SPR Springfield Properties Plc

20 February 2024                                                                                                                                 

Springfield Properties plc

("Springfield", the "Company", the "Group" or the "Springfield Group")

Interim Results

Springfield Properties (AIM: SPR), a leading housebuilder in Scotland focused on delivering private and affordable housing, announces its interim results for the six months ended 30 November 2023.

Financial Summary

* Includes land sales of £5.2m (H1 2023: £3.7m)

** Adjusted to exclude exceptional costs of £0.9m (H1 2023: £0.6m) (See the Financial Review for further detail)

H1 2024 Operational Summary

·    Total completions of 432 (H1 2023: 673), in line with management expectations, reflecting entering the year with a lower forward order book due to challenging market conditions

·    Private housing demand continued to be impacted by high interest rates, mortgage affordability and reduced homebuyer confidence

·    Recommenced engaging with affordable housing providers following the Scottish Government increasing the affordable housing investment benchmarks

o  Affordable housing contracts totalling c. £40.0m have been signed since 31 May 2023 for delivery in H2 2024 and beyond

·    In response to market conditions, the Board adopted a strategy focusing on maximising cash generation to reduce the Group's debt by year end, including through:  

o  carefully managing working capital and curtailing speculative private housing development by only commencing building homes when they are reserved

o  sustained focus on cost control, with administrative expenses, excluding exceptional items, being reduced to £12.6m (H1 2023: £14.7m)

o  actively pursuing land sales to accelerate cash realisation from the Group's large land bank - with sales totalling £18.0m agreed during and post period, of which £15.0m is expected to be received in H2 2024

o  pausing dividend payments until the bank debt is materially reduced

·    Total owned land bank of 6,421 plots (31 May 2023: 6,712 plots), 86% with planning permission (31 May 2023: 83%), and strategic options over a further 3,217 acres (31 May 2023: 3,255 acres), equating to c. 32,200 plots - one of the largest land banks in Scotland

·    Progress made against the first-year objectives set within the Group's ESG strategy and became the first housebuilder to participate in NextGeneration's Core sustainability benchmarking initiative

Current Trading and Outlook

·    On track to report results for FY 2024 in line with market expectations, including meeting target to reduce net bank debt to c. £55.0m by 31 May 2024

·    Private housing reservation rates in calendar year 2024 are showing initial signs of recovery with a return in homebuyer confidence

·    Demand remains strong in affordable housing, with the Group confident of signing further contracts in the near term

·    Advanced negotiations are underway for further profitable land sales

·    The Scottish Government's emergency rent cap is due to end on 1 April 2024, which offers the prospect of a return of investment in Scotland by private rented sector ("PRS") providers

·    Build cost inflation is continuing to reduce and stabilising around 2.5%

·    Long-term fundamentals of the Scottish housing market remain strong with an undersupply of housing across all tenures and greater private housing affordability than the UK as a whole

·    With a large number of sites with planning already in place, the Group is able to quickly accelerate site development as market conditions improve and is well-placed to satisfy pent-up demand for high-quality, energy efficient housing in attractive locations across the country

Innes Smith, Chief Executive Officer of Springfield Properties, commented: "Trading for the first half of the year was in line with our expectations, and reflects the challenging market conditions experienced across the industry. To mitigate the impacts of the downturn and ensure we are in a stronger position for when trading conditions recover, we took decisive actions to maximise cash generation and reduce our debt by year end. A key element of this was actively pursuing profitable land sales. We are pleased to have agreed sales worth £18m so far and we expect to conclude negotiations for further sales in the near term. 

"Looking ahead, we are encouraged by the improvement in private housing reservations that we have experienced in recent weeks and the signs of increasing homebuyer confidence, as has been reported by other housebuilders. We are receiving strong demand in affordable housing - and have already signed contracts worth c. £40m since 31 May 2023. We are also hopeful that the ending of the Scottish Government's emergency rent cap in April 2024 will enable a return of PRS activity. Alongside this, build cost inflation is continuing to reduce and is expected to stabilise at low levels. We are on track to meet our year-end target for net bank debt, which will continue to reduce in the next financial year.     

"The fundamentals of our business and our position within the Scottish housing market remain strong. We have one of the largest land banks in Scotland with over 6,421 owned plots, 86% of which has planning permission, and a further 3,217 acres of strategic land. We have an excellent reputation of offering high quality, energy efficient homes in desirable locations in key housing markets, and a track record of delivering developments exclusively for affordable housing. In addition, there is an undersupply of housing of all tenures, which can only be addressed through building new homes. As a result, while there remains uncertainty in the near term, with our position having been strengthened through the decisive action that we have taken, we remain confident in Springfield's prospects."

