SMP.L Regulatory News (SMP)

Date of issue: 4 February 2020

LEI: 213800WMV4WVES8TQH05

ST. MODWEN PROPERTIES PLC

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

Results for the year ended 30 November 2019

St. Modwen delivers continued progress on focused growth strategy

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

"2019 has been a positive year for St. Modwen. Following our major portfolio repositioning, our focus shifted to growth, building on the substantial opportunities in our existing portfolio. This resulted in another year of strong growth in housebuilding volumes and growing momentum in industrial and logistics development, where structural growth drivers remain positive. Underpinned by a solid balance sheet and continued capital recycling, we expect the delivery of our strategy to drive a meaningful improvement in return on capital and, with 22% growth in 2019, we are well on track to broadly double our adjusted EPRA EPS in the medium term."

Financial highlights

·; NAV per share up 3.0% to 484.2 pence (2018: 470.2 pence)(2) despite 7.8 pence exceptional provision.

·; Underlying total accounting return of 6.3% (2018: 6.0%), before impact of 1.7ppt of exceptional provision.

·; Adjusted EPRA EPS up 21.7% to 17.4 pence (2018: 14.3 pence) reflecting successful delivery of strategy.

·; Total dividend for the year up 22.5% to 8.7 pence (2018: 7.1 pence) due to strong growth in earnings.

·; Profit for the year of £49.5m after £18.5m exceptional cost, with basic EPS of 22.8 pence (2018: 27.1 pence).

·; Conservative see-through LTV of 19.6% (2018: 16.9%) providing ample headroom for future investment.

Operational highlights

Strong progress across each of our three business units in delivering our growth-focused strategy, building on our existing deep pipeline of opportunities in three sectors with good structural growth prospects.

·; Industrial & Logistics: building leasing momentum; growing development activity

o Grown industrial and logistics exposure to 44% of total portfolio by value (2018: 33%), driven by successful developments and underlying growth.

o Delivered 0.9m sq ft of new space of which 97% will be retained (2018: 0.9m sq ft and 69%), with 58% of associated £5.5m ERV let or under offer, up from 54% for our 2018 completions this time last year.

o Expect to deliver 1.5-1.7m sq ft of new space during 2020, of which 1.5m sq ft is already committed, 94% of which is set to be retained with an expected ERV of £9.5m, 18% of which is pre-let.

o Grown total future pipeline to c. 19m sq ft, 45% of which already has planning with an associated ERV of c. £56m, providing substantial medium- and longer-term growth potential.

·; St. Modwen Homes: growing volume and margins; delivering high quality and customer service

o Delivered 25% growth in volumes with 1,060 units sold during the year (2018: 848) and grown margins to 14.8% (2018: 14.4%), driving 28% growth in operating profit to £40.1m (2018: £31.3m).

o Home Builders Federation customer satisfaction rating tracking over 90%, equivalent to 5* status, and net promotor score of 76 (2018: 63), underlining high quality and focus on customer service.

o Pipeline in place to grow volumes by up to 20% p.a. to 2021 and opportunity to grow further, at a more normalised rate, beyond that, with clear steps identified to grow margins to c. 16-17% in medium term.

o Current trading remains strong, with 34.0% of targeted full-year private sales forward sold (Feb 2019: 34.6%) and broadly similar improvement in margins expected for 2020 as for 2019.

·; Strategic Land & Regeneration: recycling capital; progressing longer-term opportunities

o Sold £65m of non-core assets, including more than half of residual non-core retail, reducing non-core retail to just 2% of total portfolio by value, down from 16% at start of 2018.

o Agreed sale of £30m of residential land (2018: £53m) in-year, and 663 plots at two large sites in South Wales for £25m since the year-end, with c. 900 plots across both sites in advanced legal discussions.

o Prepared next phases of development at Longbridge for start on site in 2020, delivered latest phase of development at Swansea Bay Campus and progressed longer-term mixed-use opportunities. 

·; On track to broadly double adjusted EPRA EPS from 2018 level of 14.3 pence in medium term and deliver on ambition to grow total return to low-double digit levels over time, assuming markets remain stable, capitalising on significant growth potential embedded in existing pipeline and capital base.

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 notes 2 and 3 to the Group financial statements.

(2) Following the adoption of IFRS 9 Financial Instruments during the year ended 30 November 2019, the comparative values of EPRA NAV per share and NAV per share at 30 November 2018 have been reduced by 0.1 pence and 0.2 pence respectively to reflect the retrospective restatement required for recognising provisions against trade and other receivables using an expected credit loss rather than an incurred loss model. The Group has also adopted IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases during the year ended 30 November 2019, but there has been no impact on the reported measures as a result of the adoption of these standards. Further detail is given in the accounting policies note to the Group financial statements.

This announcement contains certain forward-looking statements. Forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "plans", "goal", "target", "aim", "may", "will", "would", "could" or "should" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. Forward-looking statements 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.

CHAIR'S STATEMENT

2019 has been a positive year for St. Modwen, with a continued increase in momentum in delivering our growth-focused strategy. During the year we restructured our internal organisation to fully align this to our three strategic objectives: build a high-quality industrial and logistics business, grow our residential and housebuilding business, and leverage our regeneration reputation - all of which is built around our core purpose, 'Changing places. Creating better futures.' In delivering on this purpose, we aim to create value for all our stakeholders, be it through bringing to life unloved, disused sites to create thriving new communities; delivering affordable, high-quality houses and a first-rate experience to customers looking for a new home; developing modern logistics and industrial space for businesses to grow and jobs to be created; or investing in our own people.

