I don't think their name "Telford" indicates where they operate - East London according to Shares.

The current sp 1.50 is more-or-less the price prior to the Olympic Bid, which probably gave the sp a boost, withouit looking to far to the cost involved.

It's been all downhill for the last 12-months - Oooo deary.
The yield isn't good, despite the fall.

Will probably be a good bit of diversification away from prime inner London. Outside London is allegedly performing better now if the housing stats are accurate.

re - placing
that means shareholders are losing ground

Telford Homes placing to raise £50m
Telford Homes is raising £50m, gross, through a placing of 13,888,889 new ordinary shares at 360 pence per share.

The group says London has a growing economy with an excellent transport network and yet suffers from a fundamental lack of supply of new homes at an affordable price, and demand remains high from the group's typical customers.

It says that following the recent acquisition of the regeneration business of United House Developments for £23 million the group has a substantial platform from which it can undertake further investment. And it says it has a number of opportunities to acquire new developments that require additional funds beyond those deployed for the acquisition.

The net proceeds will be invested in some of these development opportunities and are expected to be committed within one year and fully utilised within two years.

The board believes that the placing will enable the group to target annual profit before tax exceeding £45m from 2019 onwards and increasing towards £60m thereafter.

The placing is conditional on shareholder approval at a general meeting on 13 November.

Chief executive Jon Di-Stefano said: "Telford Homes is experiencing strong demand for its homes in non-prime inner London and has a sector leading forward sold position of almost four times last year's reported revenue. This is due in part to a fundamental lack of supply of new homes in London at an affordable price.

"The imbalance between supply and demand is not going away and the Group already has a substantial development pipeline to take advantage of this in the coming years. Despite that, there are more opportunities available in the Group's typical locations. The proposed Placing will enable Telford Homes to take advantage of those opportunities and achieve enhanced longer term growth in its output of new homes and therefore in reported profits and dividends paid to shareholders."
At 3:48pm: (LON:TEF) Telford Homes PLC share price was -33.12p at 376.88p

i understand why companies prefer placings over rights, for they are cheaper to do and the end-buyer certain
however, it is intrinsically unfair on the existing shareholders - 'twas always thus i'm afarid

Exactly and at 360p fantastic value which is why us folk get left out. Still, looks like a double bottom at 380p. Or triple if you go back to March this year.

Bought some

middle price now 380.25p

It looks like yesterday was the low point on the share price as the placing @ 360p reaches the end. High growth company and at this price is worth backing as results due very soon should see double profits at the interim stage.
Stronger order book and shares bouncing from lows yesterday

A recent email from the CEO to a share holder after the placing

Dear Steph,

Apologies for coming back to you so late in the day. We have had a few similar queries from private shareholders and although you have asked a specific question about earnings and dilution I have set out below a wider rationale for the placing. I hope you don’t mind me covering all the bases at once but it saves me having to pick and choose bits of it depending on each enquiry and you may have had follow up queries on some of these issues.

Why did we do it – the financial reasons

In simple terms to drive the longer term growth of the business it was always likely that we would need additional equity at some point. Our business is capital hungry and a typical larger development can require circa £50 to £80 million between land value and build costs and takes around three years to develop. Therefore the cycle is slow and this means growth eventually slows even with continued forward sales.

Why now rather than later comes down to two factors – opportunities in the market and the profit profile over the next couple of years. To be clear we did not need to raise the equity to fund the United House acquisition. This was very much a land acquisition deal that gave us some assets that were right up our street and enabled us to have a longer term more strategic element to the pipeline for the first time. However it does mean that we have allocated future equity to these developments in our cash flows and therefore inevitably they fill up the pipeline such that we cannot take other opportunities that are out there. So the fact that we had a full pipeline but could see more opportunities in a positive market was a significant factor in the timing.

Additionally we have an issue with profit timings in relation to 2017 and I am sure this has not helped the share price in recent months. Despite the long term nature of our developments there are ways of bringing profit recognition forward where homes are built under construction contracts. No doubt you have already noticed that we have started to talk about selling developments to institutions for PRS and this is becoming a hot topic for the industry as a whole. From our point of view this is not of interest because it accelerates profit recognition but instead because it represents an exciting new string to our bow. Nevertheless it has the benefit of earlier profit recognition and of course enhanced returns on equity due to the payment profile.

We are now seriously pursuing PRS possibilities and as a result we are currently marketing Caledonian Road to potential buyers on this basis. This is public knowledge as it has been in the market for a few weeks now. This and any other PRS deals would bring profits forward which if they cannot be replaced quickly enough just leaves a hole in the profit growth further out – i.e. robbing one year to pay another.

.The placing should enable us to smooth that impact by acquiring new sites more swiftly and therefore I believe that a combination of the placing and a couple of PRS sales would enable us to return to a broadly increasing profit growth profile from now onwards. Clearly this is not assured at this point but we have some confidence in the PRS market given our current marketing exploits.

We have previously talked about doubling profits from £19.2m in 2014 to circa £40m by 2018 and then growing from there. With the benefit of the placing plus initial PRS sales we can achieve at least that by 2018 with a smoother growth profile than currently forecast. This in the context of needing to spend the placing money and then build the developments before most of the real profit value comes in. Beyond 2018 we expect it to mean that we can continue to grow every year with no periods of stagnation while we wait for our existing capital to turn round in the development cycle. This we have broadly set out as £45 million growing towards £60 million and I appreciate you may consider these targets to be undemanding. Please consider that there is natural prudence required in forecasting that far ahead and a lot can happen in five years. We are not assuming for now that we perpetuate the sale of more developments to PRS investors further into the future and if we did do that then it would of course continue to bring profit recognition forward in later years.

We do not know what the future holds but as a result of this placing we believe that not only do we have the potential to remove a short term dip in our profit forecasts but also to ensure that our long term profit earning potential is significantly improved. Alongside this we have a stronger balance sheet and an improved net asset value per share. I believe that any housebuilder should be valued based on a hybrid of earnings potential and net asset value. We of course have a lot of our assets forward sold which also secures some of the enhanced future value.

A final point here is that this is a significant equity raise in the context of our size and is aimed at preventing the need to return to the market for more money in the coming years.

Why not just use debt?

We already have a very flexible, relatively cheap £180 million facility and we will still use it over the coming years. In fact we expect to increase it in the future. However banks themselves do not like our gearing to be too high and reducing it gives them greater confidence. In addition investors are much more negative on the issue and it frequently comes up in institutional meetings. Our peer group of course are relatively ungeared although we are of a different scale to them. High gearing holds our share price back because people see risk in debt.
... High gearing holds our share price back because people see risk in debt. We agree with this in terms of needing to reduce longer term reliance on debt and although we still expect short term gearing to increase we are conscious of needing to reduce it in later years even if it is at the expense of some potential additional earnings growth that could be achieved by throwing caution to the wind and ignoring all other views on risk.

Why not a rights issue or an open offer?

I am well aware that not having the opportunity to buy at 360 pence is frustrating and annoying for private investors. As I have said before the directors are in the same boat in terms of dilution and there were a number of reasons why we chose a placing.

Firstly we have quite a narrow institutional shareholder base in terms of large institutions but we do have lots of retail investors and small funds involved. Directors, related parties and share schemes own circa 20% and could not have taken part in a rights issue (timing and availability of funds). In addition some of our institutional shareholders (or the relevant fund managers) have been trying to sell some of their shares over the last 18 months due to issues with their funds - not I must add due to a problem with us. They are trying to reduce their holding not increase and accordingly they have not taken shares in the placing. In addition rights issues rarely get taken up by a large proportion of private or retail holders due to the nature of the holding and the potential cost involved. In short we were not confident we could raise the money from existing shareholders and a failed rights issue would have been a significant negative for the company.

A rights issue also takes time and that is dangerous when raising money. Sentiment is a big part of trying to encourage new holders to come in and in an industry that everyone sees as cyclical you are never far from a bad press day or an analyst publishing a negative report even if you don’t agree with it. Housebuilder sentiment appears to have worsened in the last few days and I am sure it would be more difficult to raise the money now.

The money has been raised from over 30 different institutions and the majority of these are new shareholders many with the potential to add to their holding in the future. This should improve liquidity in the shares which has been a bit of an issue of late and I think holds back the price even when good news is announced. I appreciate some of them can sell for a profit in the future and we may never see them again but I believe we have increased the number of long term holders and therefore those who may take up the slack when others are selling. New institutional holders want to start with a reasonable position and rarely pick up scraps as their first acquisition.

Why £3.60?

Some of this is answered by the sentiment issue above and the fact that we were dealing with new holders looking for an entry price and not so many existing holders trying to mitigate the dilution. Again we are well aware this is a dilutive price but I believe the benefits will be worth it and we are all shareholders alongside you. In context the dilutive effect of the shares at £3.60 is to reduce existing holders to circa 81.4% of the ownership. Raising £50 million at say £4.10 (the closing price the day before) would have increased this residual holding by less than 2% to 83.3%. Granted an important difference but not so significant and hence why we proceeded at that price. As you know we are also intending to offset the dilution in the dividend for the next couple of years.

What are we doing with the money?

We have already said that we expect to commit the funds within one year and utilise them in full within two (the distinction being committing subject to planning and then paying upon receipt of a consent). We have not announced any of the likely acquisitions at this point and we have to secure them in contract before we do. All I will say is that we have several long term partners bringing sites to the market and whilst we will not win them all we definitely did not want to be telling them that we did not have the money to bid in the first place. The long term dynamics of our market are too good to be doing that whilst also damaging our standing in terms of future land buying.

