Telford Homes have now released their final results for the year ended 2018.
Revenues increased when compared to last year as a £35.4M decline in contract revenue and a £4.1M fall in freehold sales revenue was more than offset by a £66.3M growth in open market revenue and a £2.1M increase in other revenue. Cost of sales also increased to give a gross profit £17.7M higher. Depreciation was up £307K and other admin expenses grew by £3M. Selling expenses were up £1.6M and the share of profit from joint ventures fell by £2.2M to give an operating profit £10.7M higher. Loan interest declined but tax charges were up £1.8M to give a profit for the year of £37.4M, a growth of £9.9M year on year.
When compared to the end point of last year, total assets increased by £13.9M driven by a £12.9M growth in amounts owed by joint ventures, a £12.4M increase in development properties, a £7M growth in amounts recoverable on contracts and a £6.7M increase in investments in joint ventures, partially offset by a £25.8M decline in cash. Total liabilities declined during the year as a £58.4M increase in bank loans and a £9M growth in accrued expenses were more than offset by a £35.8M reduction in deposits received in advance, a £26.7M fall in land creditors due to the unwinding of creditors in relation to a development site at Cambridge Heath Road following completion of the land transaction, and a £17.3M decline in trade payables. The end result was a net tangible asset level of £231M, a growth of £27M year on year.
Before movements in working capital, cash profits increased by £13.4M to £46.4M. There was a big cash outflow from working capital and after interest payments increased by £2.4M, tax payments were up £874K and there was a £7.5M swing to investments into joint ventures, there was a net cash outflow from operations of £73M, a detrimental movement of £90M year on year. The group spent £2.1M on intangible assets and received £773K in interest to give a cash outflow of £74.3M before financing. They took out £60M of new loans and paid out £12.4M in dividends which gave a cash outflow of £25.8M and a cash level of £12.8M at the year-end.
Open market residential revenue increased from £153.5M to £225.1M from 476 completions (289) with an average price of £473K (£531K). The lower average price is due to the mix of developments completing in each period in terms of product and location and to some degree reflects when individual contracts were exchanged with a significant proportion of the homes forward sold a number of years ago.
Contract revenue was £86.8M compared to £126.6M last year with the reduction due to the timing of entering into new contracts as revenue recognition is often weighted somewhat towards the start of the contract. In the current year the group exchanged contracts to deliver 279 affordable homes whereas in the prior year they exchanged contracts to deliver 400 and entered into three new build to rent contracts to deliver 387 build to rent homes.
The gross margin increased from 22.3% to 26.5% and the margin achieved on open market sale completions increased from 25.4% to 28.2%. The majority of open market completions this year were forward sold a number of years ago where the sales achieved had benefited from some price inflation prior to launch. This, combined with an easing of build cost inflation in the last year has resulted in strong margins. It is expected to trend down towards the 24% target over time as older development are replaced with sites appraised more recently.
The margin achieved on the build to rent revenue increased from 16% to 17.8%. This is due to some of the land being purchased at more advantageous rates prior to becoming part of the build to rent portfolio, but also due to build cost savings recognised in the period. The group’s target margins are still expected to be around 12 to 13%.
The London market for housing at the group’s price point has remained robust with ongoing demand from a broad base of purchasers. Although prices have fallen in some prime locations, their market has been more stable. The average price of the open market homes in their development pipeline is £539K compared to £527K last year and the board expect that to remain relatively constant in the future.
In January the group started the launch of the second phase of New Garden Quarter in Stratford. They secured more than 100 reservations across three weeks. A quarter of these were to UK buyers, a greater proportion than expected, with the remaining sales going to buyers in Hong Kong and China. The group are seeing growing investment from China despite the uncertainty surrounding Brexit. All of the remaining homes at Bermondsey Works have been sold in recent weeks alongside a slower but continuing rate of sale of the remaining higher priced homes at Manhattan Plaza. Homes priced about £750K are taking longer to sell.
Due to a number of developments being sold for build to rent rather than individual sale the group has undertaken fewer sales launches in the year than usual. In addition, some developments have been held back until nearer the build completion to encourage sales to owners. In late March the group launched all 83 homes at Bow Garden Square, E3, focused on owner-occupiers. Initial interest has been encouraging and nine reservations have been secured to date.
The group completed and handed over 476 open market homes in the year compared to 289 last year. A combination of the significant increase in recognised profit from these completions of forward sold homes and fewer launches in the last year have reduced the total forward sold position to £344M, from £546M last year. This is exacerbated by the timing of some significant build to rent transactions occurring in the final few months of the ear with the next build to rent sales expected in 2019. Forward sales still equate to over 100% of the total revenue recognised this year, however.
The development pipeline now includes over 4,000 homes, of which almost 75% are in detailed design or under construction. In December they acquired a residential development site in Walthamstow for £33.8M. Having completed some initial design work they recently began a formal sale process to identify a build to rent investor for the 257 open market homes. This process is going well and they have had an encouraging response. Depending on the timeframe to get into contract they expect to announce the transaction in the next few months.
In June 2017 they signed a pre-construction agreement with Greystar to develop nearly 900 build to rent homes in Nine Elms, Battersea. The detailed scheme is expected to go before the local planning committee in the near future. Soon after receipt of planning consent they expect to enter a full design and build contract but at this point the scheme is not included in the development pipeline. They are also exploring the possibility of undertaking further developments with Greystar.
