FY19 PBT met management’s revised guidance in February and although this was below the prior year, demonstrable progress was made in transitioning Telford Homes to a BTR-centric developer. As part of this process, net debt declined and the company ended FY19 with a pipeline with a gross development value of £1.59bn. Declared dividends were also as flagged in February (maintained at FY18 levels) and FY20 guidance is unchanged.
Exhibit 1: Telford Homes summary P&L and interim splits
|
H1 |
H2 |
2018 |
H1 |
H2 |
2019 |
|
|
|
|
|
|
|
Group revenue |
86.7 |
208.1 |
294.8 |
118.8 |
217.4 |
336.1 |
Share of JV revenue |
12.7 |
8.8 |
21.5 |
10.9 |
7.3 |
18.2 |
Total revenue |
99.3 |
216.9 |
316.2 |
129.6 |
224.7 |
354.3 |
|
|
|
|
|
|
|
Cost of sales |
-75.7 |
-161.1 |
-236.8 |
-101.2 |
-173.8 |
-275.0 |
Gross profit |
23.7 |
55.8 |
79.5 |
28.5 |
50.9 |
79.3 |
Opex |
-13.5 |
-17.2 |
-30.7 |
-17.3 |
-20.1 |
-37.4 |
|
|
|
|
|
|
|
Group operating profit |
10.2 |
38.6 |
48.8 |
11.1 |
30.8 |
41.9 |
Finance costs |
-1.5 |
-1.3 |
-2.7 |
-1.0 |
-0.8 |
-1.8 |
Pre tax profit - norm |
8.7 |
37.3 |
46.0 |
10.1 |
30.0 |
40.1 |
|
|
|
|
|
|
|
Gross margin % - reported* |
23.8% |
26.8% |
25.1% |
21.9% |
23.4% |
22.4% |
Op Margin % - reported* |
11.7% |
18.5% |
16.5% |
9.4% |
14.2% |
12.5% |
Source: Company, Edison Investment Research. *see Financial performance section for adjusted margins. Our estimates show gross interest, results are reported net; these effects wash out at the reported PBT level.
Portfolio highlights – the rise and rise of BTR: during FY19, Telford handed over four complete developments (shown at the top of Exhibit 2), added two new sites (being Oldfield Lane North, UB6 and International Way, E20 subject to planning consent) and in total worked on 23 live schemes across a full spectrum of project phases.
BTR: the year included the completion of the company’s first projects of this type: the Pavilions, N1 (for L&Q), and the BTR portion of New Garden Quarter, E15 (for Folio, part of Notting Hill Genesis, which is Telford’s JV partner on this project). Two further ones (Carmen St, E14, and The Forge, E6; both for M&G) are well underway for delivery in FY20. Both of these developments also have affordable homes being built on the same site that have been separately contracted with the housing associations Poplar HARCA and L&Q. The large Parkside, SW11 project is approaching full-build contract stage with Greystar. A £105.5m BTR deal was also signed for Equipment Works, E17, just prior to the end of FY19.
Open market: all units at Stratosphere and Stratford Central (both E15) and Bermondsey Works, SE16, are understood to have been completed and sold now totalling over 500 units (some of which were in prior years). The smaller Calder’s Wharf, E14, development has also completed its build phase and is approaching one third sold. The larger Manhattan Plaza and Liberty Building schemes (both E14) are also complete and substantially sold whereas the open-market buildings are due to complete in the coming months and the units are c 85% sold there also. As flagged in the February trading update, the build programme at City North, N4 is c six months behind plan due to third-party actions that mean completion is now expected during FY21. At the end of FY19, Telford had 39 finished units on hand for sale, around half of which have subsequently sold. Management reiterated comments that the London market remains subdued, especially at higher price points but Help to Buy remains helpful at the margin for homes priced under £600,000, which has historically been Telford’s main focus in this sub-segment.
Apart from the projects listed below, Telford continues to work on other opportunities in the background, not least with new strategic BTR partners M&G and Invesco.
