1 Overview and current trading Clive Fenton Review of operations - - PowerPoint PPT Presentation

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Overview and current trading Clive Fenton Review of operations John Tonkiss Financial results Rowan Baker Business outlook Clive Fenton 2

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4 760 legal completions1 (2017: 8642), constrained by fewer first occupations than prior year (2018: 16, 2017: 19), resulting from pause in build activity following EU referendum H1 underlying operating profit of £14.5m (2017: £24.1m), in line with guidance given in March Significant investment in H1 to promote high level of sales releases (2018: 50, 2017: 32) and deliver H2 completions, impacting H1 margins Improved customer satisfaction score by 2.3% to 93.5%, achieving HBF Five Star customer satisfaction award for a record 13th consecutive year – the only housebuilder of any size or type to achieve this Work to mitigate impact of ground rent uncertainty continues

• 1. Excluding 20 Affordable Housing units and one commercial unit
• 2. Excluding two commercial units

Forward order book currently 13% ahead of prior year Trading has remained resilient despite a challenging secondary market House price inflation remains subdued across our products

• RICS Feb 18 Market Report

“Activity indicators continue to weaken”

• Nationwide March 18 House Price Index

“Annual house price growth remained subdued”

• Halifax March 18 House Price Index

“House prices continue to remain broadly flat … the lowest rate of growth since March 13”

£581m £487m £366m £277m £141m £512m £418m £323m £250m £116m 6 April 28 February 24 January 14 November 1 September FY17 FY18

5 Forward order book

+£25m +£27m +£43m +£69m +£69m

Total sales releases at 6 April 2018 : 54 2017 : 35

6 Workflow and build activity remains on track to deliver c.80 new sales releases (2017: 52) and more than 65 first occupations in FY18 (2017: 49) Full year out-turn expectation remains unchanged since the trading update announcement in March

• Expected to be within the current range of analyst forecasts,

albeit there remains continuing uncertainty created by the Government announcement on ground rents Announcing an interim dividend of 1.9p to be paid on 8 June 2018 (2017: 1.8p)

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Even geographical spread of land bank split 38% South, 34% Central, 28% North Land market remains benign and competition remains highly fragmented Caution exercised in H1 in response to proposed ground rent changes:

• 22 land exchanges (2017: 30 land exchanges) - > 25% site margin

expected (excluding FRI income)

• 21 planning consents (2017: 34 planning consents)

Lower level of activity reflects:

• A more measured land buying approach
• Further time to renegotiate land prices and/or planning agreements to

mitigate margin impact Mitigating actions progressing well with action plans identified for partial recovery of ground rent income potentially lost

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Land exchanged March 2017 Land price reduction of £300k negotiated in H1 FY18 (overage clause in place should FRI be chargeable) Land exchanged February 2018 2.1 acre site currently occupied by a school Central location less than 0.25 miles from town centre

New brand campaign – ‘Retirement living to the full’ Television advertising campaign premiered 10 January Fully integrated across television, social, online and offline channels Resulting improvement in brand awareness to date:

• Additional 14,150 web sessions - 16% year on year increase

in calls from website

• Additional 2,400 calls generated
• Additional calls/web hits delivered 1,000 additional enquiries
• 11% increase in first time visitors

Other sales initiatives Salesforce selected for new market-leading CRM replacement system and implementation underway 9

17% 21% 62%

H1 FY18

3% 23% 74%

H1 FY17

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Part-exchange (PX) usage Increased volume of PX transactions - 38% of legal completions (2017: 26%) reflecting ongoing subdued secondary market 289 PX transactions:

• 163 third party PX (2017: 201)
• 126 on balance sheet PX (2017: 22)
• Reflecting national roll-out of on-balance-sheet PX solution

126 properties purchased and 130 sold Tight controls in place to ensure regions do not exceed capital allocation Average buy-in price of 96% of market value

