Developing the Homes and Creating the Places That London Needs

ANNUAL REPORT 2019 REPORT ANNUAL THE PLACES LONDON THAT NEEDS DEVELOPING THE HOMES AND CREATING

TELFORD HOMES PLC ANNUAL REPORT 2019 TELFORD HOMES PLC – Annual Report 2019

CONTENTS

OVERVIEW STRATEGIC REPORT GOVERNANCE FINANCIAL STATEMENTS

HIGHLIGHTS OF THE YEAR 01 BUSINESS MODEL 08 BOARD OF DIRECTORS 46 GROUP INCOME 72 STATEMENT AT A GLANCE 02 AMBITION AND 10 CORPORATE 48 STRATEGY GOVERNANCE GROUP STATEMENT OF 72 OUR INVESTMENT CASE 04 REPORT COMPREHENSIVE INSIGHT INTO BUILD 12 INCOME TO RENT STATEMENT OF 53 DIRECTORS’ BALANCE SHEET 73 MARKET OVERVIEW 14 RESPONSIBILITIES STATEMENT OF 74 CHIEF EXECUTIVE 16 AUDIT COMMITTEE 54 CHANGES IN EQUITY OFFICER'S REVIEW REPORT CASH FLOW STATEMENT 75 FINANCIAL REVIEW 24 REMUNERATION 56 STATEMENT OF 76 KEY PERFORMANCE 30 COMMITTEE REPORT ACCOUNTING INDICATORS DIRECTORS’ REPORT 64 POLICIES PRINCIPAL RISKS AND 32 NOTES TO THE FINANCIAL 81 UNCERTAINTIES STATEMENTS KEY MANAGEMENT OUR PEOPLE 36 INFORMATION OTHER SIGNIFICANT 107 DEVELOPMENT AND 38 INTERESTS TRAINING GROUP INCOME 68 INDEPENDENT 108 For further information and STATEMENT HEALTH AND SAFETY 40 AUDITORS' REPORT the latest news please visit GROUP BALANCE SHEET 69 www.telfordhomes.london SUSTAINABILITY 42 ADVISORS 112 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

HIGHLIGHTS

£354.3m £46.0m

£316.2m £40.1m £291.9m

£34.1m £245.6m £32.2m 2016 2017 2018 2019 2016 2017 2018 2019 QUICK READS TOTAL REVENUE TOTAL PROFIT BEFORE TAX INVESTMENT CASE £354.3m £40.1m 04 2018: £316.2m 2018: £46.0m

BUSINESS MODEL ADJUSTED GROSS MARGIN GEARING 23.7% 37.0 % 08 2018: 26.5% 2018: 44.6%

AMBITION AND STRATEGY ADJUSTED OPERATING DEVELOPMENT 10 MARGIN PIPELINE 13.1% £1.6 bn CHIEF EXECUTIVE 2018: 16.7% 2018: £1.3bn OFFICER’S REVIEW

16 EARNINGS PER SHARE EMPLOYEE RETENTION RATE

BOARD OF DIRECTORS 44.6p 89% 2018: 49.8p 2018: 90% 46

DIVIDEND PER CUSTOMER SHARE RECOMMENDATION RATE 17.0 p 99% 2018: 17.0p 2018: 100%

Telford Homes use a range of statutory performance measures in accordance with Generally Accepted Accounting Principles (GAAP) and Alternative Performance Measures (APMs) when reviewing the performance of the Group against its strategy. As a result, all highlights include the Group’s share of joint venture results. Statutory revenue in accordance with GAAP is £336.1 million (2018: £294.8 million) and profit before tax is £40.3 million (2018: £46.3 million).

Definitions of APMs and detailed calculations and reconciliations to statutory figures can be found in note 22. For details of the Group’s Key Performance Indicators see pages 30 and 31. Denotes a computer generated image

01 TELFORD HOMES PLC – Annual Report 2019 OVERVIEW

AT A GLANCE

TODAY WE HAVE OVER 330 EMPLOYEES DEDICATED TO DEVELOPING THE HOMES AND CREATING THE PLACES THAT LONDON NEEDS

Who we are What we do Our award Telford Homes Plc is a listed developer We focus on brownfield opportunities in winning year of residential-led, mixed-use sites locations across London where the need in London. for homes far exceeds supply. Established in 2000, we have grown We invest in the communities we create to become one of London’s largest through our sustainability strategy: developers. ‘Building a Living Legacy’. Today we have over 330 employees We have extensive knowledge and dedicated to developing the homes and expertise in acquiring land, obtaining creating the places that London needs. planning permissions and designing and building high quality developments. Our goal is to significantly increase our output of new homes over the next Our buildings are bespoke designs few years to help address the chronic consisting of various housing tenures, shortage in London, focusing particularly alongside commercial properties and on the growing build to rent market. community buildings. Our success is driven by keeping our Our customers include institutional promises and being a trusted partner investors in the build to rent sector, to everyone we work with. housing associations, individual buy- to-let investors and owner-occupiers. Meeting the needs of our customers and the local community on each Being a valued partner to landowners, development is our central focus, housing associations, local authorities, from initial concept to final delivery. build to rent investors and our supply chain is a key part of Telford Homes’ strong brand reputation, as is looking

For more information see page 08 after everyone who works for us.

02 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

NEW GARDEN QUARTER E15 We secured detailed planning consent for this mixed-use scheme on Olympic legacy land. In a joint venture with Notting Hill Genesis, we are developing 471 homes of all tenures and over 10,000 sq.ft of commercial space.

NUMBER OF HOMES 471

03 TELFORD HOMES PLC – Annual Report 2019 OVERVIEW

OUR INVESTMENT CASE

AN AWARD WINNING DEVELOPER WITH EXTENSIVE EXPERIENCE OF WORKING IN LONDON

Proven Market Strong Knowledge strategy opportunity partnerships and experience

Focused on London Chronic shortage of A respected partner A highly motivated team with an increasing homes in London and to our stakeholders, with extensive experience commitment to the strong build to rent encouraging new of planning and complex delivery of build to investor demand opportunities to construction in London rent homes work together

Over the next few years There is a clear shortage We are skilled at working We have an experienced we have the ability and of housing across London. collaboratively with our and proven management desire to deliver far more Our business model has partners to create a legacy team with extensive homes in London than been evolving in response of sustainable homes and knowledge in acquiring we are already doing. Our to increasing institutional places. Our reputation land, obtaining planning focus on the build to rent investment demand for being straightforward permissions and sector has helped us to and customer rental and trustworthy has designing and building broaden our geographical demand. The proportion given strength to our high quality developments. reach across London. It is of Londoners renting credentials as a partner of We are construction the core of our strategy as will continue to rise with choice to many reputable specialists and retain full it will enable us to achieve customers increasingly organisations including responsibility for all our our growth ambitions turning to a rental model, build to rent investors developments throughout without taking excessive in part due to affordability, and housing associations their design, build and risk or needing additional but increasingly as a amongst many others. finally handover to our equity capital. lifestyle choice that offers customers and partners. greater flexibility. View our business model on page 08 Read about our strategy Read about our Board of on page 10 Directors on page 46 Read our market overview on page 14