The positive momentum has been visible in each of our three business units, with a 25% increase in volumes in St. Modwen Homes; 85% growth in leasing and an over 60% step-up in development planned for 2020 in Industrial & Logistics; and £133m of disposals and good development progress in Strategic Land & Regeneration. We delivered a 21.7% increase in our adjusted EPRA EPS in 2019, driving a 22.5% increase in our dividend for the year to 8.7 pence per share. Our underlying total accounting return improved to 6.3%, which is stated before the impact of 1.7ppt due to the exceptional provision for a legacy project the Group developed and sold c. 15 years ago. This reduced our NAV by 1.6% but despite this, our NAV per share increased 3.0% during the year and our balance sheet remains strong, with a low 19.6% see-through LTV, even after further investments in growth.

Board changes

At the AGM in March I took over as Chair from Bill Shannon, who stepped down following eight years in the position. In September we announced the appointment of Sarah Whitney as non-executive director, who brings a wealth of experience in the real estate and corporate finance sectors to the Board, especially with respect to public private partnerships.

In November we announced that Mark Allan would be stepping down as Chief Executive during 2020 to take up the role of CEO at Land Securities plc. Mark will stay with the business until 30 April and gradually hand over responsibilities to our CFO, Rob Hudson, who will take on the role of interim Chief Executive until a new Chief Executive joins the business. A search process is well underway, focusing on external candidates, and we will provide an update on this as and when appropriate.

On behalf of the Board, I would like to wish Mark well in his new role and thank him for his substantial contribution to St. Modwen over the last three years. Under his leadership the business has seen a major transformation in culture, people agenda and purpose, which is reflected in our new Responsible Business ambitions, and it embarked on a successful growth strategy in three key sectors which are supported by long-term structural growth characteristics. While we remain alive to any future changes in the external environment, the Board is highly supportive of this strategy and therefore does not intend for this strategy to change. Our financial leverage is low, and we have a portfolio full of opportunity and a highly skilled team in place, so our focus is on delivering on the substantial growth potential we have in each of the three parts of our business.

People and culture

In my first year as Chair of St. Modwen, I have had the pleasure of meeting many talented people across all levels of our organisation. This confirmed to me that St. Modwen truly is a unique business, with an expertise rooted in its long, successful history but also an ambition to innovate and lead the way through the delivery of our purpose. How we do business is an important part of this and to create a clear link between our strategy and our ESG efforts, we will be launching our Responsible Business ambitions in early 2020. Our people are key to the success of our business, so it is important we maintain our positive, supportive culture and values. For us as a Board, this is paramount, and I would like to thank everyone for their valued contribution to our success.

Prospects

The external environment may be less unsettled than it was but having formally left the EU at the end of last month, the UK still faces uncertainty as it looks to establish new trading relationships with our international partners. Nevertheless, the outlook for St. Modwen is positive. Through the repositioning of our business in the last few years, we have materially improved our portfolio quality, reduced our borrowings and aligned our organisational design. Our capital base is strong, our strategy is focused on growth in three sectors which are supported by positive long-term fundamentals and in each of these areas we have a substantial pipeline of opportunities in place. As such, we are confident that delivery against this strategy will continue to create value for all our stakeholders, thereby truly delivering on our purpose: 'Changing places. Creating better futures.' Building on our successful track-record and unique expertise, we therefore look to the future with confidence.

CHIEF EXECUTIVE'S REVIEW

Overview

2019 for St. Modwen has been a year of growing momentum in the strategy we set out in spring 2017. The first phase of this strategy was focused on repositioning our portfolio and strengthening our balance sheet, resulting in the sale of over £800m of assets by the end of 2018 and a reduction in LTV from 33.1% to 16.9%. Since the start of 2019 our focus has been on the next phase of our strategic plan - driving growth in each of our three focus areas: industrial and logistics; housebuilding; and strategic land and regeneration. Each of these sectors is underpinned by structural growth characteristics and in each area we have a deep pipeline of opportunities in our existing portfolio. Momentum has been positive in all three parts of our business, with 25% volume growth in St. Modwen Homes, terms agreed on 58% of the space we completed during the year in Industrial & Logistics, and the agreed sale of 663 plots of residential land in Wales, with a further c. 900 in advanced legal discussions.

Our underlying results are in line with our expectations and show our strategy is starting to deliver an improvement in returns. However, as announced in December, an exceptional provision for a legacy project reduced our total accounting return by 1.7ppt, while valuation weakness in our small amount of non-core retail reduced this by a further 2.0ppt to 4.6% (2018: 6.0%). Still, NAV per share increased 3.0% to 484.2 pence (2018: 470.2 pence)(1) and EPRA NAV per share grew 4.2% to 504.2 pence (2018: 484.0 pence)(1). Despite lower rental income due to our large amount of non-core disposals during 2018, growth in housebuilding profits and lower interest costs meant adjusted EPRA earnings increased 22.1% to £38.7m (2018: £31.7m). Adjusted EPRA EPS rose 21.7% to 17.4 pence (2018: 14.3 pence), leaving us well on track to broadly double this in the medium term and driving a 22.5% increase in dividend to 8.7 pence per share (2018: 7.1 pence). After £18.5m of exceptional costs, profit for the year was £49.5m (2018: £60.5m), with basic EPS of 22.8 pence (2018: 27.1 pence).

(1) Following the adoption of IFRS 9 Financial Instruments during the year ended 30 November 2019, the comparative values of EPRA NAV per share and NAV per share at 30 November 2018 have been reduced by 0.1 pence and 0.2 pence respectively to reflect the retrospective restatement required for recognising provisions against trade and other receivables using an expected credit loss rather than an incurred loss model.

(2) Including the Group's share of net borrowings (being net debt at amortised cost less lease liabilities) and property held in joint ventures and associates.

People and organisation

The positive momentum in our business is a clear reflection of the hard work and dedication of our people. In order to strengthen the alignment between individual roles and our strategic objectives, we changed our organisational design during 2019 from what had historically been a regional structure to a functional structure with three dedicated business units: Industrial & Logistics, St. Modwen Homes and Strategic Land & Regeneration. Our purpose 'Changing places. Creating better futures.' sits at the heart of everything we do in each part of our business. This new organisational design has further enhanced our culture of empowerment and accountability and with these results we have also aligned our financial reporting to this, with new segmental balance sheets, income statements and returns on capital for each business unit. Our people are pivotal in delivering on the opportunities our strategy offers, so we will continue to invest in every part of our workforce.

