Evolution of our strategy

We have followed a consistent strategy since the early 1990s, investing only in the heart of London’s West End. In the economic recession of 1990-1993, with its severe impact on real estate, we realised that the unique features of the West End provided much greater long term resilience in tenant demand, rental growth and capital values than other locations either in London or the UK generally. This arose from our experience with our then modest holdings in Chinatown, where tenant demand and rental levels were sustained and capital values declined much less than in the wider market during that very challenging period.

Since we adopted this strategy, our progress in delivering sustained rental growth and out-performance in capital values underlines the exceptional qualities of our central locations.

Our wholly owned portfolio, entirely located in the West End, now extends to 12^1⁄2 acres of freeholds, across over 500 buildings, and comprises 1,552,000 sq. ft. of commercial and residential space. Shops, restaurants, bars and leisure space now account for 71% of our current income, whilst offices provide 19% and apartments 10%. The Longmartin joint venture, in which we have a 50% interest, owns a 1.9 acre island site in Covent Garden with 269,000 sq. ft. of mixed use space.

Our cumulative investment in our portfolio, including acquisitions and refurbishment expenditure, amounts to £969 million and is now valued at almost £1.7 billion.

London and the West End

London is one of the world’s principal global cities. It is the largest city in Europe in terms of population and gross domestic product, and is the fifth largest world city measured by GDP. It is widely considered to be the world’s largest financial centre. Importantly for Shaftesbury, London’s unique features and attractions bring more international visitors than any other city in the world.

Within London, the West End offers an unrivalled diversity of attractions. It includes historic sites of world renown and has a unique reputation for culture in its galleries, museums and facilities for performing arts, with 38 theatres in the West End alone. In addition, the number and variety of its shops and restaurants is unmatched by any other city.

The combination of these features attracts huge numbers of domestic and overseas visitors, which are an essential element of the local economy and bring great prosperity to the area. Recent research has indicated that some 200 million visits are made annually to the West End, of which 25% are from overseas and 21% are from the rest of the UK outside the South East. London’s own population of eight million and the twenty million people who are easily able to visit for the day have always been important elements of overall visitor numbers.

Deliberately, all our investments are close to London’s principal visitor attractions, and are concentrated in well-known locations. We work closely with a number of organisations and tenants to support and co-ordinate projects and campaigns which promote London as a visitor destination to a global audience.

We focus on and foster distinctive villages, such as Carnaby and Chinatown. In Covent Garden we have concentrated our investments in the districts of Seven Dials, Coliseum, Opera Quarter and St Martin’s Courtyard (adjacent to Seven Dials). In addition, we are investing in Charlotte Street, a small but long established restaurant district, and more recently in Soho. Here, in Berwick Street and neighbouring streets, rents are modest and we see potential both to create clusters of ownerships and to instigate changes over the longer term.

London has an extensive public transport system, which is essential for the movement of huge numbers of people into and around this populous city, and particularly the West End. All of our villages are located close to the West End’s principal underground railway stations of Oxford Circus, Piccadilly Circus, Tottenham Court Road and Leicester Square.

The transport network in London is now receiving substantial investment to further increase its capacity. Improvements to underground lines are underway to enable trains to run at increased frequencies. Importantly the Crossrail project is now underway, with the initial stages including the rebuilding and extension of the stations at Tottenham Court Road and Bond Street to create major interchanges close to our villages. Once fully operational, Crossrail will increase London’s rail transport capacity by 10% and bring some 1.5 million more residents within 45 minutes of the West End and the City.

Although construction of such major schemes brings lengthy disruption, they are already a catalyst for regeneration and new investment in London and the West End, creating new links and bringing greater capacity and accessibility to the whole of London’s transport network.

Investment and management strategy

Our strategy is to establish clusters of ownerships in areas and in properties which have, or have potential for, predominantly retail and leisure uses. These uses are an essential aspect of the visitor-based local economy and, for the landlord, give rise to minimal costs of obsolescence.

Using our extensive and detailed local knowledge gained over many years, we identify areas which, although well located, are neglected and lack a cohesive strategy for uses and tenant mix to attract footfall and tenant demand. We acquire buildings which are under-utilised or dilapidated. The condition of these areas and buildings is reflected in initial rental levels which we consider are modest but offer the potential for us to create long term growth.

The concentration of our holdings allows us to implement a consistent management strategy across each area and provides us with great flexibility to accommodate a variety of uses appealing to a broad range of occupiers.

