The Marcus Annual Report 2014

Plain-text annual report

M c C a r t h y & S t o n e L i m i t e d A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 4 w w w . m c c a r t h y a n d s t o n e . c o . u k Britain’s leading retirement housebuilderAnnual Report and Accounts 2014 McCarthy & Stone is Britain’s leading retirement housebuilder with a c.70% share of the owner-occupied market. We buy land and then build, sell and manage high quality retirement developments. We have sold c.50,000 apartments across more than 1,000 locations since 1977. Claridge House, Littlehampton Front cover: Horton Mill Court, Droitwich Our Performance Highlights 01 > Strong growth with new > Increased investment management, generating profit before tax1 of £63.2 million in land and build: – 74 new development sites > Growth in sales volumes, capitalising on increasing market demand for specialist retirement housing > Increased operational efficiency, improved cost discipline and greater regionalisation of the business, including the launch of a new North London office, our first new region for 14 years acquired since September 2013 – Attractive and profitable land bank – 8,701 plots, over five years’ supply – Doubling the size of the business to more than 3,000 units per annum over the medium term – Capturing a wider share of the growing retiree market Legal completions 2014 2013 2012 1,677 1,527 1,370 Net average selling price1 (£k) 2014 2013 2012 167 184 Proﬁt before tax1 (£ million) 2014 2013 2012 12.5 7.2 214 63.2 > Robust platform for sustained growth: – New leadership team with Land bank (plots) 2014 2013 2012 8,701 8,368 8,312 1 Please refer to Glossary of Financial Terms on page 70 for definitions of the financial terms used considerable sector experience – Strong balance sheet and cash generation supporting £2 billion investment in land and build over the next four years – All planning consents in place to deliver sales to 2015/16 – All land under control to deliver sales to 2016/17 – Improving margins and returns on capital StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 02 Hilltree Court, Giffnock McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk03 Contents Our Market Saxon Grange, Chipping Campden See page 08 Our Distinct Business Model Jenner Court, Cheltenham See page 10 Our Products and Services Cartwright Court, Malvern Our Customers See page 18 Mr and Mrs Malcolm, homeowners See page 28 Strategic Report 01 Our Performance 03 Contents 04 Our Business 06 Chairman’s Review 08 Our Market 10 Our Distinct Business Model 14 CEO’s Review 16 Our Strategy 18 Our Products 24 Our Services 26 Our Portfolio 28 Our Customers 30 CFO’s Review 32 Key Performance Indicators 34 Risk Management 36 Corporate Social Responsibility Corporate Governance 40 Board of Directors 42 Executive Leadership Team 44 Corporate Governance Report 46 Report of the Audit Committee 48 Report of the Nominations Committee 48 Report of the Remuneration Committee 49 Directors’ Report 51 Statement of Directors’ Responsibilities Independent Auditor’s Report 52 Financial Statements 53 Group Profit and Loss Account 54 Balance Sheets 55 Group Cash Flow Statement 56 Notes to the Financial Statements 69 General Company Information 70 Glossary of Financial Terms StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 04 Our Business Britain’s leading retirement housebuilder > c.70% share of the owner-occupied market > Proven track record of buying land, delivering planning consents and then building, selling and managing high-quality retirement developments > Sold c.50,000 apartments in more than 1,000 locations since 1977 > Consistent ‘Five Star’ top rating in the Home Builders Federation (HBF) New Home Customer Satisfaction awards > 1,677 new homes sold in 2013/14 > Six regions with close links to local communities > Separate management services business providing property management, security, care and support to our customers Two core products: > Retirement Living, exclusively for the over 60s (66% of completions) > Assisted Living, exclusively for the over 70s (34% of completions) Mandeville Court, Potters Bar Glasgow (Scotland) Altrincham and York (North) Coventry (Midlands) North London Ringwood (SW) Woking (SE) Bournemouth (Head Ofﬁce) Core services Property development Property development is at the heart of our business. We pioneered the concept that older homeowners want and deserve attractive residential property that is designed and built with their needs in mind during their retirement years. By acquiring appropriate and well-located sites and then creating and selling high-quality developments, we have become Britain’s leading retirement housebuilder. Management, care and support services As well as building and selling owner-occupied retirement developments, we manage all aspects of property maintenance, care and security so that our customers don’t have to worry. Our House Managers and Estate Management teams look after our developments and the grounds that surround them, and our on-site team of trained and qualified care workers provide a range of flexible care and support services in all new Assisted Living developments. See page 10 See page 24 McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk1,677New homes sold in 2013/148,701Plots, owned and under control, more than five years’ supply£2 billionPlanned investment in land and build over the next four years 05 Top right: Homeowner’s apartment, Queen Elizabeth Court, Kirkby Lonsdale Bottom left: Dial Stone Court, Weybridge See page 14 Assisted Living > As Retirement Living but exclusively for those aged 70 and above > Flexible care and support packages available > 24-hour staff presence > Domestic assistance > Wheelchair accessible throughout > Table-service restaurant with on-site kitchen > Care Quality Commission registered See page 20 Core products Retirement Living > Independent living in owner-occupied apartments > Exclusively for those aged 60 and above > One and two bedroom apartments > House Manager and emergency call line > Built to Lifetime Homes standards > Shared homeowners’ lounge and guest suite > Lifts to all floors > Secure camera entry system > Landscaped gardens See page 18 1 Population projections by the Office for National Statistics 2 (2012 based) Please refer to Glossary of Financial Terms on page 70 for definitions of the financial terms used StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk51%The number of people aged 65 and over is set to grow from 11.4 million in 2014 to 17.2 million in 203315Housebuilder in HBF New Home Customer Satisfaction awards£388 millionRevenue2, 25% up on 2013/14 “I believe that McCarthy & Stone is in 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 homes more suited to their lifestyle and needs in retirement.”Clive Fenton, CEO 06 Chairman’s Review Strong growth with new management Operating margin1 increased to 19% (2013: 15%) producing an operating profit1 of £75.1 million (2013: £45.2 million). The Group has benefited from stricter control of overheads, a strong focus on build costs, reduced debt levels and the new capital structure put in place in August 2013. It is also supported by a continuing strong balance sheet and robust financial position, with £474.4 million of net assets at 31 August 2014 (2013: £431.4 million) and £48.9 million of net debt (2013: £63.1 million), giving gearing1 of 10% (2013: 15%). Outlook McCarthy & Stone continues to invest significantly in its land bank to support future growth and capture a wider share of the growing retirement market. The Group acquired 74 new sites during the year (2013: 48 sites) at locations across Britain, equating to c.2,500 new plots (2013: 1,776). The Group now has sufficient properties in stock, under build or with detailed planning consent, to deliver anticipated completions and profit growth for the next two years and expects to open c.60 new sales outlets this year. In total, the land bank owned and under control stood at 8,701 plots at 31 August 2014. This represents 5.2 years’ supply. McCarthy & Stone remains exclusively focused on developing its position as Britain’s leading retirement housebuilder. Demographics remain strongly in favour of specialist retirement development, with the number of people aged over 85 expected to increase by 130% and the number of people aged 65 and older expected to increase by over 50% by 20332. One in four over 60s are interested in retirement living, yet only 1% of older owner-occupiers currently live in specialist retirement housing3. This gives the Group confidence that there is a very large addressable market for its products and the Group continues to innovate to sustain its appeal to the broad retirement age group. The housing needs of this age group must now become a priority for Government. Most household growth over the next 20 years will involve older people and policy makers need to look beyond the first time buyer. Retirement housing improves well-being, releases under- occupied family-sized homes and is highly sustainable. It must become an essential part of overall UK housing output. We are encouraged to see Government begin to look seriously at encouraging retirement housing and await with interest the publication of its research on developing new policy options in this area over coming months. Given the substantial demographic opportunity open to McCarthy & Stone in retirement housing and the quality of the current land pipeline controlled by the Group, offering potential for Results I am pleased to report a strong set of results for the year ended 31 August 2014, the first under our new leadership team. McCarthy & Stone capitalised on increasing market demand for specialist retirement housing to deliver its best financial performance since the housing market recession and establish a strong pipeline of land and build as a basis for sustained growth over the medium term. The business delivered legal completions of 1,677 homes, an increase of 10% over the prior year (2013: 1,527). Profit before tax1 for the full year increased to £63.2 million (2013: £12.5 million). The Group’s net average selling price1 increased by 16% to £214k (2013: £184k), substantially reflecting a more disciplined approach to discounts and incentives, as well as the improved quality of the developments McCarthy & Stone is now bringing to market. As a result, full year revenues1 increased by 25% over the previous year to reach £387.8 million (2013: £310.8 million). Visitor levels to our developments remained high throughout the year. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 07 Top: Mandeville Court, Potters Bar Left: Shared homeowners’ lounge, Haven Court, Hythe profitable growth over the medium term, the Board has raised McCarthy & Stone’s four-year investment target for land and build to £2 billion from the £1.5 billion announced in September 2013. In parallel, the Group continues to drive operational improvements and invest significantly in its land bank to support future growth, improve return on capital and capture a wider share of the growing retiree market. The Group increased its order book of forward sales at the end of the financial year and the early weeks of trading have been encouraging, with our weekly net reservation rate c.20% ahead of last year for the first nine weeks. Total forward sales, including legal completions in the year to date, stood at c.£160 million on 31 October 2014 (2013: c.£130 million). Board There have been significant changes to the Board during the year. My arrival as Chairman in September 2013, having previously been Chairman and Chief Executive at Persimmon plc, was followed by Clive Fenton’s appointment as CEO alongside the existing CFO, Nick Maddock. Clive brings with him over 30 years’ experience in the industry as Group Executive Director of Barratt Developments plc and then CEO of Mount Anvil. In addition, John Tonkiss (former Chief Operating Officer at Unite Group plc) joined the Executive Leadership Team, alongside the Land & Planning Director, Gary Day, and the Operations Director, Mike Jennings, who between them have more than 40 years’ experience of retirement housing at McCarthy & Stone. In addition, the Group appointed two experienced Non-Executive Directors during the year: Mike Parsons (founder and former CEO of Barchester Healthcare) and Frank Nelson (former Finance Director of Galliford Try plc). The excellent results for 2013/14 is a testament to the way this new team has started to take the business forward as well as a reflection of the hard work of our site teams, sales force, property management teams and the rest of our employees. I would like to pass on my and the Board’s thanks for the dedication and considerable efforts of our employees this year. Their commitment and the strong fundamentals of the specialist retirement market ensure that McCarthy & Stone is well-positioned for the future and I remain confident of further progress in 2014/15 and beyond. John White Group Chairman 31 October 2014 1 Please refer to Glossary of Financial Terms on page 70 for definitions of the financial terms used 2 Population projections by the Office for National Statistics (2012 based) 3 Demos, September 2013 StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk08 Our Market Positive market fundamentals While there is a growing need for all types of housing in the UK, there is a significant nationwide need for more retirement accommodation, presenting a unique opportunity for specialist housebuilders operating in this sector. The HBF estimates that in 2014 the UK is one million homes short of what is needed1. Projected population growth of over 65s (million) 2033 2014 11.4 17.2 Projected population growth of over 85s (million) 2033 2014 1.5 3.5 Owner-occupied retirement units and developments in the UK, all developers4 Calendar year 2005 2006 2007 2008 2009 2010 2011 2012 2013 Units built 2,504 3,862 4,189 3,949 2,058 925 1,473 1,876 2,465 Developments built 62 86 104 104 52 28 44 55 60 The number of people aged 65 and over in the UK is set to grow from 11.4 million in 2014 to 17.2 million in 2033, a rise of 51%, while the number of people aged 85 and over is set to grow from just over 1.5 million in 2014 to almost 3.5 million in 2033, a rise of 130%2. However, to date, the market has supplied just c.110,000 retirement properties for ownership3. In 2013, just 2,465 private retirement units were built4, compared to a total of 114,440 new housing completions in England5. In addition to an undersupply of retirement housing, we know that demand is rising. 58% of property owners aged 60 and over are interested in moving home but many feel restricted by a lack of suitable alternative housing. One quarter express particular interest in buying a retirement property – a total of 3.5 million people6. As well as a willingness to move, older property owners have the capital to invest in a retirement apartment. Those aged 60 and over hold £1.2 trillion in housing equity, and £400 billion of this is tied up in homes of those who want to downsize6. This age group is also the one age group where rates of property ownership have risen in recent years. Census data shows that levels of property ownership fell for all other age groups between 2001 and 2011 because of rising house prices and supply shortages. For those aged between 65 and 74, rates of ownership rose from 73% in 2001 to 76% in 2011. While there is a growing demand and undersupply in the retirement housing market, barriers to entry for new providers remain high. The specialised nature of the product, its unique design, the provision of associated care and support services and the targeted customer base have together restricted new entrants, with the result that McCarthy & Stone remains the only national housebuilder developing retirement housing in significant volumes. In addition, local authorities have not historically planned proactively for this form of housing, further limiting opportunities for new entrants in this part of the housing market. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukThe number of people aged 65 and over in the UK is set to grow from 11.4 million in 2014 to 17.2 million in 203358%Of property owners aged 60 and over are interested in moving home but many feel restricted by a lack of suitable alternative housing£400 billionTied up in homes of those who want to downsize3.5 millionPeople interested in buying a retirement property£1.2 trillionHeld in housing equity in the 60+ marketThe number of people aged 85 and over is set to grow from 1.5 million in 2014 to 3.5 million in 203309 Above: Saxon Grange, Chipping Campden Growing Government support These positive demographics are supported by growing Government backing for retirement housing. An Inter-Ministerial Working Group was formed in July 2013 to consider the challenges society faces in housing an ageing population, and new National Planning Practice Guidance, adopted by the Department for Communities and Local Government (DCLG) in March 2014, recognises that the need to provide housing for older people has become ‘critical’7. DCLG has subsequently commissioned high-level research aimed at developing policy options to increase the supply of suitable housing for older people, including specialist retirement housing. The updated Scottish Planning Policy, published in June 2014, made its first reference to older people’s housing. It now requires local councils to plan for this form of accommodation, allocate sites and support future development8. Similar policies appear in the draft alterations to the Greater London Authority’s London Plan, published in January 2014, which noted that the ability of older Londoners to move into local specialist retirement housing had been constrained through inadequate supply and that, over the period 2015 to 2025, older Londoners alone may require 3,600 to 4,200 new specialist retirement units per year, including 2,600 private units9. Together, these new policies show how Government at all levels is acknowledging and responding to the housing needs of the UK’s rapidly ageing population. Conclusion These factors provide continued confidence in the future growth of the retirement housing sector. Strong demographics, rising demand and growing Government support place McCarthy & Stone in a unique position to increase volumes and grow its business profitably over future years. 