My apologies for this lengthy email and in addition I am aware that I have not answered your specific query in the way you wanted due to restrictions on what I can tell you regarding future forecasts. I hope however that it helps you to understand what we have done and why. We firmly believe it is for the good of all shareholders.

Don’t hesitate to get in touch if you have any other queries.

Kind regards,
Jon

many thanks for that post
what a well set out and clear letter from the ceo which even a dope like me could understand

i'm not pleased that my holding is at quite a bit higher price, but that is the nature of things ....... however, as a long term holder in a good sector, i am very happy indeed as i think this is an excellent company for all sorts of reasons

Last night I set myself to buy this morning if it was moving lower close to the 360p placing as the future market was looking on the way down.

Waiting all morning since 8.30am for some type of retrace, after opening well up and nothing, so I Bought some, and then at 2:50pm MMs manipulated the order book taking the higher bids away and down to 373p and then 369.50p, has recovered some ground since

note - MM SCAP was one of the guitty parties

with the markets crashing around our ears, any stock that shows blue today is a rarity

My forecast made early this morning

Half Year result for 2016 due soon maybe before this month end

Profit before tax £19M
tax ................. £4M
Profits after tax £15M
EPS .............. 24.75p
dividend ......... 6.50p
No. shares used 60.6M

This afternoon shake lasted till almost the end of the day when it went back to the last "AT" 383p

Chart of the week: FTSE 100 heading for 3,500?
By John Burford | Mon, 16th November 2015 - 11:26

In the normal course of my analysis of share charts of constituents of the FTSE 100 (UKX) index, I focus mainly on the stand-alone technical picture of each market, independent of current general business conditions. 

Most of the time, especially during the bull market of 2009-2015, many shares were also in bull markets, although I have found several stand-out examples of bearish charts (see my Barclays (BARC) coverage, in particular).

But no company exists in a vacuum.  If business conditions are good, most companies will thrive and sentiment is bullish.  But when sentiment turns down - as I believe is occurring now - many shares will change trend to down.

As an investor - which in reality is really a long-term trader - you can maximise your returns by selling shares near the top and sitting on the cash.  I have never understood why someone would hold a share through all of the ups and downs that inevitably occur over a timespan of many years.

If it is the dividends you like, why not sell and then buy back at much lower prices?  Of course, the reason is sheer inertia - and lack of confidence.  And that is where technical analysis can help. 

Yes, I believe the general market is now turning down, and today I want to show you my evidence based on the FTSE 100 index itself.

This is the chart I pulled only two weeks ago showing the entire 2009-2015 bull run:

(click to enlarge)

There are several important technical aspects of this chart that stand out.

1) The entire rally has the shape of a three-wave A-B-C, rather than a five wave pattern.  The A-B-C is always counter-trend, implying that when the C wave terminates, the major downtrend will resume.  If this were really part of a five wave advance, the market would recover from the August swoon and go on to new highs in a fifth wave.  This is still a possible outcome, but it is of much lower odds because...

2) The major six-year uptrend line (in blue) is a solid line of support that has been broken in August and is now a line of resistance.  Note the several highly accurate touch points all the way along it, making it a highly reliable line.  The August break is a watershed event that has turned the bull market into a new bear market.

3) From August, the market has recovered and kissed the underside of the blue line of resistance.  If this is a genuine kiss, then the next move will be a scalded cat bounce down (a sharp retreat).  This is a typical reaction when the market, having broken key support and gingerly moved back to the line, is hit for six.  It is like the north poles of two magnets kissing - and repelling each other with force. 

And in the past two weeks, this is the action on the daily chart:

(click to enlarge)

I am calling the August plunge low a new large wave 1 and the rally to the kiss wave 2, which has the traditional counter-trend A-B-C form.  The scalded cat bounce down has now confirmed that the odds for the market to make a new high, let alone rise above the blue line, are slim.  The blue line has been tested and found to be strong resistance.

This all fits into my "third wave down" scenario.  Because third waves are usually long and strong, what does this imply?  Simply that the market is headed for a major decline.  Here are my ideas on the weekly chart:

(click to enlarge)

My first target is the Fibonacci 50% retrace of the entire six-year rally at the 5,300 region.  But my major objective is the Fibonacci 62% support level at the 4,800 area.  This is where previous lows were made on the way up (red arrows) and, because markets have long memories, this Fibonacci level contains extra-strong support potential.

I will be looking for a major wave 4 rally phase here, but, when completed, the market should descend in a fifth wave, which should test the 2009 lows at the 3,500 region.

To many, these may seem outrageous forecasts - and that may be a clue that complacency has set rock-hard.  We know that the global economy is weakening and is in a major deflationary spiral.  Debt levels everywhere are sky-high and interest rates have been kept super-low for years, but will soon start to rise.

Not only that, but there is trouble brewing in the credit markets, with US corporate junk bond defaults rising rapidly.  Bear markets in stocks usually start in the credit markets. Here is a sobering chart:

(click to enlarge)

Because debt levels are so much greater now than just before the Credit Crunch, rising defaults will have a greater impact across the debt spectrum - including the good-as-gold US Treasuries (and UK Gilts).

It will be a deflationary depression played out in the stockmarket - and I am sure I will be showing more bearish charts in COTW than bullish in the coming months.

Flash Alert

Overnight, the markets are reacting to the implications of the Paris bombings with early losses being erased.  Note that the low has been put in right on the Fibonacci 78% support level as shown on the hourly chart.  This is at the round-number 6,000 level:

(click to enlarge)

This is one more demonstration of how very important the Fibonacci levels are when looking for potential support or resistance levels.

385p +5p

Equities Research Company Update 16 November 2015
Research analyst : Robin Hardy

Still an under-valued stock: We have historically valued Telford on the same
basis as the volume national builders but this increasingly feels wrong. We see
unparalleled visibility, a clear long-term strategy, a solid focus on growth and, in
our view, still highly favourable local market dynamics. We still see fair value here
at 490p and believe that the stock is under-valued on both earnings and NAV
bases in a sector that otherwise appears stretched.

Telford Homes+

Fresh capital for capital growth
Telford Homes has raised £50m of new capital that will be used to expand,
accelerate and prolong growth. The capital base is expanded and with
continuing confidence in Telford’s local markets in London, we see greatly
enhanced prospects. The development pipeline already extends out to FY2024F
and contains up to £1.5bn of gross development value (GDV), 6.5x current year
revenue, and via the new funds we expect the pipeline to expand further from
FY2017F. This, along with close to £700m of forward sales, gives Telford by far
the greatest earnings visibility in the sector. Coupling the now substantial capital
base with still strong market opportunities for securing new sites and continued
strong buyer demand, we see great value here with fair value still at 490p. The
rating shows an FY2019F PER of 7.5x and P/NAV of 1.14x meaning this stock
presents material upside in a sector otherwise struggling to show any.

Long visibility, sustainable growth and FY2017F forecasts raised: The pipeline
of sites to bring through to development already stands at c.£1.5bn, having been
boosted by c.£500m via the £23m United House acquisition. Now that £50m of
additional resource is available to the group, we can see this expanding even
further as Telford looks to identify sites within the next 12 months and to commit
the new capital fully within two years. Supported by the new equity, we have
raised our PBT forecast for FY2017F from £25.1m to £31.9m

A still bullish market climate in Telford’s London: The media seeks to portray
high risk in London residential but we still see great opportunity for developers in
more affordable areas. Demand still heavily outweighs supply, population growth
is unabated, we see buyers gravitating towards markets offering greater relative
value and there is no practical evidence that buyer demand has diminished.
Widening the sales channel while also de-risking: Telford has opened a new
sales channel: the institutionally funded private rental sector (IPRS). We see this
becoming an important part of the London housing market, helping to bridge the
supply gap; it is good for a developer to align with this new market segment, in our
view. IPRS allows a site to run with minimal capital, no debt, full sales visibility
and earlier profit recognition while delivering overall

---------------
Telford Homes (Buy) - PEEL HUNT - 16 November 2016

2020 Vision
Telford Homes has raised £50m in new equity, which is to be invested in new developments. We forecast the group to double profits by 2020, with visibility on profits supported by a sector-leading forward sales position. The group is very well placed to grow output significantly in non-prime inner London, where the acute shortage of new homes is expected to persist. Our new target price of 475p implies potential upside of 29% and we retain our Buy recommendation.......
Https://s3.amazonaws.com/peelhunt/151113_Peel_Hunt_Telford_Homes_MN.pdf?AWSAccessKeyId=AKIAIH3MLUOYW47IPD5A&Expires=1447774715&Signature=%2Fsj%2FUlkutZITTy1TTzDr%2B6V46Qg%3D

Since around 9am the trades are more often and share price has warm up from the large spread at opening. 370 v 385p
Yesterday's closing price UT was at Offer price 385p

Also a catch up with the piers as most of them are up by 2 to 3%
a much stronger order book with DEPTH of 23 v 14

Research analyst - Robin Hardy - Equities Research Shore - 30 pages
Company Update -16 November 2015

Still an under-valued stock: We have historically valued Telford on the same
basis as the volume national builders but this increasingly feels wrong. We see
unparalleled visibility, a clear long-term strategy, a solid focus on growth and, in
our view, still highly favourable local market dynamics. We still see fair value here
at 490p and believe that the stock is under-valued on both earnings and NAV
bases in a sector that otherwise appears stretched.