04 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

Substantial Reduced Quality Growing pipeline risk and service business

Development pipeline of Forward funded build Delivering quality homes Ability and desire to 4,900 homes representing to rent transactions, to a diverse customer increase output to meet £1.6 billion of future reducing debt and mix with a 99 per cent significant housing need revenue improving risk profile recommendation rate in London in 2018

We continue to add Our heightened focus Our commitment to Political recognition of to our considerable on build to rent delivers quality and service the urgent need for new development pipeline and superior capital was demonstrated rental homes adds further in recent months have returns whilst reducing by a customer weight to our belief that secured opportunities required debt finance recommendation rate of build to rent will be one at International Way in and market risk. As a 99 per cent in 2018. This of the keys to solving Stratford for around 380 result the emergence significant achievement London’s housing crisis. homes and Greenford in of forward fund build to places us at the top of Our expanded operational Ealing for 278 homes. We rent transactions as an housebuilder rankings, structure is enabling are very active in the land increasing feature of our and is testament to the the Group to grow market and are engaged in business model, and the dedication and hard work efficiently and therefore detailed discussions on a wider London market, has of our employees in all to significantly increase number of new sites whilst proved attractive and fits areas of the business. our output of homes, continuing to appraise very well with our existing There is an increasing particularly build to rent, many others. approach to balancing risk focus on the quality of over the next five years. and return. new homes and this score serves to further See our Chief Executive underpin our reputation See our Chief Executive Officer’s review on page 16 Officer’s review on page 16 See our Financial review for delivering an excellent on page 24 product.

See our Chief Executive Officer’s review on page 16

05 TELFORD HOMES PLC – Annual Report 2019 OVERVIEW

CITY NORTH N4 City North is a mixed-use development that is being delivered through a joint venture with the Business Design Centre. It features 355 new homes and 109,000 sq.ft of commercial space and is due for completion in 2020.

NUMBER OF HOMES 355

06 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

STRATEGIC REPORT

BUSINESS MODEL 08 AMBITION AND STRATEGY 10 INSIGHT INTO BUILD TO RENT 12 MARKET OVERVIEW 14 CHIEF EXECUTIVE 16 OFFICER’S REVIEW FINANCIAL REVIEW 24 KEY PERFORMANCE INDICATORS 30 PRINCIPAL RISKS AND 32 UNCERTAINTIES OUR PEOPLE 36 DEVELOPMENT AND TRAINING 38 HEALTH AND SAFETY 40 SUSTAINABILITY 42

07 TELFORD HOMES PLC – Annual Report 2019

BUSINESS MODEL

OUR STRAIGHTFORWARD BUSINESS MODEL HAS CONSISTENTLY DELIVERED VALUE TO OUR STAKEHOLDERS

Our key resources What we do and relationships

RESOURCES LAND ACQUISITION Brownfield sites in London, with or without planning in Land non-prime locations where demand exceeds supply. Knowledge Construction expertise Our people PLANNING Respected brand Using our knowledge of each borough to work with their planning teams and provide imaginative concepts that align with policy. Strong balance sheet

RELATIONSHIPS DESIGN Developments that fit in with local communities and meet Land owners the needs of our customers. Local authorities

Housing associations

Our customers CONSTRUCTION Controlling the process with in-house expertise to deliver Build to rent investors a quality product on programme.

Supply chain

SALES AND CUSTOMERS Balancing a mix of build to rent investors, individual investors, owner-occupiers and affordable housing providers.

Reinvestment

08 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

How we create value Sharing value with our stakeholders

Buying the right land in OUR CLIENTS AND COMMUNITIES the right locations A focus on quality and service together with our sustainability commitments through our ‘Building a Living Legacy’ Taking planning risk strategy. and optimising a policy

compliant scheme Read more about our sustainability strategy on page 42

Taking control of the whole development process OUR PEOPLE Rewarding and stimulating career paths with responsibility, empowerment Reducing sales risk and opportunities for training and wherever possible development.

Read more about our people on page 36 Driving capital returns through build to rent

SHAREHOLDERS Delivering excellent Maintaining a strong dividend even in a customer service more challenging market environment due to our strategic shift to build to rent.

Read more in the Financial review on page 24

DEVELOPMENT CUSTOMER DIVIDEND EARNINGS PIPELINE RECOMMENDATION RATE PER SHARE PER SHARE £1.6 bn 99% 17.0 p 44.6p

Reinvestment

09 TELFORD HOMES PLC – Annual Report 2019

AMBITION AND STRATEGY

OUR STRATEGY HAS EVOLVED AND WE HAVE A CLEAR PLAN TO ACHIEVE OUR AMBITION OF INCREASING OUR OUTPUT OF HOMES

OUR AMBITION There is a chronic shortage of new homes in London. Our goal is to grow our output of homes, principally through our strategic focus on build to rent, and in so doing help address this shortage in one of the world’s greatest cities.

INTERNATIONAL WAY, STRATFORD E15

10 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

OUR STRATEGY

GROWING OUR A KEY BUILD TO OPERATIONAL RENT DEVELOPER CAPACITY AND PARTNER

Our existing operational structure We are building a reputation as one has the capacity to handle of the build to rent developers of much greater scale and this will choice in London whilst expanding enable Telford Homes to expand our knowledge and understanding efficiently over the next few years. of the sector to become a go to Our strategic shift to build to partner. Our new strategic build to rent provides the opportunity for rent partnerships with Invesco and significant growth in the future M&G for forward fund transactions without the need for substantial will assist us in increasing our additional capital. build to rent pipeline over the next few years.

OPERATE EFFICIENTLY DRIVING GROWTH

For more information see page 16 For more information see page 12

BROADENING OUR REDUCING DRIVING OUR GEOGRAPHIC EXPOSURE TO RESPONSIBLE FOCUS MARKET RISKS BUSINESS AND DEBT AGENDA

We have improved our access to Our increased focus on build to We recognise that in order to land opportunities and increased rent delivers enhanced capital maintain and enhance our strong the potential for new relationships returns, requiring less equity brand and reputation we must by enlarging our desired area of investment and reducing our continue to deliver responsibly operation across London. This reliance on debt finance. It de-risks across a number of core areas also enables us to target build to each scheme at an early stage and of the business. These include rent development opportunities therefore reduces the economic the quality of our finished product in new and emerging locations. risks inherent in selling homes and level of customer service, our We have proven that we have to individuals, particularly during health and safety and sustainability the knowledge and expertise market downturns. performance, our corporate to successfully expand our governance and the professional geographic horizons. conduct of our employees.

