Final Results

McCarthy & Stone plc

Annual results announcement for the year ended 31 August 2017

McCarthy & Stone (the 'Group'), the UK's leading retirement housebuilder, announces its financial results for the full year ended 31 August 2017 (FY17). All comparatives are to the full year ended 31 August 2016 (FY16) unless otherwise stated.

Financial highlights

· Legal completions in line with prior year at 2,302 units (FY16: 2,296), despite a significantly lower number of first occupations during the year (FY17: 49, FY16: 69)

· Revenue increased by 4% to a new record of £661m (FY16: £636m)

· 52 new sales outlets opened during the period (FY16: 64)

· Average selling price increased by 3% to £273k (FY16: £264k)

· Strong recovery in underlying operating margin in H2 to 17% (FY16: 17%) from H1 underlying operating margin of 10% (+700 bp) (FY16: 16%)

· Profit before tax decreased by 1% to £92m (FY16: £93m)

· Underlying profit before tax2 at £94m (FY16: £105m), mainly impacted by age and mix of units sold and increased incentives and build costs

· Underlying basic earnings per share3,4 decreased by 12% to 14.2p (FY16: 16.1p)

· Basic earnings per share decreased by 1% to 13.8p (FY16: 13.9p)

· Strong financial position, with £31m of net cash4 (FY16: £53m) at the year end notwithstanding significant ongoing investment in land and work in progress

· The Directors are proposing a final dividend of 3.6 pence per share, giving a total dividend for the year of 5.4 pence per share (FY16: 4.5 pence per share pro-rated for period since listing).

Strategic and operational highlights

· 75 high-quality development sites (FY16: 65 sites) added to the land bank. Total land bank of 9,967 plots (FY16: 10,186), equivalent to 4.3 years' supply

· Sufficient land under control and operational platform in place to deliver strategic objective of building and selling more than 3,000 units per annum over the medium-term

· Workflow on track to support growth strategy and deliver c.80 new sales releases (FY17: 52) and more than 65 new first occupations in FY18 (FY17: 49)

· New strategic relationship with PfP Capital to access the growing rental market with the bulk sale of 126 units in FY17

· Awarded Five Star rating for customer satisfaction by the Home Builders Federation (HBF) for the twelfth consecutive year - the only UK housebuilder, of any size or type, to achieve this accolade

· 15 Quality awards (FY16: 10), 7 Seals of Excellence and 1 Regional Winner at the 2017 National House Building Council (NHBC) Pride in the Job awards, underpinning exceptional build quality.

Current trading and outlook

· Forward sales as at 10 November 2017 (week 10) up 11% at £277m (11 November 2016: £250m)

· c.80 new sites planned for sales release in FY18 (FY17: 52), of which 96% are already in build

· First occupations are planned to increase to more than 65 in FY18 (FY17: 49) and are expected to be weighted towards the second half of the year due to the timing of build programmes

· The demand for high-quality retirement housing remains strong and the Group remains confident of delivering its medium-term growth objective of building and selling more than 3,000 units per annum.

Commenting on the results, Clive Fenton, Chief Executive Officer, said:

"We achieved a strong result in the second half of the year and delivered an improvement in both margins and volumes compared to the first half of FY17. Our full year completion volumes were in line with the prior year despite some headwinds as a result of the increased level of uncertainty in the secondary market and the expected lower number of first occupations. We delivered to market 49 high-quality new developments and maintained our exceptional build quality and levels of customer satisfaction. 

"The Group starts the new financial year with a strong forward order book and a robust balance sheet. We remain focused on delivering profitable growth and are on track to open c.80 sales outlets and deliver more than 65 first occupations in FY18. We have sufficient land under control, much of which already has detailed planning consent, to deliver our strategic growth plan of building and selling more than 3,000 units per annum."

- Ends -

This announcement contains certain forward-looking statements about the future outlook for the Group. Although the Directors believe that these statements are based upon reasonable assumptions, any such statements should be treated with caution as future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

Presentation for analysts and investors:

Clive Fenton, Chief Executive Officer, Rowan Baker, Chief Financial Officer and John Tonkiss, Chief Operating Officer will host an analyst and investor meeting at 9.15am GMT today at Deutsche Bank, Winchester House, 75 London Wall, London, EC2N 2DB. Refreshments will be served from 9.00am. 

Webcast for analysts and investors:

A live webcast of the presentation is available via the following link: http://www.mccarthyandstonegroup.co.uk/investors/webcast

An on demand version of the webcast will be made available later today on the Group's corporate website: http://www.mccarthyandstonegroup.co.uk/investors/webcast

Conference call details:

A conference call facility is also available. To access the conference call:

UK Access: 020 3059 8125

International Number: +44 20 3059 8125

Participant Password: McCarthy & Stone

Conference call replay facility:

A replay facility will also be available. To access the replay dial in details:

UK Access: 0121 260 4861

United States: 1844 2308 058

All other locations: +44 121 260 4861

Replay Pin: 6638245#

For more information, please contact:

McCarthy & Stone, 01202 292480

Clive Fenton, Chief Executive Officer

Rowan Baker, Chief Financial Officer

Paul Teverson, Director of Communications

Powerscourt, 020 7250 1446 / [email protected]

Justin Griffiths

Nick Dibden

Legal Entity Identifier (LEI): 213800CEJ4OQ5YPU8Z37

1 Excludes three commercial units in FY16

2 Average selling price is calculated as average list price less cash discounts and PX top-ups

3 Underlying operating profit (including underlying operating profit margin and underlying basic earnings per share) and underlying profit before tax are calculated by adding amortisation of brand and exceptional administrative expenses to operating profit and profit before tax respectively. See note 6 of consolidated financial statements for further information

