SMP.L Regulatory News (SMP)

Date of issue: 6 February 2018

LEI: 213800WMV4WVES8TQH05

This announcement contains inside information

ST. MODWEN PROPERTIES PLC

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

Results for the year ended 30 November 2017

ST. MODWEN DELIVERS SOLID RESULTS AND MAKES GOOD PROGRESS IN EXECUTING NEW AND FOCUSED STRATEGY

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

"2017 has been a positive year for us. Having established our new, more focused strategy, we started to shift our portfolio towards sectors with better structural growth characteristics, we increased commercial development activity, grew housebuilding profits and reduced net borrowings. This will continue in 2018 and beyond, so despite continuing uncertainty in the external environment, the significant potential in our existing pipeline means we expect to deliver a meaningful improvement in earnings and return on capital in the medium term."

Financial highlights

· NAV per share up 4.6% to 450.9 pence (2016: 431.0 pence).

· Total accounting return(2) for the year up 0.4ppt to 6.0% (2016: 5.6%).

· Trading profit up 15.2% to £64.6m (2016: £56.1m).

· Total dividend up 4.7% to 6.28 pence per share (2016: 6.00 pence per share).

· See-through LTV down 6.3ppt to 24.2% (2016: 30.5%).

· Successfully refinanced majority of debt facilities with new £475m unsecured facility post year end, providing greater flexibility and longer debt maturity at lower cost.

Operational highlights

Building momentum in executing our more focused strategy based on four strategic objectives, with a clear focus on sectors with long-term structural growth characteristics.

· Portfolio focus and capital discipline:

o Good progress achieved in shifting portfolio mix by increasing exposure to income producing assets to 51% (2016: 45%), with intention to further increase this over time.

o Sold Nine Elms Square land for £190m net proceeds, £27m small assets, Swansea student housing for £87m net proceeds post year end and intend to sell £100-150m retail and small assets in 2018, with terms agreed on c. £40m of this.

· Accelerate our commercial development activity:

o Delivered 1.4m sq ft new space with total GDV of £216m, including 0.9m sq ft industrial and logistics space of which we will retain £66m, with 1.6m sq ft committed pipeline at start of 2018 expected to grow further during the year.

o Prepared pipeline to deliver continued growth in 2019 and 2020 subject to tenant demand, with 7.5m sq ft medium term A1 industrial and logistics pipeline which has a GDV of c. £700m and ERV of c. £45m of which we expect to retain the majority.

· Grow our residential and housebuilding business:

o Sold 54 acres of residential land to third party housebuilders for £56m (2016: £48m) at or above book value, with at least similar volume expected for 2018.

o Delivered 43% growth in St. Modwen Homes' volumes to 694 units sold (2016: 485), driving 52% growth in pre-tax profits to £23.3m (2016: £15.3m), with up to 25% growth in volumes expected for 2018.

· Cement and grow our regeneration reputation:

o Started next phase of development of academic facilities and student housing at Bay Campus, Swansea, having released £87m of capital from the sale of the first phase.

o Progressed development of NCGM market facilities following the sale of the first ten acres of land and further phases of mixed-use development at Longbridge.

o Secured two major new residential schemes in Wantage and Buckover for combined 4,500 new homes on a 'capital light' basis.

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 Group financial statements.

(2) Our definition of total accounting return was revised in the year so that it now represents dividends paid in the year plus the movement in NAV per share in the year, rather than the movement in EPRA NAV per share. This change reflects that our strategy includes the repositioning and recycling of our portfolio towards sectors with strong structural growth, whereas the EPRA model assumes that properties are retained. An analysis of the effect of this change on the measures is included in note 2 to the Group financial statements.

(3) Our key performance metrics include a new measure of adjusted EPRA earnings and an associated adjusted EPRA EPS calculation. This is a measure of profits which excludes non-cash valuation movements and will be used as a reference for dividend payments in the future. A detailed analysis of how this measure is calculated and reconciled to our statutory figures is included in note 3 to the Group financial statements.

While the financial information included in this announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards as adopted by the EU (EU IFRSs), this announcement does not itself contain sufficient information to comply with EU IFRSs. The Company expects to publish full financial statements that comply with EU IFRSs by the end of February 2018.

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.

CHAIRMAN'S STATEMENT

2017 was a productive year for St. Modwen. With a new Chief Executive in post we undertook a full review of our business and portfolio and launched a new, more focused, strategy in the summer. This strategy is intended to improve returns on capital and enhance our operational flexibility and we believe that it will leave us well placed in what is an uncertain external environment that we expect to present both risks and opportunities.

Alongside the strategy review, the business continued to perform well. We delivered 4.6% growth in NAV per share for the year to 450.9 pence which, together with dividends, resulted in a total accounting return of 6.0% (2016: 5.6%), and profit before all tax increased 10.2% to £67.0m. We also achieved some significant milestones on our major projects, most notably the sale of the Nine Elms Square development site at New Covent Garden Market in August, which released capital for reinvestment back into the business and enabled us to keep borrowing levels firmly under control.

Our strategy is built around a clearly defined core purpose: Changing places. Creating better futures. This captures the regeneration heritage of the business and acts as an important reference point for our future activities, ensuring that our strategic objectives are not simply financially defined but reflect the value we seek to unlock more broadly. This is, of course, only possible as a result of the expertise and efforts of our people and I would like to recognise and congratulate them on another year of positive performance.