Enquiries

Results Investor Webinar

Innes Smith, Chief Executive Officer, Iain Logan, Chief Financial Officer, and Martin Egan, Chief Operating Officer, will be presenting to retail shareholders via a webinar hosted by Equity Development at 12.45pm GMT on 22 February 2024. Investors can register their attendance for the webinar at the following link: https://www.equitydevelopment.co.uk/news-and-events/spr-investor-presentation-22feb2024

A video recording of the presentation will be available shortly afterwards here.

Operational Review

In line with management expectations, the Group completed 432 homes in the six months to 30 November 2023 (H1 2023: 673). This reflects the challenging market conditions that resulted in the Group entering the year with a lower forward order book than the previous year. With private housing reservations significantly impacted by high interest rates, mortgage affordability and reduced homebuyer confidence, the Group took the strategic decision to curtail speculative private housing development by only commencing building homes when they are reserved. The Board's focus is on maximising cash generation in order to reduce the Group's debt.

A key element of this is the active pursuit of profitable land sales to accelerate cash realisation from its large land bank, with one agreement being signed during the period and two post-period end. Springfield has one of the largest land banks in Scotland with 6,421 owned plots - 86% with planning permission - and strategic options over a further 3,217 acres enabling the Group to make land sales without impacting the Group's medium term development pipeline.

During the period, the Group was pleased to recommence engaging with affordable housing providers. This followed reducing cost price inflation and an increase to the Scottish Government affordable housing investment benchmarks. The Group's focus is on short-term contracts with lower pricing risk, and it has been encouraged by the interest it is receiving, having entered into c. £40m of contracts since 31 May 2023.    

As a result of the decisive actions that have been taken during the period, and with continued careful cost control, the Group is in a stronger position to deliver future growth as more favourable economic and trading conditions return.

Land Bank

A key element of the Group's strategy to reduce net debt is the active pursuit of land sales. Land buying activity was also significantly reduced. The Group entered an agreement for a profitable sale of land for £5.2m during the period and a further two agreements totalling £12.8m post period. The Group is in advanced discussions regarding further profitable land sales and continues to be encouraged by the interest it is receiving in its land bank, a large proportion of which already has planning permission.

At 30 November 2023, the Group had 6,421 owned plots (31 May 2023: 6,712) and strategic options over a further 3,217 acres (31 May 2023: 3,255), equating to c. 32,200 plots. This equates to five years of activity for the owned land bank and 25 years for the strategic land bank.

Of the owned land bank, 86% (31 May 2023: 83%) had planning permission (including detailed and outline planning), which provides an asset for cash generation. The gross development value of the owned land bank at 30 November 2023 was £1.7bn (31 May 2023: £1.9bn).

Approximately 14% of the land under strategic option had planning permission (31 May 2023: c. 14%).

At period end, the Group was active on 50 developments (31 May 2023: 50) and during the period seven developments were completed and seven new developments became active.

Private Housing

The Group entered the period with a lower forward order book than the previous year, with reservation rates having been impacted in FY 2023 by increased mortgage rates combined with ongoing cost-of-living pressures reducing affordability and homebuyer confidence. There was a further negative impact on demand at the beginning of the period following the Bank of England increasing interest rates to 5% towards the end of June 2023. Sales levels remained low over the summer weeks, with a traditional seasonal dip during the school holidays, which continued once schools reopened in August. As a result, and as described further above, the Group decided, in September, to significantly curtail its speculative development activities and only build homes when a reservation is secured. Reservation rates remained subdued, but stable, throughout the remainder of the period. Consequently, the number of private home completions for the period was 279 compared with 429 for the first half of 2023.

However, the Group is pleased to note that there has been an improvement in reservation rates, with the average weekly reservation rate since mid-January 2024 being 62% higher than for the Group's financial year to that point. While near-term uncertainty remains, the Group is encouraged by the indications of a return in homebuyer confidence.

The average selling price ("ASP") for private housing during the period increased to £314k (H1 2023: £277k). This reflects increased selling prices across all the Group's brands as well as changes in the housing mix.

