U.S. Markets closed

Edited Transcript of SMP.L earnings conference call or presentation 4-Feb-20 9:30am GMT

Full Year 2019 St. Modwen Properties PLC Earnings Call

London Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of St. Modwen Properties PLC earnings conference call or presentation Tuesday, February 4, 2020 at 9:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Mark Christopher Allan

St. Modwen Properties PLC - CEO & Director

* Robert J. Hudson

St. Modwen Properties PLC - CFO & Executive Director

================================================================================

Conference Call Participants

================================================================================

* Christopher James Millington

Numis Securities Limited, Research Division - Analyst

* James Carswell

Peel Hunt LLP, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Mark Christopher Allan, St. Modwen Properties PLC - CEO & Director [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good morning. Welcome to the 2019 results presentation for St. Modwen. Welcome to a very healthy attendance here in the room, but also to those of you that are joining via the webcast. It will be the usual format for the results presentation. So you'll hear a little bit from me with respect to the market, the outlook and the themes around the performance and the strategy of the business. Rob will then take you through how that is translated into the financial statements, the KPIs, before we wrap up with a look forward in terms of the outlook for the business and then open up for an opportunity for questions.

So with respect to 2019, the keyword, I think that I will probably use a few times today is momentum. 2019 really was a year about building momentum in our growth strategy after 2 pretty significant years in 2017 and 2018, 2 successful years of a very substantial repositioning of the portfolio, the business and the strategy. And I think that momentum across the business is evident in all 3 business units.

So firstly, Industrial & Logistics. Well, at the end of 2019, that accounted for 44% of the portfolio. At the outset of the repositioning just over 2 years ago, that was down at 19%. And it's on track, of course, to increase substantially further beyond the 44%. In terms of the demand for the space that we're delivering, 900,000 square feet delivered in 2019, weighted to the second half of the year in terms of practical completion dates, but already 58% of that let or under offer. And looking forward, in terms of momentum, a pipeline for the future which has got increasing traction. So we are on track to deliver a 70% increase in completions in terms of square footage in 2020 compared to both 2019 and 2018 and all at pretty compelling returns.

A similar story within our housebuilding business, St. Modwen Homes. So another year of 25% growth in volumes, another year of improving margins in line with plan, so a 40 basis point improvement in margin, now just under 15%. But most importantly, and I think this is incredibly important, it isn't simply about growth for the sake of it. It is growth that is built on quality. And our key quality measures are Home Builders Federation recommend rate and our Net Promoter Score, which measures advocates versus detractors for the brand, both running at highest-ever levels. So it is growth and performance that is built very much on quality.

And then finally, the momentum in Strategic Land & Regeneration. This is the part of the business that has been most involved in recycling capital, recycling the portfolio. And another year against more challenging external backdrop, another successful year of disposals. Our noncore retail portfolio now essentially no longer an issue at less than 2% of portfolio value. But we've also seen traction here in selling surplus residential land, so around GBP 30 million worth of land sold in the year. A similar volume, again, sold in the couple of months since the year-end. And all of that is teeing up that part of the business to start driving an improvement in its return on capital.

And so that's in terms of financial returns, on the following page translates to an improvement in all metrics, certainly on an underlying basis. So our total accounting return, our NAV growth plus dividends, on an underlying basis increased from 6% in each of the previous 2 years to 6.3% and on an upward trajectory from there. On a statutory basis, that's reduced by an exceptional provision for a potential claim, which was flagged in our trading statement before Christmas, and Rob will talk more about that in terms of the detail of the numbers.

Cash profits, an incredibly important focus for us. Our adjusted EPRA earnings, up by 22% year-on-year. And as that's the driver of the dividend, the dividend also up by 22% year-on-year. And this is a business still at the end of 2019 with plenty of investment capacity. So for the second year running, LTV still below 20%. So plenty of headroom from here to invest in building further momentum in the growth in each area of the business.

So I'll now talk at each of the 3 parts of the business in a little bit more detail in terms of the market position that we see and how our strategy ensures that we are appropriately positioned to benefit from the future trends in each of the 3 sectors. So firstly, our Industrial & Logistics, obviously, a sector which is increasingly well understood in the listed real estate world. But it is a market where the fundamentals do remain strong.

The graphs on the right-hand side here look at supply and take-up. And if you look at take-up, this is all for units over 100,000 square feet, where the data is much more granular, much more available. But looking at take-up, our take-up in 2019, despite being I think relatively lumpy through the year, particularly as we saw sentiment around Brexit to ebb and flow, take-up for the year as a whole was in line with the 5-year average, and that 5-year average is itself on an upward trend, reflecting, among other things, the continued trend in growth in online retail, which we saw on the pink line there.

