Telford Homes has now released their interim results for the year ending 2017.
Revenues declined by £35.2M when compared to the first half of last year and cost of sales fell by £20.2M to give a gross profit some £15.1M below that of last time. Admin expenses increased by £383K mainly due to higher employee costs but selling expenses reduced by £3.7M due to the lower number of sales launches as the group took a cautious approach to the outcome of the EU vote, so the operating profit declined by £11.7M. Finance costs increased by £192K due to increased non-utilisation fees but tax charges fell by £2.5M to give a profit for the period of £7.4M, a decline of £9.4M year on year.
When compared to the end point of last year, total assets increased by £39.7M to £379.6M driven by a £38.8M growth in inventories. Total liabilities also increased during the period due to a £23.1M growth in payables and a £15.3M increase in borrowings. The end result is a net tangible asset level of £187.8M, a growth of just £822K over the past six months.
Before movements in working capital, cash profits declined by £12.4M to £9.6M. There was a cash outflow from working capital due to a large increase in inventories and after tax payments also grew and there was a net £7.7M investment in joint ventures which meant there was a net cash outflow of £11.4M, a detrimental movement of £35.6M year on year. The group also spent £3.6M on acquisitions to give a cash outflow of £15M before financing. The group increased bank loans by £15M and paid out £5.7M which meant that there was a cash outflow of £5.1M and a cash level of £15.6M at the period-end.
The reduction in profit during the period reflects the lower number of open market completions with just 85 in the first half compared to 282 in the first half of last year. Some of that reduction has been offset by ongoing profit recognition on an increased number of affordable homes under construction and the two current build to rent or PRS contracts. In the first two months of the second half, the group has achieved completion on over 100 additional open market homes.
In the last three months the group has experienced increased sales activity in respect of residual availability across a number of developments. Greater interest levels and more visitors to the Stratford sales centre have resulted in an increased number of reservations. Sales secured in recent months include three penthouse apartments at Horizons with an average price exceeding £1M, well in excess of the usual range.
Following the Brexit vote the group held back any significant sales launches whilst waiting for the immediate reaction to the outcome to become calmer. Although there is still uncertainty around the impact of leaving the EU, the market has settled in recent weeks and in early November the group launched the second phase of City North in Finsbury Park, a joint venture with the Business Design Centre. The development has 355 new homes together with a substantial commercial hub and incorporates a new entrance to the station. The group purchased its interest in the development from United House and went into the launch with 161 of the 308 open market homes already secured through previous sales activity.
The November launch exceeded the board’s expectations and in the space of three weekends the group sold a further 72 homes with combined sales in excess of £43M. This means that over £110M of open market revenue has now been secured on the development with final completions not due until 2020. The new sales were primarily to investors from the UK, China and Hong Kong. The net pricing achieved at City North was ahead of expectations with the average price achieved being £860 per square foot, near to the top end of the group’s price range. They have not had to discount prices below expected levels on any of their developments in contrast to the current market conditions for more expensive properties, although this has been helped somewhat by favourable exchange rates.
The group is increasing its involvement in the build to rent sector. These contracts are typically forward funding arrangements with a margin of around 12% to 13%. The margin recognised on build to rent schemes during the period was 12.8% compared to a residual gross margin on open market sale developments of 25.2% before sales and finance costs. This margin remains above target despite a large proportion of revenue arising from the Horizons development where a lower margin was accepted on the land purchase in return for land payments being made primarily from completion proceeds. The original target for Horizons has been exceeded due to a favourable balance between price inflation and cost inflation over the life of the development.
The group is very close to exchanging contracts on a third build to rent transaction and has recently started discussions on a fourth alongside looking at a number of options for partnership working outside of the existing development pipeline.
They are currently progressing the purchase of a significant site in East London alongside a joint venture partner and are in discussions on several other opportunities. The development pipeline at the period-end represented £1.42BN of future revenue to be recognised by the group and comprised over 4,000 homes including joint ventures. The average anticipated price of open market homes in the future development pipeline is £517K.
Over the last two years sales price inflation has slowed to a moderate by stable rate in low single digits. Build cost inflation is still evident but this has moderated and remains in line with board expectations. There have been indications of lower numbers of construction starts in recent months which should reduce any residual pressure on the availability of resources and their associated costs.
Net debt has increased to £32.7M compared to £17.3M at the year-end due to the investment in work in progress and lower numbers of open market completions, partially offset by an increase in deposits received on forward sales. There is still headroom of £125M on the debt facility which the group expects to utilise over the next few years.
Overall the board feel the group is well placed to deliver on their targets to exceed £50M of pre-tax profit by 2019 and currently have forward sales of over £700M and demand that remains strong from both owners and tenants.
At the current share price the shares trade on a PE ratio of 9.4 which falls to 9 on the full year consensus forecast. After an increase in the interim dividend, the shares are yielding 4.6% which increases to 4.9% on the full year forecast.