TELFORD HOMES
Putting fresh capital into the capital
Telford has raised £50m of fresh equity capital by way of a placing to accelerate growth,
extend its growth phase, provide sufficient capital to enable the group to retain a fully flexible
business model and to enable it to grow the scale of its already materially expanded
business model and profit base. While at present our forecasts only show profit growth as
far out as FY2019F, we are already able to see the expanding development pipeline
delivering revenues and rising profits out as far FY2024F, facilitated initially by the recent
acquisition from United House. Deploying the new capital is expected to swell and elongate
this pipeline and help to deliver profit growth well beyond the current forecast high point of
some £46m PBT in FY2019F. On the enlarged capital base, we can see the group growing
profits throughout the pipeline delivery and we can readily see PBT forging on towards and
past £60m. At the same time we also see Telford essentially preserving its existing balance
sheet profile and de-risking the trading and financial profile of the group from a peak in
gearing as early as FY2017F.

On the current capital base, while it would have been possible to sustain profit growth, it
would have become harder to push profitability higher. So, additional capital was always
going to be needed, in our view, in order to: provide additional growth capacity; maintain
flexibility; ensure adequate resource for investment in new sites as they arise; reflect that the
group is now undertaking larger schemes with long delivery times and longer periods of
capital outlay.

Long visibility, sustainable growth and FY2017F forecasts raised: The pipeline
of sites to bring through to development already stands at c.£1.5bn, having been
boosted by c.£500m via the £23m United House acquisition. Now that £50m of
additional resource is available to the group, we can see this expanding even
further as Telford looks to identify sites within the next 12 months and to commit
the new capital fully within two years. Supported by the new equity, we have
raised our PBT forecast for FY2017F from £25.1m to £31.9m

A still bullish market climate in Telford’s London: The media seeks to portray
high risk in London residential but we still see great opportunity for developers in
more affordable areas. Demand still heavily outweighs supply, population growth
is unabated, we see buyers gravitating towards markets offering greater relative
value and there is no practical evidence that buyer demand has diminished.

Widening the sales channel while also de-risking: Telford has opened a new
sales channel: the institutionally funded private rental sector (IPRS). We see this
becoming an important part of the London housing market, helping to bridge the
supply gap; it is good for a developer to align with this new market segment, in our
view. IPRS allows a site to run with minimal capital, no debt, full sales visibility
and earlier profit recognition while delivering overall returns comparable to open
market sales. The first IPRS sales are forecast to benefit FY2017F.

Raising growth capital – old school but the right call: While the volume house
builders are reducing capital by making large returns to shareholders, raising
equity capital for expansion is a long-established sector trend. For Telford, we
believe it is the right call for the Board to have made at this point in the market.

Long visibility, sustainable growth and FY2017F forecasts raised: The pipeline
of sites to bring through to development already stands at c.£1.5bn, having been
boosted by c.£500m via the £23m United House acquisition. Now that £50m of
additional resource is available to the group, we can see this expanding even
further as Telford looks to identify sites within the next 12 months and to commit
the new capital fully within two years. Supported by the new equity, we have
raised our PBT forecast for FY2017F from £25.1m to £31.9m

A still bullish market climate in Telford’s London: The media seeks to portray
high risk in London residential but we still see great opportunity for developers in
more affordable areas. Demand still heavily outweighs supply, population growth
is unabated, we see buyers gravitating towards markets offering greater relative
value and there is no practical evidence that buyer demand has diminished.

Widening the sales channel while also de-risking: Telford has opened a new
sales channel: the institutionally funded private rental sector (IPRS). We see this
becoming an important part of the London housing market, helping to bridge the
supply gap; it is good for a developer to align with this new market segment, in our
view. IPRS allows a site to run with minimal capital, no debt, full sales visibility
and earlier profit recognition while delivering overall returns comparable to open
market sales. The first IPRS sales are forecast to benefit FY2017F.

Raising growth capital – old school but the right call: While the volume house
builders are reducing capital by making large returns to shareholders, raising
equity capital for expansion is a long-established sector trend. For Telford, we
believe it is the right call for the Board to have made at this point in the market.

There is a chronic and acute under-supply of new housing and, thereby, significant
opportunity for an ambitious London house builder to grow into these market conditions.
While raising fresh capital has become relatively uncommon in this sector, we believe that it
is absolutely the right thing for the Board to have undertaken at this stage and we see
benefits accruing for investors in both the near term and longer term.

Practical impact

The practical impact from the raising of new capital should be evident from as early as next
year and pushing on through to at least the middle of the next decade.

Shorter-term impact

As we map out in more detail later in this note, the boosting of the capital base and the long-term
benefits this brings also allows the group to see nearer-term benefits, effectively as soon as
FY2017F. It can appear that the new capital does not impact on the group until after FY2019F
when investment in the enlarged pipeline begins to deliver, but this is not actually the case.

Our previous forecasts reflected the impact of a planning delay on one site with some profits
from FY2017F pushed into later years and a step back in PBT in that year. Due to the
additional confidence for greater scale and enduring growth potential that the new capital
brings, the Board is now looking to bring forward profits originally targeted for later years.
This process will allow Telford simultaneously to restore its previously forecast progressive
path for profits through to FY2019F while remaining confident that the new capital will Extra capital to accelerate and prolong the group’s growth phase
There is still ample opportunity to grow in London new build market The fund raising brings benefits for investors as early as FY2017F

The new capital allows Telford to restore its steady progression of pre-tax profit

provide sufficient new opportunities to allow the steady progression in profits beyond
FY2020 and allow some profit from this period to be brought forward.

The mechanism for this restoration of a progressive profit profile is the decision to open a
new sales channel to augment the existing three, core, open market channels (selling to
owner-occupiers, UK investors and overseas investors). The new channel will be the
emerging institutionally funded private rental sector (IPRS). We discuss this new market and
its impact later in this note but, essentially, selling a small number of developments (initially
two) through this channel allows for both earlier capital release and earlier profit recognition.
At the same time, visibility is increased and the development pipeline de-risked.

So, by using the new capital to build a stronger pipeline for later years, there is able to be
visible benefit little more than a year after the equity raise. The greater part of the benefit,
however, comes in the group’s ability to deliver more growth, more sustainably across the
longer term.

Longer-term benefit





The new capital allows Telford to restore its steady progression of pre-tax profit

provide sufficient new opportunities to allow the steady progression in profits beyond
FY2020 and allow some profit from this period to be brought forward.

The mechanism for this restoration of a progressive profit profile is the decision to open a
new sales channel to augment the existing three, core, open market channels (selling to
owner-occupiers, UK investors and overseas investors). The new channel will be the
emerging institutionally funded private rental sector (IPRS). We discuss this new market and
its impact later in this note but, essentially, selling a small number of developments (initially
two) through this channel allows for both earlier capital release and earlier profit recognition.
At the same time, visibility is increased and the development pipeline de-risked.

So, by using the new capital to build a stronger pipeline for later years, there is able to be
visible benefit little more than a year after the equity raise. The greater part of the benefit,
however, comes in the group’s ability to deliver more growth, more sustainably across the
longer term.

Longer-term benefit

The new capital should allow Telford to sustain growth and push the business model beyond
its current scale and enable the group to drive PBT towards, and beyond, an annual pre-tax
profit of £60m, we estimate. Such a step up in the business model is only realistically
achievable with a larger capital base as a larger pipeline of sites and higher level of working
capital will be required. In practice, the additional £50m of equity capital should mean that
the group has up to £100m of additional development capital to deploy, running broadly the
same leverage model that is already in place.

At this level of profitability the group will have an enticing array of options for the use of a
substantially enlarged free cash flow. The options are: to expand at an accelerating rate;
materially increase the dividend distribution to shareholders; and reduce indebtedness in
order to maintain greater operational and strategic flexibility. Although the London market
appears capable of running a much long growth phase, residential development still remains
cyclical and the board, mindful of this, would then look at more rapid debt reduction, while
still maintaining profit growth. However, this remains a long way into the future so the
approach could change and Telford will look to remain as flexible as possible.

If housing market conditions in London would still safely support accelerated expansion at
that time then this decision could be changed. What is clear, however, is that thanks in no
small part to the decision to raise fresh equity capital now, the group should be able to
exhibit a longer period of growth yet still retain flexibility and present a robust balance sheet.

Overall

Telford has, in our view, created a stronger and more enduring business model through this
equity raising. There are both transparent near-term and longer-term benefits to profitability
while at the same time helping to manage risk and maintain flexibility. We see a
considerable market opportunity and firmly believe that the decision to invest in order to
grow is the right one at this stage, and certainly a better option than simply to return what
appears to be surplus capital to investors as we currently see at the volume end of the
sector.
Open a new sales channel is a key factor is boost near term profitability

In the longer term, the new money will be used to expand the development base and extend the
pipeline

At a large business scale the group has a range of options to deliver benefits for shareholders

Overall, a strong and more enduring business model has been created

Growing the development pipeline The development pipeline is exceptionally strong, now standing
at c.£1,500m

The recent United House acquisition was a major boost to the development pipeline

Up to £500m of GDV has been added The pipeline now visibly extends out as far as FY2024

Telford has an exceptionally strong development pipeline, this being expressed as the
aggregate gross development value (GDV) of all schemes the group intends to develop.
Back in September 2014, following the purchase of what is now the Manhattan Plaza
development, the development pipeline pushed above the £1bn mark for the first time in the
group’s history. The pipeline was further expanded by the purchase of the Chobham Farm
JV site in Stratford and the Redclyffe Road site in Upton Park. This was a continuation of a
long-run expansion of the ultimate built-out value of developments, which is summarised in
Figure 1 below.