• Average purchase price £300k
• Average loss on sale of £2.7k

Properties resold on average c.11.5 weeks post buy-in Saving of c.£2.6m compared to use of third party PX

126 22 163 201 H1 FY18 H1 FY17

PX transactions

In-house PX 3rd party PX providers

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Development and Build initiative Continued product specification improvement

• c.£33k saving identified per development across ground floor and cavity wall

insulation

• Use of 500mm porotherm blocks to accelerate build cycle time

New commercial estimating tool (Bidcon) now live across all regions

• Optimises quality of cost information available at land buying stage to

improve commercial decision making New sub-contractor tender process now live across all regions Build cost environment Skilled labour resourcing and shortages remain challenging Some material pressures, particularly brick supply shortages 60% of annual material spend covered by fixed pricing agreements to December 2018

Build cost inflation of c.3-4% expected to continue in H2 FY18 and FY19

12 ‘Pepper Pot’ Sales Further 25 units sold across 9 developments to PfP Capital in H1 FY18 (H1 2017: 0) 31 forward sales agreed and due to complete in H2 FY18 Touchstone, a Places for People group company, embedded as letting and asset manager Shared Ownership Pilot to be launched in the North West region, based on an anticipated 70%/30% offering, with further national rollout expected Build to Rent On-going discussions to agree potential development scope and specification Several sites being considered with benefits expected over the medium-term

• 1. Source: Strutt & Parker 2017

17% of older people would rent a property – equivalent to c.2 million people1

13 Only 2,637 new bungalow homes registered in 2017 versus 26,408 in 19861 Opens up new land opportunities and enables development potential to be maximised 240 units across 15 sites now in land bank, as part of mixed schemes (incorporating either RL or RLP product) 7 further sites (180 units) with offers accepted 3 sites released for sale and due to first occupy in H2 FY18 – strong

• ff-plan sales performance to date:
• Chipping Norton 64% reserved off plan (first occupation May

2018)

• Wymondham 50% reserved off plan (first occupation July 2018)
• Buntingford 40% reserved off plan (first occupation August

2018) Net average selling price of c.£400k

• 1. NHBC new home statistics annual review 2017 & 2016

9 >40 Q3 FY18 Q4 FY18

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* First occupation defined as the date of the first legal completion within a given development

Build programmes > 49 first occupations expected in H2 – all of which have sales released All build programmes are on track Phasing is heavily weighted to Q4 with c.40 first occupations forecast in this period Sales Completions and forward sales currently at £581m and currently on track to deliver expected full year out-turn. Outcome dependant on sales progress over next quarter Off-plan sales on track to deliver >50% by first occupation New divisional structure now fully in place to increase operational

• versight.

First occupation sites

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Key financial metrics H1 FY18 H1 FY17 Change

Legal completions1 760 864 (12)% Average selling price2 £298k £260k +15% Revenue £239.6m £238.2m +1% Gross profit £32.0m £39.7m £(7.7)m Gross profit margin 13.4% 16.7% (3ppts) Underlying operating profit3 £14.5m £24.1m £(9.6)m Underlying operating profit margin3 6.0% 10.1% (4ppts) Finance expense £(3.1)m £(1.6)m £(1.5)m Underlying profit before tax3 £11.5m £22.8m £(11.3)m Statutory profit before tax £10.5m £21.8m £(11.3)m Underlying basic earnings per share3 1.7p 3.5p (1.8)p

• 1. Excludes 20 affordable housing units and 1 commercial unit in FY18 and 2 commercial units in FY17
• 2. Average selling price is calculated as average list price less cash discounts and PX top-ups.
• 3. Underlying operating profit (including underlying operating profit margin and underlying basic earnings per share) and underlying profit before tax are calculated by adding amortisation of brand and exceptional administrative

expenses to operating profit and profit before tax respectively

Reduction in legal completions to 760 (2017: 864), constrained by lower level

• f first occupations and a subdued

secondary market Significant increase in average selling price to £298k (2017: £260k), driven by continued improvement to quality and location of developments Margin impacted by higher marketing costs to promote H2 first occupations, build cost inflation and higher incentive costs Increased finance costs reflecting revaluation of shared equity portfolio partially due to change in HPI assumptions

