SMP.L Regulatory News (SMP)

Date of issue: 4th July 2017

LEI: 213800WMV4WVES8TQH05

Classification: Half yearly financial reports and audit reports and Inside information

This announcement contains inside information 

ST. MODWEN PROPERTIES PLC

("St. Modwen" or "the Company")

Half Year Results for the period ended 31st May 2017

BUSINESS SHOWS CONTINUED RESILIENCE

Mark Allan, Chief Executive of St. Modwen, commented:

"The business continued its resilient performance across the first six months of the year, despite an uncertain market environment, with all parts of the Group contributing positively. We also concluded our strategy and portfolio review, which has confirmed the significant potential present in our business and pipeline and we are now focused on realising these opportunities in the months and years ahead."

Financial highlights

· EPRA NAV per share up 1.7% to 468.4 pence (Nov 2016: 460.5 pence) and NAV per share up 2.0% to 439.6 pence from 431.0 pence.

· Total accounting return for the six months of 2.6% (2016: 1.8%).

· Profit before all tax of £29.3m (2016: £30.0m), reflecting a more stable valuation environment.

· Earnings per share of 12.1 pence (2016: 11.8 pence).

· Interim dividend increased by 4.1% to 2.02 pence per share (2016: 1.94 pence per share).

Operational highlights

· Resilient commercial performance with approximately 400,000 sq ft of commercial space delivered in the first half.

· Strong residential performance with operating profits of £13.4m (2016: £12.9m) supported by excellent progress from St. Modwen Homes which achieved 55% growth in profits, offsetting the planned decline in the Persimmon JV as it winds down.

· Good progress with major projects:

o Nine Elms Square, New Covent Garden Market, London - in June, exchanged contracts for the sale of our interest in the 10-acre Nine Elms Square site in London to Wanda Commercial Properties (Hong Kong) Co Ltd.

o Bay Campus, Swansea University - progressing with the sale of our student accommodation assets to take advantage of the strong investment demand for student housing.

Strategy and portfolio review

· Review of strategy and portfolio now complete and highlighting significant potential within business and portfolio.

· Upon completion, sale of Nine Elms Square releases significant capital to pursue strategic opportunities.

Enquiries:

St. Modwen Properties PLC

Mark Allan, Chief Executive Tel: 0121 222 9400

Rob Hudson, Group Finance Director www.stmodwen.co.uk 

Charlotte McCarthy, Head of Corporate Communications

FTI Consulting

Dido Laurimore Tel: 020 3727 1000

Tom Gough stmodwen@fticonsulting.com

Ellie Sweeney

A presentation for analysts and investors will be held at 9.30am today at FTI Consulting, 200 Aldersgate, Aldersgate Street, London, EC1A 4HD.

If you would like to attend please contact Ellie Sweeney at FTI on +44 (0)20 3727 1622 or stmodwen@fticonsulting.com. A live webcast of the presentation will be available at www.stmodwen.co.uk and presentation slides will also be available to download.

Alternatively, details for the live dial-in facility are as follows:

This announcement contains inside information as set out in Article 17 of the Market Abuse Regulation (MAR).

(*) Reconciliations between all the statutory and non-statutory measures and the explanations as to why the non-statutory measures give valuable further insight into the Group's performance are given in note 2 to the condensed Group financial statements. In particular, profit before all tax is used because it reflects the way the Group is run on a proportionally consolidated basis, and because it also removes the taxation effects on equity accounted entities from the statutory profit before tax figure. Prior period measures are for the equivalent period in the prior year other than NAV per share and EPRA NAV per share, which are as at 30th November 2016.

This announcement contains certain forward looking statements which, by their nature, involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward looking statements. Any forward looking statements made by or on behalf of the Company are made in good faith based on the information available at the time the statement is made; no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. The Company does not undertake to update forward looking statements to reflect any changes in its expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. Nothing in this announcement should be construed as a profit forecast.