Exhibit 2: Telford Homes projects active in FY19
|
Value |
Units |
Units |
Units |
Units |
Other |
Brief description |
|
£m |
Total |
OM |
BTR |
AH |
c 5%+ |
|
Stratford Central, E15 |
|
181 |
157 |
- |
24 |
|
LB Newham, Stratford. 31 storey residential tower with apartment mix including one, two and three bedrooms, suites and apartments. Excellent transport links. |
The Pavilions, N1 |
|
156 |
- |
156 |
- |
|
LB Islington, Caledonian Road. Challenging site built with one-, two- and three-bed units and green conservation space. First BTR completion (for L&Q). |
Stratosphere, E15 |
|
341 |
307 |
- |
34 |
|
LB Newham, Stratford High St. Two residential towers (36 and 12 storeys) with one-, two- and three-bedroom apartments/penthouses. Concierge, gym, roof terrace. |
Bermondsey Works, SE16 |
|
158 |
148 |
- |
10 |
|
LB Southwark, S. Bermondsey. 18-storey tower, connected lower height villas one-, two- and three-bed and duplex apartments. Concierge, gym, roof gardens, school. |
Calders Wharf, E14 |
|
25 |
21 |
- |
4 |
Y |
LB Tower Hamlets, Island Gardens, adjacent to the Greenwich Foot Tunnel. Four-storey building with one, two and three bedrooms on a riverfront site. |
Liberty Building, E14 |
|
155 |
105 |
- |
50 |
|
LB Tower Hamlets. Limeharbour, Canary Wharf. 26-storey tower, one-, two- and three-bed apartments and a penthouse. Concierge, gym and private gardens. |
Manhattan Plaza, E14 |
|
170 |
125 |
- |
50 |
|
LB Tower Hamlets, Poplar. Up to 21 storeys at its highest point comprising of a mixture of apartments and townhouses. Concierge, gym, roof gardens. |
The Forge, E6 |
|
192 |
- |
125 |
67 |
|
LB Newham, Upton Park. Buildings from three to 14 storeys. BTR homes sold to M&G Real Estate, 67 affordable homes sold to East Thames (L&Q). |
Bow Garden Square, E3 |
|
109 |
83 |
- |
26 |
|
LB Tower Hamlets, Bow. Mixed use scheme in partnership with Polar HARCA with one, two and three bed apartments and suites and villas. Community school and mosque. |
Chrisp Street, E14 |
|
643 |
443 |
- |
200 |
Y |
LB Tower Hamlets, Poplar. Chrisp St market regeneration in partnership with Poplar HARCA in a GLA new housing Zone. Part of United House acquisition. |
Carmen Street, E14 |
|
206 |
- |
150 |
56 |
|
LB Tower Hamlets, Poplar. 22-storey tower with 150 BTR homes sold to M&G Real Estate and 56 affordable homes sold to Poplar HARCA. |
LEB, E2 |
|
189 |
124 |
- |
65 |
Y |
LB Tower Hamlets, Bethnal Green. Proposed mixed use scheme with buildings from five to 15 storeys. Now in a planning appeal phase. |
Gloucester & Durham, NW6 |
|
235 |
133 |
- |
102 |
|
LB Brent, South Kilburn. Partnership with borough, site secured via London Development Panel with affordable homes sold to Notting Hill Genesis. Part of a multi-phase master plan. |
Stone Studios, E9 |
|
120 |
110 |
- |
10 |
Y |
LB Hackney, Hackney Wick. Residential-led, mixed use development with over 50,000sq ft of commercial space. |
Parkside, SW11 |
|
890 |
- |
890 |
- |
|
LB Wandsworth, Nine Elms, Battersea. Two buildings, community facilities and public space. Partnership with Greystar. Approaching full build contract stage. |
Equipment Works, E17 |
|
337 |
- |
257 |
80 |
Y |
LB Waltham Forest, Walthamstow. Mixed tenure residential development with c 19,000sq ft of flexible commercial space. BTR deal announced 19 February. |
Oldfield Lane North, UB6 |
|
278 |
194 |
- |
84 |
- |
LB Ealing, Greenford. Part of Greystar’s 20-acre large mixed-use scheme (and c 1,965 homes in total). Acquired in November 2018. |
International Way, E20 |
|
376 |
204 |
- |
172 |
|
Announced 11 Feb 2019. Conditional site purchase (subject to satisfactory planning consent). Next to Stratford International station & Westfield Stratford. |
New Garden Quarter*, E15 |
|
471 |
183 |
112 |
176 |
|
LB Newham. Three- to nine-storey mansion block design around a new two-acre public park. JV with Notting Hill Genesis. BTR homes sold to Folio London. |
Gallions Phase 1*, E16 |
|
292 |
205 |
- |
87 |
|
LB Newham, Gallions Reach. Part of a wider multi-phase Notting Hill Genesis redevelopment. Residential-led, part of United House acquisition. |
City North*, N4 |
|
355 |
308 |
- |
47 |
Y |
LB Islington. Business Design Centre JV (part of United House acquisition). Major mixed use development with new access to Finsbury Park tube station. |
Balfron Tower*, E14 |
|
137 |
137 |
- |
- |
|