We achieve our objective of creating sustainable rental growth from a low base through our innovative management approach of:

• Implementing a comprehensive long term tenant mix strategy for the dominant retail and leisure aspects of the area, creating distinctive destinations to bring greater footfall and prosperity;
• Wherever possible, maximising retail and leisure uses within the lower floors of individual buildings. We introduce alternative uses for upper floors where appropriate, to avoid the cyclicality and obsolescence of offices;
• Restoring the fabric of often dilapidated buildings, respecting their traditional features, but extending their useful lives to meet the requirements of modern occupiers;
• Working with local authorities and community stakeholders to improve the public environment in and around our locations, to create safe and welcoming areas for tenants, their customers and employees, and local residents.

Our knowledge of the West End and our locations has been accumulated over many years. We take a consistent and long term view in the management of our holdings. In our experience our holistic approach to fostering and advancing all aspects of the character of our villages enhances their appeal, bringing greater footfall and demand from potential tenants.

All our investments are within a short walk of our office, so we are always close by to respond quickly to opportunities and problems. We have regular and open contact with our tenants, the local authorities and stakeholders in the local community which provides us with important insights into their needs and how best to tailor our plans and work together to achieve our shared goals.

Sustainability

Wherever possible we seek to preserve the fabric of existing buildings in order to extend their useful lives and improve their efficiency. We believe this approach minimises the environmental impact of our business.

All our buildings are in Conservation Areas and many are listed, reflecting their collective grouping as well as their special architectural and historic features. The average age of our buildings is over 150 years and some have parts which date back to the seventeenth century. The historic nature of our buildings, and the long established street patterns in our locations, most of which were laid out by the early eighteenth century, combine to give our areas a lively and cosmopolitan atmosphere. We encourage a wide variety of suitable uses to ensure the economic viability of our buildings is improved and sustained.

Our experience is that traditional London terraced buildings, which form the majority of our portfolio, offer much greater flexibility than more modern properties. Our refurbishment projects improve buildings to meet the requirements of today’s occupiers, introducing contemporary uses and enhanced environmental performance.

Community engagement

We work closely with Westminster City Council and Camden Council, within whose jurisdictions all our properties are located, to improve the public realm in and around our villages. We promote and contribute to the costs of up-grading streets, pedestrianisation and improving street lighting and public safety. In our experience, by focussing on the needs of pedestrians, the schemes which we support bring greater footfall and security. They increase the time visitors spend in our villages, benefitting the local community as a whole and bringing greater prosperity to our commercial tenants.

We recognise the importance of working with other stakeholders in the local community to support both charities based in our areas and initiatives associated with social issues, community projects and the arts.

Details of our sustainability and community engagement policies and activities are set out in Corporate responsibility.

Risks associated with our strategy

Our investments are concentrated in the centre of London’s West End, so our prosperity and prospects are inextricably linked to and dependent upon this small geographic area, its local economy, visitor numbers and the policies of the authorities which administer it.

The key risks identified by the Board inherent in property investment generally and specific to our strategy are set out in greater detail in principal risks and uncertainties.

Our portfolio

Virtually all our buildings have a mix of uses. Lower floors contain our most valuable uses of retail, restaurant or leisure whilst upper floors are either offices or residential or a combination of both.

Our wholly owned portfolio includes 317 shops extending to 393,000 sq. ft. which provide 37% of our current gross income. The average unexpired term of our shop leases is five years. We have a wide range of shop sizes and rents across the wholly owned portfolio. At 30 September 2011, 75 large shops (i.e. those with a rental income over £100,000 per annum) accounted for approximately 60% of our retail income at that date, whilst 242 smaller units contributed 40%. These smaller shops complement the larger units we have, adding to the mix and variety offered by our villages.

We let our retail accommodation in shell form. Tenants are responsible for fitting out units at their own cost. We usually offer a rent free period during their fit-out and start-up period but make no financial contribution to their costs.

Our shop leases are structured to allow us to manage the mix of retailers within our locations. We do this to foster the identity and character of each area and ensure that our villages respond to changing tastes and spending patterns. As part of this strategy we encourage new retailers and concepts, through a combination of short and flexible leases.

Our wholly owned portfolio includes 212 restaurants, cafes, bars and clubs, totalling 483,000 sq. ft., which provide 34% of our current gross income.

As with our shops, we provide catering units in shell form. Consequently, catering leases are often granted for terms of 25 years as long periods of tenure create an asset in which the tenant is able to invest. It is rare that we are able to secure vacant possession of restaurants or bars. A combination of substantial investment by the tenant and restrictive planning policies for restaurants in the locations we have chosen to invest in make these leases valuable assets for the tenant as well as the landlord in our areas.