4 Underlying basic earnings per share have been reconciled within note 6 of consolidated financial statements

5 See note 24 of consolidated financial statements for net cash reconciliation

6 Return on capital employed (ROCE) is calculated by dividing underlying operating profit for the previous 12 months by the average tangible gross asset value at the beginning and end of the 12 month period. Tangible gross asset value is calculated as net assets excluding goodwill and intangible assets, excluding net cash  

Chairman's statement

I am pleased to present our second set of full year results since re-joining the London Stock Exchange in November 2015. The Group delivered a solid performance this year notwithstanding the headwinds experienced as a result of increased political and economic uncertainty. Revenue increased to a record £661m (FY16: £636m) and the Group continued to capitalise on the attractive demographic opportunity and structural shortage of supply of retirement housing in the UK. As previously announced, trading in the first six months of FY17 was constrained by the lower forward order book brought into the year impacted by the market uncertainty following the EU Referendum. Trading in the second half of FY17 saw an improvement due to an increased weighting of completions from newer higher margin sites, reflecting the quality and location of the developments McCarthy & Stone is now bringing to market.

Profit Before Tax reduced from £93m in FY16 to £92m in FY17 with Underlying Profit Before Tax reducing from £105m in FY16 to £94m in FY17. This reduction in profitability was mainly driven by the age and mix of units sold, increased incentive costs, build cost increases offset by pricing improvements, some additional land renegotiation costs as we repositioned our land bank in the face of more challenging market conditions and our continued investment in regional operational infrastructure to support our growth strategy.

The Group remains the UK's leading retirement housebuilder with a greater than 70% share of the owner-occupied market. Our strength of brand and continual striving for operational excellence ensures that we can continue to deliver solid results in a challenging market without any support from the Government Help To Buy scheme. We have a strong and experienced management team that is focused on delivering the Group's strategic objectives, a high-quality land bank, a robust balance sheet and the necessary operational expertise and infrastructure in place to deliver our medium-term growth strategy of building and selling more than 3,000 units per annum. 

We continue to lead the housebuilding sector on customer satisfaction. We are the only housebuilder of any size or type to have received the full Five Star rating in the Home Builders Federation customer satisfaction survey for twelve consecutive years, in which more than 90% of our customers would recommend us to a friend.

Outlook

The improvement of forward sales experienced throughout the year has continued into FY18 with total forward sales including legal completions since 1 September 2017 standing at £277m at 10 November 2017 (FY17: £250m).

Economic and political environment

The underlying housing market continues to be supported by low interest rates, good mortgage availability and low levels of unemployment. The market for retirement housing also remains highly attractive, underpinned by strong demand, albeit the secondary market was impacted by political and economic uncertainty. Research by the Department for Communities and Local Government (DCLG) recognises that around 74% of household growth in the UK to 2039 is expected to come from those aged 65 and over1 and McCarthy & Stone remains uniquely placed to capitalise on this unprecedented demographic opportunity in which demand continues to dramatically exceed supply. 

Dividend

The Group's solid performance this year has enabled the Directors to propose a final dividend of 3.6 pence per share. This follows the interim dividend of 1.8 pence per share, giving a total dividend for the year of 5.4 pence (FY16: 4.5 pence per share pro-rated for period since listing), which represents 20% growth on the FY16 dividend and is in line with our progressive dividend policy as stated at the time of our Initial Public Offering ('IPO').

Board changes

There were a number of Board changes during the year.

On 6 January 2017, we were pleased to announce the appointment of Rowan Baker as the Group's Chief Financial Officer. Rowan was previously Group Financial Controller and has worked for the Group since January 2012. She took over the role from Nick Maddock whose resignation was announced on 11 October 2016.

On 1 June 2017, we announced the appointment of John Tonkiss as the Group's Chief Operating Officer. This role has been created to help drive the Group's growth strategy. A key part of the role will be overseeing the continued development of the Group's nine regional operations across the UK. John joined McCarthy & Stone in 2014 and was previously the Group's National Operations Director.

In addition to this, John Carter joined the Board on 1 October 2017. John is currently Chief Executive of Travis Perkins plc, which owns many of the building industry's most popular brands and spans the trade, home improvement and DIY markets. John joined Travis Perkins in 1978 and held a number of senior strategic roles within the business before being appointed as Chief Executive in 2014. 

Finally, on 9 November 2017 we were pleased to announce the appointment of Paul Lester CBE as a Non-Executive Director and Chairman Designate. He will join the Board on 3 January 2018 and, subject to his election by shareholders, will take over from me as Chairman at the conclusion of the Company's next AGM in January 2018. Paul is currently Chairman of Essentra plc and Forterra plc and was formerly a director of Invensys plc. Previously, he was Group Managing Director of Balfour Beatty plc before becoming Chief Executive of support services company VT Group plc in 2002. Paul was also Chairman of John Laing Infrastructure Fund until September this year.

We are very pleased that Paul will be joining the McCarthy & Stone Board and succeeding me as Chairman. McCarthy & Stone is a great business and I am proud to have served on the Board during a transformational period for the Company, culminating in its successful IPO in 2015. While market uncertainty following recent political events has acted as a stern test for our business model, I am pleased that our high-quality product and excellent team led by Clive Fenton have proved McCarthy & Stone's resilience.