The group are pursuing several opportunities and have recently agreed heads of terms on two separate acquisitions with a combined land value of £50M. One of these already has a planning consent and the other has been agreed subject to securing a satisfactory consent. Each will now progress through the legal process and a period of due diligence. Both are expected to be individual sale developments and as a result they are able to direct their immediate acquisition focus to predominantly build to rent opportunities.
Going forward the board expects 2019 to show continued growth in revenue and profits with the development pipeline already secured to deliver this growth and a strong forward sold position. Margins are likely to trend down towards the targets used during initial site appraisal, although this could be improved upon if there is any further easing in build cost pressures (I assume the reverse is also true). In addition the group expects to move more towards build to rent transactions as a percentage of its business in the coming years which will reduced reported combined margins.
In all the group has secured forward sales of £344M as of the year-end. This comprised of £243M in relation to open market contracts, £49M of affordable housing revenues and £52M of build to rent revenue.
At the current share price the shares are trading on a PE ratio of 8.3 which falls to 7.4 on next year’s consensus forecast. After an 8% increase in the total dividend the shares are yielding 4.1% which grows to 4.5% on the full year forecast. At the year-end the group had a net debt position of £103.1M compared to £14.3M at the end of last year.
On the 12th July the group released a trading update. Since the year-end, the group has continued to trade well. The London housing market at their price point has remained robust with ongoing demand from a broad base of customers. Their homes priced below £600K continue to sell at a steady rate but above that level they have to work harder with prospective customers, although they are still securing sales in line with their forecasts.
They have started contractual negotiations for the sale of 257 homes at Equipment Works in Walthamstow with a significant build to rent investor. The group are continuing to search for a build to rent investor in which to establish a longer term relationship and have instructed Savills to assist them in the process with significant progress expected before the end of 2018.
Overall then this seems to have been a good year for the group. Profits and net assets both increased. There was an operating cash outflow compared to an inflow last year but this was due to working capital movements and cash profits increased. Margins have been strong this year but they should begin to trend downwards going forward. The market for the group’s price point is still robust, although it seems like the threshold for expensive houses that are struggling to be sold is coming down. The board expect further growth next year, however, and with a forward PE of 7.4 and yield of 4.5% these shares look decent value to me.
On the 10th October the group released a trading update covering the first half of the year. In recent weeks there has been an increasing amount of negative commentary around the outcome of Brexit. This adds to a more general downturn in the market for expensive prime homes in London which has been evident for some time.
Despite a more uncertain backdrop they have continued to achieve sales at a consistent rate in the last few months, particularly where the homes are priced under £600K on developments that are either complete or nearly complete. These sales are predominantly to owner-occupiers and a significant proportion of them are using Help to Buy. They continue to see very little domestic investor demand from individuals. In addition the sale of homes above £600K has become more challenging and each transaction takes longer to secure. This is not expected to get any easier in the short term as negative sentiment is leading customers to take a wait and see approach or look for more significant price reductions to offset a perception of higher risk as Brexit gets closer.
In order to achieve their target of exceeding £50M of pre-tax profit in 2019 they have just under 90 homes left to sell alongside some affordable and build to rent contracts that they expect to exchange during the next half year. The greater risk is in the homes yet to be sold and of these only 25 are priced over £600K. Whilst they still have sales to secure they are not changing their targets at this point and continue to expect to achieve over £50M of pre-tax profit assuming the market does not worsen further as Brexit approaches.
They are currently in the early stages of their second off plan launch of the year. The UK launch of Gallions Point two weeks ago is now being followed by events across Asia throughout October. Short term sentiment is a big factor in overseas investor demand and as such recent Brexit commentary and talk of increased stamp duty has not helped. Regardless of the outcome the vast majority of the apartments at Gallions Point are priced under £600K with completions due in 2020.
The group continue to make progress in the build to rent sector. Greystar have secured planning approval for 894 build to rent homes in Nine Elms and the group are now progressing towards entering into a full build contract in order to start on site as soon as possible. They have also been chosen to partner a major land owner to obtain planning consent for around 700 homes in East London with a view to developing a combination of subsidised affordable housing, build to rent homes for the landowner and individual sale homes. They are expecting to replicate this approach elsewhere.
The group are also close to exchanging contracts to purchase a site in West London which has planning consent to deliver nearly 280 homes for a combination of open market individual sales and subsidised affordable homes. There are many more opportunities being appraised, especially for build to rent.
As with the previous two interim reporting periods, there will be fewer completions in the first half of the year than in the second half. Pre-tax profit for H1 will therefore be lower than H2 but is expected to exceed the £8.7M achieved in H1 2017.
Overall then, the group still seems to be performing well but it looks like the period from now until Brexit will be turbulent and I think it wise to take profits here for the time being.
On the 5th November the group announced the exchange of contracts for the purchase of part of Greystar’s development site in Greenford for a total consideration of £28.4M. The development has planning consent for 1,965 homes along with retail space, restaurants and cafes, leisure facilities, work space and a primary school. Whilst around 70% of the homes are to be delivered as build to rent by Greystar the remainder are for individual sale and affordable housing. The group has acquired part of the site to deliver 194 homes for individual open market sale at an average selling price of £500K, and 84 affordable homes for shared ownership. They intend to start work on site in mid-2019 with completion anticipated in 2022.