When we do secure vacant possession of restaurants there is considerable demand from both experienced and new operators seeking to launch innovative concepts.

Offices within the wholly owned portfolio extend to 412,000 sq. ft. and produce 19% of our current gross income. Offices are an integral part of our mixed use villages but we are conscious both of the relatively small size of our units, the cyclicality of office demand and the inevitable costs of obsolescence borne by us as landlord.

In Carnaby, we have our relatively larger (average size 1,500 sq. ft.), more modern offices, which are occupied mainly by tenants in creative and fashion industries. These businesses are particularly attracted to the area by the concentration of similar businesses, and its proximity to many of their key contacts and customers. In contrast, in Chinatown, our offices are much smaller (average size 600 sq. ft.) but are essential to the local Far Eastern business community.

We have 392 apartments within our wholly owned portfolio, extending to 264,000 sq. ft., which produce 10% of our current gross income. Over many years we have pursued a policy of conversion of our smaller offices to residential, particularly those where it is not viable to refurbish them to standards expected by modern commercial occupiers.

There is good demand for residential accommodation in our villages. In our experience demand for apartments, rents and occupancy levels in our locations are much less cyclical than for offices. We fit out our apartments to a stylish but durable standard, so their repair and renewal costs are usually low. We are confident of continuing good demand and rental growth over the long term.

Other than in special situations, we generally let rather than sell our apartments. Although often we could realise their high capital values by sale, in our view this would inhibit the management flexibility we require to maximise the long term value of our buildings and villages.

Longmartin’s portfolio comprises 23 shops, extending to 69,000 sq. ft., eight restaurants totalling 43,000 sq. ft. and 102,000 sq. ft. of offices. They are located in and around St Martin’s Courtyard, a mixed use scheme which was completed during the year. In addition, Longmartin’s holdings include 75 apartments totalling 55,000 sq. ft.

Portfolio activity during the year

The availability of suitable new investments in our prosperous areas remains limited. There is usually considerable competition when properties are offered in the market from a variety of potential bidders, often financed with substantial equity rather than debt.

During the year, we acquired properties totalling £64.9 million in Covent Garden, Soho, Chinatown and Charlotte Street. Our acquisitions included fourteen restaurants and bars, eleven shops, 11,000 sq. ft. of offices and eighteen apartments.

Capital expenditure on the Group’s portfolio over the year totalled £19.2 million. Of this £12.3 million arose in the wholly owned portfolio and included £4.1 million in connection with our scheme at 36/39 Carnaby Street. Other schemes included extending retail and restaurant space, creation of new apartments, refurbishing offices, and contributions to public realm improvements across our villages.

Our share of Longmartin’s capital expenditure, which this year amounted to £6.9 million, related principally to costs to complete the St Martin’s Courtyard scheme.

Our portfolio is dominated by retail and leisure uses, where we provide space in shell form and the tenant is responsible for the costs of fitting out and obsolescence. Consequently the capital expenditure we bear is modest in relation to the overall size and value of our portfolio. In the wholly owned portfolio, capital expenditure this year amounted to only 0.8% of its Market Value.

Occupancy levels in the wholly owned portfolio have remained high throughout the year and tenant retention has been good. New lettings and renewals of commercial leases totalled £4.9 million this year, reflecting an overall level of activity similar to last year.

The ERV of commercial space in the wholly owned portfolio held for or under refurbishment at the year end amounted to £1.0 million, equivalent to 1.3% of commercial ERV. Of this, £0.5 million related to the 9,000 sq. ft. of offices in our scheme at 36/39 Carnaby Street, which will be completed in December 2011.

Demand for all uses and across all of our locations has been strong throughout the year and remains so. Consequently the level of vacancies has remained low and the total rental value of available space has not exceeded 3% of total commercial ERV.

At the year end the rental value of available vacant commercial space amounted to £2.2 million, representing 2.9% of the ERV of the commercial element of the wholly owned portfolio. The letting of the 9,000 sq. ft. of retail space in our scheme at 36/39 Carnaby Street, which accounted for almost £1.0 million of this total, was completed in November 2011.

At the year end only five of our 392 apartments were vacant and ready to let, reflecting the good level of occupancy we have seen throughout the year. A further 23 units, with an ERV of £0.6 million, were under construction.

Construction of St Martin’s Courtyard in the Longmartin joint venture was completed during the year and the scheme is now virtually fully let. At the year end, only two shops with an ERV of £0.2 million remained to be let within the scheme, of which one was under offer. In adjacent buildings, 10,000 sq. ft. of offices with an ERV of £0.5 million were under refurbishment.