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Key financial metrics H1 FY18 H1 FY17 Change

Return on capital employed1 (ROCE) 12% 14% (2ppts) Capital turn 0.9x 1.0x (0.1x) Net debt £76m £30m £(46)m Tangible gross asset value (TGAV) £743m £657m +£86m Interim dividend per share 1.9p 1.8p +0.1p

ROCE variance driven by lower operating profit, continued investment in land, build and sales & marketing expenditure ahead

• f H2 first occupation delivery

Robust balance sheet with continued focus

• n careful cash management

Announcing an interim dividend of 1.9p per share (2017: 1.8p)

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• 1. Return on capital employed (ROCE) is calculated by dividing underlying operating profit for the previous 12 months by the average tangible gross asset value at the beginning and end of the 12 month period. Tangible gross

asset value is calculated as net assets excluding goodwill and intangible assets, excluding net cash

Pricing increase reflecting continued improvements in quality and locations rather than house price inflation This has been offset by:

• Land and build cost increases

(reflecting location & specification improvements)

• Build cost inflation
• Increased discount and incentive costs
• Additional marketing activity to promote

H2 first occupations

• Increased operating costs reflecting

inflation and continued investment in anticipation of future growth

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10.1% 6.0% 9.2% 8.0% 2.8% 0.4% 1.6% 0.4% 0.1% H1 FY17 Op. profit margin List price Land & Build cost increase (location and specification improvement) Build cost inflation Total incentives costs Sales & marketing Operating costs Other H1 FY18 Op. profit margin

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£m 31 August 2017 28 February 2018 28 February 2017 £m £m £m Goodwill and intangible assets 69.3 68.4 70.2 Fixed assets & investments 3.0 2.8 3.2 Land 148.6 112.0 186.2 Land creditors (67.4) (50.4) (44.7) Sites in the course of construction 341.2 451.1 304.2 Finished stock 238.7 239.0 243.0 PX properties 33.0 33.3 4.6 PX provision (1.1) (0.8) (0.3) Total net stock 693.0 784.2 693.0 Net cash / (net debt) 30.7 (75.9) (30.4) Other net assets / liabilities (50.3) (44.1) (38.9) Net assets 745.7 735.4 697.1 Significant increase in WIP with >49 first

• ccupations forecast in H2 FY18

Lower land value reflects the Group’s cautious approach to land buying as a result of the proposed changes to ground rent legislation H1 FY18 lower level of first occupations evident in finished stock On-balance sheet PX value of £32.5m reflects 110 properties held on the balance sheet

• In line with year end balance

sheet position

• Tight controls are in place to

ensure that our regions do not exceed their capital allocation

• Average capital employed of

£24.6m during H1*

• Accounting profit of £0.6m

realised through sale of on- balance sheet PX in H1

• 40%

+48%

*Monthly average

£30.7m £234.5m (£75.9m) £69.4m £7.9m £19.3m £71.3m £173.2m

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20 120 220 320 420

Opening net cash (1/09/2017) Net revenue Land spend Build spend Operating costs & overheads Tax & interest Dividends paid Closing net debt (28/02/2018)

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Total land & build spend £245m Continuing to exercise careful cash management and maintain a strong balance sheet Secured 12 month increase in RCF from £200m to £250m as contingency against current ground rent uncertainty. Additional facility not currently forecast to be utilised Positive net cash position expected at year end

21 Potential FY18 impact H1 FRI sale completed and £10.3m recognised as revenue during H1 £14.5m deferred FRI income held on balance sheet at 28 February 2018 Due diligence work commenced on H2 FY18 sales FY19 onwards – potential impact > £20m deferred FRI income expected to be held on balance sheet at 31 August 2018, most of which would be recognised as revenue in FY19 Expected FY19 impact of no further monetisation would be c.£15m (assuming H2 FY18 FRI sales go ahead) Continuing to pursue mitigating actions to preserve margin