LB Tower Hamlets, Poplar. Refurb of 26-storey, grade II listed residential building. JV: Londonewcastle and Poplar HARCA, part of United House deal. |
Gallions Phase 2b*, E16 |
|
267 |
132 |
- |
135 |
|
LB Newham, Gallions Reach. Part of a wider multi-phase Notting Hill Genesis redevelopment. Mixed tenure, part of United House acquisition. |
Source: Company, Edison Investment Research. Note: Key a) unit types: OM = Open market, BTR = build-to-rent, AH = affordable housing, Other = non-residential (accounting for c 5%+ of development value). b) Development value: < £50m, > 50m/<£100m, xx> £100m /<£150m, >£150m /<£200m, > £200m. *JV. The four shaded developments were all fully handed over in FY19. Some existing open market developments could change to BTR.
Telford’s portfolio activity is summarised as follows:
■
Gross development value of £1.59bn / 4,900 homes
■
70% of this pipeline by units is BTR-led
■
Over 3,000 homes are in the construction phase
■
Around 950 units are in the planning phase (including LEB, International Way and Gallions, phase 2).
Financial performance – changing mix influences revenues and margins: against our expectations, Telford’s FY19 PBT was in line with our expectations at £40.1m, whereas EPS came in ahead due to a lower tax charge (at 16% after the effects of tax credits vs our modelled 22%). Net debt was c £29m lower than we had anticipated at £95.7m.
FY19 results included a record revenue performance, up 12% y-o-y to c £354m, but there were lower reported margins at the gross level (down 270bp to 22.4%) and operating (down 400bp to 12.5%) levels. The equivalent adjusted margins, which reverse out expensed interest costs, were 23.7% gross (-280bp) and 13.1% operating (-360bp).
An increase in the proportion of BTR sales from 21% to 31% contributed meaningfully to these year on year features with revenue in this sub-sector implicitly rising from £68m to £109m. Investors should be aware that there is lower financial risk associated with BTR projects due their forward-funded nature and known purchaser at the outset. Consequently they generate lower contribution margins, although the difference is narrower at the net level after factoring in project interest and selling costs. Individual sale/open-market revenue was 5% below the FY18 level, partly reflecting the market conditions referred to earlier. The sale of freeholds and other land together with other sundry fees and rental income generated revenue of £13.9m in FY19. Putting all of these items together, the blended margins across all projects were as described above.
Net debt declining, BTR activity rising
The statutory, equity-accounted balance sheet showed end FY19 net debt of c £75m, which indicates the Telford’s share of debt in JV projects was just over £20m, compared to c £3m a year earlier. The latter movement is consistent with construction progress with open-market units at the New Garden Quarter, Balfron Tower and City North developments in particular, with debt drawn down to fund WIP, following the absorption of the partners’ initial equity injections.
The cash flow statement is reported on a group, equity-accounted basis. At the free cash flow level, the primary difference between this and our presentation shown in the financial summary (on an illustrative, including share of JV, basis) is working capital; consistent with the previous paragraph we estimate the c £44m reported inflow here was effectively absorbed on JV projects, which typically have separate borrowing facilities. That said, the company manages projects – wholly owned or otherwise – on a collective basis. At group level, the positive net debt variance against our expectation was most likely due to the timing of receipts relating to the sale of Equipment Works’ BTR scheme and or freeholds and other surplus land.
Cash flow outlook: forward-funded BTR projects are inherently less capital intensive from Telford’s perspective. There will always be a mix of tenure types in the development portfolio at any one time but an increasing proportion of BTR work will lower the group’s borrowing requirement compared to open-market projects. We have modelled a reduction in net debt in each of our estimate years; in reality, debt reduction creates more funding capacity for other projects and, reflecting this, our illustrated profile is unlikely to prevail unless new opportunities cannot be found.