---

Chairman's statement

Transformation in progress

The last financial year marked the first year of a transformation strategy for McCarthy & Stone as the Group began the implementation of its two-stage strategy to become a developer, owner and manager of retirement communities.

 

Significant progress has been made in both stages of the strategy during the year.  As part of the first stage of operations optimisation (FY19 - FY21), the Group delivered £15m of annualised savings. Overheads were optimised and its structure realigned to drive increased focus on the customer by bringing sales and services closer together and reframing the development part of the business to deliver increased value in our development pipeline.  These two core activities are led by our two Chief Operating Officers appointed in January 2019 - Mike Lloyd (COO - Services & Customers) and Nigel Turner (COO - Build).  There has also been significant focus on improving margins on our FY21 schemes which are now set up to deliver savings in FY21 as planned. 

 

Good progress was also made with the Group's second stage of the strategy focused on leveraging strategic opportunities (FY19 - FY23), through providing customers with Choice of tenure, Flexibility of service and Affordability of products. Following successful incubator trials early in the year, the newly launched rental and multi-tenure offering is gaining strong momentum, with a total of 169 rental and shared ownership transactions having been completed, helping the Group to address a challenging secondary housing market and enabling it to tap into broader demand for retirement housing. Rental and multi-tenure offering is expected to form a larger proportion of overall volumes in FY20 and beyond as the Group progresses towards securing third party investment and builds a new asset class.

 

From the outset, the Board has been of the view that the delivery of the Group's strategy and its transformation with greater focus on providing customers with choice of services and tenure, requires an exceptional leadership team with the right skills and capability and the appointment of the two exceptional candidates as COOs were critical to achieving this, as demonstrated by the significant progress made during the first year of the five-year strategy.   

 

2019 performance

 

Despite continuing subdued secondary housing market conditions and strategic structural changes to the business, during the 14 month period ended 31 October 2019 the Group delivered revenue of £725m (2018: £672m) reflecting a 3% improvement in average selling price to £308k (2018: £300k) and legal completions of 2,301 units (2018: 2,134).

 

During the 14 month period the Group achieved an underlying operating profit of £68m (2018: £68m), while the Group's underlying operating profit margin reduced to 9% (2018: 10%) in line with expectations, primarily as a result of an increased usage of part-exchange and incentives to counteract the subdued secondary housing market.

 

As we become a more customer-led business, the Group is particularly proud to lead the sector on customer satisfaction and continues to be the only developer of any size or type to have received the full five star rating in the Home Builders Federation (HBF) customer satisfaction survey for 14 consecutive years, in which more than 92.8% of our customers would recommend the Group to a friend.

 

 

 

Sector fundamentals and the UK economic and political environment

 

The market for retirement communities remains highly attractive, underpinned by high demand and a chronic under-supply of suitable housing options for older people. According to the Office of National Statistics (ONS) national population projection, the number of people aged 65 or over will rise by 43% to 17.4 million and people aged 85 or over by 86% to 3 million by 2043 and yet just c.8,000 new retirement units came to the market across all tenures in 2019 against an estimated demand of up to 30,000 units per year, according to EAC (2019) and Knight Frank (2016) reports. Demand for adult social care services is also set to rise significantly from c.700,000 people in 2020 to c.1.2 million in 2040, according to the PSSRU 2018 report.

 

In addition, the Group's own annual survey of 3,000 people aged 65 and over living in the UK, undertaken in conjunction with YouGov in 2019 found that 33% would consider downsizing, equating to c. 4 million people.

 

Despite these strong fundamentals, trading conditions during the reporting period remained challenging due to the impact of ongoing political and economic uncertainty on the secondary housing market, which constrains the ability of our customers to sell their own property. Additional uncertainty over potential stamp duty changes also dented transaction levels. The Group's reservation rates were also impacted by five weeks of campaigning ahead of the General Election held on 12 December 2019.

 

Looking ahead, the results of the General Election are likely to somewhat remove the overhang of political uncertainty, but economic uncertainty linked to the outcome of negotiations on the UK future relationship with the EU is expected to continue throughout the new financial year.

 

Making a real difference as a responsible and sustainable business

 

The Group is focused on creating retirement communities, enriching the lives of its residents and employees and this influences all of its activities, from identifying and buying suitable land, to designing, building, selling and managing high quality, age-exclusive communities.

 

As a result, the Group has a positive impact on its customers and their families by removing burdens and worries of looking after large family homes, providing high-quality care and support, helping to build new friendships and giving families peace of mind that their loved ones are cared for.

 

The Group's care services have also been shown to reduce pressure on the health and social care service, saving c.£3,500 per person per year according to WPI 2019 data.

 

Through providing appropriate housing for downsizers, the Group also unlocks housing supply, as each sale results in around two to three further moves, supporting first time buyers and young families, and increasing stamp duty revenue for the Treasury.

 

The Group's land buying activities have a significant positive impact on towns and local communities by bringing life back to town centres, 97% of development sites are brownfield and c.80% of residents in our communities use local shops almost daily.

 

The Group is committed to running the business in a responsible and sustainable manner when it comes to the environment. c.97% of construction site waste is currently recycled, new environmentally friendly modern methods of construction are on trial as part of our new transformation strategy and we are looking to optimise parking requirements for all new developments given their central location. A trial involving an electric shared car pool is also underway with initial favourable customer feedback.

 

During 2020 there will be an increased Board focus on sustainability through a newly formed Board Corporate and Social Responsibility (CSR) Committee chaired by Geeta Nanda.  This will be an independent committee overseeing the work of the existing CSR committee at the Executive level. The Board Committee will be responsible for making recommendations regarding the Group's employees, environmental, societal and community engagement and its sustainability activities. It will also review health and safety arrangements and make any recommendations necessary to the Health and Safety Committee.

 

Dividend

 

We continued our focus on careful cash management throughout the year and this has enabled the Directors to propose a final dividend of 3.5p per share (2018: 3.5p per share), making the total dividend for the 14 month period 5.4p per share (2018: 5.4p per share).  This payment is in line with the dividend paid in the prior year despite the Group's lower profits and signals the Board's confidence in its new strategy.

 

Board changes

 

We continue to strengthen our leadership team and have made the following Board changes during the year:

 

1 January 2019	Mike Lloyd appointed to the Board as COO -Services & Customers
1 January 2019	Nigel Turner appointed to the Board as COO -Build
10 April 2019	Gill Barr was appointed a Non-Executive Director and Chair of The Remuneration Committee
22 May 2019	John Carter, existing Non-Executive Director, assumed the newly formed role of Company designated Non-Executive Director for engagement with the work force
31 October 2019	Mike Parsons stepped down as Independent Non-Executive Director

 

 

Post year end changes

 

15 January 2020	Geeta Nanda existing Non-Executive Director, assumed the newly formed role of Chair of Corporate and Social Responsibility Committee
20 January 2020	Adam Batty appointed as new General Counsel and Company Secretary

 

 

 

Proposed changes to remuneration policy for FY20-22

The current remuneration policy was put in place at the time of the Company's IPO. Since that time the UK Corporate Governance Code has been updated and market practice and investor views have evolved.  The Group also appointed Gill Barr as the new Chair of the Remuneration Committee in April 2019. The policy has therefore been updated to take account of these developments as well as to clarify and refine some of the more widely drawn aspects of the policy that are not required for the next policy period, namely pension contributions, discretion and clawback as well as shareholding requirements for Executive Directors. Full details of the incentive plan payments for FY19 and proposed changes to the remuneration policy can be found in the Remuneration Report in the Annual Report which will be published in February 2020.

 

In conclusion, I would like to express our gratitude to all stakeholders for their continued support of the Group during these challenging years. McCarthy & Stone has unparalleled knowledge of the market with over 40 years' experience, a highly skilled workforce, a talented leadership team and a national presence, which combined with exceptionally strong fundamentals, a rapidly aging population and success so far with the new strategy means that the Group has a more resilient business model and is well-placed to respond positively when market conditions improve.  

Chief Executive Officer's operational review

 

Our results

 

The Group's new strategy has driven a solid FY19 trading performance, against a backdrop of another challenging year in the secondary housing market during the 14 month period ended 31 October 2019  the Group delivered revenue of £725m (2018: £672m), supported by a 3% improvement in average selling price, which increased during the year to £308k (2018: £300k) reflecting improvements in the quality and locations of our developments. 

 

Trading volumes remained resilient during the period, despite more challenging conditions within the secondary housing market, largely due to the continuing political and economic uncertainty, as evidenced by persistently low levels of national housing transactions and a declining consumer confidence index. Additional uncertainty over possible stamp duty changes, which were trailed as part of the Government's plans over the summer, created further customer inertia and impacted transaction levels, making trading conditions more challenging.  Despite this, however, the Group delivered 2,301 legal completions during the 14 month period (2018: 2,134).

 

Market demand

 

The structural imbalance between supply and demand within the housing market continues to provide us with an exceptional market opportunity over the medium and long term, and the Group welcomes the recent commitments from the new Government to deliver more homes.  This structural imbalance is particularly acute in the market for retirement housing where the demand is estimated at 30,000 retirement units per annum against a supply of just c.8,000 units across all tenures.

 

To address this imbalance and as part of our strategy, we see tremendous opportunity in providing a greater choice for customers through multi-tenure solutions.  According to the English Housing Survey 2019, around one in five households (19%) in England live in the private rented sector, which is equivalent to 4.5 million households, making it the second largest tenure after home ownership, and a part of the market that has grown significantly in recent years. By comparison, 17% (4 million) live in the social rented sector and 64% (14.8 million) are owner occupiers.

 

Our own research also suggests that 50% of our customers would also be happy to consider renting, many of whom are currently owner-occupiers, which suggests strong demand in this space.

 

During four decades as the retirement housing market leader, the Group has formulated a tailored approach to sales, site acquisition, design, securing detailed planning consents and construction that mainstream housebuilders have been unable to replicate.  We also ensure that our customers receive the highest standards of ongoing support through our management services offering which now provides services for c.20,000 customers within 434 developments - one of the largest operations of its kind in the UK.  These high barriers to entry in our market ensure that we maintain a unique position as the only developer capable of meeting the nationwide need for high-quality specialist communities for the growing number of older people who are looking to move to properties more suited to their needs and lifestyle.

 

 

Strategic update

 

Stage 1 FY19-FY21: Optimisation of operations

 

The Group's main priority this year was to start delivering on its three-year programme of business optimisation with focus on delivering 15% ROCE[1], 15% operating profit margin[2] by FY21 and cumulative cash savings of >£90m across the life of the plan.  This strategy remains on track and is expected to deliver c.£40m cost savings which will be weighted towards delivery in FY21 due to its focus on build cost savings. This part of the Group's strategy is being delivered through four key workstreams - workflow realignment, rightsizing the business, establishing an efficient sales and marketing model and delivering build cost reductions.  In FY19, we delivered £15m of cost savings and £20m cash savings across these workstreams.

The Group has substantially completed its work to rightsize the business and optimise its operational cost base to deliver steady state volumes, resulting in an annualised cash saving of c.£10m.  Additional steps to optimise its operating business in line with the Group's strategy were also taken which will drive increased focus on the customer by bringing sales and services closer together and reframe the development part of the business to deliver increased value in our development pipeline.  This realignment consolidates our operational footprint into four development divisions and will help strengthen the Group's oversight as well as reducing costs further.  

Additional headcount savings of c.£2m have also been achieved as part of our strategy to optimise the Group's sales operating model and the Group's focus in FY20 now turns to improving off-plan sales and reducing incentive costs via strategic use of part-exchange and shared ownership models. These key initiatives will be supported by the Group's new Salesforce CRM system which has now been rolled out across all divisions, further marketing investment and the recent launch of an improved new website.

The build cost reduction initiative is also progressing well delivering £3m savings this year and with key savings already embedded in construction budgets for FY20 sites.  Specific plans are now in place to deliver an average improvement of c.£10k p/u across our FY21 schemes.  This activity is expected to deliver more than half of the proposed c.£40m cost saving in FY21. 

In line with the Group's strategy to smooth its workflow and legal completions delivery, during the 14 month period the Group delivered 53 high-quality first occupations (2018: 68), 38 planning consents (2018: 37), 34 land exchanges (2018: 54) and 40 build starts (2018: 53) during the year. The Group is now focusing on increasing land optionality to ensure that the business is well positioned to respond when market conditions improve.

Year end finished stock levels reduced to 1,628 (2018: 1,779) and are expected to reduce further by the end of FY20 given the lower level of planned FY20 first occupations (c.37) (2019: 53) and the increased focus on selling down recently released finished inventory (c.90% of stock is under 2 years old).  This is in line with our new strategy and underpins a strong cash position by the end of the year in line with our strategic plan.

 

Stage 2 FY19-FY23: Leveraging strategic opportunities

During the period, the Group has also made good progress with its three long-term strategic initiatives to provide customers with increased Choice, Flexibility and Affordability and leverage the long-term opportunities in this sector.

 

Choice

·    We made excellent progress with our new multi-tenure offering, giving our customers a choice of ownership, with a professional rental team now in place.  This was rolled out to more than 70 developments nationally by the end of the reporting period, following successful trials in the spring that confirmed strong demand for rental across both the Retirement Living and Retirement Living PLUS products.

·    As of 26 January 2020, the multi-tenure offering was live across all our developments with 175 rental, 43 rent to buy and 75 part buy part rent reservations since this initiative commenced.