As at 30 November 2023, the Group was active on 32 private housing developments (31 May 2023: 32), with three active developments added during the period and three developments completed. In total, as at 30 November 2023, the owned private housing land bank consisted of 4,574 plots (31 May 2023: 5,075), of which 89% had planning permission (31 May 2023: 86%).

Village Developments

Springfield Villages are large, standalone developments that include infrastructure and neighbourhood amenities. Each Village is designed to deliver approximately 3,000 homes, primarily for private sale, but also include affordable, and at Bertha Park, PRS housing, with ample green space and community facilities.

The Group has three Villages that are well underway and already home to thriving communities: Dykes of Gray, Dundee; Bertha Park, Perth; and Elgin South (formally 'Linkwood Village'), Elgin. During the period, a section 75 agreement was reached with Stirling Council for 3,042 homes at Durieshill. The Village was granted planning in 2019 and is believed to be the largest detailed planning consent to have been granted in Scotland to date. With the section 75 now in place, the Group has all consents required to commence work on site, which is expected in calendar year 2024. At Elgin South, where there were 27 completions in H1 2024 (H1 2023: 12), with a new phase of homes being released for sale during the period.  

In total (including homes delivered under contract), there were 46 private housing completions at the Villages during the period (H1 2023: 60).

Affordable Housing

During the period, the Group recommenced engaging with affordable housing providers, with a focus on 12-18 month contracts with lower pricing risk. This followed the Scottish Government increasing the affordable housing investment benchmarks and a reduction in levels of cost price inflation, which has enabled housing associations to increase the price of affordable housing contracts.

The Group is encouraged by the demand that it is receiving in affordable housing, which offers high revenue visibility with low capital exposure and strong cash flow dynamics. As previously announced, since 31 May 2023 the Group has signed contracts with affordable housing providers totalling c. £40.0m for delivery in the second half of the year and beyond, and is in advanced negotiations regarding further contracts that it expects to be awarded in H2 2024. The signed contracts include a contract with Highland Housing Alliance, signed post period, that comprises a bulk sale element for £4.2m, which is due to complete during the current financial year, and a design and build element, worth £11.2m, with the majority to be recognised in the next financial year. This bulk sale will support the Group's overall sales rates as well as its efforts to maximise cash generation.   

During the period, the Group completed 144 affordable homes (H1 2023: 175). This reduction reflects the Group's decision in the previous year to pause entering new affordable-only contracts until the economics became more attractive in the inflationary environment. Average selling price was £177k (H1 2023: £159k). This increase is partly due to the contribution to revenue from a contract signed on 31 May 2023 to deliver 55 homes at Deans South in Livingston. The number of active affordable housing developments was 15 at 30 November 2023 (31 May 2023: 15), with four active developments added during the period and four developments completed. This included completing handovers of another affordable-only development under the Group's local authority framework agreement with Moray Council, bringing the total number of projects completed in this framework to six.  

As at 30 November 2023, the total owned affordable housing land bank consisted of 1,847 plots (31 May 2023: 1,637), of which 78% had planning permission (31 May 2023: 79%). 

Contract Housing

In contract housing, the Group provides development services to third party private organisations and receives revenue based on costs incurred plus fixed mark up. To date, this has largely consisted of services provided to Bertha Park Limited, including homes across all tenures - private, affordable and PRS housing.

At 30 November 2023, the contract housing land bank with planning consent consisted of 594 plots (31 May 2023: 603). The nine homes completed during the period (H1 2023: 69) comprised six private homes, two affordable homes and one PRS home at Bertha Park Village. The reduction reflects no new phases of private housing having been released, as the Group adopted a cautious approach in private housing as described above, and the Group having completed its existing PRS contract, which made a significant contribution to H1 2023 contract housing revenue. As previously noted, the Group's strategy to expand PRS activity was put on hold following the introduction of rent control by the Scottish Government in FY 2023. However, the Group is hopeful that opportunities to build more PRS homes, particularly in its Village developments, will return with the Scottish Government's emergency rent cap scheduled to end on 1 April 2024.

Financial Review

For the six months ended 30 November 2023, revenue was £121.7m (H1 2023: £161.9m), reflecting a reduction in revenue across most of the business as described above. Private housing remained the largest contributor to Group revenue, accounting for 72.1% (H1 2023: 73.3%) of total sales, with affordable housing contributing 20.9% (H1 2023: 17.2%), contracting contributing 1.5% (H1 2023: 6.6%) and other revenue, which primarily consists of land sales, contributing 5.5% (H1 2023: 3.0%).