The bulk of the development pipeline today is scheduled for delivery to customers and for
recognition in the P&L within our forecast window reaching out to FY2019F. Some of the
more recently acquired sites had already begun to push the later reaches of the pipeline out
to FY2020.

Fig 1: Telford’s pipeline development since 2012

As at

Pipeline - £m

Forward sales - £m

Reported sales - £m

November 2015

1,500

685

N/A

March 2015

1,070

550

251

March 2014

875

341

144

March 2013

627

280

142

March 2012

524

232

124

Source: Telford Homes

Through a balance of new additional sites and net realisations from the pipeline as sites
reached physical and legal completion, the pipeline had been stable at just above the £1bn
level running through the current financial year.

However, in September Telford announced that it had acquired four development sites from
the United House Group (a rival London development company) for up to £23m, a
substantial single transaction land deal by the group’s standards. This had a number of key
impacts on the development pipeline:

. It added up to £500m of GDV – a couple of the new sites are still awaiting full planning
consent, so we say that the pipeline is now boosted by up to £500m rather than an
absolute £500m. In reality, however, we have a high degree of confidence that these
sites will be developed as anticipated. So, practically, we can see the pipeline today
does have a value at around £1,500m.
. It pushes the furthest visible completions out as far as FY2024 – these acquisitions
should provide a sizeable revenue stream starting in FY2020 from City North and
Gallions Quarter Phase 1, with Chrisp Street and Gallions Phase 2 delivering sales
across FY2021-2024. This gives Telford visibility on a substantial part of targeted
revenues across a full nine financial years (if the current year is included), the longest
forward reach the group has ever presented. We also believe that this is the strongest
and most transparent forward visibility amongst all of the quoted house builders.

There is up to £100m of additional capital that should swell the pipeline substantially

Identify within 12 months and be fully committed within 24 Solid long-term foundations are now capable of being put in place
All the necessary tools for growth are now at hand

So, the pipeline has been stepped up using financial resources already in place before the
recent equity raise. The availability of up to £100m of additional development capital (£50m
of equity + potential peak gearing of up to 100%) provides scope for substantial additions to
the pipeline. In practice, the total amount available to deploy could be higher due to the
lower capital intensity of IPRS schemes, which we expect to be a feature through the life of
the development pipeline. It is difficult externally to assess precisely the timings of
developments or their individual scale or to assess the timing and impact of additional IPRS
sales but extrapolating the United House deal and other sites more recently acquired, we
believe that there is scope to add substantially to the forward sales value once the new
capital is deployed.

The group has stated that it aims to have identified the sites to acquire within 12 months and
to be fully invested in these sites within 24 months. Given that the group typically likes to see
relatively rapid deployment post site acquisition (the United House sites have a generally
longer profile of delivery than is typical for a Telford site), we would expect these new sites
to primarily fill out the pipeline between now and FY2024 rather than materially extend the
duration.

Although nearer-term site investments per se might not extend the lifespan of the pipeline,
the foundations for a longer delivery phase (i.e. beyond FY2024) are certainly being laid.
The group has the capacity to run from the middle of the next decade with a substantial
base of capital, rising through the materially high levels of retained profits now expected plus
the recycling of cash. As we examine in the ‘Numbers’ sector of this note, we believe that
the capital base, the consequent business scale and profit levels can be sustained alongside
a reduction in the group’s indebtedness. However, we still expect the total capital available
for development to remain above £500m; we are forecasting that this figure will be just
£264m at the end of the current financial year as a comparison.

As we discuss in the section on London, we see no shortage of potential sites within
Telford’s desired development locations. While the Board is looking to deploy a sizeable
sum within a relatively short space of time, we believe that there will be ample opportunity to
invest.

Therefore, Telford now has in place, in our view, all that it requires to secure the
developments it needs to deliver rising and sustainably higher levels of profitability across
the next 8-9 years. As we discuss later in this note, we remain confident in solid, sustainable
demand from the London market (more specifically Telford’s focus within London), the
benefits from a widening of the sales channel, little or no threat of over-supply and
confidence in a solid long-term.

Pre-sales and business confidence

A key feature when looking at Telford is the quality of its order book or forward sold position
(as distinct from the pipeline) which we view as being much stronger than that of site-based,
regional or national house builders. Essentially, Telford is very heavily forward sold on all of
the schemes that are in development or can otherwise be considered live and active sites.
All of the Stratford schemes launched more recently are either fully sold or have >90% of
units with exchanged contracts. It is a notable feature of Telford’s forward sales that typically
all are fully exchanged contracts rather than that of a volume house builder which would
more typically be a mix of reservations and exchanges. This means that Telford’s order book
is more robust.

The order book or forward sold position was reported in the recent H1 trading update at
£685m, covering units for delivery across five financial years from FY2016 to FY2020. To
put the size of the forward sales into context, Telford’s forecast annual reported revenue for
the full year to March 2016 is just £244m. For FY2017F, the forecast is £284m (as revised
following the placing) and for FY2018F, £369m (as revised). If compared with the forward
sold positions of the volume, national or mid-sized site-based builders (see Figure 2 below),
we can see just how strong a position this is.

Fig 2: Telford's order book versus other house builders

Forward sales

Next full year revenue

Years' of sales

Barratt^ (HOLD at 555p)

£2,332m

£3,897m

0.60

Bellway^ (HOLD at 2366p)

£1,087m

£2,015m

0.54

Berkeley^ (HOLD at 3014p)

£2,959m

£2,453m

1.21

Bovis^ (HOLD at 941p)

£844m

£1,110m

0.76

Crest Nicholson^ (BUY at 506p)

£436m

£939m

0.46

Persimmon^ (HOLD at 1805p)

£1,710m

£3,126m

0.55

Redrow ^ (HOLD at 430p)

£565m

£1,284m

0.44

Taylor Wimpey^ (HOLD at 175p)

£1,859m

£3,106m

0.60

Telford Homes

£685m

£244m

2.81

Source: Company presentations

The table shows how the forward or orders secured position for Telford is stronger relative to
the peers group of quoted house builders, even the more comparable peers which also have
a material position in London and a similar early-buyer profile. While this shows the relative
strength of the Telford order book, it still only tells part of the story. The visibility within the
group’s development pipeline is materially longer and stronger than this and we can see the
forward sold position increasing as more sites in the pipeline are brought forward for sale.

This strong position should provide a great deal of comfort for investors that the group’s
shorter and longer-term growth objectives are both tangible and credible. Such a strong
position can also only provide solid confidence for the Board that both its assessment of and
commitment to the London market is the right strategy and that the decision to enlarge the
capital base and expand is very much the right decision.
The strongest order position
relative to sales in the house
building sector

We can this see this position only
getting stronger

Widening the sales channel

A broader, stronger and more visible sales base can now be expected

The first schemes have already been identified for sales into this channel

Selling to institutional investors bring many and diverse benefits both operationally and for
shareholders

Above we mentioned that Telford is to add an additional sales channel by seeking to align
the group with the emerging and potentially significant IPRS market. We see this as an
important development and one that brings a wide range of benefits, both operationally and
strategically, for the business and also benefits investors by helping to improve the visibility
and resilience of earnings.

While the volume house builders remain wary of IPRS (considering it non-core and fearing
that it could indicate that they have become ex-growth), we see the development of this side
of housing supply as a near certainty and as a mechanism that has the potential to alter the
new build landscape. This would be most apparent in urban markets and materially more so
in London. Indeed, we would expect IPRS activity in London to dominate the national
picture.

What is Telford proposing in this space?

Starting with the 156-unit scheme at Caledonian Road in Islington, the group intends to
identify residential schemes from its development pipeline that would be suitable to sell in a
single transaction to an institutional buyer rather than bringing that scheme to market in the
established manner of targeted launches and progressive sales. Although recent schemes
have sold very rapidly on initial release, this same momentum may not continue at the same
pace in the future.

What advantages or benefits does selling into this channel bring?

. Certainty – an entire site can be forward sold in a single transaction bringing full
visibility of revenues and cash flow.
. Phased payments and cash flow – similar to the profile already visible in provision
under a contract for social housing, Telford would operate as something akin to a
contractor, receiving phased payments at contracted levels as the development
progresses.
. Capital intensity – the capital tied up in a scheme would be materially reduced. In
addition to the phased, contracted payments above, we would anticipate that Telford
would receive a larger, initial payment to, in effect, reflect the transfer of the land to the
IPRS buyer. This, and the receipt of phased payments, should mean that the group will
have released its capital earlier than the existing profile of 10% deposits (some buyers
pay an additional 10% deposit after 12 months) and the bulk of the cash as sales
revenue on legal completion.
. Long-term potential – we see a solid and growing demand from this class of buyer.
The introduction of institutional funds into the London residential market is a powerful
mechanism in helping to close the housing supply gap. While it would increase the
market share of rented accommodation, the reality is that home ownership is unlikely to
increase significantly at prevailing prices and that renting (ideally on less onerous and
longer-term leases than existing private rentals) more akin to that seen in the
Netherlands or Germany can expand and become seen as a core means of living in the
capital, even for families.

