Glenveagh Properties PLC (GVR) Earnings Call Transcript & Summary

Good afternoon, everyone, and thanks for joining us for this fireside chat with Glenveagh Properties. I'm delighted to be joined by Glenveagh's CEO, Stephen Garvey. Over the next 30 minutes, we're trying to cover most important themes in the market and some of the more important topics for Glenveagh as well. Just for your own reference as well, if you're looking to add a question to the list here, you can still do so, if you would like to e-mail me, the e-mail address is in the top right-hand corner of the screen. And I'll try to get to that towards the end if we have time. So we've got 30 minutes here. So with limited time, we'll kick off straight away. Stephen, thanks very much for being here.

Thank you for having me.

Just starting with the market maybe, looking at your order book, the progress over the last couple of months, the nice uptick that you've seen there, probably not surprised that we're in a strong market right now, but maybe you can give us a little bit of a feel for how things are progressing in different tenures and maybe across [indiscernible] as well.

Sure. Colin, as you recall that, as we said last week, we've seen our order book increase by about 20% in just over 2 months, which is phenomenal progress particularly as you're moving into the summer. We're seeing the sales market that's definitely evolving to different dynamics. And you're seeing house price inflation today come out and talking about 6% to 7%. We're seeing that particularly on our new homes market that we're seeing really robust demand there. And the majority of our developments are now selling on digital format. So the requirement to show houses are not required. We're seeing a really strong uptick particularly in the Dublin market at this moment in time. We've really shifted a lot of our product towards the Dublin market, and we're seeing really robust demand out there. Leads are holding really strong. I think there's a number of dynamics. I think people feel more positive towards the interest rate cycle is probably moving in a downward spiral. Obviously, the Macroprudential Rules got amended over a period of time that's playing into the system as well. General confidence out there and customers said, they just want to get on with it and they're looking for the best available product that's out there for them. So that's really robust. You're also seeing then the demand on the government side. So state agencies fund and probably the approved-housing bodies are at the front at the moment in the sense of, particularly on suburban sites. Then you've got the LDA playing a much bigger role. And then you've got the municipalities, the local authorities as well starting to look for their tenure product in that. So on the tenure of affordable purchase, house rental, social housing really robust demand from a number of angles there. And the key thing is they're just looking for supply as quickly as possible to come in to the system. And you're seeing that come true. So yes, good. And I'm pretty positive in the sense of where we have left to fill the order book for the back end of the year is quite limited at this stage. We don't have a lot of product out there. We're trying to manage as best as possible. Trying to line customers up with completions as well into the back end of the year. And obviously, we're filling some of the order book into 2025. So yes, pretty happy where things are.

You referred to the 6% to 7% inflation rate. Are there any particular pockets you're seeing out there, where maybe there's headroom on the first home limits? Or is it in different kind of categories?

Well, obviously, last week, I don't know if everyone is aware, but the First Home Scheme was amended again. So there were 13 regions that were amended and price movement up, kind of around EUR 25,000. Didn't affect many of our areas at this moment in time. But to give an example, in Dublin 15, where we would see the greatest demand at this moment in time. Our core product is a 2-bedroom house, 3-bedroom house. We're priced there at around EUR 410,000 to about EUR 445,000 to EUR 465,000, depending on the product. And the pricing there is about EUR 475,000. So you're seeing that real demand there. We're seeing a shift -- interesting, we're starting to see single people come into the market, where the First Home Scheme is starting to make a difference to them. So if take a 2-bedroom home, EUR 410,000, if you're availing at 30%, you probably need a salary of EUR 70,000 to get that in a single person. So the stride to get to that is becoming greater. Just more demand on the ground. We're really seeing the Dublin market, and I suppose we've had a big shift, a lot of our schemes this year and into next year are now Dublin focused. And we're seeing that really strong, particularly where we have a standardized product and where we have our 1, 2, 3 and are now looking 4 beds, real strong demand across that. And people are just looking to get access as quickly as possible. So we're really happy with where things are at this moment.