Gross profit was £17.9m (H1 2023: £22.7m) due to the lower revenue. Gross margin increased slightly to 14.7% (H1 2023: 14.0%), which primarily reflects the improvement in gross margin in affordable housing. For H1 2024, build cost inflation was c. 4%, compared with a peak of c. 30% during the prior year.

Administrative expenses, excluding exceptional items, were £12.6m (H1 2023: £14.7m). This reflects the cost savings implemented and rationalisation across the Group, generating annualised savings of c. £4m.

Finance costs were £3.7m (H1 2023: £1.7m), which represents greater bank interest payments due to the rise in interest rates and the increase in bank debt.

Exceptional items were £0.9m (H1 2023: £0.6m), which mainly relates to restructuring costs involved with reducing the ongoing cost base of the Group.

Operating profit was £4.8m (H1 2023: £7.6m). Excluding exceptional items, operating profit was £5.6m (H1 2023: £8.2m). Statutory profit before tax was £1.2m (H1 2023: £5.9m) and adjusted profit before tax and exceptional items was £2.0m (H1 2023: £6.6m).

Basic earnings per share (excluding exceptional items) were 1.59 pence (H1 2023: 4.68 pence). Statutory basic earnings per share were 1.00 pence (H1 2023: 4.24 pence).

Net bank debt at 30 November 2023 was £93.4m (31 May 2023: £61.8m; 30 November 2022: £67.8m). This figure does not include the £15.0m of outstanding cash proceeds from land sales agreed during and post period that are to be received by the end of the financial year.

The increase in net bank debt over the six-month period primarily reflects £11.0m in scheduled deferred payments relating to the Group's acquisitions of Tulloch Homes (being the last such payment) and Mactaggart & Mickel Homes and £6.0m in contracted payments for land. It also reflects the usual working capital cycle, with work-in-progress at the end of the first half, which will unwind as houses complete in the second half of the year. The Group remains on track to meet its target of reducing net bank debt to c. £55.0m by 31 May 2024.

During the period, a term loan of £18.0m was put in place with a repayment date of 30 September 2024 to provide the Group with additional flexibility and surety during the uncertain market conditions. For further details on the Group's borrowings, see note 14.

Customer Satisfaction

The Group has set a target of 100% customer satisfaction to encourage continuous improvement and is pleased to report satisfaction levels of 96% from customers surveyed during the first half of the year - an increase over the 92% achieved for H1 2023. All reservations during the period were managed under new operating procedures that were implemented in accordance with the New Homes Quality Board Code of Practice, which the Group activated in April 2023.  

A programme to refresh websites of the Group's brands continued, with a new website for Tulloch Homes launched in October 2023 and Mactaggart & Mickel Homes post period. The websites are now part of a shared platform, ensuring a consistently high user experience for customers as well as simplifying website management for the Group.  

In addition, during the period, the Group successfully passed its external surveillance audit for its ISO 9001 (Quality Management) management system.

Build Quality and Efficiencies

Following a review of the house types offered across its brands, the Group has streamlined its portfolio down to the most popular homes that are most efficient to build and capable of accommodating future building standards to maximise energy efficiency.  The entire new range can be built efficiently from timber kits at the Group's own factories and maximise the use of modern methods of construction on site. The greater build efficiency will mitigate the cost increases associated with new regulation. For all new planning applications, homes for each brand are now selected from a portfolio of 40 house types ranging from 700sq.ft to 2,500sq.ft offering two bed to five bed homes. Architecturally, the new portfolio has protected the quality, space and character in house design, which differentiates the Group from other volume housebuilders. This includes a mix of elevations for the interesting streetscapes that Springfield is renowned for. The consistent build approaches will enable the Group to increase the quality of its housing delivery.   

Environment & People - ESG

The delivery of energy efficient homes within sustainable communities remains at the heart of the Group's activities. The Village developments, in particular, showcase the quality of the Group's award-winning placemaking abilities.

During the period, the Group became the first housebuilder across the UK to participate in NextGeneration's Core, which is a sustainability benchmark for small to medium-sized home builders. The assessment confirmed the Group's strengths in multiple areas, including its investment in employees, place-making abilities and community engagement. It attested to the Group's lead across the UK on the delivery of homes without fossil fuels, with over a decade of experience in the use of air source heating systems, as well as a head start in the use of modern methods of construction, delivering well insulated homes constructed from timber kits.

