Half-year Report

McCarthy & Stone plc (LSE: MCS) - half year results

Strong growth delivers increased profits

McCarthy & Stone (the "Group"), the UK's leading retirement housebuilder, today announces its half year results for the six months ended 29 February 2016, the first since the Group's successful IPO in November 2015. The Group delivered a further period of strong growth and significant investment progress, in line with expectations, and remains on track to deliver the full year in line with previous guidance.

Performance highlights

· Underlying profit before tax1 increased by 23% to £39.1m (2015: £31.8m)

· Legal completions increased by 19% to 923 units (2015: 776 units) at a net average selling price of £253k (12% increase on 2015: £226k), delivering revenue up 33% to £250.2m (2015: £188.5m)

· Underlying operating profit1 up 10% to £40.2m (2015: £36.5m), despite first half investment in new regional offices and additional operational infrastructure

· Operating profit decreased by 11% to £30.1m (2015: £33.8m), after £9.0m of exceptional costs primarily relating to the IPO (2015: £1.6m)

· Strong balance sheet and robust financial position, with net debt4 at the half year of £23.9m (2015: £82.0m), equivalent to gearing2 of 4% (2015: 16%)

· Further improvements in capital turn5 to 1.0x (2015: 0.9x) as a result of progress with three strategic initiatives

· HBF 5 Star customer satisfaction award for an industry-record eleventh consecutive year

· Successful IPO on the London Stock Exchange; entered the FTSE 250 on 21 March 2016

Outlook 

Commenting on today's results, John White, Group Chairman, said:

"The Group has made strong progress in the period with its strategy of investment to create an efficient and scalable business capable of building and selling more than 3,000 units per annum.

"As a result of our strong performance since listing, I am pleased to be able to announce an interim dividend of 1.0p per share which will be paid on 31 May 2016 to holders of ordinary shares on the register at the close of business on 29 April 2016. The Board is guiding towards a final dividend for the year of not less than 3.5p per share, giving a total dividend for the year of not less than 4.5p per share."

Clive Fenton, Chief Executive Officer, added:

"Our strategy is helping to deliver strong top-line growth as we continue to address increasing market demand for retirement housing driven by the UK's rapidly ageing population. The UK's population is maturing at a fast rate, but continues to suffer from a chronic undersupply of suitable retirement properties of the type we provide. McCarthy & Stone is uniquely placed to capitalise on this opportunity.

"The Group's operating performance during the period has seen significant growth in reservations, legal completions, revenue and profitability and we are carrying a strong order book into the second half, with reservations at attractive margins well ahead of last year.

"Our land bank now includes sufficient land with full planning consent to deliver all targeted sales to 2017, and sufficient land under control to deliver all targeted sales to 2019. In the first half, we have put in place the regional infrastructure and management capability necessary to help deliver these sales, which gives us confidence in the progress we are making in achieving our strategic objective of building and selling more than 3,000 units per annum.

"We are also starting to see tangible benefits from our three strategic initiatives focusing on improving sales rates, reducing time taken between securing land and starting build and implementing build programme efficiencies, reflected in the acceleration of our capital cycle, and we continue to target ROCE of at least 25% over the medium term." 

- Ends -

Conference call for analysts and investors

There will be an analyst and investor meeting at 9.00am BST today at The Grange St. Paul's Hotel, 10 Godliman Street, London, EC4V 5AJ. The presentation will be available via a webcast accessible on the McCarthy & Stone corporate website from this time.

http://www.investis-live.com/mccarthy-and-stone-plc/56fa500f1bab9c0a0036e8fe/gs4

A playback facility will also be available shortly after the presentation has finished.

For more information, please contact:

McCarthy & Stone, 01202 292480 / investor-relations@mccarthyandstone.co.uk

Clive Fenton, Chief Executive Officer

Nick Maddock, Chief Financial Officer

Paul Teverson, Director of Communications

Powerscourt, 020 7250 1446 / mccarthy-stone@powerscourt-group.com

Justin Griffiths

Nick Dibden

1 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 2 to the condensed consolidated financial statements for further information

2 Gearing is calculated by dividing net debt by net assets

3 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 debt

4 See note 5 to the condensed consolidated financial statements for net debt reconciliation

5 Capital turn is calculated by dividing revenue by the average opening and closing tangible gross asset value in the year

6 Forward order book includes legal completions between 1 March 2016 and 15 April 2016 and reservations as at 15 April 2016

Interim Management Report

Chief Executive Officer's statement

Market conditions

The improving UK housing market and increasing transaction volumes continue to provide a helpful backdrop to McCarthy & Stone's business. Despite the recent growth in housebuilding activity, there remains a significant and growing shortage of housing supply in the UK and this imbalance is particularly acute in the market for retirement housing. 3.5m people over the age of 60 have expressed particular interest in buying a retirement property1, and yet only c.141,000 specialist retirement properties for homeowners have been built2.