The Company remains uniquely-placed to capitalise on the substantial growth opportunity in retirement housing, driven by a rapidly ageing population, and the team can look to the future with confidence. The Group has made solid progress towards achieving its strategic objectives this year and my thanks go to all employees, the management team and my fellow Board members for the significant contribution they have made.

1 The Department for Communities and Local Government (DCLG) projections (July 2016)

Chief Executive Officer's operational review

Our results

The Group delivered solid progress in its first full year of trading since re-joining the Main Market of the London Stock Exchange in November 2015. Trading improved consistently throughout the year notwithstanding the increased uncertainty in the secondary market following the General Election in June 2017, and the Group made good progress in rebuilding its forward order book and progressing its workflow.

Revenue increased by 4% to £661m (FY16: £636m) primarily driven by an increase in average selling prices from £264k to £273k, reflecting a continuing improvement in sales mix and quality of sites. Legal completions were slightly ahead of prior year levels at 2,302 (FY16: 2,296) despite a weakened forward order book brought into the year and a lower level of just 49 first occupations during the period (FY16: 69). This year's volumes benefitted from accelerated off-plan sales rates which improved to 53% (FY16: 50%) and the bulk sale of 126 apartments to PfP Capital as part of a new strategic relationship allowing us to access the growing rental market.

Consistent with previous guidance, underlying operating profit decreased by 10% to £96m (FY16: £107m) at a gross profit margin of 20% (FY16: 21%), an underlying operating profit margin of 15% (FY16: 17%) and an operating profit of £94m (FY16: £95m). The reduction in profitability was mainly driven by the age and mix of units sold, increased incentive costs, build cost increases offset by pricing improvements, some additional land renegotiation costs as we repositioned our land bank in the face of more challenging market conditions and our continued investment in regional operational infrastructure to support our growth strategy.

PfP Capital

Over the course of the financial year, we sought to diversify and enhance our business model by developing a strategic relationship with PfP Capital. This represents an exciting new opportunity to access the growing rental market and has the potential to improve capital turn and enable land investment in new, previously untapped locations. This strategic relationship resulted in the sale of 126 apartments (included within the total legal completions of 2,302) across 27 sites to be held within a specialist retirement PRS Fund being established and managed by PfP Capital, the fund management business of Places for People. The apartments will be offered for private open market rent. PfP Capital aims to grow its assets under management from £150m to more than £750m over the short to medium-term by acquiring residential units and we are well placed to provide them with access to the retirement housing sector. We intend to develop this relationship further over the coming financial year.

Investment and growth strategy

We continue to pursue our strategy of creating an efficient and scalable business, capable of building and selling more than 3,000 units per annum over the medium-term. There is significant demand for our products and we are confident that we have put in place all the necessary elements that will enable us to achieve our planned growth. We have a respected brand with 40 years' experience, a high-quality land bank, a strong balance sheet with a robust capital structure and the necessary organisational capability and platform. Our experienced management team is focused on achieving this goal.

Market demand

The structural imbalance between supply and demand within the housing market continues to provide us with an exceptional market opportunity. Despite the recent growth in housebuilding activity, there remains a significant and growing shortage of housing supply in the UK. This imbalance is particularly acute in the market for retirement housing, and McCarthy & Stone stands alone among the national housebuilders as the only one that focuses entirely on this market.

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. The high barriers to entry in our market ensure that we maintain a unique position as the only housebuilder capable of meeting the nationwide need for high-quality specialist housing for the growing number of older people who are looking to move to properties more suited to their needs and lifestyle. 

Land bank

In total, c.£472m (FY16: £468m) was invested in land and build during the period. We added a further 75 high-quality sites with attractive embedded margins into the land bank (FY16: 65), equivalent to c.3,164 additional plots (FY16: c.2,614), with terms agreed on a further c.1,355 plots (FY16: c.1,700 plots) in line with our normal land buying model. The land was secured with a high level of optionality. 

At the year end, our land bank stood at 9,967 plots (FY16: 10,186), equivalent to 4.3 years' supply, of which 2.6 years had detailed planning consent. As a result, the Group now has sufficient land under control to deliver all targeted sales to FY20.

We secured 64 detailed planning consents (FY16: 60) and started build on 66 additional sites (FY16: 42). There is detailed planning in place for 100% of FY18 planned first occupations and 71% of FY19 planned first occupations.

The market for land remains benign and competition for our typical brownfield sites remains highly fragmented. Our business continues to maintain operational focus and discipline in the assessment of our land purchases to ensure that returns continue to flow to our shareholders. 

Operational infrastructure and capability

Our newer regional offices established in North London, South West, East Midlands and North West regions continued to drive the momentum of their workflows during the year. We have high-calibre senior management teams in place, combining McCarthy & Stone experience with volume mainstream housebuilder operational expertise. 

Having established these new offices, we have now commenced the roll-out of a new 'Divisional' operational structure, to manage our nine regions. The three Divisions, under John Tonkiss, our Chief Operating Officer, will each consist of three established regions.

This operational structure is similar to many national volume housebuilders and will provide the framework to run an efficient business at scale. Our existing nine regions will be clustered into: a North Division, covering Scotland, the North West and North East; a Central Division, covering East Midlands, West Midlands and South West; and a South Division, covering North London, South East and Southern. We expect to fill all the new positions from internal candidates. The establishment of these new divisions will complete the platform required to deliver our planned operational growth.

Strategic initiatives

Our continued focus on achieving operational excellence by accelerating our working capital cycle has allowed us to deliver further improvement in our three key strategic initiatives: improving sales rates, reducing time taken between securing land and starting build and implementing build programme efficiencies.

