Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Sain, I agree with your comments on the Trading Update. Just one thing. I did not see any reference to the Walthamstow BTR sale; actually, that rather surprised me because we know that they have been in contractual negotiations with the selected buyer for several months. The announced new deal for 700 homes is much bigger that Equipment Works and seems to have been somewhat lost in the wash as people focus on the Brexit related comments. It is significant news and also fits with the evolution of the BTR strategy where TEF do not have to fund the initial site acquisition costs and then forward sell (as in the case of Equipment Works and the earlier deals other than Nine Elms).
Just to add that TEF’s stated policy is to pay one third of annual earnings as dividends - about the same level as Bellway, for example. I recall seeing a table produced by an analyst comparing the dividend levels of the main builders as at end May 2018. TEF were then at 4% (as were Redrow) but the average of the entire group was 4.6%. TEF have deliberately geared up over the last 12 months from what was a low level. Worth reading the comments of the CFO in the last two annual reports which sets out the policy and the rationale behind it.
It can easily take over six months to sort out a complex JV - particularly when listed entities in different jurisdictions are involved, triggering the need for multiple approvals even once the terms have been agreed.That is once the parter(s) have been selected - and that could take several bidding rounds. Even then, it doesn't always work out - look at the recent example of Lone Star's attempt to do a deal involving Quintain. After selection, there are a host of issues to grapple with and a large number of detailed documents will be involved. Unless you have been through an exercise like this (and I spent much of my professional career doing this sort of thing, for my sins), it is very hard to appreciate the sheer amount of effort and negotiation involved). TEF will be aware that shareholders only really care about the end result and how quickly they can get there rather than the tedious detail involved, but I imagine that a lot is going on behind the scenes. There is just no point in doing a running commentary. As mentioned, I would much rather that they took the time to sort it out. This is an opportunity, but it also could be a bet the company deal and a badly thought out JV would be a living nightmare for everyone and particularly shareholders.
Doctus, Just to chip in that I am not at all surprised that it is taking some time for TEF to be able to announce its long term BTR partner - or rather partners, as I think quite likely. It is a complex process and they have to get it right. As to the timing of any announcement, the AIM rules may generally be fairly lax, but it is really clear that any non-public information which would have a substantial impact on the share price - and something like this obviously would - has to be disclosed asap. In any event, I would expect a company with a hard won reputation for transparency (i.e. TEF) to do so without question. I am pretty confident that there is good news to come, so I am happy to wait. Personally, my main focus as to the trading update is what they have to say about general trading activity and how well the overseas demand is holding up.
Housebuilders generally (RDW, BWY, TEF etc) clobbered today, presumably because a more miserable investment climate is predicted, coupled with the assumed end of HTB, which Steve Morgan (as to the uncertainty that prevails) had a justifiable rant about today. What a fantastic time to invest in house builders. TEF is my main holding, but I also invest materially in quite a few more, plus UANC, which is an interesting model which Grosvenor is now copying.The huge gap between what is being delivered in London and what is required dictates that this a compelling opportunity, but only for experienced players who have deep relationships with the planners and can play the long game. A difficult share to trade in my view, but very promising over time, which is where the majority of posters seem to be focussed.
The one comment made after the formal business at this year's TEF AGM is that they have been "inundated" with approaches to partner up for BTR projects and so they needed a firm to help them sift through and evaluate the various approaches. It is a small world and I imagine that most if not all of the potential partners will be well known to both Savills and JLL and that the majority will have been advised by at least one of them and probably both from time to time. I don't know, but I very much doubt that Savills were selected because JLL were conflicted; there are loads of ways to addressing such sensitivities. We are in a bit of a vacuum at the moment whilst negotiations are progressed. I am sure that it will be worth the wait and hopefully things will gear up now that the Summer holiday season is over.
There has been a lot of comment in the press today about Taylor Wimpey's latest woes (with Notting Hill) because of a legal problem with the title they have been offering on their Chobham Manor development. In essence, it seems that the forfeiture clause in the headless granted to the JV by London Legacy Development Corporation could be triggered by developer insolvency, which would mean that the under leases granted to end purchasers would also fall (subject to technical rights to reinstate, which are an unsatisfactory answer to an obvious and well known issue).
How this escaped the attention of the advisors to LLDC, the JV and presumably quite a few end purchasers is a very good question. LLDC no doubt rolled out the same headless on the adjoining sites, so I am fervently hoping that the issue was spotted and fixed so far as TEF is concerned. It appears that LLDC have been embarrassed by the subsequent adverse publicity and have agreed to rectify it, so probably no long term damage. Incidentally, the FT Lex column got things completely mixed up in its leader today and suggested that this was a cunning plan by TW and its "clever" lawyers. Clever is the last adjective that I would have chosen. I imagine that there have been more than a few red faces and worse.
Sain, Just on your thought that TEF might try to get the balance of The Liberty Building away to a BTR institution. Never say never, but I would be extremely surprised. BTR instis have shown that they can dovetail with housing associations, but the Liberty pepperpot offering looks much more challenging and sub-optimal. I think that a BTR purchaser would want to be in at the start to structure the product and I can see lots of issues such a purchaser would have with Liberty, not least on the management of the building. TEF decide at the outset whether to go the BTR route for very good reason.
No doubt temporarily, it has stopped raining in London. People seem to be worried about the reduced margin if TEF's focus switches increasingly to BTR, as the stated strategy indicates. Just a reminder that TEF has guided that it targets a 24% margin on open market sales - and it actually achieved 28.2% for FY 2017/18. On BTR, it targets 12/13% - and achieved 17.8% in FY 2017/18. The gap is bridged by saving selling and finance costs circa 8% and the significant derisking/improved ROE. The issue is whether competition erodes that margin further, but if you believe that TEF has a competitive advantage and so can resist pricing pressure, then this is a compelling model. It has just started raining again...
