SMP.L Regulatory News (SMP)

Date of issue: 3 July 2018

LEI: 213800WMV4WVES8TQH05

This announcement contains inside information

ST. MODWEN PROPERTIES PLC

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

Results for the half year ended 31 May 2018

ST. MODWEN DELIVERS STRONG PROGRESS IN EXECUTING NEW STRATEGY

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

"We have had a good start to 2018. Our expectations for the full year remain unchanged and we are firmly focused on executing the new strategy we established a year ago. We have sold £635m of assets since then, improving our portfolio mix and allowing us to reduce borrowings, whilst accelerating the delivery of our substantial industrial/logistics and regional housebuilding pipeline. Despite ongoing uncertainty in the external environment, structural growth drivers in both sectors remain positive, so we anticipate delivering a meaningful improvement in earnings and return on capital in the medium term."

Financial highlights

· NAV per share up 1.0% over the six months to 455.4 pence (Nov 2017: 450.9 pence).

· Total accounting return for the half year of 2.0% (2017: 2.9%) due to disposals.

· Group net borrowings down £67.8m over the half year to £366.0m (Nov 2017: £433.8m).

· See-through LTV stable since year end at 24.2% (Nov 2017: 24.2%).

· Adjusted EPRA EPS for the half year up 0.4 pence to 6.3 pence (2017: 5.9 pence).

· Interim dividend up 53.5% to 3.10 pence per share (2017: 2.02 pence per share).

Operational highlights

Considerable progress in repositioning our portfolio towards sectors with better long-term growth prospects and accelerating the delivery of our substantial development pipeline.

· Portfolio focus and capital discipline:

o Sold £350m of assets since the end of 2017, bringing total disposals since announcement of new strategy a year ago to £635m, driving significant improvement in portfolio mix.

o Expect to exceed full year target to sell £100-150m of retail and small assets, with the sale of 28% of our retail portfolio for £95m during the half year and a further c. £70m of retail and small assets under offer.

o Recycling capital out of existing assets into industrial/logistics pipeline to drive significant pick-up in income, reduction in costs and improvement in growth prospects in medium term.

· Accelerate our commercial development activity:

o Increased committed industrial/logistics pipeline from 1.0m sq ft to 1.3m sq ft since start of the year, of which approximately two-thirds will be retained, with an ERV of £6.1m.

o Obtained consent for 1.2m sq ft at key strategic sites at Chippenham Gateway and Copthorne, Gatwick with combined ERV of over £8m.

o Prepared industrial/logistics pipeline for future growth; over 10m sq ft development potential across key strategic sites with ERV of over £60m deliverable over 5-8 years, partly subject to planning, plus over 5m sq ft development potential on smaller sites with over £30m ERV.

· Grow our residential and housebuilding business:

o Delivered 31% growth in St. Modwen Homes' volumes with 302 units sold in the first half (2017: 230 units), delivering a 23.3% increase in profit to £11.1m reflecting the low level of affordable completions during the previous period. Expectation of up to 25% volume growth and 0.5ppt margin improvement for full year remains unchanged.

o Sold 21 acres of residential land to third party housebuilders for £27m (2017: £14m), in line with book value, well on track versus our target to sell at least £56m this year.

· Cement and grow our regeneration reputation:

o Released £141m of capital out of first phases of development at Longbridge and Swansea to bring forward significant residual development opportunities.

o Preparing next phase of student housing and academic facilities at Swansea for delivery by 2021 and enhancing Longbridge vision ahead of employment-led next phase.

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).

(1) 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.

(2) Prior period measures are for the six months ended 31 May 2017 other than EPRA NAV per share, NAV per share, see-through loan-to-value and Group net borrowings, which are as at 30 November 2017. Comparative references to 2017 are for the six months ended 31 May 2017 and comparative references to Nov 2017 are as at 30 November 2017.

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.

CHIEF EXECUTIVE'S REVIEW

Overview

We have had a good start to 2018 and our expectations for the full year remain unchanged. Our focus is firmly on executing the new, more focused strategy we set out a year ago, based on our four strategic objectives: portfolio focus and capital discipline; accelerate our commercial development activity; grow our residential and housebuilding business; and cement and grow our regeneration reputation.

Our successful execution to date is starting to pave the way for a meaningful improvement in earnings and return on capital in the years to come. Recycling capital out of our student housing, retail and smaller assets into retaining our industrial/logistics developments is expected to increase rental income and reduce costs, whilst delivering up to 25% growth in volume per year and a further improvement in margins in our St. Modwen Homes housebuilding business is expected to drive significant growth in residential profits. Importantly, we can deliver all this from our existing pipeline of opportunities and capital base without having to acquire further assets or rely on a general market recovery.