Bringing our purpose to life

Having substantially completed the repositioning of our portfolio and internal organisation, the next phase of our strategy provides a clear opportunity to really bring to life our core purpose: 'Changing places. Creating better futures.' To remain successful as a business in the long term, financial results must be delivered in tandem with a meaningful, positive impact on society and the environment. We have been working on many social and environmental initiatives across the business for years but there is an opportunity to bring our ESG efforts together and establish a sustainable approach for the long term. In early 2020 we will therefore be launching six Responsible Business ambitions, based around net carbon reduction, with the aim to become operationally net zero carbon by 2025 and fully net zero carbon by 2040; biodiversity and sustainable environments; diversity and inclusion; education and future skills; health and wellbeing; and responsible operating practices and partnerships. All of these are aimed at truly bringing our purpose to life in every part of our business.

Industrial & Logistics

Our Industrial & Logistics business had a positive year in 2019, as we continued to reinvest the proceeds from our non-core disposals into our substantial development pipeline in this growth sector. As such, industrial and logistics assets now make up 44% of our portfolio, up from 19% when we launched our new strategy in mid-2017. We expect this to grow further in the coming years, as we accelerate the delivery of our attractive pipeline.

Similar to last year, we completed 0.9m sq ft of developments during 2019, but we retained 97% of this space for our own portfolio (2018: 69%), improving the build-up of income. We have seen momentum in leasing build, so of the £5.5m ERV related to space we completed in 2019, 58% is let or under offer (early 2019: 54% of ERV completed in 2018), and we are seeing good interest in the remaining space.

We expect development completions to increase materially in 2020, to 1.5-1.7m sq ft, which allowing for some lease-up time, is expected to drive strong income growth for 2021 in particular. 1.5m sq ft of this is already committed, with a total development cost of £133m. We expect to retain 94% of this, which with an associated ERV of £9.5m is expected to deliver a yield on cost of 7.6% once fully let. Around 80% of this is focused on small to medium sized units of less than 150,000 sq ft, leaving us well positioned to benefit from the growing demand for last mile delivery space, as evidenced by our recent lettings to Ocado and DHL, and warehouse space near urban locations. Reflecting the growing leasing momentum, 18% of this is already pre-let (early 2019: 2%).

During the year we have expanded our pipeline, so our total pipeline now has the potential to deliver c. 19m sq ft of space in the long term, of which 45% has planning. We estimate the latter could deliver c. £56m of ERV, which with a c. 8% yield on cost and a c. 9% yield on incremental capex offers room for substantial development upside and income growth in future years.

St. Modwen Homes

Our housebuilding business St. Modwen Homes, which makes up 26% of our property assets, had another year of strong growth in 2019. We sold 1,060 units, marking an increase of 25% compared to the prior year (2018: 848 units); at the top end of our target to grow volumes by up to 25%. In line with our target, our operating margin increased to 14.8% (2018: 14.4%) and while the private average sales price reduced 3.2% compared to 2018 due to changes in sales mix and location, like-for-like sales prices increased 3.1%. Importantly, this growth was underpinned by an improvement in quality and customer experience, as we are on track to achieve 5* HBF housebuilder status and saw an increased net promoter score to 76, while our focus on the safety of our people resulted in a further reduction in our accident frequency rate, to less than one-tenth of the industry average.

Since the year end, demand for high-quality new homes in the regions, where most of our activity is focused, has remained strong so we have forward-sold 34.0% of our targeted private unit sales for the year (Feb 2019: 34.6%). We are currently sales-active on 21 outlets and will be opening a further six in the coming weeks (early 2019: 20). As such, we remain on track versus our medium-term growth ambitions yet having more than doubled our sales over the last three years, the annual rate of growth will naturally start to moderate as the business grows. We anticipate volumes to grow by up to 20% p.a. to 2021 and margins to improve by a broadly similar amount as last year during 2020. Beyond 2021, our existing 6,200-plot pipeline (excluding strategic land held by the Group), provides a solid base for further growth. We plan to selectively supplement this with the acquisition of a small number of oven-ready sites, to smooth the timing of larger strategic sites and grow volumes at a more normalised rate, and we remain on track to improve margins to c. 16-17% over time.

Strategic Land & Regeneration

Our Strategic Land & Regeneration business unit sits at the heart of our activities and combines the delivery of residential land for St. Modwen Homes or third-party housebuilders, often through substantial regeneration, and the delivery of major regeneration projects, which frequently have a large residential element.

Our focus for strategic residential land, which makes up 17% of our assets excluding land held by St. Modwen Homes, remains to monetise the value in our existing land bank and grow our activities through capital-light opportunities, to improve our return on capital. We agreed the sale of 896 plots to third-party housebuilders for £30m during the year (2018: £53m) but since the year end we agreed the disposal of 663 plots across our two sites in South Wales for £25m and we are in advanced legal discussions on the sale of a further c. 900 plots across both sites. Assuming these deals complete, the transfer of land would be phased but this would leave c. 40% of these two sites completed, under construction or controlled by housebuilders for near-term development.

Our focus in regeneration is to accelerate the delivery of projects in our existing portfolio, again to improve our return on capital. We have seen a clear pick-up in momentum at Longbridge, following our work on enhancing the vision for this major scheme and we anticipate starting on site with several public realm investments and mixed-use developments in 2020. At Swansea Bay Campus, we completed the latest phase of 411 student beds which we subsequently sold for £38m and at New Covent Garden Market, we continue the multi-year process of relocating the existing market facilities. Following the sale of our interests in Kirkby and Skelmersdale, we are working with both local councils on delivering the retail development-led regeneration local stakeholders look for, having released all our capital for reinvestment in our core sectors. We also continue to progress early stage discussions on other long-term, mixed-use urban opportunities in our portfolio, including Wythenshawe, Manchester.