Dividend

Following the launch of our new strategy we have reviewed our dividend policy and are now making some changes to ensure that it is more closely linked to cash-backed profits. To facilitate this we are introducing a new profit measure, adjusted EPRA earnings per share, which is closely aligned to cash- backed profits. From the 2017/18 financial year we intend to distribute approximately 50% of this measure each year by way of dividend with the aim of providing a sustainable, progressive dividend for our shareholders.

For the year ended 30 November 2017, we intend to pay a total dividend per share of 6.28 pence, which marks an increase of 4.7% compared to the 6.00 pence for 2016. Taking account of the interim dividend paid of 2.02 pence, we are therefore proposing a final dividend of 4.26 pence per share to be paid on 4 April 2018 to shareholders on the register as at 9 March 2018.

Board changes

We were shocked and saddened by the sudden passing of Steve Burke, our Group Construction Director, in March 2017. Steve had been with St. Modwen for over 20 years and was a valued friend and colleague to many. He is sorely missed and our thoughts remain with his family and friends.

We have also recently announced some other changes to our Board which will become effective over the next couple of months. Jamie Hopkins, Chief Executive of Workspace plc, will join the Board as a non-executive director on 1 March 2018 while Kay Chaldecott and Richard Mully will step down from their non-executive positions at the next AGM, having served nearly six and five years respectively. Ian Bull will be assuming Richard's responsibilities as Senior Independent Director.

Jenefer Greenwood, who joined the Board in June 2017, will assume the position of Chair of the Remuneration Committee at the next AGM taking over from Lesley James who will be retiring from the Board later in 2018 having served nine years.

I would like to thank Kay, Richard and Lesley for their significant contributions to the Board, and wish Jamie, Jenefer and Ian well in their new roles.

Finally, I have informed the Board of my intention to step down as Chairman at the AGM in March 2019, at which point I will have been in post for 8 years. Having recently overseen the appointment of a new Chief Executive and the launch of a new, more focused strategy, it is now appropriate that the Board considers my succession in an orderly and timely manner. I remain enthusiastic about the business and its prospects and will continue to support the Board and management team in delivering our strategy in the year ahead.

Prospects

As we enter 2018, St. Modwen is well placed. Our deep pipeline of projects underpins meaningful growth targets for both residential and commercial development, our planned portfolio rotation towards sectors with good structural growth prospects is underway and we are in a strong position financially. Although the external environment remains unsettled and is likely to remain so for some time, the combination of our focused strategy and unrivalled track record and expertise mean that we approach the future with confidence.

CHIEF EXECUTIVE'S REVIEW

Overview

2017 has been an important year for St. Modwen. Following a full review of our business, our portfolio and our pipeline, we are pursuing a more focused strategy, better suited to the external environment we operate in, and have begun to build momentum in executing this strategy. We can deliver this strategy over the next few years through a targeted approach to our existing portfolio of projects rather than needing to acquire more, an important source of advantage in investment markets which remain very competitive.

Our strategy is intended to improve returns on capital by concentrating our activities on sectors that have long-term structural growth characteristics while also enhancing our flexibility through tightly controlling leverage and reducing the proportion of our portfolio invested in land. This is captured through 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 results for the year were solid. We delivered 4.6% growth in NAV per share to 450.9 pence (2016: 431.0 pence) which, together with dividends paid during the year, resulted in a total accounting return of 6.0% (2016: 5.6%). Our EPRA NAV per share rose 10.7 pence over the year to 471.2 pence (2016: 460.5 pence) and profit before all tax increased to £67.0m (2016: £60.8m) with EPS of 26.9 pence (2016: 24.1 pence).

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

We achieved strong progress against all key performance indicators for the year. Looking forward, we will continue to focus on total return, earnings and net borrowings as our key performance measures.

Our key performance metrics include a new measure of adjusted EPRA earnings and an associated adjusted EPRA EPS calculation. This is a measure of profits which excludes non-cash valuation movements and will be used as a reference for dividend payments in the future. With effect from the 2017/18 financial year we intend to pay a dividend equivalent to approximately 50% of adjusted EPRA EPS, with the aim to provide a sustainable, progressive dividend for our shareholders. We will cease to use profit before all tax as a key performance measure with effect from the 2017/18 financial year.

Enhancing our organisation's design and culture

Successful execution of our strategy relies on having an organisation that is closely aligned to our strategic objectives and where individuals and teams understand the role they play in helping deliver the strategy. With this in mind, during the second half of the year we restructured the business from seven to three regions, each focused on accelerating commercial development activity and bringing forward residential land for development; a new central asset management function responsible for shaping and managing our income producing portfolio; and St. Modwen Homes as a standalone housebuilder within the Group. These discrete business units are supported by central functions such as HR and finance. As part of this restructuring, and with our growth objectives in mind, we have identified a total of ten new senior roles into which we are recruiting during 2018.

We are also focusing on creating a culture of empowerment, accountability and support in order to deliver the strategy. This started in 2017 with the organisational design work described above to create clear, consistent structures, roles and responsibilities across the Group and will continue in 2018 with the launch of tailored management and leadership development programmes. Recognising the need for our culture and organisation to be appropriate for the future, we have also taken the opportunity to refresh our branding and visual identity, which will be rolled out during 2018.