·    Good progress has been made in building a 'seed investment portfolio' of >100 rentals with attractive gross rental yields[3] of c.6%-8%. The Group has mandated Rothschilds & Co to secure high-quality third-party capital partners to co-invest in the Group's retirement rental strategy and to create a portfolio of scale up to an asset value of c.£300m over the next 3 years with strong yields and low occupancy churn focused entirely on the hugely underserved retirement living sector.  This workstream is well progressed and the Group has now received investment proposals from high-quality funding partners with commercial negotiations ongoing. We have a strong pipeline with potential to develop into a full Build to Rent (BTR) strategy.

·    Following this successful roll out and ramp up in H2 FY19, we now expect an increased proportion of our 2,100 targeted volumes to come from the new rental offering during FY20.  

Flexibility

·    In July, we took full ownership of our care and services operation and we are therefore now one of the largest operators in the Housing with Care sector. We continue to offer and test new services across our developments while also expanding our care offering into our Retirement Living developments and increasing catering options. 

·   This represents the first milestone towards the Group's target of generating >5% of Group revenue from management services by providing flexible, future proofed services that evolve with our customers' needs.

Affordability

·   We have been working with potential partners in the volumetric and panelised development industry to progress our plans to develop a new and more contemporary product with a more efficient layout utilising Modern Methods of Construction (MMC) to accelerate construction times, improve build quality further, reduce costs and ultimately lower average selling prices to help maintain our mass market appeal.    

·     As a result, our first development to be built using MMC is set to start construction during FY20.

 

 

 

Land bank

 

During the 14 month period, we invested £111m (2018: £112m) in land and our landbank now stands at 7,695 units (2018: 9,797 units), which equates to 3.7 years' supply (2018: 4.6 years' supply) based on current unit sales volumes. 34 high quality sites with attractive embedded margins were added to the landbank during the year (2018: 54). This is in line with our new strategy focusing on a more measured trajectory and smoother workflow objectives.

 

Our focus on quality

 

We are delighted to report that, once again, we achieved the full five star rating in the Home Builders Federation (HBF) customer satisfaction survey for 2019.  This marks the fourteenth consecutive year in which we have achieved a five star rating and this year 92.8% of our customers have said that they would recommend us to a friend.  We are the only developer of any size or type to win this award every year since it was introduced in 2005.  This sustained recognition by our customers of the quality of product and service we deliver is a strong endorsement of our continued desire to design, build, sell and manage the very best retirement developments. 

 

Our employees

 

Our performance during this transformational year would not have been possible without the dedication, enthusiasm and expertise of our people.  They are critical to the continued evolution of the business and I am personally involved in establishing employee engagement plans to support our new strategy, transitioning to a customer centric business with increased proportion of services. In addition, the voice of our employees is now represented at Board level through John Carter, who became Non-Executive Director responsible for engagement with our workforce in May 2019.

 

During the year, we introduced a structured employee opinion survey with an excellent response rate of 74%, exceeding the industry standard of 60%. Our survey delivered positive Engagement index and Culture and Transformation index scores, and we were pleased that c.80% of respondents said they felt positive about working for the company.

 

We are in our third year of building a culture of excellence that provides further opportunities for development and recognises achievements by regularly celebrating those employees who go the extra mile for a customer or colleague, through our instant, quarterly and annual PRIDE awards for Passion, Responsibility, Innovation, Determination and Excellence. The Board is mindful that 2019 was another particularly challenging year for the Group and its employees and would like to place on record their appreciation of the huge efforts undertaken by all employees across the Group, particularly against the backdrop of a difficult market.

 

In 2019, 10 (2018: 20) of the Group's Site Managers were quality award winners in the NHBC Pride in the Job Awards. In addition, two of the winners went on to win Seals of Excellence and one colleague went on to receive the Regional Award for the South West. These awards are the most prestigious within the industry and our success is testament to the hard work of all our employees across the Group.

 

Health and safety

 

I am pleased to report that we have continued to make good progress with developing a culture of excellence in health and safety across the Group.  Our vision remains not just to achieve health and safety compliance, but to lead our sector with a robust and consistent safety culture across our organisation.  Our internal monitoring regime is supported by a rigorous, independent site inspection programme including regular reporting updates to the Board.

 

During FY19 we were pleased to receive HNBC Health and Safety Awards: four commended and two highly commended awards. McCarthy & Stone is proud that the Group's high standards of health and safety have been recognised by external inspectors across multiple sites. This reflects a 100% increase in total NHBC awards received compared to last year (2018: 3).

 

Continuing work with the Government

 

Throughout the year, we continued to engage with Government departments on a variety of issues, including planning, stamp duty, social care and ground rents, making the case for the retirement community industry as a whole.

 

We welcomed new national planning guidance for councils on older and disabled people's housing which was published by the Ministry of Housing, Communities and Local Government (MHCLG) on 26 June 2019.  It recognised that local authorities should do more to plan for the provision for specialist housing for older people, noting that the need for this form of housing has become 'critical'.  In particular, the document confirmed that retirement communities have a different viability model and should be assessed differently to mainstream housing during Section 106 discussions.

 

We were also pleased to see MHCLG's publication of its response to its October 2018 consultation on ground rents on 27 June 2019, where the Government confirmed that the retirement community sector will be given an exemption and permitted to charge an economic ground rent after they are reduced to zero elsewhere.  We continue to discuss the detail of the exemption with the government and will work with them as the proposals pass through Parliament.

 

Outlook

 

The Group's new strategy has driven a solid trading performance in a difficult market.  Although the result of the General Election in December 2019 eased the political uncertainty, the pre-election period impacted our performance at the start of H1, and our H1 out-turn is expected to be lower than the prior year. Our full year out-turn remains in line with expectations, weighted towards H2.

 

We expect to see an increased opportunity for multi-tenure, which has made a positive start and is expected to become a more substantial part of the Group's overall volumes in FY20 and beyond.

 

Our focus on optimising financial performance will continue as the Group's new strategy develops throughout FY20, with the majority of benefits coming from our build cost reduction initiative, which will result in an improved operating margin in FY21. 

 

 

Financial Review

As part of the business transformation strategy announced on 25 September 2018, the Directors decided to change the Group's financial year end from 31 August to 31 October.  FY19 was the first financial year reported to 31 October and therefore was a 14 month period of account.

Our performance

During the 14 month period ended 31 October 2019 the Group delivered a solid trading performance despite the challenging underlying trading conditions resulting from the impact of ongoing political and economic uncertainty on the secondary housing market. Additional uncertainty over potential stamp duty changes also dented transaction levels, particularly in the South East, resulting in higher discount and incentive levels compared to the prior year. 

Revenue

During the 14 month period ended 31 October 2019 the Group delivered revenue of £725m (2018: £672m), reflecting a 3% improvement in average selling price to £308k (2018: £300k) and legal completions of 2,301 units (2018: 2,134) supported by higher opening stock levels and an increased use of part exchange.  Our revenue for the 14 month period included Freehold Reversionary Interest (FRI) revenue of £30m (2018: £29m).

 

As a result of the Group adopting IFRS 15 'Revenue from Contracts with Customers' at the start of FY19, there have been presentational changes regarding the treatment of part-exchange properties.  Under the new standard, any provisions against the purchased part-exchange properties have been accounted for as a deduction from the completions revenue.  Due to their ancillary nature, the proceeds from the subsequent resale have been reclassified as other operating income, while the associated costs have been reclassified as other operating expenses.  The adoption of the new standard resulted in re-classifying of certain customer incentive costs from cost of sales to a reduction against revenue.  Total adjustments resulted in c.£10m reduction in revenue to £725m.  As the adjustments were solely presentational, comparatives were not restated.   

 

The Group delivered 2,301 (2018: 2,134) legal completions during the period, including the sale and lease back of 113 sales offices and show flats to Waverstone LLP, where McCarthy & Stone is a non-controlling member.  In addition, the Group delivered 101 rental transactions together with a further 21 'rent to buy' and 47 shared ownership transactions. 

Profit

Underlying operating profit for the 14 month period was £68m (2018: £68m), whilst our underlying operating profit margin decreased to 9% (2018: 10%).  This reduction in margin percentage was mainly driven by an increased usage of part-exchange and incentives to counteract subdued market conditions.

 

During the period, the Board approved an increase in the Group's in-house part-exchange capacity to 15% of TNAV (previously 10%).  This continues to be a key tool in converting reservations to sales more quickly and cost effectively in the current challenging market.  We therefore saw an increase in the volume of part-exchange transactions to 49% of legal completions (2018: 35%).  783 of these transactions were on balance sheet PX (2018: 335) resulting from the increased national roll-out of in-house part-exchange solutions. This translated into a saving of c.£13m (2018: c.£7m) compared to the use of third-party PX with average capital employed of £53m (2018: £27m) over the financial year. 783 properties (2018: 335 properties) were purchased during the year at an average of 97% (2018: 96%) of market value with 648 properties (2018: 302 properties) re-sold within the year. The average time taken to resell these properties was 12.3 weeks (2018: 13.1 weeks) which is well within our internal target of 13 weeks.  Strict part-exchange controls have been maintained within the business, with processes now centralised to support the increased roll out.

 

Total administrative expenses for the 14 moth period amounted to £44m (2018: £40m), excluding exceptional items and amortisation of brand and remained at the same proportion of revenue as last year of 6% (2018: 6%).

 

Statutory operating profit for the 14 month period decreased to £48m (2018: £64m) impacted by £17m (2018: £2m) of exceptional costs incurred in relation to delivering our business transformation programme.  This, in turn impacted our statutory operating profit margin which decreased to 7% (2018: 9%). 

 

Similarly, underlying profit before tax for the 14 month period increased to £63m (2018: £62m) whilst the statutory profit before tax of £43m (FY18: £58m) has also been impacted by £17m (2018: £2m) of exceptional costs incurred in FY19 to deliver our business transformation programme.

 

Investment properties

During second half of FY19, the Group launched a multi-tenure approach, offering a rental product to new customers alongside the option to buy or part-buy part-rent (shared ownership).  As at 31 October 2019, the Group held a portfolio of 101 let retirement rental units.  This portfolio of rental assets has been accounted on the balance sheet as investment properties and valued at c.£28m based on a valuation carried out by independent valuation consultants.  The associated revaluation uplift of £5.9m (2018: nil) has been recognised within 'other operating income' in the income statement.

 

The Group has mandated Rothschilds & Co to secure high-quality third party capital partners to co-invest in rental proposition with clear path to grow to c.£300m portfolio over 3 years. Initial proposals received from high-quality funding partners with commercial negotiations ongoing.

 

Capital structure and interest

The Group saw its tangible gross asset value decrease to £678m (2018: £692m).  This was primarily driven by a £93m decrease in inventory, in line with the Group's strategy to establish a more measured growth trajectory, achieve a smooth workflow and reduce the levels of finished stock.

 

A decrease in trade and other receivables due in less than one year from £22m in FY18 to £13m in FY19 primarily reflects a receivable balance due from heylo housing for the bulk sale transaction at the end of FY18. An increase in trade and other receivables due in greater than one year from £28m in FY18 to £43m in FY19 is due to a receivable balance with Waverstone LLP for the bulk sale of show flats and sales offices which took place prior to the year end.  Trade and other payables have decreased from £115m in FY18 to £95m in FY19 due to a lower level of accruals resulting from the lower level of build activity at the end of FY19.

 

The Group has a strong balance sheet and maintains a continuing focus on careful cash management.  This careful cash management helped us close the year with a net cash of £25m (2018: £4m) as at 31 October 2019, notwithstanding higher levels of part-exchange and a seed portfolio of 101 rentals on the balance sheet. This resulted in a negative gearing of 3% (2018: 2%) at the end of the period. 

 

In April 2019, the Group extended the maturity date of its existing £200m revolving credit facility from May 2021 to March 2023 with Barclays, HSBC and RBS. The nominal interest rate of this facility has increased from a 1, 3 or 6 month LIBOR + 1.6% to a 1, 3 or 6 month LIBOR + 1.7% depending on the length of the drawdown.  The level of drawdown fluctuated during the 14 month period with the maximum draw down of £145m in June 2019 (2018: £195m in June 2018), reflecting the Group's working capital requirements to fund our investment in land, build and sales and marketing expenditure.  The average draw down during the period was £102m (2018: £137m).

 

The Group's net finance expenses during the 14 month period remained at £5m (2018: £5m).

 

Exceptional costs

Exceptional costs of £17m (2018: £2m) were incurred during FY19.  They represented the cost of land which will no longer be developed net of any residual land value to be recovered of £7m, redundancy costs of £4m and consultants' fees in relation to the strategic review of £6m.

 

Taxation

The effective tax rate was close to the statutory rate during the14 month period.  The total tax charge for the period was £9m (2018: £12m) which represented an effective tax rate of 20% (2018: 20%) based on a profit before tax for the 14 month period of £43m (2018: £58m).  

 

Earnings per share and dividend

Underlying basic earnings per share increased by 3% to 9.5p (2018: 9.2p) reflecting an increase in underlying profit before tax from £62m in FY18 to £63m in FY19.  Basic earnings per share for FY19 were 6.5p (2018: 8.6p).  Details of the calculation of underlying earnings per share and earnings per share can be found in notes 7 and 13 to the financial statements. 

The Directors are proposing a final dividend of 3.5p (2018: 3.5p) per share. This follows the interim dividend of 1.9p (2018: 1.9p) per share, giving a total dividend for the year of 5.4p per share (2018: 5.4p per share).  This maintains our dividend at the same level as the prior year despite the lower level of profitability and reflects the Board's confidence in its new strategy.  The proposed total annual dividend is covered 1.8 times by FY19 earnings (2018: 1.7 times) and this reflects the Board's intention to grow the ordinary dividend cover to around 2x earnings over the medium term.  Subject to shareholder approval at the Annual General Meeting ('AGM'), the dividend will be paid on 3 April 2020 to shareholders on the register at 6 March 2020. 