ACCESS TO LAND REDUCING RISK OPERATE RESPONSIBLY

For more information see page 24 For more information see page 16 For more information see page 16

11 TELFORD HOMES PLC – Annual Report 2019 OVERVIEW

INSIGHT INTO BUILD TO RENT

OUR VISION IS TO BE ONE OF LONDON’S LEADING BUILD TO RENT DEVELOPERS AND THE PARTNER OF CHOICE

Strategy Investment partners Over the last few years Telford Telford Homes is well placed to develop We are delighted to Homes has undertaken a shift in purpose-built rental housing with a strategy towards an increasing proven track record of delivering high- formally cement what proportion of homes being delivered quality homes in London over the last has been an excellent for institutionally owned build to 18 years. We are currently working with working relationship rent housing. institutional partners across multiple with Telford Homes build to rent developments. over the last three years. Our vision is to be one of London’s Commercialising the leading build to rent developers and In March 2019, we announced that the partner of choice. We are already we have formed long-term strategic production of homes working in partnership with well- partnerships with M&G and Invesco to rent at scale with a respected, experienced and ambitious for forward fund transactions. We likeminded, high quality institutional investors and we intend believe that the partnerships will developer of rental to place even greater focus on build lead to more efficient ways of buying stock, is another step to rent over the coming years. land and designing bespoke build to closer to fulfilling M&G’s rent schemes that match with each residential investment Increasing rental demand investor’s requirements. Through the strategy. Telford Homes standardisation of legal documentation, We view build to rent as being the future has been an early we also anticipate that the contractual adopter of the sector and of increasing housing delivery in London. process for each transaction will this is another example The proportion of Londoners renting be shortened. is rising and will continue to do so with of how it adjusts its customers increasingly turning to a We will continue to work with other model today to focus on rental model, not just due to affordability, investors and current partners such tomorrow’s customers but more as a lifestyle choice looking for as Greystar, on both existing and new and occupiers. greater flexibility. projects, particularly where they bring opportunities to us or on sites that do not Alex Greaves, Head of The London rental market is fit the criteria of either M&G or Invesco. undersupplied and renters are known Residential Investment at M&G Real Estate to experience issues with poor Why build to rent works for us quality housing and a lack of landlord interaction and property management. Build to rent is enabling us to reduce Purpose-built rental housing assists in our exposure to market risk in return for addressing these issues by improving reduced margins. This trade off fits well the supply of good quality rental with our traditional desire to minimise homes and delivering better customer the risks the business is taking. The amenities, improved on-site services forward funded nature of build to rent and more secure and flexible tenancies. transactions improves our return on capital and reduces our need for debt Renting is an attractive alternative to finance, which in turn means we can owning a home due to the significant more swiftly increase our output of reduction in financial commitment much needed homes in London. needed both in terms of transaction costs and financing costs. As a result, We expect our new partnerships to the rental market in the UK, particularly provide a significant catalyst to our in London, is starting to mirror that in objective to become one of London’s many US cities where build to rent has leading build to rent developers and been introduced over the last 25 years that our increasing involvement in the and made renting a way of life. sector will be a key driver of the growth of Telford Homes in the years ahead.

12 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

THE PAVILIONS N1 A residential development of 156 homes on a complex site which has been shortlisted for a Housing Design Award 2019. The homes were sold to L&Q for build to rent and affordable housing.

NUMBER OF HOMES 156 13 TELFORD HOMES PLC – Annual Report 2019

MARKET OVERVIEW

THERE REMAINS A SHORTAGE OF HOUSING IN LONDON AND DEMAND FOR RENTAL HOMES CONTINUES TO INCREASE

Economic growth in London Chronic shortfall of Increasing demand for despite uncertainty housing supply rental homes Ongoing uncertainty surrounding the There has been a clear and sustained There has been a significant shift in the UK’s departure from the European Union disconnect between demand for and tenure of households in London since has led to caution among consumers supply of housing in London. GLA 1990. As shown in chart 2, GLA analysis and businesses in relation to investment analysis of Office for National Statistics points to a consistent, long-term fall in decisions. In spite of this, there has been (ONS) data shows that, between 1997 the proportion of homes in the capital continued employment growth in London, and 2017, the number of jobs in London that are owned with a mortgage. Having exceeding the UK-wide figure to reach a grew by 42% and the population by peaked at 40% in the early 1990s, the record high of 5.9 million jobs in Q2 2018, 26%, but the housing stock by only proportion of homes owned with a up 1.5% from the previous year1. 16% (chart 1). mortgage had fallen to 29% in 2017. Conversely, private rented homes Low unemployment and greater Population growth in the capital is accounted for around 11% of households competition for labour have accelerated expected to outpace that of the UK in 1991 and had grown to 27% in 2017. earnings growth to 3.4% for the same as a whole, with the GLA projecting period relative to the previous year, the an increase – subject to the availability There are now more than 1.6 million greatest increase since 2008 2. of housing – of 1.7 million between renting households in the capital 3. The 2015 and 2035, which would take imbalance between supply and demand The Greater London Authority (GLA) London’s population to 10.5 million¹. is illustrated by upward trends in rents, forecasts growth in London’s Gross which grew by 6.2% across Greater Value Added, jobs and household The provisional estimate of the net London in 2018². income to continue over the next number of new homes completed in three years, at a faster rate than the London for 2016/17 was 40,3503. This is UK overall1. an increase of 5,000 from the previous Growth in build to rent year, but remains far short of the GLA’S Investment from individual private draft new London Plan target of 66,000 landlords has fallen significantly in recent new homes per year through to 2030. years, influenced by changes to the buy- to-let tax regime as well as economic uncertainty. Buy-to-let mortgages fell

Chart 1: Indexed trend in number of jobs, people and Chart 2: Annual trend in household tenure, London, homes in London 1997 to 2017 (1997 = 100) 1981 to 2017

150 45%

140 35% 130

120 25% 110

100 15%

90 5% 80 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 1981 1986 1991 1996 2001 2006 2011 2016

Jobs People Homes Owned with mortgage Social Owned outright Private rented

Source: GLA, ONS, MHCLG Source: GLA, MHCLG 14 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

from a high of 117,500 in 2015 to 74,900 homes in London from 2009 to 2018. in 20174. However, any reduction in Notwithstanding the burgeoning growth, individual buy-to-let investor demand the number remains a small fraction of Knight Frank has has been more than compensated by a the capital’s private rented stock. surge in institutional capital looking for upgraded its forecast for As the purpose-built rental sector has long-term investment in rental housing. build to rent investment developed, the size of schemes has CBRE data indicates investment from by 2025 to £75bn. grown; the average size of a completed institutional investors in the UK build to Rapid growth highlights scheme is 133 homes, while the average rent sector of £3.81 billion in 2018/19, significant momentum scheme under construction is 240 a doubling relative to the previous year from both overseas and homes4. Also while there has been a (chart 3). The majority of investment broadening of the institutions investing domestic institutional volume was in London5. Knight Frank in UK build to rent, some of the largest investors. Fundamental has upgraded its forecast for build to participants in the US market are not demand is growing rent investment by 2025 to £75 billion, yet present in the UK sector. among all age groups with increased activity expected and income profiles for from both overseas and domestic institutional investors4. Promising outlook privately rented homes. There is a clear recognition across In its UK Cross Sector Outlook RBC Capital Markets political parties of the urgent need to report, Savills points to the increasing European Real Estate build more homes in the UK, and in importance of purpose-built, Update, April 2019 institutionally owned build to rent London specifically. Long-run trends in homes to new housing delivery. The population growth and the cumulative effect of years of undersupply point report compares growth of only 1.1% in 1. London’s Economic Outlook: Autumn 2018, the number of outstanding buy-to-let to an ongoing need for high quality Greater London Authority. mortgages in the year to September new homes at an affordable price and 2. London: The Property Perspective Q4 2018, CBRE. 2018, compared with an increase of 30% especially homes to rent. This market 3. Housing in London: 2018, Greater London in the number of build to rent homes dynamic validates the Group’s drive to increase output focused on build to rent Authority. either complete or under construction. 4. RBC Capital Markets European Real Estate Chart 4 shows the cumulative starts and as a result contribute to addressing Update April 2019. London’s housing shortage. 5. United Kingdom Residential Investment, Q1. and completions of build to rent 2019, CBRE.