Sales initiative

The sales initiative, launched in FY15, sets out to consistently deliver off-plan reservations of 50% or more by the date of first occupation, and then to reserve out all remaining apartments within an average 12 month period.

Our sales initiative continued to make good progress during the year. The main focus has been on enhancing the early part of the customer journey via website improvements and the development of early relationships with enquirers prior to site sales launches. New relationship management teams are now in place in all regions and are working well. These improvements have contributed to an increase in the off-plan sales rate to 53% (FY16: 50%) from the 49 sites (FY16: 69) that first occupied in FY17.

A number of sites achieved significantly more than 53% of the off-plan sales rate, for example Jameson Gate, Portobello, Edinburgh which sold 100% off-plan. A further five sites sold more than 80% of apartments off-plan. It is particularly pleasing that we have been able to achieve these accelerated sales rates in a challenging market whilst also improving pricing.

The Group continued to be impacted by the challenging secondary housing market with the average time to sell out slightly higher than in the prior year. This average now stands at 19 months (FY16: 18 months) for all sites sold out during FY17.

During FY17, we worked closely with our third-party part-exchange providers to improve the terms of the part-exchange offering. In addition, we successfully piloted an in-house part exchange scheme on 163 transactions in which dependent properties are temporarily taken onto our own balance sheet pending onward sale. This resulted in a cost saving of c.£1m in relation to the 49 properties re-sold during FY17, when compared to the costs associated with using third-party part-exchange providers. As at 31 August 2017, we held 114 properties on the balance sheet at a net carrying value of £31.9m.

Development initiative

Our development initiative, also launched in FY15, aims to reduce the time taken between securing land and build start. This involved the implementation of a number of process improvements with particular focus on 'ways of working', the planning process and increased standardisation. This enables the business to bring forward profitable developments, accelerate growth plans and improve capital turn. The initiative is now embedded in all regions and is beginning to produce positive results.

A number of changes designed to accelerate this cycle were implemented during the year. In particular, we have focused on local consultations within the planning process and implemented our new Datum tool to support product and design standardisation and value engineering. Our target for reducing the time taken between land exchange and starting build is 16 months for standard sites achieving a first-time detailed planning consent. During FY17, we saved an average of four weeks per scheme, with the total time taken from land exchange to build start averaging c.18.1 months (FY16: c.19.1 months).

During the year, a Product Approval Group ('PAG') was established to enhance our product offering and identify and resolve persistent issues. The PAG is made up of senior management team members with representatives from Sales and Marketing, Management Services, Development, Construction, Procurement, Customer Services, and Health & Safety. The PAG meets regularly to achieve greater standardisation across the Group, optimise product selection and improve design.

Build initiative

The build initiative, launched in FY15, continued to drive improvements to the build process during the year, to accelerate build timescales, reduce build costs and enhance margins. Specific focus has been placed on supply chain management to maximise savings as well as driving towards longer term benefits via the increased use of modern methods of construction. The Group's framework of critical controls introduced last year is now fully embedded across all our regions and is driving improvements to build cycle times and budgets. This initiative has delivered a c. four week (FY16: c. three week) time saving from build start to first occupation and has identified savings opportunities to the value of £127k per development in relation to materials and labour which will help mitigate the impact of build cost inflation.

Our product ranges

During the year we repositioned our product branding in order to capitalise on our existing strong McCarthy & Stone brand recognition. This will now be used in a unified way across our three products: our Assisted Living product has been rebranded Retirement Living Plus and our Ortus Homes product has been rebranded as Lifestyle Living. This also allows us to optimise our marketing spend and create consistency across our product names.

As part of our Lifestyle Living range, we will shortly deliver our first 100% bungalow development of 30 units at Wymondham, Norfolk, which is now under construction. There is a growing need for modern, low-maintenance and well-connected bungalows among the older population and the appropriateness of this form of housing in later life is well-proven. The supply of bungalows in the UK has also been in steady decline, with only 2,2101 new bungalows registered with the NHBC in 2016, in comparison to 26,4081 in 1986. The particular shortage of bungalows and other houses for older people means they are likely to attract a high level of demand.

We are also exploring the provision of bungalows and cottages on larger schemes, opening up exciting new possibilities for maximising development potential on certain sites, as well as providing for completely new land opportunities. As of 31 August 2017, we had 222 (FY16: 127) bungalows within our land bank.

1 NHBC, New Homes Statistics Review 2016

Our Management Services business

The rapid growth of our Management Services business continued during the year, adding 48 new developments to its portfolio, which now total 312 (FY16: 264) managed developments. Providing our own management services allows us to establish a unique relationship with our customers, providing personal and efficient services that not only help them, but also support the point of sale, and allow us to deliver industry-leading standards of customer satisfaction. 

Our customers

We are pleased to report that we have, once again, achieved the full Five Star rating in the HBF customer satisfaction survey this year. This marks the twelfth consecutive year in which more than 90% of our customers have said that they would be prepared to recommend us to a friend. We are the only housebuilder 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. 

Quality

The Group was also pleased to achieve 15 Quality awards, 7 Seals of Excellence and 1 Regional Winner in the 2017 NHBC Pride in the Job awards, marking a 50% increase in awards from 2016. The scheme is dedicated to recognising construction site managers who achieve the highest standards in housebuilding and has been instrumental in driving up standards in the sector for 37 years.