Our results for the first half year were solid. NAV per share increased 1.0% to 455.4 pence (Nov 2017: 450.9 pence) which, combined with dividends paid during the period, resulted in a total accounting return of 2.0% (2017: 2.9%). EPRA NAV per share increased 0.7% to 474.4 pence (Nov 2017: 471.2 pence). As we flagged at the start of the year, disposals have resulted in some short-term volatility in rental income, ahead of reinvesting the proceeds in our industrial/logistics pipeline. This was offset by lower interest costs, partly due to a £220.7m reduction in see-through net borrowings since 31 May 2017, so adjusted EPRA EPS increased 0.4 pence to 6.3 pence (2017: 5.9 pence). In line with the new policy we set at the start of 2018, we are increasing our interim dividend to 3.10 pence (2017: 2.02 pence).

(1) Including the Group's share of net borrowings and property held in joint ventures and associates.

Portfolio focus and capital discipline: £635m of disposals over past year

We continue to make good progress in reshaping our portfolio. Excluding newly built homes and land transferred to St. Modwen Homes, we sold assets for £350m during the half year which means we have now sold £635m of assets since we announced our new strategy in June 2017, on average in line with book value. Representing 35% of our portfolio value a year ago, this has driven a clear improvement in our portfolio mix and, having reduced our exposure to more challenging sectors such as London residential land and UK retail by over £300m, materially improves our total return prospects.

In February we sold the first phase of student accommodation at Swansea Bay Campus for £139m, releasing £87m of proceeds net of an associated finance lease. The disposal of Longbridge Shopping Park, announced in May, also completed during the period, whilst the disposal of Wembley, announced at the same time, is expected to complete in the near term. Combined with the sale of a small asset in Liverpool, we have sold 28% of our overall retail portfolio by value within the last two months. The total proceeds of £95m were 4% below the November 2017 book value, reflecting the challenging UK retail environment, but we believe the benefits from reinvesting this capital into our higher yielding, higher growth industrial/logistics pipeline far outweigh the small initial loss.

In addition, we have agreed terms on a further c. £70m of smaller and retail assets disposals. Combined with the £95m retail disposals above this means we expect to exceed our target to sell £100-150m retail and small assets during 2018 and we now anticipate selling £150-175m of these assets this year.

Following the latest disposals, we have c. £70m of small assets and £255m of retail assets left. Approximately half of our remaining retail assets are in London or leisure oriented, where fundamentals are better than in the wider UK retail market. We expect to sell our remaining small assets and around two-thirds of our residual retail assets in the next two years, whilst we plan to retain the residual small part of our retail portfolio for the time being to explore larger mixed-use development opportunities. These disposals will allow us to keep our borrowings firmly under control as we reinvest in accelerating our residential and industrial/logistics pipeline. Despite part of our disposals completing after the period end and our continued reinvestment in the business, net borrowings reduced further during the first half of the year and our see-through LTV was maintained at 24.2% (Nov 2017: 24.2%) - down from 33.1% a year ago. We continue to expect leverage to reduce slightly over time.

Accelerating our commercial development activity: pipeline to drive strong income growth

Since the start of 2018 we have increased our committed industrial/logistics pipeline from 1.0m sq ft to 1.3m sq ft, of which we plan to retain approximately two-thirds. We continue to see healthy occupier demand for the assets we build and have agreed £2.3m of development lettings since the start of the year. As such, we now have terms agreed on 15% of the £6.1m ERV we plan to retain. Total development costs on our overall commercial development pipeline stand at £270m, of which 50% is now pre-let/pre-sold. We continued to prepare our pipeline in line with our objective to grow industrial/logistics development activity by up to 25% per year by 2020. During the half year we secured outline planning consent for a 1.0m sq ft scheme at Chippenham Gateway, adjacent to junction 17 of the M4, and cleared planning conditions and finalised consents for a 0.2m sq ft scheme at Copthorne, Gatwick, adjacent to junction 10 of the M23. With a potential ERV of over £8m, these sites are expected to become an important part of our income portfolio in the medium term, alongside our other key strategic sites.

In total, our key strategic sites offer over 10m sq ft of development potential, predominantly situated at our largest sites in the best locations. These sites could deliver over £60m of ERV over the next 5-8 years, partly subject to planning. In addition, we have over 5m sq ft of development potential on smaller sites, which could deliver over £30m of ERV in the medium term. We recently appointed a national Head of Leasing to further develop our occupier relationships and accelerate our leasing activity.

The average yield on cost on this pipeline is c. 8%, with a yield on incremental capex of c. 9%. With a gross yield on the retail, small and student housing assets we sell of c. 7%, recycling capital into our pipeline is expected to drive meaningful income growth in the medium term. In addition, with property operating costs on our older retail and small assets of c. 30%, we expect a marked reduction in costs, as we build up a modern, more efficient industrial/logistics-oriented income portfolio in the next 3-5 years.