. Rationale – the rationale is that this is set to become a material part of the London
housing landscape and that it is better for the group’s operations and for the interests of
shareholders that the group be aligned with and benefit from the growth of this market
rather than risk see it potentially consume demand.
. Very similar returns to open market sales – Telford has only contemplated aligning
with this market where it can see that the overall return it is able to make is comparable
with sticking wholly to the existing fully open market sales routes. Returns from this
market space would be multi-faceted and while initial revenues and profit on a like-for-
like basis with open market selling could appear to be lower, this is not the case in
practice.

There is a widely, long-held and incorrect perception that bulk buyers of new homes
demand and achieve selling price discounts well in excess of 20%. This might have
been the case at key points in previous cycles but it is not the case today. If a bulk
investor wants to invest today, they find that the builder is on the front foot because
they can be confident that are able sell into the open market and achieve at least their
target returns. So, any discount to open market to Around 4% of revenue that would be spent on securing sales and making the
delivery of the unit and title to individual buyers would not now be incurred.
o If there is material competition between IPRS investors for Telford’s
developments, the group’s bargaining position will be more favourable.
o No interest costs – as capital tied up in land is recovered earlier and
development capital is funded by the purchaser, there would be little or no
debt required and there would be significantly lower interest charges to
capitalise into costs.
o Potential to redeploy capital – Telford would be able to use the earlier release
of capital from a development sold into this channel to secure new sites or
fund expanded working capital elsewhere. This would generate new and
additional streams of profit.
. ‘Sleeping with the enemy’ – whereas the national or volume house builders sell
almost exclusively to owner-occupiers (and to investors but only a minority) Telford has
a more diverse and flexible selling profile. It sells to occupiers, UK small investors and
overseas small investors in varying proportions depending on the nature of the
developments, the development timeframes, the investment climate and the condition
of the housing market. There is no fixed pattern and no one segment dominates or is of
more importance. Therefore, adding a fourth class of buyer in the form of a large
investor (potentially fourth and fifth if we believe there will be UK and overseas buyers)
is for Telford not so great a departure. However, it would be for a national or volume
house builder.

Selling in this way produces similar returns to open market sales but bring substantial capital advantages
While the volume builds are wary, we see great opportunities in this market space

But there is more to becoming aligned with this new class of buyer other than simply
bolting on a new class of buyer. The development of IPRS is potentially a highly
disruptive change in the UK housing market. There are clear problems for many potential
buyers with a lack of access to residential ownership through high deposit requirements
and growing competition for both first timers and first movers from the small-scale buy-to-
let market. The UK housing market landscape is changing and it is likely that what one
might call ‘new renting’ is likely to become a major part of UK housing.

There is a major vacuum in the UK housing market and a significant annual and
historically accrued shortfall or under-supply which it is increasingly apparent is not
going to be filled by either the existing larger house builders (lack of strategic will) or the
industry’s SMEs (lack of capital). All key stakeholders in the UK housing market (the
UK state, the lenders, the Bank of England, existing homeowners and existing
investors) have no desire to destabilise asset values

Beneficial impact of IPRS on Telford’s profit delivery

We are not expecting Telford’s decision to sell two schemes to IPRS investors to change
significantly the overall aggregate profit to be delivered across the four existing forecast
years FY2016-FY2019F. While we are forecasting now that FY2017F PBT will be higher, we
are not expecting the headline PBT in FY2018F or FY2019F to be materially different,
although the make-up of that profit will be a little different.

FY2016F – due to the long pipeline profile of the group’s developments, it is too late in the
financial year for any disposals to have any impact.

FY2017F – originally FY2017F was set to be affected by the planning delay at Caledonian
Road with some of the sales pushing back into FY2018F and FY2019F. The net effect was
forecast to be that profits would step back from the £30m forecast for FY2016 and match the
£25m reported for FY2015A. Now the Caledonian Road site and one other IPRS sale are
likely to make a material contribution to FY2017F through the earlier parts of the profit
recognition on the IPRS sales of the site. This contribution to EBIT would largely restore the
original PBT forecast (which was £32m). It is likely that a second development will also be
It is better to be a partner of this
new market element than a
competitor

Telford will maintain a balance
across its now four channels to
market

The benefits for this new channel
accrue from FY2017F onwards

PBT for FY2017F is restored to the
levels originally forecast earlier this
year

sold through the IPRS channel and we have modelled a small, early contribution from a
second site in this financial year.

FY2018F – we now expect the Caledonian Road site to deliver some of its profit in FY2017F
(in our previous, revised model the recognition was to be primarily in FY2018F) but we are
maintaining overall PBT forecasts for FY2018F. This will be achieved primarily via the earlier
recognition of profits from a second IPRS site

The IPRS contributions made especially in FY2018F bring forward some profit from
FY2019F.

FY2019F – into this year the only IPRS contribution is expected to come from site #2 but
again some of this profit will have been brought forward from the completion phase of such a
site in FY2020. So, FY2020 would need to have additional profit made available. There is
already some profit in the pipeline model for FY2020 visible from the early contributions from
the United House transaction but to ‘backfill’ for the IPRS some of the new capital will need
to be making a contribution. The Board has stated that the new capital will have been fully
deployed by mid-to-late calendar 2017, so from this we can see how the additional
contribution required by March 2020 can be delivered.

To our minds, this latter point in particular brings the practical impact of the new fund raising
much more into the near term, rather than seeing it as only being able to impact from
beyond FY2019F. Therefore, the fund raise needs to be viewed in parallel with the decision
to make sales into the IPRS channel. Having the new funds in place allows Telford to be
confident that additional developments will backfill for the schemes that IPRS brings
forwards.

FY2020F and beyond – we are not currently forecasting into this timeframe as too little of
the pipeline is today in place. The United House transaction certainly began to build the
pipeline in this period but with the IPRS sales bringing sale forwards from these later years
the new capital will be an important factor in increasing the scale of the pipeline beyond
2020.

Conclusion

We see this alignment with IPRS investors as an important and highly beneficial
development for Telford Homes. We see that it could provide a new and potentially
substantial class of buyer, allow the group to make highly comparable total returns versus
open market sales, to improve internal and external trading visibility and the ability at the
same time to de-risk the group.

FY2018F surrenders some profit to
FY2017F and also brings some
forwards from later years

FY2019F is expected to bring profit
forwards from beyond the current
forecast window.

We expect IPRS to continue to
bring benefit well beyond FY2020

Raising money has become uncommon in this sector

That Telford has raised new equity capital can appear out of line with what is happening
elsewhere in the house building sector. The group is consuming capital at a time when the
rest of the sector seems to be running large capital surpluses and, instead, returning capital
to shareholders. In reality the story is somewhat more complex than this and reflects very
different strategic approaches taken by Telford and those in the volume sector.

So, why does it appear that the volume house builders are releasing capital while Telford
looks to be consuming it?

Cyclical quirks

The high free cash flows of this cycle for the volume house builders are, in our view, a quirk
or near-freak occurrence and that the more natural profile for a house builder mid-cycle
(which is where we still believe that we are in the national, mainstream, family housing
market) would be to be consuming capital as they expand into a visibly available and under-
supplied market. What Telford is doing by investing in order to grow is more traditional, more
‘old-school’ and, in our view, the right thing to be doing at this stage, although it does not
prevent it from looking out of step.

Land creditors – the volume house builders are generating ‘free’ capital surpluses by not
paying land owners for land until much later in the cycle. We see this as both a quirk of this
cycle (high land supply and low competition) and a feature limited to the ex-London markets.

Government stimulus – between 33-40% of the volume housing stock sold today requires
the buyer to use ‘help-to-buy’ (HTB) mortgages. This has made selling houses both quicker
and cheaper than would otherwise have been possible given affordability levels. Volume
house builders are able to sell houses at close to 100% of the asking price (more normally
95-96%) while incurring minimal incentive costs (cash or capital). These features are simply
not repeatable in the London market where Telford has made only a handful of HTB sales
since the scheme began.

The large house builders are reluctant to grow – while the more mid-cap builders are
expanding, the ‘big 3’ of Barratt , Taylor Wimpey and Persimmon are likely to show output
growth decelerating to just 3-4% by 2018. That means an unusually higher EBIT-to-cash
conversion now but does risk starving shareholders of growth much later in the cycle.

Model change

Telford has an emerging and changing business model which means that it is building
generally larger schemes with longer development cycles than it has hitherto. Couple this
with a desire to expand the group’s scale more broadly and it is clear that additional capital
was needed. To be pursuing a higher rate of growth such as this is uncommon in the sector
at present and even the smaller to medium-sized volume builders, seen as more growth
orientated, are only seeking relatively modest expansion.

The way things used to be

House builders raising equity capital in order to grow was very much the norm historically,
and has long been a mechanism used by Telford Homes. However, it has been a long time
since most house builders sought additional funds or growth capital in this way. Between
An ‘old school’ approach to growth for a house builder Cash generating house builders are, in our view, just a quirk
We do not see the current elements that boost house builders free cash as sustainable
There is free cash in the volume

House builders can, in the long term, only growth by consuming more capital

2000 and 2007 the preferred method for funding growth was using additional debt or by
making paper-for-paper consolidating acquisitions. In the current phase of the housing
market, there has been a high level of free cash flow for the various reasons we highlight
above coupled with a lack of desire in many cases to grow significantly after the initial
recovery period post 2009.

Telford has a naturally more cash consumptive model

In order to expand Telford has to buy more land, hold that land for perhaps three years with
limited scope to release the capital until completion and commit 80+% of the GDV in working
capital before being able to release material capital. Volume house builders would expect to
be net cash generative within less than one year after deployment of new capital.

Despite being a path less trodden, raising equity for growth is a natural progression for
Telford’s business model, it has historically been the norm for growing house builders and is,
in our view, the right thing for this group to be doing as this stage in its evolution.

Telford has a naturally more cash consumptive model than a volume
house builder

London – still a great place to do business

Raising new capital for growth is all well and good as long as the available market and buyer
demand remains intact. The media has sought, for some time, to portray the London
housing market as being in a bubble that is about to burst, causing demand to close down
and selling prices to reverse. We disagree and see almost the polar opposite of this with the
locales and product positioning that the group looks to service in London instead showing
strong, positive dynamics.

Population and the chronic under-supply in London

The rate of household formation growth in London due to population expansion drives a
notional need for 50,000-60,000 new homes per annum (owned or rental, private or public).
Replacement of old stock lifts this a little higher still in practice. In 2014, only around 18,000
new homes were built across all London boroughs despite housing being listed as a key
focus by the Mayor and the GLA. This current under-supply adds to an existing backlog that
reaches back 20 years or more, leaving London overall with at least 800,000 fewer homes
than it needs.

Home ownership in London has been materially lower than the national average for many
years so the tenure of new housing developed in the capital is always set to be different
from the profile of volume house building outside the capital. Therefore, it is important that
any housing developer in London is able to provide new homes for a variety of tenures. This
fits well with Telford’s highly flexible approach to selling and this has long allowed the group
to present differing buyer profiles depending on market conditions and the dynamics of
individual developments. Through the alignment with the IPRS market, Telford should now
be able to present an even more flexible sales profile.

Fig 3a: London’s micro population change, 2001-2011 Telford’s focus area ringed

Fig 3b: Telford’s current and potential development focus

Source: Housing in London 2014 – GLA/Mayor’s Office

We still see a good market in Telford’s target markets within the capital
Still far too few news homes are being built across London There are significant tenure shifts taking place as part of a long term trend

 

Fig 4: Population growth of London – historical and forecast (000s)

Source: ONS

Fig 5: Population growth vs. household formation, 2001-2011

Source: Housing in London 2014 – GLA/Mayor’s Office

Relative affordability

This is a term widely used by the group and while the price of homes sold by the group
might appear high in a national context, within the London market the group’s selling prices
are certainly at mid-market or below price points. In Figure 6 below we show in red the
historical or likely future locations in which Telford Homes will develop, which supports the
notion of relative affordability.

Fig 6: Average asking price by London borough

Source: Rightmove

Relative affordability is, however, not just about finding the lowest-priced local markets
possible. There are many areas in London where prices are materially lower than the
group’s typical offering but where it would be harder to envisage a reasonable balance of
demand. Telford, for example, will always aim to build only where transport links are good as
this is a key demand driver. Also there are areas where pricing might be relatively attractive
but there could be too great a bias towards a particular class of buyer.

Absolute affordability

Although house prices in London have risen sharply, the same is not true for mortgage payments

As we have argued previously, thanks to the fall in mortgage rates since 2010, the cost of
operating a mortgage in Telford’s chosen local markets has risen by materially less than
headline house price inflation might suggest. While in many areas selling prices are 40% or
more above their post-crisis lows, mortgage costs have increased by materially less. Indeed,
when considering the borrowing profile of a more typical buy-to-let investor (using interest-
only loans and moderate LTVs) it is materially cheaper to operate a mortgage now than it
was in 2009.

There are many parts of London in which homes are still relatively affordable – this is where Telford builds

In the series of charts below we show how an increasing headline average selling price has
been strongly eroded by lower borrowing costs and rising wages. On the latter point, while
wage growth is relatively low by historical measures, there has nonetheless been a rise in
national average wages of some 11% since the start of 2009. We have modelled the London
Borough of Newham, an area we see as being a fair representation of where the group is
building in London.

Mortgage rates at LTVs typical for
the group’s buyers have dropped
sharply in the last 12 months

Wage adjusted mortgage
payments for a typical Telford
buyers are, we believe, lower than
in 2009

The chart in Figure 7 below shows that, in absolute terms, a 75% LTV, five-year fixed rate
mortgage on a 25-year repayment basis costs only 10% more per month in cash terms than
in Q1 of 2009 despite average house prices rising by 37%. An interest-only mortgage on the
same basis actually costs 22% less; interest-only might be more typical for an investor
buyer.

Fig 7: Mortgage costs vs. house prices – cash cost basis (Q1 2009 = index 100)

Source: Bank of England, GLA, ONS, Shore Capital Markets

Adjusting for average wage growth in the same period (see Figure 8), we see that the
repayment mortgage costs 1% less per month versus Q1 2009 and interest-only, 30% less.
While this is a national phenomenon, it is brought into sharper focus in London as this is
where prices have risen the furthest since the low points after the financial crisis and
potentially affordability looks the most pressured.

If a market bubble is in fact inflating as many observers suggest, then by definition the price
of the asset has to have detached markedly from the buyer’s ability to pay for it. As we show
here, that is certainly not the case in the ‘relatively affordable’ parts of the London market in
which Telford operates.

Fig 8: Mortgage costs vs. house prices – wage inflation-adjusted (Q1 2009 = index 100)

Source: Bank of England, GLA, ONS, Shore Capital Markets

Affordability migration or drift

We believe that increasingly
numbers of buyers will seek for
homes in Telford’s chosen local
markets

We see greater wealth benefits in
the London market than elsewhere

Pension reforms are likely to be a
great help in this market

There may be valid concerns about an overpricing of the housing market in the likes of Nine
Elms, Kensington or Westminster but we do not see any such pressures of either excessive
pricing or over-supply in Telford’s locales. Indeed, we believe that demand is likely to move
increasingly into the areas of greater relative affordability, such as Stratford, Poplar,
Newham or Bermondsey where Telford operates today or similar areas in which it is likely to
work in future. Whereas prices in Newham, for example, have risen by ~40% since the start
of 2009, Westminster has seen a rise of 132% and Kensington & Chelsea, 118%.

Other positive factors for new build in London

There are also a number of factors that we believe are still highly favourable to the London
market, and, in particular, new build. These include:

Intergenerational transfers - Generally we believe that there is a far greater level of
capability for new entrants to the housing market to receive financial help from parents or
grandparents in London than elsewhere in the UK due to higher wealth accumulation. We
also see greater scope for more material releasing of equity by trading down than in
provincial markets.

Pensions and the Gen-X surge - Pension freedoms are a potential factor across the UK
but we see the scope being again greater in London. There is a surge in numbers in the
population approaching 55 (peaking in 2019) and we believe that the impact of early tapping
of pension pots is likely to be greatest in the capital. We would expect to see both direct
investment into buy-to-let and cross-generational investment to help first time buyers into
owner-occupation.

All stakeholders in the market desire continued positive market conditions

Investor appetite for London residential is still high
London residential is a discrete global asset class

New build in London is largely divorced from weak transaction
chains

London is largely free of the distorting interventions that impact on the volume housing sector

Stakeholders and policy - Nationally it is not in the interest of any housing market
stakeholder (the BoE, The Treasury, lenders, investors or existing home owners) to see a
major reversal in the housing market. While the seemingly right course of action might be to
raise housing supply, the conference speech by David Cameron on potentially eliminating
social housing provision shows that policy is likely to remain firmly on the demand-side.

Strong investor dynamics - We still see strong and very recent evidence that investor
demand remains high in the London housing market, or perhaps more pertinently, in the
more affordable part in which Telford operates. Demand has been strong right through 2015
to date and even as recently as 8th October Telford sold 18 of 32 remaining units at
Stratosphere (Stratford 3) in just one day.

Global investment demand - London residential is, essentially, a discrete asset class and
is one into which we expect to continue to see a net inflow of funds. London residential is not
only purchased for the pure rental income returns but for many and diverse reasons: it is
seen as a store of value much akin to gold, which investors still buy despite price gyrations
and for many it could be viewed as the Swiss bank account of the 21st Century; geared
capital returns with readily available long-term funding which is not readily repeatable in
other asset classes; capital growth has been steadier and more reliable than many other
asset classes; the UK is a relatively low tax regime for residential; residential investment has
relatively low regulation.

Freedom from chain issues - One of the major problems we see in the wider housing
market is the inability for transaction chains to function. Essentially there are too many
homeowners who would like to move but are unable to because their funding gap is too
wide. New builds, in general, can bypass this problem through the use of mechanisms such
as part-exchange but in general, chain pressures can still be an issue when selling almost
exclusively to owner-occupiers. Telford does not, generally, have the same pressures.

Although owner-occupiers are still an important source of buyer, they are now to be just one
of four sources of buyer with the other three sources being essentially free of potential chain
issues as they are a single point transaction.

House building in London avoids many volume sector pressures - There are some
growing concerns on several issues related to new housing that, while pertinent to the
volume market, do not really apply to new builds in London. This means that while volume
builders could easily see a less rosy climate as we move forwards, the development market
in London is less likely to see such changes.

. Help-to-buy – some national house builders have come to rely very heavily on this state-
funded incentive, which is used by up to 40% of purchasers. The long lead times more
typical of new home purchases in London means that HTB is rarely a feature. If house
price inflation nationally continues to rise, there is a risk that HTB will become more
restricted. While an issue for volume builders, this would have very little impact in Telford
Homes: only a handful of units have been sold since the start of HTB.

. Use of land creditors – the volume house builders have been heavy users of ‘land
creditors’, which allows them to develop sites now but pay later. This has become a key
part of overall capital for some larger house builders. Again this is barely a feature in
London and should such a source of capital reduce nationally, it is unlikely to impact in
London.
. Unreal land environment – the very substantial rise in land coming through the planning
system nationally

Perceived negative for London new build

More recently there have been some new or revised factors that could be seen as being a
negative for the London market (and the investment buyer in particular) and these factors
have raised some questions about sustainability.

Buy-to-let tax changes - Taxation of rental incomes is set to become less favourable by 2020
and this has sparked fears of a reduction in demand or perhaps a sustained sell-off. We continue
to believe that many buyers already have low expectations of making significant net income
(mortgage rates are not dissimilar to net rental yields) but rather look to the geared returns from
only investing 20-30% of the capital but getting back 100% of any inflated return. Some may sell
but we believe most will remain invested. Across the buy-to-let universe a significant number of
assets are owned outright and in London the strong market in recent times has served to push
down LTVs materially.

China - The slower economic growth in China caused some observers to question whether
demand for London residential from the Far East would dry up. We do not see this as: 1)
growth is slowing not reversing in China; 2) the wealthy middle class is still growing (typically
these are Telford’s buyers not the super-rich); 3) there is scope for Chinese investors wary
of local assets or stock markets to seek greater investment diversity internationally; 4) China
is just one market with a significant amount of Telford’s Far East demand coming from Hong
Kong, Malaysia or Singapore.

General interest rate concerns - This is an issue nationally, and in London; we take the
view that mortgage rates have dropped by close to 100bps in the last year so the practical
impact of rising interest rates is likely to be less than was feared 12 months ago. Recent
comments from the Bank of England suggest that rate rises may not come until 2017 and
still rise slowly. Therefore, mortgage interest rates may not return to 2014 levels until 2018
or 2019.

Overall, we see the positives in London outweighing the negatives and also that the
perceived negatives are likely to be less of an issue than many observers might expect.
Other issues or points of concern on housing and policy relate to volume house building in
provincial markets with limited impact in London. However, we believe that these factors
We see concerns over tax changes for buy-to-let as being over-played

We remain positive on demand from the Far East

Balance sheet

The capital base of the group is materially enlarged by this fund raising. Prior to the raise,
the group’s NAV was £120m or 199p per share at the March 2015 balance sheet date.
Therefore, this capital raise drives not only a material increase in the capital base of the
group but also boosts the NAV/share as the fresh equity has been issued at a material
premium (360p) over historical and prospective book values.

Despite the expansion of the balance sheet, the group retains a relatively equity-light capital
structure with higher leverage, which has been the case through most of the group’s 15-year
trading history. Practically, the group’s indebtedness is much lower than the headline due to
the high cover from forward sales and deposits. Although this balance sheet profile is less
common in the volume housing sector in this phase of the housing market (indeed most
house builders have essentially no debt and many have headline net cash), we believe that
the house builders are in practice more indebted than the headline numbers suggest; if the
quasi-debt form of land creditors is treated as debt, the profile of the sector’s balance sheets
changes somewhat.

Nonetheless, the group retains a different capital structure by design and we are happy with
this structure as we have a high level of confidence that the markets remain favourable and
that the group’s developments will continue to sell strongly and deliver our expected levels
of profit and asset turn.

Good for the WACC

In being the only house builder with material gearing, we believe that Telford has an
advantage in that its cost of capital (WACC) is much lower than that of the peer group.
According to the Bloomberg computation of WACC, the volume house builders show capital
cost in the range of 8.0% to 9.6% whereas Telford’s cost of capital is just 6%, reflecting the
lower cost of debt versus equity at this stage.

Higher debt but we see limited risk

As the group has expanded the capital base and enlarged its capacity for bank finance, it is
possible that observers could begin to see a raised risk profile. We disagree with this
viewpoint as we see the London housing market climate as still favourable, with improving
wider economic well-being, as well as the adoption of a wider sales base and as our
confidence in the group to deliver its pipeline through to cash and profit remains high.

While the group’s mode of operation does involve long lead times, from all recent
developments there have been strong forward sales and all active and recently completed
sites have fully sold out within or before expected timeframes.

We see little risk of walkaways

One concern always surrounding larger and longer-running housing developments, especially in
London, is that buyers who have contracted to buy will not fully complete the transaction. While
there are always likely to be buyers for whom circumstances make completion impossible, very
close to 100% of contracts exchanged in recent years have made it through to full legal
A substantially enlarged capital base will fuel long term growth

Telford’s balance sheet remains fairly equity-capital light

Telford has a materially lower WAAC than its peers
While debt is higher, it is very well covered by forward sales and deposits

We see few buyers failing to complete

completion. In the weaker market conditions between 2007 and 2009, there were a number of
buyers unable to complete but we do not see a repeat of this for a range of reasons:

. Buyer quality is higher today – buyers today rarely have greater than 80% LTV and
are typically borrowing without extensive leverage on their income or net worth. In
2006-07, a greater number of buyers bought with a 90% LTV (or higher), some with
considerable personal leverage.
. Higher deposits – buyers are putting in larger down-payments than in the last cycle.
The average selling price is higher, today standing at around £440,000 (materially
higher on some of the later delivery developments) against an average of £250,000 in
2007. In addition, deposits of up to 20% are held (some investor buyers will make a
second 10% down-payment 12 months after exchange) versus a maximum of 10% in
the last cycle. The surrendering of a deposit is, therefore, a substantially greater
undertaking in today’s market.
. Strong re-sale potential – where there were walkaways in 2007-09, the group was
able in essentially every case to re-sell the property and record a similar total revenue
once the retained deposit was taken into account.

Safety first view on deposits

The strength of the investment buyer market in the past 2-3 years has been exceptional and
many of the schemes brought to market have achieved 80+% reservations rates within the
first few days or weeks after the launch. As buyers are now required to pay a minimum 10%
on exchange (plus another 10% a year later if they are an investment or early buyer) a
considerable bank of cash has accrued that has helped to reduce the working capital burden
for the group. At the last balance sheet date, the group held some £63.7m (now c.£67m
after recent site launches such as Bermondsey Works and Manhattan) in pre-payments from
buyers and, although this figure is likely to change (depending on the balance between new
site launches and the levels of legal completions), it is expected to remain at a substantial
level through the rest of this financial year.

The reason the deposit bank has been so high has been because recent development
launches have attracted a greater number of investment buyers. In FY2014A, the group
reported that around one-third of buyers were owner-occupiers, where exchange of
contracts is typically later in the development cycle and typically three to six months before
handover. In FY2015A, owner-occupiers were 13% of forward sales leaving a greater
proportion of earlier deposits on a materially larger pipeline (forward sales at March 2014
were £341m on a pipeline value of £875m and at March 2015 £550m of forward sales were
secured on a pipeline of £1,070m). Therefore, it is easy to see how this forward funding
position was so strong.

While the pipeline is growing, it is probably more prudent to assume that the very high levels
of early demand seen in the past two years do not continue at quite the same pace as the
housing market has been cooling in London (but is still positive in Telford’s locations).
However, offsetting this is the group’s intention to undertake one or more IPRS schemes
where the cash flow profile is even more compressed towards the early weeks and months
The bank of deposits held by Telford is, and is expected to remain, high

A longer, larger pipeline and more early buyers than is seen in open market sales. Overall, the level of forward selling cash from all sources
is likely to increase, dependent on the precise timing of any IPRS transaction.

Leverage effect

Telford has a long record of successfully running with a more leveraged balance sheet

The capital base is expanding
rapidly

As already mentioned, Telford Homes has always been comfortable running a more highly
leveraged balance sheet with a relatively low level of shareholders’ equity. Going forwards
the group intends to continue to run with relatively high leverage due to investment made in
generally higher-value sites, the greater numbers of sites and the naturally higher levels of
work-in-progress on higher GDV developments.

We have been forecasting a peak in gearing in FY2017F for some time now and, despite the
raising of the new equity, we continue to forecast a similar timing and similar peak for
gearing, highlighting that the group intends to use the monies from the placing to scale up
the business, not pay down the debt. Running the balance sheet as forecast with higher
leverage and higher levels of capital employed (see Figure 9) shows high confidence by
management in the market and its position within it and underscores, as below, that there is
no shortage of ambition here.

Larger capital base for a larger business

Our cash flow and balance sheet forecasts suggest that by the end of the current forecast
window in FY2019F, the group will have close to £500m of total capital employed in its
housing operations, which compares with just £101m in FY2014A and £173m in the
FY2015A balance sheet.

The pace at which the capital employed is growing is impressive and again underscores the
scale of management’s confidence and ambitions for the group.

up to page 23

RE - Lime harbour

Planning permission granted 3rd November for the increase in number of apartments . Its only taken a few months to get through Tower Hamlets

SHARE PRICE % below 52 week high

For those who like to compare.
MJG.......down 3%
BWY.......down 7%
RDW.....down 11%
TW.......down 11%
BKG.....down 12%
CRST....down 13%
PSM......down 13%
BDEV....down 14%
BVS......down 18%
TEF.......down 22%

one interpretation of that is that we have fallen too far and have the most to gain to reach the previous 52 week high.

Published: Nov 18, 2015 10:45 a.m. ET By JEFFRY BARTASH
Yet rebound in permits signal increase in construction

The National Guard was plenty busy in October when heavy flooding wracked South Carolina. But many home builders had to put construction on hold.
WASHINGTON (MarketWatch) — Home builders scaled back construction in October, especiall in the South where storms and flooding disrupted work.

So-called housing starts fell 11% last month to an annual rate of 1.06 million, the Commerce Department said Wednesday. That’s the lowest level since March.

Housing starts in September were also revised down slightly to a seasonally adjusted 1.19 million rate.

Yet a rebound in permits to build new homes suggests the slowdown in October is likely to be temporary. Permits rose 4.1% last month to a 1.15 million annual rate.

The reduced level of construction in October occurred primarily in the South, where starts fell 18.6%. Half of all new homes are being built in the South, the fastest growing part of the country.

Permits to build new homes in the South, however, rose in October to the highest level in eight years, a sign builders are moving forward with new construction.

What’s more, nationwide permits for single-family homes rose 2.4% in October to an annual rate of 711,000. That’s the highest level since the end of 2007. Single-family homes account for about three-quarters of the U.S. housing market.

“Rising building permits signal that housing activity remains on an expansionary path,” said Gregory Daco, head of U.S. macroeconomics at Oxford Economics. Sales and construction of new homes have been rising amid a surge in hiring and an improved U.S. economy.

The number of new homes already under construction is also at a seven-year high. What’s especially hot are buildings with five units or more that are likely to be rented. Construction on these buildings hit a 41-year peak last month.

An improving housing market has been one of the bright spots for the U.S. economy over the past year. While a bit of a slowdown is expected during the winter, builders are still very optimistic.
-------------------------
Builders dial back confidence in November - Published: Nov 17, 2015 10:25 a.m.
Home builder index drops but still showing ‘good’ conditions, NAHB says - By ANDREA RIQUIER

Sentiment among home builders eased but remained strong in November, according to a closely-watched index.

The National Association of Home Builders/Wells Fargo housing market index pulled back 3 points to 62, a bit weaker than the 64 reading expected by economists polled by MarketWatch. That’s 4 points higher than the reading of 58 notched a year ago, and the average so far in 2015, also 58. A reading over 50 signals improvement.

Builder views of sales conditions in the next six months fell 5 points to 70. The index measuring views of current conditions dipped 3 points to 67. The buyer traffic index rose 1 point to 48. That index hasn’t topped the neutral 50 line since 2005.

An improving job market and increasing wages are bolstering the housing market. The unemployment rate is at the lowest level since the recession, and inflation-adjusted wages have climbed 2.4% in the past 12 months, the Labor Department separately said Wednesday.

Home builders broke ground on more homes than at any time since 2007 in September, and demand for both new and previously owned homes remains hotter than supply.

Builder confidence was mostly elevated in 2015, despite the dip in November. But NAHB noted in a release that “members continue to voice concerns about the availability of lots and labor.”

Builders have reported strong results in the most recent earnings season. D.R. Horton DHI, +0.86% , the largest U.S. company, reported a 44% jump in profit in the most recent quarter, with orders up 19%.

Lennar LEN, +0.63% , the number-two builder by volume, also reported profit and revenue that were better than expected. Orders rose more than 10%, the company said.

An exchange-traded fund tracking the home builders, the SPDR S&P Homebuilders ETF XHB, +0.79% , was slightly higher on Wednesday and has climbed 10% over the last year.

From the Telegraph - 28 November 2015

Will the buy-to-let tax derail housebuilders' shares?

The Autumn Statement offered both good and bad news for housebuilders. We asked leading fund managers how they view the firms' prospects now

Housebuilder shares have soared since the financial crisis.

Housebuilders' shares have rocketed over the past five years, benefiting from favourable government policies, record low interest rates and cheap mortgages.
Rising house prices and pent-up demand outweighing supply have been a winning formula for those investors who bravely bought these bombed-out shares five years ago.
As the table below shows, all of the shares in the sector had rock-bottom valuations five years ago. The majority had a "price to book" ratio of the less than one, offering investors a discount to the value of the firm’s assets.

Those investors who bought in have reaped the rewards – shares in Taylor Wimpey and Barratt Developments, for example, have risen by more than 600pc.
Last week, however, prices were turbulent in the wake two unexpected political moves: one of them positive and the other negative for housebuilding businesses.

The good news, a government pledge to deliver 400,000 new homes by the end of the decade, leaked out before the Chancellor, George Osborne, even stood up to deliver his Autumn Statement on Wednesday.
Shares in the sector rallied, with the majority making gains of 4pc or more in the first couple of hours of trading.
But when Mr Osborne delivered his speech, which included an unexpected stamp duty hike for buy-to-let investors, share prices fell, giving up around half their gains.

Investors took profits amid fears that the surprise tax increase could dampen overseas investor interest and pull the plug on developments that are already in the pipeline.

Fund managers' reactions: the bears
Chris White, head of equities at Premier, a fund manager, is in the bearish camp and sold shares in his last housebuilder, Crest Nicholson, a couple of weeks ago, in expectation of “potential storm clouds on the horizon” for the housebuilders.
Mr White said: “Although the Government wants to encourage housebuilding, partly to give the economy a boost, the Autumn Statement has hit landlords and potential second home owners, which will be negative at the margins.
“This gives us some concern that prices and volumes may not meet market expectations in 2016. Both labour and materials costs are rising, which may put pressure on profits.”

Another negative point is the fact that an interest rate rise is on the cards in America next month, which is likely to be followed in Britain in the second half of next year.
A rising interest rate environment does not usually correlate with positive performance for housebuilders' shares, as rising mortgage costs tend to put the brakes on demand for new properties.
The final note of caution is that valuations have arguably become too expensive, with the sector becoming more and more popular with investors. As the table shows, on the "price to book" measure valuations have more than trebled in most cases.

Share price performance over five years
Price to book ratio five years ago
Price to book ratio today
Taylor Wimpey
661%
0.7
2.4
Barratt Developments
691%
0.3
1.6
Persimmon
422%
0.9
2.6
Berkeley Group
278%
1.3
2.6
Bellway
369%
0.7
2
Redrow
299%
0.7
1.8
Crest Nicholson
95% (since February 2013)
N/A*
2.5
Bovis Homes
175%
0.8
1.4
Galliford Try
411%
0.5
2.1
* Was not listed on the stock market five years ago
Source: ShareScope

Fund managers' reactions: the bulls
But fund managers who are not rushing to bank their profits say the interest rate argument does not stack up. Rates will rise only slightly and slowly, they say.
They also disagree that, together, the two policy measures will negatively affect the housebuilders.

Richard Watts, who runs the Old Mutual UK Mid Cap fund, has been a big backer of the sector over the past couple of years and remains so.
Mr Watts said the shares were no longer bargains, but, given the shortage of houses, first-time buyers would fill any gap in demand left by buy-to-let investors.

Luke Newman, co-manager of the Henderson UK Absolute Return fund, agreed. He said: “Britain does not have enough houses to keep pace with its growing population. In recent years the Government has tried to stimulate housebuilding through policies such as the Help to Buy scheme, the loosening of planning laws and curbing local authorities’ ability to block development.
“The announcements of plans for 400,000 new affordable homes in England by 2020 and a new Help to Buy scheme for London are a welcome continuation of this policy.”
Other professional investors pointed to the fact that housebuilders were “cash rich” and would continue to return money to shareholders in the form of dividend payments.

Julian Chillingworth, chief investment officer at Rathbones, the fund group, said he viewed the sector as more of an income investment, rather than expecting a repeat of the huge share price gains in the coming years.
“The housebuilders are in strong financial positions and have plenty of cash," he said. "The yields are attractive and I expect some one-off payments – special dividends – also to be paid from time to time.”

Dividend yield*
Dividend cover
Taylor Wimpey
5%
1.6
Barratt Developments
5.2%
1.7
Persimmon
5.1%
1.7
Berkeley Group
4.7%
1.6
Bellway
3.6%
3
Redrow
2.1%
5.6
Crest Nicholson
3.7%
2.5
Bovis Homes
4.4%
2.4
Galliford Try
5.6%
1.6
* Forecast – based on analysts' expectations in one year's time.
http://www.telegraph.co.uk/finance/personalfinance/investing/shares/12021154/Will-the-buy-to-let-tax-derail-housebuilders-shares.html

H1 results this Wednesday?
380p
There is a lot of comment in the press at the moment about home builders shares being "toppy" right now but with the housing market the way it is, there could well be significant SP growth to come for all of them. They are priced very cheaply against the wider market in P/E terms anyway.
On the basis of the two detailed broker notes issued recently, TEFs has an EV of about 459p to 465p for December so there is a healthy margin of safety for buyers at the present SP and it will be interesting to see what the company has to say when it publishes its H1 results this Wednesday.

It would be helpful if HPI does not exceed about 5% per annum from now onwards to prevent affordability criteria becoming stretched. There is a risk that the BOE may tighten lending restrictions on private BTL landlords this week but doubtless the homebuilders will negotiate more favourably with their regular,repeat purchase BTL clients.
At the end of the day, the government wants more homes built and they are not going to achieve that by discouraging buyers of any type and you don't help the lower end first time buyers by bashing the market further up the ladder.