And across all grades of available space, that take-up equates to around 12 months of supply. You can see that from the bar at the right-hand side of the bottom chart. But if you look at Grade A space, the higher-quality space, it's equivalent to around 10 months of supply. So stronger demand for the higher-quality, purpose-built space, which is, of course, where our development pipeline is exclusively focused.

Now we said a year ago that we could see more of a supply response coming into the market given the strong fundamentals, and that has indeed proven to be the case, as you can see with the supply chart at the bottom right-hand side. But as we flagged a year ago, the majority of that supply response is focused at the larger end of the market where we had begun to see developers come in and build 400,000, 500,000, 600,000 square-foot units on a speculative basis. And that's the yellow and the green bars at the top of the stack chart on the right.

We're also seeing a supply response in the pink segment there, between 100,000 and 200,000 square feet. But in terms of where our pipeline is positioned, and I'll come on to talk about this in more detail in a moment, but 75% of it is below 150,000 square feet, so in the blue bar or indeed, below that, it's below 100,000 square feet. And then 1 large unit, 320,000 square feet, which is in the lighter blue segments on there, so into a part of the market where competing supply is at reasonable levels, in our view.

Now the sector has, of course -- the Industrial & Logistics sector has enjoyed a period of pretty substantial growth. We've seen rents go up and we see deals come in. Our outlook, our view of the sector now is that it is stable. You can see that in terms of demand and supply, and we expect both rents and yields for the next 12 months to be broadly stable. And that's certainly the basis on which we are underwriting our own assumptions internally. And it, of course, means for us as a business that our returns are going to be driven by development activity. And the economics of development for us remain very attractive. And the graph at the bottom right-hand side, you can just see the top right of that, a line showing our yield on cost between 8% and 9%, typically, but well ahead of both all industrial yields and, of course, the gilt rates. So very accretive development activity, both in terms of NAV growth and also in terms of income and, by extension, the dividend.

Now looking at the pipeline in a little bit more detail. The depth of the pipeline, the flexibility of the pipeline, I think, both remain key strengths of the business. Now we grew the overall pipeline across the course of the year through signing up to a couple of new longer-term option agreements on our potential employment land longer term. So in total now, the pipeline is around 19 million square feet in total. 45% of that pipeline has an implementable planning consent in place. And in location terms, we continue to focus on edge-of-urban locations and major transport corridors, major transport nodes, all areas which we feel confident in the long term of sustained occupier demand.

And it's also, as I mentioned briefly on the previous slide, a pipeline which is focused more on smaller units, where there is more flexibility and more liquidity in terms of occupier demand. So 75% of our pipeline, in terms of square footage, is focused on units below 150,000 square feet, which is shown at the 3 segments of the pie on the top right-hand side.

And as I mentioned, the economics remain compelling. So in terms of a yield on incremental CapEx, given a good proportion of this pipeline is building out land which is already on the balance sheet, that yield on CapEx is in excess of 9%. And on an all-in basis, including that land within the calculation, around an 8% yield on cost all-in. And so building out that development pipeline, leasing it up and retaining it on balance sheet will continue to be a key element in driving both income growth and total return in the years ahead.

Now another key feature of the Industrial & Logistics business in 2019 was, I think, the substantial improvement in our credibility and reputation as a business, as an industrial logistics developer and investor, as a credible strategic partner for serious multinational, certainly national occupier businesses. And that's going to be a key part of growing the business further from here. It's going to underpin our opportunities to increase the proportion of our development pipeline, which is pre-let, let during the development phase. It will increase our opportunity to deliver space going forward on a build-to-suit basis, so on a bespoke basis from identified occupier, before we even put a spade in the ground. And we knew when we embarked on our Industrial & Logistics strategy that we were going to have to be primarily speculative in order to back ourselves to grow our reputation and to grow the rent roll. We are now starting to see a shift towards pre-let, and we will see a shift from here towards build to suit as well, so de-risking the Industrial & Logistics pipeline going forward.

But key features of the type of occupiers we work with, and we've got some examples here such as Ocado, DHL, Gatwick Airport, for example, I think show how we are well positioned to benefit from sector trends, such as supporting last-mile delivery, but I think also how we are well positioned to benefit from repeat business. And in each of the 4 cases on here, there is real and active potential for repeat business with these occupiers on a national basis. And I think that will be one of the key features of the long-term sustainable growth of our Industrial & Logistics business.

And that reputation -- that credible reputation, that partnership approach to working with occupiers is translating into continued leasing momentum. And that will, of course, drive further income growth. So I mentioned the headline earlier, 58% of our 2019 completions, which were H2-weighted, already let or terms agreed. That's up from 54% at the same time last year. We saw very strong demand from occupiers signing leases in Q2 and Q3. We saw softer demand in Q1 and Q4, I think very much associated with the uncertainty running up to key dates with respect to Brexit and/or election. But throughout that, we have seen sustained inquiry levels such that we're now seeing conversion rates start to improve. And I think the outlook for demand, therefore, is something we feel pretty positive about.