Our employees

Our performance this year would not have been possible without the dedication, enthusiasm and expertise of our people. We are building a culture of excellence that provides 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. I am also delighted to report that, in our most recent employee survey, 87% (FY16: 89%) of our employees confirmed that they are proud to work for McCarthy & Stone. 

Health and safety

I am also 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 is 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 FY17 we received three BSG Health and Safety awards, including one award for Best Use of Technology for our pioneering work using drones for roof inspection to reduce the need for work at height.

Housing White Paper

In February 2017, we welcomed the Housing White Paper "Fixing our broken housing market", the country's first housing strategy for six years. It proposed a number of measures to support housebuilding and we were particularly pleased to see a number of positive references to the need to increase the provision of specialist retirement housing. 

The White Paper notes that the Government will explore ways to stimulate the market to deliver new homes for older people and is introducing a new statutory duty, through the Neighbourhood Planning Act, on the Secretary of State to produce, for the first time, guidance for local planning authorities on how their local development documents should meet the housing needs of older people. Guidance produced under this duty will set clearer expectations about planning to meet the needs of older people, including supporting the development of such homes near local services, and we understand this will be published shortly.

In addition, the White Paper notes the Government's new commitment to explore ways to help older people move at the right time, including possible future incentives. We are working with the Government to provide more information on how this incentive might work, including a possible one-time Stamp Duty exemption for older people downsizing. Such policies would help older people to move, which would also in turn help first time buyers onto the housing ladder and encourage further demand for retirement housing.

Government consultation on ground rents

In June 2017, the Government also launched a consultation on tackling unfair practices in the leasehold market with particular reference to leasehold housing and unfair escalation clauses for ground rents. We understand and support the need for action in this area. Our ground rents are on fair and stable terms as they are fixed for fifteen years and increases are linked to higher of 2% or RPI. There have undoubtedly been cases where the system has been abused by some, including with ground rents that double every ten years, and we understand why DCLG is considering taking action to protect homebuyers. We welcome this, but have raised concerns about the further proposals around reducing ground rent income for all leasehold properties to a zero or peppercorn rent.

Leasehold is a common and widely accepted form of tenure for apartment living and has traditionally been used as an efficient way of managing apartment blocks and managed estates that contain a number of residents on the same site, often with competing voices. With best practice and proper guidance in place, it can work well, and has done for a number of years, and the vast majority of apartments are on fair terms. Ground rent helps to keep the freeholder actively involved in the development and is a key part of this system. We have responded accordingly to the Government's consultation and we await its outcome.

Outlook and current trading

The workflow of the business remains on track to support our growth strategy. Build activity commenced on 73 sites during FY17 (FY16: 54) and of the c.80 sales releases which the Group plans to deliver in FY18 (FY17: 52), 96% are now under construction. During the first 10 weeks of the year 17 new sites (FY17: 13) have been successfully launched and this has contributed to an improvement in our forward order book, which currently stands at £277m (FY17: £250m). First occupations are planned to increase to more than 65 in FY18 (FY17: 49) and are expected to be weighted towards the second half of the year due to the timing of our build programmes. We therefore expect the delivery profile of the Group's profits between H1 and H2 to be similar to that in FY17.

We have started the new financial year with a high-quality land bank, a strong net cash position and an experienced management team in place. We also have the necessary regional infrastructure and strength of brand that ensures that we are uniquely placed to capitalise on the significant demographic opportunity available to us. We remain on track to deliver our strategic growth objective of building and selling more than 3,000 units per annum and continue to target a ROCE of 25% when the business achieves scale.

Financial Review

Our performance

McCarthy & Stone has continued to make progress towards achieving its medium-term strategic objective with significant focus placed on investment in land and build and keeping the workflow of the business firmly on track. 

Revenue

Revenue increased by 4% this year to £661m (FY16: £636m) primarily driven by an increase in average selling prices from £264k to £273k reflecting a continuing improvement in sales mix and quality of sites. Legal completions remained in line with the prior year at 2,302 units (FY16: 2,296) despite a weakened forward order book brought into the year and just 49 first occupations during the period (FY16: 69). Volumes benefitted from the accelerated off-plan sales rates improvement from 50% in FY16 to 53% in FY17 and the bulk sale of 126 apartments to PfP Capital as part of the new strategic relationship allowing us to access the growing rental market.

Profit

The Group achieved an underlying profit before tax for the year of £94m (FY16: £105m) and a statutory profit before tax of £92m (FY16: £93m). This was achieved at a gross profit margin of 20% (FY16: 21%) and an underlying operating margin of 15% (FY16: 17%). This reduction in operating profit margin was driven by the age and mix of stock sold, an increase in incentives offered to customers to close out completion chains in light of the increased uncertainty in the secondary market, build cost increases offset by pricing improvements, some additional abortive land costs as we sought to reposition our land bank and our continuing investment in regional operational infrastructure to support our growth strategy. 

The overheads in the business continued to be well-controlled with total administrative expenses for the year of £37m (FY16: £33m), excluding exceptional items and amortisation of brand. They remain at broadly the same proportion of revenue as last year of 6% (FY16: 5%) and reflect the investment being made to deliver the strategic growth of the business.

Capital structure and interest

We closed the year with a tangible gross asset value of £646m (FY16: £574m), which was a year-on-year increase of 13%, primarily due to the continued land and build investment during the year. Similarly, our tangible net asset value increased to £676m (FY16: £627m). The Group continued to maintain a robust financial position with a net cash balance of £31m at 31 August 2017 (FY16: £53m) and negative gearing of 4% (FY16: 8%). This reflects management's ongoing focus on disciplined cash spend in response to continuing economic uncertainty and was achieved notwithstanding the negative cash impact of our new in-house part-exchange tool which resulted in £32m part exchange assets being held on the balance sheet at the year end (FY16: £nil). We maintained a strong balance sheet and appropriate headroom against our £200m revolving credit facility ('RCF') throughout the year.

The Group incurred net finance expenses of £2m during the year (FY16: £2m), benefitting from a full year of lower interest costs under the Group's amended RCF and the annual revaluation of its shared equity debtors.

Exceptional costs

There were no exceptional costs incurred during FY17. Total exceptional costs recognised within the Consolidated Statement of Comprehensive Income during FY16 were £10m, of which £9m related to IPO advisor fees and associated costs and £1m related to management incentives, restructuring, redundancy and refinancing costs.

Taxation

The effective tax rate was close to the statutory rate during the current financial year. The total tax charge for the year was £18m (FY16: £19m) which represents an effective tax rate of 19% (FY16: 21%) based on a profit before tax of £92m (FY16: £93m). Reductions in the rate of corporation tax to 19% from 1 April 2017 and to 17% from 1 April 2020 were substantively enacted on 18 November 2015 and 6 September 2016 respectively. 

Earnings and dividend

Adjusted underlying basic earnings per share decreased by 12% to 14.2 pence (FY16: 16.1 pence) reflecting the lower level of profit after tax achieved this year. Basic earnings per share for FY17 were 13.8 pence (FY16: 13.9 pence). Details of the calculation of earnings per share can be found in note 12 to the financial statements.

The Directors are proposing a final dividend of 3.6 pence per share. This follows the interim dividend of 1.8 pence per share, giving a total dividend for the year of 5.4 pence per share. The proposed final dividend reflects our progressive ordinary dividend policy as stated at the IPO. The proposed dividend is covered 3 times by earnings. Subject to shareholder approval at the Annual General Meeting ('AGM'), the dividend will be paid on 1 February 2018 to shareholders on the register at 5 January 2018. 

The total cost of the final dividend is £19m, resulting in a total dividend cost relating to the year of £29m (FY16: £24m).

Risk management

The Group maintains a robust risk management framework, providing a clear link between 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 national reach 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. 

Target returns

Our continuing investment in land and build in order to deliver future growth together with the lower underlying operating profit delivered in FY17 led to a decrease in ROCE by 4 ppts to 16% (FY16: 20%) and a reduction in capital turn to 1.1x (FY16: 1.2x). These metrics will recover, however, once our growth plans begin to deliver results. The workflow of the business remains firmly on track as a result of our continuing investment for growth and allows us to target future increases in both margin and ROCE with the aim of achieving a ROCE of 25% over the medium-term.

Principal risks and uncertainties

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

Viability statement

In addition to making a going concern statement, the Directors are also required to make a longer-term viability statement to comply with provision C.2.2 of the UK Corporate Governance Code 2014.

In response to that, the Directors have assessed the prospects and financial viability of the Group, taking into account both its current position and circumstances, and the potential impact of its principal risks. The Directors consider that a three-year period was appropriate for this assessment as our capital cycle from land completion to final sell-out of a development, for FY17 build starts, is approximately three years. Our land pipeline also 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 (as outlined above) 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 performance of a single downside case sensitivity, which reflects a severe but plausible impact assuming that appropriate steps are taken to mitigate the impact of the downside.

The Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year assessment period.

Consolidated Statement of Comprehensive Income

For the year ended 31 August 2017

Notes 1 to 34 form part of the financial statements shown above. All trading derives from continuing operations.

Consolidated Statement of Financial Position

As at 31 August 2017

Notes 1 to 34 form part of the financial statements shown above.

These financial statements were approved by the Board on 13 November 2017 and signed on its behalf by:

Clive Fenton Rowan Baker

Director Director

Consolidated Statement of Changes in Equity

For the year ended 31 August 2017

Notes 1 to 34 form part of the financial statements shown above.

Consolidated Cash Flow Statement

For the year ended 31 August 2017

Notes 1 to 34 form part of the financial statements shown above.

Notes to the Consolidated Financial Statements

1. Significant accounting policies

The above results and the accompanying notes do not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006.

The Auditors have reported on the Group's statutory accounts for the year ended 31 August 2017 under s495 of the Companies Act 2006, which do not contain a statement under s498 (2) or s498 (3) of the Companies Act 2006 and are unqualified. The statutory accounts for the year ended 31 August 2016 have been delivered to the Registrar of Companies and the statutory accounts for the year ended 31 August 2017 will be filed with the Registrar in due course.

The audited consolidated financial statements from which these results are extracted have been prepared under the historical cost convention and in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union, IFRIC interpretations and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The principal accounting policies as set out in the McCarthy & Stone plc Annual Report and Accounts for the year ended 31 August 2017 have been applied consistently to all the periods presented.

The preparation of the financial statements in conformity with the Group's accounting policies requires the Directors to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reported period. Whilst these estimates and assumptions are based on the Directors' best knowledge of the amount, events or actions, actual results may differ from those estimates.

Going concern

The Group meets its day-to-day working capital requirements through cash in hand and its bank facilities. The Group's forecasts and projections, taking into account reasonably possible changes in trading performance, show that the Group should be able to operate within the level of its current facilities. After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. The Group therefore continues to adopt the going concern basis in preparing its financial statements. Further information on the Group's borrowings is given in note 23.

2. Adoption of future standards (new and amended)

There have not been any new standards and amendments adopted for the first time for the financial year ending 31 August 2017.

