Regeneration Driving Future Growth Morgan Sindall Group plc 6 June 2017
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 2
Introduction to speakers John Morgan Chief Executive, Morgan Sindall Group plc Jonathan Goring Managing Director, Partnership Housing Matt Crompton Managing Director, Urban Regeneration 3
Morgan Sindall Group today 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 4
Group strengths Long-term relationships Clear strategy for growth Aligned to growth markets Well defenced against cyclicality Strong balance sheet Diverse portfolio of businesses Empowered culture Strong profit growth momentum 5
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) 6
Why Regeneration? Visibility of pipeline Development agreements Long-term profit streams High barriers to entry Reputation and track record matters Long lead-in times High on agenda for all political parties Regeneration 20% ROCE potential Based on average daily capital employed 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 7
Our Regeneration business % of 2016 Group profit 1 Regeneration activities contributed 26.8m of operating profit in 2016 Construction activities 58% Regeneration activities 42% Urban Regeneration 21% Partnership Housing 21% 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 1 pre Central costs and Investments 8
Partnership Housing Jonathan Goring 9
Lovell today Housing-led regeneration m 2016 Average capital employed 1 111 Revenue 433 Operating profit 2 13.4 mixed tenure homes built 1060 6 new mixed tenure developments 7 regional offices 57 mixed tenure sites 901 employees national 14 partnerships Pipeline value 764m Order book 445m 1 Capital employed is calculated as total assets (excluding goodwill, intangibles and cash/overdraft) less total liabilities 2 Adjusted 10
This is what we do. Hull Ings, Hull Mixed tenure : Value 78m : 2012 2022 : 678 homes 11
This is what we do. The Mill, Cardiff Mixed tenure : Value 110m : 2016 2022 : 800 homes 12
This is what we do. Lymington Mews, Dagenham Mixed tenure : Value 102m : 2014 2018 : 416 homes 13
This is what we do. Miles Platting, Manchester Mixed tenure : Value 135m : 2006 2023 : 700 homes 14
This is what we do. King s Lynn, Norfolk Mixed tenure : Value 80m : 2016 2022 : 600 homes 15
This is what we do. Beacon Barracks, Stafford Contracting : Contract value 52m : 2015 2016 : 357 homes delivered in under 12 months 16
What we do. % revenue by activity 1 Mixed tenure Mixed tenure 47% 1 For the year ended 31/12/16 Contracting 53% 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 17
How we do it mixed tenure Source suitable land to bring to partnerships SECURE DEVELOPMENT AGREEMENTS Identify LAs 1 & HAs 2 looking for partnerships VIABILITY TEST Invest in site infrastructure Build social housing to rent Build houses for sale Invest in WIP Stage payments through construction Sell houses Houses handed over to LA/HA Mixed tenure scheme example Cash and profit on completion and sale Total scheme ROCE 1 Local Authorities 2 Housing Associations 18
Who we do it with. 19
Looking ahead 20
Market drivers 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 21
Order book and pipeline Order book and secured development pipeline total value of 1.2bn 1 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 Secured pipeline 63% Total value of 1.2bn Order book 37% 63% Scotland 7% NW & N Wales 15% Midlands 13% SW & S Wales 10% 37% East Anglia 12% London 41% 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. Eastern 2% 22
Mixed tenure partnership developments Mixed tenure sites Long-term visibility of mixed tenure profits 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 Sales period Construction start to first legal completion 2017 2018 2019 2020 2021 2022 2023 23
Future success factors 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 24
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 1 Book value as at 31/12/16 shared equity 1 ( 18m) investment properties 1 ( 7m) 25
Growth in the longer term 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 26
Urban Regeneration Matt Crompton 27
Muse today Mixed-use urban regeneration m 2016 Average capital employed 1 80.0 Revenue 156 Operating profit 2 13.4 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 28
This is what we do. Lewisham Gateway Before 1 st phase urban residential : 375m total project development value : 2006 2021 29
This is what we do. Rathbone Market, Canning Town Before Three phases of residential : 200m total project development value : 2007 2017 30