McCarthy & Stone remains the only national provider of specialist retirement housing and is uniquely placed to capitalise on this demographic opportunity. We firmly believe in the benefits of downsizing as a potential solution to addressing broader housing undersupply and we continue to engage with the Government on possible measures to facilitate greater housing liquidity for downsizers. 

1 Demos (September 2013)

2 Independent data provided by Elderly Accommodation Counsel (April 2016)

Trading performance

With this attractive backdrop, the Group opened 36 new sales outlets in the first half of FY16 (2015: 29), contributing towards a 21% increase in the Group's net reservations above 2015. This growth has enabled the Group to deliver a strong increase in legal completions to 923 in the period (2015: 776) and has provided a robust forward order book of c.£306m at 15 April 2016, which is 26% ahead of last year (c.£243m at 17 April 2015).

In parallel with this growth in volumes, the Group's net average selling price increased by 12% to £253k in the period (2015: £226k), reflecting further improvements in the quality and location of the developments McCarthy & Stone is now bringing to market, as well as sustained discipline around discounts and incentives. It is particularly pleasing that the business has been able to reduce the typical level of discount and incentive further in the first half to 5% of list price (2015: 7%).

Moreover, a return to house price inflation across all regions means that the Group has been able to mitigate the profit impact of build cost pressures that emerged in the housebuilding supply chain during 2014 and 2015, estimated at c.3-5% per annum.

The growth in completion volumes and the improvement in pricing has enabled the Group to deliver strong top-line growth in the first half, with a revenue increase of 33% to £250.2m (2015: £188.5m). Underlying operating profit has increased by 10% to £40.2m (2015: £36.5m) and, with the first half investment in new regional offices and additional operational infrastructure now complete, we expect a strong second half performance as these regions increasingly contribute revenues and profit. The Group reiterates its guidance for the full year of a 20% growth in volumes.

Investment and growth strategy

The first half saw the addition of a further 40 high-quality sites with attractive embedded margins into the land bank (2015: 44), equivalent to c.1,700 additional plots (2015: 1,654 plots). The market for land remains remarkably benign and competition for our typical brownfield sites remains highly fragmented. In this environment, the Group is expecting 2016 to deliver a similar number of units to the record for new land acquisitions set in 2015, and has recently increased hurdle rates again to maintain operational focus and discipline and to ensure that returns continue to flow to investors.

The land bank now stands at c.10,800 plots (2015: c.9,460 plots), equivalent to 5.6 years supply3, of which 2.9 years3 has full planning consent. As a result, the Group now has sufficient land under control to deliver all targeted sales to 2019.

The Group has also made progress with its target of £2.5bn investment in land and build over four financial years. In total, c.£233m was invested in land and build during the period, achieving 19 further full planning consents and starting build on 15 additional sites. The Group now has sufficient full planning consents to deliver all targeted sales to 2017.

To support this increased investment and the roll-out of its land bank, the Group has established four new regional offices over the past 18 months, bringing the total to nine. The first of these, being North London established on 1 September 2014, took occupations at its first new developments at Southend in November 2015 and at Maldon in February 2016. The Southend development is now reserved out and only one unit remains at Maldon. The region is now selling from a further five developments, with another 34 at various stages of the development pipeline.

In addition, the newer regional offices established on 1 September 2015, in the South West, the East Midlands and the North West, are now fully operational at their own premises, with high-calibre, senior management teams in place, combining McCarthy & Stone experience with volume housebuilder operational expertise. The establishment of these new regional offices has been accelerated by the roll-out of standard processes and systems and the transfer of workflow from existing regional offices, which continue to provide some ongoing support. In the first half, these three new regional offices acquired eleven new land sites, with terms agreed at 29 February 2016 on a further eight and, with these new regional offices, the Group now has the platform in place to deliver operational growth to more than 3,000 units per annum.