Our wholly owned holdings in covent garden, in the districts of Seven Dials, Coliseum and the Opera Quarter, represent 29% by value of our portfolio. in addition, our 50% interest in the longmartin joint venture’s holdings, centred on st martin’s courtyard, represents 7% by value of our portfolio. Totalling 36%, these interests make Covent Garden our largest investment location.

Our wholly owned portfolio includes 103 shops, 82 restaurants and cafes, 103,000 sq. ft. of offices and 162 apartments.

Covent Garden has an atmosphere distinct from the rest of the West End. Its historic street patterns and buildings and wide mix of uses and attractions, give it an often bohemian feel. It is home to half of the West End’s theatres and also has a large and flourishing residential community. Our strategy is to foster and encourage this diversity and eclectic character.

We have increased our ownership in Covent Garden this year, with purchases totalling £25.4 million. They included four restaurants, four shops together with offices totalling 10,000 sq. ft., where we have identified opportunities to implement changes of use.

The final phase of Longmartin’s St Martin’s Courtyard project was completed in April 2011. The scheme, which is fully let other than two small shops, now has a working and residential population of around 850. Other projects in adjacent buildings are now in hand to refurbish 10,000 sq. ft. of offices, to create a new small shop on Long Acre and to commence a rolling programme of improvements to a block of twelve apartments fronting Shelton Street.

We are working with other owners to strengthen Covent Garden’s appeal as a renowned shopping and leisure destination. We welcome the changes being introduced in and around the Piazza in Covent Garden, which complement our nearby holdings.

Our holdings in Chinatown represent 24% by value of our portfolio. the 68 restaurants we have in this village produce 63% of its current gross income. Chinatown is unique in its concentration of restaurants and its central location, close to Piccadilly Circus and the theatres and cinemas in Shaftesbury Avenue and Leicester Square. Our holdings are at the heart of the West End’s leisure economy which is notable for its bustling late night culture. Restaurateurs are attracted both by the long hours of trading as well as the large numbers of visitors every day of the week. Over 50 years this district has become ever more popular with Far Eastern businesses. Today its restaurants offer cuisine from many regions of China as well as from countries across South East Asia. We actively encourage this diversity as it improves choice and quality. Our shops and offices in Chinatown are almost entirely occupied by East Asian businesses. Many of our apartments are occupied by those who work in the late night economy and who appreciate living close by. Purchases during the year totalled £18.5 million and included five restaurants and a shop. Unusually one of the restaurants was acquired with vacant possession. It was quickly pre-let whilst we were carrying out repairs to this listed building. There are several important projects close to Chinatown which are bringing long term benefits to the area as a whole:

• During the year a major new high quality hotel opened at the junction of Wardour Street and Coventry Street, replacing the vacant former Swiss Centre;
• Leicester Square is undergoing an extensive refurbishment by Westminster City Council at a cost of £15 million. This scheme will enhance this important West End landmark and also provide permanent infrastructure for hosting film premieres;
• In 2012 the Hippodrome, on the corner of Charing Cross Road and Leicester Square will re-open as a major new leisure and entertainment venue.

All of these projects, together with our own plans for improvements to adjacent streets, will greatly enhance the public environment and draw yet more visitors to this important part of West End.

Our holdings across our Soho village, which we have been assembling since 2008, now represent 4% of our portfolio. our investments were initially centred on Berwick Street but we have now widened our interest to include nearby streets.

Berwick Street itself is situated in the heart of Soho and is often referred to as “Soho’s Local High Street”. It attracts good footfall despite a generally dilapidated environment, compounded by empty buildings, and the decline in its once busy market. Ownerships and tenant mix have been fragmented for many years and as a consequence rental levels are low. We aim to contribute to the revival of the street through our management strategies that have been successful elsewhere in the West End.

We have acquired more properties during the year at a cost of £16.6 million including five shops and three restaurants. As our ownership increases throughout Berwick Street we are implementing a programme of refurbishments along with a cohesive strategy to retain and enhance the traditional mix of uses in this area.

The most dilapidated buildings, which are in and close by the southern end of Berwick Street, are mainly in public ownership. We welcome the investment by others in these large buildings and in the adjoining public realm, which needs to be regenerated if the area as a whole is to return to long term prosperity. At the north end of the street the new Crossrail interchange now under construction at Tottenham Court Road, with an entrance on nearby Dean Street, should be a catalyst for regeneration.