And where we've achieved those lettings, where we've agreed to terms, they are supportive of the numbers I mentioned earlier on which we underwrite our investments. So a 7.9% yield on cost, a 10.4% yield on incremental CapEx. And at 18%, the committed pipeline being pre-let, that is up from an equivalent 2% 12 months ago. So as I mentioned, that increasing pre-let, increasing build-to-suit penetration within the portfolio will be a feature of the business increasingly going forward.

And the committed pipeline, the bar on the right-hand side of the top chart, increasing quite materially in terms of size. So coming into 2020, we were on site with 70% of our target completions for 2020. The equivalent number last year was 30%. So you can see how that translated to more of an H2-weighting on completions, so 70% of our target completions on site. And our target completions themselves are a 70% increase on the same year. So somewhere between 1.5 million, 1.7 million square feet to be delivered, 70% of that already on site and already with good inquiry levels from potential occupiers. And virtually all of that pipeline, 94%, will be retained, so setting up for quite a significant potential increase in earnings from this part of the portfolio, particularly from 2021 onwards.

So turning now in a bit more detail to St. Modwen Homes. Well, again, the story with respect to market fundamentals remains very much the same: a supportive environment, a shortage of homes across the U.K. in pretty much all regions with a bias towards the regions in terms of demand, not least because of the better levels of affordability compared to London and the South East. And of course, it's a sector which continues to benefit from government support. I think we will see more clarity on the nature and longer-term nature of that government support in the months ahead. And of course, the improvement in the stability of the political environment following a pretty decisive election result in December, I think, has to be seen as a net positive for the housebuilding sector.

And as I mentioned earlier, everything is built on a reputation for quality. So we show our Net Promoter Score at 76, bottom left-hand side, and the HBF recommend rating running well above the level required for a 5-star ratings. So quality will continue to be very much at the heart of the brand.

So in terms of some of the financials. Our volume is up 25% to 1,060 units. So the first time we've delivered in excess of 1,000 units. Like-for-like, house prices were up by 3.1%. Overall, they were down by 3.2%, but that's entirely down to a shift in mix and particularly more site starts in the regions relative to site starts in the South East, bringing down that average sales price on an overall basis.

Margins are up in line with plan to 14.8%, and we remain firmly on track for a medium-term target to get between 16% and 17% margins. Site density, site coverage and efficiency with which we approach the plotting of our various sites continues to be the key element of that, and that will come through increasingly from 2020 and '21 as those replanned sites are built out and individual units sold.

And becoming sales active currently on 21 sites with a further 6, so we are opening more outlets relative to the increased number of units. So that does skew things such as our forward sales slightly. But we are 34% of our target sales for the year already forward sold, which is exactly in line with where we were at the same point last year.

And longer term, we continue to see the pipeline from group being the key driver of growth for St. Modwen Homes, around 6 years land bank, but that will be coming down as we're delivering more quickly than we're replenishing the land bank. But our pipeline will underpin growth of around 20% per annum for the next few years comfortably. But we are beginning to supplement that within Homes on a small scale with the acquisition of oven-ready land simply to smooth out some of the inevitable lumpiness of strategic sites coming across from the group. So that will be a modest shift, but an important shift within the strategy of St. Modwen Homes to ensure it continues to be on a sustainable growth trajectory.

And I mentioned quality being at the heart of St. Modwen Homes in our offer, and we will continue through 2020 to evolve our brand and evolve it in a very customer-focused, customer-orientated way. So firstly, looking at how we evolve our product. So we will for the first time in 2020 be dual selling on site, so having 2 outlets selling at the same time in relatively close proximity. But rather than follow the traditional model of simply distinguishing it by price point and brand, we are actually selling things at comparable price points but with a much more contemporary design alongside our existing more traditional product. And based on a lot of market research, we expect to see that respond very positively.

We're also delivering our first urban apartments scheme, and I think that will be -- continue to be a feature of our pipeline to a small extent going forward. But around 180, 190 units in Digbeth in the middle of Birmingham, very close to the Bullring. But we're also, besides evolving the product, evolving our relationships. So key strategic relationships signed during the year with a major registered provider who has taken non-Section 106 housing, so a key channel for a lot of other housebuilders we've not previously used. We signed a deal that sold 60 units of private housing to a registered provider. But also now, we have a shared equity product available with a partner in that space as well. So just evolving and maturing the way in which we operate and sell as a housebuilder.

And then finally, evolving our service. And so we're moving across our sites in a transitioned way, starting with the dual selling sites at Copthorne, moving to dedicated purpose-built and, ultimately, transferable customer hubs -- a homebuyer hub as opposed to a sales experience which takes place in a double garage.