Growing our residential and housebuilding business: 31% growth in Homes volumes

The residential market in the UK regions remains resilient. We continue to see good demand from third party housebuilders for oven-ready development land and sold £27m of land during the first six months, in line with book value. This was nearly double the £14m we sold in the first half of 2017, leaving us well on track to meet our target of selling at least £56m for the full year, as we sold last year. We also forward-sold our 207-unit PRS scheme in Uxbridge for £75m, allowing us to bring forward the next phase of development of 101 apartments for private sale by St. Modwen Homes by 12-18 months.

Our housebuilding business St. Modwen Homes continues to see strong growth. The volume of units sold in the first six months increased 31% to 302 units (2017: 230 units), with growth for the full year expected to be in line with our target of up to 25%. The business is now sales active on 19 sites, up from 16 at the end of last year, with a further three outlets due to be opened in the second half. Average private sales prices increased 8% to £283,000, with like-for-like prices up 2% and the remainder driven by changes in mix and unit size. We sold 64 affordable units during the half year relative to an unusually low 10 units in the first half of 2017, so our operating margin reduced to a more normalised level of 14.6% (2017: 15.3%), in line with our target to improve margins for the full year by c. 0.5ppt (Nov 2017: 13.9%).

St. Modwen Homes profit for the first half year increased 23.3% to £11.1m (2017: £9.0m). This increase was offset by a reduction in profit from our Persimmon JV to £1.6m (2017: £4.4m), but we expect the profit growth in St. Modwen Homes to exceed the reduction in profits in the Persimmon JV for the full year. We have started to roll out initiatives to improve margins by 2-3ppt over the medium term and have secured the pipeline to grow volumes by up to 25% p.a. by 2021. This is expected to drive significant growth in residential profits in 2018 and beyond and more than offset the reduction in Persimmon JV profits as it continues to wind down its activity over the next two years.

Cementing and growing our regeneration reputation: further progress at major schemes

In addition to the £190m cash generated by the sale of the first 10 acres of land at New Covent Garden Market in the second half of 2017, the first half of 2018 saw us release £141m of capital out of the first phases of development at our other two major regeneration schemes, Swansea Bay Campus and Longbridge, Birmingham, allowing us to progress the significant opportunities that remain at these sites.

Following the sale of the 2,005 student beds in Swansea in February, we expect to complete the next 411 beds in early 2019 and the latest 40,000 sq ft of academic facilities this autumn. We are now progressing plans for the delivery of a further 600 beds and 150,000 sq ft of academic space by 2021. After the £54m sale of the shopping park at Longbridge, we have started works on enhancing the vision for the next phase of this important scheme to make sure it fits our placemaking ambitions and creates a lasting legacy. Whilst the first phase was predominantly retail and residential led, this next phase is employment and residential led and could see us deliver around 0.7m sq ft of employment space.

People

The strong progress we have made in executing our strategy reflects the high level of performance and commitment from our teams across the business. Our people have responded well to our new organisational design, which provides much clearer alignment between individual roles and strategy and allows for an appropriate balance of empowerment and accountability.

A skilled and committed workforce will remain key to us achieving our ambitions. Alongside recruitment into new roles to help facilitate growth, we are also investing significantly in training and development at all levels within the business with encouraging early results.

Looking forward

In line with our outlook in February this year, 2018 is shaping up to be a year of growth, focus and portfolio transition for St. Modwen as we remain firmly focused on executing our new strategy.

The wider UK economic and political environment is still uncertain and likely to remain so for some time to come. Although we are of course exposed to any cyclicality in the wider UK economy, the structural growth fundamentals in our key areas of regional housebuilding and industrial/logistics, remain positive. This provides us with confidence as we accelerate our development activity, although the short-cycle nature of our projects does mean we have flexibility to adjust our pipeline to any sudden changes in demand.

Since we announced our new strategy a year ago we have made considerable progress. Our organisational structure is better aligned to our strategy, our forward pipeline of projects is clear, our net borrowings are down by over £220m and with the sale of £635m of assets we have seen a significant shift in our portfolio mix. This will continue in the years ahead, as we recycle capital out of existing assets and build up a modern industrial/logistics portfolio with better long-term growth prospects by retaining the majority of our own developments.

The c. 9% yield on incremental capex on our industrial/logistics pipeline is well ahead of the c. 7% gross yield on the assets we sell, whilst the operating costs attached to the older retail and small assets we are selling are well above more efficient, new-built assets. Although disposals will continue to create some volatility in rental income and therefore earnings in the short term, we are confident our portfolio transition will drive strong earnings growth in the medium term - further enhanced by growing volumes in our housebuilding business by up to 25% p.a.

We can deliver all of this from our existing portfolio and capital base, without having to acquire or rely on a general market upturn. Building on our strong track record and expertise, we are therefore well placed to deliver a meaningful improvement in return on capital over the medium term.