Our teams have performed extremely well throughout the year and remain the bedrock of the business, possessing considerable skills and experience that can help us continue to create significant value for all our stakeholders. Our focus on creating the right organisational design and culture will help them flourish in the years ahead.

Portfolio focus and capital discipline: reshaping our portfolio

Reflecting our new, focused strategy the shape of our portfolio began to shift over the course of 2017 and this process will continue into 2018 and beyond. The successful disposal of the Nine Elms Square development site at New Covent Garden Market in August for a gross consideration of £470m (net St. Modwen share £190m) released significant capital into the business and contributed towards the overall reduction in value of our land assets, meaning that income producing assets now make up 51% of our portfolio, up from 45% a year ago. We intend to increase this level further. The capital released from the sale allowed us to reduce leverage and also begin to invest in our other strategic priorities.

During 2018 we expect to be active in the disposal of many of our smaller assets and also in reducing our exposure to retail assets. We are targeting asset sales of this type of between £100m and £150m in total across the course of the year and have already made progress with terms agreed on the disposal of approximately £40m of such assets. The proceeds from our disposal programme will be recycled into retaining the majority of assets from our industrial and logistics development programme.

In terms of capital discipline, see-through net borrowings at 30 November 2017 stood at £388m, down from £517m a year earlier and our see-through LTV reduced to 24.2% (2016: 30.5%). Excluding residential, which is our preferred measure, see-through LTV fell from 54.3% to 37.2% at the year end.

Since the year end we have also refinanced the majority of our debt facilities such that we are now financed on a fully unsecured basis, providing a cost effective, greater level of flexibility as we execute our strategy.

Accelerating our commercial development activity: committed pipeline up 38%

Across the course of 2017 we increased commercial development activity, completing 1.4m sq ft of new space with a completed value of £216m. Of this total, £102m was pre-sold or has since been sold and £41m is held pending sale. The £73m we retained principally comprises developments completed towards the end of 2017 where occupancy currently stands at 54% by rental value, with a further 11% under offer and full occupancy targeted during 2018.

Entering the 2017/18 financial year our committed development pipeline stands at 1.6m sq ft with an expected value on completion of £326m, up 38% compared to the £237m of completed value at the beginning of 2017. We expect the pipeline to grow throughout 2018 as planning consent is granted to future schemes, subject to market demand. Around 90% of our committed pipeline is focused on sectors with good structural growth characteristics, such as industrial and logistics, PRS or student accommodation, and this will remain a feature of our development activity going forward. Approximately 40% of our industrial and logistics pipeline is pre-let or pre-sold, compared to 21% a year earlier.

Approximately £700m of our medium-term pipeline relates to industrial and logistics projects with an estimated rental value of £45m. As part of our strategy to focus on sectors with growth characteristics underpinned by long term structural trends, we intend to retain the majority of this pipeline for the longer term.

Growing our residential and housebuilding business: Homes targeting c. 25% growth

Our residential activities performed well throughout 2017. In addition to the sale of Nine Elms Square, over 2,200 units of 'oven-ready' land were either transferred to St. Modwen Homes or sold in the open market, with a total value of £137m. Proceeds from third party sales totalled £56m (2016: £48m), with sales at or above book value. The market remains robust with a healthy outlook for 2018, for which we expect to secure at least a similar level of residential land sales.

At St. Modwen Homes we continued to grow sales volumes materially while maintaining a focus on quality and on-site safety. In total we sold 694 new homes, up from 485 in 2016 and achieved 5-star status from the HBF and a Gold safety accreditation from RoSPA. Margins improved to 13.9% (2016: 13.4%), resulting in an operating profit of £23.3m, and the growth in profits from St. Modwen Homes more than offset the reduction in profits associated with the wind-down of our Persimmon Joint Venture (£8.1m of operating profit compared to £11.8m in 2016). Average private sales prices increased 19% to £259,000 for the year. Like-for-like sales prices were up 6%, with the balance reflecting an increase in average unit size and greater levels of activity at Uxbridge, Greater London.

Looking forward, we expect sales volumes for St. Modwen Homes to grow by up to 25% in 2018 and, with a robust outlook for regional house prices as well as a range of internal initiatives being pursued, we expect margins to improve by a similar level again across the course of the year. We will continue to prioritise quality and safety and, as these features become more firmly embedded, we are confident they will form a foundation from which financial performance can be improved further.

Cementing and growing our regeneration reputation: good progress across the board

We made important progress at each of our major regeneration projects during the year and were also successful in securing new opportunities focused on large scale residential development.

At Bay Campus, Swansea we successfully completed the most recent phase of student accommodation and commenced work on the next phase of academic facilities and accommodation. Significant development opportunities remain and we continue to work in close partnership with Swansea University to unlock them. Since the year end we have sold the completed first 2,005 beds of student accommodation to UPP for a net cash consideration of £87m, introducing an experienced operator onto the campus and releasing capital to invest in the next phases of development.

At Longbridge, 2017 saw the successful completion of 180 beds of medical accommodation pre-sold to the MoD's DIO, a 260 apartment Extracare retirement village and further phases of new homes. Longbridge is now approximately 50% developed and significant further opportunities remain, which we will be focused on during 2018.

