1 Press release, Thursday 7 November 2019. McCarthy & Stone plc Results in line with expectations, strategy delivery on track with new rental proposition gaining momentum McCarthy & Stone , (the Group') the UK's leading developer and manager of retirement communities, is today issuing an update on its progress with key strategic initiatives together with a trading update for the 14 month financial year ended 31 October 2019 ( 2019'), ahead of reporting its annual results on 28 January 2020. All comparatives are to the 12 month financial year ended 31 August 2018. ( 2018') unless otherwise stated. Trading update Full year revenue is expected to be c. 720m (2018: 672m) supported by a increase in average selling price1 to c. 308k (2018: 300k) and total legal completions of 2,3012 units (2018: 2,1342).
2 Underlying operating profit3 for the 14 month period is expected to be within the current analyst forecast range of c. 64m to c. 71m (2018 underlying operating profit: ). Underlying trading conditions remained challenging during the period due to the impact of ongoing political and economic uncertainty on the secondary housing market. Additional uncertainty over potential stamp duty changes dented transaction levels, particularly in the South East, resulting in higher discount and incentive levels compared to the prior year. These tougher market conditions are expected to continue throughout the new financial year. Following a successful trial, the Group's new rental offering is gaining momentum, achieving recent net reservation rates of per week and with its new multi-tenure options now available across over 70 developments nationally.
3 The Group delivered 101 rental transactions during the gradual roll out period together with a further 21 rent to buy' and 47 shared ownership transactions. The associated uplift to market value of the rental assets has been recognised in the Group's balance sheet and underlying operating profit. The Board approved an increase in the Group's in-house part-exchange capacity to 15% of TNAV4. (previously 10%). This continues to be a key tool in converting reservations to sales more quickly and cost effectively. Strict part-exchange controls have been maintained and properties have been resold in line with the Group's pricing and timeline targets at an average period of weeks (2018: weeks). 1. Average selling price is calculated as average list price less cash discounts, stamp duty land tax, part-exchange top-ups and fair value adjustments 2.
4 Including a bulk sale of 113 units (2018: 68 units). The FY19 transaction is a sale and lease back of sales offices and show flats to Waverstone LLP, where McCarthy & Stone is a non-controlling member. 3. Underlying operating profit is calculated by adding amortisation of brand and exceptional items to operating profit 4. Tangible net asset value (TNAV) is calculated as net assets excluding goodwill and intangible assets Year end net cash 5 is expected to be c. 24m (2018: net cash of 4m) notwithstanding the increased level of in-house part-exchange transactions and the seed portfolio of rental properties currently held on the balance sheet prior to onward sale to a strategic rental partner. The Group maintained its industry-leading levels of customer satisfaction and remains the only developer of any size or type to receive the full Five Star rating from the HBF for 14 consecutive years.
5 Strategy update Stage 1 FY19-FY21: Optimisation of operations The Group's main priority this year was to start delivering on its three-year programme of business optimisation with focus on delivering 15% ROCE 6 , 15% operating profit margin 7 by FY21 and cumulative cash savings of > 90m across the life of the plan. This strategy remains on track and is expected to deliver c. 40m cost saving which will be weighted towards delivery in FY21 due to its focus on build cost savings. The Group's strategy is being delivered through four key workstreams . workflow realignment, rightsizing the business, establishing an efficient sales and marketing model and delivering build cost reductions. In line with the Group's strategy to smooth its workflow and legal completions delivery, the Group delivered 53 high-quality first occupations (2018: 68), 38 planning consents (2018: 37), 34 land exchanges (2018: 54) and 40 build starts (2018: 53) during the year.
6 The Group is now focusing on increasing land optionality to ensure that the business is well positioned to respond when market conditions improve. Year-end finished stock levels reduced to ,650 (2018: 1,785) and are expected to reduce further by the end of FY20 given the lower level of planned FY20 first occupations ( ) (2019: 53) and the increased focus on selling down recently released finished inventory ( of stock is under 2 years old). This is expected to underpin a strong cash position by the end of the year in line with our strategic plan. The Board will continue to review the Group's capital allocation policy on a regular basis. The Group has substantially completed its work to rightsize the business and optimise its operational cost base to deliver steady state volumes, resulting in an annualised cash saving of >c.
7 10m. Additional steps to optimise its operating business in line with the Group's strategy are being announced today which will drive increased focus on the customer by bringing sales and services closer together and reframing the development part of the business to deliver increased value in our development pipeline. This realignment will consolidate our seven regional businesses into four larger development divisions and will help strengthen the Group's oversight as well as reducing costs further. Additional headcount savings of c. 2m have been achieved as part of our strategy to optimise the Group's sales operating model and the Group's focus in FY20 now turns to improving off-plan sales and reducing incentive costs via strategic use of part-exchange and shared ownership models.
8 These key initiatives will be supported by the Group's new Salesforce CRM system which has now been rolled out across all regions, further marketing investment and the recent launch of an improved new website. 5. Calculated as cash and cash equivalents less total borrowings 6. Return on capital employed (ROCE) is calculated by dividing underlying operating profit by the average tangible gross asset value at the beginning and end of the period. Tangible gross asset value is calculated as TNAV less net debt 7. Calculated as underlying operating profit divided by revenue for the year The build cost reduction initiative is also progressing well with key savings already embedded in construction budgets for FY20 sites and specific plans are now in place to deliver an average improvement of c.
9 10k p/u across our FY21 schemes. This activity is expected to deliver more than half of the proposed c. 40m cost saving in FY21. Stage 2 FY19-FY23: Leveraging strategic opportunities During the period, the Group has also made good progress with its three long-term strategic initiatives to provide customers with increased Choice, Flexibility and Affordability and leverage the long-term opportunities in this sector. Choice The Group has made excellent progress with its multi-tenure offering, giving our customers a choice of ownership, with a professional rental team now in place. This has been rolled out to more than 70 developments nationally following successful trials in the spring that confirmed strong demand for rental across both the Retirement Living and Retirement Living PLUS products.
10 Good progress has been made in building a seed investment portfolio' of >100 rentals with attractive gross rental yields8 of The Group has mandated Rothschilds & Co to secure high-quality third-party capital partners to co-invest in the Group's retirement rental strategy and to create a portfolio of scale up to an asset value of c. 300m with strong yields and low occupancy churn focused entirely on the hugely underserved retirement living sector. The Group has now received preliminary expressions of interest from potential investors and will update the market further as part of its full year results announcement on 28 January 2020. Following this successful roll out and ramp up in H2 FY19, the Group now expects an increased proportion of its 2,100 targeted volumes to come from its new rental offering during FY20.