1 Housing shortage hits one million, HBF press release (March 2014) 2 Population projections by the Office for National Statistics (2012 based) 3 Figure based on the 105,000 private retirement units highlighted by Professor Michael Ball in Housing markets and independence in old age: expanding the opportunities (2011) plus two years of additional units built since then 4 UK-wide figures supplied by Elderly Accommodation Counsel. Figures are for the full calendar year, not McCarthy & Stone’s financial year. Numbers include leasehold, freehold and Scottish equivalents 5 House building in England: April to June 2014, Department for Communities and Local Government 6 Top of the Ladder, Demos (2013) 7 National Planning Practice Guidance, Department for Communities and Local Government (2014) 8 Scottish Planning Policy, paragraphs 132 to 133 (2014) 9 Draft Further Alterations to the London Plan, page 100 (January 2014) StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk10 Our Distinct Business Model Targeting the specialised retirement market While our business model has similarities to traditional housebuilding, including buying land, obtaining planning consents, designing buildings and selling homes, there are a number of key factors that set us apart. FITS E N E B M A N A G E M E N T O U R CUSTOMERS OUR PROD U C T D E S I G N G N NI N A N D AND PL A L McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukA tailored approach to land and planningA distinct and growing customer baseHomes specifically designed around the needs of older customersExceptional lifestyle and societal benefitsA high-quality, premium productA specialised management services offering 11 A distinct and growing customer base > Target customer age: over 60s in Retirement A high-quality, premium product > High-quality product which captures a Living, over 70s in Assisted Living > 54% single women, 16% single men, 30% couples > Older owner-occupiers who are keen to downsize into attractive and secure housing with community benefits > Those who wish to maintain their independence with support on-hand if and when required > Addressing undersupply of homes dedicated to the needs of older customers Homes specifically designed around the needs of older customers > Higher density than traditional housebuilding > Developments built to Lifetime Homes standards or above, for lasting quality > Solely apartments with an average of 41 units per development > Lower parking ratios due to lower car ownership, given the average age of our homeowners > Ongoing innovation with apartment types significant new-build premium > Homeowners buy their apartment plus access to shared areas, management and support services, delivering unique lifestyle benefits > Priced to attract older people wishing to downsize and release equity A specialised management services offering > McCarthy & Stone Management Services Limited (MSMS) delivers management services in new Retirement Living developments > A flexible personal care and support service in Assisted Living developments is provided by YourLife Management Services Limited, a subsidiary of MSMS, and is 50/50 owned in partnership with Somerset Care Group, a large and experienced not-for-profit care provider Exceptional lifestyle and societal benefits > Significant health and well-being benefits for and designs to address the changing needs and aspirations of our customers homeowners, as well as increased companionship and sense of security A tailored approach to land and planning > Our sites are within towns and cities and are > 64% of our homeowners say their well-being improves after moving, helping to reduce adult social care and public health costs typically 0.5 to 2.0 acres in size > Release of much-needed and > under-occupied family-sized housing back onto local markets, helping to address the wider housing shortage ‘Five Star’ top rating in the HBF New Home Customer Satisfaction awards in March 2014, the only housebuilder to have top marks since the awards were established in 2005 > Sites are centrally located, close to amenities with level access and good public transport links > We face less competition for our sites from traditional housebuilders, who tend to be interested in larger, usually greenfield, locations > Limited on-site affordable housing requirements and mitigated impact of Section 106 and Community Infrastructure Levy payments > Experienced and specialist in-house planning team > Optimisation of development density through reduced on-site parking and amenity space requirements StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk12 McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk13 Shared homeowners’ lounge, Cartwright Court, Malvern StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk14 CEO’s Review Increased investment to meet the needs of our ageing population Market conditions The housebuilding market in the UK has sustained further improvement during 2014 as mortgage and transaction volumes have increased and steady house price inflation has again become a feature in most regional markets. Although Help to Buy has had a dramatic impact on the mainstream housebuilders, it does not directly benefit McCarthy & Stone, as few of our customers require mortgages. However, improving market liquidity has provided a benevolent backdrop to our selling activities during the year, notwithstanding the introduction of some land and build cost inflationary pressures. Growth strategy It is against this attractive backdrop that the Group has set an ambition to create an efficient and scalable business capable of doubling in size to deliver more than 3,000 units per annum. We have announced that we are increasing our proposed investment in land and build to £2 billion over the next four years (2013: £1.5 billion). This investment will enable us to deliver around 12,000 new homes across more than 300 different locations nationwide and drive top-line growth in the business. Our differentiated land requirements mean that we face less competition from traditional housebuilders. In addition, growing support for our product and recognition of the many social benefits it provides, coupled with our specialised approach to planning, enables us to benefit from limited on-site affordable housing requirements and to mitigate Section 106 obligations and Community Infrastructure Levy payments. This provides us with confidence that we can increase our acquisition of new land in attractive locations above the level of 74 new sites acquired in the year to 31 August 2014 (2013: 48). We expect to open c.60 new sales outlets this year and over the medium term to develop and sell our land bank of 8,701 plots. Investment will primarily be targeted on our two established products: Retirement Living, which offers security and companionship in high- quality apartments for the over 60s; and Assisted Living, which is designed for the over 70s and offers a retirement apartment with additional features, including on-site dining, flexible care and support. Market opportunity I am delighted to have joined McCarthy & Stone as Chief Executive this year. It is clear that the Group has a very substantial demographic opportunity open to it, with the financial strength, the pipeline of land and the operational capability to capitalise on this growing market. McCarthy & Stone stands alone among the national housebuilders as the only one that focuses on the retirement market. During almost four decades as the retirement market leader the Group has formulated a tailored approach to site acquisition, obtaining planning consents and the design of developments that mainstream housebuilders have been unable to replicate. The Group also manages new developments to the highest standards through our management services offering, ensuring that our customers receive the highest standards of ongoing support after purchasing their new homes. This gives us 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 homes more suited to their lifestyle and needs in retirement. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk15 In addition, we will see in 2015 the opening of our first Ortus Homes developments. Ortus Homes presents an exciting opportunity for the future, exclusively for the over 55s and those in the early stages of retirement who are seeking to downsize for their leisure years. It is with great excitement that we are currently constructing Ortus Homes developments at Solihull and Swanage, and the Group has a further 20 sites in its pipeline for the Ortus product. We expect Ortus Homes will help us to capture a wider share of the active retiree market for whom the traditional concept of retirement housing has not been appropriate. We are pursuing an increasing regionalisation of our business to support our investment programme and in July we were able to announce the opening of our first new regional office in 14 years, dedicated to the North London market and the counties of Buckinghamshire, Bedfordshire, Hertfordshire and Essex. This will enable us to respond better to the local market and capitalise on the significant growth potential in this region. We continue to review other areas where regional expansion will facilitate accelerated growth. Operational efficiency and cost discipline During the year, we completed an organisational review and implemented a number of initiatives to drive operational improvements and support progress in profit and capital returns. A key focus of these improvements is the acceleration of the capital cycle through improved sales processes and reduced workflow times. We have set in motion a number of workstreams to improve the way the Group markets and sells to our customers. In addition, we are placing considerable focus on the development process from land exchange to build start. It is clear that there is scope to reduce this period significantly, delivering substantial benefit for asset turn and improved capital efficiency. Alongside the development of our business processes, we remain focused on strong financial discipline around the pricing of our product, control of our cost base and our procurement capability. During the year we have improved our financial control environment by successfully implementing a new IT system to support the finance, procurement and construction functions, which is now being used across all regions. In parallel with this, we have introduced a new central procurement function which is strengthening our procurement discipline and enabling us to take full advantage of our significant purchasing power. This is already providing substantial benefits in controlling our build costs, which, as for other housebuilders, have been subject to some upward price pressure this year. Customer focus As the industry leader, it is critical to us that we maintain the highest standards of build quality and customer satisfaction. In that regard, I am delighted that for the ninth year running, McCarthy & Stone has been recognised with a ‘Five Star’ award from our customers. These awards reflect independent customer satisfaction surveys undertaken by the HBF and are independently audited by the University of Reading. We are the only UK housebuilder, of any size or type, to take top marks every year since the awards were established in 2005. We are pleased that the quality of our product has also been recognised by the National House Building Council (NHBC), which has awarded us three Pride in the Job Quality awards and two Seals of Excellence, recognising the best site managers in the construction industry. In addition, we are delighted that one of our site managers was the regional winner for the Northern area for the second year running. Putting safety first The construction industry exposes individuals to a number of potential hazards. Our leading presence in developing and managing retirement properties brings us into contact with many groups of people, including vulnerable customers, on a daily basis. In this context, it is critical to us that we continue to make proper provision for the health, safety and welfare at work of our employees, our partners, our customers and others who may be affected by our activities. We are pleased to have made good progress with developing the Health and Safety environment across the business this year. Our vision is not just to achieve compliance with safety legislation, but to lead our sector with a robust and consistent safety culture across our organisation. Working with local communities Engaging and informing local communities during the planning application process has become a fundamental part of our approach to development. We work with councils, site neighbours and local groups to seek to mitigate any impact that our developments may have on their environment. Every development brought forward in 2013/14 featured a detailed community consultation programme, which included activities such as public exhibitions and meetings, one-to-one briefings, newsletters and dedicated websites. In the year, we spent 622 hours consulting on our applications with local people and this collaborative approach helped us to design and build better developments that meet both the aspirations of our homeowners and local communities. Our people Our people are key to the growth and success of our business. We are determined to build a culture at McCarthy & Stone that enables each employee to regard the Group as a great place to work through development opportunities, recognition of achievements and appropriate industry- competitive rewards. As part of this strategy, we have introduced employee PRIDE awards which recognise our employees who live our Company values in their day-to-day work. Outlook The Group has built a strong pipeline of land over recent years, offering the potential to build-out our substantial land bank at attractive margins and providing a platform for sustained growth. During 2013/14, we have put in place the building blocks that will enable us to capitalise on this opportunity and we are forecasting further significant growth in volumes, revenue and profit during 2014/15. Clive Fenton Group Chief Executive Officer 31 October 2014 StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk16 Our Strategy Doubling the size of our business Our strategy is to create an efficient and scalable business capable of building and selling more than 3,000 units per annum over the medium term. In support of this strategy, we are increasing investment in our pipeline of high-quality land, developing our product to meet the changing needs of our customers and driving operational efficiencies. This will enable us to target top-quartile sector margins and returns on capital over the medium term. Increased investment Sales growth Strategic priority Strategic priority £2 billion targeted investment in land and build over four years to support growth and capture a wider share of the active retiree market Grow completion volumes to more than 3,000 units per annum over the medium term, responding to strong market demand for our product 2013/14 progress 2013/14 progress > 74 high-quality sites acquired (2013: 48) > Legal completions up 10% to 1,677 units (2013: 1,527 units) > 8,701 plots now under control > Net average selling price1 up 16% to (2013: 8,368) £214k (2013: £184k) > Forward sales at 31 August 2014 of £95.6 million (2013: £76.2 million) > Units for 2014/15 completion in build or in stock > Five-year land bank with attractive margins – strong pipeline of opportunities > £2 billion land bank value > 60 planning consents granted (2013: 50) > All planning consents in place to deliver sales to 2015/16 > All land under control to deliver sales to 2016/17 2014/15 objectives 2014/15 objectives > Build out pipeline of high-quality and profitable consented land > Further targeted investment in land bank > Create additional regions, following launch of a new North London region > Improved sales rates and increased number of new developments to drive continued growth in completion volumes > Further pricing progression through improved product and sustained discipline over discounts and incentives McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk17 Continued product innovation Operational efficiency Focus on performance Strategic priority Strategic priority Strategic priority Develop our product design specifications and our service offerings to meet the changing needs of our customers and expand our customer base Create an efficient and scalable business to support planned investment and targeted growth Target top-quartile sector margins and returns on capital 2013/14 progress 2013/14 progress 2013/14 progress > Formalisation of distinct Retirement Living and Assisted Living designs and branding > 138 developments managed by our management services business at year end > Recent launch of Ortus Homes, to complement Retirement Living and Assisted Living – two developments due to open in 2014/15 and 20 more in pipeline > Organisational review announced > Operating profit1 up 66% to in March 2014, delivering headcount reductions primarily in central support functions £75.1 million (2013: £45.2 million) > Operating margin1 up to 19% (2013: 15%) > Workstreams in place to improve sales processes and reduce workflow times Increased regionalisation of the business, including launch of a new North London region > > Procurement discipline reinforced, resulting in identified savings of more than £10 million per year so far > Return on average capital employed1 up to 17% (2013: 12%) > Year end gearing1 of 10% (2013: 15%) 2014/15 objectives 2014/15 objectives 2014/15 objectives > Ongoing enhancements to core > Retirement Living and Assisted Living products Increased scale enabling management services business to become profit- making > Launch Ortus Homes developments at Solihull and Swanage > Deliver increased sales rates through improvement programme > Reduce time to build start and improve > capital turn Identify further procurement savings to mitigate emerging cost inflation > Focus on delivering best-in-class customer experience > Further improvement in both operating margin1 and return on average capital employed1 towards sector top-quartile > Manage capital structure and financing costs in line with housebuilding peer group 1 Please refer to Glossary of Financial Terms on page 70 for definitions of the financial terms used StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk18 Our Products Retirement Living 23 New Retirement Living developments opened in 2013/14 1,100 Retirement Living homes sold in 2013/14 78 Developments in pipeline Independence with peace of mind Shared homeowners’ lounge, Merrilees Gate, Edinburgh Retirement Living provides high-quality apartments exclusively for those aged 60 and over, offering security, independence and companionship among like-minded people. Apartments feature one or two bedrooms, spacious lounges, kitchens, extra storage, en-suite facilities and often private outside space in the form of balconies, terraces or patios. In addition, there are extensive shared areas, including landscaped grounds, attractive communal lounges and guest suites to accommodate visiting family and friends. Our site-based House Managers, who are available to offer help and assistance, are responsible for the day-to-day running of each development. In 2013/14, we sold 1,100 Retirement Living apartments, representing c.66% of our annual sales. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk19 Merrilees Gate, Edinburgh StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk20 Our Products Assisted Living A retirement apartment with flexible care and support 7 New Assisted Living developments opened in 2013/14 577 Assisted Living homes sold in 2013/14 23 Developments in pipeline Assisted Living is designed exclusively for customers aged 70 and over. The product includes additional features to our Retirement Living range, including a personal care service, a full table-service restaurant with meals prepared freshly on-site, plus a function room and secure mobility scooter store room. The Estates Management team is on-hand 24 hours a day to provide care and support as well as facilitate social events and activities. Assisted Living is an attractive alternative for those seeking an additional level of help but who wish to retain independent home ownership and do not want to move into residential care. Assisted Living is a unique offering in the market place and one which we can deliver at scale. In 2013/14, we sold 577 Assisted Living apartments, representing c.34% of our annual sales. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk21 Roswell Court, Exmouth StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk22 Our Products Ortus Homes 2 Ortus Homes’ developments in build for 2014/15 launch 10 Ortus Homes’ sites with planning consent for build start in 2014/15 10 Additional Ortus Homes’ sites under control Downsize for the leisure years Sales suite, Scarlet Oak, Solihull Sales suite, Scarlet Oak, Solihull Ortus Homes presents an exciting opportunity for the future, helping us broaden our product range and reach a larger audience. Exclusively for the over 55s and those in the early stages of retirement, it is designed for people wanting to downsize into high-quality, well-located and low-maintenance apartments. Developments have fewer units than our core products, with more car parking and larger apartments. They are intelligently and attractively designed to future-proof later living. Their age-exclusivity means that security and lifestyle is a focus, and privacy and personal space is a key consideration. The more active nature of these homeowners allows us to look for new land opportunities away from our traditional locations. Our first developments will open in Solihull and Swanage in 2015, delivering 50 units for sale. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk23 Scarlet Oak, Solihull StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk24 Our Services Management, care and support 138 Developments under management 2,040 Care and support hours delivered per month 20,000 Meals served per month Ongoing support for our customers Since 2010, all new McCarthy & Stone developments have been managed by our dedicated management services business, allowing us to provide a consistent service to our customers from the point of sale. Our ability to provide our own high-quality and cost-effective management service has proven to be an attractive offering. It ensures that our customers receive the highest standards of support at all times and provides added peace of mind during the sales process. As well as building and selling our apartments, this arrangement means we take care of all aspects of property management and security. Our House Managers and Estate Management teams look after our developments and the grounds that surround them. We additionally provide a range of flexible care and support services in all new Assisted Living developments. McCarthy & Stone Management Services Limited (MSMS), a wholly-owned subsidiary, delivers these services in new Retirement Living developments. Our personal care and management service in Assisted Living developments is provided by YourLife Management Services Limited (YLMS). YLMS is a subsidiary company of MSMS and is 50/50 owned in partnership with Somerset Care Group, a large and experienced not-for-profit care provider. Our new management services business has grown rapidly in recent years, and will become a profitable business in its own right in 2014/15. We are pleased to see it become a core part of our service offering alongside property development. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk25 Thomas Court, Cardiff StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk26 Our Portfolio National scale meeting local needs We are Britain’s leading retirement housebuilder, with a nationwide operation and six tightly- managed regions. We enjoy close links with the local communities in which we operate and have in-depth experience and understanding of local housing needs and planning requirements. Merrilees Gate, Edinburgh • Retirement Living • 45 apartments • Opened 2013 Yew Tree Court, Sanderstead, London • Retirement Living • 26 apartments • Opened 2014 With planning consent and coming soon Currently selling Emma Court/Lady Susan Court, Basingstoke • Dual Retirement Living and Assisted Living developments • 94 apartments in total • Opened 2013 McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 27 Queen Elizabeth Court, Kirkby Lonsdale Recently awarded ‘Best UK Retirement Development’ at the UK Property Awards 2014 • Retirement Living • 36 apartments • Opened 2014 Middleton Court, Porthcawl • Retirement Living • 60 apartments • Opened 2013 Coopers Court, Bristol • Retirement Living • 43 apartments • Opened 2014 Mallory Court, Skipton • Retirement Living • 33 apartments • Opened 2014 Mandeville Court, Potters Bar • Assisted Living • 53 apartments • Opened 2014 Scarlet Oak, Solihull • Ortus Homes • 28 apartments • Opening 2015 StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk28 Our Customers Exceptional standards of customer satisfaction We are proud to deliver a high-quality product with exceptional lifestyle benefits, addressing the needs of our ageing population. 92.5% Of our customers would recommend us to a friend Those who purchase an apartment from us are in their later years and at a point in life where the place they call home is increasingly important. Our developments and services are specifically built around their needs and play a key role in helping our customers to live happier, healthier and longer lives. “ I can’t thank McCarthy & Stone enough for what they have done for us in such a short period of time. We are really looking forward to our new life and all the free time we are going to have together.” Mr and Mrs Malcolm, homeowners Our customers are often frail and in need of some extra support, but they also want an environment where they are able to maintain their independence for as long as they can. Our developments are able to provide this balance. We remain committed to delivering exceptional standards of satisfaction to our customers across all of our products and services. In March 2014, for the ninth year running, we were awarded ‘Five Stars’ in the HBF New Home Customer Satisfaction awards, the leading benchmark for customer satisfaction in the housebuilding sector. We are delighted to be the only UK housebuilder, of any size or type, to have taken top marks in these awards every year since their launch in 2005. Almost 1,000 of our customers responded to the survey, with more than 90% saying they would recommend us to a friend. We take this as a considerable vote of confidence in our delivery of products and services and are committed to doing even better in future years. “McCarthy & Stone have transformed my life! I absolutely love my apartment and I’m so thankful I made the move.” Mrs Jean Pearce, homeowner McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk29 “ There’s a great social side. Everybody is lovely. I really couldn’t want for anything else.” Ms Jane Elkins, homeowner StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk30 CFO’s Review Top-line growth underpins improved margins and returns The level of overheads in the business continued to be well controlled, supported by actions taken as part of the organisational review which saw some streamlining and headcount reductions, primarily in central support functions. As a result, the Group generated an improved operating profit1 of £75.1 million (2013: £45.2 million). The Group expensed net interest charges of £13.4 million during the year (2013: £41.3 million), benefiting from the considerable reduction in Group indebtedness as a result of our August 2013 shareholder refinancing. After interest charges, profit before tax1 came in at £63.2 million (2013: £12.5 million). As in 2013, no dividend has been proposed or paid in the year. Cash generated through sales of new apartments has been retained within the business to support future investment in land and build and drive further growth. The Group started construction on 43 sites during the year ended 31 August 2014 (2013: 35) and opened 31 new sales outlets (2013: 38), providing a total of 1,236 new apartments for sale (2013: 1,965). Land acquisition activity moved sharply ahead, with 74 sites exchanged in the year (2013: 48) and 60 planning consents were delivered (2013: 50). Coupled with 1,370 units of stock carried into the year, this should provide a platform for further strong growth in completions and profits in 2014/15 and beyond. Capitalisation of production costs During the year, management reassessed the application of its policy for the capitalisation of costs into sites in the course of construction. It was identified that further directly attributable costs were capable of being accurately measured and captured into site costs, the impact of which, research showed, would more closely align the basis of gross and operating margin with peer group companies. As a consequence, the Group revised the estimation technique by which production overheads directly attributable to the construction of developments are identified and subsequently capitalised. In accordance with FRS18, this revised estimation technique has been adopted prospectively from 1 September 2013. This has resulted in costs being capitalised into stock in 2013/14 with a net impact of £8.1 million, representing an increase of c.1% of our stock value. These costs will be recognised in the Profit and Loss Account as the units to which they relate are sold. Financial review McCarthy & Stone made solid financial progress during the financial year ended 31 August 2014, which saw the Group deliver an increased number of legal completions as well as improved pricing, revenue1, operating margin1, profit before tax1 and return on average capital employed1. In the year to 31 August 2014, the Group generated 1,677 legal completions (2013: 1,527) at a net average selling price1 of £214k (2013: £184k), with the result that Group revenue1 was 25% higher at £387.8 million (2013: £310.8 million). A key driver for the higher selling prices was improved management control over the level of discounts and incentives given to customers, which reduced sharply as a proportion of list price compared with the prior year. This enabled the Group to deliver strong site margins which, together with an increase in revenue from the sale of freehold reversionary interests, generated gross profit of £104.0 million (2013: £66.6 million). McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk31 light of planning outcomes and latest market conditions, prior to confirming the commitment of capital. Target returns In the year to 31 August 2014, the combination of top-line growth and cost discipline enabled the Group to deliver an improvement in operating margin1 from 15% to 19% which, together with improved capital discipline, generated an improvement in return on average capital employed1 to 17% (2013: 12%). The Group is targeting to increase both operating margin1 and return on average capital employed1 further, to bring them in line with the top-quartile of the housebuilding sector peer group over the medium term. Nick Maddock Group Chief Financial Officer 31 October 2014 Top: Peel Court, Welwyn Garden City Bottom: Westonia Court, Northampton 1 Please refer to Glossary of Financial Terms on page 70 for definitions of the financial terms used Cash flow and funding The Group closed the year with a further increase in its tangible gross asset value1 to £456.1 million (2013: £422.8 million). Net assets on 31 August 2014 were £474.4 million (2013: £431.4 million) and net debt was £48.9 million (2013: £63.1 million), giving gearing1 at the year end of 10% (2013: 15%). The Group’s debt requirements are currently provided through a five-year £160.0 million term loan which is payable in full in August 2018. The Group is in full compliance with all provisions of the loan agreement. The Group’s plans to invest £2 billion over the next four years can substantially be financed from this facility and from sales-generated cash flows. However, the Group continues to review alternative sources of debt finance with a view to optimising its capital structure and financing costs. 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. This provides an appropriate basis for the management of risk at all levels of management across 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 on an ongoing basis. The control environment has been significantly enhanced during the year through the successful implementation of a new procurement and accounting system across the business, which replaces a number of legacy systems and manual controls. In addition, the establishment of a new Internal Audit function is further enhancing the control environment by providing the Board with reliable and independent assurance that risk management governance and internal control processes are operating effectively. Housebuilding is inevitably a cyclical business. As part of managing the financial risk in the business, the potential financial impact of a downturn in the housing market or the broader UK economic environment is regularly evaluated. McCarthy & Stone’s national reach and relatively small development size ensures that it is not overly dependent on particular local markets or individual developments. In addition, McCarthy & Stone’s distinct business model insulates it better from a downturn than most mainstream housebuilders, with land acquisition normally contracted subject to planning and commercial viability, providing the Group with a basis to review land acquisition decisions in StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk32 Key Performance Indicators Strong progress in 2013/14 The Group made strong progress in 2013/14 with trading ahead of 2012/13 in all areas. This was driven by increasing market demand for high-quality, specialist retirement housing and management’s drive to deliver operational efficiencies, supported by the wider upturn in the residential market. Revenue Revenue from sales of new homes is the primary driver of the Group’s profitability. The fundamentals of the retirement housing market, McCarthy & Stone’s distinct business model and its strong pipeline of quality land provides the platform for sustained revenue growth over the medium term. Legal completions 2014 2013 2012 1,677 1,527 1,370 Profit McCarthy & Stone’s margin has historically been one of the best in the sector and management’s focus on delivering sustained top-line growth with improved operational efficiency will deliver significant further margin improvement. Operating proﬁt1 (£ million) 2014 2013 2012 45.2 38.8 75.1 Net average selling price1 (£k) 2014 2013 2012 167 184 Revenue1 (£ million) 2014 2013 2012 311 258 214 388 Operating margin1 (%) 2014 2013 2012 19 15 15 Proﬁt before tax1 (£ million) 2014 2013 2012 12.5 7.2 63.2 The Group has continued to grow volumes in 2013/14 at higher prices, supported by a higher-quality product, the improved market backdrop and management’s focus on reducing cash discounts and other sales incentives. Growth in profitability was driven in 2013/14 by volume growth, stronger pricing, stricter control of our cost base and a reduction in interest charges following the August 2013 shareholder refinancing. It also reflects the change in cost capitalisation estimation technique set out in the CFO’s Review on page 30. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk33 Workflow The Group’s medium-term growth is dependent on its ability to develop its existing land bank profitably and to sell its current stock to generate cash for reinvestment. Returns McCarthy & Stone has historically delivered strong returns on capital. A combination of revenue growth, margin improvement and capital discipline will deliver increased returns on capital as the current land bank is developed. Land bank (plots) 2014 2013 2012 Land secured (sites) 2014 2013 2012 48 52 8,701 8,368 8,312 74 Tangible gross asset value1 (£ million) 2014 2013 2012 456 423 358 Return on average capital employed1 (%) 2014 2013 2012 17 12 11 Stock available for sale 2014 2013 2012 1,370 1,346 1,783 Gearing1 (%) 2014 2013 2012 10 15 483 An increase in the number of sites acquired in 2013/14 enabled further growth in the land bank. The strong sales performance helped to reduce the closing stock of finished units and to provide cash for reinvestment in developing this land bank. Higher profitability and faster capital turn delivered a significant improvement in returns in 2013/14, while good cash generation enabled both higher investment and lower gearing1. 