The cost of the dividends paid within the financial period amounted to £29m (2018: £30m).  

 

Target returns

The Group maintained ROCE at 10% (2018: 10%) and a stable capital turn at 1.0x (2018: 1.0x).   Our strategy remains on track to deliver the targets set out below, but it is the Board's expectation that this improvement will be heavily weighted towards FY21.

Our FY21 strategic targets as reported on 25 September 2018 are as follows:

·     ROCE improvement to greater than 15%

·     Improvement in operating margins to more than 15%

·     Total cost savings of more than £40m per annum

·     Total cumulative cash savings in excess of £90m between FY19-FY21

·     The Group will focus on a reduction of its capital employed by at least £70m between FY18 and FY21

 

Related party transaction

During the year, the Group completed the sale of a portfolio of 113 show flats and sales offices to Waverstone LLP and subsequent leaseback for a maximum of 12 months.  Waverstone LLP is an entity between Waverley Investments Limited and McCarthy & Stone Extra Care Limited, where McCarthy & Stone Extra Care Living Limited holds a non-controlling 49% equity interest and therefore has been treated as an associate in the Group financial statements.  Waverstone LLP was created to facilitate the purchase, management and disposal of various assets built by the Group.  Waverstone LLP has appointed McCarthy & Stone Management Services Limited a property manager and a sales agent. 

The transaction resulted in an additional FY19 cash flow for the Group of c.£17m with the remaining balance of c.£16m expected to be paid over 2 years.  FY19 underlying operating profit for the Group includes c.£3m profit from the transaction, after taking account of unrealised profit and fair value adjustments in relation to the outstanding receivable balance. 

Outlook

·     Total volume expectations remain unchanged at c.2,100 at an ASP of c.£300k

o Increased proportion of c.2,100 target volumes expected to come from rental offering during FY20

o We will continue to allocate a proportion of the balance sheet to rental until investment partner secured

o Cash and profit impact expected to be similar to tranche sales with further guidance provided once rental investment secured

·    c.37 first occupations expected in FY20 with all sites under construction

·     FRI sales assumed to go ahead as planned

·    House price inflation expected to remain subdued & build cost inflation expected to remain at c.3-4% level

·    Total exceptional costs of c.£25m still anticipated across the life of the transformation program with c.£19m incurred to FY19

·     Intention to grow ordinary dividend cover to around 2x underlying earnings over the medium term

·    Continued focus on cash generation with FY20 year end net cash position expected to be in excess of FY19

·     H1 out-turn expected to be lower than prior year, impacted by slower start to the financial year due to General election

·     Full year out-turn expected to remain in line with market expectations, weighted towards H2

Risk management

The Group maintains a robust risk management framework, providing a clear link between its strategy and the strategic, operational and financial risks faced by the business.  The approach to risk is set by the Board, which maintains a close involvement in identifying and mitigating risk and monitors certain key risk indicators at Board meetings on a regular basis. 

As part of managing the financial risk in the business, the potential impact of a downturn in the housing market or the broader UK economic environment is regularly evaluated and we have a number of key risk indicators that are used at Board level in order to assess this. Our geographic coverage and diversified portfolio of land ensures that we are not overly dependent on particular local markets or individual developments.  In addition, our distinct business model helps to insulate our business from a downturn, with land acquisition normally contracted subject to planning and also often subject to commercial viability or by way of option, enabling us to review land acquisition decisions in light of planning outcomes and latest market conditions prior to committing significant capital. 

 

Principal risks and uncertainties

 

The principal risks and uncertainties facing the Group include, but not limited to:

 

Risk Area	Risk Description	Mitigating Actions
Economic conditions	Housebuilding is cyclical and reliant on the broader economy. A deterioration in the economic outlook, including economic growth, inflation, interest rates and buyer confidence, could have a significant impact on the Group's financial performance and ability to sell or rent both retirement apartments and the properties acquired as part of the in-house part-exchange scheme. The uncertainty in the economy and specifically the secondary housebuilding market following the EU referendum is likely to continue in the short to medium term as the UK exits the EU.	The Group closely monitors industry indicators and assesses the potential impact of different economic scenarios. Decisions to allocate capital to land, build and investment property are managed centrally through the Group Investment Committee. The Group aims to maintain a geographical and product spread of developments to ensure that it is not reliant on one locality, product or service type.   The operation of an in-house part-exchange scheme is subject to strict controls and divisional limits.   The roll out of multi tenure, including the rental and shared ownership offerings will help to offset any potential impact of a downturn in the secondary housing market.
Government legislation	Like any other business, the Group is affected by changes in Government legislation. The Government consultation on unfair leasehold practices in FY18 had an adverse impact on the Group's business model.	MHCLG published its response to its October 2018 consultation on ground rents on 27 June 2019, where the government confirmed that the retirement community sector will be given an exemption and permitted to charge an economic ground rent after they are reduced to zero elsewhere.  We continue to discuss the detail of the exemption with the government and will work with them as the proposals pass through Parliament. The Group has carried out an impact assessment of lower and no ground rents and reviewed its land appraisal process accordingly.
Liquidity and funding	The Group requires appropriate facilities for its short-term liquidity and long-term funding in order to deliver its strategic objectives and stakeholder value.	Clear and concise forecasts and budgets are agreed at Board level, suitable banking and finance facilities with covenants and adequate headroom are in place and reviewed routinely and regular communication with investors and lenders is maintained. During the financial year the recurring credit facility was extended to March 2023.
Delivery of strategic objectives	Prolonged business disruption and/or failure to achieve the targeted savings could result in adverse financial deterioration and insufficient level of funding required to support working capital, which may negatively impact the viability of the Group.	Clear and concise objectives have been developed to deliver the targets as defined in the Group's strategy. The Transformation Committee which is chaired by the CEO closely monitor progress against the objectives, holds COO's and divisional management to account and takes remedial action in order to ensure delivery against agreed timelines and objectives.
Land acquisition and planning	Poor-quality land and/or location could result in programme/cost over-runs and difficulty in selling. Failure to obtain timely planning consents will adversely affect workflow, resulting in failure to meet targeted sales and/or cash flow.	Divisional land buying teams are in place providing local knowledge and expertise. These teams are targeted on land exchange and completion as part of their reward structure.   Land is acquired with a high degree of conditionality, so as to not commit to purchase without having appropriate planning agreements in place.   Divisional planning teams have the support and oversight of the COO-Build and the Group Investment Committee.
Build programmes and cost	The Group's financial performance is dependent on its ability to deliver build programmes on time and on budget. Build programme or cost over-runs could result in slower sales or reduced margins.   Significant potential for cost reduction through standardisation, design efficiencies and procurement practices have been identified as part of the Group's Strategy. Achievement of the build cost reduction initiative will be critical to the Group delivering on its strategic objectives.	Build progress and costs are reviewed regularly by dedicated divisional commercial teams, as well as being reported to divisional management at formal Division Board meetings and the Executive Committee. Independent assurance is provided by the internal audit team who perform commercial internal audits of developments under construction in order to mitigate the risk. Framework agreements have been established with key subcontractors and suppliers to provide greater certainty of price and supply. In addition, the Group has a robust control framework over more complex, higher risk developments.
Workflow	The Group has historically suffered from a bias towards achieving the majority of its completions and profits in the second half of the financial year. Hence, any political uncertainty or adverse market conditions during this period could adversely impact the Group's annual performance	The Group is re-aligning workflow towards a steady state production through the following actions: • Targeting a stable monthly flow of land exchanges • Ensuring stable monthly flow of build starts and first occupations • Reducing the number of sites in development • Introducing an incentive scheme designed to deliver smooth workflow   Workflow is closely monitored by divisional management, the Executive Committee and by the Board.
Sales performance	The Group's business plan assumes selling and charging for its products and services at attractive prices. Any volume shortfall or pricing weakness could have a significant impact on the Group's financial performance.	Detailed, regular and efficient reporting enables the Group to monitor sales volumes, revenue and pricing at a development, site and unit level. Performance against expectation is reviewed by the COO - Services and Customers and the Commercial Director with Divisional Sales Director at monthly Divisional Revenue Board meetings, and at the Executive Committee to ensure performance is being effectively managed and action taken in order to address any potential performance issues.   A strict approval process exists for pricing adjustment and the awarding of discounts and incentives in excess of certain thresholds.
Employees	The Group's employees are central to the achievement of the Group's objectives. Failure to recruit and retain sufficient staff resources of the right quality could adversely impact the business.	The Group has put in place attractive reward mechanisms and provides extensive opportunities for professional development and training, both of which are regularly reviewed against peer housebuilders and other employers in local markets. Resource requirements are assessed against annual budgets and recruitment processes are designed to ensure talent attraction and retention to deliver the Group's strategic objectives.   Investment in learning and development across the Group will also help to reduce the risk associated with employee retention.
Reputation and customer satisfaction	The Group builds, sells and rents a quality product to an ageing and sometimes frail customer base and provides ongoing management, care and wellbeing services. Any issues with the products or services the Group provides could impact on reputation or customer satisfaction to the detriment of the Group.   Adverse national publicity with respect to resales, especially older non-managed properties and those sold just prior to the housing market crash in 2008, can result in lower resale values, which in turn can adversely impact our ability to sell new retirement apartments.	The Group enforces strict procedures over the handover of developments for occupation and the handover of specific apartments to individual customers. Ongoing management, care and wellbeing services are provided within a robust framework of controls which are closely monitored.   The Care Quality Commission (CQC) inspects our Retirement Living PLUS developments and provides constructive feedback which is also used to ensure that we are meeting applicable care standards.   The business has a dedicated customer services team and tracks customer satisfaction through NHBC, HBF and internal surveys.   An in-house estate agency supports the resales process for customers in our managed developments on the general housing market, with the aim of speeding up the sales process and maximising value on resale. The business has also fundamentally changed its customer proposition to mitigate the resales issue by: a) extending the lease term from 125 years to 999 years, b) retaining the management of all developments in-house c) remaining as landlord and retaining a direct relationship with the customer.
Carrying value of land and investment property	The net realisable value of inventory and investment property owned by the Group may decline due to changes in the property market or other conditions, or the Group being unable to secure detailed planning consent on land purchased unconditionally.	Whenever possible, contracts to purchase land are via option agreement or are conditional on the Group obtaining detailed planning consent and/or contain a commercial viability clause.   The Group performs impairment reviews in line with International Financial Reporting Standards ('IFRS') requirements, on a half yearly basis to ensure the value of inventory and investment property is correctly reported.   Regular independent valuations of investment property are also performed to ensure carrying values are accurate.
Health and Safety	Construction sites are inherently risky and could expose individuals to the risk of serious injury or fatality.   Customers in the developments the Group manages are ageing and sometimes frail, with the risk that they can be more susceptible to injury.	The Group strives for excellence in health and safety and considers it to be a top priority. This is supported by a rigorous, independent site inspection process which routinely assesses and reports on standards. Regular reporting on key metrics and emerging issues is reviewed monthly by the COO-Build and submitted to the Executive Committee for further review.   Care Quality Commission inspections are performed across all Retirement Living PLUS developments and actions are tracked to address any potential weaknesses in process.
Cyber attack/IT failure	Failure of the Group's IT systems, in particular those relating to customer data and other market sensitive information such as surveying and inventory or investment property valuations, could adversely impact the performance and reputation of the Group.	The Group maintains central IT systems and has a robust cyber security programme in place. Dedicated resources and regular reviews seek to reduce the risk of successful cyber attacks and a disaster recovery programme is in place and regularly tested. Compliance with the GDPR legislation forms a core part of our policies and procedures.
Operational	The risk of loss to the Group from inadequate or failed processes, systems, human factors or due to external events, for example fraud.	Key Control framework and associated controls are operated and tested on a routine basis with assurance obtained on a quarterly basis to ensure effectiveness and operation of all operational key controls.

 

 

Viability statement

 

ln accordance with provision C.2.2 of the UK Corporate Governance Code 2016, The Directors have to assess the prospects and viability of the Group.

ln response to that, the Directors have assessed the prospects and financial viability of the Group, taking into account both its current position and principal risks. The Directors consider a three-year period is appropriate for this assessment as our land pipeline provides us with sufficient land under control to meet sales targets for the next three years. Accordingly, we consider it appropriate that our viability review period is broadly aligned with the expected longevity of our owned land supply.

The Group is subject to a number of principal risks and the Directors' viability statement review considered the impact that these risks might have on the Group's ability to meet its targets. This was undertaken through the modelling of a combined set of sensitivities, by applying a reasonably possible downside to sales volumes and pricing, rental pricing, build costs, planning risk and FRI income. This sensitivity analysis reflects a severe but plausible impact, assuming that the appropriate steps are taken to mitigate the impact of the downside and continuing availability of the £200m RCF throughout the assessment period, which has been extended until March 2023.

Based on this review, the Directors confirm that they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year assessment period.

 

FINANCIAL STATEMENTS

Consolidated Statement of Comprehensive Income

 

	Notes	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Continuing operations
Revenue	6	725.0	671.6
Cost of sales		(620.1)	(567.0)
Gross profit		104.9	104.6
Other operating income	9	238.1	11.3
Administrative expenses		(64.1)	(44.0)
Other operating expenses	9	(230.5)	(8.4)
Operating profit		48.4	63.5
Amortisation of brand	7	(2.4)	(2.0)
Exceptional items	7	(17.3)	(2.0)
Underlying operating profit		68.1	67.5
Finance income	10	1.0	0.4
Finance expense	11	(6.0)	(5.8)
Profit before tax	7	43.4	58.1
Income tax expense	12	(8.5)	(11.6)
Profit for the period from continuing operations and total comprehensive income		34.9	46.5
Profit attributable to
Owners of the Company		35.1	46.2
Non-controlling interests	27	(0.2)	0.3
		34.9	46.5

 

Notes 1 to 35 form part of the financial statements shown above. All trading derives from continuing operations.

Earnings per share
Basic (p per share)	13	6.5	8.6
Diluted (p per share)	13	6.5	8.6
Adjusted measures
Underlying operating profit	7	68.1	67.5
Underlying profit before tax	7	63.1	62.1

 

 

Consolidated Statement of Financial Position

 

	Notes	31 October 2019 £m	31 August 2018 £m
Assets
Non-current assets
Goodwill	14	41.7	41.7
Intangible assets	15	24.2	26.1
Property, plant and equipment	16	1.3	2.1
Investments in associates and joint ventures		0.4	0.4
Investment properties	18	28.5	0.2
Other receivables	20	43.0	27.8
Total non-current assets		139.1	98.3
Current assets
Inventories	19	724.9	817.5
Trade and other receivables	20	12.9	22.4
Cash and cash equivalents	29	36.7	57.0
Total current assets		774.5	896.9
Total assets		913.6	995.2
Equity and liabilities
Capital and reserves
Share capital	26	43.0	43.0
Share premium		101.6	101.6
Retained earnings		624.4	617.5
Equity attributable to owners of the Company		769.0	762.1
Non-controlling interests	27	-	1.3
Total equity		769.0	763.4
Current liabilities
Trade and other payables	22	94.6	114.9
UK corporation tax		3.7	6.5
Land payables	23	34.1	56.9
Total current liabilities		132.4	178.3
Non-current liabilities
Long-term borrowings	24	9.6	51.4
Deferred tax liability	21	2.6	2.1
Total liabilities		144.6	231.8
Total equity and liabilities		913.6	995.2

 

Notes 1 to 35 form part of the financial statements shown above.

These financial statements were approved by the Board on 27 January 2020 and signed on its behalf by:

 

John Tonkiss                                                           Rowan Baker

Chief Executive Officer                                          Chief Financial Officer

 

 

Consolidated Statement of Changes in Equity

 

	Notes		Share capital £m	Share premium £m	Retained earnings £m	Total £m	Non-controlling interest £m	Total equity £m
Balance at 1 September 2017			43.0	101.6	600.1	744.7	1.0	745.7
Profit for the year			-	-	46.2	46.2	0.3	46.5
Total comprehensive income for the year			-	-	46.2	46.2	0.3	46.5
Transactions with owners of the Company:
Share-based payments		32	-	-	0.8	0.8	-	0.8
Dividends		26	-	-	(29.6)	(29.6)	-	(29.6)
Balance at 31 August 2018			43.0	101.6	617.5	762.1	1.3	763.4
Profit for the year			-	-	35.1	35.1	(0.2)	34.9
Total comprehensive income for the year			-	-	35.1	35.1	(0.2)	34.9
Transactions with owners of the Company:
Share-based payments		32	-	-	1.4	1.4	-	1.4
Dividends		26	-	-	(29.3)	(29.3)	-	(29.3)
Acquisition of NCI without a change in control		27	-	-	(0.3)	(0.3)	(1.1)	(1.4)
Balance at 31 October 2019			43.0	101.6	624.4	769.0	-	769.0

 

Notes 1 to 35 form part of the financial statements shown above.

 

 

Consolidated Cash Flow Statement

 

	Notes	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Net cash flow from operating activities	29	81.4	14.8
Investing activities
Purchases of property, plant and equipment	16	(0.4)	(0.8)
Purchases of intangible assets	15	(1.4)	(1.1)
Proceeds from sale of property, plant and equipment		0.1	-
Outflows in relation to investment properties	18	(28.3)	-
Net cash used in investing activities		(30.0)	(1.9)
Financing activities
Issue of long-term borrowings		214.0	250.0
Repayment of long-term borrowings		(255.0)	(217.0)
Dividends paid		(29.3)	(29.6)
Acquisition of non-controlling interests	27	(1.4)	-
Net cash (used in)/from financing activities		(71.7)	3.4
Net (decrease)/increase in cash and cash equivalents		(20.3)	16.3
Cash and cash equivalents at beginning of the period		57.0	40.7
Cash and cash equivalents at end of the period		36.7	57.0

 

Notes 1 to 35 form part of the financial statements shown above.
 

Notes to the Consolidated Financial Statements

 

1. Significant accounting policies

The condensed financial information, which comprises the Consolidated Statement of Comprehensive Income, Consolidated Statement of Financial Position, Consolidated Statement of Changes in Equity, Consolidated Cash Flow Statement and related notes do not constitute statutory financial statements for the 14 month accounting period ended 31 October 2019, but are derived from those statements.  Statutory financial statements for the 12 month period ended 31 August 2018 have been filed with the Registrar of Companies and those for the 14 month period ended 31 October 2019 will be filed in due course.  The Group's auditors have reported on both periods' accounts; their reports were unqualified and did not contain statements under Section 498 (2) or (3) of the Companies Act 2006.

The condensed financial information has been abridged from the statutory financial statements for the 14 month period ended 31 October 2019, which have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union ('IFRS') and those parts of the Companies Act 2006 applicable to companies reporting under IFRS and therefore the consolidated financial statements comply with Article 4 of the EU IAS legislation.  The consolidated statement of comprehensive income and related notes represent results for continuing operations, there being no discontinued operations in the years presented.  The condensed financial information has been prepared under the historical cost convention, as modified by the use of valuations for certain financial instruments, share based payments and post-employment benefits.

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

Basis of preparation

McCarthy & Stone plc is a public Company limited by shares incorporated and domiciled in England and Wales under the Companies Act 2006. The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the 'Group'). The Company financial statements present information about the Company as a separate entity and not about the Group.

The current year financial statements have been prepared using a 14 month accounting period, due to a change in the year end date from 31 August to 31 October. It should be noted that the amounts presented in the financial statements for the current period are therefore not entirely comparable with the prior period being the 12 months ended 31 August 2018.

The Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the European Union ('EU IFRS') and have been prepared under the historical cost convention, except for investment properties and shared equity receivables that have been measured at fair value.

The registered office is 4^th Floor, 100 Holdenhurst Road, Bournemouth, Dorset, BH8 8AQ.

Going concern

The Directors consider that the Group is well placed to manage business and financial risks in the current economic environment and have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, a period not less than 12 months from the date of this report. In April 2019, the Group extended the maturity date of its existing £200m Revolving Credit Facility ('RCF') from May 2021 to March 2023 with Barclays, HSBC and RBS. As at the balance sheet date, a total of £12.0m (2018: £43.0m) has been drawn down with a further £36.7m (2018: £57.0m) held on the Consolidated Statement of Financial Position in cash, offset by promissory notes of £nil (2018: £10.0m), resulting in net cash of £24.7m (2018: £4.0m). The level of drawdown on the RCF fluctuates during the period, however the Group operates within a minimum headroom requirement of £40.0m throughout the period. If headroom were at risk, management can take mitigating action by curtailing uncommitted land purchases and build costs.

In making our assessment as to the Group's ability to continue as a going concern and managing the related funding risk, we have considered forecast net debt levels whilst reflecting on financial covenants which test the Group's interest cover, gearing, tangible net asset value and restrictions on the value of rental, shared ownership and part-exchange properties held on the balance sheet. No breaches have been identified. Accordingly, the Directors continue to adopt the going concern basis in preparing these Consolidated Financial Statements. Further information on the Group's borrowings is given in note 24.

2. Changes in accounting policies and disclosures

The accounting policies adopted, and methods of computation followed, are consistent with those of the previous financial year, with the exception of the two changes disclosed below. Specifically, the Group applied IFRS 15 and IFRS 9 for the first time. The nature and effect of the changes, as a result of adoption of these new accounting standards, are described below. There were several other new and amendments to standards and interpretations which are applicable for the first time in FY19, but either do not cause any impact or have no relevance to the Group.

IFRS 15 'Revenue from Contracts with Customers'

IFRS 15 was effective for the Group from 1 September 2018 and has been applied using the retrospective "cumulative effect" method, which means comparatives are not restated, due to adjustments being solely presentational. This standard sets out requirements for revenue recognition from contracts with customers under a five-step model to apportion revenue against performance obligations within a contract based upon the transfer of control. Revenue and profit on the sale of units is recognised when substantially all the risks and rewards of ownership have transferred to the customer, which is deemed to occur at legal completion. There is no change to this accounting treatment under the recognition criteria within IFRS 15 in comparison to prior years.

 

There are however presentational changes to our Consolidated Statement of Comprehensive Income regarding the treatment of part-exchange properties. Firstly, under IFRS 15, the requirement is to present the non-cash consideration received from a customer within revenue. This should be measured at fair value with any provisions raised taken as a reduction to revenue. Where the Group apply a provision against the purchased part-exchange property, this has now been accounted for as a reduction in the fair value of the revenue received instead of as a cost of sale.

 

Secondly, upon subsequent resale of the property, the income and costs associated with part-exchange properties were recognised on a net basis within cost of sales. Under IFRS 15, there is a requirement to present the proceeds from resale on a gross basis and this has been reclassified within 'other operating income' and the associated costs within 'other operating expenses' on the basis that it is not considered part of the core trading activities of the Group due to the differences in the nature and purpose of the properties being sold.

 

Finally, the Group have further reviewed all other transactions which arise as part of a sale which could be deemed to impact the fair value of the revenue received. This review tested specific incentives and the Group challenged whether each type of "incentive" is truly an incentive cost or is substantially a discount. This resulted in several changes of classifications of incentive type costs incurred which are offered to customers as part of a sale from Cost of sales to a reduction against Revenue.

 

The cumulative impact of these three changes under IFRS 15 has been illustrated below and results in the 2019 gross profit being increased by £1.6m with a nil impact on operating profit:

 

Impact on Consolidated Statement of Comprehensive Income	Initial 2019 result	Part-exchange fair value buy-in adjustment	Part-exchange gross up adjustment	Review of incentives against discounts	Revised 2019 result
Revenue	735.2	(5.4)	-	(4.8)	725.0
Cost of sales	(631.9)	5.4	1.6	4.8	(620.1)
Gross profit	103.3	-	1.6	-	104.9
Other operating income	22.8	-	215.3	-	238.1
Administrative expenses	(64.1)	-	-	-	(64.1)
Other operating expenses	(13.6)	-	(216.9)	-	(230.5)
Operating profit	48.4	-	-	-	48.4

 

IFRS 9 'Financial Instruments'

IFRS 9 replaced IAS 39 'Financial Instruments: Recognition and Measurement' and was effective for the Group from 1 September 2018. The Group does not presently hold any complex financial instruments. As a result, the principal area of impact is in applying the new forward-looking expected credit loss model introduced for bad debt provisions. However, as the Group's accounting policy is not to recognise revenue until legal completion and any trade receivables are insignificant, no additional provisions have been applied. The Group will continue to assess the impact and application of the new standard, particularly in line with expected growth in rental and shared ownership offerings, however we do not anticipate the new standard will have a material impact on the Group's future results or financial position.

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

3. Alternative Performance Measures ('APMs')

Within the Annual Report, the Directors have adopted various APMs. These measures are not defined by International Financial Reporting Standards ('IFRS'). 

The Directors are of the opinion that the separate presentation of these items provides helpful information about the Group's underlying business performance.

The key APMs that the Group has used are as follows:

·      Underlying operating profit	·      Net cash
·      Underlying earnings per share	·      Underlying profit before tax
·      Underlying operating profit margin	·      Return On Capital Employed ('ROCE')

 

All 'underlying' items refer to the adjusted measure being reported before 'exceptional' and 'adjusted cost' items. Specifically, the exceptional items are one-off, and their inclusion does not present consistent and comparable results. The amortisation of brand is a non-trading factor and its inclusion is not useful in determining the trading profits of the Group. ROCE is used as a metric to ensure efficient and effective use of capital and is a key metric for determining Director remuneration (including LTIP targets). ROCE is also a comparable metric used by our peer housebuilder group.

A full reconciliation between the statutory results and the underlying measures and a ROCE calculation can be seen within note 7. Net cash has been defined and calculated within note 25. Adjusted cost and exceptional items have been defined within note 7.

 

4. Standards issued but not yet effective

At the date of approval of the financial statements, the following standards, interpretations and amendments to standards have been issued, but are not yet effective for the 14 month period ended 31 October 2019. This list of new and amended standards and interpretations issued are those that the Group reasonably expects to have an impact on the financial statements when applied once they become effective.
 

IFRS 16 'Leases'

IFRS 16 replaces IAS 17 'Leases', IFRIC 4 'Determining whether an Arrangement contains a Lease', SIC-15 'Operating Leases-Incentives' and SIC-27 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease' and is effective for the Group from 1 November 2019. This standard brings significant changes to the accounting of leases by lessees. IFRS 16 requires the recognition of a 'right-of-use' asset and a corresponding lease liability on the Statement of Financial Position of the lessee. In the Statement of Comprehensive Income, the existing operating lease charges (the majority of which is currently recognised within operating profit) will be replaced by a depreciation charge against the 'right-of-use' asset. Additionally, there will be an interest cost in relation to the lease liability which will be recognised within finance expenses.

 

The Group have opted to apply IFRS 16 using the modified retrospective transition approach, whereby the Group will measure right-of-use assets at an amount equal to the lease liabilities on the date of transition.

The Group will also take advantage of several practical expedients available to lessees. These exemptions are:

•      Exclusion of all leases with term dates that end within 12 months of the date of application

•      Exclusion of low value leases (e.g. printers and laptops)

•      Application of a single discount rate to a portfolio of leases with reasonably similar characteristics

 

The Group have classified its leases in to two categories of assets - property leases and vehicle leases.

 

During 2019, the Group has performed a detailed impact assessment of IFRS 16 and a summary of the financial impact upon transition is as follows:

 

	£m
Assets
Property, plant & equipment (right-of-use assets)	7.6
Liabilities
Lease liabilities	7.6
Net impact on equity	-

 

Other standards

The Group has considered the impact of Annual Improvements 2015-2017, Amendment to IAS 28 'Investments in Associates and Joint Ventures', IFRIC 23 'Uncertainty over income tax treatments', and Amendments to IAS 19 'Employee benefits on plan amendment, curtailment or settlement' which will be applicable to the Group for the financial year commencing 1 November 2019. These standards are not expected to have a significant impact on the Group.

 

5. Critical accounting judgements and key sources of estimation uncertainty

In the application of the Group's accounting policies, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

 

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

 

Critical judgements in applying the Group's accounting policies

In applying the Group's accounting policies, one critical judgement has been made in relation to exceptional items. A judgement has been made that the items in FY19 are of significant cost, non-recurring and unusual to the normal activity of the Group and therefore a decision was made to reclassify these items separately on the face of the Consolidated Statement of Comprehensive Income.

 

No other critical judgements are deemed to have been made that have a material effect on the amounts recognised in the financial statements.

 

 

Assumptions and other sources of estimation uncertainty

The following are assumptions the Group makes about the future, and other sources of estimation uncertainty at the end of the reporting period. This has been split between those that could result in a material adjustment within one year and those over the longer-term.

 

Critical assumptions and major sources of estimation uncertainty

The Group does not have any key assumptions concerning the future, or other key sources of estimation uncertainty in the reporting period that may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

 

Other assumptions and sources of estimation uncertainty

These assumptions and sources of estimation uncertainty carry risk of resulting in a material adjustment to the carrying amounts of assets and liabilities over the longer-term.

 

Impairment of goodwill

Goodwill is tested to determine whether the estimation of the value in use of the CGU is greater than the carrying value of the asset. The value in use calculation includes an estimate of the future forecast cash flows and requires the determination of a suitable discount rate in order to calculate the present value of the cash flows. Details of the impairment review calculation and sensitivity analysis performed are included in note 17.

 

Fair value of shared equity receivables

Shared equity receivables are recognised at the fair value of future anticipated cash receipts that takes into account the Directors' view of an appropriate discount rate, a new build premium, future house price movements, the expected timing of receipts and historic gains and losses on redemptions. Shared equity receivables are reviewed at each reporting date using a variety of estimates that anticipate future cash flow from assets. Further information regarding the assumptions and sensitivity effects of a reasonable possible change across all schemes can be seen within note 31. The significant risk is specifically pinpointed to the Group's substantially largest shared equity scheme which was offered between FY12 and FY17 of which the revaluation is driven by changes in discount rates and house price inflation. Should both of these assumptions be impacted by a reasonably possible change of a 1% increase or decrease, the effect has been illustrated below:

 

	Increase assumptions by 1% £m	Decrease assumptions by 1% £m
Discount rate	(1.4)	1.6
House price inflation	1.6	(1.5)

 

Cost capitalisation of overheads

Within inventory there are a number of areas of estimation uncertainty, including determination of site margin, of which cost capitalisation of overheads is the most significant. Inventory includes a proportion of design, procurement, construction, health & safety, commercial, interior design and planning costs. Costs associated with these functions are reviewed by management to attribute those costs relating directly to the cost of the developments to inventory and those that relate to general business overheads to expenses. The assumptions used are reviewed annually by the function heads before being proposed to the Risk and Audit Committee.

 

Cost capitalisation involves estimates of the proportion of costs that are directly attributable to sites. The key source of

estimation uncertainty in this area relates to the percentage of time spent by our regions on directly attributable site activities. The percentage of their time which is capitalised ranges between 50-78% (2018: 69-85%) for the various functions. Overhead costs capitalised at 31 October 2019 amount to £19.6m (31 August 2018: £23.7m). If the prior period cost capitalisation rates were to be used, the value of the overhead costs capitalised would have increased by £1.0m.

 

6. Revenue

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Unit sales - external customers	677.6	642.8
Unit sales - revenue from an associate	16.7	-
FRI revenue	30.3	28.8
Rental revenue	0.4	-
	725.0	671.6

 

All unit sales revenue arose from the sale of properties. All revenue was generated within the UK. No individual customer is significant to the Group's revenue in any period, however unit sales revenue includes the sale of a portfolio of 113 show flats and sales offices to Waverstone LLP for which the Group has recognised its proportional share of the transaction resulting in revenue of £16.7m and a gain for the year of £2.7m. Further detail can be seen within note 34.

 

Revenue received on the disposal of part-exchange properties is shown within other operating income (see note 9).

 

7. Profit before tax

Profit before tax has been arrived at after charging:

	Notes	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Amortisation of intangibles	15	3.2	2.6
Depreciation of property, plant and equipment	16	1.1	1.1
Operating lease arrangements	28
Land and buildings		2.0	1.7
Plant and machinery		2.3	2.6
Cost of inventories recognised as an expense		524.0	480.0
Staff costs	8	91.7	94.0
Share-based payments charge to profit or loss	32	1.4	0.8
Movement in inventory provision (including part-exchange properties)		(0.6)	1.5

 

Reconciliation to underlying operating profit and profit before tax

The following tables present a reconciliation between the statutory profit measures disclosed on the Consolidated Statement of Comprehensive Income and the underlying measures used by the Board to appraise performance.

 

Exceptional items are items which, due to their one-off, non-trading and non-recurring nature, have been separately classified by the Directors in order to draw them to the attention of the reader.

 

Adjusted cost items are items which are quantitively or qualitatively material and are presented separately within the Consolidated Statement of Comprehensive Income. The Directors are of the opinion that the separate presentation of these items provides helpful information about the Group's underlying business performance. Amortisation of brand has been adjusted in order to reconcile to underlying operating profit and underlying profit before tax given the Directors do not believe this cost reflects the underlying trading of the business.

 

 

14 months to 31 October 2019	Notes	Statutory £m	Exceptional   items £m	Adjusted cost Amortisation of brand £m	Underlying £m
Operating profit		48.4	17.3	2.4	68.1
Finance income	10	1.0	-	-	1.0
Finance expense	11	(6.0)	-	-	(6.0)
Profit before tax		43.4	17.3	2.4	63.1
Income tax expense		(8.5)	(3.3)	(0.5)	(12.3)
Profit for the period		34.9	14.0	1.9	50.8
Attributable to non-controlling interest		(0.2)	-	-	(0.2)
Attributable to owners of the Company		35.1	14.0	1.9	51.0
Earnings per share
Basic (p per share)		6.5	2.6	0.4	9.5
Diluted (p per share)		6.5	2.6	0.4	9.5

 

The exceptional costs in 2019 represent the cost of land which will no longer be developed net of any residual land value to be recovered of £7.2m (2018: £nil), redundancy costs of £3.8m (2018: £0.8m) and consultants' fees in relation to the strategic review of £6.3m (2018: £1.2m).

 

12 months to 31 August 2018	Notes	Statutory £m	Exceptional items £m	Adjusted cost Amortisation of brand £m	Underlying £m
Operating profit		63.5	2.0	2.0	67.5
Finance income	10	0.4	-	-	0.4
Finance expense	11	(5.8)	-	-	(5.8)
Profit before tax		58.1	2.0	2.0	62.1
Income tax expense		(11.6)	(0.4)	(0.4)	(12.4)
Profit for the year		46.5	1.6	1.6	49.7
Attributable to non-controlling interests		0.3	-	-	0.3
Attributable to owners of the company		46.2	1.6	1.6	49.4
Earnings per share
Basic (p per share)		8.6	0.3	0.3	9.2
Diluted (p per share)		8.6	0.3	0.3	9.2

 

Key profit related metrics, underlying operating profit margin and return on capital employed ('ROCE'), have been reconciled below:

 

Underlying operating profit margin: calculated as underlying operating profit (being operating profit adding amortisation of brand and exceptional administrative expenses) divided by revenue.

 

ROCE: calculated by dividing underlying operating profit by the average of opening and closing Tangible Gross Asset Value ('TGAV' - calculated as tangible net asset value less net cash) in the year.

 

 

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Revenue	725.0	671.6
Operating profit	48.4	63.5
Operating profit margin	7%	9%
Amortisation of brand	2.4	2.0
Exceptional administrative expenses	17.3	2.0
Underlying operating profit	68.1	67.5
Underlying operating profit margin	9%	10%
Opening net assets	763.4	745.7
Opening goodwill (note 14)	(41.7)	(41.7)
Opening intangible assets	(26.1)	(27.6)
Opening net cash	(4.0)	(30.7)
Opening tangible gross asset value	691.6	645.7
Closing net assets	769.0	763.4
Closing goodwill (note 14)	(41.7)	(41.7)
Closing intangible assets	(24.2)	(26.1)
Closing net cash	(24.7)	(4.0)
Closing tangible gross asset value	678.4	691.6
Average tangible gross asset value	685.0	668.7
Underlying operating profit	68.1	67.5
ROCE	10%	10%

 

Auditor's remuneration

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Fees payable to the Group's auditor
Audit of the Company and Consolidated Financial Statements	0.2	0.2
Audit of the Company's subsidiaries	-	-
Audit related assurance services	-	-
Other services	-	-
	0.2	0.2

 

Audit of the Company's subsidiaries amounted to £30,000 (2018: £30,000). Audit-related assurance services amounted to £50,000 (2018: £35,000) in respect of a review of the half year results. Other services amounted to £nil (2018: £1,600). There were no other fees payable to the Group auditor in the period.

 

 

8. Staff costs

Staff costs for the period include Directors' emoluments, which are detailed within this note:

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Wages and salaries	74.9	79.8
Social security costs	8.6	8.4
Other pension costs	5.2	4.1
Share-based payments	1.4	0.8
Termination payments	1.6	0.9
	91.7	94.0

 

The monthly average number of persons, including Executive Directors, employed by the Group during the year was as follows:

	2019 Number	2018 Number
Office management and staff	844	995
House managers	1,401	1,166
Construction staff	188	241
	2,433	2,402

 

At 31 October 2019 the Group employed 2,523 people (31 August 2018: 2,512).

 

Directors' emoluments

Amounts recognised in respect of Board Directors' emoluments:

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Wages and salaries	2.5	1.9
Social security costs	0.3	0.3
Share-based payments	0.4	-
Other pension costs1	0.2	0.2
Termination payments	-	0.5
	3.4	2.9

 

¹ Includes salary supplements in lieu of pension

 

The emoluments of the highest paid director was £0.9m (2018: £1.3m), including pension contributions of nil (2018: nil). The number of Directors in the Company pension plan was one (2018: one).

 

9. Other operating income/expenses

Other operating income	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Other income	15.9	9.8
Valuation gains from completed investment property	6.6	-
Non-core business revenue	0.3	1.5
Part-exchange revenue	215.3	-
	238.1	11.3

 

Other income arises on the services provided by Group subsidiaries to manage certain developments. Non-core business revenue relates to income such as customer extras.

 

IFRS 15 was effective for the Group from 1 September 2018 and as part of this standard the Group has to comply with presentational changes to the Consolidated Statement of Comprehensive Income regarding the treatment of part-exchange properties. When the Group re-sells a part-exchange property, the income and costs associated with part-exchange properties are now required to be presented on a gross basis within 'other operating income' and 'other operating expenses'. For further information please see note 2.

 

Other operating expenses	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Other expenses	13.6	8.4
Part-exchange expenditure	216.9	-
	230.5	8.4

 

10. Finance income

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Gain in fair value of shared equity receivables	0.9	0.3
Interest income received	0.1	0.1
	1.0	0.4

 

11. Finance expense

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Loans interest and overdraft fees	3.4	3.6
Promissory note interest and fees	0.3	0.1
Refinancing issue costs	1.0	0.6
Loss in fair value of shared equity receivables	1.3	1.5
	6.0	5.8

The total interest expense, determined using the effective interest method, for financial liabilities that are not classified as at fair value through profit or loss was £3.1m. (2018: £3.0m).

 

12. Income tax expense

	Notes	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Corporation tax charges
Current period		7.9	11.3
Adjustments in respect of prior periods		0.1	-
Deferred tax charges
Current period	21	0.6	0.3
Adjustments in respect of prior periods		(0.1)	-
		8.5	11.6

 

 

The tax charge for each period can be reconciled to the profit before tax per the Consolidated Statement of Comprehensive Income as follows:

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Profit before tax	43.4	58.1
Tax charge at the UK corporation tax rate of 19.00% (2018: 19.00%)	8.2	11.0
Tax effect of
Expenses that are not deductible in determining taxable profit	0.2	0.3
Share options timing difference	0.1	0.3
Tax charge for the period	8.5	11.6

 

As at the year end date, a reduction in the rate of corporation tax to 17% from 1 April 2020 is substantively enacted. The UK deferred tax balances at 31 October 2019 have been calculated based on the expected rate at which the liability will unwind.

 

13. Earnings per share

Basic earnings per share is calculated as the profit for the financial period attributable to owners of the Company divided by the weighted average number of shares in issue during the period. The actual weighted average number of ordinary shares during the 14 month period ended 31 October 2019 was 537.3m for the basic and 544.0m for the diluted calculations, giving a statutory earnings per share for the 14 month period ended 31 October 2019 of 6.5p for basic and 6.5p for diluted.

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Profit attributable to owners of the Company (£m)	35.1	46.2
Weighted average no. of shares (m)	537.3	537.3
Basic earnings per share (p)	6.5	8.6

 

For diluted earnings per share, the weighted average number of shares in issue is adjusted to assume the conversion of all potentially dilutive ordinary shares. At 31 October 2019, the Company had two categories of potentially dilutive ordinary shares: 7.2m nil cost share options under the LTIP and 2.1m share options under the SAYE.

 

A calculation is done to determine the number of shares that could have been acquired at fair value based on the aggregate of the exercise price of each share option and the fair value of future services to be supplied to the Group, which is the unamortised share-based payments charge. The difference between the number of shares that could have been acquired at fair value and the total number of options is used in the diluted earnings per share calculation.

 

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Profit used to determine diluted EPS (£m)	35.1	46.2
Weighted average number of shares (m)	537.3	537.3
Adjustments for
Share options - LTIP (m)	4.4	1.3
Share options - SAYE (m)	2.2	-
Shares used to determine diluted EPS (m)	544.0	538.6
Diluted earnings per share (p)	6.5	8.6

 

 

14. Goodwill

	£m
Cost
At 1 September 2017, 31 August 2018 and 31 October 2019	41.7
Carrying amount
At 1 September 2017, 31 August 2018 and 31 October 2019	41.7

 

No impairment losses have been recognised in any of the reporting periods presented herein.

 

Goodwill arose as a result of an acquisition in 2009 of the assets and liabilities of Monarch Realisations 1 plc. As the goodwill relates to the business as a whole, it is allocated to the CGU, as defined in note 3. For key assumptions in determining recoverable amounts in goodwill impairment testing, refer to note 17.

 

 

15. Intangible assets

	Brand £m	Software £m	Total £m
Cost
At 1 September 2017	41.4	4.7	46.1
Additions	-	1.1	1.1
At 31 August 2018	41.4	5.8	47.2
Additions	-	1.4	1.4
Disposals	-	(0.2)	(0.2)
At 31 October 2019	41.4	7.0	48.4
Amortisation
At 1 September 2017	(17.3)	(1.2)	(18.5)
Charge for the year	(2.0)	(0.6)	(2.6)
At 31 August 2018	(19.3)	(1.8)	(21.1)
Charge for the year	(2.4)	(0.8)	(3.2)
Eliminated on disposals	-	0.1	0.1
At 31 October 2019	(21.7)	(2.5)	(24.2)
Carrying amount
At 31 August 2018	22.1	4.0	26.1
At 31 October 2019	19.7	4.5	24.2

 

Brand assets represent the McCarthy & Stone brand name purchased as part of the business combination in 2009. Brand assets have 9 years and 7 months of useful life remaining.

 

All amortisation charged is recognised in administrative expenses in the Consolidated Statement of Comprehensive Income.

 

 

 

16. Property, plant and equipment

	£m
Cost
At 1 September 2017	7.8
Additions	0.8
Disposals	(2.4)
At 31 August 2018	6.2
Additions	0.4
Disposals	(2.0)
At 31 October 2019	4.6
Accumulated depreciation and impairment
At 1 September 2017	(5.4)
Charge for the year	(1.1)
Eliminated on disposals	2.4
At 31 August 2018	(4.1)
Charge for the period	(1.1)
Eliminated on disposals	1.9
At 31 October 2019	3.3
Carrying amount
At 31 August 2018	2.1
At 31 October 2019	1.3

 

 

17. Impairment testing

During the periods reported in the financial statements, no impairments have been recognised against the Group's assets. For each reported period, management have performed an impairment review of goodwill, being an indefinitely lived asset, and intangible assets. The Group only has one CGU, as defined in note 3.

The recoverable amount (value in use) was determined by discounting the forecast future cash flows of the CGU. Three years of net operating cash flows were calculated using the Group's three year business plan for FY20-22. The cash flows for FY23 reflected investment in land and build required to deliver c.2,300 units p.a. and were extrapolated in perpetuity assuming a 3% p.a. growth for FY23 and FY24 and a 5% p.a. growth thereafter.  The key assumptions for the value in use calculation were:

•      Discount rate: this is a pre-tax rate that reflects current market assessments of the time value of money and risks specific to the business.  Accordingly, the rate of 12.8% (FY18: 10.0%) is considered by the Directors to be the appropriate pre-tax risk adjusted discount rate, being the Group's estimated long-term pre-tax weighted average cost of capital

•      Sales completion volumes: these are calculated on a site-by-site basis for the first three years dependent upon regional market conditions, taking into account historic sales curves and expected reservation rates. Volumes for FY23 and beyond were based on a flat delivery of c.2,300 units p.a.

•      Expected changes in selling prices: these are calculated on a site-by-site basis for the first three years dependent upon regional market conditions, pricing for existing pipeline sites and product type. Consistent with FY19, no house price inflation has been assumed

•      FRI income: this is based on the assumption that the Group will continue selling FRI during FY20-22

•      Expected build costs: these are calculated on a site-by-site basis for the first three years dependent upon the expected costs of completing all aspects of each individual development and management best estimate to deliver build cost reductions as part of the new strategy

 

These assumptions are reviewed and revised annually in light of current economic conditions and the future outlook for the business.

The result of the value in use exercise concluded that the recoverable amount of the CGU exceeded its carrying value by £309.5m and there has been no impairment to goodwill and intangible assets.

Management has modelled two scenarios by applying reasonably possible downsides to each of the key assumptions applied in the value in use calculations. 

Scenario 1: Management have performed a sensitivity analysis based on an increase in the pre-tax discount rate by 1% reflecting a potential change in the market assessments of the time value of money.  This sensitivity analysis showed that no goodwill and intangible assets impairment would arise under this scenario.

Scenario 2: Management have performed a sensitivity analysis by combining several downsides assuming that the appropriate steps are taken to mitigate the impact of the downsides.  These were as follows:

•      Based on continuing subdued secondary housing market and current reservation rates, management have applied 15.0% volume downside from May 2020. Volumes for FY23 and beyond were based on a flat delivery of c.1,700 units p.a.

•      Management have applied a 7.5% downside on pricing in the South East and North London region from May 2020, reflecting pressures in the market in these geographical regions and a 5.0% downside in all other regions

•      Additional discount has been modelled on a rental portfolio

•    Management have modelled the removal of 50% of FRI income from May 2020 given the uncertainty over the long-term sustainability of this revenue stream

•      Management have assumed 5% build cost inflation on FY20 first occupations

•      All build cost savings targeted as part of the strategic review have been removed from FY21 and FY22 first occupations

•      Management have assumed that this scenario will be mitigated by aborting uncommitted land purchases and related build costs, ceasing bonus and dividends

This sensitivity analysis showed that no goodwill and intangible asset impairment would arise under this scenario.

No impairment charges were recorded on items of property, plant and equipment throughout the current or prior period.

18. Investment properties

	Rental £m	Other £m	Total £m
Cost
At 1 September 2018	-	0.2	0.2
Additions	21.7	-	21.7
Revaluation	5.9	0.7	6.6
At 31 October 2019	27.6	0.9	28.5

The Group's investment properties consist of McCarthy & Stone properties that are held as rental apartments, for capital appreciation and are held at fair value using a market-based valuation. The fair value is based on an external valuation carried out by independent valuation consultants.

19. Inventories

	31 October 2019 £m	31 August 2018 £m
Land held for development	57.6	99.6
Sites in the course of construction	179.6	290.3
Finished stock	393.9	385.9
Part-exchange properties	93.8	41.7
	724.9	817.5

 

Days in inventory amounted to 440 days in 2019 (2018: 590 days).

 

Inventory days are calculated by taking period end inventory (excluding part-exchange properties) divided by cost of inventories recognised as an expense.

 

20. Trade and other receivables

	31 October 2019 £m	31 August 2018 £m
Trade and other receivables due in less than one year
Trade receivables	3.2	11.9
Other debtors and prepayments	9.7	10.5
	12.9	22.4

 

	31 October 2019 £m	31 August 2018 £m
Trade and other receivables due in greater than one year
Trade receivables due from an associate	14.8	-
Secured mortgages	2.5	2.8
Shared equity receivables	22.1	25.0
Shared ownership receivables	3.6	-
	43.0	27.8

 

Secured mortgages disclosed above are classified as loans and receivables and are measured at amortised cost. Shared equity receivables and shared ownership receivable are classified as financial assets measured at fair value through profit or loss.

 

The Directors consider that the carrying amounts of trade and other receivables and non-current receivables approximates their fair value.

 

Trade receivables from an associate represents balances due from Waverstone LLP and is subsequent to a fair value adjustment of £0.4m and an expected credit loss adjustment of £0.9m.

 

21. Deferred tax liability

The following are the major deferred tax liabilities recognised by the Group:

	Other temporary differences £m	Total £m
At 1 September 2017	(1.8)	(1.8)
Statement of Comprehensive Income charge	(0.3)	(0.3)
At 31 August 2018	(2.1)	(2.1)
Statement of Comprehensive Income charge	(0.5)	(0.5)
At 31 October 2019	(2.6)	(2.6)

 

The movement in other temporary differences mostly relate to tax and accounting differences in the treatment of share-based payments.

 

Deferred tax assets of £0.1m (2018: £0.1m) in relation to capital losses carried forward of £0.3m (2018: £0.3m) were not recognised as, despite there being no expiry date for these losses, there is insufficient evidence that they will ever be utilised.

 

 

22. Trade and other payables

	31 October 2019 £m	31 August 2018 £m
Trade payables	23.7	25.9
Other taxes and social security costs	2.3	2.1
Accrued expenses	38.9	58.0
Other creditors and deferred income	29.7	28.9
	94.6	114.9

 

Trade payables and accrued expenses principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases was 17 days during 2019 (2018: 18 days).

 

No material interest costs have been incurred in relation to such payables. The Group policy is to ensure that payables are paid within the pre-agreed credit terms and to avoid incurring penalties and/or interest on late payments. Other creditors include sales taxes, property taxes and customer deposits. The Directors consider that the carrying amount of trade payables approximates their fair value.

 

No purchases are made on extended payment terms.

 

23. Land payables

	31 October 2019 £m	31 August 2018 £m
Land payables	34.1	56.9

 

Land payables relate to payments due in respect of land which has been purchased under an unconditional contract.

 

24. Borrowings

Long-term borrowings	31 October 2019 £m	31 August 2018 £m
Loans (Revolving Credit Facility)	12.0	43.0
Unamortised issue costs	(2.4)	(1.6)
Promissory notes	-	10.0
	9.6	51.4

 

			Outstanding at
		Maturity	31 October 2019 £m	31 August 2018 £m
Revolving Credit Facility		March 2023	12.0	43.0

 

HSBC and RBS. The nominal interest rate of this facility has increased from a 1, 3 or 6 month LIBOR + 1.6% to a 1, 3 or 6 month LIBOR + 1.7% depending on the length of the drawdown.

 

The RCF imposes financial covenants which test the Group's 'interest cover', 'net tangible assets', 'gearing' and restrictions on the value of rental, shared ownership and part-exchange properties held on the balance sheet; all of which the Group is compliant with.

 

The RCF is secured by a floating charge over the assets of McCarthy & Stone plc, McCarthy & Stone Retirement Lifestyles Limited, McCarthy & Stone (Developments) Limited, McCarthy & Stone Extra Care Living Limited, McCarthy & Stone Total Care Management Limited, McCarthy & Stone Rental Properties Limited and McCarthy & Stone Rental Properties No.2 Limited.

 

A reconciliation of liabilities arising from financing activities has been detailed below:

 

 

 

		2019 £m
				Cash flow		Non-cash changes
		At 1 September 2018		Net cash flow		Net issue/ amortisation of issue costs	Issue of promissory notes		At 31 October 2019
Long-term borrowings
Loans		43.0		(31.0)		-	-		12.0
Unamortised issue costs		(1.6)		-		(0.8)	-		(2.4)
Promissory notes		10.0		(10.0)		-	-		-
Total liabilities from financing activities		51.4		(41.0)		(0.8)	-		9.6
		2018 £m
				Cash flow		Non-cash changes
		At 1 September 2017		Net cash flow		Amortisation of issue costs	Issue of promissory notes		At 31 August 2018
Long-term borrowings
Loans		10.0		33.0		-	-		43.0
Unamortised issue costs		(2.0)		-		0.4	-		(1.6)
Promissory notes		-		-		-	10.0		10.0
Total liabilities from financing activities		8.0		33.0		0.4	10.0		51.4

 

25. Net cash

	31 October 2019 £m	31 August 2018 £m
Loans and borrowings	9.6	51.4
Add back unamortised issue costs	2.4	1.6
Cash and cash equivalents	(36.7)	(57.0)
Net cash	(24.7)	(4.0)

 

Net cash is a non-GAAP measure and is calculated as cash and cash equivalents less long-term and short-term borrowings (excluding unamortised debt issue costs).

 

26. Share capital

The Company has one class of ordinary shares which carry no right to fixed income. There is no limit to authorised share capital.

 

Allotted and issued ordinary shares	31 October 2019 £m	31 August 2018 £m
8p each fully paid: 537,329,434 ordinary shares (2018: 537,329,434)	43.0	43.0

 

Dividends on equity shares

The interim dividend of 1.9p (2018: 1.9p) was approved by the Board on 10 April 2019 and paid on 11 June 2019 to all ordinary shareholders on the register of members at the close of business on Friday 3 May 2019. The ex-dividend date was 2 May 2019. The final dividend proposed by the Board is 3.5p (2018: 3.5p) per share resulting in a total ordinary dividend for the period of 5.4p (2018: 5.4p).  It will be paid on 3 April 2020 to those shareholders who are on the register at 6 March 2020 subject to approval at the Company's Annual General Meeting. The ex-dividend date is 5 March 2020. These financial statements do not reflect the final dividend payment.

 

The cost of the dividends paid within the financial period amounted to £29.3m (2018: £29.6m).

 

 

 

27. Acquisition of non-controlling interests

On 29 July 2019, the Group acquired the remaining 50% of the shares and voting interests in YourLife Management Services Limited ('YLMS') for a cash consideration of £1.4m. As a result, the Group's equity interest increased from 50% to 100%.

 

Previously, the Group had control of the business, due to its power to appoint the majority of the Directors and control over the relevant activities of the entity, and therefore consolidated the YLMS results as a subsidiary. The subsequent acquisition of shares has therefore been treated as an equity transaction.

 

	£m
Carrying amount of NCI acquired	1.1
Consideration paid to NCI	(1.4)
Decrease in equity attributable to owners of the Company	(0.3)

 

 

28. Operating lease arrangements

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Minimum lease payments under operating leases recognised as an expense	4.3	4.3

 

At the period end the Group had outstanding commitments for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

As a lessee:	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Within one year	2.5	4.2
In the second to fifth years inclusive	5.0	5.5
After five years	1.3	1.0
Outstanding commitments for future minimum lease payments	8.8	10.7

 

Operating lease payments typically represent rentals payable by the Group for its office properties and cars. Rent reviews and break clauses apply to leased property agreements.

 

At the period end the Group had commitments due to be received for future minimum lease payments under non-cancellable operating leases, which fall due as follows:

As a lessor:	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Within one year	1.7	0.1
In the second to fifth years inclusive	-	0.1
After five years	-	-
Outstanding commitments due for future minimum lease payments	1.7	0.2

 

 

 

29. Notes to the cash flow statement

	Notes	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Profit for the financial period		34.9	46.5
Adjustments for
Income tax expense	12	8.5	11.6
Amortisation of intangible assets	15	3.2	2.6
Share-based payments charge	32	1.4	0.8
Depreciation of property, plant and equipment	16	1.1	1.1
Finance expense	11	6.0	5.8
Finance income	10	(1.0)	(0.4)
Revaluation of inventories to investment properties	9	(6.6)	-
Profit from a transaction with related party	6	(2.7)	-
Operating cash flows before movements in working capital		44.8	68.0
(Increase) in trade and other receivables		(5.8)	(9.8)
Decrease/(increase) in inventories		99.2	(47.1)
(Decrease)/increase in trade and other payables		(42.4)	19.1
Cash generated by operations		95.8	30.2
Interest received		0.1	0.1
Interest paid		(3.7)	(4.0)
Income taxes paid		(10.8)	(11.5)
Net cash flow from operating activities		81.4	14.8

 

Cash and cash equivalents
Cash and bank balances	36.7	57.0

 

Cash and cash equivalents comprise cash and bank balances and short-term bank deposits with an original maturity of three months or less, net of outstanding bank overdrafts.

 

The increase in trade and other payables includes the movement in land payables.

 

30. Retirement benefit schemes

The Group operates a defined contribution retirement benefit scheme which is open to all employees.

 

Other than amounts that are deducted from employees' remuneration and accrued pending payment to the benefit scheme, no further obligations fall on the Group as the assets of these arrangements are held and managed by third parties entirely separate from the Group.

 

The benefit scheme charge for the period represents contributions payable to the benefit scheme and amounted to £5.2m for the 14 month period ended 31 October 2019 (12 months to 31 August 2018: £4.1m). Unpaid contributions amounted to £0.4m as at 31 October 2019 (31 August 2018: £0.4m).

 

 

 

31. Financial risk management

The Group's financial instruments comprise cash, bank loans and overdrafts, trade receivables, other financial assets and trade and other payables.

 

Categories of financial instruments		31 October 2019 £m	31 August 2018 £m
Financial assets
Fair value through profit or loss
Shared equity receivables		22.1	25.0
Shared ownership receivables		3.6	-
At amortised cost
Cash and cash equivalents		36.7	57.0
Trade and other receivables		1.1	13.3
Secured mortgages		2.5	2.8
		66.0	98.1
Financial liabilities
Trade and other payables		55.5	89.5
Land payables		34.1	56.9
Loans		9.6	41.4
Land-related promissory notes		-	10.0
		99.2	197.8

 

Capital risk management

The Group manages its capital (being debt, cash and cash equivalents and equity) to ensure entities within the Group have a strong capital base in order to continue as going concerns, to maintain investor and creditor confidence and to provide a basis for the future development of the business while maximising the return to stakeholders.

 

The RCF imposes financial covenants, which is normal for such agreements, all of which the Group is compliant with. The Group manages a robust internal forecasting and review process to ensure it operates within these capital requirements.

 

The Group does not routinely make additional issues of capital, other than for the purpose of raising finance for the management of the cost of capital of the Group or to fund significant developments designed to grow value in future.

 

Share-based payment schemes allow senior employees of the Group to participate in the ownership of the Group in order to ensure the senior employees are focused on growing the value of the Group to achieve the aims of all shareholders.

 

Financial risk management

The Group's finance function is responsible for all aspects of corporate treasury. It co-ordinates access to financial markets and monitors and manages the financial risks relating to the operations of the Group through internal reports which analyse exposures by degree and magnitude. The risks reviewed include market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk.

 

Housing market risk management

The Group's activities expose it primarily to macroeconomic risks such as deflation and the cyclical nature of UK property prices. A deterioration in the economic outlook could have a significant impact on the Group's financial performance and the Group has the following procedures which mitigate its market-related operational risk:

 

·     The Group closely monitors industry indicators and assesses the potential impact of different economic scenarios

·     Decisions to allocate new capital to land and build are managed centrally through the Group Investment Committee, membership of which includes the Chief Executive Officer, the Chief Financial Officer, the National Finance Director and the Land & Planning Director

·     The Group aims to maintain a national and product spread of developments to ensure that it is not reliant on one particular location, development or product

·     The Group undertakes a weekly review of sales, reservations and incentives at Divisional and Group level

 

The value of the Group's house price linked financial assets is sensitive to UK house prices since the amount repayable is

dependent upon the market price of the property to which the asset is linked. At 31 October 2019, if UK house prices were 1% lower for a one-year period and all other variables were held constant, the Group's house price linked financial assets would decrease in value, excluding the effects of tax, by £1.6m (2018: £1.7m) with a corresponding reduction in both the result for the year and equity.

 

Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has a low exposure to credit risk due to the nature and legal framework of the UK housing industry.

 

In certain circumstances the Group offers sales incentives resulting in a long-term debt being recognised under which the Group will receive a proportion of the resale proceeds of an apartment. The Group's equity share is protected by a registered entry on the title and usually represents the first interest in the property. A reduction in property values leads to an increase in the credit risk of the Group in respect of such sales.

 

The credit risk relating to shared equity receivables is deemed immaterial as the value is recovered though subsequent disposal of the related asset. As a result, management consider the credit quality of these receivables to be good in respect of the amounts outstanding, resulting in low credit risk. Exposure to house price sensitivity is built into the fair value calculation.

 

The Group does not have any significant credit risk exposure to any single counterparty or group of counterparties having similar characteristics. The Group defines counterparties as having similar characteristics if they are related entities. There is no material concentration of credit risk in respect of one individual customer.

 

The carrying amount recorded for financial assets in the financial statements is net of impairment losses and represents the Group's maximum exposure to credit risk. No guarantees have been given in respect to third parties.

 

Where the Group infrequently offers deferred payment terms on bulk sales, an expected credit loss model is used to prudently apply a provision using a probability-based scenario analysis. The Group recognises any further impairment gain or loss at each reporting period where the credit risk on a financial instrument has changed significantly since initial recognition. 

 

Liquidity risk management

Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities. The Group's strategy in relation to managing liquidity risk is to ensure that the Group has sufficient cash flow liquid funds to meet all its potential liabilities as they fall due. The Group produces cash flow forecasts to monitor the expected requirements of the Group against the available facilities. The principal risks with these cash flows relate to achieving the level of sales volumes and prices in line with current forecasts.

 

The maturity of the financial liabilities of the Group at 31 October 2019 and 31 August 2018 are as follows:

	2019
	Carrying value £m	Contractual cash flows £m	Within 1 year £m	1-5 years £m
Loans (net of borrowing costs)	9.6	15.3	1.7	13.6
Other financial liabilities carrying interest	-	-	-	-
Financial liabilities carrying no interest	103.2	103.2	103.2	-
Total	112.8	118.5	104.9	13.6

 

	2018
	Carrying value £m	Contractual cash flows £m	Within 1 year £m	1-5 years £m
Loans (net of borrowing costs)	41.4	48.7	2.2	46.5
Other financial liabilities carrying interest	10.0	10.3	0.2	10.1
Financial liabilities carrying no interest	146.4	146.4	146.4	-
Total	197.8	205.4	148.8	56.6

Other financial liabilities carrying interest are promissory notes (held at the prior year end), which attract availability and discount fees. Financial liabilities carrying no interest are trade and other payables and land payables. The timing and amount of future cash flows given in the table above is based on the period end position.

 

Interest rate risk management

Interest rate risk reflects the Group's exposure to fluctuations to interest rates in the market. The risk arises because the Group's RCF is subject to floating interest rates based on LIBOR.

 

In the 14 month period ended 31 October 2019, if UK interest rates had been 0.5% higher or lower, as this is a reasonably possible change, and all other variances were held constant, the Group's pre-tax profit would decrease/increase by £1.3m (12 months ended 31 August 2018: £0.7m). Calculations have been based on borrowing values at each month end.

 

Fair value of financial instruments

 

Valuation techniques and assumptions applied for the purposes of measuring fair value

 

Fair value of financial instruments carried at amortised cost

The Directors consider that the carrying amounts of financial assets and financial liabilities recorded at amortised cost in the financial statements approximate their fair values.

 

Bank and other loans

Fair value is calculated based on discounted expected future principal and interest flows.

 

Fair value measurements recognised in the Consolidated Statement of Financial Position

All financial instruments are grouped into Levels 1 to 3 is based on the degree to which their fair value is observable:

 

·     Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities

·     Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)

·     Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs)

 

The financial instruments held by the Group that are measured at fair value are the shared equity receivables and shared ownership receivables which are both measured at fair value through profit or loss using methods associated with Level 3. At 31 October 2019, the shared equity receivables were valued at £22.1m (31 August 2018: £25.0m) and the shared ownership receivables were valued at £3.6m (31 August 2018: £nil).

 

Financial assets are recorded at fair value, being the estimated amount receivable by the Group, discounted to present day values.

 

The fair value of future anticipated cash receipts takes into account the Directors' views of an appropriate discount rate, a new build premium, future house price movements, historic gains and losses on redemption and the expected timing of receipts. These assumptions cover a variety of different schemes and the range of assumptions used are stated below. The assumptions are reviewed at each period end.

 

Shared equity receivables

 

Assumptions	2019	2018
Discount rate	3.8 to 4.3%	3.8 to 4.4%
New build premium	0 to 5%	0 to 5%
House price inflation	0 to 6%1	0 to 6%1
Timing of receipt	5 to 10 yrs	5 to 11 yrs

 

¹ We apply future HPI over the next five years based on industry forecasts. The 2020 HPI used in the calculation varies between 2.0-6.0% dependant on geographical location.

 

Sensitivity-effect on value of other financial assets (less)/more	2019 Increase assumptions by 1%/1 year £m	2019 Decrease assumptions by 1%/1 year £m
Discount rate	(1.7)	1.9
New build premium	(0.2)	0.2
House price inflation	1.6	(1.5)
Timing of receipt	(0.4)	0.4

 

The fair value of the shared equity receivables are based on the external available data. The sensitivity-effect of a 1%/1year change is representative of our best estimate of a reasonably possible change based on management's expectations of changes in economic conditions.

 

The Directors review the anticipated future cash receipts from the assets at each reporting date and the difference between the anticipated future receipt and the initial fair value is credited to finance income/expense.

 

The following tables present the changes in Level 3 instruments for the 12 month period ended 31 August 2018 and the 14 month period ended 31 October 2019:

 

	2018
	Shared equity receivables £m
Opening balance	28.9
Additions	-
Disposals	(2.7)
Revaluation gains and (losses) recognised in the statement of comprehensive income	(1.2)
Closing balance	25.0

 

	2019
	Shared equity receivables £m
Opening balance	25.0
Additions	-
Disposals	(2.6)
Revaluation gains and (losses) recognised in the statement of comprehensive income	(0.3)
Closing balance	22.1

 

Shared ownership

 

Assumptions	2019	2018
Discount rate	4.3%	n/a
New build premium	5%	n/a
Timing of receipt	10 yrs	n/a

 

The following tables present the changes in Level 3 instruments for the 14 month period ended 31 October 2019:

 

	2019
	Shared ownership receivables £m
Opening balance	-
Additions	3.6
Closing balance	3.6

 

32. Share-based payments

 

Equity-settled share-based payment plans

The Group operates three share-based payment schemes as set out below:

 

Long Term Incentive Plan ('LTIP')

The Group's LTIP is open to key management at the discretion of the Board. Awards under the scheme are granted in the form of nil-priced share options. LTIP awards will normally vest, and LTIP options become exercisable, on the third anniversary of the date of the grant of the LTIP award to the extent that any applicable performance conditions have been satisfied. LTIP options will remain exercisable for ten years after the date of the grant. Awards are to be settled by the issue of new shares or acquisition of shares in the market. The performance conditions for the LTIP grants are earnings per share ('EPS'), comparative total shareholder return ('TSR') and return on capital employed ('ROCE'). The EPS and ROCE performance conditions are priced using the Black-Scholes model. The TSR performance condition is a market-based condition. In order to value the TSR performance conditions against the FTSE 250 and peer group, a Monte Carlo simulation model is required which can simulate correlation between companies.

