Our Business Model is increasingly focused on Build to Rent housing and the reduced risk and lower capital requirements it brings.
Whilst the financial year to 31 March 2019 was not without its challenges, we remain confident that our strategic move towards the growing rental market in London will enable us to increase our delivery of much needed new homes in the years ahead.
Total revenue in the year to 31 March 2019 reached a record £354.3 million, up 12 per cent on last year (2018: £316.2 million), with the proportion from build to rent developments also at a record level of 31 per cent (2018: 21 per cent). GAAP revenue, excluding the Group’s share of joint ventures, was £336.1 million (2018: £294.8 million). Profit margins remained at or above target levels with the margin on individual sale developments at 28.3 per cent (target 24 per cent) and the build to rent margin at 13.2 per cent (target 12 to 13 per cent). This has been achieved against a more uncertain and challenging market backdrop.
Total profit before tax has reduced to £40.1 million (2018: £46.0 million) due to the increased proportion of lower margin build to rent developments within total revenue. GAAP profit before tax, excluding joint ventures, was £40.3 million (2018: £46.3 million). Whilst absolute profits have fallen this should be considered in the context of a growing business delivering higher output but with a greater emphasis on lower risk and less capital intensive developments. As a result, our gearing has reduced considerably to 37.0 per cent (March 2018: 44.6 per cent; September 2018: 52.2 per cent).
We had hoped to achieve even more but, as previously reported, a number of factors hampered our ability to reach our original target of £50 million of profit before tax for FY 2019. The individual sale market in London has been subdued by a prolonged period of uncertainty and customer expectations of enhanced discounts and incentives led to reduced prices on those sales that were secured.
Our results for the year were also affected by the delay of two build contracts anticipated to exchange in FY 2019 but pushed back to FY 2020 due primarily to planning issues. Despite this, our performance in the year represents a great achievement for Telford Homes with revenue at an all-time high and profit before tax reducing largely due to our successful change in strategy towards lower margin build to rent homes.
We sell homes to diverse customer segments including build to rent investors, housing associations, owner occupiers and individual investors. The strategy we have been pursuing for some time of increasing the proportion of our homes sold to the build to rent sector has been further validated by a more uncertain market for individual sales to owner-occupiers and a significant drop in demand from individual investors.
There is a fundamental imbalance between demand and supply of rental properties in London at affordable rent levels and we firmly believe that institutionally owned build to rent developments are key to increasing housing delivery in London. As we have outlined previously, there are three primary reasons that this sector is attractive to Telford Homes:
- Firstly, the higher return on capital associated with build to rent transactions, which require no debt and limited equity investment. In return, the profit margin is lower than for individual sale developments but the forward funded nature of build to rent de-risks our development pipeline.
- Secondly, there is significant demand from institutions looking to invest in build to rent housing in London. Keen to develop pipelines of rental properties as quickly as possible, investors are seeking to access skills that Telford Homes already has in terms of site sourcing, planning and construction.
- Finally, this investment demand is underpinned by the growing proportion of customers who are renting rather than buying due partly to affordability constraints but also increasingly a desire for flexibility and as a lifestyle choice. Purpose-built rental developments typically offer better customer amenities, improved on-site services and more secure and flexible tenancies. Together with a greater sense of community, these factors make build to rent housing the ideal product for new generations wanting to live in London.
Whilst we will continue to target owner occupiers on specific developments and particularly at prices up to £600,000, sales to individual investors no longer represent a significant part of our future pipeline. Having reviewed our existing portfolio, we expect to change a number of developments that were planned as individual sale schemes to build to rent. As a result, the expected split of our current development pipeline, by number of homes, is 70 per cent on build to rent led developments and 30 per cent on developments led by individual sales.
We are making strong progress on our existing build to rent projects having already completed and handed over in excess of 300 homes with a further 1,422 currently in progress. The latter number includes 890 homes at Parkside in Nine Elms for Greystar where we are mobilising to start work in June 2019. However it does not include any developments already under construction that we are planning to deliver as build to rent, but where we have not yet entered into any forward funding agreement with an investor.
August 2018 marked an important step for Telford Homes when we handed over The Pavilions, our first institutional build to rent development, which was purchased by L&Q in 2016. Since then we have handed over the build to rent homes at New Garden Quarter to Folio, part of Notting Hill Genesis. We are also approaching build completion on two schemes we are developing for M&G Real Estate (‘M&G’), being Carmen Street and The Forge. Both developments will be handed over this calendar year and we are particularly excited to be approaching this important milestone in our relationship.
Our growing track record in build to rent has been enhanced by the recent sale of our Equipment Works site in Walthamstow to a joint venture between Greystar and Henderson Park for £105.5 million. This will be our third development working alongside Greystar, following on from Parkside and our acquisition of part of their significant site in Greenford, Ealing. We have formed a strong partnership together and we expect to extend that in the future. The Equipment Works transaction is on a forward funded basis and comprises the sale of the freehold interest in the land and the construction of 257 build to rent homes.
To cement our position as one of London’s leading build to rent developers, we recently concluded an extensive selection process managed by Savills to identify strategic partners for forward fund transactions. We are delighted to have entered partnership agreements with both Invesco and M&G. The decision to select two partners is a reflection of the high quality of the potential partners in the final stage of our selection process. We have agreed in principle to work with each partner on schemes of different sizes to provide clarity and to align with their respective investment preferences. Both are well established investors in the London build to rent market, and the new partnership formalises the strong relationship we already have with M&G.
We believe that our partnership led approach will increase the efficiency of buying land and designing build to rent schemes to meet each investor’s requirements. Having a standard set of documents should also expedite the process of contracting on individual transactions. We expect to develop a significant pipeline for both M&G and Invesco in the coming years and we will continue to work with other investors where we have been approached directly, or on sites that do not meet the partnership criteria. To have attracted such well respected and ambitious organisations as long-term partners is very pleasing and an indication of our growing reputation as a build to rent developer of choice in London.
Despite a subdued market, we continued to generate sales and this was particularly the case for homes priced below £600,000 on our developments that were complete or close to completion. These sales have been mostly to owner-occupiers, many of whom took advantage of the Help to Buy scheme. We were pleased to see the Government extend Help to Buy until 2023, although the scheme itself is not expected to be material to our longer-term business plan given our increased focus on rental homes.
Since the end of FY 2019 we have continued to make steady progress across the schemes we have available for sale and we are particularly pleased to have all of the homes at Bow Garden Square reserved, with the majority completed and handed over.
Bow Garden Square is a partnership with Poplar HARCA that includes 109 homes together with a new school and a mosque. It was recently declared ‘Development of the Year’ at the 2019 ‘RESI Awards’ and this achievement is testament to our usual high standards in terms of design and the quality of the finished scheme.
Following the successful launch of New Garden Quarter in Stratford at the beginning of 2018, we held an off-plan launch of Gallions Point in the UK and Asia in October last year. We were disappointed to secure only 15 sales, with demand predominantly dampened by economic uncertainty in relation to Brexit. The majority of the homes at Gallions Point are priced under £600,000, with completions scheduled for 2020, and we believe that they will be attractive to owner-occupiers at the appropriate time. Sales to individual investors, whether in the UK or overseas, no longer represent a significant part of our future plans and we do not expect a change in demand from that sector in the short-term.
Whilst we expect the more subdued market for sales to continue throughout 2019, individual sales to owner occupiers remain an important part of our business. For example, the site we acquired from Greystar in Greenford will see the development of 194 homes for individual open market sale at an average selling price of circa £500,000 along with 84 subsidised affordable homes for shared ownership. The scheme is expected to be completed in 2022 and will be released for sale much nearer to that time, at a point when Help to Buy will still be available. We will continue to work hard to secure sales on developments closer to completion and those already completed whilst we await greater economic certainty, particularly in terms of the outcome of Brexit.
In February 2019 we were pleased to acquire a site, subject to obtaining satisfactory planning consent, on International Way in Stratford from LCR, the Department for Transport and HS1 Ltd. The site represents our third land acquisition involving LCR and the development is anticipated to deliver around 380 new homes together with commercial space.
Our development pipeline now includes 4,900 homes (including Parkside), with a total expected gross development value of £1.59 billion (2018: £1.31 billion). This pipeline is weighted towards build to rent developments, as noted earlier, and the homes expected to be for individual sale are valued at an average price of circa £550,000 in line with our target.
