Regeneration Driving Future Growth Morgan Sindall Group plc 6 June 2017
Regeneration Driving Future Growth
Morgan Sindall Group plc 6 June 2017
2
Today’s schedule
1245 Regeneration and the Morgan Sindall Group John Morgan
1300 Overview of Partnership Housing Jonathan Goring
1335 Overview of Urban Regeneration Matt Crompton
1410 End of presentations
1415 Travel to Woolwich
1530 Woolwich: the scheme in detail and site visit Jonathan Goring
1615 Discussion
3
Introduction to speakers
John Morgan Chief Executive, Morgan Sindall Group plc
Jonathan Goring Managing Director, Partnership Housing
Matt Crompton Managing Director, Urban Regeneration
Construction Regeneration
Construction & Infrastructure Fit Out Property
Services Partnership Housing Urban Regeneration
Delivery of vital UK infrastructure and construction
Fit out of new and existing
offices
Housing maintenance programmes
Housing-led regeneration – massive supply/demand
imbalance
Mixed-use urban regeneration is a key UK
priority
Underpinning Group company activities
Morgan Sindall Group today
4
5
Group strengths
Aligned to growth markets
Strong profit growth
momentum
Clear strategy for growth
Well defenced against
cyclicality
Diverse portfolio of businesses
Empowered culture
Strong balance sheet
Long-term relationships
6
What Regeneration means to Morgan Sindall Group
“There is a pressing need to make Europe’s cities more competitive, resilient and sustainable and this challenge is at the heart of the urban regeneration process. However, the successful reuse of brownfield land and the reinvention of redundant or forgotten parts of a city, is a highly complex process and requires insight and cooperation from a diverse range of disciplines.” (Urban Land Institute, 2017) “A process that reverses physical, economic and social decline in an area where market forces will not do this without government intervention.” (UK Government, 2007)
Regeneration
Development agreements
Visibility of pipeline
Long-term profit streams
High on agenda for all
political parties
Understand and react to public sector
needs
Fits the Group’s
culture and skill set
Large, growing market
Addresses need for housing
Urban infrastructure
not fit for purpose
20% ROCE potential
High barriers to entry
Reputation and track
record matters
Long lead-in times
Why Regeneration?
Based on average daily
capital employed
7
Construction activities
58%
Regeneration activities
42%
Urban Regeneration
21% Partnership Housing
21%
Our Regeneration business
% of 2016 Group profit1 • Regeneration activities contributed £26.8m of operating profit in 2016
• Total average capital employed across Regeneration activities in 2016 of c£190m
• Targeting return from Regeneration activities of 20% in the medium term
• Expect to broadly double capital employed in Regeneration activities over next five years
8
1 pre Central costs and Investments
9
Partnership Housing
Jonathan Goring
10
Lovell today
£m 2016
Average capital employed1 111
Revenue 433
Operating profit2 13.4
Housing-led regeneration
1 Capital employed is calculated as total assets (excluding goodwill, intangibles and cash/overdraft) less total liabilities 2 Adjusted
mixed tenure homes built 1060
national partnerships 14
employees 901
regional offices 7
57 mixed tenure
sites
Pipeline value
£764m
Order book
£445m 6 new mixed tenure
developments
11 Mixed tenure : Value £78m : 2012 – 2022 : 678 homes
This is what we do…. Hull Ings, Hull
12
The Mill, Cardiff This is what we do….
Mixed tenure : Value £110m : 2016 – 2022 : 800 homes
13
Lymington Mews, Dagenham This is what we do….
Mixed tenure : Value £102m : 2014 – 2018 : 416 homes
14
Miles Platting, Manchester This is what we do….
Mixed tenure : Value £135m : 2006 – 2023 : 700 homes
15
This is what we do…. King’s Lynn, Norfolk
Mixed tenure : Value £80m : 2016 – 2022 : 600 homes
16
Beacon Barracks, Stafford
This is what we do….
Contracting : Contract value £52m : 2015 – 2016 : 357 homes delivered in under 12 months
Contracting 53%
Mixed tenure 47%
What we do….
% revenue by activity1
1 For the year ended 31/12/16
17
Mixed tenure
• Via development agreements with Housing Associations and Local Authorities
• Schemes include housing built for open market sale and contracted housing for rent
• Primary performance metric is Return on Capital Employed (ROCE)
Contracting • Via construction contracts with Housing Associations and Local
Authorities
• Contracts for new build social housing, refurbishment and planned maintenance
• Primary performance metric is % margin
How we do it – mixed tenure
Identify LAs 1 & HAs 2 looking for partnerships
SECURE DEVELOPMENT AGREEMENTS
Source suitable land to bring to
partnerships
VIABILITY TEST
Build social housing to
rent
Build houses for sale
Stage payments through
construction
Sell houses
Houses handed over
to LA/HA
Cash and profit on completion
and sale
Total scheme ROCE
1 Local Authorities 2 Housing Associations
18
Invest in WIP
Mixed tenure scheme example
Inve
st in
site
infr
astr
uctu
re
19
Who we do it with….