Progress with the Group's new third product, Ortus Homes, continues to go well. This new range presents an exciting opportunity for the future, helping us to capture a wider share of the active retiree market for whom the traditional concept of retirement housing has not been appropriate. Ortus Homes is exclusively for the over 55s and those in the early stages of retirement who are seeking to downsize for their leisure years. The first development in this new range, at Scarlet Oak in Solihull, reserved out within a year of opening in February 2015, and also won the Best Retirement Scheme at the annual Housebuilder Awards in November 2015. Our second development at Swanage took first completions in August 2015 and has only five units remaining. We are currently selling from a further seven Ortus Homes sites across the UK.

We have a total of 28 Ortus Homes developments in the pipeline, representing around 6% of our land bank, and expect this to grow to around 10% of our land bank and completions over the medium term, at comparable margins to those generated from our Retirement Living and Assisted Living developments.

3 Based on 1,923 legal completions achieved in 2015

Shortening the working capital cycle

Significant management effort continues to be placed on the acceleration of the Group's typical working capital cycle, through three strategic initiatives, focusing on improving sales rates, reducing time taken between securing land and starting build and implementing build programme efficiencies.

The Group is already seeing material benefits from its sales initiative. The introduction of new toolkits is supporting our sales force; clearer definition of our best prospects is assisting the focus of local marketing; and a partnership with a third-party contact centre and the introduction of a new online visitor booking system are providing a more consistent customer experience. In the first half, the Group again delivered its strategic target for off-plan sales, with 51% sold off-plan from new developments occupied in the first half of FY16 (2015: 44%), and on some developments much higher. Two developments, at Sidcup and Bourne End, sold 100% of units off-plan in the first half of FY16.

The development initiative, launched in FY15, has involved the implementation of a number of changes designed to accelerate the time from land exchange to build start, with particular focus on the planning process. This is enabling the business to bring forward profitable developments, accelerate its growth plans and improve ROCE. The initiative has now been fully rolled out across all regions and early results are highly promising: the 15 developments that commenced build in the first half of FY16 have taken, on average, 19.7 months from land exchange to build start, compared with an average of 23.0 months across standard build starts in FY15 and 25.2 months across standard build starts in FY14, the year before the first regional implementation. The full financial benefit of this initiative is expected to show in FY18.

The build initiative, launched in FY15, is resulting in changes to the build process, partly to accelerate build timescales and partly to reduce build costs and enhance margins. This includes the roll-out of a new framework of critical controls in support of robust build programmes and budgets. The initiative is also targeting margin improvements through improved procurement, a more structured approach to supplier partnership and value engineering of individual developments. This initiative has already identified c.£12m of cost reductions which will benefit the Group over the next four years, with the majority again expected to show in the financial performance in FY18.

Progress to date on these initiatives has enabled the business to deliver an improved capital turn of 1.0x in the first half of FY16 (2015: 0.9x), with the prospect of further significant upside to capital turn and ROCE as these improvements become fully embedded.

Financial position

The Group saw its tangible gross asset value increase to £602.5m (2015: £509.1m) and its tangible net asset value4 increase to £578.6m (2015: £427.1m). The November IPO raised £78.5m of net proceeds for the Group and the Group continues to maintain a robust financial position with net debt reduced at 29 February 2016 to £23.9m (2015: £82.0m), resulting in gearing of 4% (2015: 16%). The Group expects a similarly low level of gearing at the financial year end, and continues to target peak intra-year gearing of 15-20%, with appropriate headroom against the existing £200m revolving credit facility.

The Group saw exceptional costs of £9.0m during the period (2015: £1.6m), relating primarily to the fees and other costs of listing. There are no further material exceptional costs associated with the listing expected in the second half.

Overall, the Group generated a ROCE of 18% (2015: 18%). Progress is expected in the second half, and as such, the Group reiterates its full year guidance of a c.100 bps improvement in ROCE over the 2015 level of 20%.

4 Tangible net asset value is calculated as net assets excluding goodwill and intangible assets

Customers

I am particularly pleased that we have again achieved the full 5 Star rating in the Home Builders Federation ("HBF") survey for customer satisfaction. This marks the eleventh 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 2006 and we are one of only three major housebuilders to have retained the top rating this year. The sustained recognition by our customers of the quality of product we deliver is a strong endorsement of our continued desire to design, build, sell and manage the very best retirement developments.

Employees

Our people are critical to the continued growth and success of our business. We are building a culture of excellence with recognition of achievements and opportunities for development and we celebrate those employees who go the extra mile for a customer or colleague through our quarterly and annual PRIDE awards. Our success is illustrated by our most recent employee survey, which identified that 89% of our employees are proud to work for McCarthy & Stone.