Impact of ground rent income removal £959k c.£538k – 4 additional units through redesign (subject to planning) c.£150k – section 106 non-affordable housing potential saving c.£25k – specification adjustments

22 Loss of FRI impacts margin by an average of c.3% Plans in place for partial recovery of FRI by addressing

• Land price renegotiations
• Section 106 renegotiations
• Design efficiency savings

High level of confidence this will lead to recovery of c.1% Further opportunities continue to be explored Since 21 December 2017, all new land assessed excluding FRI income and purchased in line with existing hurdle rates

Impact of ground rent income removal £624k c.£280k – 4 additional apartments added (planning achieved) c.£200k – section 106 saving

Build activity on track to deliver >49 first occupations in H2 ASPs expected to be c.£300k for full year Significant margin recovery expected in H2 due to more favourable mix of sales from new sites and operational leverage Margins expected to be lower than prior year due to impact of build cost inflation not currently offset by house price inflation Robust balance sheet with continued focus on careful cash management; net cash position expected at year end Full year out-turn expectation remains unchanged since trading update in March

• Expected to be within current range of analyst forecasts, albeit

continuing uncertainty created by Government announcement

• n ground rents

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25 Actively engaging with the Government with the aim of securing an exemption from proposed changes to ground rents announced on 21 December 2017

• Meetings with all relevant Government departments
• Working with the 3 other major retirement housebuilders representing 90% of owner-occupied

retirement market Strong case put forward for a very specific exemption for the retirement housebuilding sector and we are seeking swift clarification on this matter In the meantime, we maintain cash discipline, exercise caution and continue to work hard to mitigate the potential impact on the business

4,641 4,842 4,846 1,782 1,287 832 2,268 2,699 3,223 1,344 1,139 1,120 28 February 2017 31 August 2017 28 February 2018

Landbank - plots

Controlled land Owned land Sites under construction Finished stock

Total 10,035 Total 9,967 Total 10,021

6,129 5,678 6,423

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Significant increase in build activity, with 3,223 plots under construction supporting delivery of H2 No overall increase in controlled and owned land plots due to uncertainty surrounding ground rents

• 8 planning consents delayed due to

renegotiations, impacting the volume of owned land

• 15 land exchanges delayed, impacting the

volume of controlled land High increase in terms agreed with 43 sites in various different stages of renegotiation

1,120 1,355 2,096 Terms agreed

49 >65 c.60 c.67 >70 >75

FY17 FY18 E FY19 E FY20 E

Latest expectation FY17 full year annoucnement expectation

27 Ground rents proposal impacts first occupation delivery in FY19 & FY20 due to lower level of planning consents and land exchanges in H1 A more modest growth trajectory now expected over next two financial years and review of cost base underway to reflect this FY19 c.60 first occupations now expected in FY19 Modest growth still expected in FY19 due to high level of first

• ccupations in Q4 FY18

54 FY19 sites already under construction Possible FY19 ground rent impact of c.£15m if no further monetisation from 1 September 2018 (assuming H2 FY18 sales go ahead) Improved phasing of legal completions and operating profit expected between H1 and H2

First occupations

28 Trading has remained resilient with continued momentum in forward order book Build programmes and operational delivery on track for forecast H2 first occupations Full year outlook unchanged since March announcement

• FY18 out-turn expected in line with current range of analyst forecasts (subject to ground rent

uncertainty) Quality landbank in place in desirable locations Medium term workflow growth impacted by lower level of land and planning activity in H1 FY18 Business focussed on mitigating actions to protect margins and reduce the potential impact of lost ground rent revenue Robust capital structure with continued focus on careful cash management Review underway to protect and enhance shareholder returns, focussing on ROCE and margins, together with evaluation of further opportunities for diversification