Chart 3: Institutional investment volumes into build to Chart 4: Cumulative build to rent starts and completions rent in UK in London, 2009 to 2018

£4.0bn 30k

25k £3.0bn 20k

£2.0bn 15k Investment 10k £1.0bn Number of homes 5k

0 0 2015/16 2016/17 2017/18 2018/19 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Starts Completions

Source: CBRE Q1 2019 Source: Molior London 15 TELFORD HOMES PLC – Annual Report 2019 OVERVIEW

CHIEF EXECUTIVE OFFICER’S REVIEW

OUR BUSINESS MODEL IS INCREASINGLY FOCUSED ON BUILD TO RENT HOUSING AND THE REDUCED RISK AND LOWER CAPITAL REQUIREMENTS IT BRINGS

Whilst the financial year to 31 March We had hoped to achieve even more 2019 was not without its challenges, but, as previously reported, a number we remain confident that our strategic of factors hampered our ability to reach move towards the growing rental market our original target of £50 million of profit in London will enable us to increase our before tax for FY 2019. The individual delivery of much needed new homes in sale market in London has been subdued the years ahead. by a prolonged period of uncertainty and customer expectations of enhanced Performance overview discounts and incentives led to reduced prices on those sales that were secured. Total revenue in the year to 31 March 2019 reached a record £354.3 million, Our results for the year were also up 12 per cent on last year (2018: £316.2 affected by the delay of two build million), with the proportion from build to contracts anticipated to exchange in FY 2019 but pushed back to FY 2020 Over the last three rent developments also at a record level of 31 per cent (2018: 21 per cent). GAAP due primarily to planning issues. years we have made revenue, excluding the Group’s share of Despite this, our performance in the substantial progress joint ventures, was £336.1 million (2018: year represents a great achievement against our objective £294.8 million). Profit margins remained for Telford Homes with revenue at an to increase our output at or above target levels with the margin all-time high and profit before tax of build to rent homes on individual sale developments at 28.3 reducing largely due to our successful to meet demand from per cent (target 24 per cent) and the change in strategy towards lower institutional investors build to rent margin at 13.2 per cent margin build to rent homes. and to deliver high (target 12 to 13 per cent). This has been quality rental properties achieved against a more uncertain and Strategic shift towards in London. challenging market backdrop. build to rent Total profit before tax has reduced to We sell homes to diverse customer Jon Di-Stefano £40.1 million (2018: £46.0 million) due segments including build to rent to the increased proportion of lower investors, housing associations, owner- Chief Executive Officer margin build to rent developments occupiers and individual investors. The within total revenue. GAAP profit before strategy we have been pursuing for some tax, excluding joint ventures, was £40.3 time of increasing the proportion of our million (2018: £46.3 million). Whilst homes sold to the build to rent sector absolute profits have fallen this should has been further validated by a more be considered in the context of a growing uncertain market for individual sales to business delivering higher output but owner-occupiers and a significant drop with a greater emphasis on lower risk in demand from individual investors. and less capital intensive developments. As a result, our gearing has reduced considerably to 37.0 per cent (March 2018: 44.6 per cent; September 2018: 52.2 per cent).

16 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

BOW GARDEN SQUARE E3 In a partnership with Poplar HARCA, Bow Garden Square is providing 109 mixed-tenure homes, a new primary school, mosque and nursery. It has been shortlisted for a Housing Design Award 2019.

NUMBER OF HOMES 109 17 TELFORD HOMES PLC – Annual Report 2019

EQUIPMENT WORKS E17 A mixed-use development of 337 homes and 18,830 sq.ft of commercial space. The homes have been sold to Greystar and Henderson Park for build to rent and Notting Hill Genesis for affordable housing.

NUMBER OF HOMES 337 18 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

CHIEF EXECUTIVE OFFICER’S REVIEW

There is a fundamental imbalance Build to rent performance for forward fund transactions. We are between demand and supply of rental delighted to have entered partnership properties in London at affordable We are making strong progress on our agreements with both Invesco and M&G. rent levels and we firmly believe that existing build to rent projects having The decision to select two partners is institutionally owned build to rent already completed and handed over a reflection of the high quality of the developments are key to increasing in excess of 300 homes with a further potential partners in the final stage of housing delivery in London. As we 1,422 currently in progress. The latter our selection process. We have agreed have outlined previously, there are three number includes 890 homes at Parkside in principle to work with each partner primary reasons that this sector is in Nine Elms for Greystar where we on schemes of different sizes to provide attractive to Telford Homes: are mobilising to start work in June clarity and to align with their respective 2019. However it does not include investment preferences. Both are well • Firstly, the higher return on capital any developments already under established investors in the London build associated with build to rent construction that we are planning to to rent market, and the new partnership transactions, which require no debt deliver as build to rent, but where we formalises the strong relationship we and limited equity investment. In have not yet entered into any forward already have with M&G. return, the profit margin is lower than funding agreement with an investor. for individual sale developments but We believe that our partnership led the forward funded nature of build to August 2018 marked an important step approach will increase the efficiency rent de-risks our development pipeline. for Telford Homes when we handed of buying land and designing build to over The Pavilions, our first institutional • Secondly, there is significant demand rent schemes to meet each investor’s build to rent development, which was from institutions looking to invest requirements. Having a standard set purchased by L&Q in 2016. Since then in build to rent housing in London. of documents should also expedite the we have handed over the build to rent Keen to develop pipelines of rental process of contracting on individual homes at New Garden Quarter to Folio, properties as quickly as possible, transactions. We expect to develop a part of Notting Hill Genesis. We are also investors are seeking to access skills significant pipeline for both M&G and approaching build completion on two that Telford Homes already has in Invesco in the coming years and we will schemes we are developing for M&G terms of site sourcing, planning continue to work with other investors Real Estate (‘M&G’), being Carmen Street and construction. where we have been approached and The Forge. Both developments directly, or on sites that do not meet the • Finally, this investment demand will be handed over this calendar year partnership criteria. To have attracted is underpinned by the growing and we are particularly excited to be such well respected and ambitious proportion of customers who are approaching this important milestone organisations as long-term partners is renting rather than buying due partly in our relationship. very pleasing and an indication of our to affordability constraints but also growing reputation as a build to rent increasingly a desire for flexibility and Our growing track record in build to developer of choice in London. as a lifestyle choice. Purpose-built rent has been enhanced by the recent rental developments typically offer sale of our Equipment Works site better customer amenities, improved in Walthamstow to a joint venture Individual open market sales on-site services and more secure between Greystar and Henderson Despite a subdued market, we and flexible tenancies. Together with Park for £105.5 million. This will be our continued to generate sales and a greater sense of community, these third development working alongside this was particularly the case for factors make build to rent housing Greystar, following on from Parkside and homes priced below £600,000 on our the ideal product for new generations our acquisition of part of their significant developments that were complete or wanting to live in London. site in Greenford, Ealing. We have formed close to completion. These sales have a strong partnership together and we been mostly to owner-occupiers, many Whilst we will continue to target owner- expect to extend that in the future. The of whom took advantage of the Help to occupiers on specific developments and Equipment Works transaction is on a Buy scheme. We were pleased to see particularly at prices up to £600,000, forward funded basis and comprises the Government extend Help to Buy until sales to individual investors no longer the sale of the freehold interest in the 2023, although the scheme itself is not represent a significant part of our future land and the construction of 257 build expected to be material to our longer- pipeline. Having reviewed our existing to rent homes. term business plan given our increased portfolio, we expect to change a number focus on rental homes. of developments that were planned as Build to rent partnership individual sale schemes to build to rent. agreements Since the end of FY 2019 we have As a result, the expected split of our continued to make steady progress current development pipeline, by number To cement our position as one across the schemes we have available of homes, is 70 per cent on build to rent of London’s leading build to rent for sale and we are particularly led developments and 30 per cent on developers, we recently concluded an pleased to have all of the homes at developments led by individual sales. extensive selection process managed Bow Garden Square reserved, with the by Savills to identify strategic partners majority completed and handed over.