OVERVIEW

Performance

St. Modwen continued to deliver a resilient performance during the first six months of the 2017 financial year, despite ongoing uncertainty in the broader economy. Profit before all tax was £29.3m (2016: £30.0m), resulting in earnings per share of 12.1 pence for the six months (2016: 11.8 pence) and the Group delivered a total accounting return (NAV growth plus dividends) of 2.6%, taking NAV per share to 439.6 pence (Nov 2016: 431.0 pence) or EPRA NAV of 468.4 pence per share (Nov 2016: 460.5 pence). An interim dividend of 2.02 pence per share (2016: 1.94 pence) is proposed. This will be paid on 5th September 2017 to shareholders on the register at 11th August 2017.

Our resilience was broad-based with residential activity, commercial development and asset management initiatives all making meaningful profit contributions, while net rental income continued to cover recurring overhead and interest costs. Our key performance metrics for the period are set out below:

*Reconciliations between all the statutory and non-statutory measures and the explanations as to why the non-statutory measures give valuable further insight into the Group's performance are given in Note 2 to the condensed Group financial statements. In particular, profit before all tax is used because it reflects the way the Group is run on a proportionally consolidated basis, and because it also removes the taxation effects on equity accounted entities from the statutory profit before tax figure. Prior period measures are for the equivalent period in the prior year other than NAV per share, EPRA NAV per share, net borrowings, see-through net borrowing and see-through LTV ratio, which are as at 30th November 2016.

Although overall profit performance was broadly in line with the prior year, its constituent parts looked somewhat different. Commercial development profits reduced by £9.6m, reflecting a deliberate slowdown in activity following the Brexit referendum and non-cash interest charges were £8.9m higher, principally because a higher share price increases the fair value of the liability for our Convertible Bond. These movements were offset by a more stable valuation environment, with a total positive movement of £10.8m (2016: a total negative movement of £5.4m) including an increase in the provision for NCGM market costs of £9.2m.

Strategy and portfolio

During the six month period we concluded our strategy and portfolio review, which clearly demonstrates the depth and breadth of potential within the portfolio and business. As a result of the review we have established four strategic objectives, against which future performance and prospects will be measured and reported, and these are set out below. They combine to create a strategy which builds on our clear areas of competitive advantage: our deep and diverse land bank and pipeline of projects and our unrivalled expertise in creating valuable developments and development land from challenging situations. Our core purpose as a business is: Changing places. Creating better futures.

· Accelerating our commercial development activity. We have a 17.3m sq ft pipeline of opportunities capable of delivery in the medium term, of which 7.5m sq ft represents high quality industrial and logistics projects (where fundamentals are strong) that are deliverable over the next few years. These projects alone equate to nine years' worth of work at recent levels of activity so, provided that market conditions remain supportive, we believe there is clear opportunity to accelerate. Assuming a profit on cost in line with our historic performance, the potential profit in this pipeline could be approximately £115m;

· Growing our residential and housebuilding business. Our residential pipeline contains approximately 16,900 plots (of which nearly 14,000 benefit from planning recognition), plus a further 10,730 plots across three larger sites that require a different strategic approach. Based on recent levels of housebuilding and land sales activity, the 16,900 plot pipeline equates to over ten years' worth of activity and, provided that the new homes market (particularly in the regions) remains robust, we believe there is a clear opportunity to accelerate. Of this total pipeline opportunity, we have identified 7,700 units for St. Modwen Homes. In the half year period, St. Modwen Homes delivered 230 units with an operating profit of £9.0m and we expect to deliver approximately 700 units for 2017. The rate of volume growth in St. Modwen Homes thereafter is unlikely to exceed 25% per annum;

· Cementing and growing our regeneration reputation. Our major projects at Longbridge, Swansea and New Covent Garden Market have contributed approximately 30% of our returns over the past five years and collectively, are still only approximately half complete. We will continue to add value through these major projects as our activities progress but we will also pursue new opportunities to apply our unique skills set;

· Portfolio focus and capital discipline. We intend to (i) rebalance our portfolio towards sectors with strong structural growth prospects, principally through asset recycling to allow us to retain a greater proportion of our industrial and logistics focused pipeline; (ii) focus on fewer, larger projects to ensure our capabilities are not diluted and (iii) reduce leverage further beyond its already low levels and thus recognising the importance of a strong balance sheet in a development-led business.