Our Strategic Land & Regeneration business unit also covers the small amount of non-core assets we have left following our major portfolio repositioning during 2017-2018. We sold a further £65m of non-core assets in 2019, slightly ahead of our plans, including more than half of our residual non-core retail assets. A fall in retail values reduced our underlying total accounting return for the year by 2.0ppt to 6.3%, but after having already sold £177m of retail assets at a less than 1% discount to book value during 2018, non-core retail is now only 2% of our portfolio (early 2018: 16%) and other non-core commercial assets are down to 3% (early 2018: 17%). We continue to expect to sell these assets over the next two years.

Looking forward

Since we launched our new strategy in spring 2017, we have achieved an enormous amount. We have sold £950m of assets, equivalent to more than half of our initial portfolio, reduced our net borrowings by half and accelerated our development activity. Meanwhile, over the last three years we have grown our adjusted EPRA EPS by 79%, our dividend by 45% and our NAV per share by 12%. These results are testimony to the hard work of all our people and it is this quality and breadth of our team which defines the strength of St. Modwen.

Our strategy is focused on three clear objectives - build a high-quality industrial and logistics business, grow our residential and housebuilding business, and leverage our regeneration reputation - and our organisational structure, with its three dedicated business units, is fully aligned to this. Importantly, each of these three areas is supported by long-term structural growth drivers: demographic growth, on top of an existing shortage of housing, means there is a need for more high-quality, affordable houses; the digitalisation of shopping and changes in the way people work continues to fuel demand for modern, well-located industrial and logistics space; and ongoing urbanisation will require the regeneration of inefficiently used land in urban locations.

Positively, the General Election in December reduced political uncertainty in the UK for the time being and the new Government appears supportive to stimulating growth across the regions. Nevertheless, uncertainties around the general economic outlook remain and even though the UK formally left the EU at the end of January, the shape of our future trading relationships with the rest of the world is unclear. As such, we remain mindful of the uncertainty this could cause in the near term and the potential effects in the long term. While we will therefore maintain a conservative level of borrowings and we have the flexibility to adjust our activity quickly in case of any unexpected changes in demand due to the short-cycle nature of our developments, the positive structural growth characteristics in our key sectors provide us with confidence to continue to invest.

With a low see-through LTV of 19.6% and a significant pipeline of opportunities in our existing portfolio, we remain well-placed to deliver a meaningful improvement in return on capital and earnings over time. 2020 is therefore set to be another year of growth and delivery against our three strategic objectives. The return on capital employed in our Industrial & Logistics business for 2019 was at 12.4% ahead of St. Modwen Homes at 11.4% and in particular Strategic Land & Regeneration at 2.9%, but as we continue to accelerate our development activity and reduce our exposure to land and non-core assets, improving the return on capital employed in the latter two segments underpins our ambition to deliver a sustainable, low double-digit total return over time. Moreover, we remain on track to broadly double our adjusted EPRA EPS from the 2018 level of 14.3 pence in the medium term and expect to make further progress on this level in 2020. As I will leave the Company on 30 April, I am therefore confident to be handing over the business in such a strong position.

PORTFOLIO AND OPERATIONAL REVIEW

Portfolio overview

Investments & disposals

At the start of 2019 we signalled that, having sold over £800m of assets over the preceding 18 months, disposals would slow, and our focus was shifting to growth. Accordingly, during 2019 we invested £134m in developments (excluding housebuilding) and £36m in land for near-term development starts, mostly via existing development agreements, the largest of which being at Gatwick. Further optimising our portfolio, we sold over half of our non-core retail for £36m and 17 other non-core assets for £29m. We also sold the latest phase of student housing at Swansea for £38m and £30m of residential land. On average our disposals were 5.9% below book value, which was solely driven by non-core retail, as our other disposals were on average slightly ahead of book value.

Looking forward, we aim to sell the remaining £74m non-core assets over the next two years and while we will consider other selective disposals where we believe forward returns are below our requirements, overall, we expect disposals to be relatively modest. We remain open to new opportunities in each of our three sectors but given the opportunities in our existing pipeline we will remain selective when it comes to acquisitions. We continue to aim to grow the share of income producing assets in our portfolio to c. 60-65% over time (2019: 42%) by reducing our exposure to land and retaining our industrial and logistics developments.

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

(2) Based on income producing assets excluding land.

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

Portfolio valuation

Our portfolio value rose to £1.48bn during 2019, representing an increase of 4.1% adjusted for investments and disposals. Our industrial and logistics assets make up 44% of this (2018: 33%), including the industrial assets which are part of our Longbridge regeneration site, and we expect this share to continue to grow over the coming years. The rest of our regeneration assets and strategic land make up 25%, while St. Modwen Homes work in progress and land comprises a further 26%. Non-core retail assets now make up only 2% of our portfolio, down from 16% two years ago, and other non-core commercial assets are 3%, down from 17%.

Our Industrial & Logistics assets saw an 8.3% increase in value during 2019, with developments up 21.3% and existing assets up 1.3%. ERVs increased 2.6% on a like-for-like basis and yields were on average broadly stable, as expected. The small amount of £30m non-core retail assets that we have left saw a 31% fall in value, vindicating the sale of £177m of non-core retail assets during 2018 at a less than 1% discount to the 2017 book value. Our other Strategic Land & Regeneration assets were up 2.6%, driven by upside from planning improvements at some of our residential sites.

Looking forward, we remain of the view that capital value growth in industrial and logistics will be chiefly reliant on rental value growth and developments. We expect upside in residential land values to remain limited, with upside from house price inflation largely offset by build cost inflation. We expect retail property values to continue to soften, but representing 2% of our assets, non-core retail is only a minor part of our current portfolio.

(1) On completed investment assets only, excluding current developments and land.

Operational performance

At the end of 2019 the annualised passing rent on our portfolio amounted to £38.4m, excluding £3.0m of contracted rent which is currently subject to rent-frees. This marked a slight reduction vs the £39.4m at the end of 2018, principally as new development lettings were offset by the loss of rental income associated with disposals. Like-for-like rental income was down 2.0%, as 1.2% growth in Industrial & Logistics was offset by a reduction in income on some future development assets in Strategic Land & Regeneration. Industrial and logistics now makes up 57% of our overall passing rent, up from 46% a year ago.

Our overall vacancy increased to 20.8% during the year, up from 18.9% at the end of 2018. However, excluding the impact of disposals and developments, our like-for-like occupancy improved 1.1ppt during the year. Around half of the vacancy at the end of November comprised newly developed industrial and logistics space, of which around one-third is currently under offer, and we expect the remaining space to be largely let during the current year. Around one-fifth of our vacant space is deliberately held back for future development.

We signed 1.9m sq ft of new leases and lease renewals during the year, generating £11.1m of annualised rental income. On average, re-lettings and renewals were agreed 4% above previous passing rent and in line with ERV. The average lease term to first break of our portfolio increased from 4.1 years to 4.7 years.

(1) Excluding £1.0m of annualised turnover rent at Trentham Gardens.

Industrial & Logistics

Development completions

We invested £86m in industrial and logistics capex during 2019. We completed 0.9m sq ft of space, of which we will retain 97%. With an associated ERV of £5.5m and total development cost of £70m, these projects are set to deliver a yield on cost of 7.9% once fully let. Momentum in leasing has continued to build, so we have already let 47% of this ERV, with a further 11% under offer - up from this time last year, when 38% of our 2018 completions were let and 17% was under offer. Key completions during the year included a 151,000 sq ft unit in Avonmouth which we let to Ocado on a 17-year fixed contract; 173,000 sq ft across three units at Gloucester, the first of which we let to a UK engineering firm; 103,000 sq ft at the third phase of our successful scheme in Burton; and 95,000 sq ft across two units in Lincoln which we let to DHL and an international food manufacturer.

In total, we signed £5.3m of development lettings during the year, up from £2.8m last year. Our 2018 completions are 73% let or under offer, as two smaller developments we started prior to our strategic review in mid-2017 still have space available, although the amount of rent associated with this is modest. We are seeing good customer interest in our recent and current projects and are in active discussions on virtually all of the remaining space from our 2019 pipeline, so we expect this to be substantially let over the next six months.

Current developments

We expect development completions to increase from 0.9m sq ft in 2019 to 1.5-1.7m sq ft in 2020. Our committed pipeline stands at 1.5m sq ft, with a total development cost of £133m. We intend to retain 94% of this with an associated ERV of £9.5m, representing an expected yield on cost of 7.6% once fully let. This is slightly below the yield on cost on last year's development completions, partly reflecting the first phase of development at Gatwick, as valuation yields around London are lower than in the rest of the UK. During 2019, we pre-let the first 100,000 sq ft phase at this site to Gatwick Airport on a 15-year fixed term. In total, 18% of our committed pipeline is pre-let, up from 2% at the start of 2019, reflecting the growing leasing momentum in the business.

Around 80% of the space in our committed pipeline comprises units below 150,000 sq ft, with an average unit size of 40,000 sq ft. This leaves us well-positioned to meet the growing demand for last mile delivery space, as evidenced by our recent lettings to DHL and Ocado, and modern warehouses near urban locations and good availability of labour. While availability in the overall logistics market has increased over the last two years, this has been driven by the delivery of speculative mega-box units over 400,000 sq ft, as availability at the smaller 100,000-200,000 sq ft end of the market has remained stable. We continue to avoid speculative development of mega-box space, as we continue to see better long-term prospects at the small to medium end of the market.

(1) Based on ERV for projects to be retained and total development cost for projects to be sold.

Future pipeline

During 2019 we secured two new development opportunities, which, subject to planning, could cater for c. 2.2m sq ft of space in the long term. Our total pipeline therefore now stands at c. 19m sq ft, of which c. 45% has planning. In addition to our 1.5m sq ft committed pipeline, we have a further 7.3m sq ft of consented space in our future pipeline, which could deliver c. £47m of ERV. With future capex of £500-550m and total development cost including land we already own of £570-620m, this could deliver a c. 9% yield on incremental capex and c. 8% yield on cost. However, having backed ourselves to establish our Industrial & Logistics business unit's market presence through speculative development over the last two years, we aim to further grow our pre-let activity in the coming years, which means we will be pragmatic about the trade-off between risk and return. We aim to grow our development activity to up to c. 2m sq ft p.a. in the near future, which, given the substantial premium of development yields over marginal financing costs and valuation yields, is expected to drive meaningful growth in earnings and development upside.

St. Modwen Homes

Development completions

We have continued to see good demand for our high-quality new homes, in particular in the regions, where the bulk of our activity is focused, and we sold 1,060 homes during the year. This represents a 25% increase versus last year (2018: 848 units); at the high end of our target to grow volumes by up to 25%. The safety of our people and the quality and overall experience we deliver to our customers remain paramount in growing our business, so we are pleased our HBF home builder status is on track for a 5* rating, our net promotor score increased from 63 to 76 and our accident frequency rate reduced further, to less than one-tenth of the industry average.

Our private average sales price reduced 3.2% to £273,000 (2018: £282,000), as a 3.1% increase in like-for-like sales prices was offset by changes in the mix of units and sites. Our operating margin increased to 14.8% (2018: 14.4%), in line with our target to grow margins by c. 0.5ppt. We are currently sales active on 21 outlets with a further six opening in the coming weeks (early 2019: 20) and our private sales rate was stable at 0.8 (2018: 0.8).