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For the six months ended 28 February 2018

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H1 2018 H1 2017 £m £m Continuing operations Revenue 239.6 238.2 Cost of sales (207.6) (198.5) Gross profit 32.0 39.7 Other operating income 4.7 4.1 Administrative expenses (19.3) (17.5) Other operating expenses (3.9) (3.2) Operating profit 13.5 23.1 Amortisation of brand intangible asset (1.0) (1.0) Underlying operating profit1 14.5 24.1 Underlying operating profit margin 6.0% 10.1% Finance income 0.1 0.3 Finance expense (3.1) (1.6) Profit before tax 10.5 21.8 Income tax expense (2.4) (4.2) Profit for the period from continuing operations and total comprehensive income 8.1 17.6 Profit attributable to: Owners of the Company 7.9 17.6 Non-controlling interest 0.2

• 8.1

17.6

As at 28 February 2018

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H1 2018 H1 2017 £m £m Assets Non-current assets Goodwill 41.7 41.7 Intangible assets 26.7 28.5 Property, plant and equipment 2.2 2.6 0.4 0.4 Investment properties 0.2 0.2 Trade and other receivables 29.3 31.7 Total non-current assets 100.5 105.1 Current assets Inventories 834.6 737.7 Trade and other receivables 12.2 9.6 Cash and cash equivalents 41.1 24.6 Total current assets 887.9 771.9 Total assets 988.4 877.0 Equity and liabilities Capital and Reserves Share capital 43.0 43.0 Share premium 101.6 100.8 Retained earnings 589.6 552.5 Equity attributable to owners of the Company 734.2 696.3 Non-controlling interests 1.2 0.8 Total equity 735.4 697.1 Current liabilities Trade and other payables 83.3 76.9 UK corporation tax 2.2 4.0 Land payables 50.4 44.7 Total current liabilities 135.9 125.6 Non-current liabilities Long-term borrowings 115.1 52.7 Deferred tax liability 2.0 1.6 Total liabilities 253.0 179.9 Total equity and liabilities 988.4 877.0 Investments in joint ventures

For the six months ended 28 February 2018

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H1 2018 H1 2017 £m £m Net cash (outflow)/inflow from operating activities (86.6) (64.0) Investing activities Purchases of property, plant and equipment (0.2) (0.2) Purchases of intangible assets (0.5) (0.1) Proceeds from sale of property, plant and equipment

• Net cash (used in) investing activities

(0.7) (0.3) Financing activities Proceeds from long-term borrowings 107.0

• Repayment of short-term borrowings
• (11.3)

Dividends paid (19.3) (18.8) Net cash from/(used in) financing activities 87.7 (30.1) Net increase/(decrease) in cash and cash equivalents 0.4 (94.4) Cash and cash equivalents at beginning of the period 40.7 119.0 Cash and cash equivalents at end of the period 41.1 24.6

11 April 2018 – Half year results announcement 4 July 2018 – Trading update 6 September 2018 – Full year trading update 13 November 2018 – Full year results announcement Other key dates

• 31 August 2018 – Year end

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Sources: (1) ONS population projections (2017), (2) ONS total housing wealth by region and age group (2013) (3) YouGov research provided for McCarthy & Stone (2017) (4) Knight Frank (2018) Retirement Housing: Market update (5) ONS population projections (2016-based)

With a 47% predicted increase in those aged 65 or over by 20375

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Supporting 15,700 homeowners across 329 developments Services delivered:

• c.29,000* hours of care and support per month
• c.68,000 meals per month

98% ‘Good’ rating in CQC Retirement Living Plus inspections in FY17 Strong focus on improving efficiencies and maintaining quality

Our distinctive management services capability provides a platform to support business growth and leverage our service offering across all of our products

*Standard domestic, care and additional hours

Three core products delivered to the same outstanding quality and target return metrics