On the 21st December it was announced that group planning director David Durant sold 46,650 shares at a value of £146K and Land Director Henry Furlong sold 57,582 shares at a value of £180K. This doesn’t look that good to be honest.
The group has announced that it has exchange contracts for the sale of The Forge to M&G Real Estate, their second transaction with them. The Forge is their third build to rent development and the sale comprises the freehold interest in the land and the construction of 125 open market homes for £48.6M. The sale is on a forward funded basis and will comprise an initial land payment followed by regular payments throughout the construction period.
Overall then this has been a bit of a slow period for the group. Profits declined and the operating cash flow deteriorated, not helped by the investment in inventory. Net assets did show a small improvement, however. The sluggish performance is as a result of less open market completions as the group held back following the Brexit vote but the market seems to have settled since then and the City North development seems to be selling well, aided by a weak Sterling with increasing sales to Chinese investors.
I have mixed feelings about the increasing reliance on the build to rent sector. The forward sales should improve cash flow but the work will be lower margin so negatively impacts the return on investment. The recent director sales are a concern but the market looks OK and build cost inflation is manageable. With a forward PE of 9 and yield of 4.9% on balance I think the risks are priced in and I am happy to hold.
On the 1st February the group announced that it had exchanged contracts for the purchase of a significant development sire, the former London Electricity Board Building in Tower Hamlets for £30.2M. The 0.94 acre site is located in Bethnal Green. The expected gross development value of the scheme is about £95M and the group expects to start work on site in 2018 with completion anticipated in 2021.
On the 17th February the group announced that Land Director James Furlong sold 50,000 shares at a value of £178K. This seems a little ominous but I’m staying put for now.
On the 29th March the group announced that its joint venture, Chobham Farm, has exchanged contracts for the sale of the first phase of open market homes at New Garden Quarter, Stratford, to Folio London, a subsidiary of Notting Hill Housing Group, the other joint venture partner in Chobham Farm.
The contract represents the group’s fourth significant build to rent transaction and involves the sale of 112 of the 297 open market homes at New Garden Quarter for a cash consideration of £53.7M. The development is underway and completion of the build to rent homes is expected in 2018. The remaining open market units, which form part of the second phase, are expected to complete in 2019 and will be launched at a later stage from the group’s sales and marketing suite in Stratford.
The sale is on a forward funded basis and will comprise an initial upfront payment followed by regular payments throughout the remaining construction period. As a result of this transaction the joint venture will no longer require any external debt finance for the entire development. The group is now developing 483 build to rent homes across the four transactions and they continue to actively look for appropriate opportunities to increase this number in future.
e year as a whole. Pre-tax profit is expected to be slightly ahead of current market expectations following a strong performance in the second half of the year. In the last few months the non-prime London housing market has remained robust despite economic and political uncertainty.
The recent build to rent sales has increased the total number of homes in these schemes under construction to 483 representing a total contract value of £232M and the board expects further progress over the next year. The last significant launch was City North in Finsbury Park in November which achieved 73 new sales at a combined value of over £43M. Subsequent to this, new developments which would have been launched have instead ben sold for build to rent.
Total forward sales at the start of the coming year have declined by £29M to £550M and the average price in the development pipeline is within the group’s target range at £517K. At the start of February the group added to its pipeline through the purchase of a significant development site, the former London Electricity Board building in Tower Hamlets for £30.2M. The expected gross development value of the scheme is approximately £95M and subject to planning consent they expect to start work on site in 2018 with completion in 2021.
Other new opportunities are constantly being appraised and in greater numbers than during 2016. These include a mix of locations and developments that suit both individual purchasers and build to rent investors. The future build to rent strategy includes buying land in collaboration with investment partners to maximise value for both parties by designing a specific product from day one.
Going forward the group expects to develop even closer relationships and longer term partnerships with specific build to rent investors in the coming months as part of the plan to grow this area of the business. Over 80% of the anticipated gross profit for 2018 has been secured and the group in on track to deliver over £40M of pre-tax profit in that year. In addition for 2019 they have secured over 60% of anticipated gross profit and expect pre-tax profit to exceed £50M.
This all seems OK to me and I continue to hold.
On the 25th April the group announced that it had exchange contracts for the purchase of Stone Studios, a residential-led mixed use development site in Hackney Wick. The 1.06 acre site has detailed planning permission granted by the London Legacy Development Corp. The development will deliver 110 new open market homes and 10 affordable homes along with 54,218 sq.ft. of commercial space including 32,540 of affordable workspace. The gross development value of the scheme is expected to be over £80M and the group intends to start work later in 2017 with completion expected in 2020.
On the 4th May the group announced that it had been selected by Brent Council as their preferred partner to redevelop Gloucester House and Durham Court, a residential development site situated in South Kilburn. The 3.2 acre site has detailed planning permission and represents the second phase out of four for the regeneration of the area. The development will deliver 124 new open market homes, 102 affordable social rent homes and ten shared equity homes. The gross development value of the scheme is expected to be about £95M and the group intends to start work on site later this year with completion in 2021.