19 TELFORD HOMES PLC – Annual Report 2019

CHIEF EXECUTIVE OFFICER’S REVIEW

Bow Garden Square is a partnership development is anticipated to deliver In the last year we have focused on with Poplar HARCA that includes 109 around 380 new homes together with creating a culture that promotes positive homes together with a new school and commercial space. mental health in our business and a mosque. It was recently declared raises understanding of this important Our development pipeline now includes ‘Development of the Year’ at the 2019 issue in the construction industry. We 4,900 homes (including Parkside), with a ‘RESI Awards’ and this achievement is established a ‘Health and Wellbeing total expected gross development value testament to our usual high standards Group’ who launched a week long of £1.59 billion (2018: £1.31 billion). This in terms of design and the quality of programme of events to support World pipeline is weighted towards build to rent the finished scheme. Mental Health Day in October 2018. developments, as noted earlier, and the The purpose was to ensure employees Following the successful launch of homes expected to be for individual sale understand that we are committed to New Garden Quarter in Stratford at the are valued at an average price of circa their mental health in the workplace and beginning of 2018, we held an off-plan £550,000 in line with our target. to provide support when they need it. launch of Gallions Point in the UK and Around 950 of the homes in our We also established several resources Asia in October last year. We were development pipeline are currently going to ensure mental health remains one of disappointed to secure only 15 sales, through the planning process. Whilst our key priorities outside of this week of with demand predominantly dampened we have experienced some frustrating events. The week was so well received by economic uncertainty in relation to delays in achieving planning consents that we did the same again in May 2019 Brexit. The majority of the homes at on certain developments, we continue and this time we extended the activities Gallions Point are priced under £600,000, to believe that our deep knowledge and across our development sites. with completions scheduled for 2020, and strong relationships across London we believe that they will be attractive to In March 2019 we officially launched put us in the best possible position to owner-occupiers at the appropriate time. the new ‘Telford Homes Academy’ when navigate this difficult environment. We Sales to individual investors, whether in our first cohort of ‘Budding Managers’ were disappointed to have our planning the UK or overseas, no longer represent started their development programme. application for the LEB Building in a significant part of our future plans and The Academy aims to provide training Bethnal Green refused recently. However, we do not expect a change in demand and development for every career this was expected and allowed for when from that sector in the short-term. stage, from trainees through to first we reported a planning delay in our time managers and then on to senior Whilst we expect the more subdued trading update in February 2019. We will managers. It will not only support and market for sales to continue throughout appeal the decision and we expect a develop those who aspire to progress, 2019, individual sales to owner- successful outcome. but also drive capability and excellence occupiers remain an important part of We are actively engaged in identifying for everyone at any level within Telford our business. For example, the site we new opportunities to add to our pipeline Homes. Business growth will continue to acquired from Greystar in Greenford and particularly those that suit build to present some fantastic opportunities for will see the development of 194 homes rent investors and our new partnerships. our employees to take on new roles and for individual open market sale at an We are in various stages of negotiations our Academy will ensure they are ready average selling price of circa £500,000 on several sites that we hope to conclude to do that. along with 84 subsidised affordable over the course of the next financial year. homes for shared ownership. The As we announced in October 2018, scheme is expected to be completed in Frank Nelson, Non-Executive Director 2022 and will be released for sale much People and culture since 2015, stepped down from the nearer to that time, at a point when One of our key differentiators is our Board due to other commitments. We Help to Buy will still be available. We will friendly and supportive culture, which is are in the process of seeking a suitable continue to work hard to secure sales on reflected in the consistently high scores replacement and expect to make a developments closer to completion and we achieve in our employee satisfaction further announcement in due course. those already completed whilst we await surveys. Our dedicated employees We put immense effort into ensuring all greater economic certainty, particularly continue to deliver tremendous of our customers are happy with their in terms of the outcome of Brexit. work across the whole Group and to new homes whether they are individuals, overcome any challenges that come build to rent investors or housing Development pipeline their way. Together we have positioned associations. In 2018 we were delighted the business well for the future and I In February 2019 we were pleased to secure an independently surveyed would like to thank all of our employees, to acquire a site, subject to obtaining customer recommendation rate of 99 and indeed each of our suppliers and satisfactory planning consent, on per cent, which is exceptionally high for subcontractors, for their help and efforts International Way in Stratford from our industry. In a time when there is ever in the last year. We have won numerous LCR, the Department for Transport and increasing focus on the quality of new awards in the last 12 months and we are HS1 Ltd. The site represents our third homes we are very proud of this result always delighted whenever we receive land acquisition involving LCR and the and the frequent praise we receive from external recognition for our work. our development partners.

20 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

GREENFORD UB6 A residential development of 278 homes on the banks of the Grand Union Canal in Greenford which forms part of Greystar’s flagship scheme.

NUMBER OF HOMES 278 21 TELFORD HOMES PLC – Annual Report 2019

STRATFORD CENTRAL E15 A completed residential development of 181 homes located in the heart of Stratford overlooking the Queen Elizabeth Olympic Park and Westfield Stratford City.