At New Covent Garden Market, held in our VSM joint venture with VINCI, we successfully sold the first ten acres of surplus land at Nine Elms Square. We also progressed the redevelopment of the market facilities with completion of both the interim flower market and the interim delivery unit, all of which unlocks the next phases of redevelopment. At this important juncture of the project we have undertaken a detailed review of our future obligations, resulting in an increase of our share of the cost provisions on the project by £24.6m. This reflects our experience of the project to date and, in particular, the constraints imposed by operating in a live environment. This was partly offset by a £14.5m increase in the value of the land.

Outside of our three major projects we were also successful in securing two new large scale residential development opportunities that provide an opportunity to showcase our infrastructure and planning capabilities. We have been appointed as master developer at both Wantage, South Oxfordshire for the construction of 1,500 new homes with associated infrastructure and Buckover, South Gloucestershire for the construction of a new 3,000 home garden village with associated infrastructure. Both of these opportunities have been secured on a 'capital light' basis whereby land is drawn down from the land owner on a phased basis linked to the pace of development and our return is linked to a share of planning gains and a margin on infrastructure works.

Looking forward

2018 promises to be a year of growth, focus and portfolio transition for St. Modwen. Having established our new strategy in 2017 and put in place the appropriate organisation to deliver it, we are now focused firmly on execution.

From a development perspective, we are confident that our activities are focused in areas that benefit from positive growth fundamentals, particularly in industrial/logistics and regional housebuilding, and we are seeking to accelerate activity in both of these areas during 2018. Importantly, this acceleration is based on increasing the rate at which we progress our existing pipeline of projects from our existing capital base; we have no need to acquire assets in what is a very competitive market and we have no need to attract additional funding given the opportunities for recycling capital out of our existing portfolio. As a result, we anticipate a meaningful improvement in both earnings and return on capital in the medium term.

Our commercial investment portfolio is beginning a period of transition as we seek to shift our focus towards industrial and logistics through retaining a greater proportion of our development pipeline and reducing our exposure to both retail and smaller, less efficient assets. This planned portfolio rotation is likely to result in some short-term volatility to our rental income profile, and therefore earnings, but will ultimately leave us with a higher quality earnings stream and more focused portfolio. Longer term, this should also provide the foundations for a meaningful increase in the income component of our returns.

The external environment is uncertain and is likely to remain so for some time, but we believe that our more focused strategy is well suited to such an environment. Our business is focused primarily in the regions, where there are less pronounced Brexit-related headwinds for property markets than in Central London, and on sectors that benefit from good structural growth prospects and, in the case of regional housebuilding, supportive Government policy.

The combination of our focused strategy, deep pipeline of projects, financial strength and unrivalled track record and expertise leaves us well placed for the future.

PORTFOLIO AND OPERATIONAL REVIEW

Portfolio focus and capital discipline

Valuation performance

Our portfolio was valued at £1.7bn at the end of November 2017. Adjusted for investments and disposals, our portfolio value increased by 2.6% during the year. This valuation uplift was largely driven by development gains and an increase in the value of our industrial portfolio, partly offset by a modest weakening in retail values and the New Covent Garden Market (NCGM) cost provision.

The value of our income producing portfolio, which makes up 51% of our total portfolio (2016: 45%), increased by 1.5%. Industrial/logistics values increased 6.2%, reflecting a combination of yield compression and rental value growth. Retail values were down 2.1% as valuation yields softened and other assets (mostly PRS/student housing) were up 0.8%. Overall, our income producing portfolio was valued at an equivalent yield of 7.5% at the end of November, which was down 20bps for the year on a like-for-like basis.

The remainder of our portfolio consists of a combination of current developments (19%) and land earmarked for future development (30%). Commercial land values were up 3.5% during the year, whilst commercial developments were up 15.9%. Residential land values were up 1.1%, as increases in value of land at NCGM and other sites including South Ockenden were partly offset by the increased cost provision for NCGM.

Looking forward to 2018, we expect retail values will continue to see some further softening, but good investment and occupational demand continues to underpin industrial/logistics values. We expect upside in land values to be largely reliant on potential further planning gains.

(1) Portfolio valuation movements exclude current residential developments.

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

(3) Excludes inventories of £39m included within the income producing portfolio.

Operational performance

Our £844m income producing portfolio currently generates £60m in annualised passing rent. Like-for-like rent increased 3.3% during 2017, with 6.7% growth in industrial ahead of 1.2% growth in retail. Overall vacancy increased from 10.7% in November 2016 to 11.7% in November 2017, partly due to a number of larger lease expiries in assets which have been taken offline for planned refurbishment. Part of our vacancy is deliberately held back for future redevelopments.

Excluding developments, we signed almost two million sq ft of new leases and lease renewals during the year generating £11.6m of annualised rental income, on average 15% above previous passing rent and 1% above November 2016 ERVs. The overall ERV of our income portfolio currently stands at £74.8m. Our average remaining lease term to first break increased slightly to 5.3 years (2016: 5.2 years).

(1) Excluding £2.7m (ERV £3.6m) of passing rent on land and £0.8m of turnover rent at Trentham Gardens.

During the year we created a centralised asset management function as part of our new organisational design. Historically our income producing portfolio was largely held to cover the running cost of the business through its relatively high rental yield and to act as a source of future redevelopment potential, but over the next few years income producing assets will start to make up a much larger part of our portfolio and should become a performance driver in their own right. The planned sale of our c. 100 smallest assets of on average £1m each, retention of the majority of our industrial/logistics developments, disposal of more of our retail assets and focused asset management approach is expected to lead to opportunities to improve operational efficiency over the next few years. The effects of this will mostly become visible in 2019 and 2020 rather than 2018, as there is a time-lag before our current initiatives translate into actual results.

Investments and disposals

2017 has been an active year, marking the start of a significant shift in the shape of our portfolio. Excluding our housebuilding activities, we have invested £213m in developments and acquisitions, which was more than offset by £324m in disposals during the period and a further £165m since the year end.

As we have substantial potential to invest in our own pipeline at much higher returns than those available in the current investment market, we have been very selective in acquisitions. We acquired £68m of assets, of which £49m comprised land drawdowns under existing development agreements for near-term development starts, principally at Uxbridge and Wantage. We also acquired a £7m industrial asset in Speke (Merseyside) where we see potential to redevelop and significantly increase the current 368,000 sq ft space.

We have been very active on the disposal side, having sold £324m of assets during the year. The largest deal was the disposal of Nine Elms Square, New Covent Garden Market for a total consideration of £470m. This was in line with the May 2017 valuation and released £190m net proceeds for our share of the site. In addition, we have sold 25 small assets for a total amount of £27m (15% above book value), two industrial assets where we believe further upside was limited for £19m (18% above book value) and four non-industrial developments for £27m. We also stepped up the disposal of residential land and sold 54 acres of oven-ready land for the construction of 1,188 new homes for £56m (2016: £48m), capitalising on the continued good levels of demand from housebuilders.

Since the end of November 2017, we have completed the disposal of the existing 2,005-bed student accommodation at Bay Campus, Swansea University in a deal which releases £87m of capital, with gross proceeds of £139m partially offset by the transfer of the corresponding finance lease creditor. We have also disposed of an industrial asset in Eastleigh (£10m our share) and the last phase of residential land at Mill Hill, North London (£16m our share). On average, these deals were in line with the latest book value.

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

(2) Income producing assets excluding land.

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

In 2018 we will continue to rebalance our portfolio to those sectors which offer the best return prospects. We expect to sell more of our remaining small asset portfolio, now comprising 80 assets valued at c. £80m, and more of our retail assets as we target a total disposal volume for these types of assets of around £100-150m. We plan to recycle this capital into retaining more of our industrial/logistics developments. We will also look to accelerate the release of capital from our land bank and plan to pursue new projects mostly on a 'capital light' development agreement basis where our initial capital outlay is limited. We have already increased our exposure to income producing assets to 51% (2016: 45%) and intend to grow this further over the next few years, recognising the significant cost of holding non-income producing land over time. We will remain very selective in terms of acquisitions, as we generally see better returns from investing our capital in our own developments than competing for existing assets.

Commercial development

In 2017 we invested £145m in commercial development, delivering £30.6m in profits (2016: £30.4m). Including 0.9m sq ft industrial/logistics space, we completed 1.4m sq ft of commercial projects, with a total GDV of £216m. We will retain £73m of this and have already secured 54% of the associated c. £6m ERV with a further 11% under offer. Around 60% of this was still held as development assets at 30 November 2017, whilst the rest has already been transferred to the income producing portfolio. Key completions included the latest 543-bed phase of student housing at Swansea, which we sold to UPP following the year end as part of a larger transaction, a 180-bed Royal Centre for Defence Medicine at Longbridge which we pre-sold to the MoD's DIO, 78,000 sq ft industrial space at Parkside which we let to Bosch and DB Schenker, and 153,000 sq ft logistics space at Tamworth which is currently being marketed and where we are seeing good levels of tenant interest.

Our current committed pipeline of 1.6m sq ft has a total GDV of £326m, development cost of £272m (2016: £198m) and a further £178m cost to complete. The majority of this 1.6m sq ft is focused on industrial and logistics, which we anticipate to deliver a yield on cost of c. 8% and a profit on cost of c. 20%, with an expected overall GDV of £126m, of which we expect to retain the majority. Around 90% of our committed pipeline is in sectors where the structural outlook is positive, including the next phase of development at Swansea Bay and PRS at Uxbridge. Reflecting the healthy occupational demand for our assets, our industrial and logistics committed pipeline is currently 40% pre-let/sold (2016: 21%), with key lettings of 164,900 sq ft to Spanish train manufacturer CAF at Celtic Business Park and 113,000 sq ft to global automotive manufacturing firm Grupo Antolin at Barton Business Park.

(1) Including land.

As part of our strategic review during the year, we identified our existing commercial land bank had the potential to deliver 17.3m sq ft of industrial/logistics space in the long term. Of this, we identified 7.5m sq ft which could be delivered in the next five years based on planning and strength of location, most of which is located in the Midlands and South West. We plan to accelerate the delivery of this 7.5m sq ft over the next few years, but the short lead-time of these schemes means we retain flexibility should demand for space unexpectedly deteriorate. Including land preparation costs, the expected future capex on these projects is c. £490m, on top of a current land value of c. £90m. With an expected ERV of c. £45m these projects should deliver a yield on cost of c. 8% and profit on cost of c. 20%, with a yield on incremental capex investments of over 9%.

In 2018 we plan to grow the amount of industrial/logistics space we deliver by up to 25% subject to market demand and we will work on preparing our pipeline for 2019 and 2020 such that we maintain the potential to deliver a similar growth rate. Given the high quality of industrial and logistics assets we build and positive medium-term outlook for these locations, we intend to retain the majority of these developments. A large part of our development profits will therefore become non-cash revaluation gains, although this change has no impact on our overall profitability. We will also continue to progress our pipeline of PRS and student accommodation opportunities, but managing these assets efficiently in the long run requires a platform and scale we do not envisage building up ourselves. In addition, we intend to sharpen the focus of our commercial land holdings to those locations where we see most near-term development upside.

Residential development - housebuilding

The UK housebuilding market remains resilient, especially in the regions, which is where the bulk of our activities are focused. As such, we have continued to see good demand for new homes built by our housebuilding subsidiary St. Modwen Homes, which sold 694 units during the year. This marked a 43% increase for the year (2016: 485), whilst the average private sales price increased 19% to £259,000 (2016: £217,000). Like-for-like private sales prices increased 6%, reflecting the good demand for our high-quality houses, with the balance due to an increase in average unit size and the mix of sites, including Uxbridge.

St. Modwen Homes retained its 5-star customer service and quality status from the HBF and gained RoSPA Gold safety accreditation, demonstrating that growth does not have to come at the expense of quality or safety. This will remain a key focus going forward. Net operating margins increased to 13.9% (2016: 13.4%), but as we transfer land to St. Modwen Homes at market value instead of at historic cost and do so on a 'just in time' basis for development, we estimate this continues to artificially reduce margins by c. 3ppt.

Overall, housebuilding activities contributed £31.4m operating profit for the year (2016: £27.1m). Reflecting its strong growth, St. Modwen Homes delivered a 52% increase in operating profit to £23.3m (2016: £15.3m). This more than offsets the reduction in operating profit from our Persimmon JV to £8.1m (2016: £11.8m) as this continues to scale down its activities as planned, having sold 227 units during the year (2016: 402).

For 2018, we expect sales volumes for St. Modwen Homes to grow by up to 25%, but despite this strong growth our focus remains first and foremost on retaining our high quality and safety standards. St. Modwen Homes was actively selling on an average of 15 sites during 2017 (2016: 11), which we expect to increase to 20 in 2018. We expect volumes in the Persimmon JV to reduce by around half as it continues to wind down its activities over the next two years, but we expect the reduction in profits from this to be more than offset by growth in St. Modwen Homes' profits. We expect St. Modwen Homes' operating margins to improve by a similar level as in 2017 and still see room to improve margins by 2-3ppt over the medium term.

Residential development - residential land

During 2017 we secured planning consent for more than 2,000 new homes (2016: 1,670), including 370 at Longbridge and 200 at Victoria Ground, Stoke-on-Trent. At the end of 2017 our residential land bank comprised approximately 22,000 plots (2016: 25,000), mostly in the Midlands and South West, plus an additional 2,400 plots where development is subject to third party consent.

As part of our strategic review this year, we indicated that we intend to grow sales volumes in St. Modwen Homes by up to 25% per year over the next couple of years, but even at this pace it would take us well over 15 years to work through our current land bank. We therefore earmarked 7,700 plots for St. Modwen Homes and plan to sell most of the remaining plots to other housebuilders over the next few years to realise the value we have created. We already sold 1,188 plots during the year and we continue to see good demand from housebuilders. Notable deals included sales at Mill Hill (609 units) and Ellesmere Port (327 units). Combined with the sale of Nine Elms Square, the sale of the final phase of Mill Hill following the year end reduced the London exposure of our residential land bank from approximately 46% to 11%.

Major regeneration projects

In 2017 we have continued to make good progress at our three major regeneration projects, Longbridge, New Covent Garden Market and Swansea, whilst we agreed two new major residential-led projects in Wantage and Buckover which will deliver a total of 4,500 homes.

At Bay Campus, Swansea we successfully completed the latest 543-bed phase of student accommodation ahead of the 2017/18 academic year, taking the total number of students living on campus to approximately 2,000. Since the year end we have sold the existing student accommodation to UPP for gross proceeds of £139m, with net proceeds of £87m reflecting the transfer of the associated finance lease creditor. This transaction introduces an experienced operator on campus whilst releasing funds for us to invest in the next phases of development. We have started the development of the next phase of academic facilities and the next 400 of the remaining 2,000 beds of student accommodation, which will complete in summer 2018 and early 2019 and have a GDV of over £50m, and we continue to work closely with Swansea University to progress the remaining substantial future development opportunities.

Longbridge saw the completion of the development of 180 beds of key worker accommodation for the MoD's DIO, a 260-apartment Extracare retirement village and further new homes by St. Modwen Homes and other housebuilders. With the overall project c. 50% developed, we will continue to progress further development.

