Chairman's Statement

St. Modwen Properties PLC Chairman | Anthony Glossop

I am pleased to report that the property market is showing some signs of recovery, and that your company is in good condition to benefit from this. Our finances are in good shape, our Hopper is full of opportunities, and we are beginning to find attractively- priced acquisitions.

Over the past twelve months, we have worked extremely hard to strengthen the company’s position.

• We have refinanced the business with an issue of new equity.
  
• We have renegotiated and improved the covenants on our banking facilities.
  
• We have generated positive operational cash flow through a judicious programme of asset sales and a careful control of development expenditure.
  
• We have succeeded in delivering a trading profit* and have made real progress in our asset management activities.
  
• We have continued to marshal our schemes successfully through the planning process to ensure a pipeline of future activity and added value.
  
• We have preserved our core team throughout the downturn, and have consequently retained all of our key capabilities, undiminished.

St Modwen’s reputation as the UK’s leading regeneration specialist has, if anything, been enhanced by our ability to continue to deliver schemes throughout this downturn. We are now looking forward to a gradual return to a more normal level of activity in our major markets.

Results

Despite another extremely difficult year, we made a trading profit* of £8.4m (2008: £19.5m). We also generated a positive operational cashflow, and reduced gearing from 105% to 80%.

However, including revaluations and other non-cash items, we incurred a loss after tax for the year of £101.7m (2008: £50.7m). This loss was principally (£80.6m) incurred in the first half of the year, since when market conditions and the company’s performance have significantly improved.

After adjusting for the effect of the equity issue, our net asset value declined by 20% to 200p per share (2008: 251p**).

Trading and valuations

The broad range and regional spread of our activities has enabled us to continue to find business even in difficult market conditions. We achieved property sales of £101m, and have steadily reduced our stock of unoccupied completed buildings.

However, compared with recent years, we have had a very low level of development activity. This, together with the absence of any meaningful cashflow from our residential land disposal programme, has placed more emphasis on the asset management aspect of our business. One long-term strategic objective has always been for our recurring income to be sufficient to cover the running and financing costs of the business. This year that has proved particularly valuable. Our team improved the rental income from our portfolio, in very challenging conditions.

Our valuations at 30th November 2009 represent what I hope is the end of a long period of adverse sentiment in the real estate investment market. The results for the year include a negative yield shift on average of 1.4%. The value of our commercial land has been reduced to reflect the lower values of the developments that will be undertaken on the land. The valuation of our residential land was also reduced significantly in the first half of the year, to reflect the depressed housing market. It is encouraging to note, however, that in this area at least, values had stabilized by the year end and no further write-down was required on our residential land in November. This is evidenced by four residential land sale transactions that we currently have in solicitors’ hands, all for prices at or above November carrying values.

Throughout the period of market price deterioration, our strategy of constantly seeking to add value has helped to mitigate the unavoidable market value write-downs. During the year we achieved a number of important planning consents and advanced the status of several of our key schemes. Market related adjustments of £134m this year (2008: £129m) were offset by added value gains arising from our marshalling and asset management activities of £27m (2008: £65m). Following these additional consents, we now have more than 20,000 residential plots with planning recognition in our Hopper, and the recovery of the residential market will make an important contribution to the company’s future returns.

Financing

In May we announced a refinancing of the business, comprising new banking covenants and a Firm Placing and Placing and Open Offer of new shares. I was very pleased with the positive reaction to the equity issue, which attracted a number of significant new investors and which raised £101.6m net of costs. This new equity finance, together with the relaxation of our banking covenants, enabled us both to reduce our gearing levels and to continue to operate well within our banking covenants despite the prolonged and significant fall in property values.

Dividend

Your board is not recommending a final dividend for the year, as we believe that the funds are currently better used in the operations of the business. We anticipate resuming the payment of dividends when we are once again generating net asset value increases.

Strategy

The economic downturn caused us to examine closely our business model and strategy; and I am pleased to say that they have not been found wanting.

We have therefore been able to adapt our activities to suit the changing conditions, scaling-back speculative schemes, but continuing to marshal sites for development on the back of pre-let or pre-sold opportunities. We have also continued to dispose of those mature assets to which we can add no further significant value. We have been able to nurture our recurring income (which now amounts to £43m per annum), by letting voids, by offering flexibility and value for money to tenants, and by retaining those income-producing assets where we felt that investment prices achievable could be improved. The broad range and regional spread of our business ensured that, whatever activity there was in the market, we have been able to respond to it.

All of this is a strong reaffirmation of our hopper strategy, which now embraces more than 5,600 acres: regionally structured, prudently financed, with the emphasis on value creation and diversification.

Therefore, despite our focus on cash generation, we have continued to seek, and to find, long-term opportunities for the Hopper. Our acquisition of an extensive portfolio from BP, following on from last year’s acquisition of their Llandarcy oil refinery, is a good example of the excellent opportunities we are finding. The acquisition, which was undertaken after considerable due diligence, includes 566 acres of developable land. It will be self-financing and will have a 20-year development horizon that will enable the company to utilise fully its brownfield land remediation expertise. We also made other significant acquisitions at Exeter, Taunton and Doncaster, adding a total of 139 acres of developable land, at a total cost of £13m.

Looking ahead, I remain confident that St Modwen’s strategy is valid in the long-term, and will give us the opportunity to provide sector-leading returns to shareholders once again.

Directors and Employees

Achieving the results for the year in the current climate is a tribute to the quality and strength of the team at all levels in the organisation. My thanks go to everyone for the efforts they have made.

We are currently in the process of making a number of changes to the composition of the board, as we continue to implement our long-term board succession strategy.

During the year Christopher Roshier and Mary Francis both stepped down as non-executive directors: Christopher, having completed 22 years’ service, including a long spell as chairman of the audit committee and senior independent director; and Mary, having completed 4 years’ service, for most of which she was chairman of the remuneration committee.

At the forthcoming Annual General Meeting, Paul Rigg will also step down as non-executive director, having completed 6 years’ service.

I would like to thank them all for the valued contribution that they have made to the guidance of the company during their time with us.

We have been fortunate to find excellent replacements in Katherine Innes Ker and Lesley James, the latter of whom has taken the chair of the Remuneration Committee.

We have also recruited Reeta Stokes as Company Secretary, assuming the role previously covered on a temporary basis by Tim Haywood, our Finance Director.

With these changes successfully implemented, and the board duly strengthened, the next steps in our non-executive succession strategy are to seek appropriate candidates for the roles of Chairman and Senior Independent Director, in time for my retirement and that of Ian Menzies-Gow in 2011. Ian and I will work to ensure that the process is seamless and that the board will continue to function as robustly and effectively as ever during this period of transition.

Prospects

Property market prospects still remain uncertain. The economy may be slowly emerging from recession, but business confidence remains fragile, with continued pressure on rents and occupancy levels.

However, St Modwen is well prepared for such conditions: our financial position is sound; our business model will increasingly create value; and we are in a good position to seize attractive opportunities to add further to the Hopper.

As yet our portfolio has not seen the resurgence in values experienced in other parts of the property market. But nevertheless I believe that we are now beginning to see important signs of improvement.

I am confident that 2010 will see the company returning to growth in profits and NAV.

ANTHONY GLOSSOP
Chairman
5th February 2010

* trading profit – excludes non-cash items such as revaluations and mark-to-market adjustments
** net asset value per share - adjusted as if the equity issue had taken place on 1 December 2007