It has no doubt taken much longer than they would have wanted, but I see from John Di-Stefano's Twitter feed that a planning application has finally been submitted on Cambridge Heath Road, proposing 189 new homes (40% of which would be affordable) plus around 18,000 sq ft of commercial space plus public realm. It will be interesting to see how long that application takes to get through the planning process. I recall that TEF had originally hoped to start work on site this year, but 2019 looks more realistic now. Still, good news, as far as it goes.
Sain,
You could call the Delancey deal a recapitalisation, but the reason I mentioned it as being of interest was because it introduced a major new investor (Oxford Properties) who is already very familiar with investing in the UK and has stated ambitions to expand on the PRS front. The scope of the JV was also expanded, so I viewed it as using an existing vehicle to go hunting for more schemes. The JV had a fair amount of firepower before Oxford came on board, but there may well have been investment restrictions that limited further expansion.
Back to TEF, I can see the attraction to all parties of seeding any fund that is established with one or more existing TEF schemes, now excluding Equipment Works, presumably. Either that or acquiring a new scheme at the same time that the JV is established. I don't think that Savills have the financial muscle to take a slice of the action as an equity investor, but I entirely agree that they could be a useful introducer. In fact, quite possibly they have been already, as it seems the task now is to work through the list of interested investors and sort out commercial terms. I suspect that the share price will continue to bob around on the water until the market knows what deal they can put together.
Lots of ways that you could cit this, but the market tends to be driven by recent precedent and the fairly recent deal between Delancey and Oxford Properties (the latter is a perfect fit for TEF) with Qatari Diar and APG as institutional investors joining in looks a prime contender. What is pretty certain is that TEF will be a pure fee developer - ie. not taking a significant equity stake, as that does not fit the model that they have developed. Basic return likely to be a multiplier on an assumed base rent, with overage on achieved rents above base levels. So, a locked in basic profit, with upside. Lots of variants on that basic theme.
The recent statements from TEF suggest that they expect to end up with at least two long term funding partners. If so, that would most obviously be structured through one multi-party JV, rather than parallel JVs. Any deal along those lines is inevitably going to be pretty complex and it will take time to put together, even after the basic commercial terms have been agreed. We would all like TEF to sort out its arrangements asap, but realistically, it is going to take time. Patience is a virtue...
Front page article in The Evening Standard tonight about the spat between the Communities Secretary (at least, for the moment) and the Mayor over the number of new homes being built in London and the level of average house prices. Gesture politics and I suspect that both parties realise that the annual build target in the draft London Plan is not going to be achieved any time soon (let alone the much higher figures that Government officials are apparently pushing for - good luck with that). However, it might encourage the Mayor and his team to put more pressure on local planning authorities dragging their heels - not limited to LBTH) and TEF is a likely beneficiary.
Once the PRS market (in London) has developed a bit more and become an established separate asset class - which I personally believe will happen - I think that TEF will be distinguished from the other generalist builders that it is currently lumped in with. That should lead to a rerating. At the moment, the different risk profile is not sufficiently well understood or credited by the market and so the share price is depressed. How long the rerating will take is an interesting question.
Hello Sain. There was no mention of. Ew sites beyond the two in negotiation recently reported, but what was said was that there was not considered to be any shortage of opportunities, so I am pretty certain that there is other stuff under review. I forgot to ask about the significant JV site in East London that was first trailed some two years ago, but my assumption from the lack of recent comment is that the deal collapsed at the detailed negotiating stage. John was also philosophical on the various LBTH sites, which I talked to him about at some length. He did say that in his view institutions have not been put off investing in LBTH, notwithstanding the somewhat charged political atmosphere. As I think you have observed in the past, the difficulties in unlocking these complex sites constitutes a significant barrier to entry for other would be competitors.
Savin, Essentially, steady as she goes. There was some discussion about the fact that there are not really any listed companies that are direct comparable to TEF and that the share price sometimes gets clobbered when the likes of Crest issue announcements. I chatted to John afterwards (and separately to Jerome, who I think will prove to be a very good signing). On the PRS front, I understand that TEF has been deluged with approaches and so I have no doubt that they will sign up with at least one insti and probably more. Savillshave been appointed to help them assess and rank the various approaches. I would be amazed if Greystar were not one of the parties that they select as a long term partner. You will also have seen that Oxford Properties have now hooked up with Delancey. The model they are using is tried and tested, although not the only option.
Anyone else going tomorrow? I am planning to attend. I wonder if we will have extra company from the Balfron Tower/Chrisp Street lobbyists.
The development pipeline is down on what it was two years ago, at which time TEF stated that its vision was to double the size of the business over a five year period by increasing its output of homes to around 1500 each year. I also remember reading somewhere that TEF believed that it had the capacity to handle around 10,000 units under construction.
Two years on and the numbers are well short of that, so they are due at least one new big deal - and probably a few. Maybe we will be told a bit more in the trading update.
I totally agree that the LBTH councillors may well want the decision on Chrisp Street to be taken out of their hands. It is all too toxic and they are damned whatever they do. The same goes for Balfron Tower and Commercial Road. In any event, LBTH must be perilously close to be taken into special measures on planning decisions, because the administration has totally broken down. It is almost beyond belief. Very sadly, local residents will lose out through all of this (and I used to be one quite a few years ago and I know the area well). As a TEF shareholder, my view is that there are other London boroughs nearby that are more open to sensible development and I hope that TEF hunt elsewhere for new sites, where the risk profile is much better. For TEF, the speculative costs for the schemes that they have in LBTH must be sub optimal and some. The residents are being very poorly served, in my view.