Our holdings in Chinatown represent 24% by value of our portfolio. the 68 restaurants we have in this village produce 63% of its current gross income.

Chinatown is unique in its concentration of restaurants and its central location, close to Piccadilly Circus and the theatres and cinemas in Shaftesbury Avenue and Leicester Square. Our holdings are at the heart of the West End’s leisure economy which is notable for its bustling late night culture. Restaurateurs are attracted both by the long hours of trading as well as the large numbers of visitors every day of the week.

Over 50 years this district has become ever more popular with Far Eastern businesses. Today its restaurants offer cuisine from many regions of China as well as from countries across South East Asia. We actively encourage this diversity as it improves choice and quality.

Our shops and offices in Chinatown are almost entirely occupied by East Asian businesses. Many of our apartments are occupied by those who work in the late night economy and who appreciate living close by.

Purchases during the year totalled £18.5 million and included five restaurants and a shop. Unusually one of the restaurants was acquired with vacant possession. It was quickly pre-let whilst we were carrying out repairs to this listed building.

There are several important projects close to Chinatown which are bringing long term benefits to the area as a whole:

• During the year a major new high quality hotel opened at the junction of Wardour Street and Coventry Street, replacing the vacant former Swiss Centre;
• Leicester Square is undergoing an extensive refurbishment by Westminster City Council at a cost of £15 million. This scheme will enhance this important West End landmark and also provide permanent infrastructure for hosting film premieres;
• In 2012 the Hippodrome, on the corner of Charing Cross Road and Leicester Square will re-open as a major new leisure and entertainment venue. All of these projects, together with our own plans for improvements to adjacent streets, will greatly enhance the public environment and draw yet more visitors to this important part of West End.

Future portfolio activity

We continue to pursue acquisitions across all our villages, seeking buildings which already have, or offer the potential for, predominantly retail and restaurant uses. Of particular interest are properties which can add to the restaurant and leisure element of our portfolio. The concentration of our investments often allows us flexibility in maximising the benefits of the valuable and restricted planning consents associated with catering uses. The timing of our acquisitions is always unpredictable and opportunistic.

We regularly review our portfolio to identify commercial properties or apartments which are no longer part of our core strategy and where disposal would not adversely impact the value and long term opportunities in our portfolio.

There is considerable demand for larger retail units and we are progressing a number of schemes, particularly in Carnaby, to meet these requirements. Inevitably there will be some short term loss of income as we secure vacant possession for our schemes.

As we have done for many years, we continue to seek alternative uses for our smaller and poorer quality offices, usually converting many of them to residential accommodation. We have identified schemes which could potentially add a further 90 apartments over the next three years.

We continue to work with Westminster City Council and Camden Council to advance further public realm improvements in and around our villages. Works to improve the eastern part of Ganton Street in Carnaby and Mercer Street, adjacent to St Martin’s Courtyard in Covent Garden, have commenced since the year end. In 2012 new public realm schemes will be delayed to minimise disruption during the period leading up to and during the Olympics. In the current financial climate, local authorities’ ability to fund new schemes may be restricted, requiring a greater contribution from the private sector.

Results

Our EPRA adjusted profit before tax amounted to £29.2 million, compared with £22.3 million in the previous year, an increase of 30.9%. The profit on ordinary activities before taxation reported in the Group Statement of Comprehensive Income amounted to £115.7 million (2010: £171.9 million).

Rents receivable across the Group (adjusted for lease incentives) have increased this year from £65.7 million to £75.4 million, a rise of £9.7 million. Income from acquisitions during the year contributed £1.3 million. In the wholly owned portfolio rents invoiced increased by around 7.5% this year compared with the previous year, after eliminating the impact of property acquisitions and disposals (2010: 3.0% year-on-year increase).

Trading conditions in the West End have remained buoyant so tenant defaults over the year have been minimal, with a charge in the Group Statement of Comprehensive Income for irrecoverable debts of £0.3 million (2010: £0.5 million). The amount of vacant space in our portfolio has remained low throughout the year, reflected in a charge for empty rates of only £0.2 million (2010: £0.2 million).

Our share of the rental income in the Longmartin joint venture has increased this year by £2.1 million to £4.3 million as a result of the completion and substantial letting of the St Martin’s Courtyard scheme during the year. Its income will rise further in the current financial year with the benefit of a full year’s occupancy.

The Group’s property outgoings rose this year by £0.7 million to £8.8 million (2010: £8.1 million). The increase was due in part to the non-recoverable costs associated with St Martin’s Courtyard, which opened to the public in November 2010 and achieved virtually full occupancy in April 2011.

As we have noted in the past, we are bearing a greater proportion of service charge expenditure in respect of smaller offices and shops, as well as from the increasing amount of residential accommodation in our portfolio.

Our management activity often has an impact on the level of non-recoverable property costs. For example:

• We do not capitalise property outgoings or interest incurred during the period when space is held vacant pending the start of our schemes or during the period of works;
• We may increase the marketing expenditure which we bear to promote our villages both to domestic and overseas retailers and visitors at times of pressure on consumer confidence and spending.

Total administration expenses include a charge of £1.6 million (2010: £1.7 million) in respect of equity settled remuneration. This comprises an accounting charge in respect of share options of £1.2 million (2010: £1.3 million) and a charge for employer’s national insurance liability on share awards and share options of £0.4 million (2010: £0.4 million). The provision for annual bonuses has increased this year by £0.8 million to £2.0 million reflecting the Group’s good performance.

Interest payable, including settlements under interest rate swaps, amounted to £27.8 million, compared with £27.2 million in the previous year. Our bank debt fell over the year as a whole by £21.4 million to £434.9 million at 30 September 2011, as expenditure on acquisitions and capital projects for the year of £79.3 million was offset by the net Share Placing proceeds of £99.8 million.

Short term interest rates have remained at unprecedentedly low levels throughout the year. The cost of settlements under our £360.0 million of interest swap contracts amounted to £14.8 million this year, a decrease of £0.3 million compared with last year. Our unhedged floating rate bank debt continues to benefit from these low rates, with a current marginal cost of additional drawings of less than 1.75%.

Net finance costs were covered 2.05 times by operating profit before investment property disposals and valuation movements (2010: 1.8 times). Based on the interest cover covenants and definitions contained in our banking agreements, net interest payable was covered 2.4 times by net property income (2010: 2.1 times), compared with the minimum ratio of 1.5 times we are required to maintain. We comfortably exceed the minimum ratio of net rental income for properties in the REIT group against attributable interest payable of 1.25 times required under REIT legislation.

The current market expectation that interest rates will remain at historically low levels for some time has resulted in an increase in the fair value deficit of our long term interest rate swaps of £24.1 million to £104.6 million at the year end. This non-cash accounting provision, which is excluded in the calculation of our banking covenants, continues to be volatile, decreasing in the first half by £37.4 million, only to rise in the second half by £61.5 million. We can see no commercial benefit at present in terminating any of our interest rate hedges, which would involve crystallising this accounting provision. However we continue to monitor opportunities to restructure our swaps as market sentiment changes.

The tax charge on the EPRA adjusted profit for the year was £0.4 million (2010: £0.1 million) and arises solely in our joint venture. Our 50% interest in Longmartin is outside the Group’s REIT business, so that our share of its results continues to be subject to provisions for corporation and deferred tax.

EPRA adjusted diluted post-tax earnings per share for the current year amounted to 11.9p compared with 9.7p last year, an increase of 22.7%. The unadjusted diluted post-tax earnings per share shown in the Group Statement of Comprehensive Income for the current year amounted to 47.0p compared with 73.0p last year.

The EPRA adjusted net asset value at 30 September 2011 of £1,164.0 million equates to a diluted net asset value of £4.63 per share (2010: £948.4 million equivalent to £4.14 per share), an increase of £215.6 million. Our Share Placing in March 2011 accounted for £99.8 million of the increase in shareholders’ funds during the year, equivalent to approximately £0.01 per share.

Unadjusted shareholders’ funds at the year end shown in the Group Balance Sheet totalled £1,053.7 million, an increase over the year of £190.0 million. The unadjusted diluted net asset value per share amounted to £4.19 (2010: £3.78).

Dividends

Distributions charged in the Group Statement of Changes in Shareholders’ Equity this year amounted to £25.7 million (2010: £22.2 million), or 10.75p per share (2010: 9.75p). There was an increase of 10.7% in the amount declared per share and a 9.9% increase in the number of shares in issue arising from the Share Placing in March 2011, which increased the 2011 Interim Distribution paid in July 2011.

A final dividend in respect of the year ended 30 September 2011 of 5.75p per share, amounting to a distribution of £14.4 million, will be proposed at the 2012 Annual General Meeting. This will result in total distributions in respect of the financial year of £28.2 million.

The interim dividend was paid, and final dividend will be paid, entirely as Property Income Distributions. REIT legislation broadly requires us to distribute a minimum of 90% of net rental income, calculated by reference to tax rather than accounting rules. Our distributions are in excess of this minimum amount. We expect to maintain steady growth in our dividends, fully covered in future by adjusted annual post-tax profits.

Finance

Our strategy is to secure flexible long and medium term debt finance together with non-speculative hedging of the interest rate exposure on a substantial portion of our floating rate debt. This finance strategy is intended to match our funding with our assets which are held for long term investment, and to provide reasonable certainty of finance costs whilst limiting the Group’s exposure to adverse movements in interest rates.

The Board keeps under review the level of current and forecast debt and the Group’s strategies regarding the appropriate levels of debt and equity finance, the maturity profile of loan facilities and interest rate exposure and hedging.

In March 2011 we strengthened our equity base with an issue of shares by way of a Share Placing. We issued 22.7 million shares, equivalent to approximately 9.9% of our issued share capital at the time, at £4.50 per share which produced net proceeds after issue costs of £99.8 million. These new funds, which in the short term have repaid part of our bank debt, provide us with the capacity to continue the expansion of our portfolio.

The nominal value of Debenture and bank borrowings at the year end totalled £495.3 million, a reduction of £21.4 million over the year. Cash outflows during the year on acquisitions amounted to £64.0 million and expenditure on the Group’s portfolio totalled £15.3 million. Revenue operations after net interest payments produced a net cash surplus of £30.1 million, compared with £26.4 million in the previous year. Tax payments totalled £4.6 million (2010: £7.4 million), which included £3.8 million in respect of the final instalments of our 2007 REIT conversion charge.

Gearing at the year end was 43% (2010: 55%), calculated by reference to our EPRA adjusted net asset value referred to above and the nominal rather than book value of our Debenture and net bank debt. The ratio of the nominal value of Debenture and net bank debt to the Market Value of our property assets was 30% (2010: 35%).

Z have sufficient resources to meet our future cash flow commitments with comfortable headroom and we operate well within our banking covenants. Any new prospective commitments, such as property acquisitions, are considered in the light of funding currently available to the Group.

At the year end committed bank facilities totalled £575 million, unchanged over the year, of which £140.7 million was undrawn (2010: £119.3 million). We have £375 million of our facilities maturing in 2016, £125 million in 2020 and £75 million in 2021, giving a weighted average maturity of 6.3 years (2010: 6.6 years). We maintain a regular dialogue with existing and prospective lenders with a view to ensuring our facilities continue to reflect the long term nature of our investment strategy.

The average margin over LIBOR we paid on amounts drawn from our bank facilities at the year end was 0.85%. If we drew all of our facilities in full, the weighted average margin we would pay would be 1.04%. These margins, fixed throughout the term of the facilities, are much lower than would be obtainable for similar arrangements in the current banking environment. Unless the current general scarcity of debt finance abates, we would expect that our margins will increase as we extend or refinance our present arrangements ahead of their contractual maturity.

We have hedging in place on £360.0 million of our £434.3 million of floating rate bank debt, fixed at rates between 4.59% and 5.15% (excluding margin) with a weighted average rate of 4.87%. The hedging contracts have a weighted average maturity of 21.4 years (2010: 22.4 years).

At the year end, reflecting both our hedged and unhedged bank debt, the weighted average cost of bank borrowings including margin was 5.02%, compared with 4.74% at the previous year end. Including our long term Debenture debt, our overall weighted cost of debt at 30 September 2011 was 5.39% (2010: 5.13%). The increase in our average cost of debt reflects the reduction in unhedged floating rate debt resulting from the proceeds of our Share Placing.

At 30 September 2011, the fair value of the Group’s interest rate swaps represented a liability of £104.6 million (2010: £80.5 million). Our strategy of taking long term, fixed rate swaps provides certainty in fixing a substantial part of our debt. However, particularly in the current environment of unprecedentedly low interest rates and the uncertainty in debt markets, it results in great volatility in this non-cash mark-to-market provision.

The deficit arising on the fair value of the Group’s long term Debenture debt, which is not reflected in our results, amounted to £11.4 million. The reduction in the deficit of £2.2 million reflects higher market credit spreads, offset by a market expectation that interest rates will rise more slowly than previously anticipated.

The Group has no legal obligation to crystallise these non-cash fair value deficits by early refinancing of its fixed rate debt or early termination of its interest rate hedges, but may consider doing so where there is a clear economic benefit to the business.