3. 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

No critical judgements have been made in the process of applying the Group's accounting policies 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 major sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities at the year end and within the next financial year.

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 and the expected timing of receipts.

Shared equity receivables are reviewed at each reporting date using a variety of estimates that anticipate future cash flows from the assets. Further information regarding the assumptions and sensitivity effects of a reasonable possible change can be seen within note 30.

Cost capitalisation of overheads

Inventory includes a proportion of design, procurement, construction, health & safety, commercial 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 70-93% for the various functions. Overhead costs capitalised at 31 August 2017 amount to £23.2m (2016: £25.7m).

Change of estimate

From 1 September 2016, the Group refined its estimate of unit cost when units are sold and the cost is released to the Consolidated Statement of Comprehensive Income. Cost of sales is now recognised on a unit-by-unit basis, by reference to the forecast future margin across the development. The impact of the change in estimate on gross profit and inventory for the year ended 31 August 2017 is a decrease of £4.1m (0.8% of cost of sales).

4. Revenue

All unit sales revenue arose from the sale of properties and is attributable to continuing operations. All revenue was generated within the UK. No individual customer is significant to the Group's revenue in any period.

Proceeds received on the disposal of part-exchange properties, which are not included in revenue were £11.6m (2016: £nil). These are recognised on a net basis within cost of sales on the basis that they are incidental to the main revenue-generating activities of the Group. The net profit on disposal of these properties was £0.1m (2016: £nil).

5. Segmental analysis

IFRS 8 'Operating Segments' establishes standards for reporting information about operating segments and related disclosures, products and services, geographic areas and major customers. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.

The Group conducts its activities through a single operating segment. Consequently, no detailed segment information has been presented.

None of the Group's customers represented more than 10% of the Group's revenue generated from the building of retirement apartments for any reporting period presented herein.

6. Profit before tax

Profit before tax has been arrived at after charging/(crediting):

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 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.

Exceptionals

The exceptional administrative costs in 2016 primarily relate to the transaction fees and other costs of listing (£8.5m). Other costs recognised within exceptionals relate to redundancy and restructuring costs (£0.9m), Management Incentive Plan payments (£0.4m) and refinancing and other costs (£0.2m). 

Auditor's remuneration

There were no other non-audit fees payable to Group auditor in the year.

Audit fees in relation to joint ventures audited by the Group's auditor were £3,000 (2016: £3,000).

7. Staff costs

Staff costs for the year include Directors' emoluments, which are detailed below:

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

Staff costs include an average of 823 persons employed during the year from YLMS (2016: 679), a 50% subsidiary held by the Group.

At 31 August 2017 the Group employed 2,264 people (2016: 2,094).

Directors' emoluments

Amounts recognised in respect of Directors' emoluments:

1 Includes salary supplements in lieu of pension

The emoluments of the highest paid director was £1.0m (2016: £0.9m), including pension contributions of nil (2016: nil). The number of Directors in the Company pension plan was two (2016: two).

8. Other operating income

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

9. Finance income

10. Finance expense

11. Tax

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

Reductions in the rate of corporation tax to 19% and 18% from 1 April 2017 and 1 April 2020 were substantively enacted on 18 November 2015. A further reduction in the corporation tax main rate from 1 April 2020 to 17% was fully enacted on 15 September 2016. The deferred tax assets and liabilities at 31 August 2017 have been calculated based on the appropriate rate at which the asset/liability will unwind.

12. Earnings per share

Basic earnings per share is calculated as the profit for the financial period attributable to shareholders 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 full year ended 31 August 2017 was 537.3m for the basic and 537.6m for the diluted calculations, giving a statutory earnings per share for the year ended 31 August 2017 of 13.8p for basic and 13.8p for diluted.

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 August 2017, the Company had two categories of potentially dilutive ordinary shares: 3.9m nil cost share options under the LTIP and 4.1m 167.4p share options under the Sharesave plan.

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.

13. Goodwill

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 (in liquidation). As the goodwill relates to the business as a whole, it has not been allocated to a specific CGU. For key assumptions in determining recoverable amounts in goodwill impairment testing, refer to note 16.

14. Intangible assets

Brand assets represent the McCarthy & Stone brand name purchased as part of the business combination in 2009. Brand assets have 11 years and 7 months of useful life remaining.

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

15. Property, plant and equipment

16. 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. The Group only has one CGU, being the McCarthy & Stone (Developments) Limited's business, which was acquired in 2009.

The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to earnings before interest, tax, depreciation and amortisation (EBITDA) used as a proxy of free cash flows beyond the budgeted years as well as the level of capital expenditure required to maintain the existing business into the future. These assumptions are reviewed and revised annually in light of current economic conditions and the future outlook for the business. Management estimates discount rates using pre-tax rates that reflect current market assessments of the time value of money and the risks specific to the business; rates used for 2017 are 7.0% (2016: 8.4%).

The forecast period employed in the impairment assessment was three years followed by an assessment of cash flows and growth into perpetuity. The growth rates used are based on management's assessment of the cash flow forecasts over the medium-term. Due to the headroom within the calculation no further growth has been assumed within the perpetuity calculation. These are based on conservative estimates of the Group's ability to participate in the growth expected in the industry. Changes in selling prices and direct costs are based on past practices and expectations of future changes in the market.

The value of goodwill recognised in the financial statements has been compared to the derived value in use with no impairment charges arising. The Group has conducted a sensitivity analysis on the key assumptions which are material to the impairment assessment including the discount rate, the cash flow projections and the terminal growth rate and concluded no material sensitivity exists in these calculations.