So now moving to the strat land and regeneration business and the momentum we see there. The focus in 2019 was very much on, by and large, concluding the noncore asset disposal program. And with noncore retail now less than 2% of the portfolio, I think we can say that has been substantially achieved. But also on selling down surplus residential land, and good progress in that area as well.

But it's important to note that the Strategic Land & Regeneration business is not simply about selling assets. This is a key source of long-term value, long-term value creation for the group. And I would point to 2 things in particular. Firstly, the residential land bank, which the table at the bottom right-hand side shows, so a total of just under 29,000 plots, including 6,200 that are already on the St. Modwen Homes balance sheet. But if you exclude those, 22,600.

Now half of that is in capital light -- the controlled column, so capital-light deals where we control a site by an option, a development agreement, promotion agreement, but we have relatively little capital tied up. And that will be a part of the business that we'll be growing materially going forward. The owned column there, the 17,500 at the bottom, about 11,000 if you exclude the Homes balance sheet, that number will be coming down as we exit surplus residential land and replace that instead with capital-light deals.

And I think the second area where there's a real potential store of future value within strat land and regeneration is a pretty exciting portfolio in the medium- or short- to medium-term of mixed-use regeneration projects focused on Birmingham, Manchester and London. I think all obviously major cities growing pretty rapidly, benefiting from a key trend around urbanization. So those are projects where we have hit key milestones in the last 12 months, but they're not milestones to translate into financial results yet. That will start with effect from 2020.

So the shift for strat land and regeneration now -- the focus now shifts to 3 objectives around improving return on capital. So concluding the noncore disposal program, selling surplus residential land, accelerating delivery on that portfolio of mixed-use projects and then leveraging our reputation in growing this part of the business, but doing so in a capital-light way. And I think we've seen good progress in each of those areas, as evidenced on the next slide. So I've mentioned the noncore sales already. But residential land plots, we sold just under 900 plots in the year for GBP 30 million. Since the year-end, we've sold a further 663 plots for GBP 25 million. Importantly, that was the first of 2 deals across both of our major South Wales sites, which account for pretty substantial proportion of our land value, about GBP 120 million or so on the balance sheet. We have a further deal agreed that's in pretty advanced discussions now that would see a further 900 plots across those 2 sites sold during the course of 2020.

That portfolio of mixed-use regeneration projects include Swansea, where we completed and sold the latest phase of accommodation in 2019. And it includes Longbridge, where we will be moving on site with the next major phase during 2020 and investing around GBP 25 million in new flexible office space, public realm and leisure facilities.

And then with respect to capital-light opportunities, we, of course, added over 2 million square feet of potential Industrial & Logistics. But I think we also, as an example here, took a pretty creative approach to regeneration in selling noncore retail with both Kirby and Skelmersdale in the Northwest where we exited the assets in terms of our investment, but we have stayed in place in partnership with the council as their regeneration development partner to deliver regeneration. And I think for a business that prides itself on changing places, creating better futures as a core purpose, it was really important for us to ensure that we, indeed, did that, not simply focused on releasing our capital. In doing this here, we've taken the capital out, but we are still delivering the regeneration. So very important, I think, for the brand.

So I'll now hand you over to Rob to take you through the financials in some more detail.

--------------------------------------------------------------------------------

Robert J. Hudson, St. Modwen Properties PLC - CFO & Executive Director [2]

--------------------------------------------------------------------------------

Right. I'll talk you through the key financial highlights and the progress we're making towards our targets. So the results are demonstrating the first signs of improvement in both our earnings and returns that we'd expected to deliver over time. Underlying total accounting return was up 0.3 percentage points, and that's despite the 2% drag impact from the noncore retail declines.

As we expected, we had a reduction in rents from the noncore asset sales, but the impact of this has been more than offset by growth in housebuilding profits, a reduction in interest costs from our deleverage and also the impact of new development lettings. So with that, our adjusted EPRA earnings were up 22% in the period. That puts us well on track towards our target of doubling them over the course of the medium term. And we also said that growth wouldn't be linear, of course, because of the impact of the noncore disposals, particularly in the earlier years. So with that growth in EPRA earnings, so our dividend also grew, which was up 22%.

As we announced with our trading update back in December, we've taken an exceptional provision in this set of results. This relates to a legacy project the group developed and sold some 15 years ago. It's a provision for a potential claim. We haven't, as of yet, received a claim on this matter yet. And we would expect if we were to receive a claim that we'd recover a meaningful portion of any amount that was claimed. However, due to the accounting requirements for this matter, we have to take the provision upfront and we'd recognize the recoveries on it over time. Now we've done some detailed analysis on our historical projects, and this gives us the confidence this is a one-off, isolated matter.