At New Covent Garden Market, via our JV with VINCI, we sold ten acres of land at Nine Elms Square for £470m, crystallising a substantial profit and releasing net proceeds of £190m for our 50% share. The JV continues to work on the relocation of the existing market facilities, which will be ongoing for a number of years. Following the disposal of Nine Elms Square we have undertaken a full review of the remaining works. The complicated nature of working on a site with a live market and an anticipated extended duration of the project have resulted in an increase in expected construction costs, with our share of this increase being £24.6m. This was partly offset by a £14.5m increase in the value of our land holdings. Our share of the remaining ten acres of land, which will be released upon completion of the market relocation, is now valued at c. £6m per acre.

During the year we secured two new large residential-led developments. At Kingsgrove, Wantage we signed a development agreement to deliver a mixed-use community of 1,500 homes over the next 10-15 years across a 227-acre site and St. Modwen Homes commenced works in late 2017. We also signed a development agreement to deliver Buckover Garden Village, a new community of up to 3,000 homes in Gloucestershire over the next 25 years, together with our development partner, the Tortworth Estate. We anticipate submitting a planning application for the 536-acre site during the second half of 2018.

Looking forward, we will continue to pursue new regeneration opportunities on a 'capital light' basis, but as these new projects are opportunistic by nature, it is difficult to make specific forecasts for this.

FINANCIAL REVIEW

Overview

During the year, we have delivered a solid performance in spite of the continuing uncertain market environment and have made strong progress in delivering upon the portfolio focus and capital discipline element of our strategy. NAV per share increased 4.6% to 450.9 pence (2016: 431.0 pence) and EPRA NAV per share increased 2.3% to 471.2 pence (2016: 460.5 pence) in spite of an 8.3 pence or 1.8% reduction as a result of deferred tax crystallising on the sale of land at Nine Elms Square. The underlying business performed well, as evidenced by trading profits of £64.6m (2016: £56.1m), and total valuation gains increased considerably to £34.6m (2016: £4.1m). As previously noted, the review of NCGM resulted in an increase in our share of the forecast market cost estimate of £24.6m. However, the £34.6m valuation gains above include our share of an uplift in the value of the land at Nine Elms Square of £14.5m, which together with the market cost increase results in a combined charge to the income statement of £10.1m.

Shortly after the year end, we refinanced £488m of bilateral secured debt facilities with a £475m unsecured revolving credit facility with an initial maturity of five years which can be extended to a maximum of seven years, subject to lender consent. In line with our strategic plans, the refinancing provides a reduced cost of debt and improved operational flexibility. The transition to unsecured debt financing provides us with the option to extend further our debt maturity profile and diversify our sources of unsecured finance ahead of the maturity of our £100m convertible bond and £80m retail bond in 2019.

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 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. 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 joint venture, Key Property Investments (KPI), owns a portfolio of principally income producing industrial assets acquired between 1998 and 2002.

Our key performance metrics include a new measure of adjusted EPRA earnings and an adjusted EPRA EPS calculation, 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 now 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. This change has no impact on our overall profitability.

Our current dividend policy is linked to NAV growth, but this includes non-cash items which cannot directly fund dividends. In order to align our dividend policy to cash profitability we therefore intend to pay a dividend equivalent to approximately 50% of adjusted EPRA EPS from the year ending 30 November 2018, with the aim of providing a sustainable, progressive dividend for our shareholders.

Our total dividend payable for 2017 is 6.28 pence (2016: 6.00 pence), an increase of 4.7% in line with NAV growth.

(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 has increased in the year to £55.8m (2016: £50.1m). The disposal of our student accommodation at Swansea completed after the year end and will result in a reduction of c. £5.8m net rental income in 2018, offset by a reduction of £2.1m in finance lease interest due to the sale. Our target to dispose of £100m to £150m of retail and small assets this year will likely result in a further temporary reduction in net rental and other income, given the time lag in recycling these proceeds into our industrial/logistics developments.

Overheads

Administrative expenses for the year were £29.0m (2016: £29.3m) reflecting a £1.5m one-off credit relating to the closure of our insurance captive. With planned investment in our organisational capabilities to deliver our planned growth, we expect costs in 2018 to increase from the underlying level by c. 5% next year.

Cash finance costs and income

Finance costs have increased during the year in line with increases in the average levels of see-through net debt prior to the sale of the land at Nine Elms. See-through net cash finance costs increased to £24.2m (2016: £22.2m). For the coming year, we expect finance costs to reduce as a result of lower net debt, a lower cost of debt due to the recent refinancing and the reduction in finance lease interest from the Swansea sale.

Non-cash finance costs and income

Net non-cash finance costs were £7.6m (2016: £0.6m income). The elements of these non-cash costs which recur at reasonably constant levels are a £5.2m (2016: £5.6m) charge for discount unwinds, principally on our share of the long-term liability to deliver the NCGM project, and a £2.2m (2016: £1.5m) charge for the amortisation of arrangement fees in relation to our loan facilities.

The other material components of these non-cash costs are inherently less predictable, as they are dependent on market movements. These relate to the valuation of our convertible bond, where we would expect a charge if the likelihood of conversion increases (i.e. if the share price increases), and the valuation of the derivatives we use to hedge our interest rate risk, where we would expect a charge if swap rates are lower than the prevailing rates at the time we entered into the derivatives. For the year just ended, the net effect of these two items was minimal, whereas in the prior year, a large favourable movement in the convertible bond more than offset the charge for discount unwinds and amortisation of arrangement fees.