PORTFOLIO AND OPERATIONAL REVIEW

Portfolio focus and capital discipline

Valuation performance

Adjusted for investments and disposals, our portfolio value increased 1.5% during the first half of the year and is now valued at £1.5bn. Our income producing portfolio makes up 47% of this, with the balance split between land held for future development (29%) and current developments (24%).

Our income producing assets increased in value by 1.2%. The value of our industrial/logistics portfolio, which is now the largest segment of our income producing portfolio, increased by 2.3% benefitting from modest yield compression, partly offset by a £2.3m write-down on our asset in Stafford where the tenant is closing its operations. As expected, general retail values remained under pressure as valuation yields softened, although the negative effect of this was offset by a strong uplift in value of our Trentham leisure/retail asset which continues to experience high growth in visitor numbers and rental income. Overall, our income producing portfolio was valued at an 8.0% equivalent yield at the end of May, which was up slightly compared to the end of 2017 on a like-for-like basis. Commercial developments were up 9.2% in value and commercial land, the vast majority of which is earmarked for industrial/logistics development, increased in value by 0.8%, with residential land increasing by 0.6% during the period.

(1) Portfolio valuation movements exclude current residential developments.

(2) Includes land held by St. Modwen Homes for future development.

(3) Excludes inventories of £4m included within the income producing portfolio.

Our outlook for the market remains broadly unchanged compared to the start of the year. The challenges in the UK retail market are well-publicised, which is resulting in subdued investment volumes and we expect retail values will see some further softening. However, there continues to be investor demand for retail assets which are realistically priced, as shown by the disposal of 28% of our retail portfolio at a modest 4% discount to the November 2017 book value. Following these disposals retail will represent just 18% of our overall portfolio, of which half is located in London or leisure oriented and benefits from a stronger outlook.

Occupier and investment demand for industrial/logistics remains robust. Although speculative supply has started to pick up, this remains relatively modest and take-up remains strong, so we expect this will continue to underpin capital values in this sector and add to the attraction of our substantial development pipeline. With general house price inflation broadly offset by construction cost inflation, we expect upside in land values to be modest and remain largely reliant on potential further planning gains.

Operational performance

At the end of May, the annualised passing rent on our £692m income producing portfolio stood at £48.5m. This was down £11.7m since the end of 2017, primarily due to the disposal of Swansea and Longbridge, as like-for-like rents increased 3.5% compared to the same period last year, with rental growth in industrial well ahead of retail, at 5.8% versus 0.4%. The disposal of Wembley which is expected to complete in the near future will further reduce annualised passing rent.

Overall vacancy is up from 11.7% in November 2017 to 12.5%, but this solely reflects the disposal of assets with no or very little vacancy, principally the Swansea student accommodation and Longbridge Shopping Park, as on a like-for-like basis our overall vacancy decreased by 0.4ppt since the end of 2017. Part of our vacant space continues to be deliberately held back for future developments.

Across our income producing portfolio we signed 1.9m sq ft of new leases and lease renewals during the half year, generating £5.8m of annualised rental income. On average, this was 31% above previous passing rent and 2% above November 2017 ERVs. The average remaining lease term to first break for our portfolio decreased from 5.3 years at the end of 2017 to 4.3 years. This chiefly reflects the sale of Longbridge, which reduced the average for the portfolio by 0.8 years.

(1) Excluding £0.4m of passing rent on land (ERV £1.9m) and £0.7m of annualised turnover rent at Trentham Gardens.

Our income producing portfolio has historically been relatively inefficient to manage, principally due to the high c. 30% of property outgoings associated with our older retail assets and a tail of very small assets. Recycling capital out of these assets into retaining our high quality, modern industrial/logistics developments will therefore significantly improve our operational efficiency in the years to come. In addition, the creation of our dedicated asset management function during the second half of 2017 is expected to further improve the operational performance of our retained assets.

Investments and disposals

During the first half of the year we continued the significant reshaping of our portfolio we initiated a year ago. Since we announced our new strategy in June 2017 we have now sold £635m of assets, on average in line with book value, which equates to 35% of our portfolio value at 31 May 2017. During the first half of 2018 we sold £350m of assets, which more than offset our £102m investment in acquisitions and developments during the same period (excluding housebuilding activities).

As we continue to see much higher returns from investing our capital in our own development pipeline than buying assets in the current investment market, we remain selective in acquisitions. All of our £21m acquisitions during the period therefore comprised drawdowns of land under existing development agreements for near-term development starts, principally for St. Modwen Homes.

Following £285m of disposals during the second half of 2017, the largest deal during the first half of 2018 was the disposal of our 45-year leasehold interest in the first phase of student accommodation at Swansea Bay Campus for £139m in February. We also forward sold our 207-unit PRS scheme at Uxbridge for £75m, which allowed us to bring forward the next phase of development of 101 private-sale apartments for St. Modwen Homes by 12-18 months.

