Telford Homes Regulatory News (TEF)

Telford Homes Plc

("Telford Homes" or the "Group")

Interim Results

Telford Homes Plc (AIM:TEF), the London focused residential property developer, today announces its interim results for the six months ended 30 September 2018 ("H1 2019" or the "period").

Highlights

Jon Di-Stefano, Chief Executive of Telford Homes, commented: "Telford Homes made pleasing progress during the first half of the financial year, despite an increasingly uncertain economic and political backdrop. Our strategic shift towards purpose built rental homes sold to institutional investors continues to be beneficial to our risk profile and growth potential whilst also being well timed in terms of the changing requirements of our typical customers in London.

We are committed to our strategy which is built upon a fundamental undersupply of homes in non-prime locations in London and our belief that short-term market sentiment does not alter the long-term structural imbalance between housing supply and housing need. These factors, coupled with our excellent reputation as a trusted build to rent partner and the associated change in our business model, give us the confidence to look forward to more success in future years."

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For further information:

Note: Figures in this announcement include the Group's share of joint venture results on a proportionally consolidated basis. For further details of key management information and alternative performance measures refer to note 6 and note 7.

CHIEF EXECUTIVE'S REVIEW

Telford Homes made pleasing progress during the first half of the financial year, despite an increasingly uncertain economic and political backdrop. Our strategic shift towards purpose built rental homes sold to institutional investors continues to be beneficial to our risk profile and growth potential whilst also being well timed in terms of the changing requirements of our typical customers in London. At £537,000, the average expected price in our development pipeline, excluding subsidised affordable housing, remains firmly under the psychologically significant £600,000.

We still have work to do in order to achieve our original target of exceeding £50 million of total profit before tax for the year to 31 March 2019 and Brexit brings a certain amount of unpredictability to that. Regardless, we remain extremely confident in our long-term strategy of delivering an increased number of much needed homes in non-prime locations of the chronically undersupplied London market.

Strategic shift towards build to rent developments

We continue to sell homes to a diverse mix of customers including build to rent investors, housing associations, owner-occupiers and individual investors. Allowing for recent economic uncertainty and adverse tax changes for individual investors, our strategic shift towards build to rent over the last three years has been well timed and remains our core focus for three reasons:

· Firstly, the higher return on capital achieved on build to rent transactions which require no debt and limited equity investment. Although margins are more modest than for individual open market sales, these forward funded developments also serve to de-risk our development pipeline

· Secondly, there continues to be significant demand from institutions looking to invest in build to rent and as a result there is no shortage of capital inflows to the sector. These institutions want to acquire a pipeline of rental properties as quickly as possible and many need the land finding, planning and construction skills that we already have

· Finally, we believe that the robust and undersupplied London rental market is moving in the direction of institutionally-owned, purpose-built developments. Tenants of such properties can enjoy higher levels of service, longer and more secure tenancies, better amenities and a greater sense of community. New generations of our customers are demanding a higher quality rental product and Telford Homes is well placed to help meet that demand. The proportion of people renting continues to increase in London due to the greater flexibility it offers and the lack of the significant financial commitment that comes with a mortgage. As a result, the market is starting to mirror that in many US cities where build to rent has been introduced over the last 25 years and made renting a way of life. We expect this trend to continue in London and potentially in other areas of the UK.

Current build to rent trading

We are progressing well with our existing build to rent projects and in August 2018 we handed over The Pavilions, our first build to rent development, which was purchased by L&Q in 2016. We are getting closer to build completion of the two schemes we are working on with M&G Real Estate in Carmen Street and Redclyffe Road and the same applies to the build to rent block at New Garden Quarter which was sold to Folio, a subsidiary of Notting Hill Genesis. All of our institutional partners are very pleased with progress to date.

In relation to new build to rent projects we are now moving towards entering a full build contract with Greystar for 894 build to rent homes at Parkside in Nine Elms and we expect to start on site early in 2019. In addition, at the Annual General Meeting in July the Group announced that we had commenced contractual negotiations with a major build to rent investor for the sale of 257 homes at Equipment Works in Walthamstow and that process is nearly complete with a formal announcement of exchange of contracts expected shortly.

In October 2018 we also announced that we have been chosen to partner a major land owner to obtain planning consent for around 700 homes on a site 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. This partnership, on a substantial project with a respected and established property owner, is another key milestone in our build to rent strategy and we expect to announce further details in the near future once we have agreed more detailed terms.