The Group published an update on its ESG strategy in September 2023. A key part of this was the development of the Group's pathway to net zero before 2045 with plans aligned with the Science Based Targets Initiative.

In addition, during the period, the Group successfully passed its external surveillance audit for its ISO 14001 (Environment Management) management system.

Markets

Within a UK context, the Scottish market is typically more stable than the broader market and the South of England in particular. This is reflected in the lower levels of house price inflation in recent years. With many regions experiencing a decline in average house prices, it is notable that the average house price in Scotland is expected to grow by 1.5% in 2024 (source: Rettie). This is partly due to the greater affordability in Scotland, characterised by lower loan to income levels with data showing that it is cheaper to buy a home than rent privately. The Group's private housing is also supported by the Scottish missive system, which ensures that customers are contracted into the purchase much earlier in the build programme.

Market conditions for Springfield and housebuilders across the UK were challenging during the first half of the year, particularly within private housing, which has continued post period. However, there was improvement compared with prior periods, with a reduction in build cost inflation to below 5% and greater availability of materials and subcontractors. This is particularly beneficial for affordable housing, which, along with the Scottish Government increasing the affordable housing investment benchmarks, has become more attractive.

Mortgage lenders have also already made significant downward shifts on mortgage rates and the appetite from lenders for new build homes has remained strong. The green credentials Springfield offers, with homes four times more efficient than many on the second-hand market, help lenders meet their own sustainability targets.

The Scottish Government rent policies continued to dampen demand from PRS investors. However, with the emergency rent cap due to end on 1 April 2024, the Group is hopeful that PRS providers will resume activity in Scotland in the near future. With a large land bank in areas of high demand, and having successfully delivered the first houses built specifically for private rent in Scotland, the Group is well positioned to benefit from any return of PRS housing development.   

In addition, the Group is receiving strong interest in its land bank - and at attractive valuations - which reflects the market preparing for an upturn in trading conditions.

The fundamentals of the housing market in Scotland remain strong. There is an undersupply of housing across all tenures, which is becoming more acute - as evidenced by three local authorities, including Edinburgh and Glasgow Councils, declaring housing emergencies and new Homes for Scotland research finding that a quarter of households in Scotland have a housing need. New housing is recognised as a key infrastructure requirement to support economic development, such as the creation of the Inverness and Cromarty Firth Green Freeport, which is due to bring £3.0bn of investment and c. 10,000 new jobs into the region. With a strong landholding in the Highlands region, the Group is well-placed to assist in delivering this infrastructure.

Dividend

As announced at the time of the FY 2023 results, while recognising the importance of dividend payments to shareholders, the Board has resolved not to declare a dividend until the Group's bank debt is materially reduced. The Group's focus is on managing cash flow and reducing its debt so that it is well positioned for as normalised market demand returns.

Outlook

The Group remains on track to report results for the year to 31 May 2024 in line with market expectations, including a reduction in net bank debt to c. £55.0m. The Board's confidence is based on the decisive actions taken in the first half, the strong interest it is receiving in affordable housing and in its land bank along with the improvement experienced in recent weeks in private housing reservation rates. Alongside this, build cost inflation continues to reduce and is expected to stabilise at around 2.5%.

Looking further ahead, the Group is encouraged by the indications of a return in homebuyer confidence, with the average weekly reservation rate since mid-January 2024 being 62% higher than for the Group's financial year to that point. The interest that the Group is receiving in its land bank - and at attractive valuations - reflects the market preparing for an upturn in trading conditions. In addition, with the Scottish Government's emergency rent cap due to end on 1 April 2024, the Group is hopeful that PRS providers will recommence investing in Scotland.

The fundamentals of the business and of the housing market in Scotland remain strong. The undersupply of housing, which is across all tenures, is intensifying. The Group offers high quality, energy efficient homes in popular locations across the country under multiple well established, reputable brands. It has an excellent track record of delivering developments exclusively dedicated to affordable housing and was the first housebuilder to deliver houses specifically built for PRS. The Group has one of the largest land banks in Scotland, 86% of which has planning permission. In addition, the decisive actions that the Group has taken during the period, and continues to take, put it in a stronger position to deliver future growth as more favourable economic and trading conditions return.

Accordingly, while there remains near-term uncertainty, particularly in private housing, the Board is confident in the Group's prospects for returning to growth and in its ability to generate shareholder value.