20
Looking ahead
21
• c250,000 houses required per annum – still a severe shortfall • Housing very high on political agenda for all parties • Forward funding available for private and social rental • £10bn Central Government funds for mixed tenure; partnership, infrastructure
and accelerated delivery • Schemes are increasing in size – Local Authorities under pressure to address all
asset alternatives
Market drivers
Order book and pipeline
22
Note: Order book represents the share of future revenue that will be derived from signed contracts. The Pipeline represents the share of the development value of the open market housing part of secured mixed tenure schemes.
63% 37%
Order book and secured development pipeline total
value of £1.2bn1
In addition, preferred
bidder on six new mixed tenure developments with
value c£350m
Significant level of ongoing dialogue on partnering
with HAs/LAs
1 As at 31/12/16
Order book 37% Secured
pipeline 63%
East Anglia 12%
Eastern 2%
London 41%
Midlands 13%
NW & N Wales
15%
Scotland 7%
SW & S Wales
10%
Total value of £1.2bn
23
Mixed tenure partnership developments
Sales period
Construction start to first legal completion
2017 2018 2019 2020 2021 2022 2023
Long-term visibility of mixed tenure profits
Mix
ed te
nure
site
s
Currently 57 mixed tenure sites • at various stages of construction and sales • average of 102 open market units per site • average site duration of 33 months
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• Accelerated delivery – off site manufacturing and track record secures partner status with HCA
• Unlocking Government land through investment in data to develop land-led partnerships
• Technology platform addresses current buying patterns and secures early sales
• Accessible homes target First Time Buyers
Future success factors
25
Route to growth in the medium term
2016 Medium-term target
ROCE 12% >20%
• Positive market for social rent and open market
• Strong order book and pipeline
• Increasing number of larger mixed tenure partnership schemes
• Recycling ‘slower-moving’ capital shared equity1 (£18m) investment properties1 (£7m)
1 Book value as at 31/12/16
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• Ambition to increase capital employed to c£250m over five-year period
current market imbalance accelerates the housing agenda
good visibility of future investment through current order book and pipeline
further leverage off our track record and relationships to support partners with their housing needs
maximise partnership opportunities through rigorous land sourcing
Growth in the longer term
27
Urban Regeneration
Matt Crompton
28
Muse today
£m 2016
Average capital employed1 80.0
Revenue 156
Operating profit2 13.4 Mixed-use urban regeneration
1 Capital employed is calculated as total assets (excluding goodwill, intangibles and cash/overdraft) less total liabilities (excluding corporation tax, deferred tax and inter-company financing). Average non-recourse debt in 2016 was £14.7m and deferred consideration was £11.4m 2 Adjusted before intangible amortisation
29 1st phase urban residential : £375m total project development value : 2006 – 2021
This is what we do.… Lewisham Gateway
Before
30
This is what we do.… Rathbone Market, Canning Town
Three phases of residential : £200m total project development value : 2007 – 2017
Before
31 5th phase neighbourhood residential : £650m total project development value : 2006 – 2026
This is what we do.… Timekeepers Square, Chapel Street, Salford
Before
32 1st phase neighbourhood residential : £115m total project development value : 2011 – 2019
This is what we do.… Wapping Wharf, Bristol
Before
33
This is what we do.… One New Bailey, Salford
4th phase city centre offices : £650m total project development value : 2006 – 2025
Before
34 2nd phase (part) town centre offices : £145m total project development value : 2015 – 2027
This is what we do.… One Stockport Exchange
Before
35
This is what we do.… Holiday Inn Express, Stockport
2nd phase (part) town centre hotel : £145m total project development value : 2015 – 2027
Before
36
This is what we do.… The Word, South Shields
1st phase leisure scheme : £100m total project development value : 2013 – 2021
Before
37
This is what we do.… New Bailey Multi-Storey Car Park (MSCP), Salford
3rd phase car park : £650m total project development value : 2006 – 2026
Before
38
How we do it….
Schemes usually secured via development agreements
MUSE RESPONSIBILITIES
Secure planning Primary infrastructure
Development management
LANDOWNER RESPONSIBILITIES
Hold land in trust Release on demand
Reward = Profit Reward = Enhanced land value
Terms would include • each phase subject to viability testing • land drawdown at prevailing land value
Establish long term relationships with landowners through development agreements
39
How we do it….
LAND
DEVELOPMENT COSTS
MARGIN
MARGIN
DEVELOPMENT COSTS
MARGIN
LAND
LAND MARGIN
base case
£100m Upside
Downside
Muse model Development Agreements ordinarily reflect priority distribution of receipts
1. Development costs
2. Agreed overhead and profit
to Muse
3. Land value
4. Overage agreement above base
Traditional model
40
Who we do it with….