Finally, with the help of Savills, we are making excellent progress towards identifying at least one institutional investor with whom we can forge a long-term partnership for future build to rent activity. Our belief is that such a relationship could lead to more efficient ways of buying land, the ability to design bespoke build to rent schemes that match our partner's requirements and a much shorter contractual process. The aim is to create a significant long-term build to rent pipeline to the benefit of both parties. We anticipate being in a position to select a partner by the end of 2018 with a view to entering into a contractual arrangement and making a formal announcement early in 2019.

Individual open market sales

Despite lower liquidity in the market as a consequence of the uncertainty around Brexit we have continued to secure individual sales, particularly for homes priced below £600,000, on developments that are complete or close to completion. These sales have typically been to first time owner-occupiers, many of whom have purchased under the Help to Buy scheme. We were pleased to see the Government extend Help to Buy until 2023 although we do not see any future end to the scheme or other potential changes as a material risk to the Group given that we have only made just under 100 sales using Help to Buy over the five years since it was introduced.

Homes priced above £600,000 are currently more difficult to sell especially if customers already own a home and are delaying a new purchase due largely to negative market commentary and sentiment. Fortunately, this price point represents a relatively small proportion of our overall portfolio and we continue to make progress selling homes above this level albeit at a much slower rate of sale than we would normally expect.

Following the very successful launch of the individual open market sale homes at New Garden Quarter, Stratford, at the beginning of the calendar year, we recently held our second 'off-plan' launch of 2018. The combined UK and overseas launch of Gallions Point, E16 resulted in 15 sales, with performance suppressed by Brexit worries and the potential risk of increased stamp duty for overseas investors. Although we were disappointed with the outcome, the majority of the homes at Gallions Point are priced under £600,000 with completions due in 2020 and we are confident that they will be very 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 pipeline with build to rent transactions and individual owner-occupier sales now drawing our focus instead.

Whilst build to rent has become our strategic focus, homes for individual open market sale remain an important part of our business model. This was underlined by our recent purchase from Greystar of part of their site in Greenford, our first in the London Borough of Ealing. Telford Homes will deliver 194 homes for individual open market sale at an average selling price of circa £500,000 and 84 affordable homes for shared ownership. We intend to begin work on site in mid-2019, with completion anticipated in 2022. As well as supporting our goal of operating in a broader footprint of London boroughs, this acquisition demonstrates the strength of our relationship with Greystar and how build to rent partnerships can lead to opportunities in other areas.

Land acquisition and development pipeline

Alongside the projects mentioned above we are appraising several other opportunities to add to our considerable development pipeline and we are engaged in detailed discussions on two further sites. In addition, we recently announced that Telford Homes has been selected to be on the Greater London Authority's 'London Development Panel 2' which is expected to bring forward sites currently in public ownership over the next few years. Our current development pipeline stands at just over 5,000 homes, including Parkside in Nine Elms, and has a gross development value of £1.65 billion.

Interim results to 30 September 2018

Our financial results in any given period are influenced by the number of individual open market completions achieved and the timing of entering into new construction contracts with affordable housing providers and build to rent investors. As was the case in the year to 31 March 2018, we expect a much greater number of open market completions in the second half of the financial year together with a number of new construction contracts and therefore the results for the financial year to 31 March 2019 will again be weighted towards the second half. All relevant developments remain on track and legal completions of homes already sold are proceeding as planned.

Total revenue in the first half of the year was £129.6 million, a 31% increase on the same period last year (H1 2018: £99.3 million), mainly due to a greater number of open market residential completions. Total profit before tax was £10.1 million, up from £8.7 million in the six months to 30 September 2017. GAAP revenue, excluding the Group's share of joint ventures, was £118.8 million (H1 2018: £86.7 million). GAAP profit before tax was £10.2 million (H1 2018: £8.8 million). For further details refer to note 6 and note 7.

The adjusted gross margin for the first half was 23.2 per cent with the corresponding figure for the year to 31 March 2018 being 26.5 per cent. This reduction was anticipated and is due mainly to a changing mix of build to rent and individual open market sales with an increasing proportion of build to rent lowering the gross margin, albeit offset by higher project specific returns on capital. There have also been a few isolated cases of modest build cost pressures in later trades as projects complete. However, general construction activity in London, particularly residential development, does appear to have reduced a little in recent months which tends to take some of the pressure off trades that are otherwise in high demand.

The adjusted operating margin for the six months to 30 September 2018 was 9.8 per cent down from 11.5 per cent in the same period last year due to the same factors impacting the gross margin. The adjusted operating margin in the year to 31 March 2018 was 16.7 per cent with the comparable H1 performance this year affected by the mix of projects noted above and more significantly the fact that revenue will be weighted to the second half while overheads remain relatively stable throughout the year.