NUMBER OF HOMES 181

DEVELOPMENT VALUE £000.0m 22 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

CHIEF EXECUTIVE OFFICER’S REVIEW

Sustainability lower capital requirements associated We are excited to work more closely with our growing number of build to with both partners to capitalise on new We were delighted to be recognised in rent transactions, the Board expects to opportunities to deliver much needed the 2018 NextGeneration sustainable exceed this threshold in the future. In homes within market leading projects. housing benchmark report as the the short-term we expect to maintain an Ultimately, we believe Telford Homes most improved housebuilder for the annual dividend of at least the 17.0 pence has a robust long-term outlook based second consecutive year. Our fourth per share recommended for this year. place ranking (from sixth in 2017 and on a model that is less cyclical, lower risk and less capital intensive, building seventeenth in 2016) also saw us Outlook receiving our first Gold Level award. on our recognised skillset and excellent These achievements are testament to There have been no changes to our reputation, and underpinned by demand our commitment to sustainable and profit before tax expectations for from both institutional investors and responsible housebuilding under our FY 2020 since the Group’s trading rental customers. ‘Building a Living Legacy’ strategy. We update in February 2019. Beyond launched this strategy in 2016 to help FY 2020 we continue to expect profits us create places that make a positive to grow again, reflecting our increased Jon Di-Stefano long-term contribution to London’s focus on lower risk and less capital Chief Executive Officer built environment. Sustainability is intensive build to rent developments. increasingly a consideration for partners 29 May 2019 Over the last three years we have and our work in this area enhances our made substantial progress against ability to secure and maintain mutually our objective to increase our output of beneficial relationships. build to rent homes to meet demand from institutional investors and to Dividend deliver high quality rental properties in The Board recommends a final dividend the capital. There remains a long-term of 8.5 pence per share giving a total structural imbalance between housing dividend for the year of 17.0 pence supply and housing need in London. per share (FY 2018: 17.0 pence). Our partnerships with Invesco and M&G Historically, our policy has been to pay signal our reputation as a trusted build to at least one third of annual earnings to rent partner and as such are a significant shareholders in dividends. In light of the step as we continue to develop our profile at the forefront of this burgeoning sector.

23 TELFORD HOMES PLC – Annual Report 2019 OVERVIEW

FINANCIAL REVIEW

TELFORD HOMES IS PLEASED TO REPORT AN INCREASE IN TOTAL REVENUE TO A RECORD HIGH OF £354.3 MILLION DESPITE A MORE CHALLENGING ECONOMIC AND POLITICAL ENVIRONMENT

However, total profit before tax reduced of joint venture results. For further to £40.1 million due to an increase in details, definitions and reconciliations the proportion of revenue derived from of Alternative Performance Measures build to rent developments. Build to rent see notes 2 and 22. transactions generate lower margins but reduce exposure to market risk Operating results and require no debt and limited equity investment. As a result, gearing reduced Total revenue increased to £354.3 to 37.0 per cent at 31 March 2019 from million from £316.2 million last year 52.2 per cent at 30 September 2018. (GAAP 2019: £336.1 million, 2018: £294.8 million) with the increase mainly Presentation of results generated from build to rent contracts. The Group recognises revenue on and Alternative Performance build to rent developments, including Measures Despite build to rent subsidised affordable housing contracts on these schemes, as contract revenue generating lower profit The Group continues to comply on a percentage of completion basis margins, the limited with IFRS 11 ‘Joint Arrangements’, which states that joint ventures throughout the build programme. Build equity requirement will should be accounted for as equity to rent developments contributed enable swifter growth investments rather than by proportional revenue, including the Group’s share of and therefore higher consolidation. The Group’s joint ventures joint venture results, of £108.7 million absolute profits in the are an integral part of the business and (2018: £67.7 million). This includes medium-term with all developments are treated consistently new contracts in the year but also lower overall gearing within the business whether wholly ongoing profit recognition on contracts requirements. owned or partially owned in a joint exchanged in previous years as the build venture structure. As such the Board programme spans a number of years. Katie Rogers believes that the financial results are Revenue from individual open market most appropriately presented using sale developments decreased to Chief Financial Officer proportional consolidation, which £231.7 million (2018: £244.2 million). means including the relevant share This includes 390 open market of the results of joint ventures in each completions (2018: 476) with an line of the income statement and average price of £552,000 (2018: balance sheet. This therefore remains £473,000) together with subsidised the method of presentation within the affordable housing revenue on these Group’s internal management accounts. schemes recognised on a percentage The Board has prepared an income of completion basis. The increase in statement and a balance sheet using the average price of the open market proportional consolidation along completions reflects the mix of homes with Generally Accepted Accounting and developments completing in each Principles (GAAP) compliant versions period in terms of product and location. presenting joint ventures as equity Other revenue in the year of £13.9 million investments. The Key Performance (2018: £4.3 million) relates mainly to Indicators and other figures within two small land sales of legacy assets this report include the Group’s share together with freehold sales in the year.

24 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

THE FORGE E6 A residential development of 192 homes. All the homes have been sold to M&G Real Estate for build to rent and East Thames for affordable housing.

NUMBER OF HOMES 192

25 TELFORD HOMES PLC – Annual Report 2019

THE LIBERTY BUILDING E14 A completed residential development of 155 open market and affordable homes located in historic Limeharbour, The Liberty Building sits opposite Crossharbour DLR station, which is just three stops from Canary Wharf.