Turning now to our adjusted EPRA earnings. One year ago, we said that we saw the potential to broadly double them over the course of the medium term. I'm pleased to say 1 year on, our adjusted EPRA earnings are growing strongly, up 22%. And we also said we'd provide a little bit more information in terms of how these results break out by each of the business units. So I've provided some color here in terms of what's been driving the underlying growth in those EPRA earnings. And you can see particular drivers of the strong growth, both in Industrial & Logistics and housebuilding. Of course, we've had the noncore sales and the reduction in associated rent. Central admin costs have been held flat. With the deleveraging and disposals, overall that's reduced our interest costs. And with that, that puts our adjusted EPRA earnings up 22%, putting us well on track towards doubling them over the course of the medium term compared to the 2018 level.

Turning now to net rent. We said we'd expect that rent to be down over the year due to the level of noncore disposals, and you can see from the chart at the top right, net rent has reduced from GBP 49 million to GBP 40 million, in line with our expectations. Disposals have reduced rent by some GBP 14 million. That's been partly offset by the impact of new development lettings which have added some GBP 5 million, taking rent for the year just ended to GBP 40 million. Because the disposals were largely weighted towards the back end of the year, the annualized impact of that going into 2020, offset by the annualized impact of our development lettings, gives us a start point for 2020 rent of some GBP 38 million.

Importantly, if you look at the chart at the bottom right, the quality of our rent roll is continuing to improve. You can see that, in particular, in the blue bar representing Industrial & Logistics rents as a proportion of the overall portfolio, which is now some 2/3 of our overall portfolio ERV. And likewise, you can see the orange and the light blue segments of our noncore assets, which is now just 11% of the overall rent compared to 57% back in November '17. So quite a significant shift in mix in the underlying portfolio, thus improving the overall quality of the rent roll.

In terms of the outlook from here. The non-core assets are only GBP 74 million now. The net rent is relatively small. It's only GBP 3 million. So as we continue to recycle the proceeds from the significant level of disposals that we've made into our Industrial & Logistics partner, which has got attractive yields, as Mark set out, we'd expect this to drive particularly strong growth in our rental income from 2021 as the impact of the disposal starts to dissipate.

Profits in St. Modwen Homes were up strongly, some 28% to GBP 40 million. That's been driven chiefly by a 25% growth in volumes. We also had a continued improvement in margins over the period by some 40 basis points, in line with our plan. From here, we'd expect growth to continue. In terms of volume growth, we'd expect to deliver up to 20% growth in volumes per annum for each of the next 2 years. We would expect growth to continue beyond 2021. But clearly, given the business has been going through a pretty rapid growth and expansion, we'd expect that growth to moderate over that period. And as Mark mentioned, we'd expect to top up some of the existing land bank with a relatively small level of oven-ready acquisitions to smooth out the inevitable lumpiness which can occur over the land bank over the course of the longer term.

We'd expect margins to improve by a similar amount in the year ahead, so as they've improved in the last year. That puts us overall on track for improving our margins to 16% to 17% over the course of the medium term. And you'll remember, of course, our margins are around 2% to 3% less when compared to other housebuilders because of the impact on how planning gains are taken through results. We take our planning gains through our valuation line, whereas other housebuilders book that through their margin. So there is that differential as well.

As you can see from the chart at the bottom right, St. Modwen Homes is now the vast majority of housebuilding profits, now 91% of the overall results. And we'd still expect the Persimmon JV to wind down by the end of 2020, but the profits there are relatively minimal. And the impact of that would be more than offset by the growth in St. Modwen Homes' profits.

Turning now to the portfolio valuations. I've set out in the chart on the top right movements by each of the key elements as part of that portfolio. Industrial & Logistics values were up 8.3% overall; existing assets, up 1.3%. Developments really driving that growth, up 21%. Noncore retail values were down some 31%. But as you'll remember, over the course of 2018, we sold nearly GBP 180 million of our noncore retail assets at a less than 1% discount to book. So you can see the portfolio repositioning is really starting to pay off in our results.

Other residential land values were up. That's due to planning gains in the period rather than the underlying values themselves, which were broadly stable. So with all of that, the overall portfolio valuation was up 4.1%. That's despite a 1.3% drag from the fall in the value of our noncore retail values. And our noncore retail is now only 2% of the assets, as Mark referred to earlier. So it's really de minimis now.

At the chart at the bottom right, you can see the growth in NAV per share, which was up 3% despite the impact of the exceptional provision in the results. So just moving through the key elements of the bridge. So our NAV per share in November '18 was 470p. Adjusted EPRA earnings added some 17p. The net impact of development and revaluation gains together are to defer the 23p before the impact of the reduction in noncore retail, which reduced by 8p and the aforementioned exceptional item, a further 8p as well. So with that, overall NAV per share was up 3%. Our EPRA NAV per share, also up 4.2%.

Importantly, the balance sheet continues to remain in a very strong position. We've got no significant debt maturities until December 2023. As you can see in the chart on the bottom right, our borrowings have more than halved since the strategic review in May '17, with that, our LTV just under 20%, giving us ample headroom and flexibility. And over the course of the medium term, I would expect to keep our LTV within the mid- to high 20s target range overall, reflecting the improving quality of the portfolio and growth in the portfolio value over the medium term.