 

LTIP		FY19 LTIP	FY18 LTIP	FY17 LTIP	FY16 LTIP	Total
Date of grant		13 December 2018*	17 November 2017	21 December 2016	25 November 2015
Options granted		3,907,455	1,916,777	1,933,352	1,930,524
Fair value at measurement date** (£)		1.39	1.49	1.32	2.12
Share price on date of grant (£)		1.39	1.65	1.56	2.32
Exercise price (£)		-	-	-	-
Vesting period		3 years	3 years	3 years	3 years
Expected dividend yield		n/a	n/a	n/a	n/a
Expected volatility		37.90%	40.00%	29.21%	26.07%
Risk free interest rate		0.77% p.a.	0.82% p.a.	0.23% p.a.	0.80% p.a.
Valuation model		Black-Scholes only	Black-Scholes  and Monte Carlo	Black-Scholes  and Monte Carlo	Black-Scholes and Monte Carlo
Movements in the period:
Options at beginning of the period		-	1,873,545	1,722,760	1,324,980	4,921,285
Granted during the period		3,907,455	-	-	-	3,907,455
Exercised during the period		-	-	-	-	-
Lapsed during the period		(260,945)	-	-	-	(260,945)
Expired in the period		-	-	-	(1,324,980)	(1,324,980)
Options at the end of the period		3,646,510	1,873,545	1,722,760	-	7,242,815
Exercisable at end of the period		-	-	-	-	-

* 688,074 options granted on 11 April 2019 under this scheme

** this is the average fair value of the tranches for each LTIP scheme

 

For the FY16 LTIP and FY17 LTIP, due to the fact that there was limited share price history for McCarthy & Stone, the Company's share price volatility was estimated as an average of the volatilities of the FTSE 250 over a historic period commensurate with the expected life of each award immediately prior to the date of grant.

 

For the FY18 and FY19 LTIP, there is now sufficient share price history for McCarthy & Stone and therefore the expected volatility uses the Company's share price volatility between the date of listing (5 November 2015) and the date of grant.

 

Sharesave Plan ('SAYE')

The SAYE Plan is an all-employee savings related share option plan. Employees are invited to make regular monthly contributions to a SAYE scheme operated by Link Asset Services. On completion of the contract period (three or five years) employees are able to purchase ordinary shares in the Company based on the average closing middle market price over the three days prior to the award, less 20% discount. There are no performance conditions.

 

SAYE					Total
Date of grant	13 December 2018	13 December 2018	10 December 2015	10 December 2015
Options granted	2,126,961	124,269	2,912,247	1,197,514
Fair value at measurement date (£)	0.40	0.42	0.68	0.75
Share price on date of grant (£)	1.39	1.39	2.34	2.34
Exercise price (£)	1.112	1.112	1.674	1.674
Vesting period	3 years	5 years	3 years	5 years
Expected dividend yield	4.00%	4.00%	26.20%	28.16%
Expected volatility	37.9%	37.9%	26.07%	26.07%
Risk free interest rate	0.77% p.a.	0.90% p.a.	0.8% p.a.	1.2% p.a.
Valuation model	Black-Scholes	Black-Scholes	Black-Scholes	Black-Scholes
Movements in the period
Options at beginning of the period	-	-	1,292,441	697,643	1,990,084
Granted during the period	2,126,961	124,269	-	-	2,251,230
Exercised during the period	-	-	-	-	-
Lapsed during the period	(357,649)	(7,013)	-	(447,297)	(811,959)
Expired in the period	-	-	(1,292,441)	-	(1,292,441)
Options at the end of the period	1,769,312	117,256	-	250,346	2,136,914
Exercisable at end of the period	-	-	-	-	-

 

Expected volatility was determined by calculating the average historical volatility over a period commensurate with the expected life of the savings term for the SAYE options, based on the FTSE 250.

 

Share Incentive Plan ('SIP')

The SIP allows all employees to purchase partnership shares each month from pre-tax pay, which are then held in trust. These shares can be sold or taken from the SIP or be left within the trust for as long as the plan remains open. All plan shares and any other assets held by the trustees will be held upon trust for the participants; there is therefore no impact to the Group's financial statements in respect of this plan.

 

Annual and Deferred Bonus Plan ('ABP')

The ABP incorporates the Company's executive bonus scheme as well as a mechanism for the deferral of bonus into awards over ordinary shares. The Committee can determine that part of the bonus under the ABP is provided as an award of deferred shares, which takes the form of a £nil cost option. All employees (including the Executive Directors) of the Group are eligible to participate in the ABP at the discretion of the Board. At 31 October 2019, four Executive Directors were participating in the scheme. For the 14 month period ended 31 October 2019, 100% of the bonus earned by the two COO's will be deferred in the form of deferred shares for three years, during which no performance conditions will apply. The amount deferred will be recognised over the three year deferral period. The CEO and CFO were participating within this scheme however did not receive a bonus (12 months to 31 August: £0.2m).

 

Total share-based payment schemes

Analysis of the income charge:	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Equity-settled share-based payments
SAYE	0.4	0.8
LTIP	1.0	-
	1.4	0.8

  

 

33. Related undertakings

The entities listed below are subsidiaries or joint ventures of the Company or Group in accordance with section 409 of the Companies Act 2006. All entities, unless noted below, are registered in England and Wales with a registered address of: 4th Floor, 100 Holdenhurst Road, Bournemouth, Dorset, BH8 8AQ.

Name	Notes	Company number	Principal activity	2019 % of shares owned	2018 % of shares owned
McCarthy & Stone (Developments) Limited		06622183	Holding company	100	100
McCarthy & Stone Retirement Lifestyles Limited		06622231	Developer	100	100
McCarthy & Stone (Equity Interests) Limited		05663330	Property investment	100	100
McCarthy & Stone (Home Equity Interests) Limited		05984851	Property investment	100	100
McCarthy & Stone Investment Properties No. 23 Limited	1	06496130	Property investment	100	100
McCarthy & Stone (Total Care Living) Limited	1	06069509	Property investment	100	100
McCarthy & Stone (Extra Care Living) Limited		06897363	Property investment	100	100
McCarthy & Stone Total Care Management Limited		06897301	Property investment	100	100
McCarthy & Stone Management Services Limited		07166051	Development management	100	100
McCarthy & Stone Lifestyle Services Limited	1	07165986	Holding company	100	100
Keyworker Properties Limited	1	04213618	Holding company	100	100
YourLife Management Services Limited		07153519	Development management	100	50
The Planning Bureau Limited	1, 2	02207050	Dormant	100	100
McCarthy & Stone Resales Limited	1	10716544	Property resales	100	100
McCarthy & Stone Rental Properties Limited	1	11771289	Property investment	100	n/a
McCarthy & Stone Rental Properties No.2 Limited	1	11822847	Property investment	100	n/a
McCarthy & Stone Rental Properties No.3 Limited	1	12143464	Property investment	100	n/a
Waverstone LLP		OC429156	Property investment	49	n/a
McCarthy & Stone Properties Limited	4	01925738	Dormant	n/a	100
McCarthy & Stone (Alnwick) Limited	4	07517819	Property investment	n/a	100
McCarthy & Stone Rental Interests No. 1 Limited	4	06897272	Property investment	n/a	100
McCarthy & Stone Financial Services Limited	4	07798214	Financial services	n/a	100
McCarthy & Stone Estates Limited	4	07165952	Dormant	n/a	100
Ortus Homes Limited	4	08658235	Dormant	n/a	100
Kindle Housing (Christchurch) Limited	3, 5	04737739	Affordable housing rental	50	50
Kindle Housing (Exeter) Limited	3, 5	05692813	Affordable housing rental	50	50
Kindle Housing (Worthing) Limited	3, 5	04239574	Affordable housing rental	50	50
Kindle Housing Limited	3, 5	04088162	Affordable housing management	50	50
Advantage Apartments Limited	2, 3, 5	03697251	Dormant	50	50
Advantage Housing Limited	2, 3, 5	03697230	Dormant	50	50
Advantage Homes Limited	2, 3, 5	03697079	Dormant	50	50

 

1     These subsidiaries will take advantage of the audit exemption set out within section 479A of the Companies Act 2006 for the 14 month period ended 31 October 2019.

2    These subsidiaries are considered dormant for the 14 month period ended 31 October 2019 and have taken advantage of the section 394A exemption from preparing individual financial statements.

3    These subsidiaries are registered at Cosmopolitan House, Old Fore Street, Sidmouth, Devon, EX10 8LS

4    These subsidiaries have been dissolved during the financial period

5    These entities are joint ventures

 

McCarthy & Stone (Developments) is directly owned by the Company. All other subsidiaries and joint ventures are indirectly owned by McCarthy & Stone plc. Each of the shareholdings gives the immediate parent company 100% voting rights unless stated above. All shares are classified as 'ordinary'.

 

34. Related party transactions

Balances and transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and other related parties are disclosed below. Transactions between the Group and associates of the Group are eliminated proportionally based upon the percentage of shares owned.

 

Waverstone LLP is an entity between Waverley Investments Limited and McCarthy & Stone Extra Care Limited, where McCarthy & Stone Extra Care Living Limited holds a non-controlling 49% equity interest and therefore has been treated as an associate in the Group financial statements.  Waverstone LLP was created to facilitate the purchase, management and disposal of various assets built by the Group.  Waverstone LLP has appointed McCarthy & Stone Management Services Limited a property manager and a sales agent. 

 

The transaction resulted in an additional FY19 cash flow for the Group of c.£17m with the remaining balance of c.£16m expected to be paid over 2 years.  FY19 underlying operating profit for the Group includes c.£3m profit from the transaction, after taking account of unrealised profit and fair value adjustments in relation to the outstanding receivable balance. 

 

Remuneration of key management personnel

The key management personnel are the Board, key internal Directors and the Executive Committee, including Non-Executive Directors. The average number of roles during the period was 18 (2018: 13). The remuneration that they have received during the period is set out below in aggregate for each of the categories specified in IAS 24 'Related Party Disclosures'.

 

	14 months to 31 October 2019 £m	12 months to  31 August 2018 £m
Short-term employee benefits	4.5	2.8
Social security costs	0.6	0.4
Share-based payments	0.7	-
Pension contributions	0.5	0.4
Termination payments	-	0.5
	6.3	4.1
Aggregate emoluments of the highest paid director	0.9	1.3

 

35. Events after the balance sheet date

There were no events after the reporting period that required disclosure or adjustment in the FY19 financial statements.

 

Notes to Editors

McCarthy & Stone is the UK's leading developer and manager of retirement communities, with a significant market share.  The Group buys land and then builds, sells and manages high-quality retirement developments.  It has built and sold more than 58,000 properties across more than 1,300 retirement developments since 1977 and is renowned for its focus on the needs of those in later life.

 

There is growing demand for retirement communities.  There are currently 12.2 million people aged 65 or over, rising to 17.4m by 2043, representing a 43% increase¹.[4]  For those aged 85 or over, the increase will be larger, from 1.6m to 3.0m, representing an 87% increase.  Research shows that 33% of those aged 65 or over are interested in moving, equating to c.4 million people².  

 

McCarthy & Stone has two main product ranges - Retirement Living and Retirement Living PLUS - which provide mainly one and two-bedroom apartments across the country with varying levels of support and care for older people.  Retirement Living developments provide independence in private apartments designed specifically for the over-60s, as well as facilities such as communal lounges and guest suites that support companionship. Retirement Living PLUS developments, which are designed specifically for the over-70s, offer all of this plus more on-site facilities such as restaurants, well-being suites and function rooms.  Importantly, they also provide on-site flexible care and support packages to assist those needing additional help. 

 

All developments built since 2010 are managed by the company's in-house management services team, providing peace of mind that it will look after customers and their properties over the long term.  This is a key part of how McCarthy & Stone seeks to enrich its customers' lives.  This commitment to quality and customer service continues to be recognised by residents.  In March 2019, the Group received the full five star rating for customer satisfaction from the Home Builders Federation for the fourteenth consecutive year - making it the only UK developer, of any size or type, to achieve this accolade.

 

For further information, please visit www.mccarthyandstone.co.uk

 

Forward-looking statements

Some of the information in this document may contain forward-looking statements regarding McCarthy & Stone plc and its subsidiaries (the Group). You may be able to identify forward-looking statements by terms such as "expect", "believe", "anticipate", "estimate", "intend", "will", "could", "may" or "might", the negative of such terms or other similar expressions or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. McCarthy & Stone plc (the Company) wishes to caution you that actual events or results may differ materially from those anticipated. The forward-looking statements reflect knowledge and information available at the date of preparation of this document and the Company undertakes no obligation to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in forward-looking statements of the Group, including among others, general economic conditions, the competitive environment as well as many other risks specifically related to the Group and its operations. Past performance of the Group cannot be relied on as a guide to future performance. Nothing in this document should be construed as a profit forecast