No impairment charges were recorded on items of property, plant and equipment throughout the period covered by these financial statements.

17. Investment in joint ventures

The Group has a 50% ownership interest in Kindle Housing Limited, which manages affordable housing. Kindle Housing Limited has 100% ownership interest of ordinary shares in each of Kindle Housing (Worthing) Limited, Kindle Housing (Christchurch) Limited and Kindle Housing (Exeter) Limited, which rent affordable housing to local key worker employees. As a result the Group also has a 50% ownership interest in these companies, all of which are registered in England and Wales.

The Group accounts for its interests in these companies using the equity method of accounting.

The share of the assets, liabilities, income and expenses of the jointly controlled entities is not material.

18. Inventories

Days in inventory amounted to 582 days in 2016 (2016: 574 days).

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

19. Trade and other receivables

Trade receivables and secured mortgages disclosed above are classified as loans and receivables and are measured at amortised cost.

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

20. Deferred tax

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

Deferred tax assets are represented by positive values and deferred tax liabilities are represented by negative values in the table above.

Deferred tax assets of £0.1m in relation to capital losses carried forward were not recognised as there is uncertainty as to whether these losses could be utilised by the Group prior to expiry (2016: £0.1m). These losses have no expiry date.

21. Trade and other payables

Trade payables and accrued expenses principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period taken for trade purchases was 20 days during 2017 (2016: 21 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, social security and employment taxes due to local tax authorities. The Directors consider that the carrying amount of trade payables approximates their fair value.

No trade payables are purchased on extended payment terms.

22. Land payables

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

23. Borrowings

The Group has in place a £200m revolving credit facility (RCF) initially with a five-year term, maturing December 2019. In May 2016, an amendment was made to the RCF agreement to improve the commercial terms and extend the facility's date from 19 December 2019 to 23 May 2021.

The nominal interest rate of the £200m RCF is 1, 3 or 6 month LIBOR + 1.6% (2016: 1, 3 or 6 month LIBOR + 1.6%) depending on the length of the drawdown. As at 31 August 2017, £10m (2016: £55m) was drawn. 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 and McCarthy & Stone Total Care Management Limited.

24. Net cash

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 and land-related promissory notes).

25. 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.

Issuance of new shares in relation to Sharesave (SAYE) plan

During the year 15,365 ordinary shares were issued to satisfy early exercise of options under our December 2015 Sharesave (SAYE) plan by seven "good leaver" employees. The shares were all issued at 167.4p each, being the exercise price of the SAYE option granted on 10 December 2015.

Dividends on equity shares

The interim dividend of 1.8p (2016: 1.0p) was approved by the Board on 4 April 2017 and paid on 9 June 2017 to all ordinary shareholders on the register of members at the close of business on Friday 28 April 2017. The ex-dividend date was 27 April 2017. The final dividend proposed by the Board is 3.6p (2016: 3.5p) per share resulting in a total ordinary dividend for the year of 5.4p (2016: 4.5p). It will be paid on 1 February 2018 to those shareholders who are on the register at 5 January 2018 subject to approval at the Company's Annual General Meeting. The ex-dividend date is 4 January 2018. These financial statements do not reflect the final dividend payment.

26. Share premium reserve

The share premium reserve represents the consideration that has been received in excess of the nominal value of shares in issue.

Movements in share premium are presented within the Consolidated Statement of Changes in Equity.

27. Operating lease arrangements

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

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.

28. Notes to the cash flow statement

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 carrying amount of cash and cash equivalents approximates fair value.

The increase in inventories comprises movements in inventories (including part-exchange properties), offset by the repayment of promissory notes.

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

29. Retirement benefit schemes

The Group operates a stakeholder 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 £2.6m for the year ended 31 August 2017 (2016: £2.1m). Unpaid contributions amounted to £0.3m as at 31 August 2017 (2016: £0.2m).

30. Financial risk management

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

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 revolving credit facility 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 Chief Operating Officer 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 regional 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 August 2017 if UK house prices were 5% 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 £1.1m (2016: £1.1m) 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. As stated in the Group's accounting policy for revenue recognition, a sale is only recognised upon legal completion and this is accompanied by full cash receipt in virtually all cases.

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.

Trade receivables consist of a large number of customers, spread across different regions. Ongoing credit evaluation is performed on the financial condition of trade receivables.

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. In addition, for contracted rental agreements deposits or advances may be held to mitigate risk. The Group also holds legal recourse and can exercise its right to recover rental equipment from non-performing customers.

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 forecast.

The maturity of the financial liabilities of the Group at 31 August 2016 and 2017 are as follows:

Other financial liabilities carrying interest are promissory notes, 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 year 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 year ended 31 August 2017, 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 £0.5m (2016: £0.5m). 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.

Interest rate swaps

At each period end, the Directors appoint a valuer to perform an external valuation of the fair value of each interest rate swap or cap outstanding.

Valuation of Levels 1, 2 and 3 financial assets and liabilities

· The fair values of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices (includes listed redeemable notes, bills of exchange, debentures and perpetual notes)

· The fair values of other financial assets and financial liabilities (excluding derivative instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments

· The fair values of derivative instruments are calculated using quoted prices. Where such prices are not available, a discounted cash flow analysis is performed using the applicable yield curve for the duration of the instruments for non-optional derivatives, and option pricing models for optional derivatives. Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of the contracts. Interest rate swaps are measured at the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates