It gives me great pleasure to report that Telford Homes has achieved record levels of revenue and profit once again in the year to 31 March 2018.
Our substantial development pipeline and increasing expertise in the burgeoning London build to rent sector underpin our confidence for the future.
Total profit before tax in the year to 31 March 2018 increased by nearly 35 per cent to £46.0 million (2017: £34.1 million)1, ahead of original market expectations. This strong performance was reflected in an improvement in our adjusted gross margin of 4.2 percentage points and a 3.3 percentage point increase in our adjusted operating margin, up to 16.7 per cent (2017: 13.4 per cent). The margin improvements are partly due to the mix of developments that completed during the period but also a combination of other factors, particularly some prudent estimates for build cost inflation that were not realised.
I am also delighted that we have been able to declare a final dividend of 9.0 pence per share, making a total of 17.0 pence per share for the year, an increase of 8.3 per cent compared with the previous year (2017: 15.7 pence). We expect to continue to pay at least one third of our annual earnings to shareholders in dividends.
Due to our strong growth and financial performance there have been many highlights in the last year but amongst those I am particularly pleased to report that the Telford Homes commitment to quality and service was demonstrated by a customer recommendation rating of 100 per cent in 2017. This significant achievement places us at the top of housebuilder customer recommendation rankings, and is testament to the dedication and hard work of our employees. There is an increasing focus on the quality of new homes and this score only serves to further underpin our reputation for delivering an excellent product, whether it is for open market sale, affordable housing or build to rent.
The London market for housing at our typical price point has remained robust, with ongoing demand from a broad base of purchasers spanning individual investors from the UK and overseas, owner-occupiers, housing associations and build to rent investors. Although prices have fallen in some prime locations, our market has been more stable. The average price of the open market homes within our development pipeline is £539,000 (2017: £527,000) and we expect that to remain relatively constant in the future.
In January 2018 we commenced the launch of the second phase of New Garden Quarter in Stratford, marketed initially in the UK and subsequently to international investors. We were delighted to secure more than 100 reservations across three weeks which exceeded our expectations. A quarter of these reservations were to UK buyers, a greater proportion than anticipated given that demand from domestic investors has been muted following recent tax changes. The remaining sales were generated in Hong Kong and multiple cities in China, with the latter accounting for more than 50 sales. We are seeing growing investment from China due to the continued international attraction of London, despite Brexit, and strong rental demand relative to supply.
The Group is also securing sales to owner-occupiers with a proportion of those sales being under the Government Help to Buy scheme. The level of demand is dependent on price point rather than the explicit need for financial assistance through Help to Buy and therefore the scheme remains an enhancement to demand rather than something the London market depends on. 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 above £750,000 are taking longer to sell and this supports our targeted approach to land acquisition with regard to average price point.
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 last year than usual. In addition some developments have been held back until nearer build completion to encourage sales to owner-occupiers where the location and price point is particularly attractive to first time buyers. In late March 2018 the Group launched all 83 homes at Bow Garden Square, E3, focused on owner-occupiers with prices starting from £390,000. Initial interest has been encouraging and nine reservations have been secured to date. Owner-occupiers take longer to commit to a purchase, especially under Help to Buy, but the Board expects ongoing demand particularly as the development moves towards completion later this year.
The Group completed and handed over 476 open market homes in the year to 31 March 2018 (2017: 289). 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 our total forward sold position to £344 million (2017: £546 million). This is exacerbated by the timing of some significant build to rent transactions occurring in the final few months of the year to 31 March 2017 with the next new build to rent sales expected in the year to 31 March 2019. Forward sales still equate to over 100 per cent of the total revenue recognised in the year to 31 March 2018.
Forward selling remains at the core of our business model, and our approach of securing sales early in the development cycle, where appropriate, has a favourable effect on our risk profile and our ability to direct investment to new opportunities. This model also gives the Board significant visibility over profit recognition and expected cash flows. This is one of the many reasons why the emergence of forward funded build to rent transactions, as an increasing feature of the London market, has proved very attractive to the Group and why it fits so well with our existing approach to balancing risk and return.
London is still not building enough homes and, whilst new home construction starts per annum have recently fallen under 20,000, according to the Ministry of Housing, Communities and Local Government (MHCLG) figures, the annual requirement in the Greater London Authority’s (GLA) latest draft of the ‘London Plan’ has now reached over 60,000 based on expected population growth. Meanwhile more and more people are looking to rent in London, often due to affordability constraints but increasingly through choice, and as a result tenant demand is set to remain strong. The rental market itself is evolving with tenants calling for higher quality facilities and levels of service and in some cases greater security of tenure and longer leases. This market trend sits well with the emergence of purpose built rental developments with enhanced resident amenity space and a full on-site service offering.
Political recognition of the urgent need for rental housing adds further weight to our strategy to focus on the forward funded build to rent sector, to enhance growth, increase capital returns and reduce required debt finance. As our reputation grows in the sector, we are increasingly being approached directly by institutions and rental operators seeking investment opportunities and each are trying to achieve significant scale as swiftly as possible.
On the one side we have a significant increase in capital keen to invest in residential housing, as already occurs in countries like the US, and on the other we have strong demand from tenants looking for exactly the type of product that those investors want to fund. The missing ingredient is the ability to source development opportunities, obtain planning consents and build the homes themselves and our expertise in these areas makes Telford Homes an attractive partner for build to rent investors. The Board continues to evaluate whether longer term partnerships with one or more of these investors could enhance our ability to undertake build to rent transactions and further grow that side of the business.
Our development pipeline now includes over 4,000 homes, of which almost 75 per cent are in detailed design or under construction. In December 2017 we acquired a sizeable residential-led development site in Walthamstow, E17 for a total consideration of £33.8 million. Having completed some initial design work, we 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 we have had encouraging responses from a number of investors. Depending on the timeframe to get into contract with the successful party, we expect to announce the transaction in the next few months.
As announced previously, in June 2017 we signed a pre-construction agreement with the US-headquartered global rental housing operator, Greystar, to develop just under 900 build to rent homes in Nine Elms, Battersea. Having worked closely with Greystar and the London Borough of Wandsworth for a number of months, the detailed scheme is expected to go before the local planning committee in the near future. Soon after receipt of a detailed planning consent we expect to enter a full design and build contract and we will make a further announcement at that time. At this point the scheme is not included in our reported development pipeline. We have formed a strong relationship with Greystar and we are actively exploring the possibility of undertaking further developments together.
The planning process in London has long been challenging and time consuming, particularly for large regeneration sites. Although this has caused delays in recent months, we are confident that our experience and relationships in each borough, as well as with the GLA, position us to navigate this difficult environment. The appointment in February 2018 of Jerome Geoghegan as Group Land and Planning Director will provide greater focus and expertise in this regard. Formerly at L&Q Housing Group, Jerome brings a wealth of experience and is well connected in the sector. Our partnerships with providers of affordable housing have been an important factor in our success to date. Subsidised affordable housing typically represents over a third of each new development and is forward funded by our partners in much the same way as build to rent, with all of the same advantages.
We are pursuing several opportunities at our preferred price point in London and we have recently agreed heads of terms on two separate acquisitions with a combined land value of just under £50 million. 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 we are able to direct our immediate acquisition focus to predominantly build to rent opportunities. Our ability to add to the Group’s development pipeline has been enhanced by the negotiation of a new £210 million corporate loan facility. This enlarged revolving credit facility extends to December 2022 and has been secured at a lower rate of interest than the previous £180 million loan facility.
The economic and political outlook for the London housing market is encouragingly benign. Notwithstanding uncertainty surrounding the UK’s exit from the EU, the economy has remained relatively robust and regardless of the outcome of the Brexit negotiations there is an understanding across the political spectrum that not enough homes are being built. Clearly the housing market is sensitive to interest rates and the Bank of England increased base rates from 0.25 per cent to 0.5 per cent in November 2017. Any subsequent changes to rates are likely to be gradual, and given the current level this is not a cause for concern to the Board. The Help to Buy scheme is currently forecast to end in 2021 but this is not of material importance to the performance of Telford Homes with relatively few sales being made to Help to Buy customers and an increased strategic focus on the rental market.
In the aftermath of the Grenfell Tower tragedy in June 2017, a wide ranging independent review of building regulations and fire safety was initiated, led by Dame Judith Hackitt. The industry must be fully supportive of that review and Telford Homes has been represented by our Group Managing Director, John Fitzgerald, on one of the working parties.
Another independent review relating to the housebuilding sector was unveiled in January 2018. Led by Sir Oliver Letwin, the review is charged with explaining the gap between the number of homes for which planning permission has been granted against those being built, particularly in areas of high demand. The review’s initial comments indicate that typically developers do not just sit on consented sites and that delays can include absorbing large numbers of homes on bigger sites into the local market. It was noted that build to rent therefore had the potential to assist in delivering much needed new homes more swiftly as rental stock does not suffer from the same absorption timeframe. Build to rent also features in the new draft London Plan and the new draft National Planning Policy Framework, demonstrating that politicians recognise that it can be a core part of the solution to the housing shortfall.
A potential shortage of skilled labour is another ongoing issue in the sector and to help address this, the Home Builders Federation has set up the Home Building Skills Partnership, which is running campaigns to encourage people into the industry. Telford Homes wants to play an active role in this initiative and John Fitzgerald has been appointed to the Home Building Skills Partnership Leadership Board. We are very proud of the huge advances we have made with our internal training programme. We now have over 20 trainees working within the business across various disciplines and are in the process of setting up the Telford Homes Academy to help develop our trainees and to support and train staff at all levels within the business.
Our key objective is to develop the homes and create the places that London needs. We are making sound progress towards achieving our stated ambition to generate marked growth in pre-tax profits, and have made great strides in putting in place the internal structures and capabilities to support further growth in the coming years. Over the next few years we have the ability, the desire and the market opportunity to do far more in London than we are already doing. Our focus on the build to rent sector has helped us to broaden our geographical reach across London and it is the core of our current strategy if we are going to achieve our growth ambitions without taking excessive risk or needing additional equity capital. We also remain committed to driving our sustainability initiatives, and measuring our ability to deliver against our targets.
We were delighted to be recognised as the most improved homebuilder in the 2017 NextGeneration sustainable housing benchmark report, moving up from seventeenth to sixth place in the rankings. The benchmark enables developers to understand the sustainability of their operations and the places and homes they build. The criteria are based on best practice standards and guidance, and are designed to be challenging and go beyond statutory requirements or standard practice. This progress recognises the ongoing development of our ‘Building a Living Legacy’ sustainability strategy and is a real achievement for a business of our size.
During the past year we have undertaken some work on articulating our brand purpose and consulted with external and internal stakeholders to understand what people think about our business. Our research underlined that we are recognised and respected for building homes and creating places, with expertise in design, sustainability and community liaison, but identified that we could do more to clarify and communicate the value we actually create. As a result we have adopted a new statement of our brand purpose, namely ‘developing the homes and creating the places that London needs’ and have sought to ‘shout a little more’ about some of the benefits we bring to everything we do. This has been recognised in numerous award wins over the last 12 months culminating in Telford Homes being named ‘Large Developer of the Year’ at the prestigious 2018 RESI awards.
We also strive to ensure that Telford Homes continues to feel like a family to all those who work for the Group, despite a relatively rapid increase in employee numbers in recent years. We now undertake an annual staff survey and act upon the suggestions that arise. This year we were very pleased to receive a staff satisfaction rating of 98 per cent. An enjoyable working environment will be even more important as we look ahead to further growth.
Telford Homes has delivered significant profit growth over the last three years with total profit before tax increasing from just over £25 million in 2015 to £46 million in 2018. Furthermore, we are well placed to achieve our stated goal of exceeding £50 million of total pre-tax profit for the year to 31 March 2019, which will represent a 100 percent increase over four years. Having arrived at this point in a short period of time the challenge now is to establish the business consistently delivering over £50 million of profit every year and furthermore to generate and sustain the next significant growth period.
Without the advent of build to rent we would not have been able to achieve consistency of profits and would instead have fluctuated around an overall upward trend. Our industry is very capital intensive and the business would have required sustained injections of new capital just to maintain the profit levels achieved in the last few years on an ongoing basis. However our increasing success in the build to rent sector means we expect to consistently deliver profit in excess of £50 million over the next three years predicated on a certain level of new build to rent business. We also expect to set a platform for delivering the next significant phase of profit growth in the medium to longer term. The level of build to rent business we are able to secure will be crucial to achieving our ambitions and to outperforming them if the opportunity arises.
The strength of our position and our ability to capitalise on the exciting possibilities ahead are a result of the hard work and dedication of the whole Telford Homes team. I am exceptionally proud of the customer recommendation and employee satisfaction scores we achieved last year and I am confident there is a relationship between them. I look forward to us building on the solid foundation we have created for Telford Homes both in the year ahead and beyond.
29 May 2018
1 GAAP profit before tax (i.e. excluding the Group’s share of joint ventures) was £46.3 million (2017: 34.6 million)