The above strategic objectives will require meaningful levels of investment and we believe there are clear liquidity opportunities within our portfolio to achieve this. Since the period end, we have exchanged contracts for the sale of Nine Elms Square, within our VSM joint venture, with our share of gross proceeds equating to £190m and completion expected later in the summer. We are also progressing with the sale of our student accommodation assets at the Bay Campus, Swansea University, to take advantage of the strong investment demand for student housing and we would expect a successful sale to release over £90m in proceeds. Together, these disposals provide the capital required to pursue our strategic objectives.

People

Our unrivalled expertise in creating valuable developments and development land from challenging situations is rooted firmly in our people; they have formed the basis of the Group's success to date and will continue to do so in the future. It is therefore important that we invest in them and ensure we provide an environment that fosters their sustained success.

With this in mind, we have recently made some changes to the way our business is organised. The changes establish a stronger link to the four strategic objectives outlined above while also seeking to create a framework of clearer accountability, more empowerment and appropriate support for our teams. The changes will be concluded by late summer and be followed with investment in leadership and management development, such that we can be confident of building a team capable of delivering on the significant potential ahead.

In March this year we were devastated by the sudden passing of Steve Burke, our Group Construction Director. Steve was with the business for over 20 years, serving on the Board since 2006, and he was instrumental in delivering many of the large scale projects that form the basis of St. Modwen's success. He is sorely missed but it is testament to his approach that he developed a highly capable team which, together with other senior colleagues, have stepped up to assume his responsibilities. Our thoughts remain with his family and friends.

Financing

It is crucial that a development-led business with significant land investments maintains a strong balance sheet. Sustainable borrowing levels and healthy covenant headroom are key to this.

Over the six months our net borrowings increased by £85m, principally reflecting the fact that acquisition and development capex exceeded proceeds from asset sales. As at 31 May 2017 see-through net borrowings were £580.3m (Nov 2016: £517.0m) and see through loan to value was 33.1%. Adjusting for the sale of Nine Elms Square mentioned above, see through net borrowings would reduce to £390m on a pro-forma basis and see through loan to value to 25%.

Outlook

We remain in uncertain times, particularly politically, and consequently we will maintain an agile approach to delivering our strategy, ensuring that we can adapt quickly if the circumstances demand.

However, our strategy and portfolio is underpinned by dynamics that go beyond simple political and economic considerations; the UK housing shortage, the need for a sustainable approach to brownfield regeneration and the significant shift in how consumers and businesses buy and behave are all clear, longer-term trends that we are well positioned to benefit from. As a result, we feel optimistic about the future.

OPERATING AND PORTFOLIO REVIEW

Portfolio summary

1Stated on a proportionally consolidated basis, including our share of joint ventures and associates. See Note 2 to the condensed Group financial statements

2Additions/ other movements include purchases, capital expenditure and reclassifications

3 Residential land market valuation gain includes £9.4m relating to NCGM

Commercial land and development

Our commercial development activity is proceeding in line with expectations, with good ongoing levels of occupier demand across the UK for both new and existing commercial space, particularly in the industrial and logistics sector where rents have remained robust.

We invested £70m into commercial development activity in the six months to 31 May 2017, booking profits of £11.5m and delivering approximately 400,000 sq ft of new commercial space. Highlights include:

· Bet 365, Etruria Valley, Stoke-on-Trent - completed the pre-sale and design and build of a 33,000 sq ft training and leisure facility for Bet 365 which will serve the company's corporate headquarters.