Property valuation

All of our investment properties are independently valued every six months by our external valuers Cushman & Wakefield and Jones Lang LaSalle (the latter for NCGM only). Our valuers base their valuations upon an open market transaction between a willing buyer and a willing seller at the balance sheet date. Therefore, no value is taken for any future expected increases but discounts are applied to reflect any future uncertainties.

In accordance with accounting standards, valuation movements are reflected as gains or losses in the income statement. We will also independently assess our work in progress for any impairment issues. Valuations in all our asset classes have been validated wherever possible by open market transactions during the course of the year. The total valuation gain in the year was £34.6m, compared to £4.1m in 2016, for the reasons previously outlined.

Profit before all tax

Profit before all tax for the year was £67.0m (2016: £60.8m), and is stated before tax on joint venture income.

Taxation and profit after tax

Our total tax charge (including joint venture tax) for the year was £6.9m (2016: £7.2m) resulting in profit after tax on a proportionally consolidated basis of £60.1m (2016: £53.6m).

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 see-through effective rate of tax for the year was below the prior year at 10.3% (2016: 11.8%), resulting from a blend of a lower Group tax charge of 12.9% (2016: 14.0%) due to the reduction in the deferred tax rate, and a higher JV tax credit in the period. Following the freezing of indexation allowance from 31 December 2017 announced in the November budget, and as signalled in previous reporting updates, the effective tax rate is expected to move towards, but remain slightly below the standard rate of tax of 19%.

Balance sheet

At the year end the shareholders' equity value of net assets was £1,000.3m (2016: £955.2m) or 450.9 pence per share which represents a 4.6% increase over the year (2016: 431.0 pence per share). This growth is after the increased dividend payments (2017 interim and 2016 final) of £13.5m or 6.08 pence per share (2016: £12.8m or 5.79 pence per share). Our EPRA net asset value rose 2.3% to 471.2 pence per share from 460.5 pence per share in spite of an 8.3 pence or 1.8% reduction as a result of deferred tax crystallising on the sale of land at Nine Elms Square.

(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.

(2) Our definition of total accounting return was revised in the year so that it now represents dividends paid in the year plus the movement in NAV per share in the year, rather than the movement in EPRA NAV per share. This change reflects that our strategy includes the repositioning and recycling of our portfolio towards sectors with strong structural growth, whereas the EPRA model assumes that properties are retained. Using the revised definition results in a total accounting return of 6.0% (2016: 5.6%) as noted above. Under the previous definition, total accounting return would have been 3.6% (2016: 4.5%). Further information is included in note 2 to the Group financial statements.

Financing

During 2017 we achieved a significant reduction in our year end see-through net borrowing position, mostly through the Nine Elms Square sale. The year end figure also benefited from a £49.0m share of the cash held in a Development Account for delivery of the NCGM project.

Cash generated (before new investment, tax and dividends) was £542.7m (2016: £306.4m) and new investment was managed tightly such that net borrowings, including our share of JVs, decreased to £388.2m (2016: £517.0m). Whilst inventories increased by £125.8m to £361.9m (2016: £236.1m) around half of this increase results from accelerated activity and land transfers for St. Modwen Homes with the remainder reflecting increased commercial development in line with our strategy. See-through loan-to-value of 24.2% (2016: 30.5%) improved markedly upon the prior year. Excluding residential, the Group's see-through loan-to-value ratio fell to 37.2% (2016: 54.3%) and, whilst the Company's capital structure remains strong, we are aiming to continue to reduce this over time.

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

Refinancing

As noted above, shortly after the year end, we achieved a transformational refinancing, moving from bilateral secured facilities to an unsecured club structure. In doing so, we paid off the balance sheet liability for out of the money interest rate swaps for a cash outlay of £5.1m and entered into an interest rate cap. This hedging activity will result in initial annual savings of c. £2.5m. A non-cash expense of £3.4m will be recognised in the first half of the Group's 2018 financial year in respect of capitalised arrangement fees relating to the previous facilities. These actions increased our weighted average facility life to 4.1 years from 2.7 years at the year end (or to 5.5 years if the two one-year extensions are applied). With £690m of see-through committed facilities against see-through net borrowings of £388.2m, we have ample headroom to transact.

(1) The weighted average interest rate is calculated using current interest rates and hedging profile applied to the Group net borrowings at 30 November 2017, thereby assuming constant net borrowing levels for 2018.

Hedging and cost of debt

We aim to have predictable costs attached to our borrowing and therefore hedge a significant portion of our interest rate risk. At the year end, 82.8% (2016: 50.0%) of our borrowings were fixed or hedged. Our ongoing interest rate risk will be managed via a combination of caps and hedges to maintain compliance with this policy.

Our spot year-end weighted average cost of borrowing increased to 4.4% (2016: 3.8%) as a result of lower borrowings at the lower marginal rates on our banking facilities. The refinancing actions described above shortly after the year end reduce this to 3.7%, despite the lower borrowings.

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 a 40% fall in values before our covenants would be breached.

Mark Allan Rob Hudson

Chief Executive Chief Financial Officer

5 February 2018