Around 950 of the homes in our development pipeline are currently going through the planning process. Whilst we have experienced some frustrating delays in achieving planning consents on certain developments, we continue to believe that our deep knowledge and strong relationships across London put us in the best possible position to navigate this difficult environment. We were disappointed to have our planning application for the LEB Building in Bethnal Green refused recently. However, this was expected and allowed for when we reported a planning delay in our trading update in February 2019. We will appeal the decision and we expect a successful outcome.
We are actively engaged in identifying new opportunities to add to our pipeline and particularly those that suit build to rent investors and our new partnerships. We are in various stages of negotiations on several sites that we hope to conclude over the course of the next financial year.
One of our key differentiators is our friendly and supportive culture, which is reflected in the consistently high scores we achieve in our employee satisfaction surveys. Our dedicated employees continue to deliver tremendous work across the whole Group and to overcome any challenges that come their way. Together we have positioned the business well for the future and I would like to thank all of our employees, and indeed each of our suppliers and subcontractors, for their help and efforts in the last year. We have won numerous awards in the last 12 months and we are always delighted whenever we receive external recognition for our work.
In the last year we have focused on creating a culture that promotes positive mental health in our business and raises understanding of this important issue in the construction industry. We established a ‘Health and Wellbeing Group’ who launched a week long programme of events to support World Mental Health Day in October 2018. The purpose was to ensure employees understand that we are committed to their mental health in the workplace and to provide support when they need it. We also established several resources to ensure mental health remains one of our key priorities outside of this week of events. The week was so well received that we did the same again in May 2019 and this time we extended the activities across our development sites.
In March 2019 we officially launched the new ‘Telford Homes Academy’ when our first cohort of ‘Budding Managers’ started their development programme. The Academy aims to provide training and development for every career stage, from trainees through to first time managers and then on to senior managers. It will not only support and develop those who aspire to progress, but also drive capability and excellence for everyone at any level within Telford Homes. Business growth will continue to present some fantastic opportunities for our employees to take on new roles and our Academy will ensure they are ready to do that.
As we announced in October 2018, Frank Nelson, Non-Executive Director since 2015, stepped down from the Board due to other commitments. We are in the process of seeking a suitable replacement and expect to make a further announcement in due course.
We put immense effort into ensuring all of our customers are happy with their new homes whether they are individuals, build to rent investors or housing associations. In 2018 we were delighted to secure an independently surveyed customer recommendation rate of 99 per cent, which is exceptionally high for our industry. In a time when there is ever increasing focus on the quality of new homes we are very proud of this result and the frequent praise we receive from our development partners.
We were delighted to be recognised in the 2018 NextGeneration sustainable housing benchmark report as the most improved housebuilder for the second consecutive year. Our fourth place ranking (from sixth in 2017 and seventeenth in 2016) also saw us receiving our first Gold Level award. These achievements are testament to our commitment to sustainable and responsible housebuilding under our ‘Building a Living Legacy’ strategy. We launched this strategy in 2016 to help us create places that make a positive long-term contribution to London’s built environment. Sustainability is increasingly a consideration for partners and our work in this area enhances our ability to secure and maintain mutually beneficial relationships.
The Board recommends a final dividend of 8.5 pence per share giving a total dividend for the year of 17.0 pence per share (FY 2018: 17.0 pence). Historically, our policy has been to pay at least one third of annual earnings to shareholders in dividends. In light of the lower capital requirements associated with our growing number of build to rent transactions, the Board expects to exceed this threshold in the future. In the short-term we expect to maintain an annual dividend of at least the 17.0 pence per share recommended for this year.
There have been no changes to our profit before tax expectations for FY 2020 since the Group’s trading update in February 2019. Beyond FY 2020 we continue to expect profits to grow again, reflecting our increased focus on lower risk and less capital intensive build to rent developments.
Over the last three years we have made substantial progress against our objective to increase our output of build to rent homes to meet demand from institutional investors and to deliver high quality rental properties in the capital. There remains a long-term structural imbalance between housing supply and housing need in London. Our partnerships with Invesco and M&G signal our reputation as a trusted build to rent partner and as such are a significant step as we continue to develop our profile at the forefront of this burgeoning sector. We are excited to work more closely with both partners to capitalise on new opportunities to deliver much needed homes within market leading projects.
Ultimately, we believe Telford Homes has a robust long-term outlook based on a model that is less cyclical, lower risk and less capital intensive, building on our recognised skillset and excellent reputation, and underpinned by demand from both institutional investors and rental customers.
Chief Executive Officer
29 May 2019