· Tamworth West, Staffordshire - works now complete on the final 153,000 sq ft industrial/logistics unit with strong levels of occupier interest received.

Commercial development pipeline (May 2017)

As at 31 May 2017, the anticipated value on completion of our committed development pipeline was £295m (Nov 2016: £237m) and weighted towards sectors with healthy long-term structural growth prospects (47% industrial/logistics and 35% student accommodation).

Our anticipated yield on cost for the full committed development pipeline is approximately 8% with an expected valuation yield on completion of approximately 6.5% and a profit on cost of approximately 20%. We expect the rate of delivery of the pipeline to increase in the second half of the year. The total cost is approximately £246m, with an associated profit still to book of approximately £45m, to be delivered over the next 18 months.

Occupier demand for commercial property remains steady and we continue to complete a range of design and build projects for a mix of tenants. In addition, we continue to undertake a proportion of development activity speculatively, particularly for industrial and logistics assets where we believe the immediacy of availability is an important factor for prospective occupiers. In response to this anticipated demand, of our 1.3m sq ft of committed industrial/logistics pipeline, 73% is being developed speculatively (Nov 2016: 79%). For the full-year, we expect to deliver 1m sq ft, of which 50% is sold, let or pre-let and there are good levels of interest on the remaining vacant space.

Commercial pipeline - medium term potential

As part of our strategic review, we analysed the potential of our existing commercial land bank over the medium-term (five years) and categorised it in terms of strength of location and readiness of deliverability:

Key:

Going forward, our commercial development activity will be focused primarily on those 7.5m sq ft of sites with the greatest potential in terms of demand (A) and near-term deliverability (1) which at current rates of development, represent over nine years' of supply. This represents a clear opportunity to accelerate our development activity in these areas whilst carefully managing the risks of delivery. The rate of production in 2017 is expected to be around 1m sq ft, with near term (one to two years) growth unlikely to exceed 25% per annum, subject to demand and risk management.

The 7.5m sq ft of A1 sites have an end GDV of approximately £700m, £45m of rental value, build capex of approximately £425m, land capex of around £65m and a current land book value of £90m. Assuming profit on cost of our commercial developments is approximately 20%, this would equate to £115m potential profit across these sites.

In the first half of the year, commercial land values demonstrated ongoing resilience, with values holding firm, reflecting investment market conditions.

Residential land and development

Our residential business continues to have three streams of activity:

· The sale of 'oven ready' development sites to third party housebuilders

· St. Modwen Homes

· Persimmon joint venture

The UK housebuilding market has remained resilient to date in 2017, particularly in the regions, with continued good demand for new homes delivered by the Group's housebuilding business, St. Modwen Homes, coupled with good levels of ongoing demand from third party house builders for 'oven ready' land for development.

Housebuilding

St. Modwen Homes is currently build-active on 17 sites across the UK, three of which were launched this year including a scheme of 85 homes at the Group's St. Andrews Park development in Uxbridge, Greater London. We anticipate this figure to grow to 20 sites by the end of 2017.

Sales volumes for St. Modwen Homes in the first half increased by 14% over the same period last year, with the associated growth in profits more than offsetting the reducing returns from the Persimmon JV as it concludes activity on the majority of the sites under the agreement and in line with plan.

Overall, housebuilding contributed £13.4m (2016: £12.9m) to profit before all tax comprising £9.0m from St. Modwen Homes (2016: £5.8m). These results are based on 230 units sold (2016: 202 units sold) and £4.4m (2016: £7.1m) from our Persimmon JV, based on a 50% share of 121 (2016: 259) units sold.

During the half year period, demonstrating the strength of demand for quality housing in the regions, the average private selling price of a St. Modwen Homes unit increased by 21% to £262,000 (2016: £217,000). This reflects a 4% increase in average selling prices, with the balance due to an increase in average unit size.

