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St. Modwen pleased with strategic progress as it sells down retail assets
St. Modwen issued an update on its trading to 31 May on Tuesday, reporting that over the past six months it continued to focus on delivering against its four strategic objectives of portfolio focus and capital discipline, accelerating its commercial development activity, grow its residential and housebuilding business, and cement and grow its regeneration reputation.
The FTSE 250 firm said that, despite continued uncertainties in the external environment and challenges in parts of the UK property market, the outlook for its two key sectors - industrial/logistics and regional house building - remained "positive".
Given the company's extensive land bank and the opportunity to recycle capital out of its existing assets, the board said St. Modwen was "well placed" to accelerate the delivery of its substantial pipeline using its own resources in the years ahead.
"We have continued to shift our portfolio towards assets with the strongest structural growth prospects," the board said in its statement.
In May it announced that it had exchanged contracts to sell Longbridge Shopping Park and Wembley Central, which together represented the disposal of 27% of the company's retail portfolio at an average 4% below book value.
The £54m sale of Longbridge has completed since then, with completion of the Wembley disposal expected in the near future.
Those disposals followed the sale of the first phase of student housing at Swansea Bay Campus in February for £139m, which released £87m of capital net of an associated finance lease.
The board said the two retail disposals at Longbridge and Wembley, as well as a small retail disposal in Liverpool, meant it had already achieved 95% of the lower end of its target to sell £100-150m of retail and small assets during 2018.
Since announcing its new strategy 12 months ago, it had now sold more than £600m of assets - excluding newly built homes and land transferred to St. Modwen Homes - representing 38% of its portfolio a year ago.
On average, those disposals were in line with book value.
The board said it was currently marketing a portfolio of small assets, and had some further small retail disposals under offer, so was confident it would reach its disposal target for the full year.
It said the sales activity allowed its to keep its borrowings firmly under control, as it reinvested in accelerating the delivery of its pipeline.
"We have continued to prepare our future pipeline in line with our objective to grow our industrial/logistics development activity by up to 25% per year by 2020.
"During the half year we secured outline planning consent for our 1.0m sq ft scheme at Chippenham Gateway, adjacent to junction 17 of the M4, and cleared planning conditions and finalised consents for a 0.2m sq ft scheme at Gatwick, adjacent to junction 10 of the M23."
With a potential estimated recovery value of more than £8m, St. Modwen said the sites were expected to become an important part of its income portfolio in the medium term, alongside its other key strategic sites.
With a yield on incremental capex of 9%, recycling capital into those and other industrial/logistics projects in its existing pipeline provided a "material pick-up" in income compared to the yield on the retail and smaller assets it sold, the board explained, whilst at the same time it built up a higher quality, more efficient portfolio.
"We continue to see good occupier demand for our space and agreed terms on £2.3m of development lettings during the period, on average in line with our expected ERVs.
"These lettings contribute to building up our retained industrial/logistics income portfolio and offset the reduction in rent from the disposal of older, less efficient retail and smaller assets."
St. Modwen said the market for new-build homes in the UK's regions remained "robust", with sales volumes for St. Modwen Homes increasing 31% compared the same period last year to 302 units sold.
The business was now sales active on 19 outlets, with an additional three outlets coming forward in the second half of the year.
In line with its target, the board said it was continuing to expect up to 25% growth in sales volumes for the full year.
Sales activity in its joint venture with Persimmon continued to reduce in line with the planned wind-down of the venture over the next two years.
"We expect that strong growth in St. Modwen Homes profits will more than offset the reduction in JV profits for the full year although this will be weighted slightly towards the second half.
"We continue to see good demand for residential land from third-party housebuilders. Proceeds from the sale of oven-ready land totalled £27m during the six months (1H17: £14m), on average at or above book value, leaving us well on track to achieve residential land sales at least in line with the £56m reported last year."
In line with its strategy to deliver on the private rented sector opportunities in its pipeline without building up a long term asset management platform for those assets itself, St. Modwen released its capital early from its 207-unit PRS scheme at Uxbridge by way of a £75m forward-sale in March.
The board said that allowed it to accelerate delivery of the next phase of 101 apartments at Uxbridge, which would be built for private sale by St. Modwen Homes.
"We continue to progress our existing major regeneration projects," the board explained.
The disposals of the first phases of development at Swansea Bay and Longbridge during the six months released £141m of capital, allowing the company to bring forward the next phases of development at the "flagship" schemes - both of which were around 50% developed.
At Wantage, St. Modwen said it was now building the first units of its 1,500-homes scheme.
"We have had a good start to 2018 and our expectations for full year performance are unchanged," said chief executive Mark Allan.
"Our operational performance remains solid and we have made considerable progress in executing our new, more focused strategy that we launched a year ago.
"Drawing on the significant potential within our existing pipeline, this successful execution is starting to pave the way towards delivering a meaningful improvement in earnings and return on capital in the years ahead."