1 Please refer to Glossary of Financial Terms on page 70 for definitions of the financial terms used StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk34 Risk Management How we manage the risks to our business Effective management of risk is integral to the successful implementation of McCarthy & Stone’s corporate strategy. In the summer of 2014, we strengthened this area of the business through the appointment of a Director of Risk and Internal Audit to enhance our existing Risk Management framework and develop our Internal Audit function. Our risk management process Identify risk Determine risk appetite Treat, tolerate or transfer risk Monitor risk Review risk Board assessment Risk registers Key controls framework Key risk indicators Assurance programme Risk is managed at McCarthy & Stone through a five-step risk management process, led from the Board. The Group’s risk management framework requires the maintenance and regular update of Group, regional and functional risk registers to identify the risks to our business model and strategic plan, with the major risks reviewed by the Board in the context of the Group’s appetite for risk. Assurance is provided over the effective design and operation of the risk framework through a formal programme of assurance activity. This is structured around three lines of defence: management assurance, through operational controls and reporting; functional support in the form of formal policies and procedures; and a programme of assurance activity, including internal and external audit. These risk registers are supported by frameworks of key operational and financial controls that enable risks to be treated, tolerated or transferred to third parties. The risk registers are complemented by the monitoring of a set of key risk indicators, which provide early warning of potential issues and enable management to react accordingly. How we manage risk Board Group management Regional management Site/development management Functional support Risk and internal audit 1 2 3 4 5 6 Overall oversight is provided by the Board, with individual members of the Board and the Executive Leadership Team sponsoring each of the key risks. Oversight and stewardship First line of defence: operational controls and reporting Second line of defence: policies and procedures Third line of defence: internal and external audit The maintenance of formal risk registers, the identification of key control frameworks, the monitoring of key risk indicators and the pursuit of a broad assurance programme provide all levels of management with a clear framework within which to operate. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukThe principal risks and uncertainties facing McCarthy & Stone include, but are not limited to: Risk area Risk description Mitigating actions 35 Economic conditions Housebuilding is cyclical and reliant on the broader economy. A deterioration in the economic outlook could have a significant impact on the Group’s financial performance. Land acquisition Inability to acquire sufficient and high-quality land in suitable geographical locations at the right price could constrain the Group’s ability to grow profitably. Development cycle The Group’s financial plan assumes it can bring developments from land exchange to planning consent to build start within budgeted timescales. Failure to deliver build starts on schedule could result in slower capital turn and reduced cash for reinvestment, adversely impacting growth plans. Build programmes The Group’s financial performance is dependent on its ability to deliver build programmes on time and on budget. Build programme or cost overruns could result in slower sales or reduced build margins. Health and Safety Construction sites are inherently risky, which could expose employees/subcontractors to the risk of serious injury/fatality. Homeowners in the developments we manage are ageing and sometimes frail, with the risk that they can be more susceptible to injury. Sales performance The Group’s financial plan assumes that it can consistently sell its products at attractive prices. Any volume shortfall or pricing weakness could have significant impact on the Group’s financial performance. Reputation and customer satisfaction The Group constructs and sells a quality product to an ageing and sometimes frail customer base and provides ongoing management, care and support services. Any issues with the products or services we provide could impact on customer experience or satisfaction to the detriment of the Group’s business model. Employees The Group’s employees are central to the achievement of the Group’s objectives. Failure to recruit and retain sufficient staff resource of the right quality could constrain growth plans. 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 Group CEO, the Group CFO, the Operations Director and the Land and 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 seeks to maintain sufficient land under control to deliver its forecast completions for the following three years. Land buyers are incentivised to identify suitable additional land opportunities for subsequent years in line with explicit hurdle rates for profit and return on capital. All land acquisition opportunities are approved by the Group Investment Committee, and larger investments additionally require Board approval. Workflow is monitored throughout the organisation at each stage of the workflow cycle, culminating in a monthly review by the Board of progress towards all budgeted build starts. As the business grows, the capacity to bring a greater volume of developments to build start is being enhanced through the outsourcing of some design activities to third parties and the pursuit of a programme of process and capability change which will accelerate workflow timelines and provide greater protection against planning risk. Build progress and costs are reviewed regularly by dedicated regional commercial teams and are reported to regional and Group management. Framework agreements have been established with key subcontractors and suppliers to provide greater certainty of price and supply. The establishment in 2013/14 of a central procurement capability and the introduction of a new IT system for procurement provides a basis to deliver ongoing procurement efficiencies. The Group strives for excellence in Health and Safety and considers it to be the top priority. The Head of Health and Safety reports directly to the Executive Leadership Team, identifying areas of concern, near misses and accidents, and is supported by a rigorous, independent site inspection programme which routinely assesses and reports on standards. Detailed reporting enables the Group to monitor sales and pricing at a site and unit level and regularly review performance against expectation with regional and local management. Processes are in place to initiate recovery action for underperforming sites. The Group is investing in an improvement programme that will upgrade its sales processes and capability and improve its ability to sell quickly at attractive prices. The Group enforces strict procedures over the handover of developments for occupation and the handover of specific apartments to individual customers. Ongoing management, care and support services are provided by our own management services business within a robust framework of controls which is closely monitored. Each region has dedicated customer services capability and the Group tracks customer satisfaction through NHBC surveys and other reporting. The Group has put in place attractive reward mechanisms and provides extensive opportunities for personal development and training, both of which are regularly reviewed against peer housebuilders and other employers in local markets. Resource requirements are assessed against annual budgets and recruitment processes are designed to ensure the availability of the right resource at the right time to deliver the Group’s plans. StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk36 Corporate Social Responsibility Pride in our people The Group’s employees are central to the delivery of its objectives. The Group recognises that attracting and retaining employees is only possible if the right working environment is created and appropriate reward mechanisms and opportunities for personal development and training are provided. The Group has a wide range of policies relating to employees to support this. Our employees Our employees are central to the delivery of our objectives. At 31 August 2014 the Group employed 900 people (2013: 941), excluding subcontractors and agency workers. Some 48% of these are employed on sites or at developments with the balance based in our regional and central offices. Diversity policy The Group is committed to promoting policies to ensure that those who are employed by the Group’s businesses are treated equally, regardless of status, sex, age, colour, race or ethnic origin. At the end of the financial year almost half of all employees were female and a similar percentage were over the age of 50. Although there are currently no female Directors on the Board, 20% of senior management employees are female, including four female Directors of our main trading subsidiaries. Disability policy The Group gives full consideration to applications for employment from persons with disabilities where the requirements of the job can be adequately fulfilled by a person with a disability. Should any employee become disabled, it is the Group’s policy, wherever possible, to continue the employment of that person and to provide equal opportunities for the career development of employees with disabilities. Training and development The Group’s ability to achieve its commercial objectives and meet the needs of its customers in a profitable, competitive and safe manner depends on the contribution of employees throughout the Group. Employees are encouraged to develop their contribution to the business wherever they work and the Group has an ongoing commitment to their training and development. Directors of the Group (Executive) Directors of subsidiary companies not included in above Employees in other senior management positions Total senior management excluding Directors of the Group Other employees of the Group Male Female 2 3 32 35 – 4 5 9 466 388 Performance against objectives is reviewed bi-annually. The process includes the identification and implementation of a tailored personal development plan. Improvement programmes focused on quality, efficiency and customer service provide an opportunity for all employees to be involved in the development of the Group’s business and products. Employee communications The Group communicates with its employees about its objectives, progress and activities through a variety of channels including regular monthly updates, quarterly newsletters and the Group’s intranet. The Group has established a set of corporate values and conducts regular employee surveys. Group-wide roadshows are conducted during the year to update all employees on the business strategy and to provide employees with an opportunity to provide feedback to management. Our employees (%) 32% Site-based 52% Ofﬁce-based 16% Management services Gender (%) 44% Female 56% Male Age (%) 55% Under 50 45% Over 50 Length of employment (%) 24% Under one year 42% One to ﬁve years 34% Over ﬁve years McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk37 Our PRIDE awards In 2013, as part of our strategy of recognising and rewarding employee excellence, we introduced our PRIDE awards which recognise employees who live our Company values in their day-to-day work: > Passion > Responsibility > Innovation > Determination > Excellence Employees are nominated by their colleagues and fellow workers for instant awards, which are given in recognition of commitment to one or more of our PRIDE values. Since we launched the PRIDE awards, over 260 employees throughout the Group have been recognised with an instant award. Quarterly awards are given to the top instant winners in each region, who are automatically shortlisted for our annual national PRIDE awards. So far over 60 employees have received a quarterly award. Top: McCarthy & Stone donated 200 reflective wristbands to Juniper Green Primary School in Edinburgh to help keep pupils safe on their way to school during winter Left: One of our Estate Managers receiving her Quarterly Pride Award StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk38 Corporate Social Responsibility continued Safety first The Board considers Health and Safety to be its top priority in all aspects of its business. McCarthy & Stone is not satisfied with mere compliance, but seeks to establish a culture of excellence where we set standards for others to follow. Health and Safety The Board seeks to promote a consistent culture of ‘safety first’ across the organisation. We made great progress last year, in spite of an increase in the number of construction sites and managed developments, with the achievement of regional accolades from our independent consultants, The Building Safety Group, as well as NHBC Pride in the Job awards, a significant part of which requires excellent Health and Safety management on site. The Board leads the way on Health and Safety with Directors ensuring that they proactively engage in safety discussions and carry out site safety visits in all regions. In addition, 2014 has seen the establishment of an employee coaching scheme that will provide the organisation with qualified Health and Safety coaches to champion the cause of Health and Safety throughout the organisation. Board members also attend and contribute to the Group Health and Safety Committee and attend Health and Safety events around the country. The Group’s determination to set the highest Health and Safety standards and exceed compliance is led from the top, with the Head of Health and Safety reporting directly to the Executive Leadership Team. Over the last year, we have brought our Health and Safety training in-house where it can be tailored to our needs. This initiative is in its infancy and has already brought with it significant safety improvements. Our accident statistics have improved and we compare favourably with other major housebuilders. We are accredited to deliver both IOSH and CITB Health and Safety management courses, which we offer to our own employees and our contractor workforce. During the year, Health and Safety awareness and behavioural safety events have been held for contractors and site teams in all of our regions. These have set new standards and provided a pathway for those who work for us to achieve them. The Group’s PRIDE values have been applied to Health and Safety with the introduction of ‘Pride in Safety’ events and discussions. This range of safety initiatives should significantly improve our culture as well as safety for our employees, contractors, customers and the public who are affected by our projects. We have also introduced training for staff to enable them to become increasingly self-supporting in their management of Health and Safety. It remains our commitment as the Group continues to grow that our management of Health and Safety will continually improve in keeping with our aspiration to establish a culture of excellence which sets standards for others to follow. Environmental sustainability For McCarthy & Stone, positive relationships with communities during construction are as important as building excellent schemes. We manage every aspect of the construction process and look to ensure that our activities have regard to site neighbours and the general public. We are committed to working with suppliers who can provide us and our customers with good quality products and materials from sustainable and local sources in a responsible and ethical manner. We are working with our supply chain to develop a waste minimisation programme that encourages the reduction, reuse and recycling of viable products from all of our waste streams. Our supply chain is required to demonstrate an acceptable standard of environmental performance and we use a balanced scorecard to assess this. We have an open and competitive tender process to enable the development of commercial relationships with suppliers who meet our values in quality, safety and sustainability. We encourage the use of framework agreements to create open, transparent and fair trading terms and ensure that payment terms and other conditions are fulfilled. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk39 NHBC Pride in the Job Awards 2014 The NHBC is the UK’s leading housebuilding industry standard setting body. As part of its strategic aim of improving the quality of new- build homes, the NHBC awards the prestigious and highly regarded Pride in the Job awards to site managers who have shown exemplary standards of build quality and site safety. McCarthy & Stone’s site managers have a strong tradition of receiving these awards since their inception 34 years ago and this year proved no different. We were delighted that three of our site managers received a Pride in the Job award in 2014 and two received a Seal of Excellence. We were even more pleased that one of our site managers was awarded regional winner for the Northern area for the second year running and will now go forward to the national final in January 2015. These awards reinforce to our customers the quality of product they are buying. Above : Two of our NHBC Pride in the Job 2014 award winners Right: Construction site, Fleet, Hampshire This Strategic Report was approved by the Board on 31 October 2014 and signed on its behalf by Nick Maddock, Director. Nick Maddock Director 31 October 2014 StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 40 Board of Directors Left to right: Frank Nelson Clive Fenton Nils Albert John White Mike Parsons Nick Maddock John White Group Chairman Clive Fenton Group Chief Executive Officer Nick Maddock Group Chief Financial Officer Experience John was most recently Group Chairman of Persimmon plc, a position he held between April 2006 and April 2011, having previously been Group Chief Executive since 1993. He has spent all his working life in the housing industry and has unrivalled experience of working within the sector. John has also been a Director of Northampton Saints Rugby Club since 2012. Experience Clive has a wealth of both housebuilding and business experience, having spent almost 30 years with Barratt Developments plc. He joined Barratt in 1983 and worked in a number of finance and operational roles before being appointed to the Group Board in 2003 with overall responsibility for all operations in the south of England. He was also responsible for Group Strategic Land, Partnership Housing and Retirement Homes. More recently he was CEO of Mount Anvil, a development company specialising in the residential property market in central London. Clive is also currently an independent, Non-Executive, advisory member of the Board of Pocket Living (2013) LLP, a subsidiary entity of Pocket Living Limited, a developer of intermediate, starter homes for first time buyers. Experience Nick joined McCarthy & Stone in 2011, having previously worked as Finance Director for Centrica’s upstream oil and gas business. He was previously Financial Controller at British Gas and a Director in Mergers and Acquisitions at ING Barings. Nick trained as a Chartered Accountant and Chartered Tax Adviser with Ernst & Young. Nick led the August 2013 refinancing of the Group’s liabilities, reducing the debt of the Group by £350 million. Nick is also the Group Company Secretary. Committees Chairman of Nominations Committee and member of Audit Committee and Remuneration Committee. Committees Member of Nominations Committee. Committees None McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk41 Committees Chairman of Audit Committee and member of Remuneration Committee and Nominations Committee. Committees Chairman of Remuneration Committee and member of Audit Committee and Nominations Committee. Committees Member of Audit Committee, Remuneration Committee and Nominations Committee. Frank Nelson Independent Non-Executive Director Mike Parsons Independent Non-Executive Director Nils Albert Nominee Director Experience Frank joined the Board in late 2013 having previously been the Finance Director of Galliford Try plc, the FTSE 250 housebuilding and construction group, for 25 years before retiring in 2013. In the last 12 months he was Interim CFO of Lamprell, the Dubai-based offshore construction company, where he helped complete a complex refinancing and turnaround before his recent return to the UK. Frank is also a Non-Executive Director of Thames Valley Housing Association where he is Chairman of the Treasury Committee and a Non-Executive Director of HICL Infrastructure Company plc. Experience Mike founded Barchester Healthcare 20 years ago, following a successful career in advertising. Award-winning Barchester has grown rapidly becoming the fourth biggest independent healthcare provider in the UK. Mike retired as CEO of Barchester in 2013 but remains a Director of Grove, the holding company. He is also Vice Chair of Care England, the sector industry association, and Chair of the Barchester Charitable Foundation. Experience Nils has been a Director at TPG Capital since 2004. He previously served as MD of B-business Partners, an Investor AB backed venture capital fund. Nils spent 13 years at General Electric in various general management roles. He served as the MD, GE Capital European Equipment Finance and Vice President, GE Capital based in London. Prior to this, he served as the MD of GE Quartz Europe headquartered in Germany and also held positions in GE Lighting and with the GE Corporate Audit Staff. Nils is also a Director of TPG Capital, Media Broadcast, Ainscough, Anglian and Vernacare. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukStrategicReportFinancialStatementsCorporate Governance42 Executive Leadership Team Left to right: Gary Day John Tonkiss Mike Jennings Paula Jordan Nick Maddock Clive Fenton Clive Fenton Group Chief Executive Officer Responsible for the day-to-day management of the operational activities of the Group. Nick Maddock Group Chief Financial Officer Gary Day Land and Planning Director Mike Jennings Operations Director Responsible for financial strategy and the financial management of the Group. He is also responsible for the Group IT function and has an oversight role over the Group Legal and Company Secretarial functions through his role as Group Company Secretary. Experience Gary is a Chartered Town Planner and member of the Chartered Institute of Housing and has more than 38 years’ experience in the industry. Gary joined the Group having worked in local government for 13 years as a senior town planner. He is currently a member of the Homes and Communities Agency’s Vulnerable and Older People’s Advisory Group and over the years has sat on numerous groups concerned with the housing implications of the UK’s ageing population. Experience Mike joined McCarthy & Stone as a Director in 1997. He worked previously for Tarmac, McLean Homes (in the UK and the US) and, prior to joining McCarthy & Stone, for Redrow Homes. Responsibilities Gary is responsible for land conveyancing, planning and political/public affairs. Responsibilities Mike is responsible for overseeing Group Construction, Group Procurement, all of the Group’s operating regions and McCarthy & Stone’s management services business. He also has primary responsibility, on behalf of the Executive Leadership Team, for the Group Health and Safety function. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk43 Paula Jordan HR Director Experience Paula joined McCarthy & Stone in 2008 with an extensive range of HR and business experience through her previous HR Director appointments in the financial services and telecoms industries. John Tonkiss Business Transformation Director Patrick Hole Interim General Counsel Experience John was previously CEO of Human Recognition Systems Limited, the UK’s leading biometric solutions provider. Prior to that, he worked for ten years for the Unite Group, the UK’s largest provider of purpose-built student accommodation, becoming Group Chief Operating Officer in 2008. John’s earlier career included senior operational management roles at TRW, one of the world’s largest automotive suppliers and a number of engineering roles at Lucas Electrical. Experience Patrick joined McCarthy & Stone on an interim basis in July 2014. Patrick is a qualified solicitor with more than 20 years’ post qualification experience. Patrick has been a partner in private practice for many years and also has a broad range of in-house experience, including interim roles at both DTZ and Keepmoat. Responsibilities Paula is responsible for the delivery of McCarthy & Stone’s people strategy, underpinning and supporting the Group’s ambitious business strategy and growth plans by ensuring that we acquire, develop and retain the best possible talent in the marketplace. Responsibilities John is responsible for leading the improvement change programme to accelerate business growth, enhance customer experience and improve operating performance. Responsibilities Patrick is responsible for the Legal and Company Secretarial functions of the Group. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukStrategicReportFinancialStatementsCorporate Governance44 Corporate Governance Report John White Group Chairman This section of the Report sets out how we manage and govern our business. A good corporate governance framework is essential for upholding our core business values and delivering our strategy. Corporate governance has therefore been one of the Board’s main areas of focus over the past year, following its restructure and the appointment of additional Non-Executive Directors. However, there is still more to do and we continue to develop and improve our corporate governance policies as our business grows. The Board has overall responsibility for our governance framework and we aim to adopt the provisions of the UK Corporate Governance Code (the Code) and the Walker Guidelines for Disclosure and Transparency in Private Equity (the Walker Guidelines) whenever possible. Our target is to be fully compliant with the Walker Guidelines by the end of the next financial year. The Code is available at www.frc.org.uk and the Walker Guidelines are available at www.walker-gmg.co.uk. The following statement sets out our corporate governance compliance during the year under review. The Board The Board is responsible for operational control of the Group, including all strategic, financial, organisational, legal and regulatory matters and the Directors normally meet once a month to enable them to discharge their duties. The Company Secretary is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. In addition, the Directors may take independent professional advice as required. There is a formal schedule of matters specifically reserved for Board decisions. In managing the Group’s operations, the Board takes account of the Investment Agreement, which governs the relationship between the Group and its shareholders. Matters requiring Board approval include Group strategy and business plans, governance, risk and major capital expenditure. Decisions on investments and development activities are made by the Group Investment Committee which meets weekly, membership of which includes the Group CEO, the Group CFO, the Operations Director, and the Land and Planning Director. Major investment decisions are additionally referred to the Board for approval. Board composition and independence The appointment and replacement of the Company’s Directors and the Company Secretary is governed by the Investment Agreement between the Company and its shareholders, the Company’s Articles of Association, the Companies Act 2006 and the individual service contracts and terms of appointment of the Directors. The maximum number of Directors is seven. The Board currently comprises the Chairman, two Executive Directors and three Non-Executive Directors. Details of the current Directors are set out on pages 40 and 41. The Non- Executive Directors have all been appointed by the Company’s shareholders. There is no Senior Independent Director or Deputy Chairman. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 45 Board evaluation With the exception of Mr Maddock and Mr Albert, all of the Directors of the Board have been appointed within the last year. There has not therefore been an evaluation of the Board and its effectiveness during the year under review. Succession planning Management of succession planning is fundamental to ensuring the best mix of skills, experience and innovation remain present at Board and senior management level. We will continue to review the diversity and abilities of our key personnel to ensure we have the right people to achieve our objectives. Internal controls The Group is fully committed to establishing a robust and effective risk management process. The Board is responsible for the system of internal controls, which are designed to manage the business risks faced by the Group, and for reviewing the effectiveness of those controls. There is an ongoing process for identifying, evaluating, monitoring and managing significant risks faced by the Group. Business targets are set within appropriate timeframes and policies, procedures and control processes for managing the Group’s business activities have been put in place. Key financial risks are controlled through clearly laid down authorisation levels and segregation of duties. Relations with shareholders The Chairman, Chief Executive and Chief Financial Officer regularly meet with the Group’s shareholders and provide feedback to all members of the Board on the issues discussed. The largest shareholder has Board representation. In addition, observers from some of the other major shareholders are invited to attend Board meetings. Regular business updates, monthly financial reporting and other ad-hoc presentations have been provided to the Group’s shareholders during the year. The Board has considered the independence of the individual Directors. The date of appointment of each of the Directors is set out on page 49 in the Directors’ Report. None of the Directors has served for more than four years. One of the Non-Executive Directors, Mr Albert, has been appointed by Remich Holding I S.à.r.l., the Company’s largest shareholder. Mr Albert is not considered to be independent by the Board. The Board has determined that Mr White, Mr Nelson and Mr Parsons are all independent. The Board is currently looking to identify an additional Non-Executive Director so that the Company is able to fulfil all the independence requirements of the Code. On appointment, each of the Directors confirmed that he had sufficient time to fulfil his duties. Mr Maddock is not a Director of any external company. Mr Fenton is an independent, Non-Executive, advisory member of the Board of Pocket Living (2013) LLP. This takes up an immaterial amount of his time. The Board is satisfied that each of the Directors has discharged his responsibilities and duties effectively during the year. During the year under review there were 12 formal Board meetings. Attendance at those meetings is shown in the table below. Director Number of meetings John White Clive Fenton Nick Maddock Nils Albert Mike Parsons Frank Nelson Jeremy Jensen Mark Elliott Board meetings attended Board meetings missed since appointment % Attendance since appointment 12 11 7 12 11 7 9 4 4 – – – – 1 2 – – 1 – 100% 100% 100% 92% 78% 100% 100% 80% On appointment, each Director receives an induction to the business. In addition, in order to assist the Directors further in their understanding of the business, some of the Board meetings are held at the regional offices to provide an opportunity for the Directors to meet the regional management team and to visit some of the Group’s sites and developments. All Directors have access to the advice and services of the Company Secretary and may also seek independent professional advice should this be required to enable them to fulfil their duties. Role of Chairman and Chief Executive Officer There is a clear separation of the roles of the Chairman and the Chief Executive Officer. The Chairman is responsible for leadership of the Board and for ensuring that the strategic direction and objectives of the Group are set. The Chief Executive Officer is responsible for the day-to-day management of the operational activities of the Group. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukStrategicReportFinancialStatementsCorporate Governance46 Report of the Audit Committee Frank Nelson Audit Committee Chairman It has been a year of change for the Committee. At the beginning of the year there were insufficient Non-Executive Directors on the Board to enable the Audit Committee membership to comply with corporate governance best practice. Following the appointment of additional Non-Executive Directors in the first quarter, the Committee membership has been reorganised. We now believe the Committee comprises members with a range of skills, and the Board is satisfied that I have recent and relevant financial experience. During the year we have established a Risk and Internal Audit function and we are now better placed to focus on driving forward the audit and risk oversight for the Group. Audit Committee membership With effect from 29 April 2014, the Audit Committee comprises Frank Nelson (Chairman), John White, Nils Albert and Mike Parsons. Prior to the appointment of Mr White, Mr Nelson and Mr Parsons to the Board, the Audit Committee membership comprised Mr Jensen, Mr Elliott and Mr Maddock. Prior to his appointment to the Board, the current Chairman of the Committee, Mr Nelson, was Finance Director of Galliford Try plc, the FTSE 250 housebuilding and construction group, for 25 years. During the year there were three Audit Committee meetings, only two of which were held subsequent to the change in Committee membership. The table below sets out attendance at the Audit Committee meetings during the year. Meetings are also attended, by invitation, by other Directors where appropriate. Director Number of meetings Frank Nelson1 John White2 Mike Parsons1 Nils Albert1 Nick Maddock3 Jeremy Jensen4 Mark Elliott5 Audit Committee meetings attended Audit Committee meetings missed since appointment % Attendance since appointment 3 2 1 2 1 1 1 1 – – – – – – – – – 100% 100% 100% 100% 100% 100% 100% 1 Committee member since 29 April 2014 2 Committee member since 1 January 2014 3 Committee member until 29 April 2014 4 Committee member until 31 December 2013 5 Committee member until 17 February 2014 McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk47 Responsibilities of the Committee The Committee provides a forum for reporting by the Group’s external auditor and for reviewing a wide range of financial matters, including the controls that are in place to ensure the integrity of the statutory annual accounts before their submission to the Board and ultimately to the shareholders. The Committee is responsible for the appointment of the external auditor, its fee and the scope of the annual audit. The performance and independence of the auditor and the work it performs is reviewed annually and the Committee remains satisfied as to the independence and effectiveness of Deloitte LLP. The Committee reviews the annual financial statements before submission to the Board including any changes in accounting policies, going concern and compliance with the relevant accounting, legal and regulatory standards. The Committee is also responsible for reviewing the Group’s processes for assessing, managing and monitoring the effectiveness of the Group’s system of risk management and internal controls. During the year, the Committee reviewed and recommended to the Board for approval the Group’s 2012/13 annual results and 2013/14 half year results as well as the audit plan for the 2013/14 year end audit. Policy on non-audit services It is the Group’s practice, whenever possible, to put non-audit work out to tender. The Board only appoints Deloitte LLP to provide non-audit services if the Directors have satisfied themselves that the auditor’s objectivity and independence have not been compromised. Deloitte LLP has been used for non-audit work when its historical knowledge of the issues has made it cost-effective to use it. During the year under review Deloitte LLP reviewed the controls around the introduction of the Group’s new procurement and accounting system as well as providing a tax advisory service. Establishment of Risk and Internal Audit function As part of establishing a Risk and Internal Audit function, a Director of Risk and Internal Audit was appointed during the year. His initial priorities have been to develop the Group’s risk management framework and establish a new Internal Audit function. He also reports to the Committee on the effectiveness and adequacy of the Group’s management of its risks and controls. A description of the Group’s principal risks and uncertainties and its mitigating actions are set out on page 35. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukStrategicReportFinancialStatementsCorporate Governance48 Report of the Nominations Committee and Report of the Remuneration Committee Report of the Nominations Committee A Nominations Committee was established in April 2014 to oversee the appointment of Directors. The membership of the Committee is John White (Chair), Frank Nelson, Mike Parsons, Clive Fenton and Nils Albert. Terms of reference for the Committee have been approved. All of the current Directors, with the exception of Mr Maddock and Mr Albert, were appointed during the year prior to the formation of the Committee. As there have not been any changes to the composition of the Board since the formation of the Committee, there were no meetings of the Committee during the year. No external search consultancy was used in the appointment of the Directors during the year. Under the terms of the Investment Agreement between the Company and its investors, Directors are approved by the shareholders prior to appointment. As the Company is a private company, Directors are not subject to annual election by the shareholders and therefore there is no requirement for the Committee to review rotation of the Directors. Report of the Remuneration Committee The Remuneration Committee currently comprises Mike Parsons (Chair), Frank Nelson, John White and Nils Albert. The Committee’s terms of reference set out its responsibilities which include the review of the terms and conditions of employment of the Executive Directors. The Committee also monitors the level and structure of remuneration for senior management within the Group. It reviews and approves any bonuses paid to the Group’s employees. The Committee is also responsible for the approval of any employee share schemes. There are currently no employee share schemes in place. The Committee met once during the year to review the remuneration for senior management and the overall amount of bonuses paid to the Group’s employees. As the Company’s shares are not listed, the Company is not required to provide a report on Directors’ remuneration. Details of the aggregate of Directors’ emoluments are set out in note 4 to the Financial Statements on page 60. John White Nominations Committee Chairman Mike Parsons Remuneration Committee Chairman McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukDirectors’ Report 49 The Directors of McCarthy & Stone Limited (registered number 6622199) (the Company) present their Report for the year ended 31 August 2014 in respect of the Company and the Group. Ownership The Company is owned by a consortium of UK and overseas companies and funds. As at 31 August 2014 the major shareholders in the consortium who each owned more than 5% of the Company were: Investor Remich Holding I S.à.r.l. ACMO S.à.r.l. Canyon Capital Finance S.à.r.l. Barclays Bank plc Field Point IV S.à.r.l. QP SFM Capital Holdings Limited % holding 25.74 14.19 9.04 8.07 7.21 6.17 In addition a further 24 companies and funds owned the remaining 29.58% of the Company. Directors and Directors’ interests The Directors of the Company during the year and up to the date of signing were: Name Current Directors: John White Clive Fenton Nick Maddock Nils Albert Mike Parsons Frank Nelson Directors who resigned during the year: Jeremy Jensen Mark Elliott No Director has any interest in the shares of the Company apart from Mr Albert who is a Director of TPG Capital (which, together with Goldman Sachs, owns Remich Holding I S.à.r.l., the Company’s largest investor). Mr Albert is the Nominated Shareholder Representative of Remich Holding I S.à.r.l. There have been no changes in the Directors’ interests in the share capital of the Company since 31 August 2014. Directors’ conflicts of interest Each of the Directors has a duty under the Companies Act 2006 to avoid a situation where he has, or could have, a direct or indirect interest that conflicts with the interests of the Company. The Company’s Articles of Association contains provisions for dealing with conflicts or potential conflicts. The procedures for dealing with conflicts of interest have operated effectively during the year under review. Directors’ indemnities As permitted by the Company’s Articles of Association, qualifying third-party indemnity provisions for the benefit of its Directors have been in place throughout the year, under which the Company has agreed to indemnify the Directors, to the extent permitted by law and by the Articles, against all liability arising in respect of any act or omission in the course of performing their duties. Position Date of appointment Group Chairman Group CEO Group CFO Non-Executive Director Non-Executive Director Non-Executive Director Group Chairman/Director Group CEO 23 September 2013 17 February 2014 19 September 2011 23 August 2013 4 November 2013 18 November 2013 Date of resignation 31 December 2013 17 February 2014 In addition the Company maintains Directors’ and Officers’ liability insurance for the Directors and Officers of all Group companies. Dividends The Directors are not recommending the payment of a dividend (2013: £nil). Political donations There were no political donations during the current or previous year. Capital structure and going concern At 31 August 2014 the Group had cash at bank and in hand of £111.1 million (2013: £96.9 million) and £160.0 million (2013: £160.0 million) of gross term debt facilities, which are non-amortising, repayable in August 2018. This facility has an annual cash interest cost of approximately £12.0 million. The Board approved a detailed budget and business plan on 26 August 2014, which indicated that the Group has adequate cash resources to service its debt facilities and to reinvest to facilitate the planned growth of the business for the duration of the loan. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. They accordingly continue to adopt the going concern basis in preparing the financial statements. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukStrategicReportFinancialStatementsCorporate Governance50 Directors’ Report continued Financial risk management objectives and policies The Group’s activities expose it to a number of financial risks including interest rate risk, credit risk, liquidity risk and price risk. The use of financial derivatives is governed by the Group’s policies approved by the Board, which provide written principles on the use of financial derivatives to manage these risks. The Group does not use derivative financial instruments for speculative purposes. Interest rate risk The Group’s historic capital structure exposed it to significant financial risk of changes in interest rates. Accordingly, the Group historically used interest rate swap contracts to hedge these exposures at fixed rates. These swap contracts were settled on 15 August 2013 as part of the refinancing of the Group. As the exposures under the new capital structure are significantly lower, no new swap contracts have been taken out against the current debt facility. Management is comfortable that the Group could absorb any resulting financial risk of reasonably foreseeable changes in interest rates. Credit risk The Group’s financial assets are bank balances and cash, long-term receivables and investment properties. The Group has adopted a Treasury Management policy to ensure that credit risk is appropriately diversified. Liquidity risk The Group aims to mitigate liquidity risk by forecasting requirements and managing cash generated by its operations, and ensuring that the Group is able to service debt as it falls due. Details of the debt repayment profile are provided in note 14 of the financial statements. Information presented in other sections Key events during the year up to the date of this report and the future development of the business are set out in the Strategic Report on pages 01 to 39. The Strategic Report includes the financial review and a description of the principal risks facing the Group. Details of the Group’s risk management objectives and policies are set out on pages 34 and 35. Information concerning the employment of disabled persons and the involvement of employees in the business is given in the corporate social responsibility section of the Strategic Report on page 36. Statement of disclosure of information to auditor Each of the persons who is a Director at the date of approval of this report confirms that: > as far as he is aware, there is no relevant audit information of which the Company’s auditor is unaware; and > he has taken all the steps that he ought to have taken in order to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This Directors’ Report was approved by the Board on 31 October 2014 and signed on its behalf by Nick Maddock, Director. The Group aims to maintain a balance between continuity of funding and flexibility through the use of overdrafts and bank loans. All capital expenditure requires Directors’ approval before it is committed. Nick Maddock Director 31 October 2014 Price risk The Group is exposed to commodity price risk. The Group manages commodity price risk through supplier negotiations. The Group Procurement function meets with the Group’s national agreement suppliers at least once a year. Such agreements tend to be of a high volume and are considered to be of strategic importance to the business. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk Statement of Directors’ Responsibilities 51 Statement of Directors’ responsibilities in respect of the financial statements The Directors are responsible for preparing the Annual Report and financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under Company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that year. In preparing these financial statements, the Directors are required to: > select suitable accounting policies and then apply them consistently; > make judgements and estimates that are reasonable and prudent; > state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and > prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukStrategicReportFinancialStatementsCorporate Governance52 Independent Auditor’s Report To the members of McCarthy & Stone Limited We have audited the financial statements of McCarthy & Stone Limited for the year ended 31 August 2014 which comprises the Group Profit and Loss Account, the Group and Parent Company Balance Sheets, the Group Cash Flow Statement and the related notes 1 to 24. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditor As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Opinion on financial statements In our opinion the financial statements: > give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 August 2014 and of the Group’s profit for the year then ended; > have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and > have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: > adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or > the Parent Company financial statements are not in agreement with the accounting records and returns; or > certain disclosures of Directors’ remuneration specified by law are not made; or > we have not received all the information and explanations we require for our audit. Gregory Culshaw ACA (Senior Statutory Auditor) for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditors Southampton, United Kingdom 31 October 2014 McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukGroup Profit and Loss Account For the year ended 31 August 2014 53 Turnover Cost of sales Gross profit Administrative expenses Other operating income Other operating expenses Operating profit Share of joint ventures turnover Share of joint ventures cost of sales Share of operating profit in joint ventures Net interest payable and similar charges Profit/(loss) on ordinary activities before taxation Taxation (charge)/credit Profit/(loss) on ordinary activities after taxation Equity minority interests Profit/(loss) for the financial year 2014 Before exceptional items £m 2014 Exceptional items £m Notes 2 2 2 9 5 6 19 18 387.8 (283.8) 104.0 (37.9) 7.9 (3.4) 70.6 0.1 (0.1) – (11.9) 58.7 (13.0) 45.7 (0.1) 45.6 – – – (2.5) – – (2.5) – – – (1.5) (4.0) 0.9 (3.1) – (3.1) 2013 Before exceptional items (restated) £m 310.8 (244.2) 66.6 (29.1) 5.5 (2.3) 40.7 0.1 (0.1) – (32.7) 8.0 (2.3) 5.7 – 5.7 2013 Exceptional items (restated) £m – – – (11.2) – – (11.2) – – – (8.6) (19.8) 3.6 (16.2) – (16.2) 2014 Total £m 387.8 (283.8) 104.0 (40.4) 7.9 (3.4) 68.1 0.1 (0.1) – (13.4) 54.7 (12.1) 42.6 (0.1) 42.5 2013 Total (restated) £m 310.8 (244.2) 66.6 (40.3) 5.5 (2.3) 29.5 0.1 (0.1) – (41.3) (11.8) 1.3 (10.5) – (10.5) The Group has no material gains or losses other than those included in the Profit and Loss Account above, and therefore no separate Statement of Total Recognised Gains and Losses has been presented. There is no material difference between the result as disclosed in the Profit and Loss Account and the result on an unmodified historical cost basis. All of the figures above relate to continuing operations. The current year operating exceptional items relate to redundancy costs following an operational review of the business, the exit of the previous Chief Executive Officer and the write-off of debt issue costs incurred in relation to the 2013 refinancing of the Group’s liabilities. The prior year exceptional items relate to one-off legal, professional, financing and management incentive costs incurred as a result of the successful refinancing of the Group. The classification between administrative expenses and cost of sales has been restated in the year. Please see note 1 for further details. The notes on pages 56 to 68 form part of these financial statements. StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 54 Balance Sheets As at 31 August 2014 Fixed assets Intangible assets: Tangible assets: Investments goodwill brand investment properties property, plant and equipment share of gross assets share of gross liabilities Investments in joint ventures Current assets Stocks Debtors: Cash amounts due within one year amounts due after one year Creditors: amounts falling due within one year Net current assets Total assets less current liabilities 0.9 (0.6) Notes 7 7 8 8 9 9 10 11 12 15 13 Creditors: amounts falling due after more than one year 14 Net assets Capital and reserves Called up share capital Share premium account Profit and loss account Shareholders’ funds Minority interests Total capital employed Company registration number: 06622199 17 18 18 19 Group 2014 £m 36.8 30.4 0.6 5.7 – Parent 2014 £m – – – – 419.7 0.3 – 73.8 419.7 694.8 9.5 29.0 111.1 844.4 (283.8) 560.6 – 15.3 – – 15.3 – 15.3 634.4 435.0 (160.0) – 474.4 435.0 381.1 56.4 36.5 474.0 0.4 381.1 56.4 (2.5) 435.0 – 1.1 (0.6) Group 2013 £m 39.3 32.4 0.8 3.4 – Parent 2013 £m – – – – 419.7 0.5 – 76.4 419.7 584.3 10.3 27.4 96.9 718.9 (205.4) 513.5 – – – 55.2 55.2 (39.9) 15.3 589.9 435.0 (158.5) – 431.4 435.0 381.1 56.4 (6.1) 431.4 – 381.1 56.4 (2.5) 435.0 – 474.4 435.0 431.4 435.0 Approved by the Board on 31 October 2014 and signed on its behalf by Nick Maddock, Director. Nick Maddock Director 31 October 2014 The notes on pages 56 to 68 form part of these financial statements. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk Group Cash Flow Statement For the year ended 31 August 2014 55 Operating activities Net cash inflow/(outflow) from operating activities Returns on investments and servicing of finance Interest received Interest paid Exceptional interest costs Net cash (outflow) from returns on investments and servicing of finance Taxation UK corporation tax paid Net cash (outflow) from taxation Capital expenditure Purchase of fixed assets Proceeds from sale of investment properties Proceeds from sale of fixed assets Net cash (outflow)/inflow from capital expenditure Cash inflow/(outflow) before financing Financing Issue of equity shares Loan facility Repayment of bank loans Capital contributions Net cash inflow from financing Increase/(decrease) in cash during the period 2014 2013 Notes £m £m £m £m 2 35.5 (30.1) 0.2 (12.5) – (5.9) (3.3) 0.2 – – – – – 0.5 (18.5) (8.6) (12.3) (26.6) (0.4) (1.8) – 2.3 150.7 97.0 (230.6) 0.5 (5.9) (3.1) 14.2 – 14.2 (0.4) 0.5 (56.6) 17.6 (39.0) 18 The prior year exceptional item included within ‘Returns on investments and servicing of finance’ represents the payment of a one-off swap break fee cost incurred by the business in relation to the successful refinancing transaction completed within that year. The notes on pages 56 to 68 form part of these financial statements. StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 56 Notes to the Financial Statements For the year ended 31 August 2014 1. Accounting policies The following accounting policies have been used in dealing with items that are considered material in the financial statements. They have been applied consistently throughout the current year and prior year with the exception of a change in estimation technique within stock (see below). Basis of accounting The financial statements have been prepared under the historical cost convention, modified by the revaluation of certain investment properties, and in accordance with applicable United Kingdom accounting standards. A separate Profit and Loss Account for the Parent Company has not been presented as permitted by the Companies Act 2006. For the year ended 31 August 2014, the Parent Company’s loss on ordinary activities after taxation was £nil (2013: £0.3 million). The accounts have been prepared on the going concern basis. For further details, please refer to the Directors’ Report. Basis of consolidation The Group’s financial statements consolidate the financial statements of McCarthy & Stone Limited and the entities it controls (its subsidiaries) drawn up to 31 August 2014, using consistent accounting policies applied across the Group. Subsidiaries are consolidated from the date of their acquisition or formation, being the date on which the Group obtains control, and continue to be consolidated until the date that such control ceases. All inter-company balances and transactions, including unrealised profits arising from them, are eliminated. Acquisitions are accounted for under the acquisition method. Purchased goodwill Goodwill arising on the acquisition of subsidiary undertakings and businesses, representing any excess of the fair value of the consideration given over the fair value of the separable assets and liabilities acquired, is capitalised and written off on a straight-line basis over its useful economic life, which is 20 years. The Directors have reviewed the appropriateness of this useful life, and consider that in view of the reputation of the Group and the continuing popularity of the McCarthy & Stone product, a useful economic life of 20 years is justified. Impairment tests on the carrying value of goodwill are undertaken in accordance with FRS11 ‘Impairment of fixed assets and goodwill’ as follows: > At the end of the first full year following acquisition. > Annually, if events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible fixed assets The brand in the Balance Sheet represents the fair value of the McCarthy & Stone brand name purchased as part of the business acquisition in 2009. This amount is written off on a straight-line basis over its useful economic life, which is 20 years. The Directors consider that in view of the continuing popularity of the McCarthy & Stone brand, it had a useful economic life of 20 years from 2009. Interests in joint ventures The Group has a number of contractual arrangements with other parties which represent joint ventures. These take the form of agreements to share control over these entities. The Group recognises its interest in these entities’ assets and liabilities using the equity method of accounting. Tangible fixed assets Tangible fixed assets are stated at cost less accumulated depreciation and any accumulated impairment losses. Costs include those costs directly attributable to making the asset capable of operating as intended. Depreciation is provided on all tangible fixed assets, other than investment properties and freehold land, at rates calculated to write off the cost, less estimated residual value based on prices prevailing at the balance sheet date, of each asset over its expected useful life as follows: Freehold buildings Leasehold land and buildings Fixtures, fittings and equipment Assets in course of construction – 50 years – over the shorter of the lease term and 50 years – over three to ten years – not depreciated during course of construction, followed by depreciation over useful life once brought into use. Shared equity receivables The Group’s shared equity interests arise from sales incentives under which the Group receives a proportion of the resale proceeds of certain apartments on its developments. The Group’s equity share is protected by a registered entry on the title and usually represents the first interest in the property. The shared equity receivables are initially recognised within turnover at fair value being the estimated future amount receivable by the Group discounted to present day values. The fair value of future anticipated cash receipts takes into account the Directors’ view of future house price movements and the expected timing of receipts. The Directors revisit the future anticipated cash receipts from the assets at the end of each financial year and the difference between the anticipated future receipt and the initial fair value is credited to finance income. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 57 1. Accounting policies continued Impairment of non-current assets The carrying values of non-current assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. This impairment is based on the asset’s recoverable amount, being the higher of value in use or fair value less costs of disposal. Leases Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases and rentals payable are charged in the Profit and Loss Account on a straight-line basis over the lease term. Investment properties Investment properties represent the long-term interest held by the Group in certain properties arising from sales incentive scheme arrangements. Gains or losses arising from changes in the fair value of investment properties are included in the revaluation reserve in the year in which they arise. Stocks Stocks are stated at the lower of cost and estimated net realisable value. The cost of work in progress and finished stock comprises the cost of land purchases, which are accounted for from the date of contract exchange, when the Group obtains effective control of the site, building costs and attributable production overheads. Net realisable value is based on estimated selling price less any further costs expected to be incurred to completion and disposal. There has been a change to the way in which attributable production overheads have been estimated during the year. Please see note 10 for a further explanation. Cash and cash equivalents Cash and short-term deposits in the Balance Sheet comprise cash at banks and in hand. Corporation tax Corporation tax comprises current tax and deferred tax. Current tax is based on taxable profits for the year. Deferred tax is recognised on all temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements, with the following exceptions: > in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and > deferred tax assets are recognised only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the related asset is realised or liability is settled, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise income tax is recognised in the Profit and Loss Account. Pensions and other post-retirement benefits The Group provides a defined contribution pension scheme arrangement. Contributions to the scheme are recognised in the Profit and Loss Account in the period in which they become payable. The amount charged to the Profit and Loss Account represents contributions payable to the individual policies held by employees with independent insurance companies. Revenue recognition Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or duty. The following criteria must also be met before revenue is recognised: Sale of leasehold interests Revenue represents the consideration received for the sale of leasehold interests in retirement apartments and is recognised on legal completion. Where these completions result in the Group providing an additional cash amount above an offer given by a third-party part exchange provider, this additional cash amount is recognised as a deduction from revenue. Freehold Reversionary Interests (FRIs) and House Manager Flat Freehold Interests (HMFIs) FRIs and HMFIs in respect of developed sites are periodically sold to third parties. Revenue arising from these sales is recognised only to the extent that the underlying leasehold interests in the retirement apartments have been sold. Other income Other income includes rents receivable, profits arising from the disposal of undeveloped land sites, VAT refunds and profits arising from the realisation of incentive scheme assets. StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 58 Notes to the Financial Statements continued For the year ended 31 August 2014 1. Accounting policies continued Interest income Revenue is recognised as interest accrues, using the effective interest method, being the rate used to discount the estimated future cash receipts over the expected life of the financial instrument. Cost of sales In order to improve the comparability and understandability of the financial statements the Directors have considered it appropriate to reclassify certain costs that were previously shown within ‘administrative expenses’ as ‘cost of sales’ within the Profit and Loss Account on the basis that these costs are directly attributable to the unit sales. The main direct costs that have been reclassified are: regional marketing costs that are directly attributable to sales, show flat running costs and estate agent referral fees. This change in disclosure is considered by the Directors to show a true and fair view and should improve comparability with other housebuilders. The reclassified costs total £6.2 million (2013: £6.7 million) and there is no impact on the total operating profit for the year or net assets. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments Equity instruments issued by the Company are recorded at the proceeds received. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the Profit and Loss Account using the effective interest method and are deducted from or added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Agency fees incurred in respect of the raising and ongoing monitoring of loan facilities are also reported within finance charges. Finance costs Finance costs of financial liabilities are recognised in the Profit and Loss Account over the term of such instruments at a constant rate on the carrying amount. Finance costs which are directly attributable to the issue of loans are capitalised and amortised over the period of the debt. Derivative financial instruments The Group has historically used derivative financial instruments to reduce exposure to interest rate movements. The Group does not hold or issue derivative financial instruments for speculative purposes. For an interest rate swap to be treated as a hedge the instrument must be related to actual assets or liabilities or a probable commitment and must change the nature of the interest rate by converting a fixed rate to a variable rate or vice versa. Interest differentials under these swaps are recognised by adjusting interest payable over the periods of the contracts. Share-based payments Certain Directors and senior managers within the Group are party to a management incentive scheme. The terms of this scheme stipulate that amounts will become payable to the participants if certain future conditions are satisfied. This agreement is accounted for partly as a cash-settled and partly an equity-settled share-based payment scheme. The cost of equity-settled transactions with employees is measured by reference to the fair value at the date at which they are granted and is recognised as an expense over the vesting period. In valuing equity-settled transactions, no account is taken of any non-market-based vesting conditions and no expense is recognised for awards that do not ultimately vest as a result of a failure to satisfy a non-market-based vesting condition. The cost of cash-settled transactions is measured at fair value. Fair value is estimated initially at the grant date and at each balance sheet date thereafter until the awards are settled. Market-based conditions are taken into account when determining fair value. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk59 2. Operating profit a. Turnover Turnover is attributable to one continuing activity within the UK, being the development, design, construction and sale of retirement apartments. b. Reconciliation of operating profit to net cash inflow from operating activities Operating profit (before exceptional items) Depreciation charge Amortisation of brand Amortisation of goodwill (Increase) in stocks (net of land creditor) Decrease/(increase) in debtors Increase in creditors (excluding exceptionals and land creditor) Cash flow on exceptional items Net cash inflow/(outflow) from operating activities (after exceptional items) 2014 £m 70.6 1.3 2.0 2.5 (45.2) 0.9 5.9 (2.5) 35.5 2013 £m 40.7 0.8 2.1 2.4 (78.2) (4.2) 7.2 (0.9) (30.1) The movement in stocks and creditors has been calculated net of the movement on land creditors as the impact on working capital is neutral. The Directors believe that this presentational format presents a fairer representation of the Group’s working capital movements and the associated underlying cash flows. Land creditors at 31 August 2014 totalled £222.9 million (2013: £157.6 million). c. Operating profit is stated after charging Depreciation of owned assets Amortisation of goodwill Amortisation of brand Operating lease rentals: Auditor’s remuneration: land and buildings plant and machinery audit services non-audit services The analysis of auditor’s remuneration is as follows: Fees payable to the Company’s auditor for the audit of the Company’s annual accounts Fees payable to the Company’s auditor and their associates for other services to the Group The audit of the Company’s subsidiaries pursuant to legislation Total audit fees Tax services Project assurance Total non-audit fees d. Other operating income comprises Net rental income Other income Non-core business revenue Land sales 2014 £m 1.3 2.5 2.0 1.2 1.8 0.1 0.1 2014 £m 0.1 – – 0.1 0.1 – 0.1 2014 £m 0.4 3.9 2.9 0.7 7.9 2013 £m 0.8 2.4 2.1 1.0 1.6 0.1 0.2 2013 £m 0.1 – – 0.1 0.2 – 0.2 2013 £m 0.7 3.6 1.2 – 5.5 StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 60 Notes to the Financial Statements continued For the year ended 31 August 2014 2. Operating profit continued e. Adjusted operating profit Operating profit before exceptional items Amortisation of goodwill Amortisation of brand Adjusted operating profit Adjusted operating margin 2014 £m 70.6 2.5 2.0 2013 £m 40.7 2.4 2.1 75.1 19.4% 45.2 14.5% The above adjusted operating profit includes the £8.1 million impact of a change in cost capitalisation estimation technique which was applied from 1 September 2013. The adjusted operating profit excluding this impact would be £67.0 million with an associated adjusted operating margin of 17.3%. f. Adjusted profit before taxation Profit before taxation before exceptional items Amortisation of goodwill Amortisation of brand Adjusted profit on ordinary activities before taxation 2014 £m 58.7 2.5 2.0 63.2 2013 £m 8.0 2.4 2.1 12.5 The above adjusted profit on ordinary activities before taxation includes the £8.1 million impact of a change in cost capitalisation estimation technique which was applied from 1 September 2013. The adjusted profit on ordinary activities before taxation excluding this impact would be £55.1 million. 3. Employees The average monthly number of employees, including Executive Directors, during the year ended 31 August 2014 was 942 (2013: 899). The total number of persons employed by the Group at 31 August 2014 was 900 (2013: 941). Average monthly number of employees, including Executive Directors, during the period: Office and management Construction The aggregate payroll cost, including Directors, was as follows: Wages and salaries Social security costs Other pension costs 4. Directors’ emoluments Emoluments (excluding pension contributions) Company contributions to Group personal pension schemes Highest paid Director: Emoluments (excluding pension contributions) Company contributions to Group personal pension schemes Number of Directors in Group personal pension schemes 2014 2013 779 163 942 2014 £m 46.7 5.4 1.7 53.8 2014 £m 1.5 – 1.5 0.4 – 0.4 2014 1 748 151 899 2013 £m 40.4 5.1 1.4 46.9 2013 £m 1.5 – 1.5 0.7 – 0.7 2013 1 The emoluments disclosed above include £0.1 million (2013: £0.2 million) sums payable to third parties for Directors’ services. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk5. Net interest payable and similar charges Loans and overdrafts PIK notes Interest rate swap payments Interest payable Refinancing transaction costs Refinancing issue costs Interest receivable Unwinding of discount on long-term receivables Net interest payable 6. Tax on profit/(loss) on ordinary activities a. Analysis of tax credit for the period Current tax: UK corporation tax on profit for the period Adjustments in respect of previous periods Deferred tax: Origination and reversal of timing differences Adjustments in respect of previous periods Tax on profit/(loss) on ordinary activities b. Factors affecting tax credit for the current period Profit/(loss) on ordinary activities before taxation Anticipated tax (credit)/charge based on profit before tax at 22.17% (2013: 23.58%) Effects of: Expenses not deductible for tax purposes Income not taxable for tax purposes (Decrease)/increase in unutilised losses and movement in short-term timing differences (Decelerated)/accelerated capital allowances Adjustments in respect of previous periods Current tax charge/(credit) for the year 61 2014 £m 12.5 – – 12.5 – 1.9 (0.4) (0.6) 13.4 2014 £m 11.7 – 0.3 0.1 12.1 2014 £m 54.7 12.1 0.3 (0.5) (0.1) (0.1) – 11.7 2013 £m 8.4 17.2 7.9 33.5 8.6 – (0.7) (0.1) 41.3 2013 £m – (0.1) (1.3) 0.1 (1.3) 2013 £m (11.8) (2.8) 1.8 (0.6) 1.4 0.2 (0.1) (0.1) The UK corporation tax rate decreased from 23% to 21% from 1 April 2014. The Finance Act 2013, which provides for a further reduction in the main rate of corporation tax from 21% to 20% from 1 April 2015, was substantively enacted on 2 July 2013. This rate reduction has been reflected in the calculation of deferred tax at the balance sheet date. c. Deferred tax movements At 1 September (Debit)/credit for the year Adjustments in respect of previous periods At 31 August (included in debtors) 2014 £m 2.0 (0.3) (0.1) 1.6 2013 £m 0.8 1.3 (0.1) 2.0 StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 62 Notes to the Financial Statements continued For the year ended 31 August 2014 6. Tax on profit/(loss) on ordinary activities continued d. Deferred tax reflected in the Group accounts Capital allowances lower than depreciation Short-term timing differences Losses Deferred tax asset provided in the accounts Provided 2014 £m Provided 2013 £m 0.2 1.4 – 1.6 0.3 1.3 0.4 2.0 Deferred tax has not been provided on capital losses carried forward of £1.6 million as there is insufficient evidence that there will be taxable gains in the future against which these losses can be utilised. 7. Intangible fixed assets Group Cost: At 1 September 2013 At 31 August 2014 Amortisation: At 1 September 2013 Charge for the year At 31 August 2014 Net book value at 31 August 2014 Net book value at 31 August 2013 Goodwill £m Brand £m 50.0 50.0 (10.7) (2.5) (13.2) 36.8 39.3 41.4 41.4 (9.0) (2.0) (11.0) 30.4 32.4 Total £m 91.4 91.4 (19.7) (4.5) (24.2) 67.2 71.7 The fair value of the brand was calculated by discounting to present value the cash flows from intra-Group royalty receipts at an appropriate discount rate. The values attributed to the royalties are turnover-based and represent the monies that the Group would expect to achieve should the McCarthy & Stone brand be sold at arm’s length to a third party. The Parent Company had no intangible fixed assets at 31 August 2014 (2013: £nil). 