We said earlier in the year, we'd provide a little bit more color and information in terms of the segmental results by each of our 3 business units. So I've set out on this slide a little bit more detail for you on that. On the left-hand side, you can see how the portfolio value has moved in each of our 3 business units since the strategic review back in May '17. The middle shows the return on capital, so the profit generated and the rent expressed as part of the valuation generating the returns. And then on the right-hand side, I've given some medium-term direction, which helps give the building blocks for how we intend to deliver low double-digit total return over time.

So taking each of those movements and ours each in turn, starting with Industrial & Logistics. Of course, the portfolio value there is growing as we continue to build out and retain our development pipeline. In terms of the returns, we're generating some pretty attractive returns in that part of the business. You can see the influence in the pink as part of the development returns as the overall return. As we continue to build out the portfolio over time, we'd expect the income element, of course, to grow as part of that, but that's a lower-risk return. And with relatively constant levels of development, so the development proportion of that overall return will start to normalize. So the overall returns will become more influenced by income over time and be low risk.

In terms of St. Modwen Homes, you can see the growth in the portfolio value there has been a little bit less than the rate of growth in the underlying activity in that part of the business. That's, of course, because we've been driving developments on the existing land bank, in particular. And you can see the impact that's starting to have in improving the return on capital over the course of the last couple of years in the middle.

So in terms of the outlook over the medium term, we've heard our intention is to grow volumes and income returns in that part of the business. With that growth in volumes, I'd expect WIP levels to increase in line with that growth in volumes. The current land bank in St. Modwen Homes today equates to around 6 years' supply. We would expect that -- to bring that length of land bank more in line with our peers in the housebuilding sector over time and thus, shorten the relative size of the land bank. And that will be a key driver for growing returns further in that part of the business going forwards.

And then finally, turning to Strategic Land & Regeneration. You can see the returns in the bottom middle section there are more muted compared to the rest of the business. That's influenced, particularly by the land, which, of course, isn't yielding and where valuations are broadly stable and, of course, the impact of the non-core assets as well. That's why we've been focused particularly on reducing the amount of invested capital in that part of the business. You can see there, we've more than halved the amount of capital invested in Strategic Land & Regeneration over the period since the strategic review.

So in terms of the outlook for this part of the business here, the intention, as you've heard, is to sell the remaining noncore assets that we have, to continue to reduce the on-balance sheet land that we have and to continue to accelerate development activity, both on our existing regeneration schemes and also going forward on a more capital-light basis on new development projects. And a combination of those factors, again, will continue to drive returns in that part of the business.

So overall, we do continue to aim to deliver sustainable low double-digit total returns over time. And you just heard a little bit more detail about how we intend to deliver that through improving the return on capital in St. Modwen Homes and Strategic Land & Regeneration and also growing the income in Industrial & Logistics. And we've made a positive start towards that over the course of the last 12 months with our underlying total return up to 6.3%. That's despite the 2% drag from the weakness in noncore retail. So we remain on track to deliver that aim over time.

We're also well on track versus our aim of broadly doubling our adjusted EPRA earnings from the -- of course, in the medium term compared to the 2018 level with 22% growth in the first year despite the impact of disposals. And we expect to make further good progress on that over the course of 2020. And so as those adjusted EPRA earnings grow with the dividend policy linked into that paying out 50% of them, so we'd expect the dividend to grow as well. So overall, we're well on track towards delivering our targets over time.

And with that, I'll hand back to Mark.

--------------------------------------------------------------------------------

Mark Christopher Allan, St. Modwen Properties PLC - CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Rob. So to wrap up before opening up to questions. Our outlook. Well, the first thing I'd like to talk about for 2020 is 2020 is going to be the year at St. Modwen where we launch formally our responsible business ambitions. Now our responsible business ambitions cover 6 different areas, and I'll go to each of them in a moment. But there are 6 areas that align to the ESG agenda that is becoming increasingly prevalent and important across the investment community at large, but they are also 6 areas that link very clearly to our core purpose: changing places, creating better futures, demonstrating that, that purpose is not simply about the physical real estate of what developments are delivered, but it's also about the way in which the company goes about doing business. So 6 areas with varying degrees of targets and ambition within them. In some cases, this is about bringing together and coordinating activity that is already taking place within the group. In other areas, these are much more serious, longer-term ambitions that will require careful management and will require investment.

So I think to the left-hand side of the chart are the more significant longer-term objectives. So net carbon reduction, a commitment from us to be operationally net zero by the end of 2025 and fully net zero by 2040. As we stand here today, we have plans -- clear plans across a number of different areas, which we are confident will eliminate 95% of our operational net zero carbon. And we have now to move those plans towards to take us to 100% during the course of the next few months. We have less-formed plans to get us to fully net zero, but I think it's an increasingly important part of the agenda for any business to be ambitious in this area and to work in partnership with other like-minded businesses, both as customers and within the supply chain to deliver on those things.