The listing of the Group has provided an opportunity to enable our employees to share in our success through the introduction of a long-term incentive plan for Executive Directors and 60 senior managers and through the establishment of a save as you earn scheme. We were delighted to see a 64% take-up of payroll employees on the initial launch of this scheme, providing a powerful reflection of the dedication of our staff to the future success of McCarthy & Stone.

Board changes

In November 2015, John Tonkiss was appointed to the Board. John is responsible for the Group's West Midlands, East Midlands, North West, North East and Scotland operating regions as well as leading the initiatives to enhance customer experience, improve operating performance and accelerate business growth. John's previous experience includes a number of years as Chief Operating Officer at Unite plc, the leading student housing provider.

Prior to the Group's IPO in November 2015, Nils Albert resigned from his role as a Nominee Director on the Board, representing the Group's then largest shareholder. 

Outlook

The Group has delivered strong first half growth and has substantially increased both the value of the forward order book and the land bank. With a significant number of recent sales releases, the opportunity to leverage the investment in new regional offices and infrastructure and the continuing good market conditions, the Group remains confident in the outlook for the full year. The forward order book demonstrates a strong start to the second half of the year, up 26% to c.£306m at 15 April 2016 (c.£243m at 17 April 2015).

The Group reiterates its full year expectations of a c.20% increase in sales volumes and a c.100bps improvement in ROCE from the 2015 level of 20%. The Group guided at IPO towards a dividend for FY16 of c.30% of profit after tax (excluding certain exceptional items), in the approximate proportions of one-third interim and two-thirds final dividend, with the expectation that the interim dividend would be pro rata from Admission to 29 February 2016 and will pay a first pro rata interim dividend of 1.0p per share on 31 May 2016 to shareholders on the register at close of business on 29 April 2016. The Board is additionally guiding towards a final dividend for the year of not less than 3.5p per share, giving a total dividend for the year of not less than 4.5p per share.

The new regional infrastructure and progression with the strategic initiatives to shorten the working capital cycle provide the Group with continued confidence that the strategic objective of building and selling more than 3,000 units per annum by 2019 at a ROCE of at least 25% remains on track.

McCarthy & Stone will release a further update on trading on 29 June 2016, including updated guidance on the prospective financial performance for the financial year to 31 August 2016.

Clive Fenton

Chief Executive Officer

18 April 2016

Principal risks and uncertainties

The principal risks and uncertainties set out at the time of the prospectus (issued in November 2015) remain valid at the date of this report and, based on the current outlook, will continue to remain valid for the remainder of the financial year. In summary, these include economic conditions, reputation and customer satisfaction, illiquidity of land and apartments, a decline in value of owned land and increases to build costs.

In addition to these risks and uncertainties, following the Group's listing on the Main Market of the London Stock Exchange in November 2015, the Group is now subject to increased corporate regulation such as the Listing Rules and failure to comply with these rules could lead to regulatory censure and potential penalties. To address this risk, the Group employs an experienced Company Secretary (and external consultants when required) to ensure continued compliance with the Listing Rules.

The Group is required to value acquired intangible assets and share-based payments and apply judgement to the valuation of shared equity receivables and land held for development, housing work in progress and deferred tax. A more detailed description of these estimation uncertainties is included in the prospectus which can be obtained from the Group's registered office or at www.mccarthyandstonegroup.co.uk.

McCarthy & Stone plc

Condensed consolidated statement of comprehensive income

Notes 1 to 16 form part of the condensed consolidated financial statements shown above. All trading derives from continuing operations.

McCarthy & Stone plc

Condensed consolidated statement of financial position

Notes 1 to 16 form part of the condensed consolidated financial statements shown above.

McCarthy & Stone plc

Condensed consolidated statement of changes in equity

Notes 1 to 16 form part of the condensed consolidated financial statements shown above.

McCarthy & Stone plc

Condensed consolidated cash flow statement

Notes 1 to 16 form part of the condensed consolidated financial statements shown above.

1. Accounting policies

Basis of preparation

McCarthy & Stone plc is a company incorporated in England and Wales.

These condensed consolidated interim financial statements are unaudited and were authorised for issue by the Board on 18 April 2016.

These condensed consolidated interim financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU and the Disclosure and Transparency Rules of the Financial Conduct Authority. This report should be read in conjunction with the Prospectus dated 6 November 2015 which includes historic financial information for the year ended 31 August 2015.