8. Tangible fixed assets Group a. Investment properties at valuation At 31 August 2013 Redemptions At 31 August 2014 Long leasehold equity interests in sold flats £m 0.6 (0.2) 0.4 Other long leasehold interest (shops) £m 0.2 – 0.2 Total £m 0.8 (0.2) 0.6 Long leasehold equity interests represent interests in apartments sold between 1989 and 1993 using a sales incentive scheme under which the Group undertook to contribute towards service charges in exchange for an equity share in the apartment. These interests are secured by legal charges on those apartments. The investment properties are valued based on prices achieved on recent sales of similar properties and are subject to annual review by the Directors and Executive Leadership Team which include suitably qualified Chartered Surveyors and Chartered Accountants. The revaluation exercise led to no change in the valuation. These properties have not been depreciated. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk8. Tangible fixed assets continued b. Property, plant and equipment Cost: At 1 September 2013 Additions Transfers Disposals At 31 August 2014 Depreciation: At 1 September 2013 Charge for the year Disposals At 31 August 2014 Net book value at 31 August 2014 Net book value at 31 August 2013 63 Land and Buildings Freehold £m Long leasehold £m Fixtures fittings and equipment £m Assets in course of construction £m – – – – – – – – – – – 0.1 – – (0.1) – 0.1 – (0.1) – – – 5.9 1.1 3.2 (0.4) 9.8 3.2 1.3 (0.4) 4.1 5.7 2.7 0.7 2.5 (3.2) – – – – – – – 0.7 Total £m 6.7 3.6 – (0.5) 9.8 3.3 1.3 (0.5) 4.1 5.7 3.4 The Parent Company had no tangible fixed assets at 31 August 2014 (2013: £nil). 9. Investments Group Investment in joint ventures The Group has a 50% share of the 1,000 issued £1 ordinary shares in each of Kindle Housing UK (Worthing) Limited and Kindle Housing UK (Christchurch) Limited and the two issued £1 ordinary shares in Kindle Housing UK (Exeter) Limited, which rent affordable housing to local key worker employees. The Group also has a 50% share of the two issued £1 ordinary shares of Kindle Housing Limited, which manages affordable housing on a shared equity basis. These companies are all 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 at 31 August 2014 is set out below: Share of the joint ventures’ balance sheet: Non-current assets Net current assets Provision for impairment Share of gross assets Non-current liabilities Share of gross liabilities Share of net assets Share of the joint ventures’ income and expenses: Turnover Cost of sales Share of operating profit in joint ventures 2014 £m 1.2 – (0.3) 0.9 (0.6) (0.6) 0.3 2014 £m 0.1 (0.1) – 2013 £m 1.1 – – 1.1 (0.6) (0.6) 0.5 2013 £m 0.1 (0.1) – StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 64 Notes to the Financial Statements continued For the year ended 31 August 2014 9. Investments continued Parent Shares in unlisted subsidiary undertakings Cost: At 31 August 2013 and 31 August 2014 Provision: At 31 August 2013 and 31 August 2014 Net book value at 31 August 2013 and 31 August 2014 The principal active companies in the Group during the period were: £m 419.7 – 419.7 Company McCarthy & Stone (Developments) Limited McCarthy & Stone Retirement Lifestyles Limited McCarthy & Stone (Equity Interests) Limited McCarthy & Stone (Home Equity Interests) Limited McCarthy & Stone Investment Properties No. 23 Limited McCarthy & Stone (Total Care Living) Limited McCarthy & Stone (Alnwick) Limited McCarthy & Stone (Extra Care Living) Limited McCarthy & Stone Total Care Management Limited McCarthy & Stone Rental Interests No. 1 Limited McCarthy & Stone Management Services Limited McCarthy & Stone Lifestyle Services Limited McCarthy & Stone Financial Services Limited Keyworker Properties Limited McCarthy & Stone Estates Limited YourLife Management Services Limited % Holding ordinary shares Nature of business Incorporated and operating in 90 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50 Holding company Developer Property investment Property investment Property investment Property investment Property investment Property investment Property investment Property investment Development management Holding company Financial services Property investment Property resale Development management England England England England England England England England England England England England England England England England Each of the above shareholdings gives the immediate parent company 100% voting rights, with the exception of YourLife Management Services Limited, where the parent has 50% voting rights, but a majority share of Directorships on the Board of YourLife Management Services Limited. 10. Stocks Group Land for development Sites in the course of construction Finished stock Land for development is further analysed as follows: Exchanged land with planning Completed land with planning Unconditional land without planning Conditional land without planning 2014 £m 314.8 191.6 188.4 694.8 47.3 88.8 3.2 175.5 314.8 2013 £m 234.8 130.7 218.8 584.3 37.9 72.1 3.1 121.7 234.8 From 1 September 2013, the Group revised its calculation of directly attributable overheads which are capitalised and held as stock. These costs now include an increased proportion of design, construction, commercial and planning costs. This has resulted in a net positive impact on the Profit and Loss Account of £8.1 million. These costs would previously have been expensed as incurred. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk10. Stocks continued The table below details the impact of this change on the primary financial statements for the year ended 31 August 2014. 2014 Pre revised estimation technique before exceptional items £m 2014 Post revised estimation technique before exceptional items £m Impact of revised estimation technique £m Turnover Cost of sales Gross profit Gross margin Administrative expenses Other operating income Other operating expenses Operating profit Current assets – stocks 11. Debtors: amounts falling due within one year Trade debtors Other debtors and prepayments Corporation tax Deferred taxation Amounts owed by subsidiary undertakings 12. Debtors: amounts falling due after one year Group Secured mortgages Shared equity receivables Deferred taxation 387.8 (292.4) 95.4 24.6% (37.4) 7.9 (3.4) 62.5 686.7 Group 2014 £m 1.4 7.5 – 0.6 – 9.5 Notes 6 – 8.6 8.6 – (0.5) – – 8.1 8.1 Parent 2014 £m – 0.5 – – 14.8 15.3 Notes 6 65 2013 Before exceptional items £m 310.8 (244.2) 66.6 21.4% (29.1) 5.5 (2.3) 387.8 (283.8) 104.0 26.8% (37.9) 7.9 (3.4) 70.6 40.7 694.8 584.3 Group 2013 £m 0.4 7.0 2.0 0.9 – 10.3 2014 £m 3.7 24.3 1.0 29.0 Parent 2013 £m – – – – – – 2013 £m 4.4 21.9 1.1 27.4 Secured mortgages represent amounts outstanding from the sale of certain of the Group’s apartments under a sales incentive scheme, which was discontinued in 1995, together with interest thereon. The amounts are secured by mortgages repayable on subsequent sale of the underlying unit, or certain other specified events. The Group’s shared equity interests arise from sales incentives under which the Group receives a proportion of the resale proceeds of certain apartments on its developments. The Group’s equity share is protected by a registered entry on the title and usually represents the first interest in the property. StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 66 Notes to the Financial Statements continued For the year ended 31 August 2014 13. Creditors: amounts falling due within one year Trade creditors Conditional land creditors Unconditional land creditors UK corporation tax Other taxes and social security costs Unamortised issue costs Other creditors Group 2014 £m 11.1 216.4 6.5 5.9 1.3 – 42.6 283.8 Parent 2014 £m – – – – – – – – Group 2013 £m 12.7 143.5 14.1 – 1.1 (0.4) 34.4 205.4 Parent 2013 £m – – – – – – 39.9 39.9 Conditional land creditors relate to the unpaid purchase consideration due on sites acquired that are conditional on satisfying certain contractual conditions. In circumstances where these conditions are not satisfied the land creditor payment will not become due. Other creditors include amounts of £nil (2013: £0.3 million) in respect of Directors. 14. Creditors: amounts falling due after more than one year Group Other loans Unamortised issue costs The Group’s loans are analysed as follows: Loan facility 2014 £m 160.0 – 160.0 2013 £m 160.0 (1.5) 158.5 Nominal interest rate Libor + 7.25% Year of maturity 2018 Outstanding at 31 August 2014 £m Outstanding at 31 August 2013 £m 160.0 160.0 160.0 160.0 The Group has £160.0 million (2013: £160.0 million) of loans in the form of term debt facilities. These are non-amortising, with a five-year term, repayable in August 2018. The nominal interest rate rises to Libor + 8.25% from February 2015. Loans are secured on the fixed and floating assets of the Group. 15. Analysis and reconciliation of net debt Group Cash Loan facility Total debt (excluding cash) Net debt Increase/(decrease) in cash Cash flow arising from change in debt Change in net debt resulting from cash flow Other non-cash movement Net debt at 1 September Net debt at 31 August 31 August 2013 £m 96.9 (160.0) (160.0) (63.1) Cash flow £m 14.2 – – 14.2 2014 £m 14.2 – 14.2 – (63.1) (48.9) 31 August 2014 £m 111.1 (160.0) (160.0) (48.9) 2013 £m (39.0) 133.6 94.6 201.8 (359.5) (63.1) McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk16. Operating lease commitments Financial commitments under non-cancellable operating leases will result in the following payments due in the next financial year: 67 Operating leases expiring: In less than one year In two to five years In more than five years 17. Share capital and reserves Equity share capital Ordinary shares of 20p each At 31 August 2013 At 31 August 2014 Land and buildings 2014 £m 0.1 0.1 0.5 0.7 Other 2014 £m 0.7 1.2 0.1 2.0 Land and buildings 2013 £m 0.1 – 0.5 0.6 Other 2013 £m 0.4 1.6 – 2.0 Authorised No. ’000 Authorised £’000 Allotted, called up and fully paid No. ’000 Allotted, called up and fully paid £’000 No limit No limit 1,905,550 381,110 No limit No limit 1,905,550 381,110 18. Combined reconciliation of shareholders’ funds and statement of movement on reserves Group: At 31 August 2013 Share-based payments Profit for the financial year At 31 August 2014 Company: At 31 August 2013 At 31 August 2014 Called up share capital £m Share premium £m Profit and loss account £m 381.1 – – 381.1 381.1 381.1 56.4 – – 56.4 56.4 56.4 (6.1) 0.1 42.5 36.5 (2.5) (2.5) The Group received no capital contributions during the year ended 31 August 2014 (2013: £0.5 million). 19. Minority interests At 1 September 2013 Share of profit on ordinary activities after taxation Share issue in subsidiary undertaking At 31 August 2014 Total £m 431.4 0.1 42.5 474.0 435.0 435.0 Total £m – 0.1 0.3 0.4 20. Contingent liabilities The Group has given unlimited guarantees in relation to the bank overdraft, loan and hire purchase liabilities of its subsidiary undertakings. At 31 August 2014, the amount outstanding under those facilities was £160.0 million (2013: £160.0 million). 21. Pensions A defined contribution money purchase pension arrangement is operated for employees in the UK to which the Group makes a contribution under specified circumstances. The Group’s pension cost for the period was £1.7 million (2013: £1.4 million). The unpaid contributions outstanding at 31 August 2014 were £nil (2013: £nil). 22. Related parties The Group and Company have taken advantage of the exemption available under FRS8 paragraph 3(c) from disclosing the transactions between members of the McCarthy & Stone Limited group of companies. StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 68 Notes to the Financial Statements continued For the year ended 31 August 2014 23. Share-based payments Directors and selected employees entered into a Management Incentive Plan in the period. The Management Incentive Plan entitles the participants to a cash bonus and shares if certain future conditions are met. The split of cash and equity will be based on a hurdle mechanism which accrues from a predetermined starting equity value compounded at a set rate of interest per annum. The cash payment will be a percentage of the final valuation above the starting equity value but below the hurdle. The shares will entitle the participants to a percentage of the total value created above the hurdle. Equity-settled share-based payment The cost of equity-settled transactions with the participants is measured by reference to the fair value at the date at which they are granted and is recognised as an expense over the expected vesting period. The number of shares issued to the participants was 19,150 and the fair value of the shares at the grant date is measured at £1.3 million based on management’s most recent valuation. Therefore the Group recognised a cost of £0.1 million in the Profit and Loss Account in relation to the equity-settled share-based payment. Cash-settled share-based payment The fair value of the cash payment under the Management Incentive Plan has been valued at £2.9 million at 31 August 2014 based on the Directors’ best estimate of possible expected outcomes. Therefore the Group recognised a total cost of £0.2 million in relation to the cash-settled share-based payment during the year ended 31 August 2014. 24. Ultimate parent undertaking and controlling party McCarthy & Stone Limited, which is registered in England and Wales, is considered to be the Group’s ultimate parent undertaking and controlling party. There is no ultimate controlling party of McCarthy & Stone Limited. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukGeneral Company Information 69 McCarthy & Stone Limited is registered in England and Wales, registered number 6622199. Coventry (Midlands) Ross House Binley Business Park Harry Weston Road Coventry CV3 2TR Colney Heath (North London) Tyttenhanger House Coursers Road Colney Heath Hertfordshire AL4 0PG Tel: 02476 441199 Tel: 01727 744350 Our offices Bournemouth (Head Office) Current address: Homelife House 26–32 Oxford Road Bournemouth Dorset BH8 8EZ Tel: 01202 292480 With effect from 1 December 2014: 100 Holdenhurst Road Bournemouth Dorset BH8 8AL Glasgow (Scotland) Unit 11000 Academy Park Gower Street Glasgow G51 1PR Altrincham (North) Unit 3 Edward Court Altrincham Business Park Altrincham Cheshire WA14 5GL Tel: 0161 941 6255 Woking (South East) 2 Genesis Business Park Albert Drive Woking Surrey GU21 5RW Tel: 0141 420 8300 Tel: 01483 908600 Our advisers Solicitors Freshfields Bruckhaus Deringer LLP 65 Fleet Street London EC4Y 1HS Bankers HSBC Bank plc 70 Pall Mall London SW1Y 5EZ Corporate Communications Brunswick Group LLP 16 Lincoln’s Inn Fields London WC2A 3ED Chartered Accountants and Statutory Auditor Deloitte LLP Mountbatten House 1 Grosvenor Square Southampton SO15 2BZ York (North) Aspen House Wykeham Road Northminster Business Park Upper Poppleton York YO26 6QW Tel: 01904 444200 Ringwood (South West) South West House 1 Embankment Way Ringwood Hants BH24 1EU Tel: 01425 322000 Financial Advisers Rothschild New Court St Swithin’s Lane London EC4N 8AL Cautionary statement regarding forward-looking statements Some of the information in this document may contain projections or other forward-looking statements regarding future events or the future financial performance of McCarthy & Stone Limited and its subsidiaries (the Group). You can identify forward-looking statements by terms such as “expect”, “believe”, “anticipate”, “estimate”, “intend”, “will”, “could”, “may” or “might”, the negative of such terms or other similar expressions. McCarthy & Stone Limited (the Company) wishes to caution you that these statements are only predictions and that actual events or results may differ materially. The Company does not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in projections or forward-looking statements of the Group, including among others, general economic conditions, the competitive environment as well as many other risks specifically related to the Group and its operations. Past performance of the Group cannot be relied on as a guide to future performance. Contacts Website: www.mccarthyandstone.co.uk info@mccarthyandstone.co.uk Email: Twitter: twitter.com/mccarthystone Facebook: facebook.com/mccarthystone StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 70 Glossary of Financial Terms Revenue Operating profit Operating margin Profit before tax Turnover including revenue from the sale of freehold reversionary interests. References in the Strategic Report to operating profit relate to adjusted operating profit before exceptional items and amortisation of intangibles, as shown in note 2e to the financial statements. References in the Strategic Report to operating margin relate to adjusted operating margin before exceptional items and amortisation of intangibles, as shown in note 2e to the financial statements. References in the Strategic Report to profit before tax relate to adjusted profit before tax before exceptional items and amortisation of intangibles, as shown in note 2f to the financial statements. Net average selling price Turnover from unit sales/units sold. Tangible net asset value Net assets excluding intangible assets. Tangible gross asset value Tangible net asset value excluding net debt. Return on average capital employed Operating profit/average tangible gross asset value. Gearing Net debt/net assets. McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukNotes 71 StrategicReportCorporate GovernanceFinancialStatementsMcCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.uk 72 Notes McCarthy & Stone Limited Annual Report and Accounts 2014www.mccarthyandstone.co.ukReport production managed by Michael Stoner Cartwright Court, Malvern M c C a r t h y & S t o n e L i m i t e d A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 4 w w w . m c c a r t h y a n d s t o n e . c o . u k Current address: Homelife House 26–32 Oxford Road Bournemouth Dorset BH8 8EZ Tel: 01202 292480 With effect from 1 December 2014: 100 Holdenhurst Road Bournemouth Dorset BH8 8AL Website: www.mccarthyandstone.co.uk Email: info@mccarthyandstone.co.uk Twitter: twitter.com/mccarthystone Facebook: facebook.com/mccarthystone

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