Biodiversity and sustainable environment. So our most important target here is, by the end of this year, to be in a position to be able to commit to a net gain of 10% in biodiversity across all development activity. Now as a business, we have around 10,000 acres of potential development land. In reality, 6,000 of those acres will be developed. The other 4,000 are effectively nondevelopable. This is about having clear coherent plans for the other 4,000 acres, to promote biodiversity in a way that will offset the often inevitable reduction in biodiversity associated with development itself.

Within diversity and inclusion, we're looking for a Kitemark to establish what we're doing are the right things and we're moving in the right direction at the right pace. And so we are signing up to the UK National Equality Standard as seeking to achieve that by the end of 2025. I think that is the increasingly globally recognized benchmark for diversity and inclusion practice.

Education and future skills. Skills availability is incredibly important to the development sector, to the builder environment sector. We're committing to invest 1% of our cash profits, our adjusted EPRA earnings, each year in supporting education and future skills initiatives. And that will be locally where the business is based, engaging with local communities, but also more strategically on a national basis longer term.

Health and well-being, increasingly talked about within businesses. Both as an employer, we have an obligation and an opportunity to improve health and well-being for our workforce, but also importantly, as a developer, we're delivering communities which arguably have a much more significant impact on long-term potential for health and well-being. So we'll be looking to make clear commitments and a clear focus in those areas.

And then finally, responsible operating practices and partnerships. We will only be able to achieve these responsible business ambitions by working in a strategic long-term partnership collaborative way with our supply chain. The first step in that over the next 12 months is to establish clear charters with our supply chain that work in both directions as to how we're going to work together to achieve those responsible business ambitions.

They are ambitions. I guess, obviously they are, therefore, ambitious. 2020 is about putting really clear plans to get us to deliver on this, but it is something we're incredibly serious about and it's something that links directly to our core purpose as a business.

So finally, outlook in more generic and perhaps more financial terms. I think the business continues to be well placed. It continues to be focused on sectors that enjoy long-term positive fundamentals. The repositioning of the business, the very substantial but successful repositioning of the business over 2017 and 2018 is shown in the rather marvelous charts on the right-hand side of the slide, the pies inside the donuts. But you can see now that having gone from a series of individual, quite disparate regions and a whole range of different activities, we are now very focused in 3 core areas. And indeed, nearly 90% of the portfolio is either in Industrial & Logistics or residential primarily through housebuilding, sectors that benefit from long-term positive fundamentals.

We have the balance sheet in place. We have the financial capacity to go after that. We have the momentum within the business. We have the pipeline. And we have the people. All of that comes together to mean that we continue to be confident in achieving the return targets we set out 12 months ago, particularly doubling our cash profits and moving the business towards a position where it can sustainably aspire to deliver low double-digit total returns.

Ladies and gentlemen, thank you very much for listening to the presentation this morning. I'm now going to open up for questions. As is normally the case, I'll ask for questions in the room first. If I could ask you in the room just to wait for a microphone, so we do pick up the question on the webcast. And then once we're finished in the room, I will open up to any questions on the phone.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Mark Christopher Allan, St. Modwen Properties PLC - CEO & Director [1]

--------------------------------------------------------------------------------

That's one reluctant question from Chris Millington.

--------------------------------------------------------------------------------

Christopher James Millington, Numis Securities Limited, Research Division - Analyst [2]

--------------------------------------------------------------------------------

Firstly, we're hearing a lot about a renewed sense of kind of optimism in the resi markets since the election. Just wondering if you see, one, if you could put a bit of a detail around that from what you're seeing. But secondly as well, kind of -- has there been any change in the commercial, the Industrial & Logistics market? So that's the first one, just kind of post-election activity.

Next one really is just wondering about how much you can continue ramping up the development pipeline in Industrial & Logistics. What should be the high watermark for the level of space developed in any 1 year? And then the final one is just about the impact of buying oven-ready land in St. Modwen Homes. What's that likely to do to margins and return on capital employed?

--------------------------------------------------------------------------------

Mark Christopher Allan, St. Modwen Properties PLC - CEO & Director [3]

--------------------------------------------------------------------------------

Okay. Cool. So first of all, with respect to post-election activity, I guess, in reality, of course, it's still relatively early days. Within the housebuilding sector, I guess, the key indicators are the number of visits, the footfall that we're seeing to our various outlets. And we have seen an improvement -- a sustained improvement in footfall year-on-year. In terms of translating into sales, because we are about to go sales active on a further 6 outlets, so effectively a 30% increase in outlets when we're targeting around a 20% increase in volume, I think our overall conversion numbers are distorted slightly by that.