Current developments

Since the end of the year, trading activity has remained strong hence we forward-sold 34.0% of our targeted private unit sales for the year (Feb 2019: 34.6%). Having more than doubled our sales volumes over the last three years, the annual rate of volume growth is naturally bound to moderate over the coming years as the business grows, although we remain on track versus our medium-term growth ambitions. We plan to add 11 sales outlets this year and aim to grow volumes by up to 20%, whilst we expect margins to improve by a broadly similar amount as in 2019. We continue to evolve our product and have recently opened our first dual-selling site where we will offer an alternative range of new homes, alongside our existing product. We have also started our first inner-city apartment scheme, around half a mile from Birmingham New Street station, which will provide 170 apartments by 2020-21. We also recently partnered with a shared-ownership and registered provider, which alongside part-exchange will further expand our offering to customers and diversify our sales from Help to Buy.

Future pipeline

Excluding strategic land held by the Group, St. Modwen Homes' existing land bank comprises c. 6,200 plots. This provides us with visibility to grow volumes by up to 20% p.a. by 2021, in line with the medium-term target we set in 2017. Beyond that, our current pipeline allows us to maintain a volume of c. 1,300-1,400 units p.a. so we plan to selectively supplement the strategic land coming through from the Group with the acquisition of a small number of 'oven-ready' sites over the coming years, to smooth the timing of larger strategic sites and continue to grow volumes at a more normalised rate, depending on the opportunities we see.

As our land bank has been transferred from the Group to St. Modwen Homes at market value, upside from house price inflation and planning gains has historically been captured through revaluation gains elsewhere in the Group, which continues to reduce our margin by an estimated c. 2-3ppt relative to housebuilders who hold their land at historic cost. Nonetheless, we maintain our target to improve margins to c. 16-17% in the coming years due to an optimisation of site coverage, scale efficiencies and a range of other, smaller initiatives.

Strategic Land & Regeneration

Development completions

At Swansea Bay Campus we completed the latest phase of 411 student beds in early 2019 and subsequently sold these for £38m in November, crystallising a healthy development return. In Uxbridge, we completed and handed over the 207-unit PRS scheme we had forward sold for £75m in early 2018.

We agreed the sale of 896 plots of residential land to third-party housebuilders during the year for £30m. While this was less than in the prior year (2018: £53m), since the year end we agreed to sell more than 663 plots at our two largest sites in South Wales, Coed Darcy and Llanwern, for £25m and we are in advanced legal discussions on the sale of a further c. 900 plots across both sites. We agreed significant planning improvements on both sites during the year, which paved the way for these disposals and thereby an acceleration in buildout of both sites. Assuming both deals complete, the transfer of land would be phased over the coming years, but combined with the next phase for St. Modwen Homes, this would leave c. 40% of the plots at our two large South Wales sites completed, under construction or controlled by various housebuilders for near term development.

Current developments

At Longbridge, we are on site with the final 21,100 sq ft phase of our Devon Way office cluster, which is pre-let on a 15-year fixed term, and St. Modwen Homes and a third-party housebuilder are currently on site to deliver 355 new homes. At New Covent Garden Market, the relocation of the market facilities through our 50/50 JV with VINCI is ongoing, ahead of the release of 10 acres of residential development to the JV in the medium term.

Following the sale of our shopping centre in Kirkby to Knowlesley Borough Council in November, we have started the development of a 95,000 sq ft extension to the existing centre, and following the sale of our interests in Skelmersdale, we are about to start works to deliver a new 51,500 sq ft retail scheme for West Lancashire Borough Council. Acting as development manager, we will therefore deliver the regeneration local stakeholders are looking for, having released our capital for reinvestment in our core sectors.

Future pipeline

Our focus remains on monetising the value in our existing land bank, both through accelerating development and disposals, to improve our return on capital. Following a period of relatively subdued activity, we have seen a marked pick-up in momentum at Longbridge in 2019, where we have been working on enhancing the vision to fit our placemaking ambitions for this flagship scheme. In 2020, we plan to start on site with various public realm improvements, a pop-up style street-food dining facility, a 44-unit apartment scheme and a 48,000 sq ft office designed around flexible working, where we are already seeing strong interest. This should further support momentum as we bring forward the future opportunities at this scheme, which is currently c. 45% developed.

At Wythenshawe, Manchester, we have continued to progress our positive early-stage discussions with the council about a large-scale mixed-use redevelopment of our existing 1960's retail centre and we continue to explore other long-term, mixed-use urban opportunities in our existing portfolio. Following a large amount of development at Bay Campus in recent years, we continue our discussions with the university about the next medium-term steps at this successful scheme.

The Group's owned residential land bank at the end of November comprised c. 17,500 plots (2018: 18,400), of which 6,200 plots were held by St. Modwen Homes and 11,300 by our Strategic Land & Regeneration business. Of the latter, c. 3,100 plots comprise strategic land which is still subject to planning, while the remaining c. 8,200 plots are sites that we will continue to invest in to prepare for disposal to third-party housebuilders. These include the 663 plots in South Wales we agreed to sell since the year end and the further c. 900 plots we are in advanced legal discussions on. In addition, we control land via development agreements which could cater for a further c. 11,300 homes in the long term (2018: 11,800), around 40% of which is still subject to planning.

FINANCIAL REVIEW

Overview

Our underlying financial performance for the year shows our strategy is starting to deliver the improvement in earnings and returns we expect it to bring over time. Despite a £13.6m reduction in net rental income due to our non-core asset disposals over the last two years, adjusted EPRA earnings increased 22.1% to £38.7m (2018: £31.7m), driven by new lettings, growth in housebuilding profits and a reduction in interest costs. As a result, adjusted EPRA EPS grew 21.7% to 17.4 pence (2018: 14.3 pence), leaving us well on track to deliver on our target to broadly double adjusted EPRA EPS in the medium term from the 2018 level. As indicated at the start of the year, net borrowings increased due to the reinvestment of part of last year's disposal proceeds into our pipeline, but our see-through loan-to-value remains low at 19.6% (2018: 16.9%).

Underlying net profit for the year increased by 12.4% to £68.0m (2018: £60.5m). However, as per our announcement in early December, an exceptional provision for a potential claim related to a historical development project reduced statutory net profit to £49.5m, which reduced underlying basic EPS of 30.6 pence per share (2018: 27.1 pence) to 22.8 pence and NAV by 1.6%. While we sold the majority of our retail assets at less than 1% below book value in 2018, valuation weakness in our residual non-core retail, over half of which we have now sold as well, resulted in a further 1.9% reduction of NAV. Notwithstanding this combined 3.5ppt drag, NAV per share increased 3.0% to 484.2 pence per share (2018: 470.2 pence)(1) and EPRA NAV per share increased 4.2% to 504.2 pence (2018: 484.0 pence)(1). Combined with dividends paid during the year, our underlying total accounting return for 2019 was 6.3% (2018: 6.0%), or 4.6% including the exceptional provision.

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 a final dividend of 5.1 pence per share, to be paid on 3 April 2020 to shareholders on the register as at 6 March 2020. This brings the total dividend for the year to 8.7 pence, marking an increase of 22.5% versus last year (2018: 7.1 pence).

(1) Following the adoption of IFRS 9 Financial Instruments during the year ended 30 November 2019, the comparative values of NAV per share and EPRA NAV per share at 30 November 2018 have been reduced by 0.2 pence and 0.1 pence respectively to reflect the retrospective restatement required for recognising provisions against trade and other receivables using an expected credit loss rather than an incurred loss model.

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 notes 2 and 3 to the Group financial statements. The Group has four material joint ventures; three of which are in partnership with VINCI, comprising 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, and one is in partnership with Salhia, Key Property Investments (KPI), which owns a portfolio of principally income-producing industrial assets.

During the year, the Group adopted three new accounting standards, being IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers and IFRS 16 Leases. The 2018 results have been restated for IFRS 9 and IFRS 15, but they have not been restated for IFRS 16 as it has been applied from 1 December 2018 using the modified retrospective approach outlined in the standard. These restatements have had limited impact on the Group financial statements and there is no change to the summarised income statement presented below. Further detail is provided in the accounting policies note to the Group financial statements.

We use adjusted EPRA earnings and 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 are predominantly built to hold, commercial development profits are largely non-cash. As such, these are excluded from adjusted EPRA earnings, other than development fee income.

With these results, we have updated our segmental reporting to reflect the changes in our organisational structure during the year. As such, our financial reporting is now aligned to our three operational business units, Industrial & Logistics, St. Modwen Homes, and Strategic Land & Regeneration, with items which are not directly allocated to specific business activities, such as borrowings and interest costs, held centrally and presented separately. To allow operating costs to be allocated appropriately, we have split administrative expenses into business unit direct operating expenses and central administrative expenses. These changes have no impact on our net profit or adjusted EPRA earnings but provide better clarity on the returns in each part of our business.

(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.

(2) Exceptional provision for a potential claim related to a legacy development project.

Net rental and other income

As expected, the Group's share of net rental and other income decreased to £40.1m (2018: £49.0m) due to the large amount of non-core disposals over the past two years. Industrial & Logistics net rental and other income increased to £18.7m (2018: £14.4m), due to £5.3m income from retained developments and £0.2m like-for-like income growth. Net rental and other income in Strategic Land & Regeneration reduced to £21.4m (2018: £34.6m), chiefly reflecting an £11.7m loss of rental income on non-core assets we sold. With asset disposals in 2019 weighted towards the end of the year and further non-core disposals to come, we expect Strategic Land & Regeneration net rental income to continue to reduce in 2020, but this to be offset by further growth in net rental income in Industrial & Logistics. As the effect of non-core sales subsides, we expect overall net rental income to grow more meaningfully in 2021 onwards.

Housebuilding profit

Gross profit from housebuilding activities increased 24.2% to £55.5m (2018: £44.7m). The majority of this comprises St. Modwen Homes where gross profit increased 22.1% to £51.4m (2018: £42.1m), while net operating profit increased 28.1% to £40.1m (2018: £31.3m). The Persimmon JV, which forms part of our Strategic Land & Regeneration business, delivered £4.1m of profit (2018: £2.6m) This JV is still anticipated to largely draw to a close by the end of 2020, but we expect the reduction in profit from this to be more than offset by continued growth in St. Modwen Homes profits.

Business unit direct operating expenses and central administrative expenses

Business unit operating expenses are costs which are directly linked to the operating activities of our three business units. During the year, these increased to £21.7m (2018: £20.6m), partly as a result of the growth in sales and build activity in St. Modwen Homes. We expect direct operating expenses to continue to grow, chiefly driven by the continued growth in St. Modwen Homes. Central administrative expenses for the year decreased slightly to £22.4m (2018: £22.7m) and are expected to grow broadly in line with inflation in 2020.

Interest and other finance costs

Net interest costs for the year fell to £9.3m (2018: £14.6m) on a see-through basis, principally due to a reduction in debt due to our disposals during 2018 and a reduction in average borrowing costs. We capitalised £3.3m of interest costs on commercial developments during the year (2018: £2.3m). We expect to be a net investor in 2020 due to the investments in our pipeline, although the impact of this on net interest cost is anticipated to be largely offset by a reduction in our average cost of borrowing during 2019.

Net other finance costs were down significantly to £7.0m (2018: £12.7m), largely reflecting £7.3m one-off expenses in the prior year related to our refinancing activity. Net other finance costs for 2019 includes a £2.5m charge for discount unwinds, principally on our share of the long-term commitment to deliver the NCGM project, and a £1.8m charge for the amortisation of arrangement fees in relation to our loan facilities. Combined, these costs have averaged c. £7m p.a. in recent years and are expected to recur at broadly similar levels. The final element of our other finance costs relates to the mark-to-market valuation of our derivatives, which is driven by the movement in swap rates and resulted in a £2.7m expense in the year.

Investment property revaluation, development and disposal gains/losses

All our investment properties are independently valued every six months by our external valuers, Cushman & Wakefield, who base their valuations upon open market transactions 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.

During 2019 our portfolio saw an underlying net revaluation and development gain of £46.9m, largely in line with the £48.4m gain in 2018. At £46.3m, virtually all of this was driven by Industrial & Logistics, as write-downs on non-core retail assets broadly offset other gains in Strategic Land & Regeneration. We recorded a £5.0m loss on disposals, compared to a £7.1m loss last year, which solely reflected a loss on the sale of non-core retail assets.

Exceptional item

We recognised an exceptional item of £22.5m to provide for a potential claim against the Company for a legacy project the Group developed and sold approximately 15 years ago, which adjusted for tax and non-controlling interests reduced our statutory net profit attributable to owners of the Company for the year by £17.3m, or 7.8 pence per share. To date, no detailed claim has been made by any of the parties involved and as such there is no certainty around the potential amount and timing of any future cash outflow. We anticipate we will be able to recover a meaningful part of any potential claim but as IFRS places a lower threshold on the recognition of potential future obligations than the recognition of potential future reimbursements, we cannot recognise any anticipated recoveries at this stage and therefore only recognised the provision element in our results. Following a thorough review of our historical projects we are confident that any alleged problem would be a one-off issue which is therefore not expected to have any impact on our strategy or medium-term return expectations.

Taxation and profit

Our underlying net profit before exceptional items for the year was £68.0m. Taking into account the above exceptional provision, our statutory net profit after tax of £49.5m (2018: £60.5m), while our total tax charge (including joint venture tax) for the year was £9.5m (2018: £12.0m).

As a property group, tax and its treatment is often an integral part of transactions. The outcome of tax treatments is recognised by the Group to the extent that the outcome is reasonably certain. Overall, the effective tax rate for the year of 16.1% was broadly stable (2018: 16.6%). As signalled previously, the effective tax rate is expected to remain at broadly similar levels, slightly below the standard rate of tax.

Return on capital

Including dividends of 7.6 pence per share paid during the year, our underlying total accounting return amounted to 6.3%, or 4.6% including the exceptional provision (2018: 6.0%). Our new segmental reporting below for the first time provides insight into how our three business units contribute to our overall Group returns. The return on capital employed for Industrial & Logistics is highest at 12.4%, driven by its large amount of development activity, ahead of St. Modwen Homes at 11.4% and Strategic Land & Regeneration at 2.9%.

We expect the difference in ROCE per business unit to narrow in the years ahead, as St. Modwen Homes reduces its land bank from c. 6 years to a level more in line with industry standards by growing its volumes, and Strategic Land & Regeneration monetises its surplus residential land, where the lack of income means returns are modest, and accelerates the delivery of its existing regeneration projects. We therefore remain on track towards our ambition to generate a low double-digit total accounting return over time, assuming markets remain stable.

(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) Following the adoption of IFRS 9 Financial Instruments during year ended 30 November 2019, the comparative values of NAV per share and EPRA NAV per share at 30 November 2018 have been reduced by 0.2 pence and 0.1 pence respectively to reflect the retrospective restatement required for recognising provisions against trade and other receivables using an expected credit loss rather than an incurred loss model. This restatement reduced other assets, gross assets, net assets and equity attributable to owners of the Company at 30 November 2018 by £0.3m.

(3) Business unit returns on capital employed are calculated as the business unit profit before interest and tax for the year divided by the average business unit net assets, after adding back any business unit specific net borrowings, for the year.

Net asset value

The aforementioned exceptional provision reduced the net asset value attributable to shareholders of the Group for 2019 by £17.3m to £1,075.7m (2018: £1,044.1m)(1) . Notwithstanding the 7.8 pence per share, or 1.6%, reduction in net asset value related to this provision, net asset value per share increased 3.0% over the year to 484.2 pence (2018: 470.2 pence)(1). EPRA NAV per share increased by 4.2% to 504.2. pence (2018: 484.0 pence)(1).

Net borrowings and loan-to-value

Following a £151.3m reduction during 2018 net borrowings increased by £53.7m to £290.6m (2018: £236.9m) during 2019 as we, as planned, reinvested part of last year's disposal proceeds. This excludes £37.5m (representing our 50% share) held in a development account for the NCGM project delivery which continues to be held in a one-year deposit account and therefore does not qualify as cash in our net borrowings calculation.

As a result, our see-through LTV increased to 19.6% (2018: 16.9%), or 17.1% including the £37.5m held on one-year deposit. As such, our overall LTV remains comfortably below our target to keep our overall LTV in the mid to high-20's percent. Whilst we remain conservative in our approach to financial leverage, we expect see-through net borrowings to grow during 2020 as we continue to reinvest part of the proceeds from our non-core disposals into our pipeline.

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

(2) Borrowings are stated at amortised cost and exclude lease liabilities.

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

Financing

During 2019, we drew down the £75m facility from the Homes England Home Building Fund we signed shortly before the end of 2018 and repaid our £100m convertible bond upon its maturity in March. We extended the maturity of £400m of our £475m unsecured revolving credit facility by one year to December 2024 and extended the maturity of our small £30m KPI JV facility (£15m our share) to January 2021. Aside from this, we have no debt maturing until December 2023 and our average debt maturity increased to 4.9 years (2018: 4.5 years).

(1) The weighted average interest rate is calculated using current interest rates, commitment fees and hedging profile applied to the see-through gross borrowings at 30 November 2019, thereby assuming constant net borrowing levels for 2019.

Hedging and cost of debt

Our weighted average interest rate reduced slightly to 3.5% (2018: 3.8%) due to the drawdown of relatively cheaper borrowings. We aim to have predictable costs attached to our borrowings, so our policy is to hedge a significant portion of our interest rate risk. The proportion of borrowings which are fixed or hedged is 65.7% (2018: 66.9%) and we continue to manage our 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 an almost 40% fall in values before our tightest covenant would be breached.

Mark Allan Rob Hudson

Chief Executive Chief Financial Officer

3 February 2020