Little New Street London EC4A 3TR Investment bankers Credit Suisse 1 Cabot Square Canary Wharf London E14 4QJ UBS 1 and 2 Finsbury Avenue London EC2M 2PP Principal legal advisors Olswang 90 High Holborn London WC1V 6XX Berwin Leighton Paisner Adelaide House London Bridge London EC4R 9HA Nabarro Lacon House 84 Theobolds Road London WC1X 8RW Maclay Murray & Spens 151 St Vincent Street Glasgow G2 5NJ Principal lending banks Bank of Scotland plc New Uberior House 11 Earl Grey Street Edinburgh EH3 9BN Royal Bank of Scotland plc 135 Bishopsgate London EC2N 3UR Barclays Bank plc Property Team Business Banking 54 Lombard Street London EC3V 9EX 88 Capital & Regional Annual Report 2007 Shareholder information 2008 financial calendar Final dividend record date Annual General Meeting Final dividend payment Interim results Interim dividend 2008 preliminary results announcement 18 April 2008 2 June 2008 13 June 2008 28 August 2008 October/November 2008 March 2009 Final dividend 2007 timetable Record date Last day to receive DRIP mandates Dividend warrants posted Payment date/shares purchased Certificates/purchase statements dispatched CREST accounts credited 18 April 2008 30 May 2008 12 June 2008 13 June 2008 18 June 2008 19 June 2008 Registrars Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone: 0845 607 6838 Designed and produced by 85four Illustrations by Patrick Morgan Printed in England by Cousin Cousin is a carbon neutral company with ISO 14001 accreditation: it recycles all solvents used in the printing process, making any waste ph neutral, and also hold FSC status. Capital & Regional Annual Report 2007 89 Capital & Regional plc 10 Lower Grosvenor Place London SW1W 0EN Telephone: +44 (0)20 7932 8000 Facsimile: +44 (0)20 7802 5600 www.capreg.com C a p i t a l & R e g i o n a l A n n u a l R e p o r t 2 0 0 7 

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