This is what we do. Timekeepers Square, Chapel Street, Salford Before 5 th phase neighbourhood residential : 650m total project development value : 2006 2026 31
This is what we do. Wapping Wharf, Bristol Before 1 st phase neighbourhood residential : 115m total project development value : 2011 2019 32
This is what we do. One New Bailey, Salford Before 4 th phase city centre offices : 650m total project development value : 2006 2025 33
This is what we do. One Stockport Exchange Before 2 nd phase (part) town centre offices : 145m total project development value : 2015 2027 34
This is what we do. Holiday Inn Express, Stockport Before 2 nd phase (part) town centre hotel : 145m total project development value : 2015 2027 35
This is what we do. The Word, South Shields Before 1 st phase leisure scheme : 100m total project development value : 2013 2021 36
This is what we do. New Bailey Multi-Storey Car Park (MSCP), Salford Before 3 rd phase car park : 650m total project development value : 2006 2026 37
How we do it. Establish long term relationships with landowners through development agreements Schemes usually secured via development agreements Terms would include each phase subject to viability testing land drawdown at prevailing land value MUSE RESPONSIBILITIES Secure planning Primary infrastructure Development management LANDOWNER RESPONSIBILITIES Hold land in trust Release on demand Reward = Profit Reward = Enhanced land value 38
How we do it. 100m base case Traditional model MARGIN MARGIN Upside Downside Muse model LAND MARGIN LAND Development Agreements ordinarily reflect priority distribution of receipts 1. Development costs MARGIN DEVELOPMENT COSTS 2. Agreed overhead and profit to Muse DEVELOPMENT COSTS 3. Land value 4. Overage agreement above base LAND 39
Who we do it with. 40
Strategic joint ventures Fund size: 100 million Fund size: 100 million 41
Case study Salford Central (through English Cities fund) Public/private Development Agreement 650m GDV 1 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 MSCP 2 spaces 1 Gross Development Value (100%) 2 Multi-storey car park 42
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 CPO 1 Inquiry CPO 1 confirmation Land assembly/ vesting Start on site 1 Compulsory Purchase Order 43
Case study Salford Central (through English Cities fund) Sources of funding to improve returns Gap funding Institutional property investors Annuity lease structures Private home buyers PRS investors Cross-subsidy 44
Looking ahead 45
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 Retail/ Leisure Convenience stores proving resilient Leisure spending continues to grow Rise in boutique cinema demand New hotel entrants and a mix of tenures 46
Forward development pipeline Forward pipeline 1 of 2.2bn with broad geographic and sector spread provides longterm visibility Current bidding activity strong, with c 1.5bn GDV of bid opportunities Development pipeline by region Yorks/NE 16% North West 30% Scotland 3% South West 13% South East & London 38% Development pipeline by sector Residential 46% Other 3% Offices 32% Retail 6% Leisure 6% Industrial 7% 1 As at 31/12/16 47
Expected flow of profit from top projects (by GDV) GDV Project 170m 107m 248m 375m 75m 200m 107m 250m 300m 200m 650m 250m Brixton Warrington WP Brentford Lewisham Stroudley Walk WP Hale Wharf Aberdeen New Victoria Stockton ECf Canning Town ECf Salford Hucknall Long-term visibility of profits 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 = profit earned 48
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 49
Growth in the longer term 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 Regeneration is perpetual 50
Woolwich Regeneration 51
A deteriorating 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 Maryon Grove Estate 52
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 53
Regeneration programme 2013 Preferred bidder selection 2015 Contract signature 2016 First sales (off plan) 2017 2030 Phase 2-7 construction & sales 2013 2015 Final negotiations 2015 2017 Phase 1 construction 2016 2018 Site 2 (phase 4) planning & consultation 2011 2012 Competitive dialogue 2013 2015 Planning & decant Peak construction of 250 homes per annum targeted 54
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 55
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 56
Appendix 57
Capital employed in Regeneration m Regeneration Partnership Housing Urban 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 - Total capital employed at 31 December 2016 133 64 69 Average Capital employed in 2016 191 111 80 58