But I think overall, we would say that they are slightly better year-on-year. We are rock-solid at that 0.8, 0.81 reservations per active outlet per week. So I think that feels solid. There is a bit of a difference between, I think, we're seeing the Midlands and the regions being stronger than the South East. I think that's been a trend for a while. We don't see that changing dramatically, I think, in the coming months. In fact, the regions are probably best placed to benefit from the kind of political environment.

I think in Industrial & Logistics, the feature across all of last year was just -- was a sustained and really encouraging level of inquiries, of interest, of serious interest. What we saw was really good conversion of that interest in the second and third quarters. Much slower conversion of that interest in Q1 and Q4, I think, fairly obviously linked to impending dates that had the degree of uncertainty associated with them. We have definitely seen a marked increase in that commitment to signing on leases in a relatively short space of time since 12th of December. We'd expect that to grow further.

In terms of Industrial & Logistics development and where that can grow. I think physically, we can deliver sustainably 2 million square feet per annum. I think the more important measure, though, is how much of that we want to do speculatively. And how much of that is going to be build-to-suit and pre-let? And I think over time, we want to grow the pre-let and the build-to-suit much more materially. If you look at the market slides earlier, about 2/3 of take-up in the big box -- the 100,000-square-foot-and-above sector, is build-to-suit or pre-let. For us, that's 20% at the moment. So we're on a fairly steep curve there. So I would think longer term, we will be looking to deliver between 50% and 60% speculatively and the remainder on a pre-let or build-to-suit basis. But we are very comfortable with our speculative program. We've deliberately focused on smaller units. We've deliberately focused on the strongest locations, so it gives us good flexibility. And I think that's borne out within the leasing.

And there was another question, but I've temporarily forgotten it. Apologies.

--------------------------------------------------------------------------------

Christopher James Millington, Numis Securities Limited, Research Division - Analyst [4]

--------------------------------------------------------------------------------

The oven-ready market in St. Modwen Homes (inaudible).

--------------------------------------------------------------------------------

Mark Christopher Allan, St. Modwen Properties PLC - CEO & Director [5]

--------------------------------------------------------------------------------

Yes. So this year, it will be 3, 4, 5 sites, it will be something like that, the typical site, 10 to 20 acres. So 150 to 300 units per outlet. They will be available on deferred terms rather meanly within the group. There aren't deferred terms on offer for one business unit to the other. So there should be a return on capital improvement for Homes as a result of that. I think in margin terms, we would expect it to be at least in line, if not modestly accretive. But the important thing is it will smooth out the inevitable lumpiness of large sites moving from the group and inevitable delays you can get from time to time in the planning process. So -- but the strategic pipeline, as you've seen on one of the earlier slides, is still very substantial. So I would still expect in the medium term, medium to long term, the very substantial majority of land to be coming through the group's strategic pipeline.

--------------------------------------------------------------------------------

James Carswell, Peel Hunt LLP, Research Division - Analyst [6]

--------------------------------------------------------------------------------

I'm James Carswell from Peel Hunt. Just in terms of the planning process. And I hear a couple of your peers have talked about planning delays either on specific projects or more generally, I think particularly following some of the changes in terms of the local actions and MPs. Are you seeing any sign of that? Or is it -- because it appears from the presentation, yes, it seems like everything is going pretty well. Or you are -- are you seeing that slowdown?

--------------------------------------------------------------------------------

Robert J. Hudson, St. Modwen Properties PLC - CFO & Executive Director [7]

--------------------------------------------------------------------------------

Yes. Planning delays have been a fact of life for a long period of time. I'm not sure they've necessarily got any worse. I mean I think the local plan process and these local plans to have -- local authorities to have approved plans, delivering their housing needs and their employment needs is clearly going through quite a few teething problems. So I don't think there are actually any agreed local plans anywhere across the U.K. as things stand at the moment.

There is clearly a real shortage of resource within local planning authorities. That's the single biggest issue. It should take 3 months to be able to clear conditions and get starting. The average is 11. We plan on the 11. So I think that's why we're not assuming it's going to be there. Yes, I wouldn't be surprised if, with a significant majority, planning reform is one of the areas that the government has a go at. But obviously, they won't be the first government to have had a crack at that.

--------------------------------------------------------------------------------

Mark Christopher Allan, St. Modwen Properties PLC - CEO & Director [8]

--------------------------------------------------------------------------------

I don't think there are any further questions in the room, so I'm just going to check if there are any questions on the line.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

(Operator Instructions) There are currently no questions.

--------------------------------------------------------------------------------

Mark Christopher Allan, St. Modwen Properties PLC - CEO & Director [10]

--------------------------------------------------------------------------------

No, I don't believe we have any questions on the line. So that will conclude the presentation, ladies and gentlemen. Thank you very much for your attention. Have a good day. Thank you.