PRESS RELEASE. 5 August 2010 CAPITAL SHOPPING CENTRES GROUP PLC INTERIM REPORT FOR THE HALF YEAR ENDED 30 JUNE 2010

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1 PRESS RELEASE 5 August 2010 CAPITAL SHOPPING CENTRES GROUP PLC INTERIM REPORT FOR THE HALF YEAR ENDED 30 JUNE 2010 Pro forma 30 June 31 December Change NAV per share (diluted, adjusted) (pence) Up 9% Market value of investment properties ( m) 4,919 4,631 Up 6% Net external debt ( m) 2,622 2,522 Up 4% Debt to assets ratio (per cent) Down 2% Six months ended 30 June (2) Change Property revaluation surplus/(deficit) ( m) (+7.7%) (649.7) (-12.8%) n/a IFRS profit/(loss) for the period ( m) (495.1) n/a Net rental income from continuing operations ( m) Up 1% Underlying earnings ( m) (1) Up 28% Underlying EPS (pence) (1) Down 17% Interim dividend per share (pence) Unchanged Weighted average shares in issue (million) Up 55% (1) Excluding valuation and exceptional items, refer note 10(c) (2) 2009 figures have been re stated to remove the impact of the Capco business following the demerger in May Property valuation recovery continued Property revaluation surplus 7.7 per cent (IPD retail monthly index 6.3 per cent for H1 2010) Average valuation yield (nominal equivalent) of 6.5 per cent (31 December per cent), still defensive Positive financial performance NAV (diluted, adjusted) per share increased to 368 pence, total return for the six month period of 12 per cent Underlying earnings up 28 per cent to 43 million ( million), 7.0 pence per share ( pence) impacted by shares issued in 2009 Operational recovery underway Net rental income from continuing operations up 1 per cent Like for like net rental income reduction narrowed to 0.4 per cent improving from reductions of 2009 full year 3.4 per cent, 2008 full year 4.3 per cent 131 lettings generating 14 million of annual rent, an increase of 4 million from the previous rent Occupancy remains strong at 98 per cent Footfall up 3 per cent year on year, 6 per cent in two years Attractive organic growth prospects Lettings, lease expiries and rent reviews Pipeline of opportunities to reinforce pre eminence of centres 1

2 Patrick Burgess, Chairman of Capital Shopping Centres Group PLC, comments as follows: Our unwavering focus on quality, with 13 prime centres all in the UK s top 50 and a number of those among the UK s very best, has been an important factor in CSC s strong performance in the first half of 2010, as we present the first set of results since the demerger of the non shopping centre activities which completed in May The results show a 7.7 per cent uplift in property valuations, increasing net asset value per share to 368 pence, and a 28 per cent increase in underlying CSC earnings before valuation items. We are now looking to drive growth in net rental income from lettings, lease expiries and rent reviews, with a particular opportunity from converting last year s short term lets into longer term lets at higher rents. With around 125 million of value enhancing active management projects under consideration and around 500 million of potential investment by way of major extensions, the Group has significant scope to grow organically without depending on acquisitions. Contents: Page Highlights 1 Operating and Financial Review 3 Directors Responsibility Statement 15 Independent Review Opinion 16 Unaudited Financial Information 17 Summary of Investment and Development Properties 36 Other Information 38 Glossary 42 Enquiries: Capital Shopping Centres Group PLC: David Fischel Chief Executive +44 (0) Matthew Roberts Finance Director +44 (0) Kate Bowyer Investor Relations Manager +44 (0) Public relations: UK: Michael Sandler, Hudson Sandler +44 (0) SA: Nicholas Williams, College Hill +27 (0) A copy of this press release is available for download from our website at NOTES TO EDITORS Capital Shopping Centres is the leading specialist UK regional shopping centre REIT Capital Shopping Centres Group PLC (CSC) is the leading specialist developer, owner and manager of pre eminent UK regional shopping centres. CSC owns 13 regional shopping centres amounting to 14.1 million sq. ft. of retail space and valued at 4.9 billion at 30 June The assets comprise four major out of town centres Lakeside, Thurrock; Metrocentre, Gateshead; Braehead, Glasgow and The Mall at Cribbs Causeway, Bristol and nine in town centres including the prime destinations in Cardiff, Manchester, Newcastle, Norwich and Nottingham. With a dedicated and skilled management team, CSC aims to be the landlord of choice for retailers, to provide compelling destinations for shoppers and to offer clarity and transparency to investors. CSC is a responsible and environmentally conscious participant in the communities where it invests. CSC focuses on the creation of long term and sustainable growth in net rental income with a view to generating superior returns to shareholders through dividend growth and capital appreciation. CSC s centres attracted 275 million customer visits and generated net rental income of 267 million in CSC was formerly known as Liberty International PLC. Its name was changed in May 2010 upon demerger of its central London activities into a newly listed company, Capital & Counties Properties PLC (Capco). This press release includes statements that are forward-looking in nature. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Capital Shopping Centres Group PLC to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any information contained in this press release on the price at which shares or other securities in Capital Shopping Centres Group PLC have been bought or sold in the past, or on the yield on such shares or other securities, should not be relied upon as a guide to future performance. 2

3 OPERATING AND FINANCIAL REVIEW OPERATING REVIEW Introduction CSC is pleased to report a strong performance for the six months ended 30 June 2010, the first set of results since the demerger of the non shopping centre activities which completed in May Highlights of the period for CSC are as follows: An overall profit of 291 million driven by a 7.7 per cent increase in property valuations, a notable turnaround from recent adverse circumstances. A 28 per cent increase in underlying earnings from 34 million to 43 million with net rental income growing from 133 million to 135 million. A robust operational performance from CSC s shopping centres with continuing footfall growth, good progress on lettings and occupancy maintained at 98 per cent. The successful opening in February 2010, fully let, of St Andrew s Way mall, Eldon Square, Newcastle. The extension to the centre of around 400,000 sq. ft. has brought further prime units to the city and driven strong increases in footfall through the entire centre. Continued lettings at the recently opened St David s, Cardiff, extension now 79 per cent committed by area, 78 per cent by income, with a further 4 per cent by income in advanced negotiation, and at Metrocentre where the leisure and catering upgrade is now fully let. Important transactions to place the balance sheet in a very sound position for the current stage of the cycle with the loan to value ratio now at 53 per cent and the first significant debt maturity not until 2014: 525 million, seven year refinancing of debt secured on Lakeside, Thurrock in January 2010, at the time the largest real estate financing in the UK since the start of the crisis in the financial markets. The restructuring of the Group s approximately 150 million ($250 million) net investment in predominantly retail assets in California, USA (C&C US). In exchange for its direct interest, CSC will receive 4.1 million shares in Equity One, a US retail REIT, and 10.9 million redeemable units in a new joint venture, completion is expected later this year. The disposal of the Westgate Centre, Oxford, and other non core UK asset disposals generating 66 million in cash. In addition, CSC has attractive organic growth prospects. Lettings, lease expiries and rent reviews have the scope to capture a 23 per cent uplift from current contracted rents to our valuers assessments of ERV, in particular from: Retailer demand for high quality space stimulated by scarcity of supply. Strong demand for larger units in centres with best catchments. Turning temporary lets into longer leases. Further, CSC has a pipeline of opportunities to reinforce the pre eminence of its centres: 125 million of identified revenue enhancing active management opportunities. Feasibility work underway on a further c. 500 million of expenditure across three major extensions to Lakeside, Thurrock, Braehead, Glasgow and Victoria Centre, Nottingham. We were pleased to obtain shareholder support for the demerger which was executed smoothly and provides an improved platform for CSC and Capco to deliver greater value for shareholders over time than the former Liberty International could as a combined business. Since demerger, the CSC management team has settled quickly and continues to focus on the core objectives of delivering like for like growth in net rental income and pursuing the active management and development opportunities within CSC s existing assets which provide the company with substantial scope to drive the overall business forward over the next few years. Market background The UK economy s modest recovery which began in the last quarter of 2009 continued in the first half of UK retail sales generally held up well and can be expected to continue at satisfactory levels for the rest of the year as consumers look to purchase ahead of the increase in VAT due to take effect in January Tax increases and the programme embarked upon by the recently elected coalition Government to control public sector expenditure are however likely to constrain levels of growth for some time to come. Consumer confidence levels have declined in the last few months as the scale of required adjustment has become apparent. The direct commercial property investment market in the UK continued its rebound from the very depressed levels of mid 2009 with the income component of real estate returns now looking attractive in the prevailing low interest rate regime. Domestic institutions have been active and, in addition, we have specifically noted genuine interest from major international institutional investors in large scale, high quality UK regional shopping centres. CSC has benefited during the period from each of the above factors, namely an improving economic background, a resilient retail environment and a recovering property investment market. 3

4 The level of retailer failures has substantially diminished from the exceptional levels experienced in late 2008 and early 2009 and, after two difficult years, the letting market for quality retail space in large centres has become more balanced between landlord and retailer. Property valuations After a relatively muted start to the recovery in asset valuations in the second half of 2009, CSC s assets have performed strongly in the first half of 2010 with a revaluation surplus of 7.7 per cent, mostly through yield contraction with rental values holding up satisfactorily. First Second First half half half Revaluation surplus/(deficit) 7.7% 2.6% (12.8)% IPD monthly index retail capital growth 6.3% 11.3% (14.0)% Nominal equivalent yield (weighted average) 6.52% 7.08% 7.37% Change in nominal equivalent yield ( yield shift ) -56bp -29bp +70bp Initial yield 5.35% 5.70% 6.30% Valuation effect of change in ERV (1)% (1)% (3)% CSC believes that the yields applied by the valuers to its assets at 30 June 2010 remain above the long term norm and are defensive relative to other retail asset classes such as prime high street shops and prime retail warehouses (nominal equivalent yields of 4.85 per cent and 5.25 per cent respectively, according to CBRE). CSC s weighted average initial yield has contracted 35 basis points to 5.35 per cent, a number impacted in the short term as CSC works through rent free periods. Valuers estimates of ERV have fallen only marginally in the period, with evidence from rent reviews and lettings supporting the current levels. Lettings New entrants to the UK retail market, together with existing successful retailers looking to upsize, are creating some price tension for well configured stores of over 15,000 sq. ft. in the best locations. So far this year, CSC has welcomed 18 new retailers not previously represented in our centres, 5 being new retailers to the UK. Demand for restaurant space is strong as casual dining formats continue to expand in our centres. In the first half of the year CSC has achieved: 131 lettings for 14.2 million aggregate annual passing rent, an increase of 3.9 million over previous rent for those units; and a further 194 lettings under offer or in advanced negotiations at levels which, if concluded, would substantially increase their passing rent from 15 million to 28 million, including 5 million relating to recently completed developments. Of the 131 lettings, the proportion in the form of short term leases has fallen: 61 of the new lettings are long term, generating an uplift in annual rent of 5.5 million to 10.4 million. In aggregate, these terms are around 16 per cent below ERV, reflecting market conditions in 2009 when the majority of these transactions went under offer; 54 short term leases were signed, with terms around 25 per cent below previous passing rent, a less severe reduction than those signed in 2009; and 16 turnover only leases were signed. Included in the above is the progress which has been made in securing improved terms on expiry of short term lettings of which, since the year end: 34 units have been re let, providing a 1.1 million uplift in annual rent to 3.0 million; and 43 are in solicitors hands or under active negotiation at terms which, if concluded, would increase annual rent by 2.8 million to 4.4 million. At 30 June 2010 CSC had 202 short term leases which represented 2 per cent of passing rent and 8 per cent of ERV. As well as generating revenue, new lettings refresh the centres, keeping the offer vibrant for shoppers. Around 120 units in established centres (6 per cent) were refitted by retailers in the first half, 53 in respect of new lettings and the balance by existing retailers. This substantial investment represents a firm commitment on the part of retailers and belief in the quality of CSC s centres. Operating highlights Occupancy of established centres, treating the 1 per cent of tenants in administration as unoccupied, has remained high at 98.1 per cent (31 December per cent). Tenants occupying 41 units and accounting for 1.4 per cent of rent entered administration in the first half ( units and 5.5 per cent of rent). Net rental income of 135 million represents an increase of 1 per cent from the same period of 2009, with a much improved trend on a like for like basis (-0.4 per cent compared to -3.4 per cent in 2009): Rental income on recently completed developments up 4 million; Reduced level of bad debt and lease incentive write offs ( 4 million); partly offset by 4

5 Income foregone on disposals ( 1 million decrease); and Full period effect of 2009 s short term re lettings. The positive letting activity in the period has increased passing rent on the continuing portfolio by 1 per cent to 269 million as well as increased levels of annualised rent contributed by leases in rent free periods, from 7 million to 17 million of annual rent. 400 Passing rent and ERV 30 June m Passing rent Other income Nonrecoverable costs End of rent frees Rent reviews Lease expiry Vacancies Over rented ERV As illustrated by the chart, CSC has considerable upside potential between current rent and the valuer s assessment of ERV, in particular from: Lease expiries where the uplift to ERV is estimated at 37 million, including 11 million currently in solicitors hands or advanced negotiation and a further 18 million in respect of short term leases Vacancies valued at 22 million in excess of the normal running void, including the remaining vacancy at St. David s, Cardiff Estimated footfall is up 3 per cent year on year for CSC s established centres, building on 2009 s 3 per cent increase. Estimated retailer sales in CSC centres increased by 8 per cent in total and broadly in line with the benchmark on a like for like basis (BRC like for like non food +0.9 per cent). Affordability improved with estimated occupancy cost ratio (rent to retailer turnover) of 13.2 per cent ( per cent) excluding anchor stores. Lakeside: Market value 988 million, 20 per cent of CSC s total. Lakeside is a prime regional shopping centre occupying a strong position on the eastern perimeter of London s M25 orbital motorway at the heart of Europe s largest aggregation of retail space. It is CSC s flagship asset and largest by value, with 13,000 free car parking spaces. Approximately 11.3 million people live within 70 minutes drive time and an estimated 25 million customer visits are made each year. Lakeside has attracted a number of new retail brands in 2010, including Cult, Guess, and Fossil. Reinforcing Lakeside as a leisure destination, Dove opened their second UK spa in January to much acclaim and additional treatment rooms have since been added to reflect the level of demand. US restaurant operator Taco Bell chose Lakeside as their first UK opening and early trading suggests it has been well received. Other new catering outlets, Sainsy s Pie & Mash and Ed s Diner, have added to the choice now provided at Lakeside. The strong market requirement for flagship stores has been well demonstrated at Lakeside this year. Primark have taken a further 20,000 sq. ft. which will enlarge their store to 100,000 sq. ft. with an improved mall frontage. Demand for well configured, large MSUs has been so strong that in June CSC conducted a best bids process for a 36,000 sq. ft. opportunity. We are looking creatively to deliver other larger format stores for existing retailers within the centre to meet demand. Elsewhere in the centre competitive bidding has delivered offers above the valuer s assumption for prime rental levels. We continue to explore further opportunities for enlarging the anchor stores, roof box extensions and unit amalgamations to meet the evolving requirements of retailers. Metrocentre: Market value 801 million, 16 per cent of CSC s total Metrocentre, Gateshead, is the largest covered shopping and leisure centre in Europe and the leading shopping centre in the UK in terms of tenant mix, transport links and catering offer. With 2.1 million sq. ft. of retail space and 9,250 free car parking spaces, it is the premier regional shopping centre destination for north east England attracting an estimated 23 million customer visits a year. Following the successful Red Mall extension in 2004, CSC embarked on a 45 million project to remodel the leisure and catering offer of the Yellow and Blue Malls to include a new Odeon IMAX cinema, Namco family entertainment centre and ten restaurants. The first two phases opened between 2008 and 2009, with the Odeon IMAX proving to be one of Odeon s 5

6 best performing locations in the UK, and the final phase is due to complete this autumn. In the first half of 2010, the final restaurant unit has been let to Zizzi, completing the new line up. TK Maxx and sister brand Homesense are currently fitting out their first shopping centre combined store in the former cinema space which will create a new retail anchor to Blue Mall. Metrocentre has also attracted a number of new retailers this year such as Apple, Radley and G Star. In addition, the former Woolworths store is now under offer with detailed planning consent to one of the UK s largest value fashion anchors, which will enable them to upsize to 60,000 sq. ft. and will create a new and important anchor to the Central Mall. Next have contracted to open a Home Store on the Metrocentre Retail Park, the first letting in our strategy to improve its tenant mix. Braehead: Market value 569 million, 12 per cent of CSC s total Braehead continues to be the most successful out of town shopping centre in Scotland with around half of Scotland s population within its catchment and an estimated 18 million customer visits per year. The Braehead shopping centre and retail park are at the heart of the successful regeneration area led by CSC, which now also includes the Xscape leisure destination, Ikea, business parks, new homes, flagship car dealerships and shortly a major garden centre. Following Sainsbury s relocation to the former B&Q unit on the retail park in late 2009, the surrender in early 2010 of their 80,000 sq. ft. former store brought the largest letting opportunity since Braehead s opening in With the continued importance of creating flagship destinations, Primark took the opportunity to relocate into the store and opened on 6 July Trading reports have been exceptional with adjacent retailers reporting noteable improvements in trade. The relocation of Primark has enabled fashion retailer H&M to upsize to a 25,000 sq. ft. store which will carry stock for all ranges including childrenswear. The opening of the new H&M store is anticipated in March Other centres Recently completed development activities at other centres include: The 1 million sq. ft. extension to St. David s, Cardiff, which opened October 2009, led the regeneration of Wales capital city into a unique shopping, leisure, cultural and tourist destination. Now 1.4 million sq. ft. with 221 stores and a catchment of 2.5 million residents plus around 12 million tourist visits a year, St. David s is number six in Experian s UK retail centre rankings. A further ten retailers new to Wales have taken space in the first half of 2010, including Carluccio s and Pandora. As trading, footfall growth and retailer comment remain positive, interest in the remaining units is increasing and CSC is confident that the centre will provide strong growth in the next few years. The new St Andrews Way mall, Eldon Square, Newcastle, has traded strongly since opening fully let in February 2010, with footfall for the centre overall up 25 per cent since opening. The enlarged 1.4m sq. ft centre now includes 70 per cent of Newcastle s prime retail space, with 38 remodelled or refurbished stores including seven new retailers to the city. Active management to create value by fulfilling retailer needs is fundamental to CSC s approach. Around 125 million of projects are planned which are targeted to enhance shareholder returns as well as reinforce the pre eminence of CSC s centres. During the period detailed planning consent has been received for a 60,000 sq. ft. flagship store bringing Next into Eldon Square. Other projects include unit amalgamations at Chapelfield, Norwich and The Glades, Bromley, and reconfiguration to create additional retail space at The Victoria Centre, Nottingham together with provision of a 10,000 sq. ft. roof box at Lakeside and development of restaurant units at Bromley, Chapelfield and Braehead. Opportunities to provide unit drivethrus on the former petrol station sites at Braehead and Metrocentre are being drawn up in response to specific user demand. Good progress is being made on the feasibility of major extensions at Lakeside, Victoria Centre, Nottingham and Braehead where discussions with local authorities have gained momentum and, despite some post election uncertainty in the planning arena, the foundations of robust planning applications are progressing. International US In May 2010, CSC announced the exchange of contracts with Equity One, a US retail REIT, relating to the restructuring of its approximately 150 million ($250 million) net investment in predominantly retail assets in California, USA (C&C US). In exchange for its direct interest, CSC will on completion receive 4.1 million shares in Equity One and 10.9 million redeemable units in a new joint venture. The transaction frees the group from day to day management of US assets and gives significantly more flexibility in dealing with its interests while retaining a cash income stream and scope to benefit from market recovery. It is anticipated that the transaction will be completed later this year when the appropriate regulatory, banking and tax clearances are received. India In the current year CSC has acquired a further 5.4 million shares in the listed Indian retailer, Provogue, the partner in the Prozone shopping centre joint venture, increasing our interest, at an average cost of Rupees 54 per share and total cost of approximately 4.2 million, from 5.2 per cent to 9.9 per cent (11.4 million shares). The joint venture s first shopping centre development, the 800,000 sq. ft. Aurangabad centre, is due to open in October with tenants beginning to shop fit. The centre is around 80 per cent let and the occupancy certificate, at this point excluding the unfinished multiplex, has now been granted. The next two projects, in Coimbatore and Nagpur, are being worked up to be embarked upon post the Aurangabad opening. Dividends The Directors have resolved to pay an interim dividend of 5.0 pence per share on 3 November 2010 to shareholders on the register on 8 October This dividend will be a property income distribution ( PID ) subject to applicable withholding tax. In line with the statement made at the time of the demerger, the Directors intend, subject to available capital resources, to pay a dividend in respect of 2010 of 15.0 pence per share in aggregate. 6

7 Business overview Post demerger, it is timely to review some important aspects of CSC s business. For a number of reasons, the Board of CSC regards the fundamentals as exceedingly sound with promising prospects from the current base: Our unwavering focus on quality, with 13 prime centres all in the UK s top 50 and a number of those among the UK s very best. The trend (which has strengthened in the last few years) for large centres with a wide range of catering and leisure attractions to outperform smaller centres demonstrated for example by CSC s high occupancy level at 98 per cent which compares very favourably with the aggregate vacancy level of UK retail space which is estimated to exceed 10 per cent. The resilient nature of our prime regional centres, exemplified by rising footfalls in the last two years, with our centres serving as lifestyle destinations for shoppers who may be cutting back other discretionary expenditure. The benefit for owners of existing large centres from a limited new supply of high quality retail space, both as a result of the market downturn of the last few years and generally from the restrictive UK planning environment. CSC s strong relationships with the UK s leading retailers as we look for our centres to host their flagship stores. The overall scale of the business with 275 million annual customer visits which, for example, provides a ready made platform for international retailers looking to enter the UK market. A wide geographic spread throughout the UK and an attractive mix with 52 per cent by value of CSC s assets comprising large scale out of town centres, and 48 per cent by value comprising the prime destinations in major cities such as Cardiff, Manchester, Newcastle, Norwich and Nottingham. The strong prospects for organic growth within our existing centres through a continuation of CSC s constant programme of investment in its centres, whether through remodelling, extensions or tenant mix changes, to refresh the centres and keep them in top condition enhancing their attraction for both retailers and shoppers. In investment terms, the value of CSC s assets when considered as a portfolio, which has taken over 30 years to assemble and could not be replicated from scratch, exceeding the aggregate value of the individual assets. Prospects CSC s top priority at present remains to drive growth in net rental income. An important element of this is to convert 2009 s short term leases into longer term lets at higher rents. Lettings already completed this year have had a positive impact on the rent roll, narrowing the gap to ERV, and, along with those to follow in the second half, will start to impact the financial results from With our highly specialised and focused management team, CSC s position as the market leading developer, owner and manager of pre eminent UK regional shopping centres offers a unique opportunity to work creatively with retailers to satisfy their expansion plans. We are confident of the investment prospects for CSC s pre eminent assets, with valuation yields still above long term trend. With around 125 million of value enhancing active management projects under consideration and around 500 million by way of major extensions to Lakeside, Braehead and Nottingham at the feasibility stage, the Group has significant scope to grow organically without depending on acquisitions. 7

8 FINANCIAL REVIEW Financing strategy and financial management In the first half of 2010 the Group s financial management has focussed on achieving the successful demerger of Capco, addressing the appropriate financial management and medium term funding structure for the demerged Group and supporting the organisation in its efforts to improve the trading performance. Notable achievements include: Underlying earnings up by 28 per cent Improving like for like net rental income trend NAV per share at 368 pence; total return for the six months 12 per cent Loan prepayments, swap terminations of 114 million and re financing of Lakeside secured facility concluded in January 2010 reduce re financing and loan financial covenant risk, resulting in no significant debt repayments until 2014 With regard to the capital structure, our preference over the medium to long term is to bring the debt to assets ratio within the per cent range and interest cover to greater than 160 per cent. Comparative figures re presented The successful demerger of Capco and the proposed joint venture agreement in respect of the C&C US business with Equity One has resulted in certain comparative figures being re presented. The Capco results up to the date of demerger have now been classified as discontinued operations in the comparative income statements and cash flow statements. The balance sheet information for Capco at 30 June 2009 and 31 December 2009 is, however, still included in the respective line categories in the balance sheets. The C&C US results have also been included as discontinued operations in the comparative income statements and cash flow statements. The C&C US balance sheet information at 30 June 2009 and 31 December 2009 is however still included in the respective line categories in the balance sheets. C&C US is categorised as an asset held for sale at 30 June 2010 and therefore in accordance with IFRS 5 non current assets held for sale its total assets and total liabilities are shown separately on the 30 June 2010 balance sheet. A pro forma balance sheet analysis prepared as if the demerger and proposed sale of C&C US had occurred at 31 December 2009 is included in the Other Information section of this report. Income from C&C US has been included in the Group s underlying earnings as it is anticipated that there will be an ongoing income stream from Equity One shares and joint venture units once the transaction has been completed. No re statement of prior year comparatives has been made due to the structure of the capital raisings in 2009 as noted in the 2009 annual report. However, the impact of the additional shares issued increased the weighted average shares used in the underlying earnings per share calculation from 402 million in the first half of 2009 to 622 million in the current period. Re basing the comparative underlying earnings per share figure of 8.4 pence to the 2010 weighted average shares reduces this comparable figure to 5.4 pence, which is 23 per cent below the 7.0 pence adjusted earnings per share achieved in the current period. Results for the six months ended 30 June 2010 The results for the period ended 30 June 2010 reflect the improved conditions in the UK commercial property market in This is most clearly illustrated by the 7.7 per cent revaluation gain on the Group s UK shopping centres in the first six months of However, the general economic environment remains challenging and it is therefore encouraging that the Group achieved growth over the comparable 2009 underlying earnings, one of the Group s key measures of performance. Income statement The Group recorded a profit for the period of 291 million, a substantial improvement on the loss of almost 500 million recorded in the first six months of The 219 million profit from continuing operations in the six month period contrasts favourably with the 320 million loss recorded in The 2010 results include a 348 million gain on property valuations which is partially offset by a 89 million non cash charge due to the movement in the fair value of derivative financial instruments. In contrast, the 2009 loss was caused by a significant deficit on property valuations, 650 million, which was partially compensated by a 397 million favourable movement in the fair value of derivative financial instruments. Those businesses classified as discontinued operations, which are detailed above, contributed a profit of 73 million in the period, largely due to property valuation gains. Underlying earnings, as shown in the chart below, which excludes valuation and exceptional items, increased by almost 10 million to 43 million. However, underlying earnings per share as noted above was adversely affected by the issue of 256 million new shares in the 2009 capital raises, resulting in a reduction of 1.4 pence per share to 7.0 pence. The Group s net rental income increased by 1 per cent to 135 million. CSC s net rental income benefitted in the period from lower bad debt charges and the income generated by the new developments at St David s, Cardiff and the St. Andrew s mall at Eldon Square. More detail on the rental performance is included in the Operating Review. Administration expenses, excluding the 8 million costs associated with the Capco demerger, reduced from 14 million in the six months to 30 June 2009 to 11 million in The saving largely resulted from lower professional fees and pension costs as a result of the insurance buyout of the defined benefit pension scheme in the second half of The sharing of certain costs with Capco in 2010 resulted in an approximate 0.5 million benefit which will cease as Capco become fully resourced in the second half of the year. 8

9 Underlying net finance costs, which exclude exceptional items, reduced by 5 million in 2010, with the benefit of the treasury strategy of loan prepayments and interest swap terminations more than offsetting the reduction in capitalised interest of 8 million following completion of the developments at St. David s, Cardiff and Eldon Square, Newcastle. Underlying earnings bridge H H m H Net rental income Admin expenses Net finance costs USA Other H Exceptional finance costs of 66 million were incurred in the period largely on interest rate swap termination costs, 28 million of which was in connection with the re financing of the Lakeside facility. The cost of the demerger amounted to 8 million in the period, these costs are classified as exceptional administration costs. Total demerger costs incurred by the Group totalled 13 million, with 2 million having been expensed in 2009 and 3 million charged to Capco. This total cost of 13 million was 2 million higher than previously indicated due to certain internal re structuring costs arising from the demerger. Balance sheet The Group s net assets attributable to equity shareholders have reduced from the 2.4 billion disclosed in the 2009 annual report to 1.9 billion largely as a result of the demerger of Capco. A pro forma balance sheet analysis prepared as if the demerger and proposed sale of C&C US had occurred at 31 December 2009 is included in the Other Information section of this report. As detailed in the table below, net assets (diluted, adjusted) have increased by 162 million from the pro forma net assets (diluted, adjusted) at 31 December This increase was due to the property valuation gain on the UK shopping centre properties of 348 million being only partially offset by the exceptional costs incurred in the period and the final dividend for 2009 paid in 2010 of 71 million. Balance sheet Pro forma (1) 30 June 31 December m m Investment, development and trading properties 4, ,618.0 Investments Net external debt (2,622.4) (2,521.6) Other assets and liabilities (623.1) (582.7) C&C US net assets Net assets 1, ,680.1 Minority interest (1.8) Attributable to equity shareholders 1, ,680.1 Fair value of derivatives (net of tax) Other adjustments Adjusted net assets 2, ,046.1 Effect of dilution Net assets (diluted, adjusted) 2, ,147.4 (1) The pro forma analysis removes the Capco balances that were demerged and re-classifies the C&C US assets as held-for-sale. The fair value provision for financial derivatives, principally interest rate swaps, included in other assets and liabilities above, increased by 76 million largely as a consequence of the deferral of expectations of UK interest rate increases. The reduction in the dilution effect from 31 December 2009 relates to the now expected repayment of the 75 million convertible bonds in September

10 Adjusted net assets per share As illustrated in the chart below diluted adjusted net assets per share of 368 pence at 30 June 2010 represents an increase of 9 per cent compared to the 31 December 2009 pro forma value of 339 pence. The increase is attributable to the property valuation gain, partially offset by the 2009 final dividend and the exceptional costs. Included in Other in the chart below is the negative 6 pence impact of the now anticipated repayment of the convertible bonds in September Net assets per share (diluted, adjusted) bridge 31 December June p +7p 368p p 327p 10p p 12p pence Dec 2009 pro forma 2009 dividend Exceptional costs Revaluation surplus Underlying earnings Other 30 Jun 2010 Cash flow The cash flow summary below shows a substantial reduction in the Group s cash balance in the period. This is due to the impact of the demerger and the strategy to reduce surplus cash held on the balance sheet m m Underlying operating cash generated Net finance charges paid (85.5) (95.4) Exceptional finance and other costs (73.2) (15.3) Net movement in working capital (4.2) (15.8) Taxation/REIT entry charge (18.2) (0.3) Cash flow from operations (59.4) 2.4 Property development/investments (30.5) (109.8) Sale proceeds of property/investments Other derivative financial instruments (19.5) Dividends (66.9) Cash flow before financing and equity raises (110.6) (84.1) Net debt repaid (79.4) (182.7) Equity capital raised Impact of discontinued operations (256.5) Others (54.1) 7.2 Net (decrease)/increase in cash and cash equivalents (498.8) Cash flow from operations has fallen from the comparable period in 2009 due to the exceptional finance and other costs, which includes termination of interest rate swap contracts ( 64 million) and Capco demerger costs ( 8 million), and higher REIT entry charges ( 19 million). Adjusting for these items, which are considered to be of a non recurring nature, gives recurring cash flow from operations of 34 million. 10

11 The table below illustrates that recurring operating cash flow covers the 2010 interim dividend of 5 pence per share. Dividends cash cover 2010 m Underlying operating cash generated Dividends received from C&C US (net of tax) 1.6 Net finance charges excluding exceptional items (85.5) Net movement in working capital (4.2) Recurring cash flow interim dividend of 5.0p investment in property related assets was mainly restricted to existing 2009 commitments, with the most significant expenditure in the period being in respect of St. David s 2, Cardiff ( 8 million), Eldon Square ( 8 million) and Braehead ( 5 million). A further 4 million was spent to increase the Group s existing investment in India. Cash proceeds from the disposal of properties and investments generated cash of 66 million, including 54 million net proceeds received from the disposal of Westgate, Oxford. Net debt repayments of 79 million are discussed in the debt structure section below. Capital commitments The Group has an aggregate commitment to capital projects of 111 million at 30 June 2010, down from the 124 million, excluding the Capco commitments, at 31 December The largest project within the outstanding commitments relates to finalisation of the St. David s, Cardiff shopping centre project including the associated residential development, which will be funded through the associated loan facility. Current expectations are that 52 million of the total commitments will be funded in the second half of Financial position The Group s debt is largely arranged on an asset specific basis, with limited or non recourse from the borrowing entities to other Group companies. This structure permits the Group a high degree of financial flexibility in dealing with debt issues and importantly avoids the concentration of covenant and refinancing risk associated with a single group wide borrowing. The flexibility of this debt structure was evidenced by the success in obtaining, where required, lender consent to proceed with the demerger. In addition to the asset specific debt, the Group has a corporate revolving credit facility of 248 million, which is available until June 2013 and can be utilised to fund opportunities before they reach the stage that they can support their own financing arrangements. This facility, which was utilised to fund working capital requirements in the first half of the year, was undrawn at 30 June Net external debt increased from 2,522 million at 31 December 2009 to 2,622 million at 30 June The largest factor in the net debt increase was the 64 million early termination of interest rate swap contracts. The Group had cash balances of 128 million at 30 June This balance includes 76 million held in a restricted bank account to fund redemption ( 75 million) and interest payments ( 1 million) on the convertible bonds due for repayment in September this year. Available undrawn facilities total 331 million, consisting of the 248 million revolving credit facility and approximately 83 million undrawn on the joint venture asset specific loan on St. David s, Cardiff. The Group is in compliance with all of its corporate and asset specific loan covenants. Pro forma (1) Group debt ratios were as follows: 30 June 31 December Debt to assets 53% 55% Interest cover 152% 141% Weighted average debt maturity 6.1 years 5.5 years Weighted average cost of gross debt 5.7% 6.0% Proportion of gross debt with interest rate protection 94% 104% (1) The pro forma figures remove the Capco balances that were demerged and the C&C US balances now held for sale The debt to assets ratio was 53 per cent, an improvement on the pro forma level of 55 per cent at 31 December The lower average rate on the Group s cost of debt was the major factor in the improved interest cover, which increased to 152 per cent from the 141 per cent applicable at 31 December 2009 on a pro forma basis. The re financing of the Lakeside facility and the interest rate swap terminations during the period resulted in: the weighted average debt maturity increasing to 6.1 years from 5.5 years as at 31 December 2009 the weighted average cost of gross debt reducing to 5.7 per cent from 6.0 per cent as at 31 December 2009 proportion of gross debt with interest rate protection falling to 94 per cent from 104 per cent at 31 December 2009 the next significant date for repayment of CMBS related debt now being

12 Debt structure and maturity 1,000 Total repayments Annual repayments ( m) The significant repayments of Group debt during the first half of 2010 were 18 million of scheduled loan amortisation plus a voluntary 48 million prepayment on the loan secured on the Victoria Shopping Centre, Nottingham. Debt maturing in the second half of 2010 totals 93 million, including the 75 million of convertible bonds, with the balance being further scheduled loan amortisation. In 2011 and 2012, the Group has no debt maturities other than scheduled amortisation. 27 million of unsecured bonds mature in 2013 with the next maturity of secured loans being 56 million in The undrawn Revolving Credit Facility of 248 million and 83 million undrawn on the facility secured on St. David s, Cardiff mature in 2013 and 2014 respectively. Financial covenants Full details of the loan financial covenants are included in the Other Information section of this report. Financial covenants apply to 2.4 billion of secured asset specific debt. The two main covenants are Loan to Value (LTV) and Interest Cover (IC). The actual requirements vary and are specific to each loan. During the period the Group made asset specific loan prepayments of 48 million and 36 million of swap repayments to reduce financial covenant risk. A further 34 million of CMBS notes, that were owned by a Group company since issuance, were cancelled at zero cash cost to the Group. 2 million was injected into Xscape Braehead Partnership, as part of a loan prepayment and covenant moderation agreement, including the Loan to Value covenant being waived until During the year the 248 million revolving credit bank loan was amended with the 2011 maturity extended to This renegotiation also resulted in reduced borrowing costs and improved financial covenants. These financial covenants are tested semi annually on a number of the Group s companies, defined as the Borrower Group, and all tests are currently satisfied. There is a minimum capital cover and interest cover condition applicable to the 231 million mortgage debenture tested semi annually. Both tests were satisfied at 30 June 2010, the latest test date. Compliance with financial covenants is and will continue to be constantly monitored. Re-financing activity Lakeside The 546 million loan and associated CMBS notes secured on the Lakeside, Thurrock Shopping Centre was scheduled to mature in July 2011 but was re financed in January this year with a new 525 million, 7 year loan maturing in 2017 to take advantage of the improvement in bank liquidity and reduce near term refinancing risk. At the time of prepayment the loan had a funding cost of 5.5 per cent. The hedging arrangements of the new loan require an increasing level of interest rate protection from the current level of 60 per cent towards maturity. In addition, 30 per cent of the loan amount is protected by an interest rate cap with a maximum interest rate payable of 4 per cent. The new loan and the associated hedging arrangements reduced the overall interest cost of the loan and was the most significant factor in lowering the Group s average cost of debt from 6.0 per cent to 5.7 per cent. Interest rate hedging and fair value of financial instruments At 30 June 2010 the fair value liability of the Group s derivative financial instruments was 391 million. This liability includes the Group s derivative contracts to hedge both interest rate and currency risk. During the period scheduled derivative payments of 53 million were made plus 64 million of interest rate swap prepayments, however a deferral of expectations of sterling interest rate increases resulted in the liability increasing by 76 million from the comparable balance at the end of At 30 June 2010 the Group s gross debt was 94 per cent hedged by a combination of fixed rate debt or floating rate debt with rate protection through interest rate swaps and interest rate caps. Whilst interest rate swaps fix the interest rate payable and provide certainty over future cash flows, interest rate caps allow the Group certainty on the upper level of interest rate payable but also benefit from participating in the current low rate environment. 12

13 Interest rate and US$ hedging policy has historically been based on having certainty on cash flows. The Group hedges using predominantly interest rate swaps to eliminate the risk of our loans, which have been taken out on a variable basis. Following completion of the Equity One Inc transaction, the Group s intention is to phase out currency hedging and therefore the existing currency swaps will not be renewed as they mature. Taxation Since the Group became a UK REIT on 1 January 2007, the Group has made REIT entry charge payments of 124 million, including payments made in respect of Capco prior to demerger, with 21 million paid in the first half of A further 43 million has still to be paid, with 23 million due to be paid in the second half of 2010 and the balance in The financial benefits to date have amounted to almost 170 million, comprising net rental income and capital gains sheltered from UK tax. The tax charge on continuing operations in the period of 1 million comprises the REIT entry financing charge of 2 million partially offset by deferred tax credits on the revaluation of interest rate swaps. The total tax charge on discontinued operations of 6 million comprises 2 million of irrecoverable withholding tax suffered on dividends paid by C&C US and deferred tax on the revaluation of the C&C US properties. Audit partner The audit partner, Parwinder Purewal, was due to rotate off the audit following the conclusion of the 31 December 2009 audits of the Group and its subsidiaries as he had completed five years in the role. Given the significant changes in the Group arising from the demerger of Capco and the Board composition in the year, the Audit Committee requested and PricewaterhouseCoopers LLP agreed to an extension to the tenure of the audit partner in order to provide continuity and to support the maintenance of audit quality. He will therefore continue to act as audit partner for one further year, being the year ending 31 December