As previously indicated, activity in the Persimmon JV will reduce in line with plan over the next two years as it reaches its conclusion, with expected unit volumes reducing by 40% in 2017. Conversely, we expect St. Modwen Homes to increase unit volumes meaningfully and this should at least offset the reduced returns from the JV, with unit volumes in St. Modwen Homes anticipated to increase to approximately 700 units in 2017.

In the period, net operating margins for St. Modwen Homes were 15.3% (2016: 15.2%). Land is transferred to St. Modwen Homes from the Group at current market value rather than cost. Including the approximate £5m per annum of residential planning gains we generate each year, the margins would be approximately three percentage points higher.

Over the near term, margins are expected to remain close to current levels, reflecting our focus on maintaining our reputation for quality and brand, having recently been awarded with a 5* customer service and quality award from the Homebuilders Federation (HBF). In the medium term, opportunities have been identified to improve margins by approximately 2-3%, these include driving a reduction in site overhead costs, supply chain initiatives and buying, adding value through sales extras and ongoing efficiencies in overheads as the business scales up.

Residential land

In the period, we made £47m of acquisitions, principally into land for residential development at St. Andrew's Park, Uxbridge.

In response to ongoing appetite from third party housebuilders we have continued to agree and complete sales of residential land for prices at or above book value. Over the last six months, including our share of joint ventures, we sold or agreed for sale 35 acres of land representing 500 units for proceeds of £17m, in line with, or slightly above book value. For the full year we anticipate total sales proceeds of around £40m.

Residential pipeline - medium-term potential

As part of our strategic review, we also analysed the potential of our existing residential land bank over the medium-term (five years) and categorised it in terms of strength of location and readiness of deliverability. Our pipeline is summarised below:

Total residential pipeline - medium-term potential (excluding NCGM and South Wales)

These plots are broadly balanced between 9,200 identified for third party land sales and a pipeline of 7,700 for St. Modwen Homes. More than one third of our residential land bank is identified in A1 sites which are particularly well positioned in terms of location (concentrated in the Midlands and South) and readiness for delivery.

At current activity levels, the potential supply equates to approximately 10 years' of build for St. Modwen homes and 11 years' of third party sales, highlighting the opportunity to accelerate activity in both areas.

This year, we anticipate St. Modwen Homes will deliver up to 700 units. Growth in St. Modwen Homes will be carefully managed to balance against risk and protecting our brand and quality, with volume growth in the near term unlikely to exceed 25% per annum. The current average private selling price per unit is approximately £262,000 with operating margins of around 14%, build capex per unit of approximately £140,000 and land capex per unit of £22,000.

We expect residential land sales to other housebuilders over the medium term to increase to approximately £50-£60m per annum, with associated capital expenditure costs of £30-£40m to be netted off in bringing the land forward for sale. Our larger land holdings in South Wales are likely to require a different strategic approach to accelerate development activity and we are considering our options carefully.

Income generating portfolio

Representing £775m of value (43% of the portfolio), our income generating properties provided a robust and diverse see-through net rental and other income of £27.0m for the six months (2016: £26.9m) from over 1,700 occupiers. Managed by our skilled team of asset managers, the portfolio covers a broad range of sectors, such as industrial/ logistics, student accommodation and retail and can be separated into two distinct categories of assets:

- High yielding - comprising £320m of high yielding assets that provide opportunity for further development and value creation in the longer term; and

- Investment portfolio - comprising £455m of assets where our development and asset management activities are substantially complete.

As at 31st May 2017 our income generating portfolio was made up as follows:

During the first half of the year, our income producing portfolio demonstrated continued resilience in both our industrial and logistics, and student accommodation sectors. Equivalent yields in industrial/ logistics remained steady at 8.4% (Nov 2016: 8.4%) and student accommodation equivalent yields moved inwards slightly to 5.9% (2016: 6.0%). Conversely and as previously indicated for 2017, there was some weakness in our retail portfolio in the first half, with some outward yield movement to 7.7% (Nov 2016: 7.5%) as inflation puts pressure on consumer spending. We expect a continuation of these themes by sector into the second half.

Realising value from the portfolio is an important element of our business model. During the first half we completed or agreed a number of notable sales totaling £36m of proceeds with £2m income and including Celtic Business Park in Newport, South Wales where specialist warehouse firm, Tilstone, acquired a 50,000 sq ft unit let to Amazon for £3.9m, representing a net initial yield of 6.3%.

As part of the six month strategic review, we have identified a £100m portfolio of 93 smaller value assets, equating to only 6% of our portfolio by value. We now intend to dispose of this portfolio over the next few years and in doing so, free up our resources to concentrate on fewer, larger projects as well as generating liquidity for reinvestment. We made good progress in the first half of the year, disposing of £15m of these assets.

Furthermore, we have also identified the opportunity to reposition the income producing portfolio over time towards sectors with good structural growth prospects by retaining a greater proportion of our higher yielding industrial/ logistics development pipeline as it completes, where the average yield on cost is approximately 8%. This will be substantially funded through the sale of our drier, lower yielding investment assets over time, principally in the retail sector, where the average yield is 7.7%.

Finally, as a result of sustained investor appetite for student housing, we are progressing with the sale of our student accommodation assets at the Bay Campus, Swansea University and we would expect a successful sale to release over £90m in proceeds.

Asset Management

During the half year, we have continued to add value through our actions to the portfolio, delivering £12.8m of added-value gains in the period, principally in our student accommodation and industrial and logistics assets, where we have delivered low single digit rental growth.

FINANCIAL REVIEW

Presentation of financial information

As we use a number of joint venture arrangements, the statutory financial statement disclosures do not always provide a straightforward way of understanding our business. Reconciliations between all the statutory and non-statutory measures and the explanations as to why the non-statutory measures give valuable further insight into the Group's performance are given in Note 2 to the condensed Group financial statements. In particular, profit before all tax is used because it reflects the way the Group is run on a proportionally consolidated basis, and because it also removes the taxation effects on equity accounted entities from the statutory profit before tax figure.

Income statement

1. Residential property profits include direct residential overheads of £3.2m (2016: £2.1m)

2. Cost coverage - the ratio of recurring rental and other income to operating costs comprising interest and overheads, excluding the direct overheads relating to the residential business.

Net rental and other income

Our cost coverage is now 106% (2016: 101%), covering recurring overheads and interest costs with revenue from our income generating portfolio. We expect some short-term variability in this ratio as we execute strategic sales. The Group's share of net rental and other income increased marginally to £27.0m (2016: £26.9m) as asset management activity offset the loss of income from asset sales.

This proactive asset management also saw our occupancy levels maintained at 90% and, excluding the Bay Campus student accommodation at Swansea University, the average lease length has been maintained at five years.

Overheads

Administrative expenses for the period decreased to £14.0m (2016: £14.9m) through cost control and a reduction in one-off costs compared to the prior period.

Profit before all tax

Profit before all tax for the period was £29.3m (2016: £30.0m), and is stated before tax on joint venture income but after other finance charges, comprising non-cash movements, principally for discount unwinds and the market value of both our interest rate swaps and our convertible bond. The fair value of the convertible bond increased in the period to be trading slightly above par to 31st May 2017, principally as a result of our higher share price, resulting in a charge of £4.0m (2016: credit of £5.2m). This £9.2m variance from the prior period is the chief component of the increase in other finance charges, which together with the other non-cash financial items, totaled £7.9m (2016: £1.0m credit).

Taxation and profits after tax

Our total tax charge (including joint venture tax and deferred tax included in negative goodwill) for the year reduced to £2.4m (2016: £3.7m) resulting in profit after tax on a proportionally consolidated basis of £26.9m (2016: £26.3m). Basic earnings per share were 12.1 pence (2016: 11.8 pence). As a property group, tax and its treatment is often an integral part of transactions. The outcome of tax treatments, including tax planning, is recognised by the Group to the extent that the outcome is probable. The effective rate of tax for the period excluding our JVs decreased slightly to 15.1% (2016: 16.8%) due to higher indexation allowances from a higher inflationary environment. We expect our effective tax rate to remain slightly below the standard rate of tax of 19%, due to normal trading reliefs from which the Group can benefit.

Balance sheet

At the period end the shareholders' equity value of net assets was £974.3m (Nov 2016: £955.2m) or 439.6 pence per share (Nov 2016: 431.0 pence per share) representing a 2.0% increase after the 2016 final dividend payment of £9.0m (4.06 pence per share). Our interim dividend payable for 2017 is 2.02 (2016: 1.94) pence, an increase of 4.1% in line with management expectations of our full year result. Our EPRA net asset value rose 1.7% to 468.4 pence per share (Nov 2016: 460.5 pence per share).

This table is presented on a proportionally consolidated basis, including the Group's share of assets and liabilities of Joint Ventures and Associates in the Balance Sheet categories to which they relate, rather than on a statutory basis as one line representing the share of net assets of those joint ventures and associates. The comparative for total accounting return is for the equivalent six month period in the prior year.

NCGM

Since the period end we have exchanged contracts for the sale of our interest in Nine Elms Square, London. Our expected share of VSM's cash proceeds after overage, enabling costs and tax will be £190m upon contractual completion, of which £70m will be held in a restricted development account to fund our share of future obligations in respect of the completion of the new market facilities. The transaction is in line with our net book value.

The pro-forma impact on the key lines of the balance sheet is as follows:

NCGM post disposal pro-forma

Financing

Taking into account growth in the valuation of the Group's portfolio, see-through loan-to-value increased to 33.1% (Nov 2016: 30.5%) and adjusted gearing (at amortised cost and excluding finance leases) increased to 56.6% (Nov 2016: 48.9%). Excluding residential land value, the Group's see-through loan-to-value ratio rose to 59.7% (Nov 2016: 54.3%). Although the Company's capital structure remains strong, we intend to reduce our see-through loan-to-value (excluding residential land) to below 40% over time by retaining a portion of the proceeds from both major asset sales highlighted above and normal cash generation.

Group adjusted gearing, see-through loan-to-value and see-through loan-to-value excluding residential land value are reconciled in Note 2i to the condensed Group financial statements.

Corporate facilities

Our weighted average facility life is 3.2 years (Nov 2016: 3.7 years) and we have no facility maturities until 2019. We have reduced our weighted average cost of debt to 3.7% (Nov 2016: 3.8%) and, with £722m of see-through committed facilities against see-through net borrowings of £580.3m, we have ample funding to transact.

Hedging, cost of debt and corporate funding covenants

We aim to have predictable costs attached to our borrowing and therefore hedge a significant portion of our interest rate risk. At the period end, 65% (Nov 2016: 50%) of our borrowings were fixed or hedged. As any new financing is put in place we will ensure that our hedging positions are appropriate for our future development expectations. Covenant compliance continues at all levels and across all metrics and we continue to operate with considerable headroom against all measures.

Principal risks and uncertainties

The key risks which could have a material impact on the Group's performance, together with the corresponding mitigating actions, are set out on pages 49 to 52 of the Annual Report for the year ended 30th November 2016, which is available at www.stmodwen.co.uk.

These risks comprise uncertainty in the economic, political and market environment; the availability of funding and the management of cash flow fluctuations; management of construction and development (including joint venture arrangements); regulatory, operational and compliance risk; and recruiting, developing and retaining highly skilled staff. These risks are expected to continue to remain relevant for the second half of the financial year.

Mark Allan Rob Hudson

Chief Executive Group Finance Director

3rd July 2017