Our net debt has increased to £122.7 million (FY 2018: £103.1 million) as projected, on account of building out some of our individual sale schemes and gearing is up to 52.2 per cent at 30 September 2018 from 44.6 per cent at 31 March 2018.

Adoption of IFRS 15 'Revenue from contracts with customers'

The Group adopted IFRS 15 'Revenue from contracts with customers' from 1 April 2018. This has changed the Group's accounting policy for some directly attributable sales costs which, under the new standard, are required to be prepaid and then expensed at the time of corresponding revenue and profit recognition rather than expensed as incurred. This has resulted in a restatement of opening reserves at 1 April 2018 by an increase of £1.8 million net of deferred tax, mainly in relation to agent's commission, with a corresponding increase in prepayments held on the balance sheet. This prepaid commission will unwind over the next few years as forward sold properties complete and profit is recognised. The first £0.5 million of the restated prepaid commission has accordingly been expensed in the six months to 30 September 2018.

Dividend

The Group's dividend policy is to pay one third of earnings across each financial year. The Board is pleased to declare an increase in the interim dividend to 8.5 pence (H1 2018: 8.0 pence). This dividend will be paid on 11 January 2019 to those shareholders on the register at the close of business on 7 December 2018. The ex-dividend date is therefore 6 December 2018.

People

As a sign of our commitment to the build to rent sector, we recently welcomed Caroline Radford to the new role of Build to Rent Development Manager. Caroline is responsible for all existing and future build to rent relationships and contracts, and reports to our Group Financial Director, Katie Rogers.

As we announced in October 2018, Frank Nelson, Non-Executive Director, stepped down from the Board due to other commitments. We are grateful to Frank for his contribution to Telford Homes since January 2015 and wish him well. We are in the process of seeking a suitable replacement and will make a further announcement at the appropriate time. 

Operating responsibly

We are very proud of our record on sustainability especially since we introduced 'Building a Living Legacy', our strategy to create places with a positive long-term contribution to London's built environment, in 2016. This is an area of increasing importance for our partners and a key factor in our ability to secure mutually beneficial partnerships.

Aside from our recognised environmental credentials, we play an important role in engaging with and developing communities. The recent opening of a primary school in St. Paul's Way, Tower Hamlets brings the total number of new school places created by Telford Homes in the last three years to 1,690. The multiple use site including the new school, 109 mixed tenure homes, a community centre / sports hall and a mosque is our third development based around building a new school and has been well received and praised by each of the stakeholders involved in the scheme.

Outlook

In our trading update on 10 October 2018 we reiterated our original target of exceeding £50 million of total pre-tax profit for the year to 31 March 2019. We also identified that the greatest risk to achieving that target was approximately 90 homes that were still to be sold of which 25 were priced above £600,000. Since that date we have made good progress and now have just under 60 sales still to achieve of which 20 are priced above £600,000. However, the uncertainty arising from Brexit and indeed the wider political situation remains a concern across the sector making it difficult to accurately predict sales rates over the coming months. Individual sales already secured, combined with existing construction contracts for build to rent and subsidised affordable housing and new construction contracts that are expected to be exchanged before 31 March 2019, would amount to total profit before tax in excess of £40 million. This provides us with a strong base to work towards our £50 million target by securing further individual sales that will complete in the remainder of financial year.

We are committed to our strategy which is built upon a fundamental undersupply of homes in non-prime locations in London and our belief that short-term market sentiment does not alter the long-term structural imbalance between housing supply and housing need. These factors, coupled with our excellent reputation as a trusted build to rent partner, the associated change in our business model and the new opportunities this growing sector brings, give us the confidence to look forward to more success in future years.

Jon Di-Stefano

Chief Executive

27 November 2018 

GROUP INCOME STATEMENT INCLUDING PROPORTIONAL SHARE OF JOINT VENTURE RESULTS FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018

Key management information is presented to the Board with the Group's share of joint venture results proportionally consolidated and therefore including the relevant share of the results of joint ventures in each line of the income statement and balance sheet.

The Group's joint ventures are an integral part of the business and all developments are treated consistently within the business whether wholly owned or partially owned in a joint venture structure. In addition, the proportion of results generated from joint ventures will fluctuate year to year depending on the timing of developments.

As such the Board believes that the financial results presented in this way are the most appropriate for assessing the true underlying performance of the business. A reconciliation between the key management information income statement and balance sheet and Generally Accepted Accounting Principles (GAAP) compliant information, accounting for joint ventures under IFRS 11 as equity investments, is included in note 6. The key management information presented in this way is deemed to be an alternative performance measure. For further details on alternative performance measures, including further definitions and reconciliations, see note 7.

GROUP BALANCE SHEET INCLUDING PROPORTIONAL SHARE OF JOINT VENTURE RESULTS AT 30 SEPTEMBER 2018

GROUP INCOME STATEMENT

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018

GROUP STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018

GROUP BALANCE SHEET

AT 30 SEPTEMBER 2018

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018 (UNAUDITED)

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2017 (UNAUDITED)

GROUP STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 MARCH 2018 (AUDITED)

GROUP CASH FLOW STATEMENT

FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2018

NOTES

6 Segmental reporting

The Group has only one reportable segment being housebuilding in the United Kingdom. Financial analysis is presented on this basis to the chief decision makers for the Group these being the directors.

Management information is presented to the directors with the Group's share of joint venture results proportionally consolidated to reflect the true underlying performance of the Group. The Group adopted IFRS 11 'Joint Arrangements' in the year to 31 March 2015 and as such joint ventures within these condensed financial statements are accounted for as equity accounted investments rather than by proportional consolidation. A reconciliation between management information including a proportional share of joint venture results and the GAAP compliant information in the condensed financial statements is as follows:

7 Key management information and Alternative Performance Measures

The Chief Executive's review includes both statutory and Alternative Performance Measures (APMs). The Board uses APMs which, although financial measures of either historical or future performance, financial position or cash flows, are not defined or specified by IFRS. The APMs, in management's view, better reflect the underlying performance of the business and provide a more meaningful comparison of how the business is managed and measured on a day-to-day basis.

Our APMs are aligned to our strategy and are used by the Board for planning, reporting, to measure the performance of the business and form the basis of the performance measures linked to remuneration. The measures are also used in discussions with the investment analyst community and current and potential shareholders.

The APMs used by the Board and highlighted in this report are defined and explained below.

Key management information including the Group's share of joint ventures result proportionally consolidated

Key management information is presented to the Board with the Group's share of joint venture results proportionally consolidated and therefore including the relevant share of the results of joint ventures in each line of the income statement and balance sheet as set out above.

Where revenue and profit metrics include the Group's share of joint venture results proportionally consolidated, they are defined and referred to as set out below.

Total revenue - Total revenue is defined as IFRS revenue plus the Group's share of revenue from its joint ventures.

Total gross profit - Total gross profit is defined as IFRS gross profit plus the Group's share of gross profit from its joint ventures.

Total operating profit - Total operating profit is defined as IFRS operating profit plus the Group's share of operating profit from its joint ventures.

Total profit before tax - Total profit before tax is defined as IFRS profit before tax plus the Group's share of profit before tax from its joint ventures.

Adjusted margins

The Board reviews margins at a gross and operating level before the inclusion of any interest costs capitalised within work in progress and subsequently expensed through cost of sales. This is consistent with the approach used by the business when appraising land and therefore allows comparability to the original site purchase viability and also comparability across the sector as many of the Group's peers do not capitalise interest per IAS 23.

Adjusted gross margin - is calculated as the IFRS gross profit plus the Group's share of gross profit from its joint ventures (total gross profit), adjusted for interest expensed through cost of sales, divided by total revenue, expressed as a percentage.

Adjusted operating margin - is calculated as the IFRS operating profit plus the Group's share of operating profit from its joint ventures (total operating profit), adjusted for interest expensed through cost of sales, divided by total revenue, expressed as a percentage.

Other APMs

The other APMs and KPIs used by the Group are defined below.

Total finance costs incurred

Total finance costs incurred, including the Group's share of joint venture finance costs, consist of interest on development financing, non-utilisation fees and amortised arrangement fees. Interest on development financing is capitalised into work in progress as required by IAS 23 and all other fees are charged directly to the income statement.

Gearing - Gearing is calculated as net debt (total borrowings less total cash), including the Group's share of joint venture debt and cash proportionally consolidated, divided by net assets expressed as a percentage.

Development pipeline

The development pipeline is defined as revenue under the Group's control, including the Group's share of joint venture revenue, to be recognised in future years.

For a full list of the Group's KPIs and APMs refer to the 2018 Annual Report.

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Copies of this announcement are available from the Group at Telford House, Queensgate, Britannia Road, Waltham Cross, Hertfordshire EN8 7TF and on our website www.telfordhomes-ir.london