The information for the year ended 31 August 2015 does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The interim financial statements should be read in conjunction with the Annual Report and Financial Statements, for the year ended 31 August 2015, which were prepared in accordance with European Union endorsed International Financial Reporting Standards ("IFRS") and those parts of the Companies Act 2006 applicable to companies reporting under IFRS. The Annual Report and Financial Statements for the year ended 31 August 2015 were approved by the Board of Directors on 2 October 2015 and delivered to the Registrar of Companies. The auditor's report on those Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.

There have been no new or revised standards and interpretations relevant to the Group within the first half of the financial year ending 31 August 2016.

Going concern

The Directors consider that the Group is well placed to manage business and financial risks in the current economic environment and have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, a period not less than 12 months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing these condensed consolidated interim financial statements.

2. Profit for the year

Reconciliation to underlying operating profit and profit before tax

The following tables present a reconciliation between the statutory profit measures disclosed on the condensed 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. Amortisation of brand has been adjusted in order to reconcile to underlying operating profit and underlying profit before tax given that the Directors do not believe this cost reflects the underlying trading of the business. In the judgement of the Directors this presentation shows the underlying performance of the Group.

Half year ended 29 February 2016

The exceptional costs in the half year ended 29 February 2016 primarily relate to the fees and other costs of listing

Half year ended 28 February 2015

The exceptional costs in the half year ended 28 February 2015 relate to redundancy, office relocation and restructuring costs following an operational review of the business, and advisory costs in relation to the refinancing of the Group's debt.

Year ended 31 August 2015

The exceptional costs in the year ended 31 August 2015 relate to fees and other costs of listing, redundancy, office relocation and restructuring costs following an operational review of the business, and advisory costs in relation to the refinancing of the Group's debt.

3. Income tax expense

The tax charge for each period can be reconciled to the profit per the statement of comprehensive income as follows:

Reductions in the rate of corporation tax to 21% from 1 April 2014 and to 20% from 1 April 2015 were substantively enacted on 17 July 2013. The UK deferred tax assets and liabilities at 29 February 2016 have been calculated based on the rate of 20%.

4. Inventories

Days in inventory amounted to 713 days in the half year ended 29 February 2016 (H1 2015: 842 days and FY 2015: 685 days).

5. Borrowings

During December 2014, the £160.0m term debt facility was replaced by a new £200.0m revolving credit facility (RCF), with a 5 year term, maturing December 2019. The nominal interest rate of this facility is 1, 3 or 6 month LIBOR + 2.5% depending on the length of the drawdown. As at 29 February 2016, £99.0m 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.

Land-related promissory notes with terms of 15-18 months were used for some of the land acquisitions in FY15. The total finance cost of the land-related promissory notes is 4%. The land-related promissory notes in issue are structured as ancillary facilities of the RCF and are therefore linked to the security arrangements discussed above. All land-related promissory notes have maturity dates within 12 months of the date of this report and have therefore not been disclosed as at 29 February 2016 as long-term borrowings.

Net debt

Net debt 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). As at 31 August 2015, net debt was reported as cash and cash equivalents less long-term borrowings (excluding land-related promissory notes and unamortised debt issue costs).

6. Notes to the condensed consolidated cash flow statement

Cash and cash equivalents

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.

7. Segmental analysis

The Board regularly reviews the Group's performance and balance sheet position for its entire operations, which are based in its country of domicile, the UK, and receives financial information for the UK as a whole. As a consequence the Group has one reportable segment which is UK housebuilding.

As there continues to be only one reportable segment whose revenue, profits, expenses, assets, liabilities and cash flows are measured and reported on a basis consistent with the Group financial statements, no additional numerical disclosures are necessary.

8. Seasonality

In common with the rest of the UK housebuilding industry, activity occurs throughout the year, but is subject to the main house selling season in Spring. As this season falls in the second half of the Group's financial year, the Group's results are weighted to the second half of the financial year.

9. Earnings per ordinary share

Basic earnings per share are calculated as the profit for the financial period attributable to shareholders of the Group divided by the weighted average number of shares in issue during the period.

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 29 February 2016, the Company had two categories of potentially dilutive ordinary shares: 1.9m nil cost share options under the 2015 LTIP and 4.1m 167.4p share options under the 2015 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.