41
Strategic joint ventures
Fund size: £100 million Fund size: £100 million
42
Case study – Salford Central (through English Cities fund)
• Public/private Development Agreement
• £650m GDV1
• 20-year agreement • Scale:
- 1,094 residential units
- 390 PRS units
- 1.6m sq ft offices
- 390 hotel bedrooms
- 250,000 sq ft retail/leisure
- 1,258 MSCP2 spaces
1 Gross Development Value (100%) 2 Multi-storey car park
43
Case study – Salford Central (through English Cities fund)
Timeline up to the commencement of construction
2006 2007 2008 2009 2010 2011 2012 2013
Development Agreement
Planning guidance
Development Framework
Outline planning consent
CPO1 Inquiry
CPO1 confirmation
Land assembly/ vesting
Start on site
1 Compulsory Purchase Order
44
Case study – Salford Central (through English Cities fund)
Sources of funding to improve returns
Private home buyers ▼ PRS investors ▼
Institutional property investors ▼
Annuity lease structures ▼
Gap funding ►
Cross-subsidy ▼
45
Looking ahead
46
Market drivers
Residential
• c250,000 homes per annum required
• Housing White Paper focus
• Established national and local relationships
• Private Rented Sector demand
Offices
• Above average regional take-up
• Regional supply continues to fall
• Attractive yields
• Public sector office rationalisation
Industrial & distribution
• Unprecedented on-line retailer demand
• Limited speculative development
• Opportunities for ‘bespoke’ pre-let development
• Convenience stores proving resilient
• Leisure spending continues to grow
• Rise in ‘boutique’ cinema demand
• New hotel entrants and a mix of tenures
Retail/ Leisure
47
Forward development pipeline
South East & London
38%
South West 13%
North West 30%
Yorks/NE 16%
Scotland 3%
Development pipeline by region
Offices 32%
Retail 6%
Leisure 6% Industrial
7%
Residential 46%
Other 3%
Development pipeline by sector
Forward pipeline1 of £2.2bn with broad geographic and
sector spread provides long- term visibility
1 As at 31/12/16
Current bidding activity strong, with c£1.5bn GDV of
bid opportunities
48
£ GDV Project
170m Brixton
107m Warrington
248m WP Brentford
375m Lewisham
75m Stroudley Walk
200m WP Hale Wharf
107m Aberdeen
250m New Victoria
300m Stockton
200m ECf Canning Town
650m ECf Salford
250m Hucknall
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Expected flow of profit from top projects (by GDV)
£ = profit earned
Long-term visibility of profits
£ £ £
£ £ £ £
£ £ £ £
£ £
£ £
£
£ £ £ £
£ £ £ £ £
£ £
£
£ £ £
£
£
£ £ £ £ £
£ £ £ £ £ £
£ £ £ £ £ £ £ £ £ £
£ £ £ £ £ £ £ £ £ £
49
Route to growth in the medium term
2016 Medium-term target
ROCE 15% Towards 20%
• Positive market dynamics
• Growing and strengthening pipeline, augmented by further selective bidding
• Continued efficient use of capital and funding sources
• Recycling ‘slower-moving’ capital
50
• Ambition to increase capital employed to c£150m over five-year period expected to be £90m+ in 2017
scheduled completions indicate material phasing of profit to 2018, with lower profit in 2017
• Success factors long-term pipeline significant visible opportunities favourable market dynamics competitive advantage of track record and capability
Growth in the longer term
Regeneration is perpetual …
51
Woolwich Regeneration
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A deteriorating estate
Maryon Grove Estate
In 2010, The Royal Borough of Greenwich made the decision to demolish and regenerate three
of their most challenging estates in Woolwich
Connaught Rd Estate
Morris Walk Estate
53
The development – a summary
• £450m GDV partnership with Royal Borough of Greenwich
• Major demolition programme • Creating 1,500 high-quality homes (1,000
open market) • Seven phases over three estates; each
triggered by viability tests • Currently one year ahead of our 12-year
construction programme • Partnership awarded based on quality
54
Regeneration programme
Peak construction of 250 homes per annum
targeted
2013 Preferred bidder
selection
2011 – 2012 Competitive
dialogue
2013 – 2015 Final
negotiations
2013 – 2015 Planning &
decant
2015 – 2017 Phase 1
construction
2016 – 2018 Site 2 (phase 4) planning
& consultation
2017 – 2030 Phase 2-7 construction
& sales 2015 Contract signature
2016 First sales (off–plan)
55
Wider Regeneration offer
• Community Trust established to fund local
projects within Greenwich area • 88 apprenticeships created for the local
community • Engagement with local schools • High Considerate Constructors Score • Supporting local business and employment
Pictured: Social enterprise café supporting local charity and employing vulnerable young people
56
Development agreement
• 20-year development agreement • Seven phases over three sites • ROCE and margin used to
determine land value for each phase
• Overage agreements in place • Option to change tenure phase by
phase
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Appendix
58
Capital employed in Regeneration
£mRegeneration Partnership
HousingUrban
Regeneration
Total net land & regeneration WIP 196 113 83
Unsold completed units (excl JVs) 4 2 2
Amounts invested in joint ventures 35 - 35
Shared equity loans and investment properties 25 25 -
Other working capital -117 -79 -38
Non-recourse debt -5 - -5
Deferred consideration -8 - -8
Other net assets 3 3 -
Average Capital employed in 2016 191 111 80
Total capital employed at 31 December 2016 133 64 69