In May we announced that we had exchanged contracts for the disposal of Longbridge Shopping Park and Wembley Central shopping centre via two separate transactions. The sale of Longbridge completed during the same month, whilst the sale of Wembley is expected to complete in the near future. Combined with the disposal of a small retail asset in Liverpool this means we have now sold £95m of retail assets, on average 4% below their November 2017 book value. We also sold 21 acres of residential land for £27m during the first six months, in line with book value, as the market for oven-ready residential land remains resilient.

(1) Based on the Group's share of amounts relating to joint ventures.

(2) EPRA net initial yield on income producing assets excluding land.

(3) Excluding land transfers to St. Modwen Homes and completed home sales.

Looking forward, we will continue to reposition our portfolio to further optimise its return prospects and momentum in this remains positive. In addition to the £350m of assets we have sold so far this year, we have already agreed terms on the disposal of a further c. £70m of small and retail assets. As such, we expect to exceed our target to sell £100-150m of retail and small assets for the full year and we now anticipate selling £150-175m of these assets during 2018.

We expect to sell our residual c. £70m of small assets and around two-thirds of our remaining £255m retail assets over the next two years, whilst we plan to retain the small residual part of our retail portfolio for the time being in order to explore potential larger-scale mixed-use development opportunities. We plan to recycle the proceeds from our disposals into retaining the majority of our industrial/logistics developments, as we aim to build up a high quality, efficient income portfolio. Although the share of income producing assets as part of our overall portfolio reduced from 51% to 47% over the last six months, primarily due to the disposal of Swansea and Longbridge, we plan to increase this to c. 60-65% over time as we intend to reduce our exposure to land, recognising the significant cost of holding a large amount of non-income producing land on our balance sheet for a longer period.

Commercial development

We increased our investment in commercial development during the first half of the year to £81m (2017: £70m), delivering £10.9m in profits (2017: £9.5m). Our committed development pipeline increased to 1.8m sq ft with a total development cost of £270m, up from 1.6m sq ft at the start of the year. This includes 1.3m sq ft of industrial/logistics space with a total cost of £131m, of which we plan to retain approximately two-thirds - a level which we expect to increase over the next few years. With an ERV of £6.1m the yield on cost on these projects equates to an attractive 8%, whilst the yield on incremental capex is over 9%. We have secured 15% of the associated rent on these schemes. In total, we agreed £2.3m of development lettings since the start of the year, in line with our expected ERVs, including 153,000 sq ft at Tamworth and 35,000 sq ft at Avonmouth to pharma logistics firm Movianto.

Our overall committed commercial pipeline is now 50% pre-let or pre-sold, up from 41% at the start of the year, with around 85% of our non-industrial/logistics pipeline comprising our forward-sold PRS scheme in Uxbridge and the latest phase of development at Swansea Bay Campus.

(1) Including land.

We have continued to prepare our future pipeline to deliver up to 25% growth per year in the amount of industrial/logistics space we deliver over 2018-2020, although the short lead-time of our projects means we retain flexibility to adjust our pipeline to any potential changes in occupier demand. During the half year we secured outline planning consent for our 1.0m sq ft scheme at Chippenham Gateway, adjacent to junction 17 of the M4, and cleared planning conditions and finalised consents for a 0.2m sq ft scheme at Gatwick, adjacent to junction 10 of the M23. With a potential ERV of over £8m, these sites are expected to become an important part of our income portfolio in the medium term.

Our focus is on bringing forward these and other key strategic schemes in our pipeline, which have a combined development potential of over 10m sq ft and a potential ERV of over £60m. These key strategic schemes generally comprise large projects in our best locations, which are expected to form the core of our future income portfolio and which could be delivered over the next 5-8 years, partly subject to planning. In addition, we have a number of smaller projects capable of delivering over 5m sq ft potential industrial/logistics space, with a potential ERV of over £30m. Albeit smaller, these projects are in good locations and support the near-term replacement of income from selling retail and smaller assets.

The average yield on cost on these schemes is c. 8%, with a yield on incremental capex of c. 9%. This is well above the c. 7% gross yield on our student housing, retail and smaller asset disposals, so combined with the much lower property outgoings and maintenance capex associated with newly developed industrial/logistics assets, recycling capital out of existing assets into retaining the majority of our industrial/logistics pipeline is expected to drive strong income growth over the medium term.

Residential development - housebuilding

The market for new-built housing in the UK regions remains robust and we continue to see good demand for the new homes built by our housebuilding business St. Modwen Homes. We sold 302 units during the first half of the year, which marks an increase of 31% vs the same period last year (230 units), so we are well on track to realise the up to 25% growth in volumes we target for the full year compared to the 694 units we sold in 2017.

The average private sales price increased 8% to £283,000 (2017: £262,000), with like-for-like prices up 2% driven by the good demand for the high-quality homes we build and the remainder driven by changes in the mix of units and sites. St. Modwen Homes is now sales active on 19 outlets, with a further three outlets coming forward in the second half of the year. Quality and safety remain a key focus for us as we continue to grow and we retained our RoSPA Gold accreditation.

St. Modwen Homes' operating margin for the half year was 14.6%, which was down compared to the first half of 2017 due to an unusually low level of affordable sales last year, but which is in line with our target of improving our margin by c. 0.5ppt this year (Nov 2017: 13.9%). As we transfer land to St. Modwen Homes at market value shortly before it starts construction, upside in land values from planning gains or house price inflation is captured elsewhere in the Group through property revaluations, which reduces our operating margin by c. 2-3ppt compared to housebuilder peers who carry their land at historic cost.

Given the continued ramp up in activity, profit from our housebuilding activities is weighted towards the second half of the year and our expectation that, for the full year, growth in profits from St. Modwen Homes will more than offset the planned reduction in profits from our JV with Persimmon remains unchanged. This is balanced towards the second half of the year, as for the first half of 2018 our overall residential profits reduced slightly to £12.7m (2017: £13.4m). Within this, St. Modwen Homes profits rose 23.3% to £11.1m (2017: £9.0m), but this was offset by a planned reduction in profit from our Persimmon JV to £1.6m (2017: £4.4m), as the JV continues to wind down its activity over the next two years.

Looking beyond 2018, we have now secured the pipeline for St. Modwen Homes to deliver up to 25% growth in volumes per year over 2019-2021 and we have started to roll out initiatives to improve our operating margin by c. 2-3ppt over the medium term, in part through optimising site coverage, but also due to improved efficiency from scale benefits and a range of other initiatives. Combined, this is expected to drive strong growth in our overall residential profits over the next few years, as the expected growth in St. Modwen Homes profits more than compensates for the planned reduction in Persimmon JV profits.

Residential development - residential land

In addition to growing our own housebuilding business, we further accelerated the release of capital by selling residential land to third party housebuilders. Demand for oven-ready land remains good, reflecting the positive outlook for housebuilding in the regions, so we capitalised on this by selling 921 plots in the first six months of the year for £27m, principally at Mill Hill and Longbridge. This is nearly double the amount we sold in the same period last year (2017: £14m), leaving us well on track to meet our full year target to sell at least £56m of land.

Combined with the disposals in the second half of 2017, we have now sold £260m of residential land since we announced our new strategy a year ago, on average at or above book value. In addition, we have significantly de-risked our land holdings, as our exposure to London has come down from 46% a year ago to 10% now.

Our overall land bank currently consists of 21,000 plots (Nov 2017: 22,000), excluding plots where development is subject to third party consent. This remains more than we need to facilitate the growth in our own housebuilding activities, so we will continue to crystallise the value in our land bank, as we intend to reduce the proportion of land as part of our overall portfolio value. In addition to traditional housebuilding, we will continue to progress the PRS opportunities in our pipeline, but we do not envisage owning and managing these assets ourselves for the longer term.

Major regeneration projects

During the half year we have continued to progress the delivery of our three major regeneration projects, Longbridge, Swansea and New Covent Garden Market, releasing significant capital out of the first phases of development to bring forward the next phases of these successful schemes.

At Longbridge, we sold the 320,000 sq ft shopping park which made up the core of the first phase of the town centre development for £54m. The scheme continues to see further phases of new homes being delivered and we have started to work on enhancing the vision for the 468-acre site, which is now c. 50% developed. Whilst the first phase was predominantly retail and residential-led, the next phase will see us deliver c. 0.7m sq ft of employment space. Inspired by our core purpose: 'Changing places. Creating better futures.', we want to make sure this next phase fits our placemaking ambitions to create a lasting legacy at this important scheme.

At Swansea Bay Campus, we reported in February that we sold the first phase of student housing, comprising 2,005 beds, to UPP for £139m, releasing £87m of proceeds net of an associated finance lease liability. The next 411 student rooms are expected to complete in early 2019 and we are on track to complete a 40,000 sq ft academic building which is pre-sold to global education provider Navitas later this year, with a combined development cost of £40m. We are also progressing plans for the next 150,000 sq ft of academic facilities and a further 600 student beds for delivery by 2021.

Following the sale of Nine Elms Square in the second half of 2017, we have continued to work on the relocation of the existing market facilities at New Covent Garden Market via our JV with VINCI as planned. This remains a long-term project and one that will release further land for development in due course.

At our more recently added schemes, we expect to start selling the first homes at our 1,500-unit project in Wantage and we are progressing planning for our 3,000-home Buckover Garden Village scheme. We continue to pursue new regeneration opportunities on a 'capital light' basis, but by nature these projects are opportunistic, so it is difficult to make specific forecasts for this.

FINANCIAL REVIEW

Overview

Our financial performance over the first six months of the year was solid and in line with our expectations for the full year. NAV per share increased 1.0% to 455.4 pence (Nov 2017: 450.9 pence) and EPRA NAV per share increased 0.7% to 474.4 pence (Nov 2017: 471.2 pence). As we flagged at the start of the year, disposals created some short-term volatility in rental income, but this was offset by a marked reduction in interest costs, so adjusted EPRA earnings were £0.8m higher than in the first half of 2017 at £13.9m. As a result, adjusted EPRA EPS increased to 6.3 pence (2017: 5.9 pence). Whilst we expect disposals to continue to weigh on rental income in the short term, we expect earnings to increase materially over time as our industrial/logistics pipeline starts to generate income. Against a backdrop of a £220.7m reduction in see-through net borrowings over the past 12 months, our total accounting return including dividends paid over the first six months was down slightly at 2.0% (2017: 2.9%).

Presentation of financial information

Due to the number of significant 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. The Group has four material joint ventures, three of which are in partnership with VINCI and one in partnership with Salhia. The VINCI joint ventures comprise the NCGM operation and joint ventures at Uxbridge and Mill Hill (the latter through The Inglis Consortium), both of which are engaged in the remediation and subsequent sale of land. The Salhia JV, Key Property Investments (KPI), owns a portfolio of principally income producing industrial assets acquired between 1998 and 2002.

We use adjusted EPRA earnings and an adjusted EPRA EPS as key performance measures, which exclude non-cash valuation gains and losses. As our residential developments are built to sell, residential profits are cash-based and therefore included in this metric, but as our commercial developments will be predominantly built to hold, commercial development profits will be largely non-cash in the future. As such, these are excluded from adjusted EPRA earnings, other than development fee income.

Our dividend policy is aligned to cash profitability and we intend to pay a dividend equivalent to c. 50% of adjusted EPRA EPS per year, with the aim of providing a sustainable, progressive dividend for our shareholders. Reflecting this, we will pay an interim dividend of 3.10 pence per share for the first half of 2018, marking an increase of 53.5% compared to last year (2017 interim: 2.02 pence per share), to be paid on 4 September 2018 to shareholders on the register as at 10 August 2018.

(1) This table is presented on a proportionally consolidated basis, including the Group's share of profits and losses of joint ventures and associates in the income statement categories to which they relate, rather than on a statutory basis as one line representing the share of net losses of those joint ventures and associates.

Net rental and other income

The Group's share of net rental and other income in the first half of the year decreased to £26.2m (2017: £27.0m). Disposals reduced net rental income by £2.4m, partly offset by £0.6m growth in like-for-like income, £0.3m income from acquisitions and £0.7m income from retained developments. With the disposals of Longbridge Shopping Park close to the end of May and Wembley after the period end, we expect net rental income in the second half of the year to be below the first half, reflecting the time lag of recycling capital into industrial/logistics developments

Administrative expenses

Administrative expenses for the first half year increased slightly to £14.4m (2017: £14.0m) due to our investment in preparing our business for future growth, partly offset by the capitalisation of £0.4m of costs directly related to commercial development activities. The capitalisation of these has no impact on our overall profit or accounting return, as the benefit to overhead costs is offset by lower property development or valuation gains. However, it improves the consistency of adjusted EPRA earnings, as property development and valuation gains are excluded from this measure. Our expectation for overhead costs for the full year to be c. 5% ahead of the £30.5m underlying level last year remains unchanged.

Interest and other finance costs

Net interest costs for the half year fell to £8.9m (2017: £11.5m) on a see-through basis, principally due to a reduction in debt due to our disposals, the lower average cost of borrowing following the refinancing of our bank facilities in December 2017 and the capitalisation of £0.5m interest costs on commercial developments. Similar to capitalised overhead costs, the latter has no impact on our overall profit or accounting return for the year, as the benefit to net finance cost is offset by a reduction in property development or valuation gains. As our net borrowings reduced slightly, we expect interest costs for the second half of the year to be slightly lower than the first half.

Net other finance costs were £5.5m (2017: £7.9m). This includes a £1.9m charge for discount unwinds, principally on our share of the long-term commitment to deliver the NCGM project, and a £0.8m charge for the amortisation of arrangement fees in relation to our loan facilities. Combined, these two costs have been just over £7m p.a. over the last two years and we expect these to recur at relatively constant levels. It also includes a £3.6m one-off expense related to the refinancing of our secured debt facilities in December. The final element of our non-cash finance costs relates to the mark-to-market valuation of our convertible bond and derivatives, which is driven by the movement in our share price and swap rates and resulted in a £0.8m credit in the first half.

Investment property revaluation and disposal gains/losses

All our investment properties are independently valued every six months by our external valuers Cushman & Wakefield and Jones Lang LaSalle (the latter for NCGM only), who base their valuations upon an open market transaction between a willing buyer and a willing seller at the balance sheet date. In accordance with accounting standards, valuation movements are reflected as gains or losses in the income statement. We also independently assess our work in progress for any impairment issues. Where applicable asset valuations have been validated with reference to open market transactions.

Over the first six months our portfolio saw a total valuation gain of £9.0m. During the first half of 2017 the portfolio recorded a gross revaluation gain of £20.0m, which was partly offset by a £9.2m cost impairment related to NCGM. During the first half of 2018 we recorded a £4.9m loss on property disposals (2017: £2.0m gain), principally related to Longbridge Shopping Park.

Taxation and IFRS net profit

Our total tax charge (including joint venture tax) for the half year was £4.3m (2017: £2.4m) resulting in IFRS net profit after tax of £20.8m (2017: £26.9m).

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 reasonably certain. Overall, the Group effective tax rate for the half year was above the same period last year at 17.7% (2017: 15.1%), resulting predominantly from the freezing of indexation allowance from 31 December 2017. As signalled previously, the effective tax rate is expected to remain at broadly similar levels, slightly below the standard rate of tax of 19%.

Balance sheet and net asset value

The net asset value attributable to shareholders of the Group increased to £1,011.0m (Nov 2017: £1,000.3m) or 455.4 pence per share, which represents a 1.0% increase over the six-month period (Nov 2017: 450.9 pence). Combined with the 2017 final dividend of 4.26 pence per share paid during the period, this reflects a total accounting return of 2.0% (2017: 2.9%). EPRA NAV per share increased by 0.7% to 474.4 pence (Nov 2017: 471.2 pence), as the crystallisation of £5.1m interest rate swap liabilities upon refinancing our bank facilities in December reduced EPRA NAV by 1.9 pence per share.

(1) 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.

Net borrowings

Cash generated before new investment, tax and dividends during the first half year increased to £256.4m (2017: £144.3m) and was well in excess of new investment, largely driven by our substantial disposals, whilst inventories increased by £7.6m at £369.5m (Nov 2017: £361.9m).

As a result, see-through gross borrowings fell £73.7m during the first half of the year to £389.6m (Nov 2017: £463.3m). See-through net borrowings reduced by £28.6m to £359.6m (Nov 2017: £388.2m), as the reduction in gross borrowings was partly offset by the fact that during the period £37.5m of cash (representing our 50% share) held in a Development Account for the delivery of the NCGM project was placed in a one-year deposit so this no longer qualifies as cash in our net borrowings calculation. The sale of Swansea reduced our finance lease liabilities by £51.8m to £6.1m.

Consequently, our see-through loan-to-value was stable at 24.2% (Nov 2017: 24.2%), or 21.7% including the cash held on one-year deposit. Excluding residential investments, our see-through loan-to-value increased slightly to 39.8% (Nov 2017: 37.2%), or decreased to 35.6% including the cash on one-year deposit, which remains within our target of sub 40%. Since we announced our new strategy a year ago, see-through net borrowings have come down £220.7m whilst our 24.2% LTV is down 8.9ppt.

(1) Proportionally consolidated, including the Group's share of joint ventures and associates.

(2) See-through loan-to-values are reconciled in note 2j to the condensed Group financial statements.

Financing

As reported previously, in December we refinanced £488m of secured bilateral debt facilities expiring in 2019/2021 with a new £475m unsecured club facility with a maturity of five years and an option to extend this to seven years, improving flexibility and resulting in initial interest savings of c. £2.5m p.a. As a result, our average duration of debt increased to 3.6 years, or 5.0 years including the extension options. Our first debt maturities are our £100m convertible bond and £80m retail bond which mature in 2019 and which have an average borrowing cost of 4.4%. With total committed see-through facilities of £693m (Nov 2017: £703m) compared to £359.6m see-through net borrowings, we maintain substantial financial headroom.

(1) The weighted average interest rate is calculated using current interest rates, commitment fees and hedging profile applied to the Group net borrowings at 31 May 2018, thereby assuming constant net borrowing levels for 2018.

Hedging and cost of debt

The refinancing of our bank facilities in December reduced our weighted average cost of borrowing from 4.4% to 3.7%, although this has increased to 4.1% since then due to the £73.7m reduction in our overall gross borrowings, which increased the proportion of our gross borrowings relating to our bonds, which have a higher cost of debt than our bank borrowings.

As we aim to have predictable costs attached to our borrowings our policy is to hedge a significant portion of our interest rate risk. The proportion of borrowings which are fixed or hedged is 66.9% (Nov 2017: 82.8%) and we continue to manage our ongoing interest rate risk via a combination of caps and hedges.

Corporate funding covenants

Covenant compliance continues at all levels and across all metrics and we continue to operate with considerable headroom against all measures. Our portfolio could withstand more than a 35% fall in values before our covenants would be breached.

Mark Allan Rob Hudson

Chief Executive Chief Financial Officer

2 July 2018