The half year ended 28 February 2015 and full year ended 31 August 2015 earnings per share calculations shown above have been calculated using a re-based weighted average number of ordinary shares of 476,387,438 (for both the basic and diluted calculations) to allow meaningful comparison with the half year ended 29 February 2016 earnings per share data. This was pursuant to the consolidation of the Group's share capital at a ratio of 4:1 which occurred on the 11 November 2015. The actual weighted average number of ordinary shares during both the half year ended 28 February 2015 and the full year ended 31 August 2015 was 1,905,549,751 (for both the basic and diluted calculations) giving a statutory earnings per share for the half year ended 28 February 2015 of 1.2p (both basic and diluted) and for the full year ended 31 August 2015 of 3.4p (both basic and diluted).

10. Dividends on equity shares

The interim dividend was approved by the Board on 18 April 2016 and, in accordance with IAS 10 'Events after the Reporting Period', has not been included as a liability in these condensed consolidated interim financial statements.

The interim dividend will be paid on 31 May 2016 to all ordinary shareholders on the register of members at the close of business on Friday 29 April 2016. The ex-dividend date is 28 April 2016.

11. Valuation of level 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.

Fair value measurements recognised in the statement of financial position

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value. The grouping into levels 1 to 3 is based on the degree to which their fair value is observable:

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

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

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

The financial instruments held by the Group that are measured at fair value all relate to financial assets measured at fair value through profit and loss (FVTPL) using methods associated with level 3. The sensitivities are not material on assets held at fair value.

There were no transfers between levels 1, 2 or 3 in the period.

Financial assets comprise shared equity loans secured by way of a second charge on the property, investment properties and an interest rate cap.

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

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

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

At initial recognition, the fair values of the assets are calculated using a discount rate appropriate to the class of assets that reflects market conditions at the date of entering into the transaction. The Directors consider at the end of each reporting period whether the initial market discount rate still reflects up-to-date market conditions. If a revision is required, the fair values of the assets are re-measured at the present value of the revised future cash flows using this revised discount rate. The difference between these values and the carrying values of the assets is recorded against the carrying value of the assets and recognised directly in the statement of comprehensive income.

The following tables present the changes in level 3 instruments for the following periods:

12. Related party transactions

Balances and transactions between the parent Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and other related parties are disclosed below.

Transactions involving Directors and key management personnel

At 29 February 2015 there was a total of £nil (H1 2015: £0.1m, FY 2015 £0.1m) due from Directors and key management personnel included within trade and other receivables in connection with the equity settled share-based payment scheme which was fully settled during H1 2016.

No advances, credits or guarantees have been entered into with any of the Directors of the Company during the period.

13. Issuance of equity securities

Capital reduction of share capital and share premium

In order to create additional distributable reserves for the Company, the Company resolved, by a special resolution passed as a written resolution on 26 October 2015, that the nominal value of the Company's shares be reduced from 20p to 2p, reducing the amount standing to the credit of share capital account of the Company by £342,998,955.18 from £381,109,950.20 to £38,110,995.02 and that the Company's share premium of £56,400,000 be cancelled.

Issuance of new shares in relation to the Management Incentive Plan

On 26 October 2015, the Company resolved, by a special resolution passed as a written resolution, to issue 43,706,526 ordinary shares at a nominal value of 2p to the 16 participants in the Management Incentive Plan in exchange for the transfer by these participants of the shares held by them in M&S MipCo S.à r.l.

Consolidation of share capital

On 26 October 2015, the Company resolved by special resolution passed as written resolution, to consolidate the issued and fully paid ordinary share capital of the Company at a ratio of 4:1.

Issuance of new shares in relation to primary proceeds from the IPO

On 26 October 2015, the Company resolved, by a special resolution passed as a written resolution, to issue 50,000,000 new ordinary shares of the Company at a nominal value of 8p pursuant to the raising of primary proceeds from the IPO.

14. Share plans

During the period, the Group launched three employee incentive schemes: An all-employee Sharesave plan and two discretionary plans - the Long Term Incentive Plan and the Annual and Deferred Bonus Plan (ABP).

On 15 December 2015 options were granted under the Group's Sharesave plan to those employees who had elected to participate.

Based on the Group's latest FY16 forecast, no shares will be awarded in relation to FY16 to the participants of the ABP.

On 25 November 2015 the Group granted nil-cost options under the Group's Long Term Incentive Plan (LTIP) to Executive Directors and 60 senior managers. The LTIP is subject to three performance conditions and vests over three years.

Vesting Schedule for 2015 LTIP Awards: