Shaftesbury PLC
Annual Report 2018

Plain-text annual report

S S h h S a h a f f a t t f e e t s e s b s b b u u r u r r y y y A A A n n n n n n u u u a a a l l l R R R e e e p p p o o o r r r t t t 2 2 2 0 0 0 1 1 7 1 8 8 Strategic report Overview Shaftesbury is a real estate investment trust which invests exclusively in the liveliest parts of London’s West End. Our objective is to deliver long-term growth in rental income, capital values and shareholder returns. Focused on restaurants, leisure and retail, our 15-acre portfolio is clustered mainly in Carnaby, Seven Dials and Chinatown, but also includes substantial ownerships in east and west Covent Garden, Soho and Fitzrovia. Strategic report Annual review 42 Portfolio report 50 Acquisitions 51 Financial results 55 Financial management 57 Risk management 61 Viability statement Governance 64 Our people 70 Governance at a glance 74 Corporate governance 80 Nomination committee report 82 Audit committee report 86 Directors’ remuneration report 89 Remuneration at a glance 90 Remuneration policy Annual remuneration 97 report 108 Directors’ report 110 Directors’ responsibilities 111 Independent auditor’s report Financial statements 118 Group statement of comprehensive income 119 Balance sheets 120 Cash flow statements 121 Statements of changes in equity 122 Notes to the financial statements Other information 140 Alternative Performance Measures (APMs) 142 Portfolio analysis 142 Basis of valuation 144 Summary report by the valuers 146 Non-financial information statement 147 Shareholder information 148 Glossary of terms 10 Strategic report Overview 1 Shaftesbury in numbers 2 Chairman’s statement Q&A with the Chief 3 Executive Business model and strategy at a glance Exceptional portfolio in the heart of London's West End Focus on restaurants, leisure and retail 20 Curating distinctive 12 17 21 22 and lively destinations Promoting our destinations Restaurants, cafés and leisure Retail 24 26 Offices 28 Residential 32 Measuring success 34 Sustainability and stakeholders Shaftesbury Annual Report 2018 12345 Strategic report Overview Shaftesbury in numbers 1 Strategic report Overview Our portfolio in the heart of the West End 15 acres and 1.9 acres owned in joint venture 1.9m sq.ft. commercial and residential space4 and 0.3m sq.ft. in joint venture 595restaurants, cafés, pubs and shops4 >200mannual visits to the West End c.700,000 City of Westminster’s working population 100%of portfolio within short walk of an Underground station £3.95bn portfolio valuation1,3 £154.0m estimated rental value2,3 £32.5m reversionary potential2,3 £31.4m lettings, renewals and rent reviews4 Financials 4.6%EPRA vacancy2,4,5 7.6%scheme vacancy4,5 £175.5m profit after tax 58.1p earnings per share 16.8p dividends per share £51.7m EPRA earnings1,2 17.1pEPRA earnings per share1,2 5.8%net asset value return1,2 £9.91 EPRA NAV1,2 22.8% loan to value1,2,3,6 2.6x interest cover1,2,3 1 An alternative performance measure. See page 140 2 See Glossary on page 148 for definition 3 Including our 50% share of the Longmartin joint venture 4 Wholly-owned portfolio 5 % of total ERV 6 Based on net debt People 30employees 60%Gender balance (% female employees) 11 years average length of service Shaftesbury Annual Report 2018 1 11 Strategic report Overview Chairman’s statement Our results this year once again demonstrate the resilient qualities of our portfolio, our strategy and our experienced management. A key ingredient of our success is our transparent and socially- responsible culture, which pervades every aspect of our governance arrangements and how we behave. Reflecting our long investment horizon, decisions are made based on long-term benefits and rewards, rather than being focused on short-term gains. We take a holistic approach both to our business and the areas in which we choose to invest, which benefits all who visit the West End as well as the important local community. We are committed to sustainability in the management of our portfolio of mainly older buildings, extending their economic useful lives through use change and sympathetic refurbishment, as well as minimising the environmental impact of both our activities and those of our occupiers. Our team’s experience and forensic knowledge of our West End locations, and the local investment and occupier market, are invaluable to both the delivery of our strategy and its evolution. Our staff development and succession plans are ensuring we maintain a broad and growing range of skills to address the future needs of the business. On behalf of the Board, I would like to thank the team for their outstanding commitment and contribution to our progress this year. After serving nearly nine years as a non-executive director, Hilary Riva will retire from the Board at the AGM in February 2019. We all thank Hilary for her excellent contribution, counsel and guidance over the past nine years. We expect to appoint a new non-executive director shortly. With the exceptional qualities of our portfolio, the expertise of our team and a strong balance sheet, I am confident we are well placed to navigate the challenges which may lie ahead and take advantage of the opportunities which inevitably will arise. Jonathan Nicholls Chairman 26 November 2018 Over 32 years, we have assembled an impossible-to-replicate portfolio in the heart of London’s West End. Our focus on delivering long-term growth in rental income, achieved with modest capital expenditure, underpins our record of sustained, sector-leading returns to investors. Our approach was honed in the severe property-sector recession of the early 1990s, and the resilience it brings to our business was tested and proven in the global financial downturn of 2007 to 2010. Reflecting the growth in our EPRA earnings1 this year, the Board is pleased to recommend a final dividend of 8.5p, bringing the total dividends for the year to 16.8p, an increase in rate per share of 5.0%. The total distribution for the year will be £51.6 million. Over the past ten years the compound annual growth rate in EPRA earnings1 and dividends per share has been 7.2% and 7.0% respectively. A long-term investment strategy, such as ours, needs to be supported by stable, long-term finances. In December 2017 we raised £260.4 million, net of expenses, through a placing of new equity. This well-supported share issue has ensured we have committed resources to continue to invest in, and take advantage of, opportunities to grow the business, whilst avoiding the risks inherent in excessive debt leverage. The proceeds are now fully deployed or earmarked for investment. Shaftesbury Annual Report 2018 2 Strategic report Overview Q&A with the Chief Executive Brian Bickell answers questions on our performance and activities during the year, the evolution of our business and longer-term challenges and priorities. How has Shaftesbury performed this year? It has been another year of good progress with growth in income, earnings and the value of our portfolio. Our results continue to demonstrate the appeal and qualities of our carefully-curated and iconic destinations, underwritten by the global attraction and exceptional features of London and the West End. Footfall, spending and the demand for space in our locations continues to be largely unaffected by the widely-reported headwinds affecting the national economy and consumer confidence. Profit after tax for the year was £175.5 million. EPRA earnings1 this year have risen by £6.5 million to £51.7 million, which equates to an increase in EPRA earnings per share1 of 5.6% to 17.1 pence. Net property income increased by 6.2% to £93.8 million (2017: £88.3 million) as a result of an increase in rents receivable, reflecting income from acquisitions and like-for like growth of 6.4%, partly offset by an increase in property costs. We have benefited from the first full year of interest savings following debt restructuring in 2016 and 2017, which significantly reduced our blended finance cost. The valuation of our portfolio1,2 now stands at £3.95 billion, reflecting a like-for-like increase of 3.8%, of which 3.0% arose in the first half of the year. In assessing our portfolio, the valuers take into account growing contracted income, prospects for long-term growth in rental values and continuing high levels of occupancy. The portfolio revaluation surplus, together with disposal profits, have added 39 pence to EPRA net asset value per share1, which now stands at £9.91, an increase of 4.1%. Net asset value return1 for the year was 5.8%. What underpins London’s economic resilience and prospects? London is one of the leading global cities. It has the largest economy of any Western European city and contributes almost one quarter of UK GDP. The breadth of its economy encompasses: • a world-leading financial and commercial centre; • a major hub for creative industries, from technology to media; • a globally-recognised location for education and research; • home to world-class visual and performing arts facilities; and • a valuable visitor economy, attracting more international tourists than any city in the western hemisphere as well as huge numbers of local and domestic visitors. 1 An alternative performance measure. See page 140 2 Including our 50% share of the Longmartin joint venture Shaftesbury Annual Report 2018 3 +5.6% EPRA EPS1 £3.95bn Portfolio valuation1 Financial results: pages 51 to 54 Valuation review: pages 42 to 44 Strategic report Overview11Strategic report Overview Q&A with the Chief Executive continued This unique combination of features means London is not solely reliant on the fortunes of the wider UK economy. Although the uncertainty surrounding the implications of Brexit for the UK economy are having an adverse impact on business and consumer confidence, London is much less affected. It continues to attract domestic and international businesses and investment, with medium-term growth projections for London out-performing national forecasts. Why do you focus on the West End? At the heart of the city, the West End draws over 200 million visits annually. Its huge working population provides a regular, daily customer base for its retail, restaurant and leisure businesses. Importantly, throughout the week and particularly around weekends, local, domestic and international visitors arrive in their millions to enjoy its tourist and cultural attractions as well as unrivalled shopping, dining and leisure choices. Together with its residential population, the West End offers a busy, seven- days-a-week trading environment, and a more-affluent customer base, which underpins its prosperity and appeal to businesses. London’s extensive transport infrastructure makes the West End accessible not only to Londoners, but also to the large population in the south east who commute or visit for a day out. The five main Underground stations in the West End currently handle some 225 million passengers annually. The opening of the Elizabeth Line, now expected late next year, will add 10% to London’s transport capacity and will improve the West End’s transport connectivity materially. All our ownerships are within a short walk of the new Tottenham Court Road and Bond Street interchanges, which are forecast to be handling 200 million passengers annually by the mid-2020s. Has leasing activity across the portfolio been affected by UK-wide economic uncertainties? With robust footfall and trading in our locations, occupier demand has been stable throughout the year. We completed leasing transactions with a rental value of £31.4 million and, excluding our larger schemes, EPRA vacancy1,2 over the year has remained in line with our ten-year average. £31.4m leasing transactions The average period taken to let space, measured from the date it becomes available to the completion of a contractual commitment, has increased over the year by 4 weeks to around 2½ months. Potential occupiers have become more cautious, especially where they are contemplating substantial fit-out and rental commitments. This is particularly so where they are exposed to UK-wide consumer spending trends. At our three completed larger schemes, 84.4% of the income is now contracted or under offer. Our mixed use scheme at 57 Broadwick Street, Carnaby, was fully let during the year and we completed the letting of Thomas Neal’s Warehouse, in Seven Dials, in November 2018. At our retail and restaurant scheme at Central Cross, Chinatown, 47% of the income is now contracted and a further 23% is under offer. The ERV of space available or under offer is £1.9 million, representing just 1.3% of total portfolio ERV. Whilst the pace of these lettings has impacted on revenue growth in the year ended 30 September 2018, they will now be making a useful contribution to earnings in the current financial year. 84.4% completed larger scheme income contracted or under offer schemes undertaken extending to 177,200 sq.ft. Are you continuing to invest in improving the portfolio? During the year, schemes to improve our buildings extended to 177,200 sq. ft. Capital expenditure totalled £25.3 million. Having completed the development of the three larger schemes we commenced in 2015, and in response to sustained demand for the space we typically have to offer, over recent months we have taken opportunities to accelerate a number of schemes. Whilst these will temper revenue growth until they become income- producing, they will bring long-term benefits to our portfolio. Shaftesbury Annual Report 2018 4 Leasing and occupancy: pages 45 to 46 Asset management: pages 46 to 47 Why we invest in London’s West End: page 12 Q&A with the Chief Executive continued Have you been able to add to the portfolio this year? We seek to buy buildings which have a predominance of valuable restaurant or retail uses on lower floors already, or where we see potential to achieve this. We focus on high-footfall West End locations, close to our existing holdings, where we can see prospects for long-term rental growth. Our asset management strategy often brings compound benefits to our existing holdings. Ownerships in our locations are fragmented and buildings we seek are likely to be privately, rather than institutionally, owned. Growing macroeconomic uncertainties have not had any discernible impact on the West End investment market during the year or on the availability of assets to buy. Existing owners tend to have a long-term outlook, valuing the security these investments provide, and, in the absence of financial or personal pressures, they remain reluctant to sell. For the same reasons, other investors – domestic and international – are keen and competitive buyers of the limited number of buildings which come to the market. Despite this supply/demand imbalance, we have secured additions to the portfolio totalling £167.8 million. Our largest acquisition was 72 Broadwick Street, in December 2017, for £92.1 million, which has given us control of a 0.5-acre site in the centre of Carnaby. £167.8m acquisitions The forward-purchase of a long-leasehold interest in 90-104 Berwick Street, Soho, which we contracted in August 2017 for £41 million, including costs, has been delayed. The vendor has advised that their redevelopment scheme, which we will acquire once complete, is behind schedule and will not be handed over to us until mid-2019. This strategic acquisition will increase our ownership to around 50% of Berwick Street’s frontages. At year end, the ERV of space held for, or under refurbishment totalled £10.9 million (7.6% of ERV²) and extended to 174,700 sq. ft. In September 2018, we secured vacant possession of 65,300 sq. ft. of space at 72 Broadwick Street, Carnaby. Shortly we will submit a planning application to introduce new uses and reconfigure the building, and currently expect to start our works in summer 2019. How do you ensure the appeal of your iconic West End locations evolves? Creating prosperous environments for our tenants is fundamental to sustained growth in rental income and, in turn, the value of our portfolio. Our long-term strategy focuses on curating distinctive, lively destinations in the West End, attracting footfall and spending to support our retail, restaurant and leisure occupiers. We deliberately focus on an innovative mid-market offer, to appeal to the broadest customer base. Promoting our areas to the widest audience of potential visitors and customers is an essential aspect of our strategy. The environments we create are also important in attracting office occupiers and residents for our apartments. In recent years, we have seen considerable growth in interest and spending on innovative, casual dining and leisure concepts. It is now widely-acknowledged that a varied and interesting food and beverage offer, particularly where there is very high visitor footfall, is a significant attraction in its own right and draws potential customers for retailers. We are the largest single owner of restaurants, cafés and licensed premises in the West End, and their importance as a source of rental income has grown from 28% to 35% of ERV2 over the last 10 years. Our largest cluster of restaurants is in Chinatown, where we have a rolling programme to introduce new food concepts from mainland China and across the Far East. Carnaby’s casual dining and leisure offer, which now accounts for 21% of its income, continues to draw increasing footfall from lunchtime to late evening, throughout the week. How are you adapting to the changing retail environment? With consumer spending patterns, tastes and expectations changing at an ever-faster rate, often heavily influenced by social media, we recognise the importance of ensuring our locations respond to these trends through our choice of occupiers and, where appropriate, changing uses. We seek out, trial and support new concepts, both domestic and international, and have always adopted a leasing strategy which provides flexibility for tenants as well as ourselves. Importantly, rental levels in our busy locations are very competitive compared with nearby streets. Whilst our shops usually have an online presence, we are starting to see internet-based retailers taking physical space in our locations to promote their brand identities. 1 Wholly-owned portfolio 2 % of total ERV Acquisitions: page 50 Restaurants, cafés and leisure: pages 22 to 23 Promoting our destinations: page 21 Retail: pages 24 to 25 Shaftesbury Annual Report 2018 5 Strategic report Overview11Strategic report Overview Q&A with the Chief Executive continued How do you see the investment market and potential for acquisitions changing in the medium term? We do not expect to see an increase in the availability of properties to acquire in the foreseeable future. However, we have a forensic knowledge of the local market and a focus on purchases which meet our strict criteria, based on their potential and benefits they may bring to our extensive holdings over the long term. Together with readily-available finance, this gives us an advantage in a highly-competitive environment. We are always keen to add to our ownerships. However, our main focus is to crystallise the income potential of the buildings we already own, whilst creating opportunities to grow their income-generating potential further. Following last year’s equity placing, how are the Group’s finances positioned? Our financing strategy has always been based on maintaining a mix of equity and external finance, with debt arrangements which we believe are prudent and support our long-term investment and asset management horizons. We monitor gearing levels, taking into account current financial commitments, as well as the need for funding to grow and invest in our portfolio, which often requires us to act quickly when opportunities arise. In light of recent and prospective investment commitments, in December 2017, the Board resolved that it was the appropriate time to raise additional equity to ensure gearing did not increase to a level which would constrain future portfolio activity or increase financing risk. A well-supported equity placing was carried out, issuing new shares on a non pre-emptive basis equivalent to 9.98% of share capital at £9.52, raising £260.4 million, net of expenses. In 2016 and 2017, we took important steps to restructure our debt finance, taking advantage of low long-term interest rates to retire expensive legacy finance and hedging. This initiative was completed in early 2018 with the restructure and extension of our two remaining revolving bank facilities. Our earliest debt maturities are now in 2022 and 2023, with a spread of expiries out to 2035. We are now very well placed to continue our long-term investment strategy, with the capacity to raise additional long-term debt finance when appropriate, without the risk of being hampered by adverse equity market conditions. At the year end, gearing2,3,4 stood at 29.5% and our loan-to-value ratio1,2,3 was 22.8%. Cash and available debt resources stood at £343.5 million, of which £92.7 million is already earmarked for investment. As a result of voting at the 2018 AGM, we currently do not have authority from shareholders to carry out non pre-emptive share issues. Should the need arise, this does not preclude issuing equity on a pre-emptive basis through, for example, a rights issue or open offer. How do you engage with your community? We operate in the heart of the West End. By value, some 84% of our portfolio falls within the jurisdiction of the City of Westminster, with the remainder in the London Borough of Camden. We work with both local authorities across a range of activities. Day-to-day, we augment their management services such as street cleaning and security. Also, we work with neighbouring long-term owners and Business Improvement Districts to help address wider West End issues such as air quality, biodiversity and freight and waste consolidation. We identify and collaborate with the local authorities on projects to improve the public realm around our areas. Schemes this year included a major new public square at Newport Place, Chinatown and the repaving of Earlham Street West in Seven Dials, both of which have improved the streetscapes materially and are already bringing increasing footfall. £260.4m equity placing 2 major public realm schemes £225m bank facilities refinanced 1 An alternative performance measure. See page 140 2 Including our 50% share of the Longmartin joint venture 3 Based on net debt 4 Based on EPRA net assets Shaftesbury Annual Report 2018 6 Sustainability and stakeholders: pages 34 to 39 Public realm improvements: page 72 Financial management: pages 55 to 56 We are based in the community in which we operate and strive to be a responsible, accessible corporate citizen. Our extensive engagement with the local community provides financial support and advice for a wide range of local community groups and charities as well as arts organisations. We hosted 30 organisations at our community partner’s networking breakfast this year, which was addressed by the Leader of Westminster City Council. We have evaluated our community investment, comprising the value of time we devote to community activities and contributions, both in kind and in cash, at £0.9 million this year. Who are the people who work for Shaftesbury? The successful delivery of our strategy is supported by an experienced team, who are committed to ensuring its implementation continues to evolve to meet the challenges and opportunities of change across not only our business, but the local and wider environment in which we operate. We operate our business with a staff of just 30 employees but we are supported by over 200 out-sourced advisors across a wide-range of professional disciplines, as well as contractors and on-site personnel. We have a comprehensive code of standards to which these organisations are required to adhere to, including matters such as sustainability and sourcing of materials, health and safety, London Living Wage commitments, Modern Slavery Act obligations and diversity. Importantly, we benefit not only from the knowledge and experience our external advisors bring, but also their enthusiasm and support for our business and values. What is your outlook for the year ahead and longer term? Uncertainty surrounding our departure from the EU and future trading and other arrangements with the EU27, together with structural changes in traditional national retailing patterns, continue to affect nationwide business confidence and investment, economic growth and consumer spending. However, the global attractions of London and the West End to businesses and huge numbers of local, domestic and international visitors, together with their broad-based economies, create an operating environment which is insulated from the impact of national headwinds and has good long-term growth prospects. Although we are seeing longer letting periods for the largest space we have to offer, general demand continues to be firm, buoyed by the trading conditions our tenants are reporting. Importantly, our ownership clusters enable us to curate distinctive locations and we continue to focus on growing their appeal by offering an ever-evolving experience with a variety of affordable, contemporary retail, restaurant and leisure choices. This approach supports the prosperity of our tenants and sustains demand for the competitively- priced commercial and residential accommodation we offer. Our experienced, enthusiastic team, which brings flair and innovation to the management of our portfolio, coupled with secure finances and underpinned by the dynamism of, and prospects for, London and the West End, have always been, and will continue to be, the foundations of the long-term success of this exceptional business. Brian Bickell Chief Executive 26 November 2018 Gareth Field Passed away June 2018 Aged 54 Our dear colleague Gareth died suddenly on 20 June 2018. Our Financial Controller and IT manager, he joined the Group in October 1987, and was close to completing 31 years’ service. He is greatly missed by all his Shaftesbury colleagues as well as all those who were fortunate to meet him. He will be fondly remembered by all for his love of life, personality, warmth and humour, gregarious nature, loyalty and support, openness and his commitment to Shaftesbury. Gareth was the cornerstone of the Shaftesbury team and a great ambassador for the business and our culture; he embodied the best of us. His love of sport and Wales was second only to that of his family; our thoughts are with his wife Nicki, his children Chris and Annabel, and his mother Carole. We share the pain of their loss. Strategic report Overview Q&A with the Chief Executive continued Shaftesbury Annual Report 2018 7 11 We are committed to supporting our diversity agenda At Shaftesbury, we appreciate the importance of diversity in terms of new ideas, fresh perspectives and a variety of skills it brings to our business. It enhances our reputation as an employer and motivates both staff and the people with whom we work. Diversity is not limited to gender but includes a wide spectrum of attributes and backgrounds. Outside of our workplace, we promote the diversity agenda in a variety of ways. Right: We are sponsors of Pride in London. Across Soho, Carnaby and Seven Dials, many of our occupiers actively supported the festival with one-off events and a range of special deals and products. With this year’s #PrideMatters campaign focused on what Pride means to the community, from celebration to diversity and beyond, we were pleased to welcome back the Pride in London pop-up shop to the heart of Soho, which raised £63,000 for the organisation. Shaftesbury and diversity Freehold A networking group for real estate professionals who identify as LGBT. Founded in 2011, it now has over 1,000 members. Brian Bickell has been a member of its board since 2011. Real Estate Balance We are members of Real Estate Balance, whose mission is to improve gender diversity across the industry, particularly at senior levels. 30% Club We have signed up to this global initiative to encourage improved gender balance on boards to not only encourage better leadership and governance, but also contribute to better all-round performance. International Women’s Day Seven Dials celebrated International Women’s Day in March with a host of activities and special events, including a free live panel discussion. Pathways to Property We support this programme to introduce young people from varying social backgrounds to the real estate sector and its career opportunities. Shaftesbury Annual Report 2018 1 Case Study one Diversity 9 Strategic report Overview Business model and strategy At a glance We own an exceptional portfolio in the heart of London’s West End clustered in popular destinations with a focus on restaurants, leisure and shops Carnaby £1.42bn 297Restaurants, cafés & pubs 35% 298Shops 33% Chinatown £0.84bn Offices 0.5m sq.ft. 20% Soho £0.3bn Fitzrovia £0.15bn 593Apartments 12% Covent Garden £1.01bn St Martin’s Courtyard £0.22bn Portfolio valuation including our 50% share of the Longmartin joint venture % of wholly-owned portfolio ERV See page 14 See page 17 Shaftesbury Annual Report 2018 10 Strategic report Strategic report Overview Overview Business model and strategy At a glance continued Curating distinctive and lively destinations Attracting occupiers Delivering long- term returns Ownership clusters Footfall and spending Growing contracted income and rental potential Forensic knowledge of the West End Tenant selection Management strategy Engagement with local community and stakeholders Improve our buildings and the public realm Promoting our destinations High occupancy Sustained demand Growth in earnings and dividends Long-term growth in portfolio value and total shareholder returns See page 20 See pages 32 and 33 Supported by Experienced management team Prudent financial management Effective governance See pages 39 and 64 to 67 See page 55 See page 70 Shaftesbury Annual Report 2018 11 11Strategic report Overview Exceptional portfolio in the heart of London’s West End Since the early 1990s, we have invested exclusively in the heart of London’s West End, concentrating on iconic, high-footfall locations. BOND STREET R E G E N T S T R E E T Over the years we have identified well-located areas where footfall potential is good but rents are initially low, often because they have suffered from fragmented ownership, lack of investment and the absence of a coherent strategy for uses and tenant mix. We take a long-term view in our investment and management strategies. Establishing ownership clusters enables us to unlock rental and capital value potential whilst compounding the benefits of individual transactions, such as improved tenant quality and higher rental tones, across our adjacent and nearby holdings. This investment strategy was born out of our experience in the property recession of 1990 – 1993, when our then modest holdings in Chinatown saw sustained tenant demand, rental growth and rising cash flow. Capital values declined much less, and recovered more quickly, than the wider London or UK market in that challenging period. We saw similar economic performance in the global financial crisis of 2007 – 2010. Since we adopted this strategy, our portfolio, which now comprises nearly 600 buildings, mostly of domestic size, close to the West End’s world-class visitor attractions, has delivered sustained rental growth and long-term out-performance in capital values and total shareholder returns. The areas in which we invest are long-established, with street patterns generally laid out between 1680 and 1720. Our wholly-owned portfolio is all within Conservation Areas and around 20% of our buildings are listed as being of special architectural interest. Portfolio valuation1 Carnaby 36% Covent Garden 26% Chinatown 21% Soho 7% Fitzrovia 4% Longmartin 6% £3.95bn ERV2 Over 32 years to accumulate and virtually impossible to replicate GREEN PARK £143.7m Restaurants, cafés and leisure 35% Shops 33% Offices 20% Residential 12% 15 acres and 1.9 acres owned in joint venture T E E R T E S G D O O G OX F O R D S T R E E T T O T T E N H A M C O U R T R O A D C H A R I N G C R O S S R O A D R E G E N T STREET Y L D I L A C P I C E U N E AFTESBU RY A V H S L L A L M L A P L L A E M H T ST JAMES’S PARK G A C R E N O L D N A S T R 1 Including our 50% share of the Longmartin joint venture 2 Wholly-owned portfolio Shaftesbury Annual Report 2018 12 T E E R T E S G D O O G T O T T E N H A M C O U Fitzrovia 0.8 acres R T R O A D OX F O R D S T R E E T TOTTENHAM COURT ROAD OXFORD CIRCUS R E G E N T S T R E E T BOND STREET Carnaby 4.7 acres R E G E N T STREET Y L D I L A C P I C GREEN PARK c. 600 buildings clustered in iconic, high footfall locations C H A R I N G Seven Dials 3.2 acres C R O S S R O A D G A C R E St Martin’s Courtyard 1.9 acres L N O COVENT GARDEN Soho 1.5 acres E U N E AFTESBU RY A V Chinatown H 3.2 acres S LEICESTER SQUARE D N A S T R Coliseum 1.0 acre CHARING CROSS 100% of our portfolio is close to an Underground/ Elizabeth Line station PICCADILLY CIRCUS L L A L M L A P L L A E M H T ST JAMES’S PARK 1.9 million sq. ft. of commercial and residential space and 0.3 m sq. ft. held in joint venture 1 1 Strategic report Overview Exceptional portfolio in the heart of London’s West End continued Opera Quarter 0.6 acres Shaftesbury Annual Report 2018 13 Strategic report Overview Exceptional portfolio in the heart of London’s West End Our destinations Carnaby Carnaby is a unique, iconic shopping and dining destination, a few minutes away from both Oxford Circus and Piccadilly Circus. Attracting an estimated 40 million people each year, it is a popular and internationally-renowned destination for fashion retail, focused on flagship stores, new concepts and independent brands. It now has a growing reputation for lively, casual dining, cafés, pubs, bars and clubs, centred on Kingly Court and Kingly Street. Our ownership, across 14 streets, covers 4.7 acres. 65% of the Group’s office space is in Carnaby. It includes our largest floor plates and more modern office buildings. carnaby.co.uk Covent Garden Covent Garden, famous for its historic street patterns and architecture, is home to half of London’s West End theatres. It has a broad range of shops, restaurants, bars and cafés, giving it a distinctive atmosphere appealing to a wide range of audiences. There is also a flourishing residential community. Our wholly-owned holdings, extending to 4.8 acres, are principally centred on Seven Dials in north Covent Garden, close to Leicester Square and the Tottenham Court Road transport hub. They also include the Coliseum and Opera Quarter restaurant districts, in east and west Covent Garden. Annual footfall in Seven Dials alone is estimated at over 30 million people. This location also includes 1.9 acres, close to Leicester Square, held by the Longmartin joint venture, in which we own 50%. sevendials.co.uk stmartinscourtyard.co.uk Carnaby of our portfolio1 36% £44.8m £57.2m current income2 ERV Shaftesbury Annual Report 2018 14 Covent Garden of our portfolio1 26% £30.2m current income2 Longmartin of our portfolio3 6% £8.1m £10.3m current income3 ERV3 £37.6m ERV % of village annualised current income Carnaby Covent Garden Chinatown Soho Fitzrovia Longmartin Restaurants, cafés and leisure Retail Offices 21% 39% 62% 42% 51% 14% 46% 28% 20% 22% 16% 34% 27% 12% 4% 17% 7% 36% Strategic report Overview Exceptional portfolio in the heart of London’s West End Our destinations continued Residential 6% 21% 14% 19% 26% 16% Chinatown Chinatown is at the heart of London’s West End entertainment district, next to Leicester Square, Piccadilly Circus and Shaftesbury Avenue. It has an exceptional concentration of restaurants which offer a wide range of Chinese and East Asian dining choices. The prosperity of this thriving destination is underpinned by the large number of visitors it attracts throughout the day, and into the night, seven days a week, estimated at over 50 million annually. We are the dominant owner, with holdings extending to 3.2 acres. chinatown.co.uk Soho Soho is unique in its combination of a flourishing day-time business community and an important evening and night-time economy. By day, it offers a wide variety of independent, quirky shops and is a hub for creativity with many small businesses, typically in the media, tech and fashion sectors. In the evening and night-time, its distinctive atmosphere and exceptional choice of restaurants, cafés, bars and clubs, together with nearby theatres, create a popular destination for visitors as well as the West End’s large working population. It has a large residential community. thisissoho.co.uk Fitzrovia Fitzrovia is a bustling neighbourhood and renowned dining district, just north of Oxford Street and close to Tottenham Court Road. Our ownerships extend to 0.8 acres on, or close to, Charlotte Street and Goodge Street. Fitzrovia’s rapidly increasing office concentration, dominated by creative, media, fashion and tech businesses, together with a large student population, add to the cosmopolitan feel of the area. Chinatown 21% of our portfolio1 £24.1m current income2 £31.6m ERV Soho 7% of our portfolio1 £9.4m current income2 £11.6m ERV of our portfolio1 Fitzrovia 4% £4.9m £5.7m current income2 ERV 1 By value 2 Annualised, as at 30 September 2018 3 Our 50% share of the Longmartin joint venture Shaftesbury Annual Report 2018 15 11Strategic report Overview Exceptional portfolio in the heart of London’s West End Why London’s West End? The West End The West End is a popular destination with estimated visits in excess of 200 million annually. Visitors are attracted by its variety of shops, wide choice of innovative and accessible dining and leisure concepts, together with its unrivalled concentration of entertainment and cultural attractions, historic buildings and public spaces. Generating over 3% of the UK’s economic output, the City of Westminster is an economic powerhouse. With an estimated 700,000 jobs across the borough, it is the largest employment centre in the UK. Together with its visitor base and important residential community, this brings seven-days-a-week footfall and spending. The West End is at the heart of the capital’s transport network. The six underground stations closest to our villages handle over 225 million passengers annually. This network is critical to the success of the West End and infrastructure investment continues to improve capacity and reliability. Our portfolio is uniquely well-placed to benefit from the Elizabeth Line, currently expected to open late next year. Apart from increasing network capacity, it will extend the West End’s provincial catchment area and shorten travel times, factors which are expected to increase visitor numbers and retail and leisure spending. Passenger numbers at the Tottenham Court Road and Bond Street transport hubs are forecast to reach over 200 million by the mid-2020s, materially changing footfall patterns in the West End. >200 million annual visits to the West End c.700,000 working population in the City of Westminster >3% of UK GVA produced within the City of Westminster >225 million passengers use the six Underground stations closest to our villages London London is one of the world’s principal global cities. It is the largest city in Western Europe and is a world-leading financial and commercial centre. Its unrivalled variety of heritage and cultural attractions draw huge numbers of domestic and international visitors. 2017 saw an increase in international visitors for the eighth consecutive year, rising to a record 19.8 million visits with an estimated spend of £13.5 billion. Forecasts point to growth in overseas and domestic overnight visits of around 25% by 2025. The city’s population is currently around 8.9 million and is expected to grow to 10 million by 2030. Additionally, there is a similar population in southern England, within easy commuting or visiting distance. Its global appeal brings prosperity to the city, giving it a broad and resilient economic base, which is not reliant solely on the fortunes of the wider UK economy. 8.9 million London’s population 19.8 million overseas visits to London in 2017 Shaftesbury Annual Report 2018 16 1 1 Strategic report Overview 68% of ERV1 Restaurants, leisure and retail 1 Wholly-owned portfolio 2 EPRA vacancy 3 Excluding larger schemes at 30 Sept 2017 and 2018 Shaftesbury Annual Report 2018 17 Strategic report Overview Focus on restaurants, leisure and retail Diversified mix of income streams, focused on restaurants, leisure and retail over lower floors with offices and residential on upper floors. Our 1.1 million sq. ft. of restaurant, leisure and retail space provides 69% of our annualised current income1 and 68% of ERV1. It comprises 297 restaurants, cafés and pubs and 298 shops, mainly of medium or small size. Like-for-like ERV growth¹ restaurants, leisure and retail Tenant selection Careful tenant selection is critical to ensure our areas remain popular and attract growing footfall. We favour new concepts, independent operators and international retailers making their UK debut and prefer mid-market, innovative formats, rather than predictable chains. Long history of demand exceeding availability In our areas, listed building and conservation legislation largely restricts wholescale development. Also, local planning and licensing policies for restaurants and leisure constrain the availability of space. With a long history of resilient occupier demand, there is a structural imbalance between supply and demand, which is fundamental to our portfolio’s rental prospects and capital value. They have both shown significantly greater long-term growth and stability through economic cycles than the real estate market outside this location, even in times of adverse economic conditions. Over the past ten years, the ERV of these uses has demonstrated like-for-like annualised growth of 3.6%, despite rental levels remaining broadly flat during the global financial crisis. Over the same period, vacancy levels for these uses have averaged 2.5% of ERV1,2,3. 160 140 120 100 80 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ERV (cumulative, rebased to 100 at 30 September 2008) Restaurants, leisure and retail vacancy1,2,3 4% 3% 2% 1% 0% 3.5% 3.6% 3.1% average: 2.5% 3.1% 2.7% 2.6% 1.4% 2.3% 1.5% 0.8% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Evolution of uses over time (% of ERV¹) Residential Offices Shops Restaurants and leisure 7 22 43 28 2008 Limited obsolescence An important aspect of restaurant, leisure and retail accommodation is that we provide it in shell form only. Tenants are responsible for their fit-out, normally with no capital contribution from us. When tenants vacate, we re-let the shell of space usually without incurring significant refurbishment costs, limiting portfolio obsolescence. Upper floors - a mix of offices and residential Typically, our upper floors comprise small offices, residential, or a mix of both. A local working population and a residential community are important elements of the character and economy of our areas, bringing added life and vibrancy, and providing regular customers for our shops, restaurants, cafés, and leisure operators. 12 20 33 35 2018 Restaurants, cafés, leisure and retail: pages 22 to 25 Offices and residential: pages 26 to 29 1Charitable engagement The Connection Through sponsoring two outreach workers we help homeless people in our areas. The organisation provides immediate relief from homelessness and long-term support leading to housing, work and independence. House of St Barnabas We support this charity which aims to create a fairer future where lasting work is a reality for people affected by homelessness. The charity supports people back in to work through a City & Guilds accredited 12 week employability programme. LandAid We are a corporate sponsor of this property-sector charity, focused on providing accommodation for young homeless people. We held an advisors' treasure hunt in the West End, which raised £17,600. The Samaritans As well as sponsoring a charity comedy night and providing funding so they could open at Christmas and on New Year’s Day, we helped them hold Brew Monday in Kingly Court, where many Carnaby restaurants and cafés came together to donate hot drinks and snacks, raising invaluable funds and the organisation's profile. Choose Love A pop-up store selling presents for people in need. They sell real gifts – practical items – which are donated to refugees. All the donations support front-line services and the shop is raising awareness of Help Refugees. Shaftesbury Annual Report 2018 18 We have a long record of supporting local charities and not-for-profit organisations Through sponsorship, provision of accommodation, pro-bono advice and time, we assist local organisations to support their valuable work across the West End, and its local community. We offer retail space which is temporarily vacant to a range of charities and groups to enable them to promote their aims and activities to the many millions who visit our locations. Right: We sponsored a special benefit performance, hosted by Sir Ian McKellen, of The York Realist at the Donmar Warehouse, in aid of their Young & Free scheme and the Albert Kennedy Trust. Photograph by Johan Persson 19 Strategic report Overview Curating distinctive and lively destinations Our strategy is to encourage footfall to, and spending in, our areas to provide our restaurants, cafés, pubs and shops with an environment within which they can prosper. This drives sustained occupier demand and high occupancy levels, which, in turn, supports our ability to deliver long-term sustainable income growth. Key aspects to our management strategy are set out below. Ownership clusters Tenant selection Improving our buildings and the public realm Compounding benefits of individual transactions across nearby holdings Providing visitors with an interesting experience Unlocking value, improving long-term sustainability and creating welcoming areas Exceptional portfolio: pages 12 to 16 Restaurants, cafés, leisure and retail: pages 22 to 25 Asset management: pages 46 to 47 Environment: pages 36 to 37 Promoting our destinations Engagement with local community and stakeholders Forensic knowledge of the West End Raising awareness, footfall and spending Promoting our destinations: page 21 Understanding local expectations and supporting the West End Stakeholders and community: pages 34 to 38 Experience through economic cycles Our people: pages 39 and 64 to 67 Shaftesbury Annual Report 2018 20 Strategic report Overview Promoting our destinations Marketing is a key aspect of the holistic curation of our areas, encouraging footfall and spending. Strategic report Overview Karen Baines Head of Group Marketing and Communications answers questions regarding marketing and promoting our destinations Why is marketing your destinations important? Whilst we invest in popular and buzzy areas, we can’t assume that visitors to the West End will know of, or come to, our areas. Therefore, we tell the story and the heritage of our iconic shopping and dining destinations to raise their profile and stand out from other London destinations. We support our tenants in raising awareness of their businesses and how they provide unique experiences, generally not available on the high street. Is the strategy the same for each village? Inevitably our aim is the same; to raise awareness, drive footfall and increase spend. However, we tailor brand values, messaging and tactics, taking into account each of our areas’ history, personality and target audience. What do you do? Throughout the year, we hold widely-publicised campaigns and events in our destinations, such as shopping evenings, street food festivals and our innovative Christmas decorations. As well as active engagement with trade and consumer press, our digital strategy includes dedicated websites for our areas and a significantly growing social media presence. Some of our events this year included: • Soho Music Month and Seven Dials Soundtrack, which supported the Mayor’s wider “Sounds Like London” campaign for London; • Street Eat, where we hosted a picnic table along the length of Carnaby Street for visitors to celebrate a wide range of street food from our local restaurants; • National Dumpling Day in Chinatown, where 1,800 dumplings were given away; and • In Seven Dials, we hosted a week of activities to promote International Women’s Day. Our occupiers help bring our events to life, using their own marketing channels and, often arranging their own, related activities. Where appropriate, we collaborate with partners to increase our reach and enhance the impact of campaigns and events to attract greater exposure. For example, in partnership with 20th Century Fox, recently we have unveiled a Bohemian Rhapsody- themed light installation in Carnaby. What feedback have you had from tenants following events? It’s been resoundingly positive; as well as making them feel part of the community, they value Shaftesbury’s support in raising the profile of our areas and their brands, with both domestic and international audiences. “ We are delighted to support Carnaby Street Eat. What’s better than setting up stall, eating tons of food, having some fun and getting to know as many of our customers and neighbours as possible.” Stevie Parle, Chef-Owner of Pastaio How do you measure success? There are a lot of factors we take into consideration, including footfall, tenant and partner feedback, and social media influence and statistics. How important is social media? Digital is one of the many strands of our integrated marketing strategy. With consumers becoming ever more digital savvy, our shoppers and diners increasingly are using social media to discover places to visit and to share their experience. We use a wide range of social media platforms, including Weibo and WeChat, which enable us to tailor our messaging to, and engage with, Chinatown’s wider western and Asian audience. For tenants, social media is vital to their brands, so we support them in promoting new launches, initiatives and events across our digital platforms and through our partners. Digital influencers are an important aspect of our social media strategy, through promoting our story to their large, loyal follower base. Do your events present security concerns? Ensuring safety and security is paramount. We work with Westminster and Camden Councils and the emergency services to ensure visitors, residents and workers remain safe and secure whilst enjoying our events. Shaftesbury Annual Report 2019 21 11Strategic report Overview Restaurants, cafés and leisure We are the largest single provider of dining and leisure space in the West End, curating high-profile and busy destinations such as Chinatown, Kingly Court, Neal’s Yard and Opera Quarter. 35% 297 of our portfolio1,2 restaurants, cafés and pubs1 0.6m sq.ft. Why do you invest in restaurants, cafés and leisure? With its high footfall, the West End has become London’s dining hot-spot. Increasingly, the large working population and visitors are looking for interesting and different dining and leisure experiences. Consequently, these are important drivers of footfall, dwell-time and trading in our locations. What are you looking for when you select tenants? The majority of our restaurants provide casual dining, with a focus on atmosphere, quality and experience, often with an all-day offer. Favouring mid-market formats, we look for distinctive concepts, something we don’t have and which add more depth to the existing offer. We like operators to have had some experience honing their concept, in, for example, pop-ups, markets, supper clubs etc. We think about whether we would like to eat there, as we are customers as well. Is it a risk taking fledgling operations? It is part and parcel of our philosophy to be forward-thinking; to support new concepts. The team behind them needs to be good, have a plan for fit-out, service and social media, and be well-financed. Are you being impacted by the number of casual dining concepts which are in financial difficulty? We continue to see healthy trading across our areas. Much of the well-publicised financial distress has been in national chain formats, which have expanded across the country and are suffering from a national slowdown in dining and leisure spending, or poor site selection. We are not seeing this in our areas, where the footfall is high and there is a relatively affluent customer base. The incidence of concepts not succeeding in our locations is relatively low, but, with unsatisfied demand, others usually are keen to step in and take the space. 1 Wholly-owned portfolio 2 % of ERV 3 At 30 September 2018 4 Leasing activity during the year ended 30 September 2018 Why is the availability of restaurant and leisure space constrained? Local planning and licensing policies restrict large-scale increases in these uses, whether by development, extension of existing space, or conversion from other uses. The barriers to entry are high, with existing operators reluctant to relinquish their valuable sites, other than for significant premiums. Generally, tenants ensure they preserve their valuable occupation rights and our bad debt history is low. How good is occupier demand? With operators attracted by potential to trade prosperously in this seven-days-a-week economy, occupier demand is good, outstripping availability of space. Competition for available space continues to be strong, and occupancy levels remain high. At 30 September 2018, EPRA vacancy1,2 for our restaurant, café and leisure space was 1.4%, of which 0.4% was under offer. “ Shaftesbury have been very encouraging every step of the way. They took a bit of a punt on The Palomar - we hadn’t done anything before and I think a lot of landlords wouldn’t have been so brave.” Layo Paskin, The Palomar How is Chinatown changing? The 86 restaurants, cafés and bars we own in Chinatown, close to the West End’s major entertainment venues, represent 35%, by floor space, of our total ownership of these valuable uses. In this especially busy location, notable for its long hours of trading, our strategy is to improve the variety of the dining offer, whilst maintaining affordability and remaining respectful of its Chinese heritage. Our vision is to showcase different regions of China, whilst adding pan-Asian operators. Julia Wilkinson Head of Restaurant Strategy answers questions on restaurants, cafés and leisure ERV by village1 £50.0m Carnaby 20% Covent Garden 26% Chinatown 39% Soho 9% Fitzrovia 6% Shaftesbury Annual Report 2018 22 1 Strategic report Overview Restaurants, cafés and leisure continued 22 new lettings 12 lease renewals 31 rent reviews 9 years 1.4% £10.5m EPRA vacancy1,3 weighted average unexpired lease term1,3 lettings/rent reviews1,4 (21.0% of restaurant, café and leisure ERV) Recently, we have invested in improving the overall visitor experience through major public realm improvements. Also, we have improved our branding for the area through events, marketing and a stronger social media presence, including in mainland China. What are your typical lease terms? Tenants invest considerable sums fitting out their space, sometimes spending the equivalent of 3-5 years’ rent and, therefore, we grant longer leases than for shops, to provide an extended period over which occupiers can amortise this cost. Until recently, leases were granted over whole buildings and provided tenants with renewal rights on expiry. We find that upper floors often are now under-utilised and, where opportunities arise, we seek to negotiate the surrender of these leases to secure vacant possession. This allows us to improve the configuration of space on the lower floors, attract new operators on more beneficial terms and often release valuable upper floors for other uses. Reflecting the strength of demand for our restaurant space, in recent years we have reduced the term of leases we grant and introduced more flexibility at expiry. Also, we include turnover-related rental top-ups, giving us the higher of market rent and a percentage of annual turnover. This provides a useful contribution to both income and earnings, as well as providing us with data to better understand the metrics of restaurant trading across our areas. At 30 September 2018, the proportion of our restaurant income under historical leases was 54% (2017: 60%), providing us with opportunities to add further value and flexibility over the coming years. Typical lease terms Historical Leases New Leases Term Rent reviews Security of tenure on expiry Turnover-related top-up Space leases typically granted over Proportion of our restaurant leases (by income) Incentives 54% N/A 15 years 25 years Five-yearly, upward-only Five-yearly, upward-only Yes No Whole buildings No Yes Operational space only (i.e. not upper floors) 46% Short rent-free period to help cover tenant fit-out time. No contribution to fit-out costs Progress against 2018 priorities Priority Status Letting of restaurant and café space at Central Cross Eight of the nine restaurant, café and leisure units have been let. The remaining restaurant is under offer Identify further opportunities to negotiate vacant possession of restaurants let on historical leases Introduce new restaurant operators to our destinations Negotiated vacant possession of four leases in the year, with a rental value of £1.0m 22 new openings during the year 2019 priorities Identify further opportunities to negotiate vacant possession of, or restructure, historical restaurant leases Introduce new restaurant concepts to our destinations Promoting our destinations: page 21 See page 45 for more information on Central Cross Shaftesbury Annual Report 2018 23 1 Strategic report Overview Retail Our shops, mainly clustered in Carnaby, Seven Dials and Soho, make an important contribution to the West End’s reputation as a leading global destination. 33% 298 of our portfolio1,2 shops1 0.5m sq.ft. What is the typical space you lease? A significant feature of our retail portfolio is that we are able to offer retailers the choice of a wide range of rental levels and shop sizes, from small boutiques to large flagships, in modern or historic buildings, so they can find the right space to suit their brand. It allows us to attract a variety of formats from new start-ups to more established retailers looking to open unique concepts in the West End. How do you keep your destinations interesting? It is important that shoppers can find something different from that commonly found in shopping centres and on high streets. Our retail strategy constantly evolves to respond to changing consumer behaviour, but the central principle remains - maintain a fresh retail mix by seeking out both national and international brands which intend to launch new, interesting concepts and global first stores. Many of our retailers are independents, an important factor in making our districts unique destinations. How do you assess potential retailers? Each of our destinations has a specific brand identity. In selecting retail concepts, we assess whether they fit this identity, will add value and attract footfall. We favour brands that offer unique experiences and products, want to be part of our community and which offer a reason for shoppers to visit our areas. Is social media important? It is important but we look at everything a brand does. If they are using social media in an exciting and fresh way to generate consumer interest and drive sales, then that’s a good sign. However, this is only one part of the story. If the brand has an interesting story, is generating interest, and is driving footfall in our streets, then it adds value to the area. 1 Wholly-owned portfolio 2 % of ERV 3 At 30 September 2018 4 Leasing activity during the year ended 30 September 2018 5 Source: Cushman & Wakefield, published information and company data 6 Based on 30 ft. zones 7 Letting status at 26 November 2018 How affordable is your space? Rental levels in our high-footfall and spending locations are competitive compared with nearby streets (see the chart, opposite). “ We chose Seven Dials because the location is so central, and it’s an iconic and beautiful neighbourhood that’s home to so many beloved retailers. We’re excited to be alongside the Seven Dials shops, and to be able to call London home to our first permanent store in Europe.” Jen Rubio, Away How do you stay ahead of the curve? Our typical retail leases are short, allowing us to have a portfolio of brands which are relevant and trend-driven. It is important we identify the next generation of ideas and concepts. We travel a lot looking for inspiration, seeing other cities and their brands, and visiting retailers who are interested in opening in London. Many retailers we meet view London’s West End as the place to launch a successful international business. Trade shows also provide new ideas, as do existing tenants who look to grow within our areas or start new concepts. Sometimes we trial new brands on a short and flexible basis, which often are converted to longer leases. Promoting our destinations: page 21 Sam Bain-Mollison Head of Retail answers questions on retail ERV by village1 £46.9m Carnaby 51% Covent Garden 26% Chinatown 14% Soho 7% Fitzrovia 2% Shaftesbury Annual Report 2018 24 1 continued1 Retail Strategic report Overview 23 new lettings 18 lease renewals 14 rent reviews 4years 10.9% £6.5m EPRA vacancy1,3 lettings/rent reviews1,4 (13.9% of retail ERV) weighted average unexpired lease term1,3 How do you assess whether a brand is a success? Our relationship with brands starts when we select them. Our office is close to all our shops so we have real-time day-to-day experience of their trading. This knowledge is supplemented by turnover data. How has online retail affected you? Whilst online is having a major impact on wider high street retail, we find that there is consumer demand for the interesting mix of brands and concepts across our areas, particularly when coupled with the experience that our food and beverage offer provides. Also, we are starting to see internet brands wanting physical space in our destinations, to reinforce their brand identities. How are retailers trading in your areas? Despite continued headwinds and challenges across the retail sector, generally our tenants continue to trade well. Importantly, our mid-market retail offer is not limited solely to fashion, but includes, for example, health and beauty, accessories and lifestyle brands. Whilst businesses are being more cautious in taking on new commitments over larger space, and the average time to conclude lettings has increased a little this year, we are continuing to see good interest for the smaller space we typically have to offer. Our flexible portfolio allows us to respond to this demand, and, where practical, we are dividing larger units. Leasing activity during the year has been good with lettings, renewals and rent reviews being concluded ahead of ERVs assessed by our valuers. At 30 September 2018, EPRA vacancy1,2 of our retail space was 10.9%, of which 7.0% was under offer, including 5.3% at Central Cross and Thomas Neal’s Warehouse. Average retail vacancy1 over the past ten years has been 3.7%. Typical lease terms Our retail leases generally are short, giving us the opportunity to refresh tenant mix: Smaller shops: 3-5 years Larger shops: 5-10 years Short rent-free period to help cover tenant fit-out periods. West End retail rental tones5 (prime zone A per sq.ft.) 2,200 1,200 1,000 750 710 650 535 Shaftesbury streets 400 360 285 240 220 195 185 Bond Street6 Oxford Street6 Ja m es Street W C2 Long Acre C ovent G arden M arket Regent Street6 C arnaby Street N eal Street Foubert's Place Floral Street M on m outh Street N e w burgh Street Earlha m Street Berwick Street Progress against 2018 priorities Priority Status Letting space at Thomas Neal’s Warehouse and Central Cross Thomas Neal’s Warehouse: let7 Central Cross: two retail units under offer, three units available to let7 Introduce further interesting retail concepts to our destinations 23 new openings during the year 2019 priorities Let remaining retail space at Central Cross Continue to introduce interesting retail concepts to our destinations See page 45 for more information on Thomas Neal’s Warehouse and Central Cross Shaftesbury Annual Report 2018 25 Strategic report Overview Offices We are an important provider of small, flexible office space in the West End. 20% 0.5m sq.ft. of our portfolio1,2 of offices1 The growth in flexible and co-working operators, in and around our areas, is a positive, bringing additional, often young, workers, who become customers for our restaurants, cafés, pubs and shops. Responding to the need to remain competitive with occupiers’ requirements, we have a programme to ensure fibre connectivity to our buildings, so occupiers can “plug and play”. Also, in Seven Dials, we are trialling a flexible workspace concept, providing tenants with fitted and cabled space, and are working on a portal system which will better connect occupiers to provide a more integrated community. Lease contracts for this space are short and simple, costs are fixed and lease terms are flexible, starting at two years. “ Many tenants are SME businesses in the media, creative, fashion and tech sectors” How is demand? The availability of office space like ours remains low across our locations and we continue to see good demand. Whilst we have seen a small increase in incentive packages, retention rates have been good, and occupancy levels have remained high. At 30 September 2018, EPRA vacancy1,2 for our offices was 2.0% of total office ERV. How important are offices to your areas? Offices are integral to the mix of uses in our areas, bringing a large working population which is an important source of customers for our restaurants, cafés, pubs and shops during the week. How big is a typical office? As with our other uses, the historical nature of our buildings means that there is no typical unit size. At 30 September 2018, we owned 466,000 sq. ft. of office space across our wholly-owned portfolio, a net increase of 63,000 sq. ft. during the year, of which 54,100 sq. ft. was due to the purchase of 72 Broadwick Street, Carnaby. Our office space, which is mostly above restaurants, cafés and shops, is let to 253 tenants. Our average letting is 1,420 sq. ft., often over more than one floor. We do have a number of larger floor plates, mainly in Carnaby and Seven Dials, which means we appeal to different sized businesses. Typically, who are your tenants? Many are SME companies in the media, creative, fashion and tech sectors, which have traditionally been based across Carnaby, Soho and Covent Garden. They are attracted by the community of similar businesses in this vibrant, creative part of London. Additionally, our tenants benefit from privilege cards, offering discounts in our shops, restaurants and cafés. Are you being adversely impacted by the rise of flexible and co-working operators? We offer flexible space on affordable terms and have a range of office sizes, allowing our occupiers to grow and adapt in a rapidly-changing market. At 30 September 2018, our average rent was £57 per sq. ft. (2017: £55 per sq. ft.) and average ERV was £64 per sq. ft. (2017: £61 per sq. ft.). Rob Kirk Portfolio Executive Charles Owen Portfolio Executive answer questions on our offices 1 Wholly-owned portfolio 2 % of ERV 3 At 30 September 2018 4 Leasing activity during the year ended 30 September 2018 Shaftesbury Annual Report 2018 26 1 1 Offices continued Strategic report Overview 26 new lettings 15 lease renewals 5 rent reviews 4years 2.0% £6.2m EPRA vacancy1,3 lettings/rent reviews1,4 (21.2% of office ERV) weighted average unexpired lease term1,3 ERV by village1 £29.3m Carnaby 69% Covent Garden 19% Chinatown 4% Soho 7% Fitzrovia 1% Typical lease terms Smaller offices: 3-5 years Larger offices: 5-10 years, with break options at year 5 Incentives: Short rent-free period. No contribution to fit-out costs Short rent-free period to help cover tenant fit-out periods Progress against 2018 priorities Priority Status Maintain strong cash flows through high occupancy Occupancy levels have remained high throughout the year and retention rates have been good with 15 leases renewing Complete our 57 Broadwick Street redevelopment The scheme completed in April 2018 and the space is fully let Further office upgrades to meet modern, flexible space standards Schemes extending to 55,200 sq. ft. completed or underway at 30 September 2018 2019 priorities Maintain strong cash flows through high occupancy Obtain planning consent for our 72 Broadwick Street scheme Further office upgrades to meet modern, flexible space standards See page 45 for more information on 57 Broadwick Street and page 50 for 72 Broadwick Street Shaftesbury Annual Report 2018 27 Strategic report Overview Residential Demand to rent our 593 mid-market apartments - mainly studios and one or two bedroom flats – remains good. of our portfolio1,2 apartments1 What are your typical apartments? They are mainly mid-market, affordable studios and one or two-bedroom apartments, many of which have been created from the conversion of small office accommodation back to its original residential use. How long are your leases? We let our apartments unfurnished, on three-year Assured Shorthold Tenancies. In our experience, around 10% of leases renew at the end of term. Who are your tenants? Typically they are international students and people working in and around the area, often for a few years only, who want the buzz of the West End. How is the letting market? Demand remains good and normally we have over 98% occupancy. Lettings and renewals1 with a rental value of £8.2 million were completed during the year. Whilst rents achieved, on average, were 0.1% below previous levels, reflecting a greater availability of flats to rent in Central London, high occupancy levels have delivered an important cash flow for the business. How are you responding to increased competition across central London? We have a rolling programme to upgrade our apartments, in order to ensure their specification remains competitive. Currently, we are planning to install fibre connectivity to our flats, a feature which is increasingly demanded by potential tenants. “ Demand for our mid-market apartments remains good, resulting in high occupancy levels and a stable cash flow” Will your residential portfolio continue to grow? Over the past five years, we have increased the number of apartments by approximately 26%, through conversion from other uses and acquisitions. We have a number of planning consents for residential conversion, which we could implement in the future. However, we do not expect the proportion of our income from residential to change materially. Why do you choose to lease rather than sell your apartments? Most of the value of our buildings is in the commercial uses on the lower floors. Generally, we do not sell our apartments so that we retain control over whole buildings to realise the long-term potential in those valuable lower floors. Shelley Webb Head of Residential answers questions on our residential portfolio 1 Wholly-owned portfolio 2 % of ERV 3 At 30 September 2018 4 Leasing activity during the year ended 30 September 2018 Shaftesbury Annual Report 2018 28 0.4m sq.ft.12%593 1 continued1 Residential Strategic report Overview 224 new lettings 68 lease renewals EPRA vacancy1,3 lettings/renewals1,4 (46.9% of residential ERV) Typical lease terms Three year Assured Shorthold Tenancies Let unfurnished Annual RPI uplifts Mutual break options on a rolling two-month basis after the first six months Progress against 2018 priorities Priority Status Continue our rolling refurbishment programme to upgrade our apartments and improve their rental prospects Identify future potential residential conversions Refurbishment works on 66 apartments during the year, of which 43 were ongoing at year end Planning consents granted to create 24 apartments Maintain strong cash flow through high occupancy Average occupancy: 98% of ERV 2019 priorities Continue our rolling refurbishment programme to upgrade our apartments and improve their rental prospects Maintain strong cash flow through high occupancy ERV by village1 £17.5m Carnaby 19% Covent Garden 39% Chinatown 23% Soho 10% Fitzrovia 9% Apartments by number of beds 3 2 1 1 bed 67% 2 bed 27% 3 bed 6% Shaftesbury Annual Report 2018 29 1.1%£8.2m30 We have been committed to operating in an environmentally and sustainable way for many years. Focusing on environmental sustainability is a key aspect of our long-term strategy. We have a rolling programme to improve the environmental efficiency of our buildings. We encourage our tenants to embrace sustainability, be it through fit-out or reducing waste. More details on our approach to sustainability and the environment can be found on pages 34 to 37. Left: We support the Mayor of London and the #OneLess campaign to install public water fountains. As a step towards reducing plastic waste in London and protecting the environment, Kingly Court was chosen as the first site for this important initiative. We are actively working with our restaurant, cafe and pub tenants across the portfolio to remove single-use plastic water bottles from their businesses. Shaftesbury and sustainability Sustainable buildings We aim to achieve BREEAM “Very Good” on all our refurbishment projects. We have a rolling programme of energy performance improvement across our 600 buildings. We now have more than 38% of our space with an energy performance rating of C or above. Pass on Plastic We donated space to create an exciting pop-up ocean experience to support this campaign to educate the public on the need to eliminate single-use plastics. Sustainable Restaurant Association We encourage restaurant tenants to become members of the SRA and fit-out and operate their premises sustainably. Also, we sponsor the Open Right Award at the “Food Made Good” awards in recognition of restaurants fitting-out sustainably from initial opening. Shaftesbury Annual Report 2018 21 Strategic report Overview Measuring success The principal metrics we focus on in running the business include both long-term performance and operational measures, reflecting our long-term strategy. Total shareholder return (%) 237.3% Compound annual growth in EPRA NAV1 (%) 11.8% 10.2% 68.0% 43.8% 59.1% 4.1% 5.0% 6.3% 6.1% 4.1% 4.5% 5.4% 5.7% -9.4% 1 year -1.1% 3 years 5 years 10 years 1 year 3 years 5 years 10 years Shaftesbury FTSE 350 REIT Index Shaftesbury RPI plus 3% Rationale Measures shareholder value creation, taking into account share price movements and dividends in the period. Alignment with remuneration Performance over three years is benchmarked against an index of other listed real estate companies for our LTIPs. For executive directors, the benchmark is the FTSE 350 REIT Index. For staff, this is the last year of vesting of LTIPs benchmarked against the FTSE 350 Real Estate Index. For future years there will be alignment with the executive directors. Commentary Over the long term, we have outperformed the sector. However, during the past year we have underperformed with our share price falling from a small premium to a modest discount to EPRA NAV. Rationale Traditional sector measure of value creation. Alignment with remuneration We compare compound annual growth in EPRA NAV per share to a target of RPI plus 3% as a performance measure for our LTIPs. Commentary Over five and ten years, we have out-performed the benchmark. However, over the shorter term, EPRA NAV growth has been below the target, largely reflecting exceptional refinancing costs incurred in 2016 and 2017. EPRA NAV growth over 2018 was 4.1%, largely driven by the revaluation of our portfolio (see page 43). This compared with the benchmark hurdle of 6.3%. Over three years to 30 September 2018, compound annual growth was 4.5%, 1.6 percentage points below the benchmark. Excluding the exceptional refinancing costs, three year growth was 6.0% p.a. LTIP vesting: page 101 LTIP vesting: page 101 Portfolio management Financial management Growth in annualised current income3,5 5.1% Loan to value1 ERV growth3,5 2.4% Blended cost of debt1 22.8% 3.2% Reversionary potential3 26.7% Weighted average debt maturity 10.2 years Scheme vacancy4 7.6% See more on pages 44 and 47 See more on pages 55 to 56 Operational measures In addition to our KPIs, there are other operational metrics we monitor in assessing the performance of the business. 1 An alternative performance measure. See page 140 2 Data includes acquisitions 3 Including our 50% share of property held in joint venture 4 Wholly-owned portfolio 5 Like-for-like 6 Excluding larger schemes Shaftesbury Annual Report 2018 32 Measuring success continued 6.0% 4.6% Sustained rental growth2,3 154 145 139 Maximise occupancy4 128 119 122 114 106 100 94 110 103 92 86 78 84 78 81 68 63 10 year average: 2.9% 2.9% 2.6% 2.8% 2.7% 2.3% 1.4% 1.6% 1.6% 2.5% 2.7% 2012 2009 2010 Annualised current income (£m) 2011 2013 ERV (£m) 2014 2015 2016 2017 2018 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EPRA vacancy (% of ERV) Thomas Neal’s Warehouse and Central Cross Rationale In our leasing activity, we aim to establish new rental tones which exceed ERVs assessed by our external valuers. This grows our portfolio’s reversionary potential by providing rental evidence in leasing negotiations on our nearby holdings. We aim to crystallise this rental potential into contracted income over three to five years. Importantly, the level of lease incentives granted to tenants remains modest. Alignment with remuneration Achieving rents above ERV is a KPI in our annual bonus scheme. Commentary Our strategy has delivered sustained growth in annualised current income and rental values over many years. The 10-year like-for-like compound annual growth rate in annualised current income and ERV of our portfolio has been 5.1% p.a. and 3.9% p.a. respectively, with growth every year. Commercial leasing transactions4 during the year were concluded 5.1% higher than ERV at September 2017. Rationale Low vacancy levels are a key factor in ensuring our portfolio produces good cash flows. Alignment with remuneration Maximising occupancy is a KPI in our annual bonus scheme. Commentary Average EPRA vacancy4 over the past ten years has been 2.9% of ERV. Over the past two years, EPRA vacancy has increased as a result of our larger Thomas Neal’s Warehouse and Central Cross development schemes. At 30 September 2018, EPRA vacancy included 1.9% in respect of these schemes (2017: 3.5%). Average letting time6 in 2018 was 2.5 months (2017: 1.5 months). Reversionary potential: page 44; Leasing: page 45; Annual bonus outcome: page 100 Vacancy: page 46; Annual bonus outcome: page 100 Financial results and reporting Our people Sustainability and stakeholders Growth in net property income EPRA earnings per share1 6.2% 17.1p Employee retention % female employees 100% 60% See more on pages 51 to 54 See more on page 39 % of Energy Performance Certificates of grade E or above 78% London Benchmarking Group contribution as a % of EPRA earnings 1.7% See more on pages 36 to 38 Shaftesbury Annual Report 2018 33 Strategic report Overview11 Strategic report Overview Sustainability and stakeholders Our goals are: - The environmentally sustainable re-use and management of existing buildings -Invest in the local community -Effective stakeholder engagement - A fair and ethical framework for employees and our supply chain Benchmark indices At the heart of our sustainability strategy is a focus on extending the economic useful lives of our buildings. Through changes of use and reconfiguration, within the constraints of legislation, our buildings can continue to meet the needs of modern occupiers. In an urban location, which is intensively used by huge numbers of visitors, a large working population and residential community, social issues and challenges are bound to arise. We therefore focus on community-related activities which help to support organisations that tackle these problems. The Wild West End collaboration, which promotes biodiversity, continues to gain momentum. Working with other neighbouring landowners, we are increasing the number of biodiversity features throughout our portfolio, with the consequent associated benefits of improved health and well-being for tenants, residents and visitors. The concept won an EPRA sustainability award for its outstanding contribution to society. Our non-financial information statement is set out on page 146. Management of sustainability The Sustainability Committee meets quarterly to define objectives, agree strategies and review progress. We have a robust and effective Sustainability Policy which is reviewed annually by the Board and is available on our website. We continue to base our sustainability strategies on our core goals: Stakeholders: engaging with our tenants, investors and other stakeholders ensures that we are aware of their expectations and can respond accordingly. In particular, we work with tenants to identify ways in which they can use our buildings more efficiently and operate in a more sustainable manner. Environment: re-use and careful management of existing buildings. In addition, reducing the running costs of buildings and improving their operational efficiency is important in attracting tenants, as well as meeting regulatory requirements. Working closely with our supply chain enables us to control our most significant impacts and facilitate better sustainability standards throughout. Community: engaging with local groups and charities to ensure we support our community. Employees: investing in our employees to support their development and encourage retention. During 2018, we reviewed our materiality assessment which identifies the sustainability key issues and challenges which we should be addressing in the year ahead. Our broad strategic goals remain relevant and will continue to form the framework of our approach. Community, central London air pollution, living wage, health and safety, greenhouse gas emissions and infrastructure continue to be key issues, both internally and externally, and human rights, waste, material use and biodiversity are all increasing in significance. Shaftesbury Annual Report 2018 34 Sustainability and stakeholders continued Modern slavery and human rights We have policies in place which address human rights, modern slavery and the ethical conduct of our business, all of which are included within our Sustainability Policy which is updated annually. We respect international principles of human rights and have been a signatory of the UN Global Compact since 2015. Our Sustainability Policy is also provided to organisations in our supply chain to encourage them to adopt and enforce similar policies in their own businesses. We ask our principal advisors and suppliers to commit to the Universal Declaration of Human Rights with respect to all employees and sub-contractors employed by them. We promote the human rights of our employees through equal opportunity and in our recruitment process, regardless of their sex, sexual orientation, age, race, disability, marital status, religion and nationality. As a consequence of our outsourcing model, the effective communication of our policies and objectives throughout our supply chain is important to ensure that an ethical and sustainable approach is adopted to the employment of labour and the purchase of goods and services on our behalf. We ensure our Supplier Code of Conduct is circulated to our principal suppliers for inclusion in contracts. Our Code requires payment of the London living wage and compliance with the Modern Slavery Act 2015 throughout our supply chain. We have recently launched a new supplier engagement process which includes our expectation that suppliers commit to our Sustainability Policy and Supplier Code of Conduct. As part of our 2017 Modern Slavery Statement, we committed to seek accreditation with the Living Wage Foundation which we have successfully achieved. It covers payment of our own employees as well as those within our immediate supply chain. We have updated our whistleblowing policy and expanded our commitment to facilitate the reporting of inappropriate business behaviour through a dedicated and confidential whistleblowing hotline for employees and our supply chain. Health and safety The Board has overall responsibility for health and safety. In our refurbishment projects, responsibility for health and safety is identified within all pre-tender documentation and is monitored by site and project managers. Managing agents oversee day-to-day health and safety matters throughout the portfolio. There were no reportable health and safety incidents in the portfolio. The accident frequency rate for Shaftesbury employees was zero (2017: zero) and there were no health and safety prosecutions, enforcement actions or fatalities in 2018. Stakeholders As a long-term business in the West End, we have developed relationships with an extensive range of stakeholders with whom we work across a range of activities. y s i t r e d iv Bio arehold e r s h S e t s a W S u p p l i e r s Visitors E n ergy Labour/em conditio plo n s y m e n t Tenants E m p l o y e e s C o m m u n i t y s t n e d si e R a l r itie s c L o a u t h o A i r q ality u We work closely with our suppliers and hold an annual sustainability seminar which considers environmental and community matters and ensures that our supply chain is aligned with our values. For the first time this year, we held a similar seminar for the construction companies and project managers in our supply chain, which was received very positively. Labo ur o it i p l c / n e d m o y o We hold an annual community breakfast which is a networking opportunity for our local partners - community groups, re charities, not-for-profit organisations and local government a h which operate in our areas. S e l s e n p m e y o t E n m s Biodiversit y holders Our employees work closely with our local community including local organisations, groups and statutory authorities with responsibility for particular issues in our local environment such as safety and policing. y t ni u m l i e S u p E p r s n v i r o n m e nt Visito r s C o m A ir q uality Read more on our fifth community breakfast: page 38 Shaftesbury Annual Report 2018 35 Strategic report Overview11 Strategic report Overview Sustainability and stakeholders continued 57 Broadwick Street An office refurbishment scheme which is on track to achieve BREEAM Excellent post construction. The use of the existing structure provided the opportunity to reduce the amount of new materials used within the construction process while reducing the environmental impact caused by the development. The building incorporates a variety of energy and water efficiency measures within both the building fabric and the services installation including: • Enhancements to the building fabric envelope thermal performance by introducing thermal insulation to achieve lower capacity heating systems, thereby reducing energy consumption • Providing new high performance glazing in order to reduce solar heat and reduce the cooling plant required • Providing occupancy detection and automatic daylight dimming within the lighting control system • Using low energy, high efficiency light sources • Maximising the use of daylighting within the building • Including water appliances within the building that reduce water consumption. The 5th floor roof area includes a green roof and planters that have been planted with species in accordance with the objectives of Wild West End and provide both biodiversity benefits as well as reducing potential water run-off compared with the original building. Environment We improve and extend the useful economic life of our buildings through refurbishment, change of use and reconfiguration. All our portfolio is located in Conservation Areas and around 20% of our buildings are listed. Within these constraints, we strive to provide environmentally efficient commercial and residential accommodation as well as advice to occupiers, to minimise the overall impact of our business on the environment. Waste We achieved a recycling and composting of food waste rate of 55% for Carnaby and Seven Dials. We encourage composting by our restaurant tenants, and active engagement with tenants has increased the proportion to 18%. The remaining waste is diverted from landfill to energy from waste schemes. Our refurbishment projects diverted, on average, over 98% of waste from landfill. Air quality We recognise the decline in air quality in central London and although we cannot directly influence this, we are promoting measures that will contribute to an improvement. We promote to occupiers the benefits of delivery consolidation and the use of a zero-emissions vehicle through our nominated suppliers. Through this initiative, there was a saving of 2.9 tonnes of carbon over the course of the year – equivalent to 6,838 miles driven. Biodiversity measures also help with improving air quality. Single-use plastic This year we have engaged with our tenants to address the environmental issue of single-use plastic that is affecting both the local and global environment. Initiatives have included the installation of a water fountain at Kingly Court as part of the #OneLess and Mayor of London initiative. To date, the equivalent of over 20,000 500ml plastic bottles have been avoided. We hosted a two-week public exhibition to raise awareness of single-use plastic and had a visit from Plasticus The Whale. The Carnaby arch was themed for WWF’s Earth Hour 2018 and our Street Eat food festival in August was entirely single-use plastic free. Shaftesbury Annual Report 2018 36 Read more on single-use plastic: page 31 Sustainability and stakeholders continued Building certifications Our objective is to achieve BREEAM Very Good for all larger commercial and domestic refurbishment schemes with three schemes completing during the reporting period and a number of others are in progress with the majority on course to achieve at least Very Good. In total over 10% of the portfolio by floor area is on course to be BREEAM certified. Use of materials We maximise the re-use of materials on site in all our refurbishment projects, with a significant proportion of the primary structure and external façade retained. Similarly, our approach is to re-use timber. Timber features such as windows, joists, floorboards, staircases and panelling are retained where possible. For the small volume of timber purchased, 89% was Forest Stewardship Council (FSC) certified and, overall, 96% was sustainably sourced with full chain of custody. Biodiversity We recognise the importance of promoting biodiversity. The West End is an intensively-used urban area, which needs thriving and connected green spaces. This is important both for wildlife and the health and well-being of occupiers and visitors. This year we made further progress with our goal to improve the biodiversity of empty and inaccessible roof tops. Through installing additional features throughout the portfolio, including green roofs, sedum roofs, window boxes, bird boxes and insect homes, we have increased total area coverage by 33% from 9,524 sq. ft. to 12,644 sq. ft. We promoted Defra’s Bees’ Needs Week again this year, by installing a bee-themed Carnaby Street arch and hosted a pop up ‘Hive’ on Carnaby Street, which helped to promote bee conservation organisations and research. Our work was recognised by DEFRA with an award as a Bees’ Needs Champion 2018 for raising public awareness of the needs of pollinators. We have installed two bee hives in Carnaby, making a total of five across our portfolio. Energy consumption Energy consumption has been largely unchanged year-on-year reflecting fluctuations in tenant numbers and occupancy. Due to the increased use of renewable energy in the national grid, greenhouse gas emissions decreased by over 16% from 1,316 tonnes to 1,099 tonnes. EPCs We continue to make good progress against the Government’s Minimum Energy Efficiency Standards (MEES). From April 2018, demised areas at the time of letting are required to have an Energy Performance Certificate (EPC) of grade E or above. Properties that have in the past been assessed at Grades F or G are currently occupied. Once they become vacant, we will carry out such works as are necessary to improve their rating to above the minimum level. A number of properties have not been assessed yet as they are let on long-term leases which have not been subject to an expiry since 2008, when EPCs were introduced. They will be scheduled for works, to meet or exceed the requirements of MEES, when the leases expire. Of the EPCs assessed after refurbishment, over 80% were a grade C or above. Number of leases A-E Grade 1,144 F or G grade 168 Unassessed 155 See page 109 for our Greenhouse gas reporting See page 41 for information on greening our villages Shaftesbury Annual Report 2018 37 Strategic report Overview11Strategic report Overview Sustainability and stakeholders continued £0.89m Community Our activities are aligned with the area in which our portfolio is located and community engagement is embedded at all levels of our organisation. We have a long record of close involvement with local charities and not-for-profit organisations which work on initiatives in these communities. Not only are they our neighbours, but the work of our local partners ensures that the West End continues to be a vibrant and diverse destination which supports residents, businesses and cultural organisations and welcomes growing numbers of domestic and international visitors. Our community investment committee oversees the strategic direction and effectiveness of our community giving. Reporting directly to the Board, the committee strengthens our community engagement through its focus on developing our relationships with key community partners and expanding participation opportunities. We have continued our membership of the London Benchmarking Group (LBG). Our contribution is measured in accordance with their framework which provides a standard and comparable methodology. The total contribution comprises more than just cash - it is time given by employees and the cost of properties used for charitable or educational purposes. We provide space to charities and other not-for-profit organisations on a short-term basis to assist in promoting their charity or cause in our areas or provide cost- effective space for organisations in our central locations. The chart shows the breakdown of these elements of our contribution. Our community contribution amounted to £0.89 million which equates to 1.7% of EPRA earnings. We support a wide range of organisations, a number of which are showcased throughout this annual report. Others not mentioned elsewhere include: London College of Fashion, ZSL, Phoenix Gardens, St Anne’s Church, China Exchange, Trekstock and the Chinese Information and Advice Centre. How we contribute What we support Cash 52% Employee time 21% In-kind contributions 19% Management costs 8% Social welfare 28% Other 4% Arts/culture 10% Education 40% Health 8% Environment 10% Shaftesbury Annual Report 2018 38 Key activities CEO Sleepout for The House of St Barnabas Staff, including our Chief Executive, took part in the CEO Sleepout raising funds for The House of St Barnabas, a charity which works to break the cycle of homelessness. A total of £24,000 was raised. Founding Partner of the Young Westminster Foundation As a founding partner, we support the Foundation’s mission to create opportunities for children and young people in Westminster enabling the next generation to fulfil their potential. In this role, we encourage the local community, visitors, occupiers and partners to engage with the initiative. Westminster Lion accreditation A new initiative from Westminster City Council which recognises businesses that work hard to make a positive impact in their communities. Our fifth community breakfast We work with many not-for-profit organisations in the local area. To enable them to meet each other and network, we host an annual community breakfast. More than 80 people attended the breakfast from 30 organisations spanning the arts, education, health, food, organisations for the homeless and elderly, environment, business improvement districts and local councils. Brian Bickell welcomed guests and introduced Councillor Nickie Aiken, Leader of Westminster City Council, who spoke about local issues and the City Council’s priorities. See page 63 for more on community engagement See page 18 for more information on charitable engagement See page 49 for more on our support to the arts Sustainability and stakeholders continued Employees Our team We have a team of 30 full and part-time permanent employees. We operate on an outsourcing business model whereby day-to-day activities are devolved to long-term external advisors, agents and suppliers. Decision-making and strategic functions are not outsourced. Employees by department Executive Directors/company secretarial 5 Property (including marketing) 15 Finance 4 Administration 6 Fairplace Award 2017 We became the first FTSE 250 real estate company to win the prestigious Fairplace Award, an ethical workplace accreditation from property charity the Ethical Property Foundation. The award recognises good policy and practice in the community in terms of funding local projects, carbon footprint and sustainability, and landlord and tenant engagement. Our culture Our culture is open and inclusive. We encourage individuality and independence and we treat others with respect. Our roles are interesting and varied, providing a breadth of experience and interest. Another essential ingredient in making Shaftesbury a good place to work is our culture of encouraging innovation and embracing new ideas. Decisions are made efficiently and employees can see their ideas coming to life. As a business, we make long-term decisions and are proud of our reputation for being a responsible landlord and an integral part of our local community. We care about our impact, aiming to create legacies that sustainably improve our locations. This attracts people to work, and stay working, with us. This is borne out by the fact that our average length of service is 11 years and our employment turnover in 2018 was zero. Diversity and inclusion We are committed to diversity within our team, recognising that diversity of thought, skills and personal attributes contribute to a successful business. As a signatory to the 30% Club, gender diversity at senior levels of our organisation is important but we also recognise that diversity is not just limited to gender. Hence, we also support Real Estate Balance which seeks to address the gender imbalance in property. Our approach is reflected in our recruitment procedures where we ensure that we recruit from the widest talent pool and consider a full spectrum of attributes and backgrounds. We support the Pathways to Property programme which aims to improve diversity in the property sector by introducing students from less-advantaged and non-traditional backgrounds to the industry. Pay and benefits We offer our employees competitive remuneration packages which recognise their contribution to our business. Everyone, regardless of their role or level of seniority, receives the same benefits, including participation in our LTIP scheme, a generous pension scheme and a tailored development programme. Volunteering leave was introduced last year and 14% of employees have taken advantage of the flexible working arrangements we offer which are designed to accommodate different working patterns. Training and development Investment in the training and development of our employees is essential to our long-term success. All employees have access to training and development tools and support that they require for their day-to-day roles and for their career progression. We offer a wide suite of training opportunities which can comprise psychometric analysis, 360-degree assessment, external courses, internal training and professional development. This year, we have partnered with Henley Business School to enable senior employees to undertake more intensive development training. We have engaged a human resource specialist to assist with our strategic approach to employees and to formalise procedures we have in place. As we are part way through this work, we expect to be able to report more extensively next year. For the first time, we have undertaken an employee survey, so that we can be aware of our working environment and the expectations of employees. The results of this will be reported in next year’s annual report. Number of employees Female Females on Executive Committee (excluding executive directors) 2018 30 60% 57% 2017 29 59% 57% Percentage of female board members 30% 30% Average training hours per employee Average length of service (years) Employee turnover (number) Absentee rate (EPRA calculation) Employees with flexible working arrangements 19 11 0 1.6 14% 16 12 1 0.96 14% See also the Nomination Committee report on pages 80 to 81 for the Board’s approach to gender diversity. See page 8 for more information on supporting the diversity agenda Shaftesbury Annual Report 2018 39 Strategic report Overview11 40 Shaftesbury and the environment Window boxes and planters Across our portfolio, we have over 1,000 window boxes, 105 planters and 50 hanging baskets, planted with "bee-friendly" species. Green walls and roofs Twelve green roofs and walls, together with over 1,700 sq. ft. of sedum pods increase biodiversity across our areas. Bees’ Needs Week Carnaby became a hive of activity as, together with many of our tenants, we supported Bees’ Needs Week to raise awareness of the importance of pollinators to the beauty of our landscapes and our economy. We have five bee hives in Carnaby and Covent Garden. The greening of our villages is an intrinsic part of our sustainability strategy With over 200 million visits annually to the West End, we recognise the importance that thriving green spaces play in the city environment . Across our portfolio, we have a number of features which not only make our locations more pleasant places to spend time, by encouraging biodiversity, improving air quality and encouraging access to green spaces. Further details on our approach to sustainability are set out on pages 34 to 37. Left: Together with other West End property owners, we have formed "Wild West End" which is working to encourage birds, bees and bats back into the West End. Situated between four of London’s Royal Parks, the partnership aims to create a connecting network of green stepping stones through a combination of green roofs, green walls, planters, street trees and flower boxes. This benefits not just wildlife and the environment, but all those who come to the area. As part of our biodiversity strategy, we have created a roof-top garden at our office planted with pollinator-friendly plants. Shaftesbury Annual Report 2018 41 Strategic report Annual review Portfolio report Relentless asset management and leasing activity continues to drive high occupancy, rental growth and the valuation of our portfolio. Valuation Portfolio valuation1 Our portfolio, including our 50% share of the Longmartin joint venture, has been valued at 30 September 2018 at £3.95 billion, an increase of £304.9 million over the year. After allowing for acquisitions, disposals and capital expenditure, the revaluation surplus1 was £118.1 million. This surplus reflects: • strong investor demand for well-located assets with the prospect of high occupancy, growth in rents and cash flows, yet limited exposure to obsolescence; • the benefits of our asset management activity delivering increased contracted income and improved ERV, with the incremental benefits often having a compound effect across nearby holdings; • the relative affordability of our rents in our high footfall locations compared with nearby streets; and • robust occupier demand in our carefully-curated locations and the resilience this provides against the headwinds that are impacting wider UK high street rents and occupancy. Like-for-like valuation growth was 3.8%, comprising 4.2% in the wholly-owned portfolio, partly offset by a decline of 2.4% in the Longmartin joint venture. Continued investor demand and limited supply Our portfolio, in the heart of the West End, has a history of delivering sustained rental growth and sector outperformance over the long term. Unsurprisingly, existing owners of the types of buildings we seek to acquire remain reluctant to sell in this especially prosperous and resilient area, severely limiting the availability of assets to buy. Macroeconomic uncertainty is continuing to focus institutional and private investors on less cyclical locations and secure income streams. This, together with a limited supply of investment opportunities, means that when assets become available, competition is intense. The equivalent yield attributed by our valuers to our wholly-owned portfolio reduced by 5 basis points in the six months to 31 March 2018 and remained flat over the following six months at 3.41% (2017: 3.46%). The valuation of the geared long leasehold interest held by the Longmartin joint venture fell over the year by 2.4%, of which 1.9% was reported in the first half. The equivalent yield has remained broadly flat at 3.82% (2017: 3.80%). However, during the year, our valuers have reduced their estimate of retail ERVs on Long Acre by 8.5%, of which 5% was reported in our interim results. This reflects a lack of recent letting evidence and a potential increase in availability of large shops in this “high street” location, where rental tones have increased significantly over recent years. Additionally, the valuation takes into account the short-term impact of securing vacant possession of space for our planned restaurant scheme in St Martin’s Courtyard. Potential for greater value Cushman & Wakefield, independent valuer of our wholly-owned portfolio, has continued to note that: • our portfolio is unusual in its substantial number of predominantly restaurant, leisure and retail properties in adjacent, or adjoining, locations in London’s West End; and • there is a long record of strong occupier demand for these uses in this location and, as a result, high occupancy levels, which underpins the long-term prospects for rental growth. Consequently, they have reiterated to the Board that some prospective purchasers may recognise the rare and compelling opportunity to acquire, in a single transaction, substantial parts of the portfolio, or the portfolio in its entirety. Such parties may consider a combination of some, or all, parts of the portfolio to have a greater value than currently reflected in the valuation included in these financial statements, which has been prepared in accordance with RICS guidelines. Simon Quayle Property Director Tom Welton Property Director Shaftesbury Annual Report 2018 42 See page 47 for information on St Martin’s Courtyard See page 25 for the relative affordability of our rents Portfolio valuation (£bn)1,4 5 9 . 3 4 6 3 . 5 3 3 . 3 1 . 3 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 1 6 2 . 4 1 0 2 £3.95bn Valuation growth (%)1,2,4 0 . 1 2 . 0 8 1 4 1 0 2 5 1 0 2 0 4 . 6 1 0 2 0 7 . 7 1 0 2 8 . 3 8 1 0 2 3.8% ERV growth (%)1,2,4 6 6 . 0 7 . . 7 5 . 5 3 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 4 . 2 8 1 0 2 2.4% Portfolio report continued Annualised current income £m 44.8 30.2 24.1 9.4 4.9 ERV £m 57.2 37.6 31.6 11.6 5.7 113.4 143.7 8.1 10.3 Topped-up net initial yield % Equivalent yield % 2.96% 2.78% 2.67% 2.90% 2.83% 2.84% 3.16% 3.56% 3.26% 3.34% 3.44% 3.31% 3.41% 3.82% Fair value £m % of portfolio 1,424.7 1,013.7 837.2 300.8 148.2 36% 26% 21% 7% 4% 94% 6% Village Carnaby Covent Garden Chinatown Soho Fitzrovia Village Carnaby Covent Garden Chinatown Soho Fitzrovia Wholly-owned portfolio4 3,724.6 Longmartin joint venture3 224.6 Total portfolio1,4 3,949.2 100% 121.5 154.0 2018 valuation growth2 5-year CAGR2 3.9% 4.0% 4.2% 6.2% 4.5% 4.2% 3.8% 12.1% 9.6% 9.4% 10.8% 11.0% 10.6% 8.6% 10.5% Wholly-owned portfolio4 Longmartin joint venture3 -2.4% Total portfolio1,4 1 I ncluding our 50% share of the Longmartin joint venture. See presentation of financial information on page 51 2 Like-for-like. See Glossary on page 148 for definition 3 Our 50% share 4 Portfolio excluding non-core asset acquired as part of a portfolio. See note 8 on page 126 for a reconciliation to the financial statements Shaftesbury Annual Report 2018 43 Strategic report Annual review2 Strategic report Annual review Portfolio report continued Reversionary potential Converting our portfolio’s reversionary potential into contracted income and cash flow, while further increasing rental values, are key drivers to long-term value creation. Our leasing and active asset management activity during the year has, once again, delivered growth in both annualised current income and ERV. At 30 September 2018, annualised current income stood at £121.5 million following a like-for-like increase of 5.1% over the year. Annualised current income1,3 (£m) Total ERV, which is based on today’s rental tones, and largely reflects rental evidence established through leasing transactions, was estimated by our valuers at £154.0 million. Excluding the impact of acquisitions and disposals, which contributed £6.0 million (net), like-for-like growth was 2.4%. The total reversion now stands at £32.5 million, 26.7% above annualised current income. The components of this reversionary potential are shown below. We remain confident that, through our proven long-term management strategy, we shall not only continue to convert this rental potential into cash flow, but also deliver further long-term growth in rental values. ERV1,3 (£m) 6.4 144.5 3.5 154.0 (0.4) 2.4% 114.1 1.9 (0.3) 5.1% 5.8 121.5 100 100 2017 Acquisitions Disposals Like-for-like growth2 2018 2017 Acquisitions Disposals Like-for-like growth2 2018 Components of the reversion1,3 (£m) Contracted/ rent-free periods On expiry of rent-free periods Scheme vacancy On completion and letting of schemes in progress at 30 September 2018 ERV - based on current rental evidence Annualised current income How it will be realised EPRA vacancy On letting of space available at 30 September 2018 Under-rented leases Through the normal cycle of rent reviews, lease renewals and lettings. This is typically converted to contracted income over a 3 – 5 year period 9.3 154.0 11.8 +26.7% 121.5 100 7.3 4.1 Annualised current income Contracted/ rent-free periods EPRA vacancy Scheme vacancy Under-rented leases ERV - based on current rental evidence 1 Including our 50% share of the Longmartin joint venture. See presentation of financial information on page 51 2 Like-for-like. See Glossary on page 148 3 Excluding a non-core asset acquired as part of a portfolio Shaftesbury Annual Report 2018 44 Leasing and occupancy Leasing During the year, we concluded lettings, lease renewals and rent reviews in the wholly-owned portfolio with a rental value of £31.4 million (2017: £31.1 million), equating to 21.9% of ERV. Commercial leasing transactions totalled £23.2 million (2017: £23.8 million) and residential lettings and renewals amounted to £8.2 million (2017: £7.3 million). Rents for commercial uses were, on average, 5.1% above ERV at 30 September 2017, providing useful evidence for our valuers. At 30 September 2018, space with a rental value of £3.7 million was under offer. Commercial Lettings and renewals Rent reviews 2018 £m 14.5 8.7 +4.0% vs September 2017 ERV +25.4% vs previous rent (5-year CAGR: +4.6%) 23.2 +5.1% vs September 2017 ERV Thomas Neal’s Warehouse (0.6% of ERV1) 100% let2 In the heart of Seven Dials, Thomas Neal’s Warehouse is a unique flagship retail unit extending to 22,800 sq. ft. including 3,000 sq. ft. of restaurant space. In autumn 2017, we agreed terms with an international retailer over the whole space but in August 2018 they withdrew. At 30 September 2018, this unit was under offer again, and recently we have completed the lease. Opening in summer 2019, this food hall concept will further strengthen Seven Dials as a popular and distinctive retail and leisure destination. Residential Lettings and renewals Total 8.2 31.4 -0.1% vs previous rent Central Cross, Chinatown (2.6% of ERV1) Our share of leasing transactions in the Longmartin joint venture was £1.4 million (2017: £3.9 million). Progress at our completed larger schemes 57 Broadwick Street, Carnaby (1.7% of ERV1) 70% let or under offer2 30% available2 Located at the eastern gateway to Chinatown, our scheme provides 28,500 sq. ft. of retail space and 20,400 sq. ft. of restaurant and café accommodation. At 30 September 2018, 76% of the scheme was let or under offer. Subsequently, we have placed another unit under offer, but one offer has been withdrawn. At 26 November 2018, the scheme was 70% let or under offer: • Eight of the nine restaurant, café and leisure units (ERV: £1.8 million) had been let and one (ERV: £0.3 million) was under offer. • Two retail units (ERV: £0.5 million) were under offer and three units (ERV: £1.1 million), extending to 19,400 sq. ft., were available and are being marketed. 100% let We completed and let this mixed-use scheme, at the eastern entrance to Carnaby, during the year. On the lower floors, where we created new retail and restaurant space, we have introduced an online retailer who wanted a presence in Carnaby, and a new restaurant concept. 1 Wholly-owned portfolio 2 Letting status at 26 November 2018 Portfolio report continued Shaftesbury Annual Report 2018 45 Strategic report Annual review2 Strategic report Annual review Portfolio report continued EPRA vacancy1 at 30 September 2018 Restaurants, cafés and leisure Shops Offices Residential Total % of total ERV 2018 % of total ERV 2017 Larger schemes2 Under offer Available-to-let Other vacancy Under offer Available-to-let Total Under offer Available-to-let - 0.3 0.3 0.2 0.2 0.4 0.2 0.5 1.9 0.6 2.5 1.4 1.2 2.6 3.3 1.8 - - - 0.1 0.5 0.6 0.1 0.5 - - - 0.1 0.1 0.2 0.1 0.1 1.9 0.9 2.8 1.8 2.0 3.8 3.7 2.9 1.3% 0.6% 1.9% 1.3% 1.4% 2.7% 2.6% 2.0% 0.2% 3.3% 3.5% 0.8% 1.7% 2.5% 1.0% 5.0% £0.7m £5.1m £0.6m £0.2m £6.6m 4.6% 7,500 sq.ft. 99,900 sq.ft. 79,000 sq.ft. 3,900 sq.ft. 9,500 sq.ft. 6.0% 109,900 sq.ft. EPRA vacancy1 EPRA vacancy decreased by 1.4% to 4.6% of total ERV over the year, following letting progress at our larger schemes. Excluding these larger schemes, EPRA vacancy was 2.7%, of which 1.3% was under offer. Other vacancy Excluding larger schemes, available-to-let vacancy comprised nine shops (ERV: £1.2 million), 8,000 sq. ft. of office space (ERV: £0.5 million), one restaurant and one café (ERV: £0.2 million) and two apartments (ERV: £0.1 million). Space under offer included eight shops, two restaurants, 1,500 sq. ft. of offices and three flats. In the Longmartin joint venture, four shops (8,400 sq. ft.), one apartment and 5,700 sq. ft. of office space were available. The ERV of our 50% share of this space was £0.7 million, of which £0.3 million was under offer. Asset management activity Conservation status and listed building legislation limits wholescale development in our areas. However, through refurbishment and reconfiguration, we improve our buildings to improve their income prospects and unlock value. This involves a combination of: • maximising trading space across the lower floors. • converting under-utilised space on upper floors to introduce more valuable uses. • improving environmental performance. Annual capital expenditure is normally around 1% of portfolio value. Whilst capital outlay on schemes is generally modest, often the loss of income is a relatively large part of the overall cost. Schemes during the year extended to 177,200 sq. ft. (9.7% of wholly-owned floor space). Capital expenditure totalled £25.3 million, representing 0.7% of wholly-owned portfolio value. This included £4.8 million in respect of 57 Broadwick Street, Carnaby. At 30 September 2018, vacant space held for, or under, refurbishment extended to 174,700 sq. ft. and represented 7.6% of ERV. This included 65,300 sq. ft. at 72 Broadwick Street, where we recently secured vacant possession. During the year, schemes with an ERV of £8.1 million completed, including 57 Broadwick Street, Carnaby. New schemes with an ERV of £10.0 million commenced, of which our larger scheme at 72 Broadwick Street, Carnaby, accounted for £4.0 million. Our current schemes are not expected to make a significant contribution to revenue in the year ending 30 September 2019. See page 45 for information on 57 Broadwick Street, Thomas Neal’s Warehouse and Central Cross 1 Wholly-owned portfolio 2 Thomas Neal’s Warehouse and Central Cross Shaftesbury Annual Report 2018 46 Vacant space1 held for, or under, refurbishment at 30 September 2018 Restaurants, cafés and leisure 0.1 Larger schemes2 Other schemes 2.9 Shops - 0.6 Offices 3.5 2.5 Residential 0.4 0.9 Total 4.0 6.9 % of total ERV 2018 2.8% 4.8% % of total ERV 2017 1.7% 4.9% Portfolio report continued £3.0m £0.6m £6.0m £1.3m £10.9m 7.6% 40,700 sq.ft. 10,900 sq.ft. 93,300 sq.ft. 29,800 sq.ft. 174,700 sq.ft. 6.6% 124,000 sq.ft. Other schemes Excluding 72 Broadwick Street, we had 47 other schemes underway at 30 September 2018, extending to 109,400 sq. ft. and representing 4.8% of ERV. These included 39,600 sq. ft. of restaurants and cafés (ERV: £2.9 million), 10,900 sq. ft. of shops (ERV: £0.6 million), 39,500 sq. ft. of office space (ERV: £2.5 million), and 32 apartments either being created or upgraded (ERV: £0.9 million). These included some medium-sized schemes, as set out below. Longmartin In the Longmartin joint venture, our share of capital expenditure in the period was £2.4 million. At 30 September 2018, the ERV of our 50% share of space held for refurbishment was £0.9 million. This included: • Our mixed-use commercial scheme on the corner of Long Acre and Upper St Martin’s Lane, currently on track to complete in spring 2019. Our share of the cost is £4.6 million of which £3.1 million has been spent to date. • A scheme to improve St Martin’s Courtyard, including creating two new restaurants whilst reconfiguring a third, which we will commence shortly. Expected to complete in autumn 2019, our share of the cost is £3.7 million. Public realm improvements We identify and contribute to public realm improvements in our villages. In our experience, creating safe and welcoming environments is an important catalyst for long-term growth in footfall and spending. During the year, the scheme to improve the pedestrian environment on the west section of Earlham Street completed. Together with the recently-completed improvements to Cambridge Circus, we are seeing increased footfall already, and expect this to grow further once the Elizabeth Line opens. Westminster City Council’s extensive public realm scheme encompassing Newport Place and Newport Court, which we have funded, is now complete and has transformed the eastern end of Chinatown. The new part-pedestrianised public square in Newport Place will provide a focal point for visitors, and, subject to planning and licensing, will provide the opportunity for al fresco dining for the first time in Chinatown. Scheme Description 1 Gerrard Place, Chinatown Reconfiguration to create two restaurants, including active frontage in Horse & Dolphin Yard, and 9 apartments 45/49 Charing Cross Road, Chinatown Reconfiguration and extension to provide new flagship restaurant space at this gateway to Chinatown and five apartments 50 Marshall Street, Carnaby Creation of retail unit and refurbishment and 1 Little Marlborough Street, Carnaby extension of office space. Office extension and refurbishment Estimated cost £m Costs to date £m Estimated completion 6.4 3.6 5.0 2.6 1.1 0.8 - 0.6 Autumn 2019 Summer 2019 Summer 2020 Summer 2019 1 Wholly-owned portfolio 2 2018: 72 Broadwick Street, 2017: 57 Broadwick Street Read more on 72 Broadwick Street on page 50 Read more on public realm improvements on page 72 Shaftesbury Annual Report 2018 47 Strategic report Annual review2 48 We are supporters of the arts With over 40 live theatres, world-class museums, galleries and live music venues, the arts are an important part of the patchwork of features which make the West End so special. Our support, provided in a variety of ways, some of which are noted here, helps ensure the West End continues to be a thriving cultural and creative hub. Left: We participated in Lumiere London 2018, the UK’s largest light festival. Featuring more than 50 artworks by UK and interna- tional artists, the festival attracted huge numbers of visitors. We contributed a number of pieces, including puppeteer-operated flame-coloured flamingos in Chinatown, our giant plug, bulbs and Shaida Walking installations in Carnaby and, in Seven Dials, an iconic telephone box which had been transformed into a contemporary aquarium. Shaftesbury and the arts Donmar We are a corporate sponsor of this not-for-profit theatre in Seven Dials, which is renowned for its diverse artistic policy and exceptional educational work with young people and budding artists. ENO community choir We are founding funders of this choir, which is open to all who live or work in Westminster, providing the opportunity to learn, sing with professional opera singers, attend dress rehearsals at the Coliseum and sing in public. Soundtrack As part of the Mayor of London’s “Sounds like London” campaign, Soundtrack was a popular one-day music festival in Seven Dials, which showcased up and coming music, comedy and theatre acts. Stage One Through subsidised space, we help this charity which aids aspiring theatre producers get on the career ladder and provides them with valuable co-working space. Soho Music Month Carnaby and Soho celebrated Soho Music Month in June. Events included an all-female record market in Berwick Street, and an exhibition, Platform LDN, in Carnaby. Many tenants participated, putting on music sessions and hosting events. There was also an educational element with local students working towards their Open College Network qualification. Shaftesbury Shaftesbury Annual Annual Report 2018 Report 2018 49 49 Strategic report Annual review Acquisitions Whilst the availability of assets to buy continues to be limited, during the year, we secured acquisitions totalling £167.8 million. Acquisitions When seeking out new acquisitions, we remain disciplined, concentrating on buildings: • in, and around, our areas; • which have a predominance of, or potential for, restaurant, leisure and retail uses; and • which offer the potential for future rental growth, either individually or through combination with our existing ownerships. 72 Broadwick Street, Carnaby In early December 2017, we acquired the freehold of 72 Broadwick Street, situated at the important eastern gateway to Carnaby, for £92.1 million. The Group already owned an ungeared long leasehold interest over 13,900 sq. ft. of retail and café space in the lower floors of the building. Acquiring the freehold gave us control over this important 0.5 acre site, which, on purchase, provided 54,100 sq. ft. of office accommodation, eleven apartments extending to 11,200 sq. ft. and a large basement car park. In September 2018, we secured vacant possession of the office and residential space, and held a public consultation on our plans for this building, which include: • introducing new retail, restaurant and leisure uses; • relocating the office and residential entrances; • refurbishing and extending the remaining office space; and • reconfiguring and upgrading the residential accommodation. We will be submitting a formal planning application shortly and, subject to receiving the necessary consents, expect to start our works in summer 2019. Ahead of this, we have commenced stripping out the space. We estimate our enhanced scheme will take two years at a cost of around £30 million. Neal Street, Seven Dials In late December 2017, we acquired six shops on Neal Street, Seven Dials, for £24.4 million. Adjacent to existing holdings, these buildings increase our ownership of frontages on the northern section of Neal Street to around 70%. Situated close to the Tottenham Court Road Crossrail hub, we expect the northern end of Neal Street to see material footfall growth once the Elizabeth Line service starts next year. Current rental tones on this part of the street are significantly lower than at the southern end. However, with the benefit of growing footfall and our careful curation, we expect this differential in rents will narrow significantly over the medium term. Great Marlborough Street, Carnaby In March 2018, we purchased the freehold of 35 and 36 Great Marlborough Street, for £22.5 million. Located at the busy northern gateway to Carnaby, the buildings comprise two food retail units (3,000 sq. ft.) and 4,250 sq. ft. of office accommodation on the upper floors. We are discussing plans with Westminster City Council to improve the street-scape in the vicinity, which, together with our wider estate management strategy, will improve medium-term rental growth prospects for this part of Carnaby. Other acquisitions Other acquisitions during the year totalled £28.8 million. These additions to our portfolio in Carnaby, Covent Garden, Chinatown and Soho comprised one restaurant, one café, one bar, one shop, 9,200 sq. ft. of office space and one apartment. These offer the potential for good rental and capital growth through short and medium-term asset management initiatives. 90-104 Berwick Street, Soho (forward purchase) The redevelopment of 90-104 Berwick Street, Soho, which we have contracted to purchase once it has been completed, has been delayed. We now anticipate completing the acquisition of this long leasehold interest, for £41 million, including acquisition costs, in mid-2019. Located at the southern end of Berwick Street, the development will provide 12,500 sq. ft. of retail, a 5,500 sq. ft. supermarket, a 2,000 sq. ft. restaurant and a 110-bedroom hotel. Both the hotel and supermarket have been pre-let, representing two thirds of the expected income from the property. Following this acquisition, we will own around 50% of Berwick Street’s frontages. Andrew Price Portfolio Executive Shaftesbury Annual Report 2018 50 Strategic report Annual review Financial results Strategic report Annual review £93.8m net property income +6.2% £175.5m profit after tax (41.8)% 58.1p basic EPS (46.3)% 16.8p dividends per share +5.0% Chris Ward Finance Director £51.7mEPRA earnings1 +14.4% 17.1pEPRA EPS1 +5.6% £9.91 EPRA NAV1 +4.1% Presentation of financial information EPRA measures As is usual practice in our sector, we produce alternative measures for certain indicators, including earnings, making adjustments set out by EPRA in its Best Practice and Policy Recommendations. EPRA earnings are a measure of the level of underlying operating results and an indication of the extent to which current dividend payments are supported by recurring earnings. In our case, EPRA earnings exclude portfolio valuation movements, profits on disposal of investment properties and deferred tax arising in our Longmartin joint venture. In 2017, it also excluded fair value movements in respect of interest rate swaps, until they were cancelled in September 2017. EPRA NAV is a sector-recognised benchmark, which makes adjustments to reported NAV to provide a measure of the fair value of net assets on a long-term basis. Assets and liabilities which are not expected to crystallise in normal circumstances are excluded. In our case, the calculation excludes deferred tax related to property valuation surpluses in the Longmartin joint venture. Net asset value return measures shareholder value creation, taking into account the growth in EPRA NAV together with dividends paid in the year. Presentation of investment properties and debt Our property portfolio is a combination of properties which are wholly-owned by the Group and our 50% share of property held in the Longmartin joint venture. The financial statements, prepared under IFRS, include the Group’s interest in its joint venture as one-line items in the Income Statement and Balance Sheet. The analysis that follows is based on the IFRS financial statements. Internally, management consider the valuation of properties and our debt position on a proportionally consolidated basis, including our 50% share of the joint venture. Consequently, the analysis of the valuation on pages 42 to 44 and the finance review on pages 55 to 56 are presented on this proportionally consolidated basis. We consider that this presentation better explains to stakeholders the Group’s activities and financial position. Measures presented on a proportional consolidation basis are alternative performance measures (APMs) as they are not defined under IFRS. Further details on APMs used in this annual report, and how they reconcile to IFRS, are set out on page 140. 1 An alternative performance measure. See page 140 Shaftesbury Annual Report 2018 51 2Strategic report Annual review Financial results continued Income statement Net property income Administrative expenses Valuation gains and disposal profits Operating profit Net finance costs Interest rate swaps fair value movements Share of Longmartin post-tax results Profit before tax Tax Reported earnings for the year Basic earnings per share EPRA earnings1 EPRA earnings per share1 2018 £m 93.8 2017 £m 88.3 (13.7) (14.1) 127.7 207.8 231.7 305.9 (31.2) (32.7) - (1.1) 22.0 6.4 175.5 301.6 - 175.5 58.1p 51.7 17.1p - 301.6 108.1p 45.2 16.2p Profit after tax Profit after tax for the year was £175.5 million (2017: £301.6 million) and basic earnings per share was 58.1p (2017: 108.1p). The decrease in profit after tax was largely due to a lower revaluation surplus in the wholly-owned portfolio this year. Together with disposal profits, this contributed £127.7 million (2017: £231.7 million). Additionally, earnings were boosted last year by a gain on the fair value of interest rate swaps of £22.0 million. These swaps were cancelled in September 2017. Higher net property income, lower administrative costs, and reduced net finance costs, together, increased profit after tax by £7.4 million. This was partly offset by a post-tax loss in the Longmartin joint venture, our share of which reduced earnings by £1.1 million in 2018, compared with a profit in 2017 of £6.4 million. The results of the joint venture are set out on page 53. EPRA earnings1 EPRA earnings increased by 14.4% to £51.7 million (2017: £45.2 million) and EPRA earnings per share grew 5.6% to 17.1p (2017: 16.2p). The smaller relative increase in EPRA earnings per share, compared with that for EPRA earnings, reflects the additional shares in issue following the equity placing in December 2017. EPRA earnings are reconciled to profit after tax in note 22 to the financial statements. The increase in EPRA earnings was driven principally by growth in net property income and lower net finance costs, partly offset by lower net property income in the Longmartin joint venture, largely due to scheme vacancy. EPRA earnings1 5.5 0.4 1.5 51.7 (0.9) 45.2 20 2017 Admin costs Longmartin 2018 Net property income Net finance costs Net property income Rents receivable increased by 9.1% to £112.8 million (2017: £103.4 million), reflecting continued conversion of our portfolio’s reversionary potential into contracted cash flow, together with the impact of acquisitions. Excluding acquisitions and disposals, the like-for-like increase was 6.4%. Turnover-related rental top-ups made a useful contribution, totalling £1.1 million (2017: £0.7 million). Acquisitions accounted for £3.3 million of the increase, while disposals reduced rents receivable by £0.4 million compared with last year. Rents receivable 6.5 112.8 103.4 3.3 (0.4) 70 2017 Acquisitions Disposals 2018 Like-for-like Growth Irrecoverable property charges were £19.0 million (2017: £15.1 million). The increase in property operating costs reflects: • growing our promotional and social media activities, an essential aspect of our strategy to drive footfall and spending; • a high incidence of repairs and maintenance projects in the year, the cost of which is only partly recoverable through service charges; • increases in estate management costs; and • buying in leases to allow us to improve our tenant mix. Net property income was £93.8 million, up 6.2% (2017: £88.3 million). Shaftesbury Annual Report 2018 52 Portfolio valuation: pages 42 to 44 Acquisitions: page 50 Read more on the equity placing on page 56 Promoting our destinations: page 21 Administrative expenses Administrative expenses amounted to £13.7 million (2017: £14.1 million). Despite increased headcount, employee costs were £1.4 million lower than in 2017, due to decreased charges for variable compensation. Other administrative costs were £1.0 million higher than last year, largely as a result of increased professional fees and irrecoverable VAT. Valuation gains and disposal profits Our wholly-owned portfolio’s revaluation surplus was £123.1 million (2017: £230.6 million), representing like-for-like valuation growth of 4.2% (2017: 7.5%), principally driven by a like-for-like increase in ERV of 2.6% (2017: 3.4%) and yield compression of five basis points (2017: 11 basis points compression). Disposals of non-core properties generated net proceeds, after sale costs, of £13.3 million (2017: £13.4 million) and a surplus over 2017 book value of £4.6 million (2017: £1.1 million). These included three shops, 1,875 sq. ft. of office space and three apartments, as well as nine lease extension premiums received from residential long leaseholders. Net finance costs Net finance costs decreased by £1.5 million to £31.2 million (2017: £32.7 million). This reflects the benefits of reduced borrowing costs following the refinancing last year, together with lower net debt and higher interest income following the equity placing in December 2017. These savings were partly offset by an accelerated write-off of previously unamortised loan issue costs, totalling £0.3 million, following the refinancing of our bank facilities in February 2018. Tax As a REIT, the Group’s activities are largely exempt from corporation tax. As a result, there is no tax charge in the year (2017: £Nil). As with most businesses, we do collect and pay other taxes and levies e.g. payroll taxes, VAT, stamp duty land tax, business rates, and withholding tax on Property Income Distributions. During the year, the total amount paid in respect of these taxes amounted to £29.2 million (2017: £18.1 million). In addition, our share of taxes, including corporation tax, levied on, or collected by, the Longmartin joint venture was £1.8 million (2017: £0.9 million). Tax strategy The Group’s tax strategy is to account for tax on an accurate and timely basis. Our appetite for tax risk is low and we structure our affairs based on sound commercial principles, rather than engaging in aggressive tax planning. We maintain an open dialogue with HMRC with a view to identifying and solving issues promptly. HMRC have designated us as a ‘low risk’ taxpayer, a status we aim to maintain. Our detailed tax strategy is available on our website. Share of Longmartin post-tax results Following the reduction in the valuation of Longmartin’s investment property (see page 43), the joint venture delivered a loss after tax for the year, our 50% share of which was £1.1 million (2017: profit of £6.4 million). Our share of the revaluation deficit was £5.0 million, compared with a surplus last year of £2.6 million. Excluding this revaluation loss and the related deferred tax credit, our share of EPRA earnings1 from the Longmartin joint venture decreased by £0.9 million to £2.8 million (2017: £3.7 million). This reduction was largely due to scheme-related vacancy during the year and the benefit, last year, of back-rents following rent review settlements. Dividends Dividend strategy As a REIT, we are required to distribute a minimum of 90% of qualifying REIT income, calculated by reference to tax rather than accounting rules, as a PID. This is treated as income for investors, and is taxed according to their own tax status. PIDs are subject to withholding tax at basic rate income tax, except for certain classes of investors who can register to receive their distributions gross, rather than net. Notwithstanding this distribution requirement, our dividend policy is to maintain steady growth in dividends, reflecting the long-term trend in our income and EPRA earnings, adjusted to add back the non-cash accounting charge for equity-settled remuneration. To the extent that dividends exceed the amount available to distribute as a PID, we pay the balance as ordinary dividends. Principal risks and uncertainties, including those which might affect income and earnings, are set out on pages 59 to 60. The Board monitors the Group’s ability to pay dividends out of available resources and distributable reserves. Prospective dividend payments are estimated in our forecasts, which also take into consideration future liquidity requirements. At 30 September 2018, we had distributable reserves of £222.2 million. It is our policy, where possible, for subsidiary companies to distribute the majority of their distributable profits to Shaftesbury PLC annually. Currently, there are no restrictions on any subsidiaries’ ability to distribute profits. The Board has recommended a final dividend of 8.5 pence per share, an increase of 4.9% on last year’s final dividend (2017: 8.1 pence). This brings the total dividend for the year to 16.8 pence per share, an increase of 5.0% on 2017 (16.0 pence). This increase reflects growth in net property income and earnings enhancements from last year’s refinancing. Total dividends for the year are covered 1.02 times by EPRA earnings per share1 and 1.03 times by adjusted earnings per share1, after adding back the non-cash accounting share option charge of £0.6 million (2017: £1.4 million). Annual bonus outcome: page 100 Portfolio valuation: pages 42 to 44 Financial management: pages 55 to 56 Financial results continued 1 An alternative performance measure. See page 140 Shaftesbury Annual Report 2018 53 Strategic report Annual review2Strategic report Annual review Financial results continued The total distribution for the year will be £51.6 million, 9.6% higher than last year (2017: £47.1 million). This reflects the increased dividend per share and the greater number of shares now in issue, and is fully covered by adjusted EPRA earnings1 of £52.3 million. If approved at the 2019 AGM, the final dividend will be paid on 15 February 2019 as an ordinary dividend. EPRA NAV EPRA NAV per share1 increased by 39p (4.1%) to £9.91 during the year (2017: £9.52). Revaluation surpluses, including disposal profits, added 39p, comprising 41p from the wholly-owned portfolio less our share of the revaluation deficit in the Longmartin joint venture. EPRA earnings of 17.1p per share largely were offset by dividends paid (16.4p per share). EPRA NAV is reconciled to net assets in note 22 to the financial statements. Dividends vs adjusted earnings1 (pence per share) Dividends 5-year CAGR: 6.1% EPRA NAV1 (pence per share) 17 952 (16) 17.3 16.8 16.7 16.0 39 991 (1) 13.75 13.9 13.1 13.2 14.7 14.7 2014 2015 2016 2017 2018 Dividends Adjusted EPS1 Balance Sheet Investment properties 3,714.8 3,407.3 2018 £m 2017 £m Investment in joint venture Net debt Other net assets Net assets NAV per share1 EPRA NAV per share1 Net asset value return1 143.9 (841.3) 15.6 148.0 (914.2) 5.8 3,033.0 2,646.9 £9.87 £9.91 5.8% £9.49 £9.52 8.9% Net assets Net assets increased by £386.1 million, predominantly due to the equity placing in December 2017, which added £260.4 million, and profit after tax of £175.5 million, partly offset by dividends paid which totalled £50.6 million. 900 2017 EPRA earnings Revaluation 2018 Dividends Share placing/ rounding Cash flows and net debt Net debt decreased by £72.9 million to £841.3 million (2017: £914.2 million). The major cash flows were: • net proceeds from the share placing of £260.4 million. • net capital investment in our portfolio of £181.1 million. • operating cash inflow totalling £46.3 million. • dividends paid amounting to £50.6 million. Net cash flows from investing activities in respect of the Longmartin joint venture were nil, following receipt of dividends totalling £3.0 million, offset by an equal amount advanced under the shareholder loan agreement. Net debt1 (£m) 181.1 914.2 50.6 (46.3) (260.4) 2.1 841.3 600 2017 Dividends Equity placing 2018 Operating cash inflow Net portfolio investment Other 1 An alternative performance measure. See page 140 Shaftesbury Annual Report 2018 54 Share placing: page 56 Portfolio valuation: pages 42 to 44 Strategic report Annual review Financial management Equity placing and refinancing activities completed during the year. Long-term financing and available resources continue to support our long-term investment strategy. Our approach to financial management Investment in our portfolio is funded through a combination of equity and debt, with equity providing the permanent capital to support our long-term strategy. Debt provides capital for investment in our portfolio. Under REIT rules, we are required to distribute the majority of our recurring earnings. Furthermore, the importance of our ownership clusters in long-term value creation means that opportunities to recycle capital are limited. We seek to minimise financing risk and whilst we do not set out loan-to-value targets, over the long term, we would expect debt to represent around one third of our invested capital. Typically, when gearing approaches the upper limit of our tolerance, we look to secure additional equity funding to provide financial capacity for continued investment in our portfolio. Key aspects of our debt arrangements are: • Conservative leverage • Spread of maturities and sources of finance We use debt to enhance, not drive, returns. Reduces refinancing risk. • Long-term arrangements form the core of our debt finance Consistent with the long-term nature of our portfolio and secure income streams. • Medium-term revolving facilities Provide flexibility and the ability to act swiftly when acquiring properties. • Majority of interest is fixed Limits exposure to interest rate risk. Loan to value1,3,4 Sources of finance1 Interest cover1,4 Blended cost of debt1,2,4 22.8% . 7 6 2 . 2 4 2 8 . 2 2 . 6 3 2 . 2 2 2 £1.2bn Bonds5 Revolving bank facilities6 Term loans5 18% 36% 46% 2.6x . 6 2 3 2 . 0 2 . 1 . 2 1 . 2 3.2% 1 . 5 . 9 4 . 5 4 3 3 . 2 . 3 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 1 Including our 50% share of Longmartin debt. See presentation of financial information on page 51 2 Including non-utilisation fees on undrawn bank facilities 3 Based on net debt 4 An Alternative Performance Measure (APM). See page 140 5 Fixed rate 6 Variable rate Read more on the equity placing on page 56 Shaftesbury Annual Report 2018 55 Strategic report Annual review2 Strategic report Annual review Financial management continued Share issue On 6 December 2017, we strengthened our equity base, through a non pre-emptive issue of 27,855,508 million new ordinary shares, representing approximately 9.98% of our issued share capital at the time. The shares were issued at £9.52 per share, which equated to EPRA NAV at 30 September 2017 and represented a discount of 4.9% to the closing price of £10.01 per existing ordinary share on 5 December 2017. After issue costs of £4.8 million, net proceeds were £260.4 million, representing a total discount of approximately 6.59%. The placing was to finance: • the acquisition of 72 Broadwick Street, Carnaby, and additional anticipated capital expenditure; • the forward purchase of a long-leasehold interest in 90-104 Berwick Street; and • other property acquisitions, totalling £9.0 million, in the preceding six months. Net debt (including 50% share of the Longmartin joint venture)1,5 The remainder of the proceeds were raised to provide financial capacity for further acquisitions, as opportunities arise, and to fund value-enhancing schemes. Cash and cash equivalents Undrawn floating rate facilities Available resources Refinancing bank facilities In February 2018, we restructured our revolving bank facilities with arrangements as follows: • £125 million facility extended from 2020 to 2022. • new £100 million facility maturing in 2023, replacing a £150 million facility which was due to mature in November 2018. In line with our approach to financial management, as we invest further in our portfolio, we shall utilise these facilities and raise additional new debt facilities to support our long-term strategy, whilst maintaining a balance between equity and debt which avoids the risks inherent in excessive leverage for this business. Finance summary Reported net debt 2018 £m 2017 £m 841.3 914.2 900.0 973.6 118.5 225.0 343.5 45.6 275.0 320.6 At 30 September 2018, available resources amounted to £343.5 million, of which £92.7 million will be used to fund capital commitments at that date, the anticipated capital expenditure at 72 Broadwick Street, and our share of scheme costs in the Longmartin joint venture. Debt metrics1 Loan-to-value4,5 Gearing3,4,5 Interest cover5 % debt fixed Blended cost of debt2,5 Marginal cost of undrawn floating rate facilities Weighted average maturity (years) Debt maturity profile (£m)1 Weighted average maturity: 10.2 years 2018 £m 22.8% 29.5% 2.6x 100% 3.2% 1.6% 10.2 2017 £m 26.7% 36.5% 2.3x 100% 3.3% 1.2% 10.3 Bank facilities (variable) Bonds (fixed) Term loan (fixed) JV term loan (fixed, our 50% share) 290 285 125 100 60 135 130 120 2019 2022 2023 2026 2027 2029 2030 2031 2035 90–104 Berwick Street: page 50 72 Broadwick Street: page 50 At 30 September 2018, all of the net proceeds had been spent or earmarked for acquisitions and schemes. Use of proceeds at 30 September 2018 Gross proceeds Issue costs Net proceeds Amounts deployed to date Acquisitions - Completed in the 6 months preceding the placing and £2m deposit for 90-104 Berwick Street - Completed since the share issue Capital expenditure to date Amounts earmarked for investment - 90-104 Berwick Street (net of deposit) - Contribution to anticipated capital expenditure for our enhanced scheme at 72 Broadwick Street Total deployed or earmarked for deployment £m 265.2 (4.8) 260.4 11.0 167.8 17.4 196.2 39.0 25.2 64.2 260.4 Related party disclosures relevant to the share issue are set out in note 17 to the financial statements. We had not issued shares for cash on a non pre-emptive basis during the three-year period preceding December 2017. 1 Including our 50% share of Longmartin debt. See presentation of financial information on page 51 2 Including non-utilisation fees on undrawn bank facilities 3 Based on EPRA net assets 4 Based on net debt 5 An Alternative Performance Measure (APM). See page 140 Shaftesbury Annual Report 2018 56 Strategic report Annual review Risk management The Board’s attitude to risk management is consistent with its low overall appetite for risk. This report should be read in conjunction with the viability statement on page 61. Context and risk appetite We invest exclusively in London’s West End, a location of which our management team has a forensic knowledge and which has shown significantly greater long-term growth and economic stability through the property cycles than the wider real estate market. Our strategy has delivered long-term success for the Group. However, inevitably our geographic concentration is an inherent risk and there are certain external factors which we cannot control. However, in the execution of our strategy, we seek to structure the Group’s operations to minimise exposure to operational and financial risks, recognising that our appetite to risk varies across different elements of our strategy, as follows: High Medium Low Geographic concentration Development risk Letting risk Financing risk Compliance risk Reputation risk Important factors contributing to the relatively low risk of our business include: • Our experienced senior leadership team, with an average tenure of 16 years, has an in-depth knowledge of our business and the West End property market. We are based in one location, close to all our holdings; • The nature of our portfolio does not expose us to risks inherent in material speculative development schemes; • With a diverse tenant base, there is limited exposure to any single occupier; • We manage our balance sheet on a conservative basis with moderate leverage, long-term finance, a spread of loan maturities, good interest cover and with the majority of interest costs fixed; • Our culture encourages open dialogue within the management team and with the wide range of external advisors we employ in running the business; • The organisation of our Group structure is simple and transparent; and • Our governance framework includes clearly defined responsibilities and limits of authority. The Board’s attitude to risk is embedded in the business, with executive directors closely involved in all aspects of operations and significant decisions. Non-executive directors approve capital, debt and non-routine transactions above a relatively low specified level. Senior management is incentivised in the same way as executive directors to achieve the Group’s strategic goals of delivering long-term growth in rental income, capital values and shareholder returns. Decisions are made on the basis of long-term benefit, rather than short-term gain. Exceptional portfolio in the heart of the West End: page 12 Culture: page 39 Asset management activity: pages 46 to 47 Sustainability and stakeholders: pages 34 to 39 Restaurants, cafés, leisure and retail: pages 22 to 25 Governance: pages 74 to 79 Financial management: pages 55 to 56 Remuneration report: pages 86 to 88 Shaftesbury Annual Report 2018 57 Strategic report Annual review2 Strategic report Annual review Risk management continued Top down Oversight, assessment and mitigation at a Group level Identification, assessment and mitigation at an operational level Bottom up Board • Overall responsibility for risk management and internal control • Determines the risk appetite • Review principal and emerging risks Risk committee • Co-ordinate and develop the risk management process • Consider strategic and emerging risks and internal controls Executive management • Day-to-day monitoring of risk • Design and implementation of controls Audit committee • Monitor the effectiveness of the risk management process and internal control framework Assurance • Review of the effectiveness of controls • Observations from the external auditor How we monitor and manage risk Roles and responsibilities in managing our risk and controls framework are summarised above. The Board has overall responsibility for risk management and the systems of internal control. Such systems are designed to manage, rather than eliminate, the risks faced by the business and can provide only reasonable, not absolute, assurance against material misstatement or loss. Executive management are closely involved with day-to-day operations. Issues are dealt with as they arise and, where significant, are discussed more widely with the executive team. This ensures an awareness of the risk and solutions adopted. Challenges that have arisen and how risks have changed are key inputs from executive management to the Risk Committee. The day-to-day management of the Group’s portfolio is outsourced to two managing agents. The Group monitors their performance and has established extensive financial and operational controls to ensure that each maintains an acceptable level of service and provides reliable financial and operational information. The managing agents share their internal control assessments with the Group. During the year, areas of focus included: Topic GDPR Actions Project to implement the requirements of GDPR, including training for all staff. Cyber security Reputation management Crisis communications training for External review of our arrangements. senior management In the coming year, we plan to review tax procedures in relation to both the “Senior Accounting Officer” regime and preventing the facilitation of tax evasion. Also, we plan to carry out an audit on one of our managing agent’s processes. The Risk Committee, comprising a mix of executive directors and members of the senior management team, co-ordinates and develops the risk management and controls framework. It meets twice a year, or more frequently as needed, and reports to the Audit Committee and Board. Shaftesbury Annual Report 2018 58 Risk Committee – key activities • Review and assessment of the Group’s risk register; • Identification of new and emerging risks; • Provide support in defining risk appetite; • Assess and review the Group’s control environment; and • Assess the effectiveness of the Group’s controls. During the year, we commissioned an external review of the Risk Committee’s activities to ensure it remains effective and meets the needs of the business, now and into the future. How we assess risk and internal controls Significant risks and mitigating controls are detailed in the risk register. Risks are considered in terms of the likelihood of occurrence and their potential impact on the business. In assessing impact, a number of criteria are considered including the effect on our strategic objectives, operational or financial matters, our reputation, stakeholder relationships, health and safety and regulatory matters. Risks are assessed on both gross (assuming no controls are in place) and residual (after mitigation) bases. To the extent that significant risks, failings or control weaknesses arise during the year, appropriate action is taken to rectify the issue and implement controls to mitigate further occurrences. During the year, executive management assessed the effectiveness of key controls, reporting their findings to the Audit Committee. The review did not identify any significant control failings. In the coming year, it is anticipated that the effectiveness of these key controls will be reviewed independently, to provide third-party assurance. The Group’s processes and procedures to identify, assess, and manage its principal risks and uncertainties were in place throughout the year and remained in place up to the date of the approval of the Annual Report. Audit committee report: pages 82 to 85 Strategic report Annual review Principal risks and uncertainties Strategic report Annual review The Board has carried out a robust assessment of the principal and emerging risks and uncertainties which might prevent the Group achieving its goal of long-term growth in rental income, capital values and shareholder returns. These risks and uncertainties, their mitigation and the evolution of risk during the year are set out below. They are largely consistent with those reported in 2017, although now include the potential impact of a disorderly Brexit. Other risks discussed, but, through mitigation, currently are not considered to be principal risks or uncertainties included: Market Failure to adapt to changing market conditions or competition Reputation Failure to anticipate changes in profitability Misconduct or poor operational standards by third party agents Damage to reputation with stakeholders Governance, data and internal control disruption and/or loss of data Significant cyber security breach leading to Expulsion from REIT regime through non-compliance Health and safety issues Failure to meet our corporate social responsibility objectives Failure to meet financial or tax compliance obligations Attracting, retaining and developing talented people Succession planning People Emerging risks include the well-publicised headwinds affecting the retail sector, including future consumer trends and technological disruption to the retail landscape. These topics are considered regularly so that we can adapt to ensure our destinations remain distinctive and interesting. This report should be read in conjunction with the viability statement on page 61. Reduction of spending and/ or footfall in our areas Spending and footfall are important ingredients for the success of our restaurant, leisure and retail tenants Potential causes • Fall in the popularity of the West End and particularly our areas leading to decreasing visitor numbers • Changes in consumer tastes, habits and spending power • Terrorism or the threat of terrorism • Competing destinations Consequences • Reduced tenant profitability • Reduced occupier demand • Higher vacancy • Reduced rental income and declining earnings • Reduced ERV, capital values and NAV (amplified by gearing) Mitigation • Focus on areas and uses which have a long history of growth and resilience • Ensure our areas maintain a distinct identity • Seek out new concepts, brands and ideas to keep our areas vibrant and appealing • Active promotion of our areas • Tourism and retail/leisure spending in the West End are not solely reliant on the wider-UK economy • Regular Board monitoring of performance and prospects • KPI to deliver sustainable rental growth Link to strategy 1 2 3 Evolution of risk Residual risk within appetite 1 2 3 4 Exceptional portfolio in the heart of London’s West End: page 12 Focus on restaurants, leisure and retail: page 17 Curating distinctive and lively destinations: page 20 Financial management: pages 55 to 56 Shaftesbury Annual Report 2018 59 2 Strategic report Annual review Principal risks and uncertainties continued Changes in planning and licensing regulations All our properties are in the boroughs of Westminster and Camden. Changes to policies may limit our ability to maximise the long-term potential of our portfolio Potential causes • Unfavourable changes to national or local planning and licensing policies • Tenants acting outside of planning/licensing consents Consequences • Ability to maximise the growth prospects of our assets limited • Reduced occupier demand • Reduced earnings • Decrease in property values and NAV (amplified by gearing) Mitigation • Ensure our properties are operated in compliance with local regulations • Make representations on proposed policy changes, to ensure our views and experience are considered • Use of specialist advisors on planning and licensing • Monitoring of tenant compliance with planning consents and licences • Mix of uses in our portfolio means we are not reliant on income from one particular use Link to strategy 2 Evolution of risk Residual risk within appetite Macroeconomic factors Impact of economic and political uncertainty, including a disorderly Brexit Decline in the UK real estate market Changes to macroeconomic outlook Potential causes • Unforeseen macroeconomic shocks or events • Disorderly Brexit • Upward cost pressures Consequences • Lower consumer confidence • Reduced visitor numbers • Reduced tenant profitability • Reduced occupier demand • Pressure on rents • Higher vacancy • Reduced rental income and declining earnings • Reduced ERV, capital values and NAV (amplified by gearing) • Specifically in the case of a disorderly Brexit, tenants could suffer: - Staff shortages - Increased import prices - Longer lead times and lower availability of stock Mitigation • Focus on locations and uses which historically have proved to be economically resilient • Tourism and retail/leisure spending in the West End are not reliant on the wider-UK economy • Active promotion of our areas • Diverse tenant base with limited exposure to any one tenant • Tenant deposits held against unpaid rent obligations at 30 September 2018: £20.6 million. Link to strategy 1 2 3 Evolution of risk Potential causes • Changes to global political landscape • Increasing bond yields and cost of finance • Reduced availability of capital and finance • Lower relative attractiveness of property compared with other asset classes Consequences • Reduced property values • Decrease in NAV (amplified by gearing) • Risk of loan covenant breaches • Ability to raise new debt funding curtailed Mitigation • Focus on assets, locations and uses where there is a structural imbalance between availability of space and demand, and which historically have demonstrated much lower valuation volatility than the wider UK property market • Regular review of investment market conditions including bi-annual external valuations • Conservative levels of leverage • Spread of sources of finance and loan maturities • Quarterly forecasts including covenant headroom review • Pool of uncharged assets available to top up security held by lenders Link to strategy 1 2 4 Evolution of risk Risk increase reflects growing macroeconomic uncertainty and expectations of rising long-term interest rates The increased rating reflects continued uncertainty as our EU departure approaches Residual risk within appetite Residual risk within appetite 1 2 3 4 Exceptional portfolio in the heart of London’s West End: page 12 Focus on restaurants, leisure and retail: page 17 Curating distinctive and lively destinations: page 20 Financial management: pages 55 to 56 Shaftesbury Annual Report 2018 60 Strategic report Annual review Viability statement The directors have assessed the Group’s viability and confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period to September 2023. Period of assessment The five-year assessment period reflects lease lengths or rent review patterns across the majority of our portfolio, and corresponds with the Group’s current forecast period. Typical lease terms are set out on pages 23 to 29. Whilst the directors consider prospects over a longer period in the execution of our strategy, we consider this assessment horizon strikes the optimum balance between planning for the longer term and the progressively unreliable nature of forecasting in later years. The directors confirm that they have no reason to expect a material change in the Group’s viability immediately following the end of the five-year assessment period. Assessment process Our forecasts are updated at least half-yearly and reflect the Group’s established strategy of long-term investment in London’s West End, existing commitments, available financial resources, and long-term financing arrangements. They consider profits, cash flows, and other key financial ratios over the period, as well as the headroom in the financial covenants contained in the Group’s various loan agreements. In its assessment, the Board considered a five-year review of the Group’s viability, prepared by senior management. The base case scenario was the latest five-year forecast. The key forecast assumptions were: • continued crystallisation of the portfolio reversionary potential over the period. ERVs are based on current, proven rental tones, and do not assume any further growth. Our long record of converting ERV into contracted income and cash flow, typically over a three-to-five year period, is set out on page 33. • no further acquisitions or capital expenditure, other than that which had been committed or approved by the Board. • no new debt facilities are raised and no debt refinancing takes place, other than refinancing bank facilities totalling £125 million and £100 million which mature in 2022 and 2023 respectively. These facilities represent 18% of our total committed debt arrangements. The review considered the potential impact of the principal risks which could affect solvency or liquidity in ‘severe but plausible’ scenarios, and particularly those risks which could result in reduced income, profitability and capital values. Sensitivity analyses were prepared which flexed these key inputs, both individually and in unison. See pages 59 to 60 for principal risks and uncertainties. Our investment strategy is focused on restaurants, leisure and retail, uses which, in the West End, have a long record of resilience and growth. Our management strategy has delivered high occupancy and sustainable income growth over the long term as set out on page 33. A fall in income would result in lower earnings. If sustained, this could lead to reduced dividends but would not threaten the Group’s viability unless loan covenants were breached. See page 53 for information on our dividend policy. A reduction in capital values might curtail the ability to raise new debt funding, but would not present a viability risk if loan-to- value loan covenants continued to be satisfied. See page 55 for more on our prudent approach to financial management, including loan-to-value and interest cover ratios. The sensitivity analyses modelled asset value declines resulting from increasing equivalent yields to levels similar to those in 2008/09, together with a 10% decline in ERVs. This would result in a near halving of our portfolio valuation. In unison, we considered decreases in rental income of up to 50%. These assumptions would represent a significant contraction in the size of the business over the five-year period. However, our assessment is that such a scenario would not threaten the viability of the Group. The Strategic Report on pages 1 to 61 was approved by the Board on 26 November 2018. Brian Bickell Chief Executive Chris Ward Finance Director Shaftesbury Annual Report 2018 61 Strategic report Annual review2 62 As a responsible, long-term investor in our areas, being a good neighbour and focusing on local issues is essential. By working with, and supporting, our local community to address issues and challenges of mutual interest and concern, collectively we make the West End an even better place. Working within fifteen minutes’ walk of all our holdings, we are well-positioned to understand local issues and support local charities and not-for-profit organisations, to help them make a difference. Read more on our work with the local community on page 38. Left: We sponsor the annual Soho Food Feast - a festival which raises money for Soho Parish Primary School. Supported by many of our restaurants, it attracts foodies from across London as well as families and Soho residents, giving it a great community feel and energetic atmosphere. To date, the event has raised funds for a new multi-level playground and for a healthy eating kitchen. Shaftesbury and the community Chinese Community Centre The Centre preserves and promotes Chinese culture, arts and identity and fosters better community integration. We fund a Chinese-speaking advisor to provide advice on welfare, benefits and housing. Soho Fete We sponsor this fete, which marked its 40th anniversary this year. With live music, food and drink from local restaurants, this fete is popular amongst the Soho community. Soho Parish Primary School We supported the school through trips, including to the London Zoo, and advice on refurbishing classrooms. Westminster Tea Dance Organised through the Sir Simon Milton Foundation, we co-sponsor the afternoon at the ballroom of the Grosvenor House hotel which hosts 1,000 Westminster residents over 65. The event is part of the Silver Sunday national campaign to tackle loneliness and isolation in the elderly in the community. Shaftesbury Annual Report 2018 63 Governance Our people Executive Directors Brian Bickell FCA Chief Executive Overall responsibility for implementing strategy and day-to-day operations Joined the Group in 1986 Board appointment Appointed Finance Director in 1987 and Chief Executive in 2011 External appointments Director of Longmartin Properties Limited Board member of Westminster Property Association Chairman, UK China Visitor Alliance Board member of Freehold Simon J Quayle BSC MRICS Executive Director Responsible for the asset management and operational strategy in Carnaby, Soho and Fitzrovia Joined the Group in 1987 Tom J C Welton MRICS Executive Director Responsible for the asset management and operational strategy in Covent Garden and Chinatown Joined the Group in 1989 Chris P A Ward MA (OXON), ACA Finance Director Responsible for implementation of the Group’s financial strategy and all aspects of accounting, taxation and IT Joined the Group in 2012 Board appointment Appointed Property Director in 1997 Board appointment Appointed Property Director in 1997 Board appointment Appointed Finance Director in 2012 External appointments ZSL development strategy board Revo strategy board Member of Council for Sustainable Business External appointments Director of Longmartin Properties Limited External appointments Westway Trust: trustee, chairman of audit committee and member of property and regeneration committee Left to right: Chris Ward, Simon Quayle, Brian Bickell, Tom Welton Shaftesbury Annual Report 2018 64 Governance Our people Non-executive Directors Jonathan C Nicholls ACA, FCT* Non-executive Chairman and Chairman of the Nomination Committee Board Chairman appointment 2016 Skills Over 20 years’ experience of public company boards and their operation Finance, commercial, strategic, communication, investor relations and management skills 21 years’ experience in property and related industries Experience From 1985 various roles at Abbey National. In 1996 joined Hanson PLC and became Finance Director in 1998 Old Mutual plc Group Finance Director from 2006-2008 Non-executive director of Man Group plc 2004-2006 Non-executive director and chairman of the audit committee of Great Portland Estates plc 2009-2016 Non-executive director and chairman of the audit committee of SIG plc 2009-2017 Current external appointments Non-executive director, senior independent director and chairman of the audit committee of D S Smith Plc Chairman of Ibstock plc Jill C Little* Non-executive director and Senior Independent Director Board appointment 2010 Experience John Lewis Partnership 1975 to 2012. Merchandise director 2002-2011 and Business and Development director 2011-2012 Current external appointments Chairman of the Commercial Group of the National Trust, NTE Limited and NTRE Limited Non-executive director of Joules Group Plc and Nobia AB Skills Extensive experience in the retail sector Communication and management skills Sally E Walden* Non-executive director and Chairman of the Remuneration Committee Board appointment 2012 Experience From 1984 to 2009 with Fidelity International in senior fund management roles Current external appointments Trustee of the Fidelity Foundation Director of the Pantry Partnership Skills Experience of financial markets and fund management Financial analysis skills Experience in remuneration structures Dermot C A Mathias BSC, FCA* Non-executive director and Chairman of the Audit Committee Board appointment 2012 Experience Partner in the corporate finance department of BDO LLP from 1980 Senior partner of BDO and chairman of the policy board of BDO International 2004-2010 Left to right: Jill Little, Jonathan Nicholls, Hilary Riva, Richard Akers, Sally Walden, Dermot Mathias Governance Current external appointments Non-executive director and chairman of the audit committee of JTC PLC Governor of Activate Learning Skills Strong financial skills Extensive experience in leadership and management Richard Akers FRICS* Non-executive director Board appointment 2017 Experience Senior executive of Land Securities Group PLC from 1995-2014. Joined main board in May 2005 as Managing Director of the Retail Portfolio Director and President of the British Council of Shopping Centres 2009-2012 Current external appointments Non-executive director, senior independent director and chairman of the remuneration committee and safety, health and environmental committee of Barratt Developments PLC Member of the advisory board of Battersea Power Station Development Company Limited Non-executive director of The Unite Group plc Skills Broad range of real estate knowledge and experience at board level, including retail property Hilary S Riva OBE* Non-executive director and designated non-executive director for employee engagement Board appointment 2010 Will retire from the Board in February 2019 Experience Previously managing director of various high street brands including Top Shop, Warehouse, Dorothy Perkins and Evans Chief Executive of the British Fashion Council from 2005-2009 and remained in a non-executive capacity until 2010 Current external appointments Non-executive director and chairman of the remuneration committee of ASOS Plc Director of Shepherd Neame Limited Skills Extensive experience in the fashion retail sector Understanding of consumer behaviour and strategic planning * Independent non-executive directors for the purposes of the UK Corporate Governance Code. More detailed biographies are available on our website. Shaftesbury Annual Report 2018 65 3Governance Our people Senior leadership team The Executive Committee comprises the executive directors and the senior leadership team. Penny Thomas LLB (HONS), FCIS Company Secretary Joined 2005 Advises the Board on governance. Responsible for compliance, company secretarial and group-wide sustainability. Member of sustainability, risk, pension and community investment committees. Trustee of Soho Square Garden Committee. Julia Wilkinson BSC MSC MRICS Portfolio & Group Restaurant Strategy Executive Joined 1997 Group restaurant and leisure leasing strategy and Opera Quarter, Coliseum and Fitzrovia asset management. Andrew Price BSC (HONS), MRICS Portfolio Executive Joined 2001 Group-wide acquisitions strategy and Chinatown asset management. Chairman of community investment committee and member of pension and risk committees. Rob Kirk BSC (HONS), MRICS Portfolio Executive Joined 2004 Carnaby and Soho asset management and group-wide property management and environmental strategy. Member of sustainability and risk committees. Board member of Soho Neighbourhood Forum. Shaftesbury Annual Report 2018 66 Governance Our people Senior leadership team continued Shaftesbury Annual Report 2018 67 Sam Bain-Mollinson BA (HONS) MSC, MRICS Head of Retail Joined 2011 Group retail strategy and leasing. Charles Owen BSC (HONS), MRICS Portfolio Executive Joined 2012 Seven Dials and St Martin’s Courtyard asset management and group-wide planning strategy. Member of community investment and risk committees. Karen Baines FCIM Head of Group Marketing & Communications Joined 2016 Consumer, trade and corporate communications, marketing and events. Corporate website shaftesbury.co.uk Other websites carnaby.co.uk sevendials.co.uk chinatown.co.uk thisissoho.co.uk stmartinscourtyard.co.uk 3Governance Our people Directors' Q&A Chairman Jonathan Nicholls and non-executive director Richard Akers, our most recent appointment, provide an insight into their respective roles at the Group. How do you encourage open and constructive dialogue at board meetings? For the Board to operate effectively, it is essential that every director’s opinion is heard and fed into the decision-making process. In order to facilitate constructive dialogue, I strive to cultivate a board culture that is open and transparent. On a practical level, I ensure that Board papers are sent out early so that the directors have sufficient time to properly prepare for every meeting. “ The Chairman must have the interpersonal skills to ensure that the Board as a whole functions cohesively and effectively” What do you enjoy most about your roles as Chairman and Chairman of the Nomination Committee? I have seen first-hand how the Group’s management strategy has created dynamic and attractive West End destinations, and I am proud to be the Chairman of such an exciting company. My role has presented me with the unique opportunity to learn about how we operate. Relative to its financial size, we are a small organisation of 30 staff all based in one office in Carnaby, and it has been a real pleasure getting to know our people, our exceptional portfolio and how the business operates. What skills are required to be an effective Chairman and how do these differ from other board positions? The fundamental role of the Chairman is to manage and lead the Board which means that strong leadership skills are essential, more so than in other directorship positions since responsibility for the successful running of the Board rests with the Chairman. We benefit from a Board comprised of individuals with a breadth of experience. The Chairman should have the interpersonal skills to ensure the Board functions cohesively and effectively, and where each director’s views and opinions are respected. Even the most experienced boards can face difficult and challenging periods and the Chairman should have the experience and strength of personality to overcome these situations and provide leadership to the rest of the Board. The Chairman should be able to communicate effectively to external stakeholders, for example, at the annual general meeting. How do you feel that your industry experience has prepared you for your role as Chairman of the Board? I have held numerous management and directorship positions in my career, all of which have equipped me with the diverse skill set required to hold the positions of Chairman of the Board and the Nomination Committee. As a former executive director and a non-executive director of various PLCs for over ten years, I have had meaningful decision-making roles at board level which informs my business judgement. I know what it is like to be both an executive and non-executive director so that I can put myself in the shoes of our directors which helps me to understand and cultivate different points of view and act as a liaison between management and the Board. Jonathan Nicholls Chairman answers questions regarding his role as Chairman Shaftesbury Annual Report 2018 68 Governance Our people Directors' Q&A continued Richard Akers Non-executive Director answers questions regarding the roles and responsibilities of the non-executive directors What attracted you to the role of a non-executive director at Shaftesbury? I have always been a fan of Shaftesbury because of its clear identity, strategy and consistent performance. It is unique in its approach to property investment, namely the careful curation of its locations to create vibrant and attractive destinations. Joining the Board gives me the opportunity to contribute my own industry experience to help drive that strategy through creative contribution and helpful challenge to the Board. What types of skills and competencies make a successful non-executive director? A fundamental skill for any effective non-executive director is the capacity for independent thought and a resistance to group-think. Non-executive directors must provide an external perspective to the Board which means that big picture and long-term thinking skills are extremely valuable as well. Effective communication, active listening skills and knowing how to ask the right questions to get to the root of an issue quickly are important if there is to be effective debate at Board level. It goes without saying that non-executive directors must be passionate about the company and its direction and bring some specific competency or experience to the table. How do the non-executive directors simultaneously support and constructively challenge the executive directors? It is a delicate balance. On the one hand, the non-executive directors must maintain independence and hold the executive directors to account against the strategy whilst on the other they must provide support and be committed to our direction. I am pleased to say that this Board maintains a very open and collaborative culture which is overseen by our Chairman, and this encourages the type of constructive debate one would expect from a well-functioning and supportive Board. “ A fundamental skill for any effective non-executive director is the capacity for independent thought and a resistance to group-think” Outside of the boardroom, how do the non-executive directors maintain a high level of involvement? A non-executive directorship does not involve just attending board meetings every few months. In between board meetings, the non-executive directors are given regular progress updates and a good deal of information is shared to ensure we are each fully aware of developments and can prepare effectively for upcoming meetings. In addition, there are regular meetings with members of the executive team as well as portfolio tours with the property team, all of which promote a high level of involvement and engagement with employees at all levels of the business. Shaftesbury Annual Report 2018 69 3 Governance Governance at a glance Leadership Sets out the Group’s governance structure as well as the function and operation of the Board The role of the Board • Leadership of the Company • Meets 5 times a year • Schedule of matters reserved for the Board • D&O cover and deeds of indemnity Division of responsibility • Separation of roles of  Chairman and Chief Executive • Statement of division of responsibilities The Chairman and Non-executive directors • Independent Chairman • Meetings of non-executive directors held without executives after each Board meeting • Senior Independent Director identified Risk management and internal control • Robust assessment of principal risks - pages 59 - 60 • Effectiveness of risk management and internal control systems - pages 57 - 58 • Viability statement - page 61 UK Corporate Governance Code (2016)1 Full compliance - see pages 74 - 75 Audit Committee and auditors • Audit Committee report - pages 82 to 85 • Whistleblowing policy - page 85 • Review of need for internal audit function - page 85 • Recent and relevant financial experience Accountability Explains the role of the Board and Audit Committee in maintaining effective risk management and internal control procedures Financial and business reporting • Annual report which is fair, balanced and understandable - page 54 • Auditor’s report - pages 111 to 117 • Business model description - pages 10 - 11 • Going concern - page 84 1 Available at www.frc.org.uk Shaftesbury Annual Report 2018 70 The level and components of remuneration • Annual Remuneration report - pages 86 to 107 Re-election and Commitment • All directors stand for annual re-election • 3 non-executive directors have more than 6 years’ service and are subject to rigorous review • Engagement with largest shareholders on extension of tenure of Jill Little • Time commitment considered when electing and re-electing directors Governance Governance at a glance continued Effectiveness Explains the procedures in place and the steps taken to ensure the Board and its Committees function effectively Composition of the Board • Independent Chairman • Balance of 4 executive directors, 5 independent non-executive directors and Chairman • Skills and experience - pages 64 - 65 Development and Evaluation • Induction of new non-executive director - page 81 • Directors’ training monitored and updates on regulatory and legislative changes provided • Internal Board performance evaluation - page 78 Appointments to the Board • Succession planning • Nomination Committee report - pages 80 - 81 • Independent non-executive directors • Non-executive director search Information and support • Company Secretary advises the Board through the Chairman • Access to independent professional advice • Good information flows between management and the Board Dialogue with shareholders • Over 175 meetings with investors and potential investors in the year, including portfolio tours - page 79 • Chairman and Senior Independent Director available to shareholders • Regular updates on shareholder meetings provided to Board Procedure • Remuneration policy proposed for shareholder approval at 2019 AGM - pages 90 to 96 • Annual remuneration report - pages 97 to 107 • No director is involved in fixing their own remuneration • Committee Chairman engages with shareholders Constructive use of general meetings • Accessible AGM with voting on a poll, separate resolutions and proxy voting (for, against or withheld) • Committee Chairs available at AGM to answer questions • Notice sent out at least 20 working days before meeting Relations with shareholders An overview of the actions taken to engage with shareholders Remuneration Describes the Group’s approach to remuneration in relation to directors and how it is implemented Shaftesbury Annual Report 2018 71 33Good quality, well-managed public spaces are an important part of our strategy to encourage visitors and businesses to our locations, and improve local amenity for residents. We partner with our local authorities, investing in improvements to the public realm in our locations to raise the standard of the paving, redistribute more space to pedestrians and improve lighting. We also work with them to promote and fund pedestrianised streets that are available for servicing at limited times, but are then given over solely to pedestrians at all other times. With exceptional footfall across our areas, we supplement services provided by the authorities with additional street cleaning, on-street waste management, CCTV monitoring and patrolling with on-site staff. We help people to move around our areas by providing wayfinding, and we create the sense of place using signage, environmental improvements such as window boxes and planting, iconic art installations and creative seasonal lighting and decorations. Shaftesbury and the public realm Earlham Street (right) Improvements included a new single surface road and widening scheme following the road closure at the junction with Shaftesbury Avenue Newport Court The resurfacing of the area in the courtyard and funding for a new pagoda to enhance the area in front of the new restaurants Shaftesbury Annual Report 2018 72 73 Governance Corporate governance Dear shareholder Corporate governance is embedded in our culture and the day-to-day running of your Company. I am committed to maintaining the high standards of governance we have demonstrated for many years. We pride ourselves on being open, transparent and engaged with our shareholders, stakeholders and our local community. The theme of our annual report this year reflects the network of our relationships with our wider stakeholder group. I am pleased to report how we have complied in full with the UK Corporate Governance Code, which sets out the principles of good governance we apply in our day-to-day operations. We are now preparing for an updated code which will come into effect for the financial year commencing 1 October 2019. Board changes Jill Little, our senior independent director, has been on the Board since February 2010 and will reach nine years’ service in February 2019. Hilary Riva also reaches nine years’ service at the same time and will retire from the Board at the 2019 AGM. As part of our non-executive succession process, we are currently undertaking a search for an additional Board member to join us following Hilary Riva's retirement. However, in order to manage the succession of our non-executive directors, we are smoothing the bunching of appointments that has occurred in the past by proposing that Jill Little remain on the board for a further year. We value Jill Little's experience and wisdom; she makes a valuable contribution to the Board and her independence is undoubted. However, she will step down as senior independent director and from membership of all the Committees of the Board at the 2019 AGM. As extending her service beyond nine years is a departure from the UK Corporate Governance Code, we have written to our largest shareholders to seek their views. Of those that responded, all indicated that they were supportive of this approach. Therefore, we are proposing Jill Little’s re-election for a further year at the 2019 AGM. Richard Akers, who joined the Board in November 2017 will become senior independent director at the conclusion of the 2019 AGM. Employees We have continued to focus on employee recruitment, training and development. We have instigated a number of procedures to ensure we recruit from a diverse talent pool. We have continued our investment in training and development which is important to ensure that employees grow in their roles and that we retain their skills and experience. 2018 UK Corporate Governance Code A new code comes into effect next year. This will apply to us from 1 October 2019. However, in accordance with best practice, we are assessing what provisions we have in place already, and what we can adopt early during the course of this year. We will report on compliance and progress in next year’s annual report. What’s in place now: Two-year post-vesting holding period in the LTIP rules. Designated non-executive director for employee engagement. Whistleblowing helpline. Emerging risks description. What’s coming in during the year: The remuneration policy to adopt the same pension level for directors as employees for newly-appointed directors. This will apply from the 2019 AGM, if the policy is approved by shareholders. Review of diversity policy. Progress work on culture to document our values. Update terms of reference for committees to reflect new code. Shaftesbury Annual Report 2018 74 Governance Corporate governance continued The Executive Committee comprises the executive directors, company secretary and the senior leadership team. Its role is to monitor operational matters and contribute to the longer-term evolution and implementation of strategy. It provides senior employees below Board level greater engagement and experience in the management of the business. We continue to embed the Executive Committee structure into the business. This Committee meets on a monthly basis and this year had an off-site meeting where the team considered how the business should respond to various structural changes in the business environment in which we operate. We appointed Hilary Riva as the designated non-executive director with responsibility for employee engagement. Her remit is to engage with our employees so the Board understands their views. On Hilary Riva’s retirement from the Board at the 2019 AGM, Richard Akers will take on the role. We have a wide range of external advisors with whom we work closely. We are very aware of the importance of these relationships together with how their behaviour impacts on our wider stakeholders. This year, we have updated our Supplier Code of Conduct, compliance with which is mandated throughout our supply chain. Culture Our corporate culture underpins the success of our business and is embedded throughout our business model. The Board has an open and transparent culture which is facilitated and monitored by me. This is particularly evident in Board meetings where discussion is constructive and open. Last year, the Board undertook the first stage of our work to articulate and document our culture and values. During this year, the work has continued with employees across the organisation who participated in a similar workshop as the directors. The output comparison showed that, organisation-wide, the views on the culture of the business were consistent between the Board and employees. As one of the first activities as designated non-executive director for employee engagement, Hilary Riva set up a culture group and is meeting with employees and our external human resources advisor, to document our values and behaviours that will be used to describe our culture and frame how we work. As this work spans more than one reporting year, we expect to report more fully next year. As you will see from my biography, I am a director of two other FTSE companies and chairman of one of those. I would like to assure you that I have sufficient time to devote to my role as your Chairman and do not envisage any new appointments. We are proud of our annual report and strive each year to improve the transparency and clarity of our reporting. We received EPRA gold awards for both our sustainability and financial reporting in last year’s annual report. We are committed to being a sustainably- focused business and we are working with our wider stakeholder group to improve the environment. Therefore, we are this year using the authority in our articles to move away from the paper version of this report and ask shareholders to look at it online in future years. You have the option to continue to receive the report through your letterbox. We hope you share our commitment and in future will read this report online. We are always willing to engage with our shareholders who are the owners of the business. The Board, and in particular Committee Chairmen, are available via the Company Secretary for dialogue with shareholders. Jonathan Nicholls Chairman 26 November 2018 Compliance with the UK Corporate Governance Code The Company has complied in full with the main and supporting principles of the UK Corporate Governance Code during the year. Their application is contained in the rest of the governance section. Where appropriate further information is given on the Code provisions and how they are applied. Data protection The Data Protection Act 2018 came into force in May. It has changed the way personal data is managed by all businesses. Our policies and procedures were updated and we verified that, not just us, but key suppliers were also prepared for the changes. This has linked in with our work on cyber security and making sure we have robust IT systems in place. Board performance evaluation This year, we have undertaken an internal Board performance review. The process, recommendations made, and the actions to implement those recommendations, are summarised on page 78. Summary of Board performance evaluation: page 78 Shaftesbury Annual Report 2018 75 3Governance Corporate governance Leadership The Board has executive and non-executive directors, with a wide range of business experience, including property, finance, retail and fund management which, together, provide a balanced skillset. Leadership The Chairman leads the Board. He was independent on his appointment to the Board. He chairs the Nomination Committee, but, in line with the UK Corporate Governance Code, is not a member of the Remuneration or Audit Committees. Each of the other non-executive directors is considered by the Board to be independent as they do not fall within any of the criteria within the UK Corporate Governance Code that would impact their independence. The Board meets regularly and there is an annual cycle of topics to be considered, including key management and financial updates, as well as approval of significant acquisitions and refurbishment schemes. The non- executive directors meet after each Board meeting without management present. Each Committee provides a summary of business discussed to the Board and the minutes of all Committee meetings are circulated to the Board. The Chief Executive is responsible for the operational and day-to-day management of the business. Senior employees below Board level are invited to present to the Board on operational topics during the course of the year. Non-executive directors have direct and open access to all employees below Board level. The structure of our Committees is set out opposite. Board and Committee meeting attendance Board Audit Remuneration Nomination Independent Number held Chairman Jonathan Nicholls1,2 5 5 3 - 6 - 2 2 Non-executive directors Richard Akers3 4/4 2/2 4/4 1/1 3 3 3 3 6 6 6 6 2 2 1 2 Jill Little Dermot Mathias1 Hilary Riva Sally Walden1 Executive directors Brian Bickell2 Simon Quayle Tom Welton Chris Ward2 5 5 5 5 5 5 5 5 N/A Y Y Y Y Y 1 Chairman of a Committee 2 Has attended Committee meetings by invitation 3 Indicates the actual number of meetings Richard Akers could attend following his appointment to the Board and Committees on 28.11.2017 Shaftesbury Annual Report 2018 76 Leadership Governance Corporate governance Leadership continued The Board is collectively responsible for strategy, performance, risk management and sustainability Board of directors Board Committees Certain functions of the Board and decision-making powers are delegated to the Board Committees Chief Executive Management Committees The Management Committees have responsibility for setting and executing certain strategic outcomes overseen by the Chief Executive Executive Committee • Implementation of long-term strategy • Day-to-day operational matters Sustainability Committee • Sustainability policy and strategy • Annual sustainability report Risk Committee • Assessment of principal risks • Effectiveness of risk management and internal control Pensions Committee • Pension scheme governance Community Investment Committee • Strategy for community investment • Approve investment in community activities Shaftesbury Annual Report 2018 77 3Audit Committee• Financial reporting• Monitor external auditors• Risk and internal controlRead the report pages 82 - 85Remuneration Committee• Remuneration policy• Annual remuneration including bonus and LTIP awards• Set annual performance objectivesRead the report pages 86 - 107Nomination Committee• Succession planning• Recommend candidates • Board performance evaluation• DiversityRead the report pages 80 - 81 Governance Corporate governance Effectiveness Effectiveness All directors are subject to annual re-election. Jill Little will have served nine years as a non-executive director of the Company in February 2019. Under the UK Corporate Governance Code, she will cease to be independent. For the reasons explained on page 74, we are proposing her re-election by shareholders for a further year though she will step down as senior independent director and from all committee memberships following the 2019 AGM. Hilary Riva will retire at the 2019 AGM having reached nine years on the Board. Sally Walden and Dermot Mathias have more than six years’ service and were subject to a detailed review by the Nomination Committee which considered their contribution and independence. In terms of Committee membership, unless not permitted by the UK Corporate Governance Code, all non-executive directors are members of each Committee. This ensures that they are involved in all aspects of the Committees' business. All Committees have written terms of reference which are available on the corporate website. Tenure of directors Executive directors Non-executive directors Richard Akers 2017 Jonathan Nicholls 2016 Sally Walden 2012 Dermot Mathias 2012 Chris Ward 2012 Jill Little 2010 Hilary Riva 2010 Tom Welton 1997 Simon Quayle 1997 Brian Bickell 1987 1987 2018 See page 80 for Nomination Committee non-executive director tenure review Shaftesbury Annual Report 2018 78 Directors’ skills Property Retail Finance Remuneration Fund management Executive directors Brian Bickell Simon Quayle Tom Welton Chris Ward • • • • Non-executive directors Jonathan Nicholls • Jill Little Sally Walden Dermot Mathias Richard Akers • Hilary Riva • • • • • • • • • • • • Board performance evaluation A full externally-facilitated evaluation took place in 2017. As a result of that review, non-executive directors now meet at every Board meeting without the executives present. We have also streamlined the volume and format of the information sent to the Board. This year, an internal questionnaire-based evaluation was led by the Chairman and supported by the Company Secretary. Each director was invited to comment on the operations and performance of the Board, its Committees and their fellow directors. The results were collated by the Company Secretary and feedback was provided by the Chairman at the September meeting of the Board. The Senior Independent Director undertook a review of the Chairman's performance with contributions from the other directors and provided feedback on his performance to the Board as a whole. The evaluation this year highlighted that the key area of focus for the year ahead remains both executive and non-executive succession. Governance Corporate governance Relations with shareholders Governance Relations with shareholders The Board considers regular contact with our shareholders to be an important aspect of corporate governance. Investor relations is the responsibility of the Chief Executive. During the year, the Chief Executive and executive directors held over 175 meetings with UK and overseas institutional investors, comprising both current and potential shareholders as well as equity market analysts. Meetings involved either group or individual presentations and tours of the portfolio. Tours provide an opportunity to see our assets, understand management strategy, and to meet the senior leadership team. Feedback from these meetings is provided to the Board. All directors are present at the AGM and available to answer questions from shareholders. Our AGM includes a presentation from the Chief Executive on our business activities. Live audio webcasts with replay facilities are available for the annual and half year results presentations to analysts. A live-streamed video webcast will be available for the 2018, and subsequent, analyst results presentation. During the year, we have undertaken a number of engagement activities with major shareholders and corporate governance agencies: • consulted on the extension of tenure of Jill Little. • consulted on the 2019 Remuneration Policy which is being proposed for a binding shareholder vote at the AGM. • offered general engagement meetings with the Chairman. At the 2018 AGM, three resolutions received votes against in excess of 20%: • Ordinary resolution – authority to allot shares: 27.4% • Special resolutions – authority to allot shares on a non-pre- emptive basis: 25.2% and 26.1% In each case, the combined holdings of PEL (UK) Limited, Orosi (UK) Limited and Orosi (UK) 2 Limited, our largest shareholder, voted their then 25.02% shareholding against these resolutions. Votes against resolutions in excess of 20% are recorded on the Investment Association’s public register of substantial votes against resolutions. Under the UK Corporate Governance Code, companies are expected to engage with shareholders who cast large votes against a resolution, to understand the reasons for their voting. The votes against these resolutions followed the shareholder’s request to us to circulate a letter to our other shareholders under the authority of Section 314 of the Companies Act 2006. Since the 2018 AGM, the Board has sought to engage with the beneficial owner. To date, we have only received an acknowledgement of our letters so we will continue to seek a meeting as we believe constructive dialogue and engagement is in the interests of all our shareholders. The Board considers the authority sought by the allotment and pre-emption resolutions continues to be in the best interests of the Company, and will propose them at the 2019 AGM. Trading updates Results presentations and webcasts Roadshows Portfolio tours Annual General Meeting Sector conferences Consultations Shaftesbury Annual Report 2018 79 3 Governance Nomination committee report Dear shareholder The primary role of the Committee is to consider Board composition and orderly succession, both for executive and non-executive directors. Committee members Jonathan Nicholls (Chairman) Richard Akers Jill Little Dermot Mathias Hilary Riva Sally Walden Succession planning and development As Chairman of this Committee, my focus is on Board succession and talent development to ensure that there is a pipeline of able and experienced people in the business for potential future senior executive and Board appointments. The Committee ensures that the evolution of the Board’s membership is planned and properly managed, and that in the event of unforeseen changes, management and oversight of the business and long-term strategy would not be disrupted. In considering executive director succession, we address continuity in, and development of, the management team below Board level. Current executive directors have a long tenure. Whilst there are no immediate vacancies at Board level, we recognise that it is important to develop internal talent. Our development planning encourages employees to fulfil their potential and grow in their roles. We continue to keep the composition of the Board under review. Directors standing for re-election Dermot Mathias and Sally Walden have been non-executive directors for more than six years. The Committee has concluded that they continue to bring to the Board the appropriate range of skills and expertise to operate effectively and maintain their independence. The Committee therefore recommends that they remain on the Board for a further year. As set out on page 74, Jill Little will remain on the Board for a further year. The Committee advised the Board on the proposal to re-elect each director, other than Hilary Riva, who will retire from the Board at the 2019 AGM as she will reach nine years' service in February 2019. Key activities • Appointment of Richard Akers recommended to the Board • Committee Report • Proposed directors for election and re-election • Reviewed skills of directors for re-election with more than 6 years’ service Non-executive directors I reported in detail last year on the process for the search for a new non-executive director. This culminated in the recommendation to the Board to appoint Richard Akers. He joined the Board at the end of November 2017 and a detailed summary of his induction process is contained within this report. Hilary Riva will retire at the 2019 AGM. We have commenced a search for an additional non- executive director to join us on the Board as her replacement. Engagement with shareholders As Chairman of the Committee, I consult with shareholders regarding succession. With the departure from the UK Corporate Governance Code to extend the tenure of Jill Little by a year, I have written to shareholders representing 66% of our share capital to ascertain their views on this approach. Of those that responded, all were in favour of the proposal. I am available to shareholders throughout the year and at the 2019 AGM to answer questions on the work of the Committee. Jonathan Nicholls Chairman – Nomination Committee 26 November 2018 Focus for 2019 • Non-executive succession • Culture • Diversity policy/action plan • Oversight of employee development October 2017 November 2017 December 2017 January 2018 February 2018 March 2018 April 2018 Shaftesbury Annual Report 2018 80 Core programme One-to-one briefings Reading and reference material Non-executive director induction The Chairman led the induction process for Richard Akers, assisted by the Company Secretary. Richard Akers' induction began shortly after the announcement of his appointment on 5 October 2017. In addition to various one- to-one meetings (see below), he was also provided with reading and reference material relating to our operations. As there are a small number of senior employees in one location, Richard met the team during the process. Chairman Chief Executive Portfolio tours with Property Directors Finance Director Chairs of Audit, Nomination and Remuneration Committee Key advisors: external auditors, valuers, corporate communications Role of a director: Directors’ duties and Shaftesbury policies The Board: Schedule of matters reserved, minutes, and procedures Rules: Articles of Association Current issues: Shareholder feedback The Group: Key information including history, structure, financial reports and budget People: Structure chart Relationships: Key advisors and joint venture partner Board Committees: Terms of reference, membership, and minutes Key responsibilities • Review the structure, size and composition of the Board and its Committees (including skills, experience, independence and diversity) and make recommendations to the Board accordingly. • Lead the process for new Board appointments and review succession for directors and senior management. • Review the time commitment expected from the Chairman and non-executive directors. • Ensure an effectiveness review of the Board, its Committees and directors is conducted annually. • Succession planning for executive and non-executive directors March 2018 April 2018 May 2018 August 2018 June 2018 September 2018 July 2018 Governance Nomination committee report continued Diversity The Board recognises the importance of diversity, both in its membership, and its employees. It has a clear policy to promote diversity across the business. The Board considers that quotas are not appropriate in determining its composition and has therefore chosen not to set targets but keeps the topic of diversity under consideration in all aspects of Board composition. Diversity includes but is not limited to gender, and is considered at every level of recruitment. All appointments to the Board, and elsewhere, are made on merit. Gender diversity across the Company is set out below. For the second year running, we were top of FTSE 250 in the Hampton-Alexander review for the highest female representation on the executive committee and direct reports. The Hampton-Alexander review, which is an independent, business-led initiative supported by the Government, aims to increase the number of women in leadership positions in FTSE 350 companies. Directors Senior leadership team excluding executive directors All employees 3 30% 7 70% 4 57% 3 43% 18 60% 12 40% Female Male We were ranked in the top 200 globally for gender diversity by Equileap which provides insight on diversity data. We support initiatives to promote diversity within the real estate sector. Brian Bickell is a board member of Freehold, a forum for LGBT real estate professionals. We have committed to the RICS Inclusive Employer Quality Mark scheme which aims to drive behaviour changes by encouraging businesses in the real estate sector to look carefully at their employment practices and to ensure inclusivity is embedded in their operations. During the year, we have appointed two permanent employees and four interim employees and these principles have been applied in the recruitment process. We are a member of Real Estate Balance whose objective is to achieve a better gender balance, at board and executive management level, in the real estate industry, by supporting the development of a female talent pipeline across the sector. The Group is a signatory to the 30% Club which is a campaign to achieve a minimum of 30% women on FTSE 350 boards. It also seeks to develop a diverse talent pool. Our Board has achieved the 30% target. Diversity is wider than gender balance, and the Board is committed to maintaining a diverse workforce. We will be preparing a policy and action plan in the coming year. Shaftesbury Annual Report 2018 81 3Governance Audit committee report Dear shareholder Accountability I am pleased to present the Committee’s report which highlights the key activities and focus for the year ended 30 September 2018. The Committee is an important element of the governance structure. It is composed solely of independent non-executive directors, with a good diversity of experience, including property, retail and finance. For the purpose of the UK Corporate Governance Code, I meet the requirement of having appropriate recent and relevant financial experience. Meetings At my request, all meetings are attended by the external auditor, the Chairman and members of the senior management team. The Committee meets privately with the external auditor and the valuers to discuss any matters they may wish to raise. The Committee is satisfied that both the external auditor and valuers remain independent and objective in their work. Throughout the year, I meet with executive directors, as appropriate, to obtain a good understanding of key issues affecting the Group which helps me in my oversight of the agenda and discussions at Committee meetings. Risk, control and assurance The Risk Committee evaluates the risk and control arrangements, reporting to the Audit Committee. Whilst we do not have a formal internal audit function, we commission external reviews, from time to time, to supplement the existing risk and control arrangements. Reviews this year and anticipated work for the coming year, are set out in the following report. Effectiveness The Committee receives comprehensive reports for consideration on a timely basis in advance of meetings. This facilitates a good quality of discussion and level of challenge by the Committee. The performance of the Committee was considered as part of the wider Board effectiveness review. The review was positive and we believe that the Committee continues to operate effectively. Engagement with shareholders I welcome questions from shareholders on the Committee’s activities. If you wish to discuss any aspect of this report, please contact me via the Company Secretary. I will be attending the 2019 AGM and look forward to meeting you there. I would like to thank the other members of the Committee, management and our external auditors for their support during the year. Dermot Mathias Chairman – Audit Committee 26 November 2018 See page 78 for the Board effectiveness review Committee members Dermot Mathias (Chairman) Richard Akers Jill Little Hilary Riva Sally Walden Key activities • Annual report • Viability statement • Going concern • Committee report • Re-appointment of auditors • Independence and objectivity of auditors • Approved auditor fees • Risk management and internal control October 2017 November 2017 December 2017 January 2018 April 2018 Shaftesbury Annual Report 2018 82 Governance Audit committee report continued Key responsibilities • Review the work of the external auditor and valuer and any significant financial judgement made by management. • Monitor the reporting process and financial management. • Review the full and half year financial statements, including consideration of material estimates and areas of judgement exercised in their preparation. • Advise the Board on various statements made in the Annual Report, including those on viability, going concern, risk and controls and whether, when read as a whole, the Annual Report is fair, balanced and understandable and provides the information necessary for shareholders to assess performance, business model and strategy. • Consider the appointment of the external auditor, their reports to the Committee, performance, objectivity and independence. • Review the risk management framework and ensure that risks are carefully identified and assessed, and that systems of risk management and internal control are in place and effective. • Consider the need for an internal audit function. • Review the whistleblowing arrangements. Financial Reporting The Committee reviewed the content and tone of the annual and half year results. The Finance Director provided a commentary on the draft results, financial position and key estimates and judgements. The executive directors confirmed to the Committee that they were not aware of any material misstatements in the half year and annual results and the auditors confirmed that they had found no material misstatements in the course of their work. After reviewing the reports from management and, following discussions with the external auditor and valuers, the Committee was satisfied that: • the financial statements appropriately addressed the critical judgements and key estimates, both in respect of the amounts reported and the disclosures; • the processes used for determining the value of the assets and liabilities had been appropriately reviewed, challenged and were sufficiently robust; and • the Group has adopted appropriate accounting policies. During the year, we received a letter from the Financial Reporting Council (FRC), following a review of our 2017 Annual Report by their Conduct Committee1. No questions or queries arose from the review and no response from us was requested. A number of minor matters were noted for consideration and, where appropriate, changes have been made to disclosures in the 2018 Annual Report. Focus for 2019 • Assessing the effectiveness of key controls • Review of one of our managing agent's processes • Consideration of certain tax procedures 1 The FRC noted that the review was carried out without the benefit of a detailed understanding of our business or the underlying transactions entered into, although it was conducted by staff who have an understanding of the relevant legal and accounting framework. They also commented that their role is to consider compliance with reporting requirements, rather than to verify information provided. Therefore, their letter does not provide assurance that our 2017 Annual Report is correct in all material respects. • Half year results • Audit plan and strategy • External auditor • Non-audit fees • Cyber-security • Risk management and effectiveness controls • Whistleblowing policy • Considered need for internal audit function • Risks and controls update • Cyber-security update April 2018 May 2018 June 2018 July 2018 August 2018 September 2018 Shaftesbury Annual Report 2018 83 33Governance Audit committee report continued 2018 Annual Report Valuation of investment properties The valuations provided by external valuers are significant components of the annual and half year results. External valuations are subjective and require significant estimates to be made, including, but not limited to, market yields and ERVs. At 30 September 2018, the valuation of investment properties was £3.72 billion. Additionally, our share of the valuation of investment properties held in joint venture was £224.6 million. A commentary on these valuations is set out on page 42 and a summary of the key assumptions made by the valuers is shown on pages 144 to 145. In reviewing the valuations, the Committee considered: • an analysis and commentary by management; • presentations from the valuers of the wholly-owned portfolio and the Longmartin joint venture, which included comparable evidence for the key assumptions adopted; and • an assessment by the external auditor, who used in-house real estate valuers as part of its audit. The Committee was satisfied with the assumptions and estimates used in the valuation. Other estimates Whilst not material in the context of the Group’s assets or net assets, the Committee reviewed the estimates made by management in calculating the charge for equity-settled remuneration and was satisfied with the assumptions adopted. The above description of the significant estimates should be read in conjunction with the Independent Auditor’s Report on pages 111 to 117 and the significant accounting policies disclosed in the notes to the financial statements, particularly note 1 which describes significant estimates and assumptions. Further information on the approach taken by the valuers in valuing investment properties and a sensitivity analysis on equivalent yields and ERV are set out in note 8 to the financial statements. Fair, balanced and understandable The Committee discussed a report from the Finance Director covering the systems and controls around the preparation of the financial statements and whether the Annual Report; • was open and honest, reporting challenges alongside successes and opportunities; • provided clear explanations of KPIs and their link to the strategy; • explained our business model, strategy and accounting policies simply, using clear language; • included clear signposts to additional information; and • was in accordance with the information provided to the Board during the year. The Committee considered whether the Annual Report: • was fair, balanced and understandable; • provided the necessary information for shareholders to assess the Group’s performance, business model and strategy; and • had been written in straightforward language, without unnecessary repetition, and that the use of Alternative Performance Measures had been adequately explained and reconciled to the financial statements and not been given more prominence than a corresponding measure under IFRS. The Committee reported to the Board that, in its view, the Annual Report was fair balanced and understandable. The Board’s confirmation can be found in the directors’ responsibilities statement on page 110. Viability statement At the request of the Board, the Committee reviewed the Viability Statement and the period for which the Board should assess the prospects of the Group. We continue to adopt a five-year assessment period, based on lease lengths and review patterns for the majority of the portfolio and corresponding to current forecasts. The Committee discussed the viability assessment, prepared by management, which included, inter alia: • stress testing in severe but plausible scenarios, particularly in respect of loan covenant compliance; and • an assessment of investment commitments alongside liquidity and financing capacity. The Committee was satisfied that the five-year assessment period remained appropriate and recommended the Viability Statement to the Board. See also page 61. Going concern The Committee reviewed whether it was appropriate to adopt the going concern basis in the preparation of the results. In considering this, it reviewed the Group’s five-year forecasts, availability of liquidity and expected headroom under the financial covenants in debt arrangements. Following the review, it recommended to the Board that it was appropriate to adopt the going concern basis. The Board’s confirmation is set out on page 108. External valuers The Committee monitored the valuers’ objectivity and independence and met with the valuer of the wholly-owned portfolio without management present to allow them to raise any concerns they may have had. The valuers have confirmed that they are appropriately qualified to carry out the valuations and that fees they receive are not a material part of their overall fee income. Further details in respect of the valuer of the wholly-owned portfolio, including fees for valuation and non-valuation services, are given in note 8 to the financial statements. The Committee remains satisfied that the valuers are objective and independent. External auditors The Company has complied with the provisions of the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014. This is the third year that Eamonn McGrath has been the lead audit partner. Eamonn has announced his retirement following the conclusion of the 2018 audit. His successor, Dan Saunders, has met with the Chairman, Audit Committee Chairman and Finance Director. We are assured that the transition and handover period will be managed efficiently. The Committee would like to thank Eamonn for his professionalism as audit partner to the Group over the past three years. There are no contractual obligations restricting our choice of external auditor. In accordance with the current regulations, we will re-tender the audit at least every ten years. The last tender was in 2014. Shaftesbury Annual Report 2018 84 Accountability Governance Audit committee report continued Risk management and internal control Our approach to risk management and internal control is set out on page 57 to 58. Principal risks and uncertainties are disclosed on pages 59 to 60. Risks and internal controls are monitored by executive management on a day-to-day basis. The Risk Committee formally assesses strategic and emerging risks, as well as key mitigating controls, reporting to the Audit Committee. Executive management reports to the Audit Committee on its assessment of the effectiveness of key controls. In the coming year, we anticipate this work will be supplemented by an external review (see internal audit, below). Additionally, the external auditors review procedures and controls as part of their work and comment, where appropriate, to the Committee. The Committee remains satisfied that there is a robust review of risks and that the controls over the significant risks operate effectively. Internal audit The Committee reviews the need for an internal audit function annually. The Committee has advised the Board that it considers that there is no need to establish an internal audit function. This assessment is based on the focused nature of the Group’s business, the close involvement of the executive directors in day-to-day decision making and relatively simple Group structure. From time to time, the Group engages external advisors to carry out targeted reviews to supplement the existing risk management and internal control arrangements and provide further assurance. In 2018, this comprised: • reviews of the cyber security and GDPR arrangements; and • an assessment of procedures to identify, evaluate and control strategic risks. Projects anticipated for the coming year are set out on page 83 and the findings from these reviews will be made available to the external auditor. Whistleblowing The Committee reviewed and approved the Group’s whistleblowing procedures and has introduced a dedicated whistleblowing line for employees and the wider supply chain. Annual auditor assessment Annually, the Committee assesses the qualifications, expertise, resources, and independence of the Group’s external auditors, as well as the effectiveness of the audit process. It does this through discussion with the Finance Director, review of a detailed assessment questionnaire and confirmations from the external auditor. The Chairman of the Committee and the Finance Director also meet with an independent partner of Ernst & Young LLP (EY). EY has confirmed to the Committee that: • It has internal procedures in place to identify any aspects of non-audit work which could compromise its role as auditor and to ensure the objectivity of its audit report. • The total fees paid by the Group during the year do not represent a material part of its firm’s fee income. • It considers that it has maintained audit independence throughout the year. The Committee’s relationship with the external auditor is one of openness and professionalism. From its discussions during the year, it considers that the auditor provides appropriate professional challenge and reports its findings in a frank and honest manner. During the year, an Audit Quality Review Team (AQRT) from the FRC undertook an inspection of EY’s audit of the Group’s financial statements for the year ended 30 September 2017. As part of that process, the Audit Committee Chairman spoke with the AQRT to share the Audit Committee’s perspectives on the quality of EY’s audit and its delivery on commitments made by the audit firm as part of the audit tender process. On completion of the review, the Audit Committee received and considered the AQRT’s final report on its inspection and discussed it with the audit partner. The report gave the Committee no concerns over the quality, objectivity or independence of the audit. The Committee remains satisfied with the effectiveness of the external audit and the interaction between the auditors and the Committee. Also, it is satisfied as to the auditor’s qualifications, expertise and resources and remains confident that its objectivity and independence are not in any way impaired by the provision of non-audit services. Audit fees Fees payable to the auditor for audit and non-audit services are set out in note 4 to the Financial Statements on page 126. Total fees related to non-audit services represented 18% of the total fees for audit services (2017: 41%). The auditor was also paid £31,400 (2017: £31,000) for its audit of Longmartin Properties Limited. The Company’s 50% share of this was £15,700 (2017: £15,500). The Committee’s policy is that non-audit assignments are not awarded to the external audit firm if there is a risk that audit independence and objectivity could be compromised. Other than in exceptional circumstances, non-audit fees should not exceed 70% of audit and assurance fees over a rolling three-year period. The award of any non-audit assignment to the auditors in excess of £25,000 is subject to the prior approval of the Committee. Shaftesbury Annual Report 2018 85 33Governance Directors’ remuneration report Dear shareholder I am pleased to present our 2018 directors’ remuneration report. The resilience of our strategy and business model against the backdrop of the economic and political uncertainty nationally has delivered EPRA earnings¹ of 17.1 pence per share, an increase of 5.6% and an increase² in the portfolio valuation¹ of 3.8% to £3.95 billion. The key performance metrics are summarised on page 89 and more detailed financial information is set out in the strategic report. The remuneration policy on pages 90 to 96 sets out our approach to the reward of executive and non-executive directors. Our aim is to provide a remuneration structure which is fair, with incentives aligned to our strategy and long-term objectives, and which encourages executive continuity, in line with our culture. This policy will be submitted for a binding shareholder vote at our 2019 AGM. The remainder of the report, on pages 97 to 107, summarises the remuneration outcomes in respect of the reporting year and the proposed executive director remuneration for the year ahead. This part of the report will be subject to an advisory shareholder vote at the 2019 AGM. Committee composition and meetings We have good experience on the Committee with two current and one former public company remuneration committee chairs. Our external advisors attend meetings when required. The Chairman is invited to attend all meetings, and the Chief Executive also attends when invited. Annual bonus and LTIP outcomes for the year At the beginning of each year, we set financial and operational targets for the annual bonus scheme which align with our long-term strategy. Where projects extend for periods beyond the financial year, annual targets are set to assess progress towards achievement of the ultimate objectives. In setting targets, we use the Group’s KPIs which drive value through the delivery of long-term rental growth.  The outcome of performance against our targets was 52.5% of the maximum potential award. Each executive director has elected to receive his award solely in the form of deferred shares, and will therefore receive an award under the Deferred Annual Share Bonus Scheme of 78.75% of salary in December 2018, which will vest in December 2021. LTIP awards which were made in 2015 will vest in December 2018, based on a three -year performance period which ended on 30 September 2018. Annualised TSR of 1.9% per annum exceeded that of the benchmark (FTSE 350 REIT Index) by 1.5% per annum over the period. Growth in NAV exceeded the benchmark RPI by 1.4% over the period. As a result of this performance, the TSR target was partially met and the NAV target was not met resulting in 22.5% vesting of these awards. This vested award will be subject to a two-year holding period in line with our policy. The Committee has not exercised discretion in making these awards. Committee members Sally Walden (Chairman) Richard Akers Jill Little Dermot Mathias Hilary Riva 1 An alternative performance measure see page 140. 2 Like-for-like. See glossary on page 148. Key activities • Set 2018 annual bonus targets • Review 2017 annual bonus outcomes • Ratify LTIP vesting • LTIP grant approval • Committee report • Annual salary review • Oversight of all employee salary reviews • Review annual work cycle • Update on share schemes October 2017 November 2017 December 2017 January 2018 February 2018 March 2018 April 2018 Shaftesbury Annual Report 2018 86 Remuneration Governance Directors’ remuneration report continued Review of remuneration policy In advance of the renewal of our remuneration policy at the 2019 AGM, during 2018 the Committee undertook a thorough review of the framework currently in place to ensure it remains appropriate for the business and in the context of evolving shareholder expectations and market practice. The Committee determined that our current remuneration policy continues to support the delivery of the strategy and long-term objectives whilst encouraging executive continuity. Therefore, the Committee is not proposing to make any major changes to the structure of the policy. The Committee is mindful of recent developments in the market and UK Corporate Governance Code regarding the alignment of executive pension contributions with those across the wider organisation. The Committee is proposing that the new policy will reduce pension provision for future executive director appointments from 25% to 17.5% of salary, in line with the pension contribution received by all our other employees. The new UK Corporate Governance Code will be applicable to us from 1 October 2019. The Committee will monitor how practice and investor expectations evolve during 2019 with respect to the extension of shareholding requirements into a post-employment period and will report on our proposed approach in next year’s Directors' Remuneration Report. 2019 LTIP grant An LTIP award will be made in December 2018 at 125% of basic annual salary with a three-year performance period ending 30 September 2021. Subject to performance against the targets, awards will vest in December 2021, and be released in December 2023 following a two-year post-vesting holding period.  As part of the policy review described above, the Committee reviewed the performance measures within our incentive framework to ensure they remained appropriate to reflect business performance and shareholder value creation. Following the review, we are proposing to amend the LTIP performance measures as follows: • Introduce a new element based on Total Accounting Return (TAR) against a peer group of FTSE 350 REIT companies. This measure captures NAV per share growth plus any ordinary dividends paid, expressed as a percentage of the period's opening NAV. • We will retain the current TSR and NAV measures in their current form. These measures have been used since the inception of the LTIP. The three measures will be equally weighted (one-third on each). We believe that this structure provides a more balanced and comprehensive approach to assessing our property and shareholder value performance over the long-term and provides a less binary outcome to performance assessment. Key responsibilities • Determine the terms of employment and remuneration for executive directors and senior management. • Ensure that the executive directors are remunerated fairly and responsibly with the long-term interests of the Company in mind. • Consider the appropriateness of the directors’ remuneration framework against arrangements for other employees. • Review and approve the performance targets and outcomes for the annual bonus schemes and share incentive schemes. • Review the remuneration policy every three years. • Ensure that the remuneration report and disclosure of director remuneration is simple to read and understand, accurate and complete. Focus for 2019 • Monitor practice of post-employment shareholding guidelines • Impact of new Corporate Governance Code generally • Oversight of remuneration policies and procedures throughout Shaftesbury and link with culture • Feedback from shareholders • Review Committee performance • Review advisor’s performance • Interim update on bonus and LTIP performance • Policy review • Policy review • Preparation for year end remuneration processes • Dilution review March 2018 April 2018 May 2018 June 2018 July 2018 August 2018 September 2018 Shaftesbury Annual Report 2018 87 3 Governance Directors’ remuneration report continued 2018 salary review Salaries of executive directors were reviewed and increases of 2% for the Chief Executive and Property Directors and 3% for the Finance Director were approved, effective from 1 December 2018. This is in line with CPI of 2.7% and below the average salary increases awarded to employees. Alignment with employees In reviewing salaries and bonus outcomes, we consider overall remuneration packages of the executive directors together as well as all other employees' remuneration. All employees have the same benefit structure as directors: they participate in the LTIP and have the opportunity to defer their annual bonus into shares. They also participate in Sharesave, and receive health and life insurance. Engagement with shareholders As Chairman of the Committee, I consult with shareholders on a regular basis regarding executive remuneration. Ahead of the publication of this report, I engaged with shareholders representing 70% of our share capital and received good support for the proposed changes to policy and to our LTIP performance measures. I am available to shareholders throughout the year and at the 2019 AGM to answer questions on executive remuneration. Sally Walden Chairman - Remuneration Committee  26 November 2018  Advisor to the Committee Deloitte LLP act as independent advisor to the Committee.  Deloitte LLP is a member of the Remuneration Consultants Group and voluntarily operates under the Code of Conduct in relation to executive remuneration consulting in the UK. The Committee is satisfied that the Deloitte LLP engagement partner and team that provide remuneration advice to the Committee do not have connections with the Group that may impair their objectivity and independence. The fees charged by Deloitte LLP for the provision of independent advice to the Committee during the financial year were £32,000 (excluding VAT). Deloitte LLP provided no other services to the Group during the year.  Context for our approach to remuneration We have 30 permanent employees, including four executive directors. The combined holdings of the executive directors is just over 3.3 million shares (market value at 30 September 2018 of circa £30 million). This equates to individual holdings of between 3 and 30 times their annual salary. These substantial holdings have been built up over a number of years through a combination of: • Taking the annual bonus in shares through the Deferred Annual Share Bonus scheme; • Retaining shares from the LTIP; and • Acquiring shares for cash. Our small team of executive directors and key employees all have a close involvement and direct impact on the continuing development and implementation of the Group’s strategy. Consequently, the Committee considers it appropriate that, in setting objectives and measuring performance, emphasis is placed on team rather than individual performance. Average length of service of the executive directors is 25 years and members of the executive committee (excluding executive directors) is 11 years. Remuneration Shaftesbury Annual Report 2018 88 Governance Remuneration at a glance Governance SALARY + BENEFITS + PENSION CONTRIBUTION + ANNUAL BONUS + LTIP = TOTAL REMUNERATION Fixed pay Performance-related pay Performance-related pay framework (2019 awards) 10% occupancy p to 15 U 10% CSR performance (KPI) 5% growing net property income (KPI) 33.3% on TSR measured relative to FTSE 350 REIT Index f i 0 % taken in sh a r e s Annual bonus Up to 100% of salary if taken in cash 17.5% convert ERV’s to contractual income (KPI) ard of 15 w a m u m i x a M 0 % o f salary in n o r m a l LTIP Awards of 125% in normal circumstances c i r c u m s ta nces 33.3% on TAR against a peer group of FTSE 350 REIT companies 40% specific projects 17.5% rental growth (KPI) 33.3% NAV return measured on an absolute basis 2018 Group performance Net property income £93.8m +6.2% Dividends per share EPRA earnings per share1 17.1p +5.6% EPRA NAV per share1 16.8p +5.0% £9.91 +4.1% Portfolio valuation1 TSR (Shaftesbury) ERV growth2 £3.95bn +3.8% -9.4% versus FTSE 350 Real Estate Index +4.1% +2.4% 1 An alternative performance measure (APM). See page 140 2 Like-for-like. See Glossary on page 148 Shaftesbury Annual Report 2018 89 33 Governance Remuneration policy Set out below is our policy on directors’ remuneration, which will be proposed for a binding vote at the 2019 AGM. If approved, the policy will be effective from that date. Changes to the remuneration policy The main change to this remuneration policy, from the previous policy approved by shareholders at the 2016 AGM, and as described in Sally Walden’s introductory letter, is the reduction in pension contributions (or equivalent cash allowance) for newly appointed executive directors from 25% to 17.5% of salary to bring it in line with all other employees in the organisation. Executive directors Element Link with strategy Operation Salary Fixed remuneration at a level appropriate to skills, experience and complexity of the role. Salaries are normally reviewed annually with effect from 1 December. Any increases are determined with reference to inflation and the salary increases for other employees, unless there is a change of role or responsibility or a new director is recruited (see recruitment policy). Sector and other relevant market data (eg against constituent companies of the FTSE 350 REIT Index) may be requested from remuneration advisors. The Committee recognises the importance of setting salaries at levels in the context of market median levels in the real estate sector, but which are not excessive in relation to the Group’s particular strategy and features. The emphasis in the Group’s remuneration policies is to place greater weight on performance- based rewards within the overall remuneration package. Annual bonus To incentivise performance in the reporting year through the setting of targets at the beginning of the year. These annual targets are consistent with the Group’s long-term strategy. The opportunity to defer the bonus and take it in shares seeks to align directors’ interests with those of shareholders and discourage short-term decision making. LTIP To incentivise and reward performance over the long-term, aligning directors’ interests with those of shareholders and to encourage the management of the Group’s business in accordance with its long-term strategy and goals. Shaftesbury Annual Report 2018 90 Annual performance targets are set by the Committee at the beginning of the year and are linked to the Group’s strategy and key business objectives. Directors have the choice to take a Performance targets are set by the Committee. Performance is assessed against a set of key financial and bonus in shares or cash, in full or part non-financial annual measures which may vary each year depending on the annual priorities of the business At the end of the financial year, the Committee evaluates performance against these objectives, whilst also taking into account overall financial performance and future prospects. The Committee also satisfies itself that short-term targets have not been met at the expense of long-term goals. Within the parameters of the scheme, the Committee has discretion to adjust bonus outcomes (upwards or downwards) as it considers appropriate, to ensure alignment of pay with overall performance and market conditions. Minimum performance required for any part of the bonus to be earned is calibrated so as to be appropriately stretching and achievable. Where directors take all or part of the bonus as an award of shares (in the form of a conditional award of shares or a nil-cost option), these awards vest after a minimum of three years from grant under the Company’s deferred bonus plan. No further performance conditions apply. Awards may also, at the Committee’s discretion, be settled in cash. Malus and clawback provisions apply to all elements of the bonus (as described elsewhere in this section). Awards may be granted in the form of nil cost options, conditional share awards or, at the Committee’s discretion, be settled in cash. Maximum value 150% of salary at date The awards will be subject to performance targets measured over a three-year period. It is intended that of grant in normal circumstances. these performance measures are aligned to strategic objectives and shareholder value. For awards under this At the end of the performance period, performance against the targets is calculated, and the percentage of awards that will vest is determined. Unless the Committee determines otherwise, vested awards will then be subject to an additional holding period before participants are entitled to receive their shares. A holding period will normally last for two years, unless the Committee determines otherwise. Malus and clawback provisions apply to the LTIP (as described elsewhere in this section). Maximum value 200% of salary in exceptional circumstances such as executive recruitment (this has not been used to date). policy, the performance measures will be as follows (equally weighted): • Total Accounting Return (TAR) measured against a peer group of FTSE 350 REIT companies; • Net Asset Value Return, being growth in EPRA NAV together with dividends paid in the period measured on an absolute basis; and • Total shareholder return measured relative to a relevant index of peers. Threshold vesting will be no higher than 25% of the each performance measure. The detailed targets are set out in the Annual Remuneration Report. before determining the final vesting level. The Committee will consider the Group’s underlying financial performance over the performance period Maximum potential value Performance measures and performance periods The Committee does not specify a None maximum salary or maximum salary increase. Further details on salary levels and any increases are provided in the Annual Remuneration Report. as follows: shares; or in cash. Up to 150% of salary if taken entirely in Up to 100% of salary if taken entirely and prevailing market conditions. Measures will be weighted in alignment with the Group’s objectives for each year. A substantial part of the total bonus will be based on quantitative KPIs. Further details of the measures, weightings and targets applicable are provided in the Annual Remuneration Report for that year. Changes to the remuneration policy The main change to this remuneration policy, from the previous policy approved by shareholders at the 2016 AGM, and as described in Sally Walden’s introductory letter, is the reduction in pension contributions (or equivalent cash allowance) for newly appointed executive directors from 25% to 17.5% of salary to bring it in line with all other employees in the organisation. Executive directors Link with strategy Operation Element Salary Fixed remuneration at a level Salaries are normally reviewed annually with effect from 1 December. Any increases are appropriate to skills, experience determined with reference to inflation and the salary increases for other employees, unless and complexity of the role. there is a change of role or responsibility or a new director is recruited (see recruitment policy). Annual bonus To incentivise performance in the reporting year through the setting of targets at the beginning of the year. These annual targets are consistent with the Group’s long-term strategy. The opportunity to defer the bonus and take it in shares seeks to align directors’ interests with those of shareholders and discourage short-term decision making. Sector and other relevant market data (eg against constituent companies of the FTSE 350 REIT Index) may be requested from remuneration advisors. The Committee recognises the importance of setting salaries at levels in the context of market median levels in the real estate sector, but which are not excessive in relation to the Group’s particular strategy and features. The emphasis in the Group’s remuneration policies is to place greater weight on performance- based rewards within the overall remuneration package. Annual performance targets are set by the Committee at the beginning of the year and are linked to the Group’s strategy and key business objectives. At the end of the financial year, the Committee evaluates performance against these objectives, whilst also taking into account overall financial performance and future prospects. The Committee also satisfies itself that short-term targets have not been met at the expense of long-term goals. Within the parameters of the scheme, the Committee has discretion to adjust bonus outcomes (upwards or downwards) as it considers appropriate, to ensure alignment of pay with overall performance and market conditions. Minimum performance required for any part of the bonus to be earned is calibrated so as to be appropriately stretching and achievable. Where directors take all or part of the bonus as an award of shares (in the form of a conditional award of shares or a nil-cost option), these awards vest after a minimum of three years from grant under the Company’s deferred bonus plan. No further performance conditions apply. Awards may also, at the Committee’s discretion, be settled in cash. Malus and clawback provisions apply to all elements of the bonus (as described elsewhere in this section). LTIP To incentivise and reward Awards may be granted in the form of nil cost options, conditional share awards or, at the performance over the long-term, Committee’s discretion, be settled in cash. aligning directors’ interests with those of shareholders and to encourage the management of the Group’s business in accordance with its long-term strategy and goals. At the end of the performance period, performance against the targets is calculated, and the percentage of awards that will vest is determined. Unless the Committee determines otherwise, vested awards will then be subject to an additional holding period before participants are entitled to receive their shares. A holding period will normally last for two years, unless the Committee determines otherwise. Malus and clawback provisions apply to the LTIP (as described elsewhere in this section). Governance Remuneration policy continued Remuneration Maximum potential value Performance measures and performance periods The Committee does not specify a maximum salary or maximum salary increase. None Further details on salary levels and any increases are provided in the Annual Remuneration Report. Directors have the choice to take a bonus in shares or cash, in full or part as follows: Up to 150% of salary if taken entirely in shares; or Up to 100% of salary if taken entirely in cash. Performance targets are set by the Committee. Performance is assessed against a set of key financial and non-financial annual measures which may vary each year depending on the annual priorities of the business and prevailing market conditions. Measures will be weighted in alignment with the Group’s objectives for each year. A substantial part of the total bonus will be based on quantitative KPIs. Further details of the measures, weightings and targets applicable are provided in the Annual Remuneration Report for that year. Maximum value 150% of salary at date of grant in normal circumstances. Maximum value 200% of salary in exceptional circumstances such as executive recruitment (this has not been used to date). The awards will be subject to performance targets measured over a three-year period. It is intended that these performance measures are aligned to strategic objectives and shareholder value. For awards under this policy, the performance measures will be as follows (equally weighted): • Total Accounting Return (TAR) measured against a peer group of FTSE 350 REIT companies; • Net Asset Value Return, being growth in EPRA NAV together with dividends paid in the period measured on an absolute basis; and • Total shareholder return measured relative to a relevant index of peers. Threshold vesting will be no higher than 25% of the each performance measure. The detailed targets are set out in the Annual Remuneration Report. The Committee will consider the Group’s underlying financial performance over the performance period before determining the final vesting level. Shaftesbury Annual Report 2018 91 33Governance Remuneration policy continued Executive directors continued Element Link with strategy Operation Maximum potential value Performance measures and performance periods All employee plans Pension Part of overall package for all employees, encouraging share ownership. Part of overall package for executive directors providing appropriate remuneration and retirement benefits. Executive directors are eligible to participate in other share plans, which are offered on similar terms to all employees, for example Sharesave and SIP. The limits are as defined by HMRC None from time to time. Contribution paid into a personal pension plan or taken as a cash equivalent, reduced for any resultant tax liability borne by the Group. Other benefits Part of overall package for executives providing comprehensive remuneration. Each executive director currently receives: • car allowance • private medical cover • life insurance • permanent health insurance Shareholding guidelines To further encourage long-term alignment between executives and shareholders. Newly appointed directors will not receive a car allowance. Other benefits may be provided if considered reasonable and appropriate by the Committee, including, but not limited to, housing allowance and relocation allowance. Executive directors are expected to build up a shareholding of 200% of salary (as at the date of appointment to the Board), to be accumulated over five years from appointment. Shareholding may include shares subject to deferred annual share bonus awards, though reduced in number to reflect that the holding is subject to income tax and national insurance deductions on exercise. Shares received under the LTIP and deferred annual share bonus scheme are required to be retained on a net of tax basis, until the minimum shareholding level is attained. Notes to the table: Performance measures 1 The performance measures set by the Committee for the annual bonus scheme reflect Group KPIs and short-term measures which are consistent with, and support, the Group’s strategic goals of long-term growth in rental income and net asset value. The Committee may make reasonable changes to the measures or weightings each year in order to ensure continued alignment with strategy. 2 LTIP performance measures have been selected to align the interests of directors with those of shareholders. Performance targets are set by the Committee to be appropriately stretching and achievable taking into account the Group’s strategic priorities and the economic environment in which the Group operates. Non-executive directors and Chairman Operation Element Link with strategy Fees and benefits To provide market-competitive director fees. Fees are normally reviewed every two years. Sector and other relevant market data (eg constituent companies in the FTSE 350 REIT Index) may be requested from remuneration advisors where required. A further fee is payable to reflect the additional time commitment required for other Board duties, such as chairing Board committees or acting as Senior Independent Director. The fee paid to the Chairman is determined by the Committee and fees to non-executive directors are set by the Board. No director takes part in discussions regarding their own remuneration. Benefits may be provided to non-executive directors if considered reasonable and appropriate by the Board. Shaftesbury Annual Report 2018 92 For any executive director appointed None after 8 February 2019, the maximum contribution (or cash allowance) is 17.5% of salary. For any executive director appointed prior to 8 February 2019, the maximum contribution (or cash allowance) remains 25% of salary. There is no maximum value. None Benefits are set at a level which the Committee determines is reasonable and appropriate. The value may vary depending on service provided, cost and market conditions. N/A N/A Maximum potential value Performance measures and performance periods As with the policy for the executive None directors, the policy does not specify a maximum fee or level of increase. Governance Remuneration policy continued Executive directors continued Element Link with strategy Operation All employee plans Part of overall package for all employees, encouraging share ownership. Executive directors are eligible to participate in other share plans, which are offered on similar terms to all employees, for example Sharesave and SIP. The limits are as defined by HMRC from time to time. None Maximum potential value Performance measures and performance periods Pension Contribution paid into a personal pension plan or taken as a cash equivalent, reduced for any resultant tax liability borne by the Group. Part of overall package for executive directors providing appropriate remuneration and retirement benefits. Other benefits Part of overall package for Each executive director currently receives: executives providing comprehensive remuneration. • car allowance • private medical cover • life insurance • permanent health insurance Newly appointed directors will not receive a car allowance. Other benefits may be provided if considered reasonable and appropriate by the Committee, including, but not limited to, housing allowance and relocation allowance. Shareholding guidelines To further encourage long-term Executive directors are expected to build up a shareholding of 200% of salary (as at the date of alignment between executives appointment to the Board), to be accumulated over five years from appointment. Shareholding and shareholders. may include shares subject to deferred annual share bonus awards, though reduced in number to reflect that the holding is subject to income tax and national insurance deductions on exercise. Shares received under the LTIP and deferred annual share bonus scheme are required to be retained on a net of tax basis, until the minimum shareholding level is attained. None For any executive director appointed after 8 February 2019, the maximum contribution (or cash allowance) is 17.5% of salary. For any executive director appointed prior to 8 February 2019, the maximum contribution (or cash allowance) remains 25% of salary. There is no maximum value. None Benefits are set at a level which the Committee determines is reasonable and appropriate. The value may vary depending on service provided, cost and market conditions. N/A N/A Notes to the table continued: 3 The Committee may amend or substitute any performance measure applicable to an LTIP award if an event occurs that causes the Committee to determine an amended, or substituted, measure would be more appropriate and not materially less difficult to satisfy. The Committee reserves the right to make any remuneration payments, and payments for loss of office (including exercising any discretion available to it in connection with such payments), notwithstanding that they are not in line with the policy set out above where the terms of the payment were agreed: (i) before 5 February 2016 (the date the Company’s previous directors’ remuneration policy approved by shareholders in accordance with section 439A of the Companies Act came into effect); (ii) before the policy set out above came into effect, provided that the terms of the payment were consistent with the directors’ remuneration policy (approved by shareholders in accordance with section 439A of the Companies Act) in force at the time they were agreed; or (iii) at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the Company. For these purposes “payments” includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are “agreed” at the time the award is granted. The Committee may make minor amendments to the policy set out above (for regulatory, exchange control, tax or administrative purposes, or to take account of a change in legislation) without obtaining shareholder approval for that amendment. Non-executive directors and Chairman Link with strategy Operation Element Fees and benefits To provide market-competitive Fees are normally reviewed every two years. Sector and other relevant market data (eg constituent director fees. companies in the FTSE 350 REIT Index) may be requested from remuneration advisors where required. Maximum potential value Performance measures and performance periods As with the policy for the executive directors, the policy does not specify a maximum fee or level of increase. None A further fee is payable to reflect the additional time commitment required for other Board duties, such as chairing Board committees or acting as Senior Independent Director. The fee paid to the Chairman is determined by the Committee and fees to non-executive directors are set by the Board. No director takes part in discussions regarding their own remuneration. Benefits may be provided to non-executive directors if considered reasonable and appropriate by the Board. Shaftesbury Annual Report 2018 93 33 Governance Remuneration policy continued Difference between policy for directors and employees Pay and benefits throughout the Group are taken into consideration when setting remuneration policy. The 26 employees below Board level are offered the same remuneration package elements as executive directors, although not all employees are eligible for all benefits provided to executive directors. Individual salary levels, percentage levels of awards in the annual bonus and LTIP vary according to employees’ level of responsibility. The same performance criteria, where relevant, are applied to executive directors and other employees. As the same remuneration policy is applied to executive directors and all employees, the Committee did not consult employees when drawing up the policy. Recruitment policy Executive directors A newly-appointed director’s remuneration would be proposed by the Committee and approved by the Board in line with the policy. The Group offers salary, benefits, annual bonus and awards under the LTIP. If the Group considered it appropriate to buy out any pre-existing variable pay arrangements of an incoming director, it would only be with replacement awards structured on a comparable basis eg in terms of vesting period, performance conditions etc. In doing so, the Committee would consider relevant factors when structuring such awards, including the likelihood of those pre-existing conditions being met. The Committee has the discretion to implement a one-off arrangement for the purposes of buy-out awards only, in accordance with Listing Rule 9.4.2 R. External appointment Element Approach Maximum annual grant value* The salaries of new appointees will be determined by reference to relevant market data, experience and skills of the individual, internal relativities and their current salary. Where new appointees have initial salaries set below market, any shortfall will be managed with phased increases within three years, subject to the individual’s development in the role. 150% of salary 200% of salary In line with the limits set out in the policy table. For executive directors joining part way through a year, awards would be pro-rated. The Committee may determine different performance targets for the new recruit, to reflect the shortened period in role. New appointees will be granted awards under the LTIP under the limits described in the policy table. The Committee may amend or alter the performance targets for the new recruit, as it considers appropriate. In line with the limits as described in the policy table. Salary Annual bonus LTIP All employee share plans, pension and other benefits *excludes compensation for variable remuneration lost on leaving a former employer Internal appointment In the event of appointing a new executive director by way of internal promotion, the policy will be consistent with that for external appointees as detailed above. Further detail on the policy for employees below board level is set out above. Non-executive directors Newly appointed non-executive directors are paid fees at a level consistent with existing non-executive directors. Fees would be paid pro-rata in their first year. Shaftesbury Annual Report 2018 94 Governance Remuneration policy continued Loss of office payment Provisions for payments on termination contained in executive directors’ service contracts are set out below: Date of appointment Date of current contract Notice period Termination arrangements Brian Bickell 1.10.2011 6.6.2011 One year’s notice One year’s salary and benefits payable in event of termination without notice. Director’s duty to mitigate loss Simon Quayle Tom Welton Chris Ward 1.10.1997 1.10.1997 9.1.2012 8.10.1997 8.10.1997 3.10.2011 One year’s notice Termination by payment of annual salary One year’s notice Termination by payment of annual salary One year’s notice One year’s salary and benefits payable in event of termination without notice. Director’s duty to mitigate loss Any new executive director would be appointed on the same loss of office terms as Brian Bickell and Chris Ward, namely twelve months’ salary and benefits, with a duty to mitigate loss on termination. The terms of appointment of non-executive directors are documented in letters of appointment. Non-executive directors have a one-month notice period and their appointment would terminate without compensation if not re-elected at an AGM. All contracts are available for inspection at the Company’s registered office. Approach to other remuneration payments on termination of employment and change of control In addition to the contractual provisions regarding payment on termination set out above, the Group’s incentive plans and share schemes contain provisions for termination of employment: Component Good leaver* Annual bonus May be eligible, at the discretion of the Committee, to receive an award based on the achievement of the performance targets and reduced pro-rata for time served in the year. Paid in cash with no uplift. Deferred Annual Share Bonus Scheme Awards vest on the normal vesting date unless the Committee determines the award should vest following cessation of employment. Bad leaver* Change of control** Outstanding award forfeited At the discretion of the Committee Will receive the lower of the value of the original cash bonus (before any uplift for deferral) or the value of any deferred shares on the date of cessation Awards vest at date of change of control LTIP Unvested awards will vest at the same time as if the individual had not left the Group, unless the Committee determines the award should vest following the cessation of employment. Vested awards remain subject to the two-year post-vesting holding period***. Outstanding unvested awards are forfeited Vested awards remain subject to the two-year post-vesting holding period The extent to which an unvested award vests will be determined by the Committee, taking into account normal performance conditions, and, unless the Committee determines otherwise, the proportion of the vesting period the participant has served. Awards vest (and are released) taking into account, in the case of unvested awards, the performance conditions and, unless the Committee determines otherwise, the proportion of the vesting period that has elapsed All employee plans In line with HMRC rules In line with HMRC rules In line with HMRC rules * Good leaver provisions relate to termination of office or employment by reason of death, disability, injury, retirement with the agreement of the Company, the participant’s office or employment being with a company or business which ceases to be a member of the Group or, in other exceptional circumstances, at the discretion of the Committee (including redundancy). Bad leaver provisions apply under all other circumstances. ** Alternatively, on a change of control, awards may be exchanged for equivalent awards of shares in a different company. In the event of a demerger, delisting, special dividend or other event which, in the Committee’s opinion, would materially affect the current or future value of the Company’s shares, the Committee may allow awards to vest and be released early on the same basis as for a change of control. Alternatively, in these circumstances or in the event of a variation of the Company’s share capital, the Committee may adjust the number of shares subject to an award. *** If a participant leaves during a holding period for any reason, his award will normally be released at the same time as if he had not left the Group, unless the Committee determines it should be released following his cessation of employment. However, if a participant is summarily dismissed, his award will immediately lapse. The use of any discretion described above would be disclosed in the Annual Report for the relevant year. Shaftesbury Annual Report 2018 95 33Governance Remuneration policy continued Remuneration Consideration of shareholder views Shareholders, representing almost 70% of the Company’s issued share capital, have been given the opportunity to comment and question the Committee on the remuneration policy and the proposed change. The Chairman of the Committee was available to discuss the policy with shareholders and governance bodies. Shareholder responses were reported to, and considered by, the Committee. Of those that responded, all were supportive of the proposals. External appointments Executive directors are permitted to accept external appointments, with the prior approval of the Board, where there is no adverse impact on their role. Any fees arising from such appointments may be retained by the executive director where the appointment is unrelated to our business. Potential remuneration for directors The charts below set out the potential remuneration receivable by directors for below threshold, on-target and maximum performance. Potential reward opportunities are based on this policy and applied to salaries as at 1 December 2018. Note that the projected values exclude the impact of any share price movement or dividend accrual. Brian Bickell (£’000) 2,223 34% 34% 32% 1,266 15% 30% 55% 693 100% LTIP Annual bonus Fixed Minimum On-target Maximum Simon Quayle, Tom Welton and Chris Ward (£’000) 493 100% 898 15% 30% 55% 1,573 34% 34% 32% Minimum On-target Maximum The minimum scenario reflects salary, pension and benefits (ie fixed remuneration) which are the only elements of the executive directors’ remuneration packages not linked to future performance. The on-target scenario reflects fixed remuneration as above, plus bonus payout of 75% of salary and LTIP threshold vesting at 25% of maximum award. The maximum scenario reflects fixed remuneration, plus full payout of all incentives. It assumes a maximum bonus of 150% of salary which would be receivable fully in shares. Shaftesbury Annual Report 2018 96 Remuneration Governance Governance Annual remuneration report Set out below is the annual remuneration report on directors’ pay for the year ended 30 September 2018. The report details how we intend to apply the remuneration policy for the year ahead and how we implemented it during the year. Statement of implementation of remuneration for the year ending 30 September 2019 Executive directors’ salaries from 1 December 2018 1.12.2018 £’000  Brian Bickell Simon Quayle Tom Welton Chris Ward 510 360 360 360 1.12.2017  £’000  500 353 353 349 Increase 2% 2% 2% 3% This compares to an average increase across the employee population of 3.6% and inflation (CPIH) of 2.7%. Annual bonus targets Maximum bonus of up to 150% of salary (if taken in shares) and 100% of salary (if taken in cash). Disclosure of annual bonus targets for the year ending 30 September 2019 is deemed to be commercially sensitive and therefore the actual targets are not set out in this report. A range was introduced last year for the rental growth target with a threshold level for achievement. This year, ranges for other measures are being introduced where appropriate. The targets will be disclosed retrospectively next year, provided they are no longer commercially sensitive. Measure Rental growth (KPI) Deliver growth in ERVs Convert ERVs to contractual income (KPI) Commercial lettings/reviews/renewals at or above valuers’ ERVs twelve months earlier Growing net property income (KPI) Net property income growth to at least track growth in rents receivable CSR performance (KPI) Corporate responsibility performance Occupancy Maximise portfolio occupancy Specific projects Various 1 Global Real Estate Sustainability Benchmark Weighting Target or reason for non-disclosure The Committee considers specific disclosure of targets regarding the achievement of rental levels, the speed of completing letting or delivery of specific projects or transactions would be prejudicial to the interests of shareholders. As a consequence of the geographic concentration of the Group’s portfolio, disclosure of such targets could have a material adverse impact on the Group’s position when negotiating transactions with current or potential tenants or other parties. To match baseline year corporate responsibility scores in GRESB and EPRA reporting benchmarks. Specific operational objectives to be met during the year critical to progressing long-term property projects and financing. 17.5% 17.5% 5% 10% 10% 40% Shaftesbury Annual Report 2018 97 33Governance Annual remuneration report continued LTIP LTIP awards of 125% of salary will be granted in December 2018. Performance will be measured over a three-year period which commenced on 1 October 2018. A two-year post-vesting holding period will apply to these awards. The vesting of this award will be subject to three performance measures, equally weighted, as shown in the following tables: Annualised TSR of the company’s shares less annualised TSR of the FTSE 350 REIT index Less than 0% pa 0% pa Between 0% pa and 5.5% pa 5.5% pa or more Vesting schedule (for this component) 0% 25% Pro-rata on a straight line basis between 25% and 100% 100% Annualised net asset value growth less annualised RPI growth Vesting schedule (for this component) Less than 3% pa 3% pa Between 3% pa and 7% pa 7% pa or more 0% 25% Pro-rata on a straight line basis between 25% and 100% 100% TAR against peer group of FTSE 350 REIT companies1 Vesting schedule (for this component) Below median Median Median to upper quartile Upper quartile 0% 25% Pro-rata on a straight line basis between 25% and 100% 100% 1 TAR measures growth in EPRA defined NAV plus any ordinary dividends paid during the period expressed as a percentage of NAV. Non-executive directors’ fees from 1 December 2018 Non-executive director fees are reviewed every two years and were reviewed in 2017 with changes taking effect from 1 December 2017. There are no changes to fees for the year ending 30 September 2019. Fees for the Chairman remain at £225,000 per annum and for non-executive directors at £57,000. There is an additional fee of £10,000 where a non- executive director chairs a committee and for the Senior Independent Director (if not already in receipt of a Committee Chairman fee). The Chairman does not receive an additional fee for chairing the Nomination Committee. Shaftesbury Annual Report 2018 98 Governance Annual remuneration report continued Remuneration for year ending 30 September 2018 Single total figure of remuneration for executive directors (audited) Salary Benefits1 Pension benefit2 Annual bonus3 LTIP4 Total 2018 £’000 2017 £’000 2018 £’000 2017 £’000 2018 £’000 498 352 352 348 489 345 345 341 55 49 40 40 52 48 39 34 109 77 77 78 2017 £’000 107 76 76 76 2018 £’000 2017 £’000 2018 £’000 2017 £’000 394 278 278 275 404 285 285 282 167 118 118 115 778 549 549 535 2018 £’000 1,223 874 865 856 2017 £’000 1,830 1,303 1,294 1,268 Brian Bickell Simon Quayle Tom Welton Chris Ward 1 Benefits comprise car allowance, permanent health insurance, life insurance, health insurance and Sharesave options which have been valued based on the monthly savings amount and the discount on the option price of 20% 2 Pension contribution is 25% of salary and may be taken in cash (in part or entirely). The cash equivalent is reduced by any resultant tax liability borne by the Group 3 Payment for performance in respect of the relevant financial year. For 2018, each executive directors could have received bonuses of 78.75% of salary in shares or 52.5% of salary in cash. Each director has elected to take their 2018 bonus entirely in shares, which are deferred for a period of three years. No further performance criteria apply 4 Reflects the vesting of shares in the LTIP in respect of performance for the relevant financial year. The TSR and NAV performance conditions for the three-year performance period to 30.9.2018 were met in part and 22.5 % of the awards vested. The value of these awards has been calculated by multiplying the number of shares that will vest by the three-month average share price to 30.9.2018 of £9.19. The 2017 estimated figure has been restated to reflect actual share price at the date of vesting. The value of dividends paid during the year on vested shares is also included Single total figure of remuneration for non-executive directors (audited) Fee 2018 £’000 213 48 57 57 57 57 2017 £’000 150 - 55 55 55 55 Committee chair/ senior independent director1 fees 2018 £’000 2017 £’000 Benefits 2018 £’000 2017 £’000 - - 10 - 10 10 - - 10 - 10 10 - - - - - - 3 - - - - - Total 2018 £’000 213 48 67 57 67 67 2017 £’000 153 - 65 55 65 55 Jonathan Nicholls Richard Akers2 Jill Little Hilary Riva Dermot Mathias Sally Walden 1 Fee is only payable if the Senior Independent Director is not the chair of any other Committee  2 Joined Board on 28.11.2017 Remuneration Shaftesbury Annual Report 2018 99 33 Measure Rental growth Deliver growth in ERVs1,2 Occupancy Maximise portfolio occupancy1,2 Let vacant property quickly2 Other Ratio of property outgoings to gross rents receivable2 Corporate responsibility performance Governance Annual remuneration report continued Annual bonus outcome for year ended 30 September 2018 Full retrospective disclosure of the targets for the 2018 annual bonus scorecard is provided below. Each executive director has elected to received his award solely in deferred shares under the Deferred Annual Share Bonus Scheme, which will vest in December 2021. Weighting Target Achievement Percentage awarded 35% Extent by which commercial leasing transactions exceed valuers’ ERV in the range of 3 - 7% Commercial leasing transactions exceeded previous year ERV on average by 5.1%  Annual like-for-like growth in Group total ERV in range of 3-7% Annual growth in Group total ERV: 2.4%  17.5% 10% ERV of space available to let not to exceed 3% of Group ERV (measured quarterly; excludes larger schemes3) Target met. Quarterly average EPRA vacancy rate: 2.85% Complete lettings within target periods (measured from date space became available to let; range 1 – 3 months; excludes larger schemes3)  Targets met for residential lettings. Not met for other uses 5% Ratio of property outgoings to Not met gross rents receivable not to exceed three year rolling average 10% Maintain relative rankings in key EPRA Gold award indices: • EPRA • GRESB4  GRESB4 “green star” rating Project and financing targets were largely met. Performance against larger scheme letting targets was assessed in the context of a market-wide slowdown in transaction activity for larger space as a consequence of macro economic uncertainties 5% 0% 10% 20% Deliver projects and transactions successfully 40% Specific operational objectives to be met during the year critical to: Progressing key long-term projects and larger schemes3 Total 100% 52.5%  1 Group KPIs 2 Wholly-owned portfolio 3 Larger schemes: Thomas Neal’s Warehouse, Central Cross and 57 Broadwick Street 4 Global Real Estate Sustainability Benchmark Last year we reported that we were looking at our annual bonus targets to introduce ranges for individual targets. This was to avoid a binary approach to awards under the targets. The Committee believes this approach provides a better incentive for employees. For 2018, a range was set for rental growth, with a threshold level for achievement. As noted on page 97, ranges have been introduced this year for certain operational measures. The Committee is focused on ensuring that setting annual bonus targets should not be at the expense of our long-term strategy. The measures in the “Deliver projects and transactions successfully” section above, include targets with a duration of more than one year that are important to the long-term success of the business. It is difficult to give more detailed disclosure than that set out above as the identification and achievement of these targets is commercially sensitive. Full disclosure will be made once the projects have been completed. Shaftesbury Annual Report 2018 100 Governance Annual remuneration report continued Committee’s exercise of discretion The Committee is mindful that annual bonus awards should fairly reflect performance in the round, exercising its discretion, where appropriate, to take account of overall financial performance and future prospects of the Company. The Committee has not exercised discretion in the award of bonuses for the year ended 30 September 2018. The table below shows historic exercise of discretion by the Committee. Year 2015 2016 2017 2018 Actual bonus percentage potential according to achievement table Bonus percentage after exercise of discretion by remuneration committee 70% 82% 55% 52.5% Reduced to 60% Reduced to 60% No change at 55% No change at 52.5% LTIP vesting for the performance period to 30 September 2018 The detailed performance against targets which resulted in 22.5 % vesting of the LTIP in 2018 is as follows: Historic LTIP vesting performance Annualised TSR of the company’s shares less annualised TSR of the FTSE 350 REIT index Less than 0% pa 0% pa Between 0% pa and 5.5% pa Award vesting criteria Performance1 0% 25% Pro-rata on a straight line basis between 25% and 100% Performance in three-year period to 30 September 2018: 1.9% pa and outperformed the benchmark by 1.5% pa Vesting outcome (for this half of the award) 45% of maximum 5.5% pa or more 100% 1 Calculated using the three-month average TSR in the periods before granting and vesting Vesting % 100 100 50 0 63.5 50 50 100 100 22.5 2012 Year of vesting 2013 2014 2015 2016 2017 2018 TSR NAV Annualised NAV growth less annualised RPI growth Less than 3% pa 3% pa Between 3% pa and 7% pa 7% pa or more 100% Award vesting criteria Performance 0% 25% Pro-rata on a straight line basis between 25% and 100% Performance in three year period to 30 September 2018: 4.5% pa versus RPI growth of 3.1%. Outperformance of 1.4%. Vesting outcome (for this half of the award) is zero Vesting in December 2018 is the first vesting of options under the 2016 scheme rules. Shares vesting are subject to a two-year post-vesting holding period. Shaftesbury Annual Report 2018 101 33Governance Annual remuneration report continued Share scheme interests awarded during the year (audited) Brian Bickell Simon Quayle Tom Welton Chris Ward Scheme Deferred Annual Share Bonus Scheme1 LTIP2 Deferred Annual Share Bonus Scheme1 LTIP2 Deferred Annual Share Bonus Scheme1 LTIP2 Deferred Annual Share Bonus Scheme1  LTIP2 Face value at date of award £’000 404 625 285 441 285 441 282 436 1 Deferred Annual Share Bonus Scheme: Directors elected to take their annual bonus for the year ended 30.9.2017 in shares which were purchased in the market. The face value is calculated using the price paid to acquire the shares, being £9.996279. No further performance criteria are applied to share awards under this scheme. 2 LTIP: Awards of nil cost options are made by the Committee at 125% of salary divided by the average share price over five days prior to the date of grant. The face value is calculated using the average share price used to determine the number of shares awarded, being £9.902 (the average share price over the five days prior, up to and including 4.12.2017). There is a three year performance period (targets below) with a two-year post-vesting holding period. Performance targets for the LTIP awards granted during the year are the same as those set out on page 101 (with 50% of the award assessed on each metric). Shaftesbury Annual Report 2018 102 Directors’ shareholdings and share scheme interests at 30 September 2018 (audited) Governance Annual remuneration report continued Shares under option not vested and subject to performance criteria1 Sharesave Shareholding requirement met2 196,373 138,576 138,576 136,510 4,812 4,812 4,812 3,950 Yes Yes Yes Yes Deferred shares1 131,864 93,028 93,028 90,871 Executive director  Brian Bickell Simon Quayle Tom Welton Chris Ward Non-executive director Jonathan Nicholls Richard Akers Jill Little Hilary Riva Dermot Mathias Sally Walden Shares owned outright 1,240,592 1,083,452 877,570 151,827 30,000 7,000 8,364 20,068 16,208 60,000 1 On exercise or vesting, deferred shares and LTIP nil cost options are subject to income tax and national insurance. The number that will actually be transferred will be reduced if directors sell sufficient shares to meet their income tax and employees’ national insurance liability. 2 Under the remuneration policy, executive directors are expected to build up a shareholding of 200% of salary (as at the date of appointment to the Board), to be accumulated over five years from appointment. There have been no changes in directors’ shareholdings between 30 September 2018 and the date of this report. Additional details on the share awards summarised in this table are provided below, with further explanation on the operation of the plans set out in the Remuneration Policy table.  Remuneration Shaftesbury Annual Report 2018 103 33Governance Annual remuneration report continued 1. Deferred Annual Share Bonus Scheme Entitlement to ordinary shares Date of grant Market price on date of grant  £ Brian Bickell Simon Quayle Tom Welton Chris Ward 22.12.2014 8.2.2016  12.12.2016 12.12.2017 22.12.2014 8.2.2016 12.12.2016 12.12.2017 22.12.2014 8.2.2016 12.12.2016 12.12.2017 22.12.2014 8.2.2016 12.12.2016 12.12.2017 7.80 8.30 8.95 9.996 7.80 8.30 8.95 9.996 7.80 8.30 8.95 9.996 7.80 8.30 8.95 9.996 At 1.10.2017 55,304 42,436 48,988 - 146,728 39,075 29,928 34,544 - 103,547 39,075 29,928 34,544 - 103,547 36,068 29,258 33,387 - 98,713 Awarded  in year - - - 40,440 40,440 - - - 28,556 28,556 - - - 28,556 28,556 - - - 28,226 28,226 Delivered  in year 55,304 - - - 55,304 39,075 - - - 39,075 39,075 - - - 39,075 36,068 - - - 36,068 At  30.9.2018 - 42,436 48,988 40,440 131,864 - 29,928 34,544 28,556 93,028 - 29,928 34,544 28,566 93,028 - 29,258 33,387 28,226 90,871 There are 598,868 shares held in an employee benefit trust at 30 September 2018. Remuneration Shaftesbury Annual Report 2018 104                 Governance Annual remuneration report continued 2. LTIP Number of ordinary shares under option Market price of share on grant £ Date of grant At 1.10.2017 Granted during year Brian Bickell 8.12.2014 7.78 74,220 8.2.20161,2 8.30 65,413 12.12.20162 8.95 67,850 - - - 12.12.20172 9.97 - 63,110 207,483 63,110 Simon Quayle 8.12.2014 7.78 52,345 8.2.20161,2 8.30 46,126 12.12.20162 8.95 47,900 - - - 12.12.20172 9.97 - 44,550 146,371 44,550 Tom Welton 8.12.2014 7.78 52,345 8.2.20161,2 8.30 46,126 12.12.20162 8.95 47,900 - - - 12.12.20172 9.97 - 44,550 146,371 44,550 Chris Ward 8.12.2014 7.78 51,175 8.2.20161,2 8.30 45,115 12.12.20162 8.95 47,350 - - - 12.12.20172 9.97 - 44,045 Vested and exercised during year 74,220 - - - 74,220 52,345 - - - 52,345 52,345 - - - 52,345 51,175 - - - 143,640 44,045 51,175 Lapsed during year - - - - - - - - - - - - - - - - - - - - At 30.9.2018 - 65,413 67,850 63,110 196,373 - 46,126 47,900 44,550 138,576 - 46,126 47,900 44,550 138,576 - 45,115 47,350 44,045 136,510 Market price of share on date of exercise £ Performance period Exercise period 10.00 1.10.2014- 30.9.2017 - 1.10.2015- 30.9.2018 - 1.10.2016- 30.9.2019 - 1.10.2017- 30.9.2020 10.00 1.10.2014- 30.9.2017 - 1.10.2015- 30.9.2018 - 1.10.2016- 30.9.2019 - 1.10.2017- 30.9.2020 10.00 1.10.2014- 30.9.2017 - 1.10.2015- 30.9.2018 - 1.10.2016- 30.9.2019 - 1.10.2017- 30.9.2020 10.00 1.10.2014- 30.9.2017 - 1.10.2015- 30.9.2018 - 1.10.2016- 30.9.2019 - 1.10.2017- 30.9.2020 12.2017- 6.2018 12.2020- 6.2021 12.2021- 6.2022 12.2022- 6.2023 12.2017- 6.2018 12.2020- 6.2021 12.2021- 6.2022 12.2022- 6.2023 12.2017- 6.2018 12.2020- 6.2021 12.2021- 6.2022 12.2022- 6.2023 12.2017- 6.2018 12.2020- 6.2021 12.2021- 6.2022 12.2022- 6.2023 1 The TSR and NAV performance conditions over the three years ended 30.9.2018 have been met in part and 22.5% of the nil cost options granted on 8.2.2016 will vest in December 2018. 2 Options granted from 2016 onward are subject to a two-year post-vesting holding period. Shaftesbury Annual Report 2018 105 33Governance Annual remuneration report continued 3. Sharesave Options are granted at a 20% discount to the market price on date of grant up to the maximum monthly savings amount permitted by HMRC over three or five years.  Brian Bickell Date of grant 2.7.2014 1.7.2016 Simon Quayle 2.7.2014 1.7.2016 Tom Welton 2.7.2014 1.7.2016 Chris Ward 2.7.2014 30.6.2017 At 1.10.2017 2,788 2,024 4,812 2,788 2,024 4,812 2,788 2,024 4,812 2,788 1,162 3,950 Granted during year Lapsed during year Exercised during year - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Market value of share on date of exercise £ Exercise period - 8.2019- 1.2020 - 8.2021- 1.2022 - 8.2019- 1.2020 - 8.2021- 1.2022 - 8.2019- 1.2020 - 8.2021- 1.2022 - 8.2019- 1.2020 - 8.2020- 1.2021 At 30.9.2018 2,788 Option price £ 5.38 2,024 7.41 4,812 2,788 2,024 4,812 2,788 2,024 4,812 2,788 1,162 3,950 5.38 7.41 5.38 7.41 5.38 7.74 Percentage change in Chief Executive remuneration compared to average percentage change in remuneration for all other employees Chief Executive change Other employees change Relative importance of spend on pay (£m) Base salary Taxable benefits Annual bonus Total 1.9% 5.9% (2.6)% (0.1)% 3.4% 19.0% (6.5)% (0.2)% The analysis for other employees is based on a like-for-like group of employees, i.e. the same individuals appear in the 2017 and 2018 figures and the 2017 comparatives have been restated on that basis. Annual bonus figures reflect the extent to which individuals choose to take annual bonuses as deferred shares in the Deferred Annual Share Bonus Scheme, which attract a 50% uplift in value. Shaftesbury Annual Report 2018 106 51.6 47.1 8.5 9.9 2018 2017 Employee costs Dividends Remuneration Governance Annual remuneration report continued Review of past performance The chart below shows the TSR for the Company compared with the FTSE 350 REIT Index, of which the Company is a constituent, over ten years. The Committee uses this index as one measure of performance for awards of shares under the LTIP, as it considers this is an appropriate measure against which the relative performance of the Company should be compared for the purposes of considering executive directors’ remuneration.  Ten-year TSR chart to September 2018 400 350 300 250 200 150 100 50 0 2008 Shaftesbury FTSE 350 REIT 237.3% 59.1% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Datastream as at 28 September 2018 Ten-year chief executive single total figure of remuneration1 Chief Executive single total figure of remuneration (£’000) Annual bonus payout² (% maximum) Long-term incentive award vesting (% maximum) 2009 850 50% 50% 2010 1,013 50% 50% 2011 1,650 90% 76.7% 2012 1,198 40% 100% 2013 1,075 2014 1,455 40% 50% 75% 50% 2015 1,523 60% 63.5% 2016 1,954 60% 100% 2017 1,830 55% 100% 2018 1,223 52.5% 22.5% 1 2009-2011: Jonathan Lane, 2012-2018: Brian Bickell 2 Based on award in cash. See page 99 for details of award taken in shares Shareholder voting At the 2018 AGM, there was an advisory shareholder vote on the Annual Remuneration Report. Voting by shareholders representing 66.9% of the issued share capital on the resolution was as follows:  Annual Remuneration Report 195,395,694 For % For 95.5 Against % Against Withheld Total votes 9,126,268 4.5 1,079,168 204,521,962 On behalf of the Board Sally Walden Chairman - Remuneration Committee  26 November 2018 Shaftesbury Annual Report 2018 107 33 Governance Directors’ report The directors present their report and the audited consolidated financial statements for the year ended 30 September 2018. Strategic report For the review of the business and its likely future developments, see the Strategic Report on pages 1 to 61. Corporate governance statement For the corporate governance statement, see pages 74 to 107, which are incorporated by reference into this report. Results and dividends The results for the year ended 30 September 2018 are set out in the Group Statement of Comprehensive Income on page 118. An interim dividend of 8.3p per ordinary share was paid on 6 July 2018 (2017: 7.9p). The directors recommend a final dividend in respect of the year ended 30 September 2018 of 8.5p per ordinary share (2017: 8.1p), making a total dividend for the year of 16.8p per ordinary share (2017: 16.0p). If authorised at the 2019 AGM, the dividend will be paid on 15 February 2019 to members on the register at the close of business on 18 January 2019. The dividend will be paid as an ordinary dividend. Share capital During the year, 27,855,508 ordinary shares were issued at £9.52 per share as a result of a placing on 6 December 2017. A further 414,350 ordinary shares were issued at either nil cost on the exercise of LTIP options, or £6.94 on the exercise of Sharesave options. At 30 September 2018, the Company’s issued share capital comprised 307,302,187 ordinary shares of 25p each. The Company has one class of ordinary shares. All shares rank equally and are fully paid. No person holds shares carrying special rights with regard to control of the Company. There are neither restrictions on the transfer of shares nor on the size of a holding, which are both governed by the Articles of Association and prevailing legislation. The directors are not aware of any agreements between holders of shares in the Company that may result in restrictions on the transfer of shares or on voting rights. Directors Rules governing the appointment and replacement of directors are contained in the Articles of Association. Changes to the Articles of Association are only permitted in accordance with legislation and must be approved by a special resolution of shareholders. Details of the directors who served during the year ended 30 September 2018 and up to the date of the financial statements, their interests in the ordinary share capital of the Company and details of options granted under the Group’s share schemes are set out on pages 64 to 65 and in the Annual Remuneration Report on pages 97 to 107. No member of the Board had a material interest in any contract of significance with the Company, or any of its subsidiaries, at any time during the year. The Board manages the business of the Company under the powers set out in the Articles of Association. These powers include the directors' ability to issue or buy back shares. Going concern The directors confirm they have a reasonable expectation that the Company has adequate resources to continue in operation for at least 12 months from the date of signing these financial statements. Purchase of own shares The Company was granted authority at the 2018 AGM to make market purchases of its own ordinary shares. This authority will expire at the conclusion of the 2019 AGM and a resolution will be proposed to seek further authority. No ordinary shares were purchased under this authority during the year or in the period from 1 October 2018 to 26 November 2018. Major shareholders Information provided to the Company pursuant to the Financial Conduct Authority’s Disclosure and Transparency Rules (“DTR”) is published on a Regulatory Information Service and on the Company’s website. As at 26 November 2018, the following information has been received in accordance with DTR 5, from holders of notifiable interests in the Company’s issued share capital. Notifiable interests Ordinary shares % of capital disclosed1 PEL (UK) Limited, 26,798,820 Orosi (UK) Limited, 30,131,276 Orosi (UK) 2 Limited 23,442,540 Norges Bank BlackRock Inc 80,372,636 71,135,465 15,201,236 1,146,033 8.72 9.80 7.63 26.15 23.15 4.94 0.37 Nature of holding Direct Direct Direct Direct Indirect Financial instruments (securities lending) 16,347,269 5.31 Directors’ indemnities and directors’ and officers’ liability insurance The Company’s agreement to indemnify each director against any liability incurred in the course of their office to the extent permitted by law remains in force. The Group maintains Directors’ and Officers’ Liability Insurance. Shaftesbury Annual Report 2018 108 1 As at date of notification Governance Directors’ report continued Financial instruments See pages 132 to 134. Change of control The Longmartin joint venture and a number of debt financing agreements contain clauses which take effect upon a change of control of the Group and may alter or terminate these agreements. The Group’s share schemes contain provisions relating to the vesting and exercising of options in the event of a change of control of the Group. Authorisation of directors’ conflicts of interests Directors are required to notify the Company of any conflict or potential conflict of interest and make an annual declaration. The Board confirms that no conflicts have been identified or notified during the year and, accordingly, the Board has not authorised any conflicts of interest as permitted by the Articles of Association. Employment, human rights and environmental matters See sustainability and stakeholders on pages 34 to 39 and the Nomination Committee report on pages 80 to 81. Independent auditors A resolution for the re-appointment of Ernst & Young LLP as auditors to the Company will be proposed at the 2019 AGM. The Board, on the advice of the Audit Committee, recommends their re-appointment. 2019 annual general meeting The 2019 AGM will include resolutions dealing with the remuneration policy, authority to issue shares, disapplication of pre-emption rights, authority to purchase the Company’s own shares, authority to call a general meeting on not less than 14 days’ notice and an increase in authority for non-executive directors' maximum pay level. The resolutions are set out in the Notice of Meeting, together with explanatory notes which are contained in a separate circular to shareholders which accompanies this Annual Report. Disclosure of information to auditors Each director has confirmed that: a) so far as they are aware, there is no relevant audit information of which the Company’s auditors are unaware; and b) they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given in accordance with section 418 of the Companies Act 2006. Greenhouse gas reporting We report our greenhouse gas emissions (GHG) in accordance with UK legislation. The figures relate to landlord controlled common parts such as staircases. The numbers are therefore minimal. Overall, energy consumption has remained consistent year on year reflecting fluctuations in tenant numbers and occupancy. Due to the increased use of renewable energy in the national grid, GHG in the portfolio decreased by over 16% from 1,316 tonnes to 1,099 tonnes. Absolute Scope 1 and 2 GHG emissions1 2017 Scope 1 2018 Change Total tCO2e Scope 2 Total tCO2e 223 2018 876 207 8% 2017 Change 1,109 (21)% We are reporting on two emission intensities this year: performance against turnover and common parts floor areas. For common parts floor areas this has been measured in 66 of the 122 reported properties. The emissions intensity figure was 56 kgCO2e/m2 (0.06 tonnes CO2e/m2), a small decrease from last year’s 64 kgCO2e/m² (0.06 tonnes CO2e/m2). Against turnover, the intensity has decreased from 12 tonnes per £million of total revenue to 9 tonnes per £million of total revenue. The scope 2 total above differs from 906 tCO2e reported last year, due to restatements within the portfolio. Carbon Smart have conducted the verification of our GHG emissions for the period. They have confirmed that the reported emissions for scope 1, 2 and 3 have received limited verification in accordance with the requirements of the ISO 14064 – part 3 standard. The boundary of the verification included the landlord areas from the properties where the Group has sole ownership and operational control. The verification is limited to 2018 and no prior restatements or changes to portfolio data were included. Based on the verification procedures detailed in the full statement on our website, Carbon Smart found no evidence to suggest that our GHG inventory is not materially correct and prepared in accordance with the internal reporting methodologies and WBCSD & WRI GHG corporate and scope 3 standards. By Order of the Board Penny Thomas Company Secretary Shaftesbury PLC Incorporated, registered and domiciled in England and Wales number 1999238 22 Ganton Street Carnaby London W1F 7FD 26 November 2018 1 For the reporting year we have again followed the UK Government environmental reporting guidance and used the 2017 UK Government’s Conversion Factors for Company Reporting. Greenhouse gas emissions are reported using the following parameters to determine what is included within the reporting boundaries in terms of landlord and tenant consumption: Scope 1 – direct emissions includes whole building gas data. Fugitive emissions from air conditioning are included where it is the landlord’s responsibility within the common parts. There are no company vehicles to report within Scope 1. Scope 2 – indirect energy emissions includes purchased electricity for the head office and landlord controlled common parts areas and a small number of buildings where the occupied areas and common parts are on the same meter. Electricity used in refurbishment projects has also been recorded. Shaftesbury Annual Report 2018 109 3 Governance Directors’ responsibilities The directors are responsible for preparing the Annual Report, the Remuneration Report and the financial statements in accordance with applicable law and regulations. Directors’ responsibility statement under the Disclosure and Transparency Rules Each of the directors, whose names and functions are listed on pages 64 to 65 confirm that, to the best of their knowledge: • the Group and Company financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and • the Strategic Report contained on pages 1 to 61 of the Annual Report includes a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that they face. Directors’ statement under the UK Corporate Governance Code Each of the directors confirm that, to the best of their knowledge, the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy. This directors’ responsibilities statement was approved by the Board and signed on its behalf by: Brian Bickell Chief Executive 26 November 2018 Chris Ward Finance Director 26 November 2018 Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union (EU) and Article 4 of the IAS Regulation and have also elected to prepare the Parent Company financial statements in accordance with IFRSs as adopted by the EU. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies in accordance with IAS8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’ and then apply them consistently; • make judgements and accounting estimates that are reasonable and prudent; • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; • provide additional disclosures when compliance with the specific requirements of IFRSs as adopted by the EU is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s and Company’s financial position and performance; • state that the Group and Company has complied with IFRSs as adopted by the EU, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to do so. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s and Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. A copy of the financial statements of the Group is placed on the Company’s website. The directors are responsible for the maintenance and integrity of the Company’s website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Shaftesbury Annual Report 2018 110 Governance Independent auditor’s report To the members of Shaftesbury PLC Governance Our opinion on the financial statements In our opinion: • Shaftesbury PLC’s Group financial statements and Parent company (‘Company’) financial statements (the ‘financial statements’) give a true and fair view of the state of the Group’s and of the Company’s affairs as at 30 September 2018 and of the Group’s profit for the year then ended; • The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; • The Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2006; and • The financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the Group financial statements, Article 4 of the IAS Regulation. What we have audited Shaftesbury PLC’s financial statements at 30 September 2018 comprise: Group Company Balance sheet Statement of comprehensive income Cash flow statement Statement of changes in equity Related notes 1 to 24, including a summary of significant accounting policies 4 4 4 4 4 4 4 4 4 The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union. The Company financial statements have been prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report below. We are independent of the Group and Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Conclusions relating to principal risks, going concern and viability statement We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs (UK) require us to report to you whether we have anything material to add or draw attention to: • the disclosures in the annual report set out on pages 59 to 60 that describe the principal risks and explain how they are being managed or mitigated; • the directors’ confirmation set out on page 59 in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; • the directors’ statement set out on page 122 in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; • whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or • the directors’ explanation set out on page 61 in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. Shaftesbury Annual Report 2018 111 3Governance Independent auditor’s report continued Overview of our audit approach Key Audit Matters • The valuation of investment property (including properties within the Longmartin Joint Venture) • Revenue recognition including the timing of revenue recognition, and the treatment of rents and incentives Audit scope The Group operates in London’s West End and consists of a single reportable segment across eleven statutory entities. All of the Group’s companies were included in the scope of the audit. The Group audit team performed direct testing of the Longmartin Joint Venture balances which are included in the Group Materiality • Overall Group materiality: £40m which represents 1% of total assets. • Specific Group materiality: £4.0m which represents 5% of operating profit before investment property valuation movements and net finance costs. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters. Risk: The valuation of investment property £3,714.8m (plus £228.7m being the Group’s share in the Longmartin joint venture). Refer to the Audit Committee Report (page 84); Accounting policies (pages 122 to 124); and Note 8 of the Consolidated Financial Statements (pages 126 to 127). The valuation of investment property (including properties held in the joint venture) requires significant judgement and estimates by management and the external valuers. Any input inaccuracies or unreasonable bases used in these judgements (such as in respect of estimated rental value and yield profile applied) could result in a material misstatement of the statement of comprehensive income and balance sheet. There is also a risk that management may unduly influence the significant judgements and estimates in respect of property valuations in order to achieve property valuation and other performance targets to meet market expectations or bonus targets. Our response to the risk Our audit procedures around the valuation of investment property included: • We understood and assessed the design and implementation of the Group’s controls over data used in the valuation of the investment property portfolio and management’s review of the valuations. • We evaluated the competence of the external valuers which included consideration of their qualifications and expertise, as well as their independence. • We performed testing over the inputs to the valuations. For a sample of properties we tested the contracted rent and key lease terms by agreeing this back to lease agreements. 16% 84% Fair value of investment properties tested by audit team Chartered Surveyors Fair value of investment properties tested by analytical procedures • The Group audit team includes Chartered Surveyors who tested a sample of properties. They challenged the valuation approach and assumptions. The sample size they tested accounted for 84% of the fair value of investment properties (including investment properties held in the Longmartin joint venture). Our Chartered Surveyors compared the equivalent yields applied to each property to an expected range of yields taking into account market data and asset specific considerations. They also considered whether the other assumptions applied by the external valuers, such as the estimated rental values, tenant incentives and development costs to complete were supported by available data such as recent lettings and occupancy levels. • Together with our Chartered Surveyors, we looked for contra indicators for the estimated rental values and yields adopted. • We searched the tenant base to confirm there was no concentration of higher risk of failure tenants. Shaftesbury Annual Report 2018 112 • In respect of the properties not in the sample tested by our Chartered Surveyors (16% of the fair value), we performed detailed analytical procedures on a property-by-property basis. This involved forming an expectation of the fair value of each property in the portfolio by reference to relevant external market data relating to capital growth rates. We investigated the valuations of those properties which were not in line with our initial expectations. This included further discussions with management and the external valuers and, where appropriate, the involvement of our Chartered Surveyors. • We made enquiries of the external valuers and inspected their terms of reference to confirm that they had not been subject to undue influence or direction from management. • We utilised our detailed analytical procedures and work of our Chartered Surveyors described above in order to assess for evidence of undue management influence. • We performed site visits accompanied by our Chartered Surveyors for a sample of properties (focusing primarily on development properties) which enabled us to assess the stage of completion of, and gain specific insights into, these refurbishments/developments. • For development appraisals, we vouched the costs incurred to date, and agreed the cost to complete estimates to approved budgets and contractual arrangements. We met with the surveyors to discuss the project costs and risks associated with the project. • Together with our Chartered Surveyors, we met with the external valuers to discuss the findings from our audit work described above and to seek further explanations as required. We also discussed the impact of current market conditions on the property valuations. Key observations communicated to the Audit Committee We have audited the inputs, assumptions and reviewed the methodology used by the external valuers. We conclude that the inputs and methodology applied are reasonable and that the external valuations are an appropriate assessment of the fair value of investment properties at 30 September 2018. We did not identify any exceptions or material errors in the input testing for the sample we tested. We conclude that the valuation of each of the assets in the sample tested by our Chartered Surveyors are within a reasonable range. We conclude that management provided an appropriate level of review and challenge over the valuations but we did not identify evidence of undue management influence. Risk: Revenue recognition, including the timing of revenue recognition, and the treatment of rents and incentives £112.8m of rents receivable (FY17: £103.4m). Refer to the Accounting policies (page 123); and Note 2 of the Consolidated Financial Statements (page 125). Market expectations and profit based targets may place pressure on management to distort revenue recognition. This may result in overstatement or deferral of revenues to assist in meeting current or future targets or expectations. In order to distort rental income, management could manipulate the deferred revenue balance or the IFRS rent adjustment for lease incentives. Our response to the risk • We performed detailed testing for a sample of leases by agreeing the annual rent back to the terms of the lease agreements. • For a sample of leases, we tested that the lease income, including the treatment of lease incentives, is on a straight-line basis, and in accordance with SIC-15 Operating Leases – Incentives. • We verified the completeness of the lease incentives recorded. For a sample of leases, we read the terms to identify rent free periods and other incentives. We verified that these incentives in our sample were correctly recorded in the rent free asset and that income was correctly straight-lined. • We performed substantive analytical procedures and found that the revenue recognised by the Group and each of the operating companies was materially consistent with our expectations developed from rents in the tenancy schedules. • We performed analytical procedures to confirm the deferred income balance is materially within expectations. We substantively tested a sample of balances by agreeing the timing of rent recognised to invoices or rent agreements. • We considered the decline in the UK retail and restaurant sector and assessed the impact on the Group’s financial statements. We obtained a list of known Creditors Voluntary Arrangements and looked at Shaftesbury’s tenant list to identify tenants at risk of non-payment of rental amounts. We obtained the aged debtors listing for the Group and the Longmartin Joint Venture to identify aged debtors. We tested recoverability of the aged debtors by agreeing to subsequent cash receipts. We enquired with and challenged management regarding the appropriateness of the provision for doubtful debts. We also considered the recoverability of other tenant-related balances including lease incentive assets and prepaid letting costs. • We assessed whether the revenue recognition policies adopted complied with IFRSs as adopted by the European Union. • We performed audit procedures specifically designed to address the risk of management override of controls including journal entry testing to confirm the processing and timing of journals to record revenue is consistent with our expectations. Governance Independent auditor’s report continued Shaftesbury Annual Report 2018 113 33Governance Independent auditor’s report continued Key observations communicated to the Audit Committee We audited the timing of revenue recognition, treatment of rents and incentives, and assessed the risk of management override. We have assessed the recoverability of the aged debtors and tenant-related balances, including lease incentive assets and prepaid letting costs, and concluded that the provision is reasonable. Based upon the audit procedures performed, we conclude that revenue has been recognised on an appropriate basis in the year. The procedures we carried out over revenue recognition apply to all the Group`s revenue and the revenue in the Longmartin Joint Venture. An overview of the scope of our audit Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the Group, effectiveness of group-wide controls and changes in the business environment when assessing the level of work to be performed at each entity. Our application of materiality We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. The table below sets out the materiality, performance materiality and threshold for reporting audit differences applied on our audit: Overall Specific Applicable for account balances not related to investment properties, loans and borrowings Basis 1% of total assets 5% of operating profit before investment property valuation movements and net finance costs Materiality £40.0m £4.0m Performance materiality Audit differences £30.0m £3.0m £2.0m £0.2m Materiality The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. When establishing our overall audit strategy, we determined a magnitude of uncorrected misstatements that we judged would be material for the financial statements as a whole. We determined that total assets would be the most appropriate basis for determining overall materiality given that key users of the Group's financial statements are primarily focused on the valuation of the Group's assets; primarily the investment property portfolio. This provided a basis for determining the nature, timing and extent of risk assessment procedures, identifying and assessing the risk of material misstatement and determining the nature, timing and extent of further audit procedures. For planning purposes this was initially based on the total assets as at 31 March 2018. We assessed that for account balances not related to investment properties (either wholly owned or within the Joint Venture), loans and borrowings, a misstatement of less than overall materiality for the financial statements could influence the economic decisions of users. We have determined that specific materiality for these areas should be based on operating profit before investment property valuation movements and net finance costs. We believe that it is appropriate to use a profit-based measure for specific materiality as profit is also a focus of users of the financial statements. During the course of our audit, we reassessed initial materiality. There has been no change in our overall materiality or in our materiality threshold as at 30 September 2018. In the prior year audit we adopted an overall materiality of £36m based on 1% of total assets. We also applied a specific materiality of £3.7m based on 5% of operating profit investment property valuation movements and net finance costs. Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our judgement is that overall performance materiality and specific performance materiality (i.e. our tolerance for misstatement in an individual account or balance) for the Group should be 75% (2017: 75%) of the respective materiality. Our objective in adopting this approach is to confirm that total detected and undetected audit differences do not exceed our materiality for the financial statements as a whole. Shaftesbury Annual Report 2018 114 Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to the Committee any uncorrected audit differences on investment property valuations in excess of £2m, as well as uncorrected audit differences in excess of £0.2m that relate to our specific testing of the other account balances not related to investment properties, loans and borrowings. These are set at 5% of their respective planning materiality. We also agreed to report differences below that threshold that, in our view, warranted reporting on qualitative grounds. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. Other information The other information comprises the information included in the annual report including the Strategic report Overview, Strategic report Annual Review, Governance and Other information (including Shareholder information, Portfolio analysis, Basis of valuation, Summary report by the valuers, Sustainability and the Glossary of terms) set out on pages 1 to 107 and 142 to 148, other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact. We have nothing to report in this regard. In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions: • Fair, balanced and understandable set out on page 84 – the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or • Audit committee reporting set out on pages 82 to 85 – the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee is materially inconsistent with our knowledge obtained in the audit; or • Directors’ statement of compliance with the UK Corporate Governance Code set out on page 74 – the parts of the directors’ statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R (2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code. Opinion on other matters prescribed by the Companies Act 2006 In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit: • the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements and those reports have been prepared in accordance with applicable legal requirements; • the information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with rules 7.2.5 and 7.2.6 in the Disclosure Rules and Transparency Rules sourcebook made by the Financial Conduct Authority (the FCA Rules), is consistent with the financial statements and has been prepared in accordance with applicable legal requirements; and • information about the Company’s corporate governance code and practices and about its administrative, management and supervisory bodies and their committees complies with rules 7.2.2, 7.2.3 and 7.2.7 of the FCA Rules. Governance Independent auditor’s report continued Shaftesbury Annual Report 2018 115 33Governance Independent auditor’s report continued Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the Company and its environment obtained in the course of the audit, we have not identified material misstatements in: • the strategic report or the directors’ report; or • the information about internal control and risk management systems in relation to financial reporting processes and about share capital structures, given in compliance with rules 7.2.5 and 7.2.6 of the FCA Rules We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or • the Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit • a Corporate Governance Statement has not been prepared by the Company Responsibilities of directors As explained more fully in the directors’ responsibilities statement set out on page 110 the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the Group and Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or the Company or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. Our approach was as follows: • We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant frameworks which are directly relevant to specific assertions in the financial statements are those that relate to the reporting framework (IFRS, the Companies Act 2006 and UK Corporate Governance Code) and the relevant tax regulations in the United Kingdom, including the UK REIT regulations. • We understood how the Company is complying with those frameworks through enquiry with management, and by identifying the Company’s policies and procedures regarding compliance with laws and regulations. We also identified those members of management who have the primary responsibility for ensuring compliance with laws and regulations, and for reporting any known instances of non-compliance to those charged with governance. • We assessed the susceptibility of the Group’s financial statements to material misstatement, including how fraud might occur by reviewing the Companies risk register, enquiry with management and the Audit Committee during the planning and execution phases of our audit. • Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures involved the following: - Inquire of members of senior management, and when appropriate, those charged with governance regarding their knowledge of any non-compliance or potential non- compliance with laws and regulations that could affect the financial statements. - Reading minutes of meetings of those charged with governance. - Obtaining and reading correspondence from legal and regulatory bodies including HRMC. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Shaftesbury Annual Report 2018 116 Other matters we are required to address • We were appointed by the Company on 15 October 2015 to audit the financial statements for the year ended 30 September 2016 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments is 3 years, covering the years ended 30 September 2016 to 30 September 2018. Our audit engagement letter was refreshed on 30 October 2017. • The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the Company and we remain independent of the Group and the Company in conducting the audit. • The audit opinion is consistent with the additional report to the audit committee. Use of our report This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. 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 auditor’s 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. Eamonn McGrath (Senior statutory auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 26 November 2018 1. The maintenance and integrity of the Shaftesbury PLC website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website. 2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Governance Independent auditor’s report continued Shaftesbury Annual Report 2018 117 33Financial statements Group statement of comprehensive income For the year ended 30 September 2018 Revenue Property charges Net property income Administrative expenses Operating profit before investment property disposals and valuation movements Profit on disposal of investment properties Net surplus on revaluation of investment properties Operating profit Finance income Finance costs Change in fair value of derivative financial instruments Share of post-tax (loss)/profit from joint venture Profit before tax Tax charge for the year Profit and total comprehensive income for the year Earnings per share: Basic Diluted EPRA See page 140 for an explanation of the EPRA measures used in these financial statements. Notes 2 3 4 5 8 6 16 10 7 22 2018 £m 122.1 (28.3) 93.8 (13.7) 80.1 4.6 123.1 207.8 0.8 (32.0) - (1.1) 175.5 - 175.5 58.1p 58.0p 17.1p 2017 £m 111.5 (23.2) 88.3 (14.1) 74.2 1.1 230.6 305.9 0.1 (32.8) 22.0 6.4 301.6 - 301.6 108.1p 107.9p 16.2p Shaftesbury Annual Report 2018 118 Financial statements Balance sheets As at 30 September 2018 Notes Group 2018 £m 2017 £m Non-current assets Investment properties Accrued income Investment in joint venture Property, plant and equipment Other receivables Investment in subsidiaries Current assets Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Non-current liabilities Borrowings Total liabilities Net assets Equity Share capital Share premium Share-based payments reserve Retained earnings Total equity 8 9 10 13 11 12 13 14 15 17 18 18 18 Financial statements Company 2018 £m - - 59.0 1.3 - 1,160.9 1,221.2 51.2 100.6 2017 £m - - 59.0 1.2 - 619.6 679.8 484.3 25.8 3,714.8 3,407.3 9.9 143.9 1.3 3.7 - 9.5 148.0 1.2 3.7 - 3,873.6 3,569.7 30.3 118.5 22.0 45.6 4,022.4 3,637.3 1,373.0 1,189.9 40.8 41.6 6.6 106.6 948.6 989.4 948.8 990.4 (1.8) 4.8 (0.8) 105.8 3,033.0 2,646.9 1,368.2 1,084.1 76.8 378.4 1.2 2,576.6 3,033.0 69.8 124.9 3.0 2,449.2 2,646.9 76.8 378.4 1.2 911.8 69.8 124.9 3.0 886.4 1,368.2 1,084.1 The Company made a profit of £73.5 million (2017: £57.7 million) in the year. On behalf of the Board who approved and authorised for issue the financial statements on pages 118 to 139 on 26 November 2018. Brian Bickell Chief Executive Chris Ward Finance Director Shaftesbury Annual Report 2018 119 44 Financial statements Cash flow statements For the year ended 30 September 2018 Group 2018 £m 76.5 0.8 (31.0) 46.3 (167.8) 13.3 (26.6) (0.4) 3.0 (3.0) - - - 2017 £m 76.7 0.1 (32.8) 44.0 (40.1) 13.4 (41.5) (0.1) 4.8 - - - - Company 2018 £m (15.9) 0.7 (1.8) (17.0) - - - (0.4) 3.0 (3.0) 73.0 (188.9) - (181.5) (63.5) (116.3) 0.1 265.2 (4.8) 72.0 (72.0) - - (1.8) - (50.6) 208.1 72.9 45.6 118.5 0.1 - - 146.5 (437.2) 493.2 (10.4) (6.1) (92.1) (44.5) 49.5 30.0 15.6 45.6 0.1 265.2 (4.8) 72.0 (72.0) - - (1.8) - (50.6) 208.1 74.8 25.8 100.6 2017 £m (13.8) 0.1 (11.1) (24.8) - - - (0.1) 4.8 - 575.2 (82.4) (9.8) 487.7 0.1 - - 146.5 (437.2) - (10.4) - (92.1) (44.5) (437.6) 25.3 0.5 25.8 Notes 21 5 17 17 15 15 20 13 13 Cash flows from operating activities Cash generated from operating activities Interest received Interest paid Net cash generated from operating activities Cash flows from investing activities Investment property acquisitions Investment property disposals Capital expenditure on investment properties Purchase of property, plant and equipment Dividends received from the joint venture Increase in loans to the joint venture Amounts received from subsidiaries Amounts provided to subsidiaries Acquisition of subsidiary Net cash used in investing activities Cash flows from financing activities Proceeds from exercise of share options Proceeds from share placing Share placing costs Proceeds from borrowings Repayment of borrowings Proceeds from issue of mortgage bonds Repayment of debenture stock Loan issue costs Termination of derivative financial instruments Equity dividends paid Net cash from financing activities Net change in cash and cash equivalents Cash and cash equivalents at 1 October Cash and cash equivalents at 30 September Shaftesbury Annual Report 2018 120 Financial statements Statements of changes in equity For the year ended 30 September 2018 Financial statements Share capital £m Share premium £m Share-based payments reserve £m Notes Retained earnings £m Total equity £m Group At 1 October 2016 Profit and total comprehensive income for the year Transactions with owners: Dividends paid Exercise of share options Fair value of share-based payments Release on exercise of share options At 30 September 2017 Profit and total comprehensive income for the year Transactions with owners: Dividends paid Share placing Exercise of share options Fair value of share-based payments Release on exercise of share options At 30 September 2018 Company At 1 October 2016 Profit and total comprehensive income for the year Transactions with owners: Dividends paid Exercise of share options Fair value of share-based payments Release on exercise of share options At 30 September 2017 Profit and total comprehensive income for the year Transactions with owners: Dividends paid Share placing Exercise of share options Fair value of share-based payments Release on exercise of share options At 30 September 2018 20 17 4 20 17 17 4 20 17 4 20 17 17 4 69.7 124.8 3.6 - - 0.1 - - 69.8 - - 6.9 0.1 - - - - 0.1 - - 124.9 - - 253.5 - - - 76.8 378.4 - - - 1.4 (2.0) 3.0 - - - - 0.8 (2.6) 1.2 69.7 124.8 3.6 - - 0.1 - - 69.8 - - 6.9 0.1 - - - - 0.1 - - 124.9 - - 253.5 - - - 76.8 378.4 - - - 1.4 (2.0) 3.0 - - - - 0.8 (2.6) 1.2 The Company’s distributable reserves are disclosed in note 18 to the financial statements. 2,189.0 301.6 (43.3) (0.1) - 2.0 2,449.2 175.5 (50.6) - (0.1) - 2.6 2,387.1 301.6 (43.3) 0.1 1.4 - 2,646.9 175.5 (50.6) 260.4 - 0.8 - 2,576.6 3,033.0 870.1 57.7 (43.3) (0.1) - 2.0 886.4 73.5 (50.6) - (0.1) - 2.6 1,068.2 57.7 (43.3) 0.1 1.4 - 1,084.1 73.5 (50.6) 260.4 - 0.8 - 911.8 1,368.2 Shaftesbury Annual Report 2018 121 44Financial statements Notes to the financial statements For the year ended 30 September 2018 1 Accounting policies Basis of preparation Shaftesbury PLC (the Company) is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the UK. The address of the registered office is given on page 109. The Company is the ultimate parent company of the Shaftesbury PLC Group (the Group). The Company has not presented its own Statement of Comprehensive Income, as permitted by Section 408 of the Companies Act 2006. The Company made a profit of £73.5 million (2017: £57.7 million) in the year. These financial statements have been prepared in accordance with IFRS as adopted by the European Union, IFRS Interpretations Committee (IFRIC) and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared in Pounds Sterling and under the historical cost convention as modified by the revaluation of investment properties and derivative financial instruments. Going concern The Group’s business activities, together with the factors affecting performance, financial position and future development are set out in the Strategic Report on pages 1 to 61. The financial position of the Group including cash flow, liquidity, borrowings, undrawn facilities and debt maturity analysis is set out on pages 54 to 56. The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for at least 12 months from the date these financial statements were approved. Therefore, they continue to adopt the going concern basis in preparing the financial statements. Significant judgements, assumptions and key estimates The preparation of the financial statements in accordance with IFRS requires the directors to make judgements and estimates about the carrying amounts of assets and liabilities, in applying the Group's accounting policies. The judgements and estimates are based on historical experience and other relevant factors, including expectations of future events, and are reviewed on a continual basis. Although the estimates are made using the directors' best knowledge of the amount, event or actions, actual results may differ from the original estimates. Significant area of estimation uncertainty The investment property portfolio is valued by independent third party valuers. Cushman & Wakefield value the properties owned by the Group, and Knight Frank LLP value the properties owned by the Longmartin joint venture. The valuation is inherently subjective due to, among other factors, the individual nature of each property, its location and the expected future rental income. As a result, the valuations the Group places on its property portfolio are subject to a degree of uncertainty and are made on the basis of assumptions which may not prove to be accurate, particularly in periods of volatility or low transaction flow in the commercial property market. Cushman & Wakefield and Knight Frank LLP make a number of assumptions in forming their opinion on the valuation of our investment properties, which are detailed in the Basis of Valuation on pages 142 to 143. These assumptions are in accordance with the RICS Valuation - Global Standards. However, if any assumptions made by the external valuers prove to be incorrect, this may mean that the value of the Group's properties differs from their valuation reported in the financial statements, which could have a material effect on the Group's financial position. See note 8 for further information. The directors did not make any significant judgements in the preparation of these financial statements. New accounting standards and interpretations a) The following amendment to an existing standard was relevant to the Group and mandatory for the first time for the financial year ended 30 September 2018. It did not have an impact on the amounts reported in the financial statements, however it did require additional disclosures, as set out in note 15. • IAS 7 (amendment) - Statement of cash flows (disclosure initiative) b) The following new standards and amendments to existing standards are relevant to the Group, are not yet effective in the year ended 30 September 2018 and are not expected to have a significant impact on the Group’s financial statements: • Annual Improvements 2014-2016 • IFRS 2 (amendment) - Classification of share-based payment transactions • IFRS 9 - Financial instruments • IFRS 15 - Revenue from contracts with customers • IFRS 16 - Leases IFRS 9 - Financial Instruments (effective from 1 January 2018) This standard deals with, amongst other things, the classification and measurement of financial instruments. Having carried out an assessment of the standard, the Group believes the main impact will be the measurement and presentation of trade receivables in the Group financial statements, and balances due from subsidiaries in the Company financial statements. Having considered expected credit losses and sources of forward-looking data, we do not currently expect any impact will be material. IFRS 15 - Revenue from contracts with customers (effective from 1 January 2018) This standard is based on the principle that revenue is recognised when control passes to a customer. In our case, the standard is most applicable to the recognition point for service charge income and disposals of investment properties. As the standard excludes rental income, which falls within the scope of IFRS 16 - Leases, it is not expected that IFRS 15 will have a significant impact on the Group’s financial statements. There may be changes to presentation and disclosure. Shaftesbury Annual Report 2018 122 continued4 Notes to the financial statements Financial statements 1 Accounting policies continued IFRS 16 – Leases (effective from 1 January 2019) For operating leases in excess of one year, this standard requires lessees to recognise a right-of-use asset and a related lease liability representing the obligation to make lease payments. The right-of-use asset is assessed for impairment annually and is amortised on a straight-line basis. The lease liability is amortised using the effective interest method. Lessor accounting is substantially unchanged from current accounting. Therefore, since the Group is primarily a lessor, this standard does not significantly impact the Group’s financial statements. However, for the Company, it will result in the recognition of a right-to-use asset and corresponding lease liability, which we estimate at approximately £3 million, in the year when the standard becomes effective. c) There are no other standards or interpretations that are not yet effective that would be expected to have a material impact on the Group. Basis of consolidation The Group financial statements consolidate the financial statements of the Company and its subsidiaries. Subsidiaries are those entities controlled by the Company. Control exists when the Company is exposed to variable returns and has the ability to affect those returns through its power over the entity. All intercompany transactions and balances are eliminated on consolidation. The accounting policies of the subsidiaries are consistent with those adopted by the Group. In the Company’s Balance Sheet, investments in subsidiaries are included at cost less any provision in respect of impairment loss. Net property income Revenue comprises rents receivable from tenants under operating leases, recognised on an accruals basis, and recoverable expenses incurred on behalf of tenants, where the Group acts as principal. Rents are recognised on a straight-line basis over the term of the lease. Value added tax is excluded from all amounts. Income arising as a result of rent reviews is recognised when agreement of new terms is reasonably certain. Premiums receivable from tenants to surrender their lease obligations are recognised in the Statement of Comprehensive Income. The cost of any incentives given to lessees to enter into leases is spread on a straight-line basis over the non-cancellable period of the lease, being the earlier of its expiry date or the date of the first break option. Lease incentives are usually in the form of rent-free periods. Irrecoverable property costs are charged to the Statement of Comprehensive Income when they arise. Employee benefits Share option schemes The Company administers a long-term incentive plan (LTIP) and a sharesave scheme (SAYE). The cost of granting share options to employees under these schemes is recognised in the Statement of Comprehensive Income based on the fair value at the date of grant. The expense is recognised on a straight-line basis over the vesting period based on the number of options that are expected to vest. The fair value of the long-term incentive plan is calculated using the modified binomial pricing model and the Monte Carlo simulation pricing model for the non-market based and market based conditions respectively. At each reporting period, the non-market based condition is reassessed and the impact, if any, of a revision to original estimates is recognised in the Statement of Comprehensive Income. The fair value of the sharesave scheme is calculated using a modified binomial pricing model. Deferred share bonus scheme Under the Company's annual bonus scheme, employees have the option to take their annual bonus in either cash, or shares. Where employees opt to take the bonus in cash, it is expensed to the Statement of Comprehensive Income in the year in which it relates. Where employees opt to take all, or part, of their bonus in shares, the Company offers a matching award of up to 50%, subject to continued employment throughout the performance period. The cost of the matching award is recognised on a straight-line basis over the performance period. The remaining expense is recognised in the year in which it relates. Provisions for leavers during the performance period are set out on page 95. Pension contributions Payments to defined contribution plans are charged as an expense to the Statement of Comprehensive Income as they fall due. Investment properties Investment properties are initially recognised on acquisition at cost, including related acquisition costs, and are revalued annually to reflect fair value. Fair value is determined either by external professional valuers or by the directors in the case of properties sold shortly after the period end. The fair value, as determined by the valuers, is reduced for any unamortised lease incentive balances. Gains or losses arising on the revaluation of investment properties are included in the Statement of Comprehensive Income. Depreciation is not provided in respect of investment properties. Shaftesbury Shaftesbury Annual Annual Report 2018 Report 2018 123 123 4Financial statementsNotes to the financial statements continued41 Accounting policies continued Additions to properties include costs of a capital nature only. Expenditure is classified as capital when it results in future economic benefits which are expected to accrue to the Group. All other property expenditure is written-off in the Statement of Comprehensive Income as incurred. Premiums payable to tenants in connection with the surrender of their lease obligations are capitalised if they arise in connection with a value-enhancing project, otherwise they are recognised immediately in the Statement of Comprehensive Income. Amounts received by way of compensation for dilapidations from tenants vacating properties are credited against the cost of reinstatement works. Where the Group has no intention of carrying out such works, the amounts received are credited to the Statement of Comprehensive Income. Purchases and sales of investment properties are recognised in the financial statements when the significant risks and rewards of ownership are transferred. All of the Group’s leases to its tenants are operating leases except where the Group grants long leasehold interests to tenants, in which case, as substantially all the risks and rewards of ownership are transferred to the tenant, the property is not recognised as an investment property. Acquisitions Where properties are acquired through corporate acquisitions and there are no significant assets (other than investment property) and liabilities, and without a business being acquired, the acquisition is treated as an asset acquisition. In all other cases, the acquisition is treated as a business combination. Joint ventures Joint ventures are those entities over which the Group has joint control, established by contractual agreement. The Group has one joint venture, the investment in which is accounted for using the equity method. On initial recognition the investment was recognised at cost. Subsequently, the carrying amount is increased or decreased to recognise the Group’s share of the profit or loss of, and dividends from, the joint venture. The Group’s investment in the joint venture is presented separately on the Balance Sheet and the Group’s share of the joint venture’s post-tax profit or loss for the year is also presented separately in the Statement of Comprehensive Income. Where there is an indication that the Group’s investment in its joint venture may be impaired, the Group evaluates the recoverable amount of its investment, being the higher of the joint venture’s fair value less costs to sell and value in use. If the recoverable amount is lower than the carrying value an impairment loss is recognised in the Statement of Comprehensive Income. If the Group’s share of losses in the joint venture equals or exceeds its investment in the joint venture, the Group does not recognise further losses, unless it has legal or constructive obligations to make payments on behalf of the joint venture. In the Company’s Balance Sheet, the investment in its joint venture is stated at cost less any provision for impairment loss. Trade receivables and payables Trade receivables and trade payables are recognised at fair value and subsequently held at amortised cost, less any provision for impairment in respect of trade receivables. Tenant lease incentives are included in current trade and other receivables when the amounts to be charged against rental income fall within one year of the Balance Sheet date. Amounts which will be charged against rental income in more than one year are included in non-current assets. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and on-demand bank deposits. Cash held on deposit which has certain conditions restricting its use and is not available on demand, liquid or readily convertible, is classified within other receivables. Borrowings and costs of raising finance Borrowings are initially recognised at fair value net of transaction costs incurred and are subsequently held at amortised cost. Issue costs and premiums are written-off to the Statement of Comprehensive Income using an effective interest rate method. Derivative financial instruments Derivative financial instruments, comprising interest rate swaps for hedging purposes, are measured at fair value. Movements in fair value are recognised in the Statement of Comprehensive Income. Segmental information IFRS 8 requires operating segments to be reported in a manner consistent with the internal financial reporting reviewed by the chief operating decision maker. The chief operating decision maker of the Group is the Board. The Board is responsible for reviewing the Group’s internal reporting in order to assess performance. The information reviewed by the Board is prepared on a basis consistent with these financial statements. That is, the information is provided at a Group level and includes both the IFRS reported results and EPRA measures (see page 140 for an explanation on the EPRA measures used in these financial statements). The Group’s properties are all located in London’s West End, and are all of a similar type. The properties are typically mixed-use buildings with restaurants, leisure and retail on the lower floors and small offices and apartments on the upper floors. As the properties share similar economic characteristics we consider them to be one operating segment. As such, no further segmental information is presented. Shaftesbury Annual Report 2018 124 Financial statements Notes to the financial statements continued2 Revenue Rents receivable Recoverable property expenses 2018 £m 112.8 9.3 122.1 Rents receivable includes a credit of £0.5 million from amortisation of accrued income in respect of lease incentives (2017: charge of £0.5 million). 3 Property charges Property operating costs Vacant property costs Fees payable to managing agents Letting, rent review, and lease renewal costs Marketing and events expenditure Property outgoings Recoverable property expenses 2018 £m 7.6 1.4 2.6 3.6 3.8 19.0 9.3 28.3 2017 £m 103.4 8.1 111.5 2017 £m 5.7 1.1 2.4 3.3 2.6 15.1 8.1 23.2 Following a review of the Group's property charges, the amounts included in the table above have been reclassified between the different types of property expenses, to provide a better representation of the underlying expenditure. The 2017 figures have been restated accordingly. This had no impact on the total property charges for that year. 4 Administrative expenses Group and Company Employee costs Depreciation Other head office costs Less: administrative fees received from the joint venture Employee costs (including the directors) Wages and salaries Social security costs Other pension costs Equity-settled remuneration 2018 £m 8.5 0.4 4.9 13.8 (0.1) 13.7 2018 £m 6.6 0.8 0.3 0.8 8.5 2017 £m 9.9 0.3 4.0 14.2 (0.1) 14.1 2017 £m 6.9 1.3 0.3 1.4 9.9 Included within equity-settled remuneration is a charge of £0.6 million (2017: £1.4 million) for the LTIP and SAYE schemes. Note 19 includes a summary of the principal assumptions made at the last grant dates for these schemes. Details of the employee costs for the Group's key management personnel are set out in note 24. Within the table above, amounts for social security costs were previously included within each of the respective employee costs. These have been reclassified and presented together in their entirety. The 2017 figures have been restated accordingly. Average monthly number of employees Executive directors Head office and property management Estate management 2018 number 4 25 1 30 2017 number 4 22 1 27 Shaftesbury Annual Report 2018 125 4Financial statementsNotes to the financial statements continued44 Administrative expenses continued Auditor remuneration Audit of the Company Audit of the Group Total fees for audit services Audit related assurance services - half year review Other assurance services Non-audit services Total fees for non-audit services Total fees 2018 £000 61 116 177 22 10 - 32 209 2017 £000 60 128 188 22 27 29 78 266 The auditor provided no taxation services to the Group in 2018 (2017: nil). Total fees for non-audit services represented 18% (2017: 41%) of the total fees for audit services. The audit fees are relatively low due primarily to the simple Group corporate structure. 5 Profit on disposal of investment properties Net sale proceeds Book value at date of sale 6 Finance costs Debenture stock interest and amortisation Mortgage bond interest Bank and other interest Issue cost amortisation 2018 £m 13.3 (8.7) 4.6 2018 £m - 13.9 16.5 1.6 32.0 2017 £m 13.4 (12.3) 1.1 2017 £m 0.1 7.4 23.8 1.5 32.8 7 Tax charge for the year The Group’s wholly-owned business is subject to taxation as a REIT. Under the REIT regime, income from its rental business (calculated by reference to tax rather than accounting rules) and chargeable gains from the sale of its investment properties are exempt from corporation tax. 8 Investment properties At 1 October Acquisitions Disposals Refurbishment and other capital expenditure Net surplus on revaluation of investment properties Book value at 30 September Fair value at 30 September: Core properties valued by Cushman & Wakefield Non-core properties valued by Cushman & Wakefield Less: unamortised lease incentives (note 9) Book value at 30 September The investment properties valuation comprises: Freehold properties Leasehold properties Shaftesbury Annual Report 2018 126 2018 £m 3,407.3 167.8 (8.7) 25.3 123.1 3,714.8 3,724.6 2.4 (12.2) 3,714.8 2018 £m 3,495.3 231.7 3,727.0 2017 £m 3,111.6 37.1 (12.3) 40.3 230.6 3,407.3 3,416.5 2.4 (11.6) 3,407.3 2017 £m 3,133.0 285.9 3,418.9 Financial statements Notes to the financial statements continued8 Investment properties continued Investment properties were valued at 30 September 2018 by professionally qualified external valuers. The Group's wholly-owned portfolio is valued by Cushman & Wakefield, members of the Royal Institution of Chartered Surveyors (RICS). All properties were valued on the basis of fair value and highest and best use, in accordance with IFRS 13 and the RICS Valuation - Global Standards, which incorporate the International Valuation Standards and the RICS UK Valuation Standards edition current at the valuation date. When considering a property’s highest and best use, the valuer considers its actual and potential uses which are physically, legally and financially viable. Where the highest and best use differs from the existing use, the valuer considers the use a market participant would have in mind when formulating the price it would bid and reflects the cost and likelihood of achieving that use. The fair value of the Group’s investment properties has primarily been determined using a market approach, which provides an indication of value by comparing the subject asset with similar assets for which price information is available. The external valuer uses information provided by the Group, such as tenancy information and capital expenditure expectations. In deriving fair value, the valuer also makes a series of assumptions, using professional judgement and market observations. The key assumptions are the equivalent yields and estimated future rental income, (ERVs), as set out in the Basis of Valuation on pages 142 to 143. Equivalent yields are based on current market prices, depending on, inter alia, the location and use of the properties. ERVs are calculated using a number of factors which include current rental income, market comparatives and occupancy levels. Whilst there is market evidence for these inputs, and recent transaction prices for similar properties, there is still a significant element of estimation and judgement. As a result of adjustments made to market observable data, these significant inputs are deemed unobservable. Since the key inputs to the valuation are unobservable, the Group considers all its investment properties fall within Level 3 of the fair value hierarchy in IFRS 13. The Group’s policy is to recognise transfers between hierarchy levels as at the date of the event or change in circumstances that caused the transfer. There have been no transfers during the year (2017: none). The major inputs to the external valuation are reviewed by the senior management team. In addition, the valuer meets with the external auditor and the Audit Committee. Further details of the Audit Committee’s responsibilities in relation to valuations can be found in the Audit Committee Report on pages 82 to 85. A summary of the Cushman & Wakefield report can be found on pages 144 to 145. Fees were agreed at fixed amounts in advance of the valuations being carried out. During the year, Cushman & Wakefield acted as letting agents for Shaftesbury Carnaby PLC and Shaftesbury Chinatown PLC, rent review surveyors for Shaftesbury CL Limited, and provided other advice to Shaftesbury PLC. Non valuation fees represented 53% of total fees for the valuation of the Group's investment properties. The fees payable by the Group to Cushman & Wakefield do not constitute a significant part of their fee income. Sensitivity analysis As noted in the significant judgements, assumptions and key estimates section on page 122, the valuation of the Group’s property portfolio is inherently subjective. As a result, the valuations the Group places on its property portfolio are subject to a degree of uncertainty and are made on the basis of assumptions which may not prove to be accurate, particularly in periods of volatility or low transaction flow in the commercial property market. The Group’s properties are all located in London’s West End and are virtually all multi-use buildings, usually configured with commercial uses on the lower floors and office and/or residential uses on the upper floors. Cushman & Wakefield value properties in their entirety and not by use. Consequently, the sensitivity analysis below has been performed on the Group’s portfolio as a whole. Increase/(decrease) in the fair value of investment properties -5.0% £m (172.5) Change in ERV -2.5% £m (88.7) +2.5% £m 83.1 Change in equivalent yields +5.0% £m 170.4 -0.50% £m 682.8 -0.25% £m 308.9 +0.25% £m (270.8) +0.50% £m (501.1) These key unobservable inputs are inter-dependent. All other factors being equal, a higher equivalent yield would lead to a decrease in the valuation of a property, and an increase in the ERV would increase the capital value, and vice versa. At 30 September 2018, the Group had capital commitments of £58.7 million (2017 as restated: £52.6 million). This included £39.0 million (2017 as restated: £39.0 million) relating to the forward purchase of a long leasehold interest and £19.7 million (2017: £13.6 million) relating to future capital expenditure for the enhancement of the Group’s investment properties. The 2017 figure has been restated to include amounts relating to the forward purchase of a long leasehold interest. See pages 42 to 50 for a discussion of the Group’s property activity during the year. Details of the restrictions on the Group's investment properties are set out in note 15. 9 Accrued income Accrued income in respect of lease incentives Less: included in trade and other receivables (note 12) 2018 £m 12.2 (2.3) 9.9 2017 £m 11.6 (2.1) 9.5 Shaftesbury Annual Report 2018 127 4Financial statementsNotes to the financial statements continued410 Investment in joint venture Group At 1 October Share of (loss)/profits Dividends received Book value at 30 September Company Shares at cost At 1 October and 30 September 2018 £m 148.0 (1.1) (3.0) 143.9 2018 £m 2017 £m 146.4 6.4 (4.8) 148.0 2017 £m 59.0 59.0 The Company owns 7,782,100 B ordinary £1 shares in Longmartin Properties Limited, representing 50% of that company’s issued share capital. The company is incorporated in Great Britain and registered in England and Wales and is engaged in property investment in London. Longmartin Properties Limited’s principal place of business and registered office is the same as the Group, as set out on page 109. Control of Longmartin Properties Limited is shared equally with The Mercers’ Company, which owns 50% of its issued share capital. At 30 September 2018, the joint venture had capital commitments of £10.4 million (2017: £5.5 million) relating to future capital expenditure for the enhancement of its investment properties, of which, 50% relates to the Group. The summarised Statement of Comprehensive Income and Balance Sheet used for consolidation purposes are presented below: Statement of Comprehensive Income Rents receivable Recoverable property expenses Revenue from properties Property outgoings Recoverable property expenses Property charges Net property income Administrative expenses Operating profit before investment property valuation movements Net (deficit)/surplus on revaluation of investment properties Operating profit Finance costs (Loss)/profit before tax Current tax Deferred tax Tax credit/(charge) for the year (Loss)/profit and total comprehensive (loss)/income for the year (Loss)/profit attributable to the Group Balance Sheet Non-current assets Investment properties at book value Accrued income Other receivables Cash and cash equivalents Current assets Total assets Current liabilities Non-current liabilities Secured term loan Other non-current liabilities Total liabilities Net assets Net assets attributable to the Group Shaftesbury Annual Report 2018 128 2018 £m 16.1 1.5 17.6 (1.8) (1.5) (3.3) 14.3 (0.4) 13.9 (10.0) 3.9 (6.8) (2.9) (1.5) 2.3 0.8 (2.1) (1.1) 2018 £m 457.4 2.1 1.3 460.8 2.6 3.9 467.3 15.5 120.0 43.9 179.4 287.9 143.9 2017 £m 17.7 1.5 19.2 (1.7) (1.5) (3.2) 16.0 (0.2) 15.8 5.3 21.1 (6.8) 14.3 (1.7) 0.2 (1.5) 12.8 6.4 2017 £m 462.6 3.1 1.3 467.0 1.2 3.9 472.1 10.1 120.0 46.1 176.2 295.9 148.0 Financial statements Notes to the financial statements continued11 Investment in subsidiaries Shares in Group undertakings At 1 October Acquisition of subsidiary Additional share capital issued by subsidiaries Impairment of subsidiary At 30 September 2018 £m 619.6 - 554.7 (13.4) 1,160.9 2017 £m 754.7 9.8 - (144.9) 619.6 During the year Shaftesbury Charlotte Street Limited distributed £13.4 million to the Company following a capital reduction. Following this, the Company impaired its investment in this subsidiary. A number of subsidiaries issued share capital to the Company during the year. All transactions were settled through intercompany indebtedness. In 2017, the Company acquired 100% of the share capital of Shaftesbury West End Limited. The Company also impaired its investment in Shaftesbury Chinatown PLC, following a capital reduction and distribution from that company. The full list of the Company’s subsidiary undertakings is presented below. Except where indicated otherwise, the Company owns, directly, all of the ordinary issued share capital: Active subsidiaries: Shaftesbury Carnaby PLC Shaftesbury Covent Garden Limited Shaftesbury Chinatown PLC Shaftesbury Soho Limited Shaftesbury AV Investment Limited Dormant subsidiaries: Carnaby Estate Holdings Limited Carnaby Investments Limited Carnaby Property Investments Limited1 Chinatown Estate Holdings Limited Chinatown Property Investments Limited1 Covent Garden Estate Holdings Limited Shaftesbury Covent Garden Property Investments Limited1 Shaftesbury Charlotte Street Limited Charlotte Street Estate Holdings Limited Chinatown London Limited Shaftesbury AV Limited1 Shaftesbury CL Investment Limited Shaftesbury CL Limited1 Helcon Limited2 Shaftesbury West End Limited Shaftesbury Investments 1 Limited Shaftesbury Investments 2 Limited Shaftesbury Investments 4 Limited Shaftesbury Investments 5 Limited Shaftesbury Investments 6 Limited Shaftesbury Investments 7 Limited Shaftesbury Investments 8 Limited Shaftesbury Investments 9 Limited Shaftesbury Investments 10 Limited 1. 100% of the share capital of these subsidiaries is held by other Group companies. 2. This subsidiary is in the process of being voluntarily wound up in order to simplify the Group structure. All of the companies are either engaged in property investment or dormant. They are incorporated in Great Britain and are registered in England and Wales. The registered office of the subsidiaries is the same as the Group, as set out on page 109. 12 Trade and other receivables Amounts due from tenants Provision for doubtful debts Accrued income in respect of lease incentives (note 9) Amounts due from subsidiaries Amounts due from joint venture Prepayments Other receivables Group Company 2018 £m 16.2 (1.2) 15.0 2.3 - 3.9 9.0 0.1 30.3 2017 £m 12.0 (0.5) 11.5 2.1 - 0.9 7.1 0.4 22.0 2018 £m - - - - 46.6 3.9 0.7 - 51.2 2017 £m - - - - 482.7 0.9 0.6 0.1 484.3 At 30 September 2018, amounts due from tenants which were more than 90 days overdue totalled £2.6 million (2017: £1.1 million). Provisions against these overdue amounts totalled £1.0 million (2017: £0.4 million). The remaining balance is not considered to be impaired. Cash deposits totalling £20.6 million (2017: £18.5 million) were held against tenants’ rent payment obligations. The deposits are held in bank accounts administered by the Group’s managing agents and are not included within the Group Balance Sheet. Shaftesbury Annual Report 2018 129 4Financial statementsNotes to the financial statements continued413 Cash and cash equivalents Cash and cash equivalents at 30 September 2018, comprising cash at bank, were £118.5 million (2017: £45.6 million) for the Group and £100.6 million (2017: £25.8 million) for the Company. Non-current other receivables include £3.7 million at 30 September 2018 (2017: £3.7 million) which relate to cash held on deposit as security for certain secured term loans, and where there are certain conditions restricting their use. 14 Trade and other payables Rents and service charges invoiced in advance Trade payables and accruals in respect of capital expenditure Amounts due to subsidiaries Other taxation and social security Other payables and accruals 15 Borrowings Group Mortgage bonds Secured bank facilities Secured term loans Total Group borrowings Nominal value £m 575.0 - 384.8 959.8 2018 Unamortised issue costs £m (5.3) (1.8) (4.1) (11.2) Group Company 2018 £m 25.2 2.7 - 5.1 7.8 40.8 Book value £m 569.7 (1.8) 380.7 948.6 2017 £m 22.8 4.0 - 5.2 9.6 41.6 2018 £m - - 2.8 1.3 2.5 6.6 Nominal value £m 575.0 - 384.8 959.8 2017 Unamortised issue costs £m (5.8) (0.8) (4.4) (11.0) 2017 £m - - 100.6 2.0 4.0 106.6 Book value £m 569.2 (0.8) 380.4 948.8 Details of the Group’s current financial position, including the refinancing activity during the year, are discussed on pages 55 to 56. In the year ended 30 September 2017, two subsidiaries of the Company issued £575 million of Guaranteed First Mortgage Bonds. Following this, the Company redeemed its existing £61.0 million Debenture Stock. At 30 September 2018, there were no drawings against the Group’s secured bank facilities (2017: none). The Group is still able to benefit from these committed revolving facilities, and as such, unamortised issue costs of £1.8 million (2017: £0.8 million) continue to be carried in the Balance Sheet. The Group’s borrowings are secured by fixed charges over certain investment properties held by subsidiaries, with a carrying value of £3,151.4 million (2017: £3,015.4 million), and by floating charges over the assets of the Company and/or certain subsidiaries. To the extent there is a fixed charge over a property, consent is needed from the relevant lender for the fixed charge to be removed, for example, in the case of a disposal of that property. There are currently no restrictions on the remittance of income from investment properties. Net debt reconciliation Non-current borrowings Mortgage bonds Secured bank facilities Secured term loans Loan issue costs Loan issue costs1 Cash & cash equivalents (note 13) Net debt at 30 September 2018 Net debt at 30 September 2017 Cash flows 1.10.2017 £m Inflows £m Outflows £m Non-cash items 30.9.2018 £m 575.0 - 384.8 (11.0) 948.8 11.0 (45.6) 914.2 752.1 - 72.0 - - 72.0 - (358.9) (286.9) (95.1) - (72.0) - (1.8) (73.8) 1.8 286.0 214.0 257.2 - - - 1.6 1.6 (1.6) - - - 575.0 - 384.8 (11.2) 948.6 11.2 (118.5) 841.3 914.2 1. Loan issue costs are eliminated in the calculation of net debt. The cash flows relating to secured bank facilities were drawings under revolving credit facilities and their subsequent repayments. Shaftesbury Annual Report 2018 130 Financial statements Notes to the financial statements continued  15 Borrowings continued Availability and maturity of borrowings Repayable between 1 and 5 years Repayable between 5 and 10 years Repayable after 10 years Committed £m 225.0 290.0 669.8 1,184.8 2018 facilities Drawn £m - 290.0 669.8 959.8 Undrawn £m 225.0 - - 225.0 Committed £m 275.0 290.0 669.8 1,234.8 2017 facilities Drawn £m - 290.0 669.8 959.8 Interest rate profile of interest bearing borrowings Fixed rate borrowings Secured term loans Mortgage bonds 2027 Mortgage bonds 2031 Weighted average cost of drawn borrowings 2018 2017 Debt £m 384.8 290.0 285.0 Interest rate 3.85% 2.35% 2.49% 2.99% Debt £m 384.8 290.0 285.0 Undrawn £m 275.0 - - 275.0 Interest rate 3.85% 2.35% 2.49% 2.99% The Group and Company also incur non-utilisation fees on undrawn facilities. At 30 September 2018, the weighted average charge on the undrawn facilities of £225.0 million (2017: £275.0 million) for the Group and Company was 0.66% (2017: 0.69%). The weighted average credit margin on the Group and Company’s secured bank facilities was: Drawn facilities If facilities were fully drawn Company Secured bank facilities Total Company borrowings 2018 - 1.46% Nominal value £m - - 2018 Unamortised issue costs £m (1.8) (1.8) Book value £m (1.8) (1.8) Nominal value £m - - 2017 Unamortised issue costs £m (0.8) (0.8) 2017 - 1.51% Book value £m (0.8) (0.8) At 30 September 2018, there were no drawings against the Company’s secured bank facilities (2017: £Nil). The Company is still able to benefit from these committed revolving credit facilities, and as such, unamortised issue costs of £1.8 million (2017: £0.8 million) continue to be carried in the Balance Sheet. Net debt reconciliation Non-current borrowings Secured bank facilities Loan issue costs Loan issue costs1 Cash & cash equivalents (note 13) Net debt at 30 September 2018 Net debt at 30 September 2017 1. Loan issue costs are eliminated in the calculation of net debt. Availability and maturity of borrowings Repayable between 1 and 5 years Cash flows 1.10.2017 £m Inflows £m Outflows £m Non-cash items 30.9.2018 £m - (0.8) (0.8) 0.8 (25.8) (25.8) 382.4 72.0 - 72.0 - (414.0) (342.0) (580.2) (72.0) (1.8) (73.8) 1.8 339.2 267.2 253.8 - 0.8 0.8 (0.8) - - (81.8) - (1.8) (1.8) 1.8 (100.6) (100.6) (25.8) Committed £m 225.0 2018 facilities Drawn £m - Undrawn £m 225.0 Committed £m 275.0 2017 facilities Drawn £m - Undrawn £m 275.0 Shaftesbury Annual Report 2018 131 4Financial statementsNotes to the financial statements continued4  16 Financial instruments Fair value of derivative financial instruments (Group and Company) Interest rate swaps At 1 October - deficit Swap contracts terminated Fair value movement credited to the Statement of Comprehensive Income At 30 September - deficit 2018 £m - - - - In 2017 the Group and Company terminated interest rate swap contracts with a notional principal of £180.0 million at a cost of £92.1 million. Categories of financial instruments Group Financial assets Trade and other receivables (note 12) Amounts due from joint venture (note 12) Other receivables (note 13) Cash and cash equivalents (note 13) Financial liabilities Trade and other payables - due within one year (note 14) Interest bearing borrowings (note 15) Net financial instruments Company Financial assets Amounts due from subsidiaries (note 12) Amounts due from joint venture (note 12) Cash and cash equivalents (note 13) Financial liabilities Trade and other payables - due within one year (note 14) Amounts due to subsidiaries (note 14) Interest bearing borrowings (note 15) Net financial instruments 2018 book value £m 15.0 3.9 3.7 118.5 141.1 (10.5) (948.6) (959.1) (818.0) 46.6 3.9 100.6 151.1 (2.5) (2.8) 1.8 (3.5) 147.6 2017 £m (114.1) 92.1 22.0 - As restated 2017 book value £m 11.5 0.9 3.7 45.6 61.7 (13.6) (948.8) (962.4) (900.7) 482.7 0.9 25.8 509.4 (4.0) (100.6) 0.8 (103.8) 405.6 Other receivables relate to cash held on deposit, which have certain conditions restricting their use which are due between 2029 and 2035. The Group’s trade and other payables are all due within one year (2017: all due within one year). Net financial instruments for the Company at 30 September 2017 have been restated to include cash and cash equivalents in the above table. This has no impact on the net assets of the Company for that year. Other financial instruments The Group’s mortgage bonds and secured term loans are held at amortised cost in the Balance Sheet. The fair value of these financial instruments is £955.2 million (2017: £975.9 million). The difference between the fair value and the book value is not recognised in the reported results for the year. The fair values have been calculated based on a discounted cash flow model using the relevant reference gilt and appropriate market spread. The valuation technique falls within Level 2 of the fair value hierarchy in IFRS 13. The fair values of the Group’s and Company’s cash and cash equivalents, and those financial instruments included within trade and other receivables, interest bearing borrowings (excluding the mortgage bonds and the secured term loans), and trade and other payables are not materially different from the values at which they are carried in the financial statements. Shaftesbury Annual Report 2018 132 Financial statements Notes to the financial statements continued16 Financial instruments continued Contractual cash flows The tables below summarise the undiscounted contractual cash flows arising on interest bearing financial liabilities based on conditions existing at the Balance Sheet date. The Group has no obligation to repay its mortgage bonds or secured term loans in advance of their maturities between 2027 and 2035. Group 30 September 2018 Financial liabilities Interest bearing borrowings: Principal (note 15) Interest Total 30 September 2017 Financial liabilities Interest bearing borrowings: Principal (note 15) Interest Total Company 30 September 2018 Financial liabilities Interest bearing borrowings: Principal (note 15) Interest Total 30 September 2017 Financial liabilities Interest bearing borrowings: Principal (note 15) Interest Total Book value £m Contractual cash flows £m 948.6 3.0 951.6 Book value £m 948.8 3.6 952.4 959.8 342.9 1,302.7 Contractual cash flows £m 959.8 371.6 1,331.4 Book value £m Contractual cash flows £m (1.8) 0.1 (1.7) Book value £m (0.8) 0.2 (0.6) - - - Contractual cash flows £m - - - <1 year £m - 28.7 28.7 <1 year £m - 28.7 28.7 <1 year £m - - - <1 year £m - - - 1-2 years £m - 28.7 28.7 1-2 years £m - 28.7 28.7 1-2 years £m - - - 1-2 years £m - - - 2-5 years £m - 86.2 86.2 2-5 years £m - 86.2 86.2 2-5 years £m - - - 2-5 years £m - - - 5-10 years £m 290.0 136.8 426.8 5-10 years £m 290.0 143.6 433.6 5-10 years £m - - - 5-10 years £m - - - >10 years £m 669.8 62.5 732.3 >10 years £m 669.8 84.4 754.2 >10 years £m - - - >10 years £m - - - Management of financial risks (Group and Company) An overview of the Group's risk management policies and the principal risks and uncertainties is set out on pages 57 to 60. The disclosure below provides further detail regarding financial risk management. Credit risk Credit risk refers to the risk that a counterparty will default on their contractual obligations resulting in financial loss to the Group. The Group reviews the creditworthiness of potential tenants prior to entering into contractual arrangements. The Group has a large and diverse tenant base so that tenant credit risk is widely spread. Where appropriate, tenants are required to provide cash deposits to mitigate the potential loss in the event of default. Tenant deposits are referred to in note 12. Provision is made in full where recovery of financial assets is, in the opinion of the directors, uncertain. The carrying amount of financial assets, net of provisions for impairment, represents the Group’s maximum exposure to credit risk. Financial assets that are neither past due nor impaired are expected to be fully recoverable. Where cash is deposited with banks or financial institutions, the Group considers the counterparty credit rating and places amounts with different banks or financial institutions to spread counterparty credit risk. Deposits and liquidity requirements are reviewed on a weekly basis. Shaftesbury Annual Report 2018 133 4Financial statementsNotes to the financial statements continued416 Financial instruments continued Liquidity risk The Board keeps under review the Group’s funding requirements, available facilities and covenant compliance to ensure it has sufficient funds available to meet its existing commitments and to extend its portfolio through investment and acquisition of additional properties. The Group’s policies regarding finance and its current financial position are set out in the Strategic Report on pages 55 to 56. Market risk Interest rate risk arises from the Group’s use of interest bearing financial instruments, and is the risk that future cash flows from financial instruments will fluctuate due to changes in interest rates and credit costs. The Group’s policy is to minimise interest rate risk through long-term fixed rate debt. At 30 September 2018, the Group’s drawn borrowings consisted entirely of fixed rate debt. Given this, the Group’s exposure to changes in long-term interest rates and the potential impact on the Group’s results and financial position is considered to be insignificant. The Board keeps under review the Group’s interest rate risk, particularly in light of expectations of future interest rate movements. Capital risk management The capital structure of the Group consists of equity and net borrowings, including cash held on deposit. The type and maturity of the Group’s borrowings is set out in note 15 and the Group’s equity structure is set out in the Statement of Changes in Equity. The Group regularly reviews its loan covenant compliance. The Group’s capital management objectives are to continue as a going concern and to provide enhanced shareholder returns whilst maintaining an appropriate risk reward balance to accommodate changing financial and operating market cycles. The Group’s capital structure such as levels of gearing and loan-to-value ratio are discussed in the Strategic Report on pages 55 to 56. 17 Share capital Allotted and fully paid (ordinary 25p shares) At 1 October Exercise of share options Share placing At 30 September 2018 number million 279.0 0.4 27.9 307.3 2017 number million 278.6 0.4 - 279.0 2018 £m 69.8 0.1 6.9 76.8 2017 £m 69.7 0.1 - 69.8 During the year, 27,855,508 ordinary 25p shares were issued at £9.52 per share, raising £265.2 million. Transaction costs in connection with the issue, which amounted to £4.8 million, have been charged against share premium in accordance with the Companies Act 2006. In respect of the equity issue, Invesco Asset Management Limited and Orosi (UK) Limited were related parties of Shaftesbury PLC for the purposes of the Listing Rules and participated in the equity placing in respect of 1,050,000 and 6,864,368 placing shares respectively, for a total consideration of approximately £9.996 million and £65.349 million respectively. These transactions were disclosed via the Regulatory News Service on 6 December 2017, in accordance with LR11.1.10R, and Shaftesbury PLC received written confirmation from its sponsor that the terms of the transactions were fair and reasonable as far as Shaftesbury PLC’s shareholders were concerned. 18 Reserves The Statement of Changes in Equity is set out on page 121. The following describes the nature and purpose of each of the reserves within equity. Reserve Share premium Share-based payments reserve Retained earnings Description and purpose Share premium is the amount by which the fair value of the consideration received for ordinary shares exceeds the nominal value of shares issued, net of expenses. The equity-settled remuneration expense charged to the Statement of Comprehensive Income is credited to the share-based payments reserve. Upon exercise of options, the expense previously recognised is transferred to retained earnings. Cumulative gains and losses recognised in the Statement of Comprehensive Income. Transfers from the share-based payments reserve are also credited to this account. The Company’s retained earnings at 30 September 2018 include amounts distributable of £222.2 million (2017: £218.0 million). Shaftesbury Annual Report 2018 134 Financial statements Notes to the financial statements continued 19 Share-based remuneration The Group operates a long-term incentive plan (LTIP), sharesave scheme (SAYE) and a deferred annual share bonus scheme (DASBS). A summary of the rules of the schemes is set out in the Remuneration Policy on pages 90 to 96. LTIP and SAYE schemes The following share options granted to executive directors and employees were outstanding at 30 September 2018: Awarded Exercised Lapsed At 30.9.2018 Exercisable 30.9.2018 Option exercise price Weighted average price at exercise Exercise period At 1.10.2017 23,419 17,974 21,368 16,115 - 402,426 138,800 Date of grant SAYE 2.7.2014 3.7.2015 1.7.2016 30.6.2017 29.6.2018 LTIP 2006 scheme 8.12.2014 2.12.2015* LTIP 2016 scheme 8.2.2016* 12.12.2016 12.12.2017 - - - - 12,831 - (11,924) - - - - - (728) (1,162) - 23,419 6,050 20,640 14,953 12,831 - - (402,426) - - - - 138,800 224,225 406,621 - 1,250,948 - - 400,195 413,026 - - - (414,350) - - - (1,890) 224,225 406,621 400,195 1,247,734 - 1,296 - - - - - - - - 1,296 £5.38 £6.94 £7.41 £7.74 £7.57 Nil Nil Nil Nil Nil - £9.29 - - - 2019 2018-2020 2019-2021 2020-2022 2021-2023 £9.97 - 2017-2018 2018-2019 - - - 2020-2021 2019-2022 2020-2023 * Following satisfaction of performance targets in respect of the three years ended 30 September 2018, 98,707 options over ordinary shares will vest in December 2018. Weighted average exercise price Weighted average remaining contractual life At 1.10.2017 £0.43 2.1 years Awarded £0.24 Exercised £0.20 Lapsed £7.61 At 30.9.2018 £0.43 2.6 years The fair value of option grants is measured by Lane Clark & Peacock LLP, Actuaries & Consultants. For the grants made during the year, the main inputs and assumptions, and the resulting fair values, are as follows: Grant date Share price at date of grant Exercise price Expected life of award Share return volatility (per annum) Risk free discount rate per annum Index return volatility* Correlation between the Company’s shares and those in the index* Dividend yield * The index is the FTSE 350 REIT Index. Fair values: SAYE No holding period Contingent holding period Two year holding period SAYE 3 Year 29.6.18 £9.325 £7.57 3 15% 0.8% - - 1.8% SAYE 5 Year 29.6.18 £9.325 £7.57 5 16% 1.0% - - 1.8% LTIP 12.12.17 £9.985 Nil 3 16% 0.5% 19% 82% - SAYE 3 Year SAYE 5 Year LTIP (TSR) LTIP (NAV) £1.81 - - - £1.95 - - - - £3.97 £3.89 £3.77 - £9.99 £9.79 £9.49 The assumed volatility was determined taking into account factors including the historical volatility of the Company share price. Actual future volatility may differ, potentially significantly, from historic volatility. The vesting conditions relating to options granted under the 2016 LTIP are described in the Annual Remuneration Report on page 101. Shaftesbury Annual Report 2018 135 4Financial statementsNotes to the financial statements continued419 Share-based remuneration continued Deferred annual share bonus scheme At 1 October Awarded Exercised At 30 September 20 Dividends Final dividend for: Year ended 30 September 2017 Year ended 30 September 2016 Interim dividend for: Year ended 30 September 2018 Year ended 30 September 2017 Dividends paid in the year Timing difference on payment of withholding tax Dividends cash paid 2018 Shares 597,351 208,914 (207,397) 598,868 2017 Shares 491,804 221,283 (115,736) 597,351 2018 £m 25.1 - 25.5 - 50.6 - 50.6 2017 £m - 21.3 - 22.0 43.3 1.2 44.5 Pence per share PID - 5.2p 8.3p - Ordinary 8.1p 2.35p - 7.9p A final dividend of 8.5p per share was recommended by the Board on 26 November 2018. Subject to approval by shareholders at the 2019 AGM, the final dividend will be paid as an ordinary dividend on 15 February 2019 to shareholders on the register at 18 January 2019. The dividend totalling £26.1 million will be accounted for as an appropriation of revenue reserves in the year ending 30 September 2019. See page 53 of the Strategic Report for commentary on dividends. The total distribution for the final dividend for the year ended 30 September 2017 of £25.1 million increased from £22.6 million, (the amount reported in the 2017 Annual Report), due to the increase in outstanding share capital as a result of the share placing in December 2017, prior to the payment of the dividend in February 2018. The trustee of the Company’s Employee Benefit Trust waived dividends in respect of 598,868 (2017: 597,351) ordinary shares during the year. 21 Cash flows from operating activities Operating activities Profit before tax Adjusted for: Lease incentives recognised (note 2) Equity-settled remuneration (note 4) Depreciation (note 4) Investment property valuation surplus (note 8) Profit on disposal of investment properties (note 5) Net finance costs Administrative charges, finance charges, and dividends received from subsidiaries settled through intercompany indebtedness Impairment of subsidiary (note 11) Dividends received from the joint venture (note 10) Share of (loss)/profit from the joint venture (note 10) Cash flows from operations before changes in working capital Changes in working capital: Change in trade and other receivables Change in trade and other payables Cash generated from operating activities See note 15 for the cash flow movement in net debt. Group Company 2018 £m 175.5 (0.5) 0.8 0.4 (123.1) (4.6) 31.2 - - - 1.1 80.8 (5.1) 0.8 76.5 2017 £m 301.6 0.5 1.4 0.3 (230.6) (1.1) 10.7 - - - (6.4) 76.4 (0.5) 0.8 76.7 2018 £m 73.5 - 0.8 0.4 - - 1.7 (100.0) 13.4 (3.0) - (13.2) 0.1 (2.8) (15.9) 2017 £m 57.7 - 1.4 0.3 - - (12.0) (200.1) 144.9 (4.8) - (12.6) (0.1) (1.1) (13.8) Shaftesbury Annual Report 2018 136 Financial statements Notes to the financial statements continued22 Performance measures Earnings per share Basic Dilutive effect of share options Diluted Profit after tax £m 175.5 - 175.5 2018 Number of shares million 302.1 0.3 302.4 EPRA earnings per share The calculations below are in accordance with the EPRA Best Practice Recommendations. Basic EPRA adjustments: Investment property valuation surplus (note 8) Profit on disposal of investment properties (note 5) Movement in fair value of derivatives Adjustments in respect of the joint venture: Investment property valuation deficit/(surplus) Deferred tax EPRA earnings EPRA adjusted earnings per share EPRA earnings Charge for share options (note 4) EPRA adjusted earnings Profit after tax £m 175.5 (123.1) (4.6) - 5.0 (1.1) 51.7 Profit after tax £m 51.7 0.6 52.3 2018 Number of shares million 302.1 302.1 2018 Number of shares million 302.1 302.1 Net asset value per share The calculations below are in accordance with the EPRA Best Practice Recommendations. Basic Dilutive effect of share options Diluted Deferred tax* EPRA NAV Deferred tax* Excess of fair value over carrying value of debt: Secured term loans* Mortgage bonds EPRA NNNAV 2018 Number of ordinary shares million 307.3 0.4 307.7 307.7 307.7 Net assets £m 3,033.0 0.5 3,033.5 16.7 3,050.2 (16.7) (34.5) 32.0 3,031.0 Earnings per share pence 58.1 (0.1) 58.0 Earnings per share pence 58.1 (40.7) (1.5) - 1.6 (0.4) 17.1 Earnings per share pence 17.1 0.2 17.3 Net asset value per share £ 9.87 9.86 0.05 9.91 (0.05) (0.11) 0.10 9.85 Profit after tax £m 301.6 - 301.6 Profit after tax £m 301.6 (230.6) (1.1) (22.0) (2.6) (0.1) 45.2 Profit after tax £m 45.2 1.4 46.6 Net assets £m 2,646.9 0.5 2,647.4 17.9 2,665.3 (17.9) (40.0) 15.5 2,622.9 2017 Number of shares million 278.9 0.7 279.6 2017 Number of shares million 278.9 278.9 2017 Number of shares million 278.9 278.9 2017 Number of ordinary shares million 279.0 0.8 279.8 279.8 279.8 Earnings per share pence 108.1 (0.2) 107.9 Earnings per share pence 108.1 (82.7) (0.4) (7.9) (0.9) - 16.2 Earnings per share pence 16.2 0.5 16.7 Net asset value per share £ 9.49 9.46 0.06 9.52 (0.06) (0.14) 0.05 9.37 * Includes our 50% share of deferred tax and fair value of secured term loans in the Longmartin joint venture. The calculations of diluted net asset value per share show the potentially dilutive effect of share options outstanding at the Balance Sheet date and include the increase in shareholders’ equity which would arise on the exercise of those options. Shaftesbury Annual Report 2018 137 4Financial statementsNotes to the financial statements continued422 Performance measures continued Net asset value return EPRA NAV at 1 October (A) EPRA NAV at 30 September Increase during the year Dividends paid during the year NAV return (B) NAV return % (B/A) Total investment property revaluation surpluses Wholly-owned portfolio revaluation surplus (note 8) Longmartin joint venture revaluation (deficit)/surplus (note 10) Financing ratios Loan-to-value and gearing Nominal value of debt Cash and cash equivalents Net debt (A) Fair value of investment properties (B) Loan-to-value (A/B) EPRA net assets (C) Gearing (A/C) Interest cover Operating profit before investment property disposals and valuation movements (A) Finance costs Finance income Net finance costs (B) Interest cover (A/B) 2018 pence 952.00 991.00 39.00 16.40 55.40 5.8% 2018 £m 123.1 (5.0) 118.1 2017 Share of joint venture £m 60.0 (0.6) 59.4 227.8 26.1% 7.9 2.7 - 2.7 2.9x 2017 pence 888.00 952.00 64.00 15.45 79.45 8.9% 2017 £m 230.6 2.6 233.2 Total £m 1,019.8 (46.2) 973.6 3,646.7 26.7% 2,665.3 36.5% 82.1 35.5 (0.1) 35.4 2.3x Wholly- owned business £m 959.8 (118.5) 841.3 3,727.0 22.6% 80.1 32.0 (0.8) 31.2 2.6x 2018 Share of joint venture £m 60.0 (1.3) 58.7 224.6 26.1% 7.0 2.8 - 2.8 2.5x Total £m 1,019.8 (119.8) 900.0 3,951.6 22.8% 3,050.2 29.5% 87.1 34.8 (0.8) 34.0 2.6x Wholly- owned business £m 959.8 (45.6) 914.2 3,418.9 26.7% 74.2 32.8 (0.1) 32.7 2.3x For the wholly-owned group, the blended cost of debt is 3.15% (2017: 3.19%). This is calculated using the cost of drawn borrowings of 2.99% (2017: 2.99%) plus the cost of commitment fees on undrawn bank facilities of 0.66% (2017: 0.69%). At 30 September 2018, the undrawn bank facilities totalled £225.0 million (2017: £275.0 million). For total debt, the blended cost of debt is 3.22% (2017: 3.26%) and includes the impact of our share of debt in our joint venture of £60 million (2017: £60 million), upon which interest is charged at 4.43% (2017: 4.43%). See page 51 in the Strategic Report for explanations of why we use these performance measures. Shaftesbury Annual Report 2018 Shaftesbury Annual Report 2018 138 138 Financial statements Notes to the financial statements continued23 Operating leases The Group as lessor Future aggregate minimum rentals receivable under non-cancellable operating leases based on contracted rental income at the year end: Not later than one year Later than one year but not later than five years Later than five years but not later than ten years Later than ten years 2018 £m 104.8 262.7 155.9 145.1 668.5 2017 £m 96.1 241.5 144.5 107.8 589.9 The Group has over 1,250 leases granted to its tenants. These vary depending on the individual tenant and the respective property and demise. Typical lease terms are set out in the Strategic Report on pages 23 to 29. The Company as a lessee Future aggregate minimum payments in respect of a non-cancellable operating lease based on annual amounts payable at the year end: Not later than one year Later than one year but not later than five years Later than five years but not later than ten years Later than ten years 2018 £m 0.4 1.6 2.0 0.2 4.2 2017 £m 0.4 1.6 2.0 0.6 4.6 The Company leases its head office accommodation from a wholly-owned subsidiary. 24 Related party transactions During the year, the Company received administrative fees, dividends and interest from its subsidiaries. The Company leases its office accommodation from a subsidiary and paid interest on amounts due to subsidiaries. The Company also received interest on a loan and administrative fees from the joint venture. These transactions are summarised below: Transactions with subsidiaries: Administrative fees receivable Dividends receivable Interest receivable Interest payable Rents payable Amounts due from subsidiaries Amounts due to subsidiaries Transactions with the joint venture: Administrative fees receivable Dividends receivable Interest receivable Amount due from the joint venture 2018 £m 10.5 83.8 6.3 0.6 0.4 46.6 (2.8) 0.1 3.0 0.1 3.9 2017 £m 11.4 177.3 12.8 1.4 0.4 482.7 (100.6) 0.1 4.8 - 0.9 All amounts are unsecured, repayable on demand and bear a market rate of interest. Directors are considered the only key management personnel. Apart from the directors’ remuneration set out in the Annual Remuneration Report on pages 97 to 107, and below, there were no other transactions with directors. See note 17 for disclosure of related party transactions regarding the share placing during the year. Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the Group, is set out below. Further information regarding the remuneration of individual directors is given in the Annual Remuneration Report on pages 97 to 107. Directors' emoluments Short-term employee benefits Other long-term benefits Share-based payments 2018 £m 2.9 0.8 0.4 4.1 2017 £m 2.8 0.8 1.2 4.8 Shaftesbury Shaftesbury Annual Annual Report 2018 Report 2018 139 139 4Financial statementsNotes to the financial statements continued4Other information Alternative Performance Measures (APMs) The Group has applied the European Securities and Markets Authority (ESMA) guidelines on alternative performance measures in these annual results. An APM is a financial measure of historical or future financial performance, position or cash flows of the Group which is not a measure defined or specified in IFRS. Set out below is a summary of APMs used in this Annual Report – some of which are EPRA performance measures, which are a set of standard disclosures for the property industry, as defined by EPRA in its Best Practice Recommendations. APM Nearest IFRS measure Explanation and reconciliation EPRA earnings and earnings per share Profit and total comprehensive income for the year Note 22 and Strategic Report (pages 51 and 52) Basic earnings per share Adjusted earnings per share Basic earnings per share Note 22 and Strategic Report (page 53) Net asset value per share Net assets attributable to shareholders Note 22 and Strategic Report (page 54) Diluted net asset value per share Net assets attributable to shareholders Note 22 EPRA net assets and NAV Net asset value return Total portfolio Revaluation surplus Valuation growth Net debt Group LTV Gearing Blended cost of debt Interest cover Net assets N/A Note 22 and Strategic Report (pages 51 and 54) Note 22 and Strategic Report (pages 51 and 54) Investment properties Strategic Report (pages 42 to 43 and 51) Net surplus on revaluation of investment properties Note 22 and Strategic Report (pages 42 and 54) Net surplus on revaluation of investment properties Strategic Report (pages 42 to 43) Borrowings less cash and cash equivalents Note 22 and Strategic Report (pages 51 and 56) N/A N/A N/A N/A Note 22 and Strategic Report (pages 51 and 55 to 56) Note 22 and Strategic Report (pages 51 and 56) Note 22 and Strategic Report (pages 51 and 55 to 56) Note 22 and Strategic Report (pages 51 and 55 to 56) Where this report uses like-for-like comparisons, these are defined within the Glossary. EPRA Measures The following is a summary of the EPRA performance measures included in this Annual Report. The measures are defined in the Glossary. Measure Earnings Definition Earnings from operational activities, excluding fair value movements in respect of properties and interest rate swaps (in 2017), profits on disposal of investment properties and deferred tax arising in our joint venture Earnings per share EPRA earnings per weighted average number of ordinary shares Net assets NAV per share Triple net assets Triple NAV (NNNAV) Net Initial Yield (NIY) Topped-up NIY Vacancy Cost ratio Net assets adjusted to remove deferred tax arising in our joint venture Diluted EPRA net assets per share EPRA net assets adjusted to include the fair value of debt Diluted triple net assets per share Current annualised rental income less non-recoverable property costs as a % of property valuation plus assumed purchasers’ costs NIY adjusted to reflect expiry of rent-free periods and stepped rents ERV of vacant space as a % of ERV of all properties Total costs as a % of gross rental income - including direct vacancy cost Total costs as a % of gross rental income - excluding direct vacancy cost Page 137 2018 £51.7m 2017 £45.2m 137 137 137 137 137 143 143 46 141 141 17.1p 16.2p £3,050.2m £2,665.3m £9.91 £9.52 £3,031.0m £2,622.9m £9.85 2.68% 2.84% 4.6% 28.0% 26.6% £9.37 2.77% 2.89% 6.0% 26.9% 25.6% As disclosed in note 1 to the financial statements, the Group’s properties are all located in London’s West End, and are all of a similar type. The properties are typically mixed-use buildings with restaurants, leisure and retail on the lower floors and small offices and apartments on the upper floors. As the properties share similar economic characteristics we consider them to be one operating segment. Like-for-like calculations of growth in values and rents are therefore stated on an aggregated basis. Shaftesbury Annual Report 2018 140 EPRA cost ratio Gross rental income Revenue Less: recoverable property expenses Share of joint venture rents receivable Cost Property charges Less: recoverable property expenses Share of joint venture property expenses Administrative expenses Share of joint venture administrative expenses Total costs Vacant property costs Share of joint venture vacant property costs Total costs excluding vacant property costs EPRA cost ratio (including vacant property costs) EPRA cost ratio (excluding vacant property costs) Note: We do not capitalise property nor administrative expenses. Investment properties Whilst our portfolio is geographically concentrated in London’s West End, it is granular in nature, with almost 600, generally small, buildings, often clustered in contiguous blocks. It is not practical to provide detailed property-by-property information recommended by EPRA’s BPR. However, an analysis of our portfolio, split by destination and occupier use, is set out on pages 142 to 143. We own 100% of our properties, except for property held by our Longmartin joint venture, in which we have a 50% interest. The breakdown of our wholly-owned portfolio between freehold and long leasehold ownership is set out on page 126. At 30 September 2018, we had 802 commercial and 545 residential tenants, with no individual tenant representing a material amount of our current annualised income. The ten largest commercial tenants represented just 10.7% of current annualised income. As our tenant base is so granular, we do not believe listing the top ten tenants, nor a detailed analysis of tenant business sector is useful. However, the analysis on pages 142 to 143 sets out details of income and rental values by destination and occupier use. EPRA vacancy by occupier use is set out on page 46. Like-for-like growth in annualised current income and ERV is set out on page 44. Like-for-like growth in rental income is set out on page 52. Other information Alternative Performance Measures continued Note 2 2 10 3 3 10 10 3 2018 £m 122.1 (9.3) 8.1 120.9 28.3 (9.3) 0.9 13.7 0.2 33.8 (1.4) (0.3) 32.1 28.0% 26.6% 2017 £m 111.5 (8.1) 8.9 112.3 23.2 (8.1) 0.9 14.1 0.1 30.2 (1.1) (0.3) 28.8 26.9% 25.6% Development disclosures Our wholly-owned portfolio is all within Conservation Areas and around 20% of our buildings are listed. We do not carry out material speculative developments. Our capital expenditure commitments are low, representing an average of 1.0% of portfolio value over the past five years. Included in this are numerous small schemes, and no one scheme is material. At 30 September 2018, we had one larger scheme, details of which are set out on page 50. An overview of assets held for, or undergoing, refurbishment is set out on pages 46 to 47. EPRA capital expenditure Group Acquisitions Investment property capital expenditure - On acquisitions during the year - On like-for-like portfolio Joint venture (our 50% share) Investment property capital expenditure 2018 £m 167.8 1.3 24.0 2.4 195.5 2017 £m 37.1 0.5 39.8 1.2 78.6 Details of acquisitions and capital expenditure in the year are set out on pages 46 to 50. Shaftesbury Annual Report 2018 141 55Other information Portfolio analysis At 30 September 2018 Portfolio Fair value (£m) Restaurants, cafés and leisure Shops % of total fair value Current income (£m) ERV (£m) Number Area – sq. ft. % of current income % of ERV Average unexpired lease length – years Number Area – sq. ft. % of current income % of ERV Average unexpired lease length – years Offices Area – sq. ft. % of current income % of ERV Average unexpired lease length – years Residential Number Area – sq. ft. % of current passing rent % of ERV 1 Shaftesbury Group’s 50% share Note 1,14 2,14 3,14 4 4 5 4 4 5 4 4 5 4 4 Carnaby 1,424.7 36% 44.8 57.2 61 Covent Garden 1,013.7 26% 30.2 37.6 95 Chinatown 837.2 21% 24.1 31.6 86 Soho 300.8 7% 9.4 11.6 32 Longmartin1 224.6 6% 8.1 10.3 9 Total portfolio 3,949.2 100% 121.5 154.0 114,000 178,000 221,000 62,000 48,000 623,000 39,000 21% 17% 10 97 39% 36% 9 97 62% 62% 11 57 42% 39% 9 37 180,000 147,000 83,000 44,000 16,000 470,000 73,000 46% 42% 4 28% 32% 4 20% 21% 4 22% 28% 3 304,000 88,000 25,000 39,000 10,000 466,000 102,000 27% 35% 4 109 12% 14% 4 214 4% 4% 3 149 17% 18% 2 68 67,000 133,000 97,000 37,000 25,000 359,000 55,000 6% 6% 21% 18% 14% 13% 19% 15% Basis of valuation At 30 September 2018 Overall initial yield Topped-up initial yield Overall equivalent yield Tone of restaurant equivalent yields Tone of restaurant ERVs - £ per sq. ft. Tone of retail equivalent yields Tone of retail ERVs - ITZA £ per sq. ft. Tone of office equivalent yields Tone of office ERVs - £ per sq. ft. Average residential ERVs - £ per sq. ft. per annum Shaftesbury Annual Report 2018 142 Note Carnaby 2.81% 2.96% 3.56% Covent Garden 2.64% 2.78% 3.26% Chinatown 2.47% 2.67% 3.34% Soho 2.77% 2.90% 3.44% 3.40%-3.85% 3.35%-3.90% 3.40%-3.75% 3.40%-3.75% £120-£153 £55-£178 £270-£420 (ZA) £110-£145 3.30%-3.75% 3.00%-3.90% 3.40%-4.25% 3.40%-4.25% £125-£535 £110-£480 £150-£365 £150-£305 3.85%-4.50% 4.00%-4.25% 4.25% 4.25%-4.50% £58-£85 £50-£75 £43-£65 £53-£73 £53 £52 £44 £51 7 8 9 10 10 10 10 10 10 10 Fitzrovia 148.2 4% 4.9 5.7 23 51% 49% 8 10 16% 17% 5 7% 8% 2 53 26% 26% Fitzrovia 2.82% 2.83% 3.31% 3.25%-3.65% £93-£120 3.30%-4.35% £100-£215 4.00%-4.35% £48-£60 £58 Wholly- owned portfolio 3,724.6 94% 113.4 143.7 297 37% 35% 9 298 32% 33% 4 17% 20% 4 593 14% 12% Wholly- owned portfolio 2.68% 2.84% 3.41% 14% 13% 13 22 34% 39% 3 36% 35% 5 75 16% 13% Longmartin 2.99% 3.16% 3.82% 3.75%-4.00% £90-£138 3.40%-4.15% £94-£650 3.75%-4.00% £63-£79 £52 At 30 September 2018 Portfolio Fair value (£m) Restaurants, cafés and leisure Shops % of total fair value Current income (£m) ERV (£m) Number Area – sq. ft. % of current income % of ERV Number Area – sq. ft. % of current income % of ERV Average unexpired lease length – years Average unexpired lease length – years % of current income % of ERV Average unexpired lease length – years Residential Number Area – sq. ft. % of current passing rent % of ERV 1 Shaftesbury Group’s 50% share 21% 17% 10 97 46% 42% 4 27% 35% 4 109 6% 6% 39% 36% 9 97 28% 32% 4 12% 14% 4 214 21% 18% 62% 62% 11 57 20% 21% 4 4% 4% 3 149 14% 13% Note 1,14 2,14 3,14 Carnaby 1,424.7 36% 44.8 57.2 61 Covent Garden 1,013.7 26% 30.2 37.6 95 Chinatown 837.2 21% 24.1 31.6 86 Fitzrovia 148.2 4% 4.9 5.7 23 Wholly- owned portfolio 3,724.6 94% 113.4 143.7 297 Longmartin1 224.6 6% 8.1 10.3 9 Total portfolio 3,949.2 100% 121.5 154.0 114,000 178,000 221,000 62,000 48,000 623,000 39,000 51% 49% 8 10 37% 35% 9 298 14% 13% 13 22 Offices Area – sq. ft. 304,000 88,000 25,000 39,000 10,000 466,000 102,000 180,000 147,000 83,000 44,000 16,000 470,000 73,000 16% 17% 5 32% 33% 4 34% 39% 3 67,000 133,000 97,000 37,000 25,000 359,000 55,000 26% 26% 14% 12% 16% 13% 7% 8% 2 53 17% 20% 4 593 36% 35% 5 75 At 30 September 2018 Overall initial yield Topped-up initial yield Overall equivalent yield Tone of restaurant equivalent yields Tone of restaurant ERVs - £ per sq. ft. Tone of retail equivalent yields Tone of retail ERVs - ITZA £ per sq. ft. Tone of office equivalent yields Tone of office ERVs - £ per sq. ft. Note Carnaby Chinatown Covent Garden 2.64% 2.78% 3.26% 2.81% 2.96% 3.56% 2.47% 2.67% 3.34% 3.40%-3.85% 3.35%-3.90% 3.40%-3.75% 3.40%-3.75% £120-£153 £55-£178 £270-£420 (ZA) £110-£145 3.30%-3.75% 3.00%-3.90% 3.40%-4.25% 3.40%-4.25% £125-£535 £110-£480 £150-£365 £150-£305 3.85%-4.50% 4.00%-4.25% 4.25% 4.25%-4.50% £58-£85 £50-£75 £43-£65 £53-£73 Average residential ERVs - £ per sq. ft. per annum £53 £52 £44 £51 Fitzrovia 2.82% 2.83% 3.31% 3.25%-3.65% £93-£120 3.30%-4.35% £100-£215 4.00%-4.35% £48-£60 £58 Wholly- owned portfolio 2.68% 2.84% 3.41% Longmartin 2.99% 3.16% 3.82% 3.75%-4.00% £90-£138 3.40%-4.15% £94-£650 3.75%-4.00% £63-£79 £52 Soho 300.8 7% 9.4 11.6 32 42% 39% 9 37 22% 28% 3 17% 18% 2 68 19% 15% Soho 2.77% 2.90% 3.44% 4 4 5 4 4 5 4 4 5 4 4 7 8 9 10 10 10 10 10 10 10 Other information Portfolio analysis and Basis of valuation continued Notes 1. 2. 3. 4. 5. 6. 7. 8. 9. The fair values at 30 September 2018 (the “valuation date”) shown in respect of the individual villages are, in each case, the aggregate of the fair values of several different property interests located within close proximity which, for the purpose of this analysis, are combined to create each village. The different interests within each village were not valued as a single lot. Current income includes total annualised actual and ‘estimated income’ reserved by leases. No rent is attributed to leases which were subject to rent-free periods at the valuation date. Current income does not reflect any ground rents, head rents nor rent charges and estimated irrecoverable outgoings at the valuation date. ‘Estimated income’ refers to gross estimated rental values in respect of rent reviews outstanding at the valuation date and, where appropriate, ERV in respect of lease renewals outstanding at the valuation date where the fair value reflects terms for a renewed lease. ERV is the respective valuers’ opinion of the rental value of the properties, or parts thereof, reflecting the terms of the relevant leases or, if appropriate, reflecting the fact that certain of the properties, or parts thereof, have been valued on the basis of vacant possession and the assumed grant of a new lease. Where appropriate, ERV assumes completion of developments which are reflected in the valuations. ERV does not reflect any ground rents, head rents nor rent charges and estimated irrecoverable outgoings. The percentage of current income and the percentage of ERV in each of the use sectors are expressed as a percentage of total income and total ERV for each village. Average unexpired lease length has been calculated by weighting the leases in terms of current rent reserved under the relevant leases and, where relevant, by reference to tenants’ options to determine leases in advance of expiry through effluxion of time. Where mixed uses occur within single leases, for the purpose of this analysis, the majority use by rental value has been adopted. The initial yield is the net initial income at the valuation date expressed as a percentage of the gross valuation. Yields reflect net income after deduction of any ground rents, head rents and rent charges and estimated irrecoverable outgoings at the valuation date. The topped-up initial yield, ignoring contractual rent-free periods, has been calculated as if the contracted rent is payable from the valuation date and as if any future stepped rental uplifts under leases had occurred. Equivalent yield is the internal rate of return, being the discount rate which needs to be applied to the expected flow of income so that the total amount of income so discounted at this rate equals the capital outlay at values current as of the valuation date. The equivalent yield shown for each village has been calculated by merging together the cash flows and fair values of each of the different interests within each village and represents the average equivalent yield attributable to each village from this approach. 10. The tone of rental values and yields is the range of rental values or yields attributed to the majority of the properties. 11. All commercial floor areas are net lettable. All residential floor areas are gross internal. 12. For presentation purposes some percentages have been rounded to the nearest integer. 13. The analysis includes accommodation which is awaiting, or undergoing, refurbishment or development and is not available for occupation at the date of valuation. 14. The analysis excludes a non-core asset, acquired as part of a portfolio. Shaftesbury Annual Report 2018 143 55Other information Summary report by the valuers To the directors of Shaftesbury PLC In accordance with your instructions, we have undertaken a valuation of the various commercial and residential freehold and long leasehold property interests as at 30th September 2018 (the “Valuation Date”) held by Shaftesbury Carnaby PLC, Shaftesbury Covent Garden Limited, Shaftesbury Chinatown PLC, Shaftesbury Soho Limited, Shaftesbury AV Limited, Shaftesbury CL Limited and Shaftesbury West End Limited, which are subsidiary companies (collectively referred to as the “Subsidiary Companies”) of Shaftesbury PLC (the “Company”), as referred to in our Valuation Reports dated 9 November 2018 (“our Reports”). Our Reports were prepared for accounts purposes. All properties have been subject to external inspections between January and October 2018 and a number were subject to internal inspections. We confirm that the valuations and Reports have been prepared in accordance with the RICS Valuation – Global Standards which incorporate the International Valuation Standards (“IVS”) and the RICS UK Valuation Standards (the “RICS Red Book”) edition current at the Valuation Date. It follows that the valuations are compliant with IVS. We confirm that all valuers who have contributed to the valuations have complied with the requirements of PS 1 of the RICS Red Book. We confirm that we have sufficient current knowledge of the relevant markets, and the skills and understanding to undertake the valuations competently. We confirm that Charles Smith has overall responsibility for the valuations and is in a position to provide an objective and unbiased valuation and is competent to undertake the valuations. Finally, we confirm that we have undertaken the valuations acting as an External Valuer as defined in the RICS Red Book. In accordance with PS 2.5 and UKVS 4, we are required to make certain disclosures in connection with this valuation instruction and our relationship with the Company and the Subsidiary Companies. Charles Smith has been the signatory of valuation reports addressed to the Company and the Subsidiary Companies since 2013. Cushman & Wakefield Debenham Tie Leung Limited (“C&W”) has been carrying out this valuation instruction for the Company, and now the Subsidiary Companies, for a continuous period since 1996. As well as preparing our Reports, we also undertake valuations of certain of the properties referred to in our Reports for other purposes, such as secured lending and for inclusion in shareholders’ circulars. On 1st September 2015, DTZ acquired Cushman & Wakefield and the combined group now trades under the Cushman & Wakefield brand. Cushman & Wakefield’s financial year end is 31st December. The proportion of fees payable by the Company to the Cushman & Wakefield group in the financial year to 31st December 2017 was less than 5%. We anticipate that the proportion of fees payable by the Company to the Cushman & Wakefield group in the financial year to 31st December 2018 will remain at less than 5%. Prior to 1st September 2015, there had been no fee-earning instructions between DTZ and the Company or the Subsidiary Companies, other than valuation instructions, for in excess of four years. Prior to 1st September 2015, Cushman & Wakefield were appointed as retail agents by Shaftesbury Soho Limited and Shaftesbury Carnaby PLC; this instruction ceased in 2017. C&W acted as rent review surveyors on behalf of Shaftesbury CL Limited during 2018 and are currently appointed as letting agents on behalf of Shaftesbury Chinatown PLC in respect of restaurant accommodation in the property known as Central Cross. In accordance with the provisions of VPS3 of the RICS Red Book edition current at the Valuation Date, in undertaking our valuations we have lotted together certain individual properties to form a separate property (each referred to as a “Property”, collectively as the “Properties”) in the manner we consider to be most likely to be adopted in the case of an actual sale. We consider that lotting the properties together on the basis reflected in our valuations would allow a purchaser to capitalise on the estate management advantages and opportunities available from such comprehensive ownership. Shaftesbury Annual Report 2018 144 A high proportion of the total value of the Subsidiary Companies’ properties and Properties is accounted for by properties and Properties situated in adjacent and/or adjoining locations in four specific areas of the West End of London: Carnaby Street and its environs, Chinatown and the adjoining area immediately west of Wardour Street (south of its junction with Shaftesbury Avenue), and the areas around Seven Dials in the western part of Covent Garden and a block of properties to the east of the Central Covent Garden Piazza with its main frontage to Wellington Street. These areas are all dominated by retail and restaurant uses. In our opinion, at the Valuation Date, this particular unusual confluence of ownership and use characteristics may cause some prospective purchasers to regard parts of the portfolio when combined as having a greater value than the aggregate of the individual values of the combined properties and Properties which make up those parts. As required by the provisions of the RICS Red Book, in undertaking our valuations, we have valued each property or Property separately, rather than valuing the portfolio as a whole or in combinations of parts. The “total” valuation figure below is the aggregated value of the separate properties or Properties within the various categories of tenure referred to below. All valuations were on the basis of Fair Value. We have assessed Fair Value in accordance with VPS4 item 7 of the RICS Red Book. Under these provisions, the term “Fair Value” means the definition adopted by the International Accounting Standards Board (“IASB”) in IFRS 13, namely “The price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date”. Under IFRS 13, The Fair Value Hierarchy, the properties we have valued are designated as Level 3 inputs. Level 3 inputs have been designated as unobservable inputs. Unobservable inputs are used to measure fair value to the extent that relevant observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. An entity develops unobservable inputs using the best information available in the circumstances, which might include the entity’s own data, taking into account all information about market participant assumptions that is reasonably available. [IFRS 13:87-89]. Our opinion of the Fair Value of each of the properties and Properties has been primarily derived using comparable recent market transactions on arm’s length terms. We have not made any allowance for vendor’s sale costs nor for any tax liabilities which may arise upon the disposal of any of the properties or Properties. We have made deductions to reflect purchasers’ normal acquisition costs. A full explanation of the Assumptions made in our valuations and details of the sources of information are contained within our Reports. The Company, its managing agents or professional advisers have provided us with the floor areas of the remaining properties or parts of properties. We have read some of the leases and related documents provided to us in respect of the commercial properties. Where we have not read leases, we have relied on tenancy information provided by the Company, its managing agents or professional advisers. Certain properties were subject to works of repair or refurbishment at 30th September 2018, or were subject to outstanding retentions and fees in respect of projects already completed at that date. In these instances, the Company advised us of the amount of the outstanding costs. The costs will be borne by the Company as they are not recoverable from tenants. We have reflected these costs in our valuations. The total amount of such costs is £17,461,800 and details of the individual sums are included in our Reports. Other information Summary report by the valuers continued The contents of our Reports including this summary report are confidential to Shaftesbury PLC, Shaftesbury Covent Garden Limited, Shaftesbury Carnaby PLC, Shaftesbury Chinatown PLC, Shaftesbury Soho Limited, Shaftesbury AV Limited, Shaftesbury CL Limited and Shaftesbury West End Limited for the specific purpose to which they refer and are for their use only. Consequently, and in accordance with current practice, no responsibility is accepted to any other party in respect of the whole or any part of the contents of our Reports or this summary report. Before our Reports or this summary report, or any part thereof, are reproduced or referred to, in any document, circular or statement, and before their contents, or any part thereof, are disclosed orally or otherwise to a third party, the valuer’s written approval as to the form and context of such publication or disclosure must first be obtained. For the avoidance of doubt, such approval is required whether or not Cushman & Wakefield Debenham Tie Leung Limited is referred to by name and whether or not the contents of our Reports or this summary report are combined with others. Charles Smith MRICS International Partner RICS Registered Valuer For and on behalf of Cushman & Wakefield Debenham Tie Leung Limited As referred to above, we have lotted together certain individual properties to form a number of separate Properties. In the case of five Properties which comprise a number of individual properties, the majority of such properties are held freehold but certain of them are held on long leases. In order to divide our valuation of these Properties between the categories of freehold and long leasehold, we have undertaken notional apportionments of value between the freehold elements and the long leasehold elements which together comprise the relevant Properties. The amounts arising from these notional apportionments of value have been included in the figures representing the freehold and long leasehold categories below. The amounts arising from the notional apportionments do not themselves represent the Fair Value of the two elements. The Subsidiary Companies own a number of properties on a freehold basis where they also hold long leasehold interests within the freehold and have not merged the interests. For the purposes of the freehold/long leasehold split below, we have included such properties within the freehold category. Having regard to the foregoing, we are of the opinion that the aggregates of the Fair Values, as at 30th September 2018, of the freehold and long leasehold property interests owned by the Company and the Subsidiary Companies, subject to the Assumptions and comments in our Reports dated 9 November 2018, were as follows: Freehold Properties Long leasehold Properties Total £3,495,245,000 (Three billion, four hundred and ninety-five million, two hundred and forty-five thousand pounds) £231,740,000 (Two hundred and thirty-one million, seven hundred and forty thousand pounds) £3,726,985,000 (Three billion, seven hundred and twenty-six million, nine hundred and eighty-five thousand pounds) A long lease is one with an unexpired term in excess of 50 years. Shaftesbury Annual Report 2018 145 55Other information Non-financial information statement We are not required to comply with the new non-financial reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006. However the table below, and information it refers to, is intended to help stakeholders understand our position on key non-financial matters. This builds on existing reporting that we already do under the following frameworks: CDP, Disclosure and Transparency Rules, Guidance on the Strategic Report (UK Financial Reporting Council), UN Global Compact, UN Sustainable Development Goals and UN Guiding Principles. Reporting requirement Environmental matters Related CSR goal The environmentally sustainable re-use and management of existing buildings, page 34 Employees A fair and ethical framework for employees and our supply chain, page 39 Policies and standards which govern our approach1, 2 Further information Sustainability policy Environment, pages 36 to 37 Greenhouse gas reporting, page 109 Sustainability and stakeholders, pages 34 to 35 Anti-bullying and harassment policy Diversity and inclusion, pages 39 and 81 Disability policy Employees, pages 39 and 74 to 75 Equal opportunities policy Health and safety, page 35 Health and safety policy Nomination Committee report, pages 80 to 81 Human rights A fair and ethical framework for employees and our supply chain, page 35 Modern Slavery and Human Trafficking Statement Statement of data protection principles Modern slavery and human rights, page 35 Sustainability and stakeholders, pages 34 to 39 Social matters Invest in our local community, page 38 A fair and ethical framework for employees and our supply chain, page 39 Sustainability policy Community Investment Committee Terms of Reference Sustainability policy Supplier Code of Conduct Community, page 38 Sustainability and stakeholders, pages 34 to 39 Anti-corruption and anti-bribery A fair and ethical framework for employees and our supply chain, page 35 Bribery and anti-corruption policy Audit Committee report, pages 82 to 85 Whistleblowing policy Money laundering policy Modern slavery and human rights, page 35 1 Certain group policies and internal guidelines are not published externally 2 Further information is available on our website, including our Supplier Code of Conduct and our Sustainability Policy Shaftesbury Annual Report 2018 146 Sustainability and stakeholders: pages 34 to 39 Business model and strategy: pages 10 to 11 Risk management: pages 57 to 58 Other information Shareholder information Corporate Timetable Financial Calendar Annual General Meeting and AGM statement 8 February 2019 2019 half year results May 2019 Dividends and bond interest Proposed 2018 final dividend: Ex-dividend Record date Payment date 2019 interim dividend to be paid Bond interest 17 January 2019 18 January 2019 15 February 2019 July 2019 31 March and 30 September 2019 Effect of REIT status on payment of dividends As a REIT, we do not pay UK corporation tax in respect of rental profits and chargeable gains relating to our property rental business. However, we are required to distribute at least 90% of the qualifying income (broadly calculated using the UK tax rules) as a PID. Certain categories of shareholder may be able to receive the PID element of their dividends gross, without deduction of withholding tax. Categories which may claim this exemption include: UK companies, charities, local authorities, UK pension schemes and managers of PEPs, ISAs and Child Trust Funds. Further information and the forms for completion to apply for PIDs to be paid gross are available on our website or from the registrar. Where we pay an ordinary dividend this will be treated in the same way as dividends from non-REIT companies. The 2018 final dividend between will be paid as an ordinary dividend. Registrar Equiniti Limited Aspect House Spencer Road Lancing West Sussex, BN99 6DA Telephone 0371 384 2294 (International +44 121 415 7047). Lines open 8.30am to 5.30pm, Monday to Friday (excluding public holidays in England and Wales). Shareholder accounts may be accessed online through www.shareview. co.uk. This gives secure access to account information instructions. There is also a Shareview dealing service which is a simple and convenient way to buy or sell shares in the Company. Secretary and registered office Penny Thomas LLB (Hons), FCIS 22 Ganton Street Carnaby London W1F 7FD Other information Shaftesbury Annual Report 2018 147 55 Other information Glossary of terms Annualised current income Total annualised actual and ‘estimated income’ reserved by leases at a valuation date. No rent is attributed to leases which were subject to rent-free periods at that date. It does not reflect any ground rents, head rents nor rent charges and estimated irrecoverable outgoings at the valuation date. ‘Estimated income’ refers to gross ERVs in respect of rent reviews outstanding at the valuation date and, where appropriate, ERV in respect of lease renewals outstanding at the valuation date where the fair value reflects terms for a renewed lease. Like-for-like growth in annualised current income is the change during a period, adjusted to remove the impact of acquisitions and disposals, expressed as a percentage of annualised current income at the start of the period. Alternative Performance Measure (APM) A financial measure of historical or future financial performance, position or cash flows of the Group which is not a measure defined or specified in IFRS. Best Practices Recommendations (BPR) Standards set out by EPRA to provide comparable reporting between investment property companies. Blended cost of debt Weighted average cost of drawn borrowings, plus non-utilisation fees on undrawn borrowings. Building Research Establishment Environmental Assessment Method (BREEAM) An environmental impact assessment method for commercial buildings. Performance is measured across a series of ratings: Pass, Very Good, Excellent and Outstanding Compound Annual Growth Rate (CAGR) The year-on-year growth rate of an investment over a specified period of time. Diluted net asset value per share Net asset value per share taking into account the dilutive effect of potential vesting of share options. Shaftesbury Annual Report 2018 148 EPRA European Public Real Estate Association. EPRA adjustments Standard adjustments to calculate EPRA measures, in accordance with its BPR. EPRA cost ratio Total costs as a percentage of gross rental income. EPRA earnings The level of recurring income arising from core operational activities. It excludes all items which are not relevant to the underlying and recurring portfolio performance. EPRA EPS EPRA earnings divided by the weighted average number of shares in issue during a reporting period. EPRA net assets Net assets adjusted for items that are not expected to crystallise in normal circumstances, such as the fair value of derivative financial instruments and deferred tax on property valuation surpluses. It includes additional equity if all vested share options were exercised. EPRA NAV EPRA net assets per share, including the potentially dilutive effect of outstanding options granted over ordinary shares. EPRA triple net assets EPRA net assets amended to include the fair value of financial instruments and debt. EPRA NNNAV EPRA NAV amended to include the fair value of financial instruments and debt. EPRA vacancy The rental value of vacant property available expressed as a percentage of ERV of the total portfolio. Equivalent yield Equivalent yield is the internal rate of return from an investment property, based on the gross outlays for the purchase of a property (including purchase costs), reflecting reversions to current market rent, and such items as voids and non-recoverable expenditure but disregarding potential changes in market rents. Estimated rental value (ERV) ERV is the market rental value of properties owned by the group, estimated by the Group’s valuers. Like-for-like ERV growth is the change in ERV during a period, adjusted to remove the impact of acquisitions and disposals, expressed as a percentage of ERV at the start of the period. Fair value The amount at which an asset or liability could be exchanged between two knowledgeable, willing and unconnected parties in an arm’s length transaction at the valuation date. Gearing Nominal value of group borrowings expressed as a percentage of EPRA net assets. Interest cover Operating profit before investment property disposals and valuation movements, divided by finance costs net of finance income. Like-for-like growth in rents receivable The increase in rents receivable during an accounting period, adjusted to remove the impact of acquisitions, disposals and changes as a result of larger refurbishment schemes, expressed as a percentage of rents receivable in the corresponding previous accounting period. Loan-to-value (LTV) Nominal value of borrowings expressed as a percentage of the fair value of property assets. Long Term Incentive Plan (LTIP) An arrangement under which an employee is awarded options in the Company at nil cost, subject to a period of continued employment and the attainment of performance targets over a three-year vesting period. Net asset value (NAV) Equity shareholders’ funds divided by the number of ordinary shares at the balance sheet date. Net asset value return The change in EPRA NAV per ordinary share plus dividends paid per ordinary share during the period of calculation, expressed as a percentage of the EPRA NAV per share at the beginning of the period. Net initial yield Net initial income at the date of valuation expressed as a percentage of the gross valuation. Yields reflect net income after deduction of any ground rents, head rents, rent charges and estimated irrecoverable outgoings. Property Income Distribution (PID) A PID is a distribution by a REIT to its shareholders paid out of qualifying profits. A REIT is required to distribute at least 90% of its qualifying profits as a PID to its shareholders. Real Estate Investment Trust (REIT) A REIT is a tax designation for an entity or group investing in real estate that reduces or eliminates corporation tax on rental profits and chargeable gains relating to the rental business, providing certain criteria obligations set out in tax legislation are met. Reversionary potential The amount by which ERV exceeds annualised current income, measured at a valuation date. Topped-up net initial yield Net initial yield adjusted to assume rent-free periods or other unexpired lease incentives, such as discounted rent periods and stepped rents, have expired. Total Shareholder Return (TSR) The change in the market price of an ordinary share plus dividends reinvested expressed as a percentage of the share price at the beginning of the period. Valuation growth The valuation movement and realised surpluses or deficits arising from the group’s investment property portfolio expressed as a percentage return on the valuation at the beginning of the period adjusted, on a time weighted basis, for acquisitions, disposals and capital expenditure. When measured on a like-for-like basis, the calculation excludes those properties acquired or sold during the period. Design: SG Design (sg-design.co.uk) Print: Park Communications on FSC® certified paper. Park is an EMAS certified company and its Environmental Management System is certified to ISO 14001. 100% of the inks used are vegetable oil based, 95% of press chemicals are recycled for further use and, on average 99% of any waste associated with this production will be recycled. This document is printed on XPER, a paper sourced from well-managed, responsible, FSC® certified forests. The pulp used in this product is bleached using an Elemental Chlorine Free (ECF) process. This is a certified CarbonNeutral® publication. Emissions generated during the manufacture and delivery of this product have been measured and reduced to net zero through a verified carbon offsetting project via The CarbonNeutral Company. This is in accordance with The CarbonNeutral Protocol, the global leading standard for carbon neutrality. Shaftesbury PLC 22 Ganton Street Carnaby London W1F 7FD T: 020 7333 8118 shaftesbury.co.uk 

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