THE LIBERTY BUILDING LONDON E14

NUMBER OF HOMES 155 26 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

FINANCIAL REVIEW

The Group’s strategy to increase the to 31 March 2018 when build cost The increase in selling expenses is number of homes developed for build to savings achieved in that year improved largely due to the nature of the individual rent investors will, over time, result in an the profit margin. sale market at present with more even greater proportion of the Group’s intensive marketing required to secure The margin achieved on open market revenue and profit being recognised on sales including advertising and on-site sale developments of 28.3 per cent was a percentage of completion basis over development specific sales centres and largely consistent with that achieved last the life of each development as opposed show apartments. There was also more year (2018: 28.4 per cent) and remains to individual open market sales where agents commission payable in relation ahead of the Group’s target when revenue and profit is recognised at the to build to rent developments this year appraising new sites of 24 per cent. point of legal completion. Build to rent due to the exchange of a forward fund A significant proportion of the open sales will therefore result in the Group contract for Equipment Works. market completions in the current recognising revenue and profit earlier year were from two sites, Stratford The Group’s adjusted operating margin than if the homes had been sold to Central and The Liberty Building, both has decreased by over three percentage individual purchasers. of which were substantially forward points to 13.1 per cent (2018: 16.7 per Total gross profit is in line with the prior sold a number of years ago where the cent) flowing through from the lower year at £79.3 million (2018: £79.5 million) sales achieved had benefitted from gross margin achieved as a result of and on a GAAP basis £75.0 million some price inflation prior to launch. more build to rent activity together (GAAP 2018: £74.8 million). Total gross The margin recognised on open market with an increase in sales costs as a profit is stated after expensing loan developments is expected to trend down proportion of revenue due to the more interest that has been capitalised within towards the target margin over time as challenging market environment. inventories of £4.5 million (2018: £4.2 older developments which benefitted Total profit before tax has decreased million) and therefore before charging from sales price inflation are replaced by from the record high achieved last year this interest the adjusted gross margin sites acquired more recently. of £46.0 million to £40.1 million (GAAP was 23.7 per cent compared to 26.5 per Administrative expenses have increased 2019: £40.3 million, 2018: £46.3 million). cent last year. Total gross profit is similar to £27.6 million (2018: £24.2 million), This was below our original market to the prior year despite an increase in including the Group’s share of joint expectations of £50 million due to a revenue due to the increasing proportion ventures, and £27.4 million excluding subdued London sales market resulting of the revenue arising from lower margin joint ventures (2018: £24.1 million). This in a slower sales rate and a delay on build to rent developments. rise is mainly due to higher employee two build contracts that were expected On build to rent developments, the costs which have enabled the Group to exchange in FY 2019 and are now Group is prepared to accept a lower to deliver an increase in revenue in this anticipated in FY 2020. gross margin due to the advantages of year and investment in knowledge and forward funding and savings in selling experience and an operational structure Finance costs expenses and interest costs. Forward which enables further growth in the funding broadly means an initial payment future. As a percentage of revenue, Finance costs incurred by the reimbursing the cost of the land followed administrative expenses have remained Group mainly consist of interest on by monthly construction payments relatively similar year on year at circa development financing, non-utilisation and finally a payment on completion. 7.8 per cent. fees and amortised arrangement fees. As such very little equity is used during Interest on development financing Selling expenses have increased to £9.8 construction and no debt is required. The is capitalised into work in progress million (2018: £6.5 million) including the Group expects build to rent transactions as required by IAS 23 and all other Group’s share of joint ventures and £9.0 to achieve a net margin of approximately fees are charged directly to the million excluding the Group’s share of 12 to 13 per cent. The Group’s normal income statement. joint ventures (2018: £5.7 million). The target gross margin is 24 per cent, which Group adopted IFRS 15 ‘Revenue from Total finance costs incurred, including after allowing for selling and finance cost contracts with customers’ from 1 April our share of joint venture costs, savings of circa eight per cent means a 2018 and the prior year figures have increased marginally to £8.9 million net margin reduction for build to rent of not been restated and are therefore not (2018: £8.8 million) and includes £2 three to four per cent. In the Board’s view prepared on a like-for-like basis, see million of non-utilisation fees, £0.9 this reduction is more than offset by a page 80 for further details. As a result million of amortised arrangement fees substantially improved return on capital. of adopting IFRS 15, selling expenses in and £5.4 million of interest capitalised The actual margin achieved on the build the year to March 2019 are £0.9 million on developments. Finance costs have to rent revenue recognised in the year to higher than they would have been under not increased despite a rise in average 31 March 2019 was in line with the target the previous accounting standard and borrowings in the year at £156.0 million margin at 13.2 per cent albeit lower than therefore on a comparable basis, selling (2018: £111.7 million) due to the full year the 18.1 per cent achieved in the year expenses have increased by £2.4 million. benefit of the new lower rate revolving credit facility signed in December 2017.

27 TELFORD HOMES PLC – Annual Report 2019

FINANCIAL REVIEW

Dividend In the future a greater proportion of the developments in a capital efficient way Group’s revenue is expected to be derived using the relatively cheap debt funding The current policy is to pay one third from construction contracts, in particular available. However, the Board has stated of earnings as dividends however the build to rent, and this will ultimately reduce that gearing is expected to remain under Board has committed to paying more the level of work in progress held on the 50 per cent going forward as open than this over the next few years where balance sheet. This is because work in market individual sale homes become earnings are expected to be lower than progress is charged out to cost of sales a reducing proportion of the pipeline. those reported for the year to March throughout the course of development on Telford Homes has sufficient headroom 2018. During this time, the Board expects a percentage of completion basis as profit within its five year £210 million revolving the annual dividend to be at least 17 is recognised. This differs to open market credit facility signed in December 2017 pence per share. In the future, the Board individual sale homes whereby the work with NatWest, HSBC, Santander and anticipates enhancing the Group’s in progress balance builds up throughout AIB. As at 31 March 2019, the Group dividend policy to take account of the the development until handover of had drawn £106.7 million of this facility, reduced capital requirements of build each unit when revenue and profit is leaving headroom of £103.3 million to rent transactions. recognised in full. to fund future site acquisitions and The Board is recommending a final construction costs. The Group dividend for the year of 8.5 pence which, Development pipeline remains well within the development together with the interim dividend of 8.5 The Group has a development pipeline and corporate covenants stipulated pence paid on 11 January 2019, makes a of 4,900 homes (31 March 2018: 4,000 within the facility and maintains total dividend for the year of 17.0 pence homes) with a value of £1.59 billion (31 excellent long-term relationships (2018: 17.0 pence). Earnings per share March 2018: £1.31 billion). Over 80 per with its banking partners. equate to 44.6 pence (2018: 49.8 pence) cent of the units in the development Joint venture developments are funded and therefore the dividend payment is 38 pipeline have a planning consent and outside of the revolving credit facility with per cent of earnings. The final dividend are in design or under construction. is expected to be paid on 19 July 2019 to site specific loans secured as and when those shareholders on the register at the The Group seeks to de-risk the required. The Group has a £110 million close of business on 7 June 2019. The development pipeline by securing forward facility with Lasalle Residential Finance ex-dividend date is 6 June 2019. sales whenever possible. In the past a Fund to fund its 50 per cent owned joint substantial proportion of these forward venture at City North and a £35 million Balance sheet sales have been to individual investors facility with RBS to fund Balfron Tower, in but going forward they are more likely which the Group has a 25 per cent stake. Net assets at 31 March 2019 were to be achieved predominantly through Telford Homes is in a strong financial £252.9 million, an increase from £231.1 build to rent transactions and subsidised position with sufficient headroom million last year mainly due to retained affordable housing. Currently 60 per cent within existing debt facilities and less profits. This equates to net assets of the homes in our pipeline that are under need for debt going forward with the per share of 333 pence (31 March 2018: construction are forward sold. 306 pence). strategic shift into build to rent. Forward funded build to rent developments will Inventories, including the Group’s share Borrowings enable Telford Homes to grow with a of joint ventures, are the most significant The Group funds its development costs lower risk and less capital intensive proportion of net assets at £320.6 through a combination of debt and equity strategy. Despite build to rent generating million (2018: £373.9 million). Excluding unless subject to a forward funding lower profit margins, the limited equity joint ventures, inventories decreased arrangement. Due to the strategic shift requirement will enable swifter growth from £300.0 million to £197.4 million. towards build to rent and therefore more and therefore higher absolute profits The inventories balance is largely made forward funded developments, the in the medium-term with lower overall up of land being progressed through business has continued to grow but with gearing requirements. the planning system and land and a reduction in net debt to £93.6 million development costs on sites in design (2018: £103.1 million) and lower gearing and under construction. The value at 37.0 per cent (2018: 44.6 per cent). Katie Rogers of unsold finished properties within inventories was £15.7 million at We still anticipate a relatively modest Chief Financial Officer 31 March 2019 (2018: £34.8 million). level of debt within the Group to 29 May 2019 fund open market individual sale

28 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

GALLIONS POINT E16 In partnership with Notting Hill Genesis, we are developing 292 homes in a contemporary new neighbourhood which is a key part of the regeneration of The Royal Docks.