Independence with peace of mind Downsize for the leisure years A retirement apartment you own with flexible care and support

Minimum age 60 Typical number of apartments per site 30-50 FY17 completions 1,722 FY17 % land bank 57% Minimum age 70 Typical number of apartments per site 50-70 FY17 completions 479 FY17 % land bank 36% Minimum age 55 Typical number of apartments per site 20-40 FY17 completions 101 FY17 % land bank 7%

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*Source: Annual report

Lifestyle living Late middle-age living for the fully independent Retirement Living Plus For those in need of increased support Retirement Living For the physically independent

Other retirement housebuilders

Lack scale, national coverage and more limited access to financing

Rental market Retirement village market

Not prevalent in the UK UK predominantly an

• wner-occupied market

Generalist housebuilder Residential full-time Nursing/ Care Homes

Lack intellectual capital and appetite Fundamentally different business model

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Previously entered retirement housing market1 Currently operating in retirement housing market1

     1          

• 1. Previous entry or current entry refers to significant specialist owner-occupier retirement housing operations

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Sites Units Sites Units Sites Units Owned sites Land held for development 43 1,782 30 1,287 21 832 With detailed planning consent 31 1,299 29 1,257 20 802 Awaiting detailed planning consent 12 483 1 30 1 30 Sites in the course of construction1 53 2,268 64 2,699 80 3,223 Pre sales releases 28 1,256 49 2,017 31 1,299 Post sales release 25 1,012 15 682 49 1,924 Finished stock 102 1,344 107 1,139 93 1,120 Total owned sites 198 5,394 201 5,125 194 5,175 Exchanged sites With detailed planning consent 35 1,286 26 908 25 1,067 Awaiting detailed planning consent 86 3,355 93 3,934 89 3,779 Total exchanged sites 121 4,641 119 4,842 114 4,846 Total land bank 319 10,035 320 9,967 308 10,021 Terms agreed, awaiting exchange 28 1,120 28 1,355 43 2,096 Total 347 11,155 348 11,322 351 12,117 Workflow milestones Sites Units Sites Units Sites Units Land exchanges 30 1,243 45 1,921 22 977 Planning consents 34 1,314 30 1,159 21 938 Land completions 26 1,081 32 1,291 25 915 Build starts 24 1,073 42 1,711 32 1,258 Sales releases 32 1,223 20 904 50 1,973 First occupations 19 691 30 1,234 16 746 Inventory holding (£m) H1 FY17 H2 FY17 H1 FY18 Land held for development 186.2 148.6 112.0 Sites in the course of construction 304.2 341.2 451.1 Finished stock 243.0 238.7 239.0

Part-exchange properties

4.3 31.9 32.5 Total 737.7 760.4 834.6 Legal completions (unit numbers) H1 FY17 H2 FY17 H1 FY18 Current year first occupations 226 947 250 Prior year first occupations and earlier 638 491 510 Total 864 1,438 760 * Does not include sites under construction at the pre-foundation stage. H2 FY17 H2 FY17 2017 H1 FY18 2018 H1 FY18 2018 2017 H1 FY17 H1 FY17

42 38% 34% 28%

Regional landbank distribution (plots)

South Central North

28 February 2018 2017 Total plots 10,021 10,035 Average plots per site 33 31 Average Net ASP £307k £301k Average land cost* per plot £65k £64k Plot cost % of ASP 21% 21%

* Basic land cost

43 February CLG Committee Housing for Older People report published:

• Range of measures supporting retirement housing
• New national strategy and new planning use class for retirement

housing recommended

• Highlighted potential supply increase to 25,000 units a year

March Draft National Planning Policy Framework published:

• Few references to older people included
• Additional guidance on older people’s housing being prepared

separately Forthcoming Spring/Summer Government announcements expected:

• New planning guidance on older and disabled people
• Social care green paper

Prime Minister Theresa May with CEO Clive Fenton at Swift House, Maidenhead

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