St. Modwen Properties pleased with performance at year-end

St. Modwen Properties updated the market on its full-year ended 30 November on Tuesday, ahead of its final results, reporting that it continued to deliver well against its stated strategic objectives during the period.

The FTSE 250 company said that, while the external environment remained uncertain and the outlook for parts of the UK property market was challenging, its two key sectors - industrial/logistics and regional housebuilding - continued to see structural growth.

Its successful disposals reduced its see-through net borrowings by more than half over the past 18 months, leaving the firm well placed to accelerate the delivery of its “substantial” pipeline in years to come.

Meanwhile, the board said the short cycle nature of St. Modwen’s projects provided it with flexibility to adjust its pipeline in the event of any unexpected changes in demand.

“We have exceeded our disposal targets for 2018 comfortably,” the board said, noting that last week it completed the £72m sale of Edmonton Green shopping centre, which meant it had now sold more than half of the retail portfolio it owned at the start of the year for a total consideration of £177m, on average less than 1% below book value.

It also sold 36 small assets for £48m, taking total proceeds from retail and small asset disposals to £225m, which was almost double the £100m-£150m it initially targeted for the year.

Combined with the first phase student accommodation sale in Swansea, the PRS forward-sale in Uxbridge and the sale of £72m of land, total disposals for the year amounted to £529m, on average in line with book value.

“The large volume of disposals during 2018 will reduce our rental income in 2019 but, assuming market conditions remain stable, we expect the impact on adjusted EPRA earnings to be more than offset by further growth in housebuilding profits, rental income from new developments as they are let and a reduction in interest costs,” the board explained.

“Since we announced our new strategy in June 2017, we have now sold £814m of assets - excluding new-build homes - representing over 40% of our starting portfolio, providing ample financial capacity to deliver on our growth plans whilst maintaining a conservative level of leverage.”

St. Modwen said it would continue to reposition its portfolio towards assets and sectors with the strongest structural growth prospects but, following the positive progress to date, the volume of disposals was set to moderate.

The board said it continued to accelerate its commercial development activity, and currently had 1.5 million square feet of committed industrial/logistics projects, up from one million square feet at the start of 2018.

It delivered 0.9 million square feet of industrial/logistics space during the year, of which 0.3 million square feet was pre-sold.

“We continue to experience good occupier interest and we agreed terms on £4.9m of development lettings during the year, representing 0.6 million square feet of space.”

The company said that, although there was a time-lag between the large volume of recent disposals and the delivery of new developments, the estimated recovery value yield on incremental capital expenditure on its pipeline of around 9% remained “well ahead” of the blended 5%-6% net yield on its disposals, excluding land disposals.

“As such, recycling capital into our pipeline is expected to deliver a substantial increase in rental income over time.”

In residential, the firm said it continued to see “good demand” in St. Modwen Homes, with sales volumes increasing 22% to 848 units, which was in line with the board’s objective to grow volumes by up to 25% per annum by 2021.

The company was now sales active on 22 outlets, up from 16 year-on-year.

“Operating margins improved as planned so, as expected, growth in St. Modwen Homes profits has more than offset the scheduled reduction in Persimmon joint venture profits,” the board said.

“Our focus on the regions, where affordability is better, leaves us well placed to further grow St. Modwen Homes volumes by up to 25% per annum.

“Reflecting this, our forward order book is up 21% compared to this time last year.”

Third-party housebuilder demand for residential land remained robust, the company claimed.

Including one land sale which had exchanged and was expected to complete shortly, the company sold £53m of land, which was described as “broadly in line” with the £56m it sold last year.

“We remain focused on monetising the value in our land bank.”

On the regeneration front, St. Modwen said it continued to advance its major regeneration projects.

Following the release of £141m of capital from the initial phases of development at Swansea and Longbridge during the first half of the year, in the second half Longbridge saw a start on site of the next phase of 215 new homes delivered by a third-party housebuilder, whilst at Swansea the company completed the latest phase of forward-sold academic facilities and was on track to complete the latest 411 student beds in early 2019.

Looking at the books, St. Modwen said that following the “marked reduction” in net borrowings during the year, last week it redeemed its £80m 6.25% retail bond which was scheduled to mature in November 2019.

That resulted in a £3m one-off reduction in net profit in 2018, but would lead to a similar improvement in interest costs in 2019.

The company also recently signed a £75m seven-year loan facility with Homes England, which was extendable to up to 10 years, and would support the company’s objective to grow its residential and house building business.

“2018 has been a year of excellent progress against the strategic objectives we set out in June 2017 and our full year performance is in line with our expectations,” said St. Modwen chief executive officer Mark Allan.

“Given the substantial opportunities in our existing pipeline and our strong capital base, we are now well positioned to deliver a meaningful improvement in earnings and return on capital in the years ahead.”

The company said it intended to announce its results for the full year on 5 February.