The Board monitors both actual and forecast performance against the financial covenants contained in the Group’s bank facilities and Debenture trust deed. Each of our facilities is secured against designated property assets and in addition each of the lenders, including the Debenture trustee, has a shared floating charge over the assets of the Company and certain of its wholly owned subsidiaries.

The outstanding Debenture stock of £61.0 million is secured by a first charge on property assets, where we must maintain a minimum value of 150% of the stock outstanding, and where the net rental income has to match the coupon of 8.5%. We are comfortably in excess of these covenants based on assets currently charged.

Our banking covenants are structured on a Group-wide basis and are broadly similar for each of our facilities. The financial covenants, together with their status at 30 September 2011, were as shown in the table below.

Based on the results for the year ended 30 September 2011, net property income could fall by approximately £25 million (equivalent to 37% of this year’s Group net property income) before the interest cover covenant is reached. Based on the year end property valuations and debt levels, property values across the Group would have to decline by around 50% before we reach our loan to value or gearing covenant limits. The actual future headroom on covenants will be affected by a number of factors, including future acquisitions, expenditure commitments and valuation movements.

Performance and benchmarking

The table above summarises our performance this year against our chosen benchmarks.

As explained in previous years, we have been unable to identify a published property performance index which relates specifically to a portfolio of mixed use buildings such as ours, or recognises restaurant uses, an increasingly important element of our investment strategy, as a component. We have therefore used for comparison purposes the IPD UK Monthly Indices which track movements across all main commercial property categories throughout the UK on a monthly basis. Shaftesbury is a constituent of the FTSE 350 Super Sector Real Estate Index.

Taking into account acquisitions and capital expenditure during the year, our portfolio grew in value by 7.2% over the year, out-performing our IPD benchmark, which reported general capital growth of 1.7%.

We expect our properties, which have a consistent record of greater stability in values, rising income and rental values and limited obsolescence, will continue to out-perform the wider market over the long term.

Our portfolio recorded a total return of 11.3% for the year, exceeding the total return of 8.7% recorded by our IPD benchmark. The degree of our out-performance of this index reflects the lower yield profile of our property assets.

We recorded a positive total shareholder return for the year ended 30 September 2011 of 10.0% compared with the FTSE 350 Super Sector Real Estate Index which recorded a decline of 0.4%.

Key performance indicators

The key financial objective of the Group is to deliver out- performance over the long term in the growth of its net asset value. Fundamental to this objective is sustained long term rental growth from our property assets and a focus on uses which minimise costs of obsolescence which over time lead to improvement in their capital value.

The Group’s key financial performance indicators measure its portfolio performance, both in terms of capital value and total returns, against the publicly-available IPD UK Monthly Index which, as explained above, tracks movements across all main commercial property categories throughout the UK on a monthly basis. The Group’s performance against this index is set out in the table above.

The rental prospects of the Group’s portfolio are the key driver of long term performance. The key non-financial performance indicators related to rental income growth used within the business measure are:

• the extent to which rents achieved meet or exceed the rental values estimated by the Group’s external valuers at their last valuation and;
• the ability of management to maximise the occupation of the Group’s properties and, where vacancies arise, minimise the time that properties are vacant and not producing income. In the case of properties being refurbished, the void period monitored includes time spent in designing schemes, obtaining planning consents, carrying out physical works and marketing up to the point of completing lettings. For vacant properties which are ready to let, marketing periods are monitored and assessed.

The Board is satisfied that the Group’s performance relating to the achievement of growth in rental income and estimated rental values in the current year has more than met its expectations. This year rents across all uses have throughout the year generally met or exceeded valuers’ estimates. Like-for-like growth in rents receivable of 7.5% has been significantly above the Group’s recent average growth rate.

The amount of vacant space across the portfolio has remained very low throughout the year. Where space has become vacant, void periods have generally remained at acceptable levels although the Group continues to experience delays due to problems beyond its control, for example in the planning process or through the failure of utility companies to meet their service obligations.

The future

Against a background of great uncertainty in financial markets and the wider economy, London’s West End has continued to prosper. Subdued consumer and business confidence apparent elsewhere is not evident in our locations, where we continue to benefit from strong demand for all our uses.

The major events which London will host in 2012 may well bring some short term disruption to the West End but are expected to attract many visitors and will advertise London to a global audience. We are not complacent and we never take the prosperity of the West End for granted. However we remain confident that the enduring appeal of London and its unique features and unrivalled attractions, together with our innovative and enterprising management approach, will ensure our resilient portfolio continues to out-perform in the challenging economic period ahead.

Brian Bickell Chief Executive

30 November 2011

Portfolio analysis