NUMBER OF HOMES 292 29 TELFORD HOMES PLC – Annual Report 2019

KEY PERFORMANCE INDICATORS

WE MONITOR PERFORMANCE AGAINST OUR STRATEGIC OBJECTIVES THROUGH THE FOLLOWING KPIs

PROFITABILITY GROWTH AND RISK AND EFFICIENCY

£46.0m £1.6bn £546m £1.5bn £40.1m £1.3bn £34.1m £344m

£224m 2017 2018 2019 2017 2018 2019 2017 2018 2019

TOTAL PROFIT DEVELOPMENT FORWARD SALES BEFORE TAX PIPELINE £40.1m £1.6 bn £224m Total profit before tax is defined Development pipeline is defined as Forward sales is calculated as revenue as IFRS profit before tax plus the revenue substantially under our control, secured by exchange of contracts, Group’s share of profit before tax including the Group’s share of joint including the Group’s share of joint from its joint ventures. venture revenue, to be recognised in venture revenue, to be recognised in future years. future years. Why we measure it: Total profit before tax demonstrates the overall Why we measure it: The availabiliy Why we measure it: Forward sales underlying profitability of the Group of land is a key input of our business measure the Group’s exposure to risk across all developments. This key and we continually monitor our and provide security over the Group’s metric is also used to determine Board development pipeline to ensure we ability to service its debt facilities. and senior management bonuses. have sufficient land to deliver on our growth strategy.

16.7% £552k 44.6% £539k £527k 13.4% 13.1% 37.0%

7.0% 2017 2018 2019 2017 2018 2019 2017 2018 2019

ADJUSTED AVERAGE INDIVIDUAL SALE GEARING OPERATING MARGIN PRICE IN PIPELINE 13.1% £552k 37.0 % Adjusted operating margin is This is the average revenue expected Gearing is calculated as net debt calculated as the total operating profit, across all of the individual sale homes (borrowings less cash), including the adjusted for interest expensed through in the development pipeline. Group’s share of joint venture net debt, cost of sales, divided by total revenue, divided by net assets expressed as expressed as a percentage. Why we measure it: The average price a percentage. in our development pipeline measures Why we measure it: Adjusted operating how successful we have been in our Why we measure it: Gearing measures margin demonstrates how efficiently aim of focusing on affordable our exposure to debt risk and indicates the business is being operated. non-prime locations when exposed the efficiency of the Group’s capital to sales price risk. structure.

30 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS

For definitions of APMs see note 22

SHAREHOLDER VALUE OPERATIONAL

49.8p 100% 90% 90% 89% 99% 99% 44.6p 36.8p 2017 2018 2019 2017 2018 2019 2017 2018 2019

EARNINGS PER SHARE CUSTOMER EMPLOYEE RETENTION (‘EPS’) RECOMMENDATION RATE RATE 44.6p 99% 89% EPS is calculated by dividing the profit The percentage of customers who Unplanned leavers in the year as a for the year attributable to ordinary on completing an In House Research percentage of the average number shareholders by the weighted average survey would recommend Telford of employees subtracted from 100. number of ordinary shares outstanding Homes to a friend. during the year, excluding those held in Why we measure it: Retaining our the Share Incentive Plan. Why we measure it: Delivering high employees is crucial in achieving our levels of customer satisfaction strategy and maintaining our strong Why we measure it: EPS measures enhances our reputation and reduces culture and brand. returns generated for shareholders. the costs associated with rectifying This key metric is used to set targets poor quality work. and monitor performance under the Long-Term Incentive Plan (LTIP) for the Board and senior management.

17.0p 17.0p 0.16 4th 15.7p 6th 0.12 0.11

17th 2017 2018 2019 2017 2018 2019 2017 2018 2019

DIVIDEND PER SHARE ACCIDENT FREQUENCY NEXTGENERATION (‘DPS’) RATE SUSTAINABILITY BENCHMARK 17.0 p 0.16 4th Dividend per share is the dividend Accident Frequency Rate (AFR) is This benchmark enables homebuilders, paid per ordinary share. calculated as the number of injuries Government, affordable housing (RIDDOR)* per year divided by the hours providers, investors, employees and the Why we measure it: The dividend per worked per year multiplied by 100,000. public to understand the sustainability share is a measure of income returned of homebuilders’ operations and the to shareholders. Why we measure it: Health and safety new homes they build. is a priority for Telford Homes. It is vital that we measure our ability to monitor Why we measure it: To demonstrate and manage the health and safety our sustainability performance within impact of everything we do. the 25 largest housebuilders in the UK.

* (RIDDOR = Reporting of Injuries, Diseases & Dangerous Occurrences Regulations).

31 TELFORD HOMES PLC – Annual Report 2019

PRINCIPAL RISKS AND UNCERTAINTIES

THE GROUP’S FINANCIAL AND OPERATIONAL PERFORMANCE IS SUBJECT TO A NUMBER OF RISKS

The Board is ultimately accountable for effective risk management within the Group. The Board has developed a set of risk management policies, procedures and controls, and maintains oversight through regular reviews. The risk management process is designed to identify, evaluate and mitigate where possible the significant risks we face. The Audit Committee formally reviews the effectiveness of our risk management processes and internal control systems on the Board’s behalf. During the course of these reviews, the Board has not identified or been advised of any material failings or weaknesses. The risk environment in which we operate continues to evolve and this is reflected in the principal risks and uncertainties that are set out on the following pages. The principal risks identified have been assessed based on likelihood and impact, both before and after mitigation through the Group’s operations and policies. The risk matrix below sets out those risks after allowing for mitigation.

GROUP RISK MATRIX – AFTER MITIGATION

KEY 1 Regulation 2 Political outlook

ALMOSTCERTAIN 3 Reputation 4 Cyber 5 Sustainability

LIKELY 6 Planning process 7 Build cost and programme 8 Innovation 9 Access to land 10 Retain and attract employees POSSIBLE 11 Credit

LIKELIHOOD 12 Economic environment 13 Health and safety 14 Liquidity UNLIKELY VERY UNLIKELY VERY

INSIGNIFICANT MINOR MODERATE MAJOR SEVERE IMPACT

32 OVERVIEW STRATEGIC REPORT GOVERNANCE KEY MANAGEMENT INFORMATION FINANCIAL STATEMENTS