I suppose some of the indicators are showing that there's been a reasonable supply response at this point in time, but the backdrop still seems to be [indiscernible] tilted?

Yes. I look at it this way. There is absolutely -- we've probably commenced in the last 12 months 50,000 units. And obviously, this is the incentive there with the levy. A lot of commencements in the month of April. When you look under the data, I think that's the key thing is what exactly is being started. So you've seen absolutely apartments, a large portion of that. A lot of that is going towards the state. But the actual owned door housing, the amount of that that's developed is actually quite limited. So yes, we've seen an uptick, but as a percentage, it's probably been the apartments that's been doing the biggest lift. When you look on the ground, the availability of suburban product, there hasn't been a massive uptick because the availability is quite limited. There's certainly been a sea change in apartments, but they're predominantly going back to the state through various times.

And with the uptick in activity, any changes on the build cost inflation outlook?

It's been pretty steady for the year. Labor is pretty good. We're not struggling at all to fill any contracts out there, the availability of labor. We probably accelerated a lot of programs last year to start on sites, and we're seeing the benefits of that. We're not seeing ourselves struggle with any subcontractors or contractors out there, so happy where that is. Probably a little bit of volatility in the commodity side still, and it's just working its way through. But overall, in a pretty good place that the labor side seems really good. And obviously, there's going to be a little bit of volatility in the -- things that are outside of our control [indiscernible] external markets. But no, we're pretty happy. We're obviously seeing the benefits of the commercial market who are owing the bid, so the availability of labor, supply chains and that, that's freeing up a bit of capacity out there.

Understood. And I think one of the interesting points from last week is you flagged that you're kind of changing gears on land investments at this point in time. Can you talk a bit about what opportunities have actually risen?

Yes. I suppose just to give a little bit of clarity, the business consistently brings land into the system. The normal way we would bring land in is we're trying to do deals subject to planning or options agreements, and we're still doing that, and we're still bringing land in that way. Some of the schemes that start this year are working their way through the system. What we kind of want to call out was what we're seeing at this moment in time is some strategic assets for us. So where we might be looking at 1,000 units, and we're looking at a few locations, particularly now where we know where our policy is now going. And we've identified a number of them. And the normal investment might be somewhere between EUR 40 million and EUR 60 million a year. We might just step that up in this period of time. To give clarity to people, we might go open spend, but we will come down over the medium term. So we were kind of saying we'd be at EUR 400 million by the end of this year. We might go up a little bit before we come down over the medium term. So it's not a sea change in that. The strategic view of where we see things and how things are playing out is, there's a number of these assets that are in play at this moment in time is the unwind of NAMA, which is now happening. NAMA is to be done and dusted and closed doors by probably June 2025 to be [indiscernible]. So we're going to see a lot of activity on that side by the back end of the year. You're seeing people who having the capacity and the capability to develop sites as well. Family businesses that are probably winding down due to various things. And what we've looked at is, we're looking at maybe, say, a 1,000-unit sites that's strategic for us, that has Suburban owned door product, but adjoining it is a partnership side. And what we're looking at is, as we've kind of always called this out, you're maybe paying 10% of NDV, so, say, EUR 35,000, EUR 36,000 a unit. But adjoining a site is a partnership site that, when you amalgamate it, you're getting access to 1,500 units for about EUR 23,000. The thing that we have really seen as the year has evolved and with the way policy is going is the land investment is important, but the bigger aspect is the business as we really scale up here, is the actual working capital. And the role the state can play in bringing the working capital to play is actually the thing that I'm more focused on, because that's a game changer. You're looking at 3,000 or 4,000 units a year that's coming up to EUR 600 million or EUR 700 million or EUR 800 million depending on the product. But if the state can play a bigger role, that's where the capital efficiency can really accelerate for the business. And we're just seeing those opportunities. So I would say it's a medium-term thing to maybe look at one or two of these strategic assets. And I suppose what we want to do was flag it to the market that, if we come out with something, but that it was a surprise, we always have to invest in land, but we're seeing those opportunities. And I think we really want is going to do for the businesses if we can take one or two of the these down is, it's the returns of -- maybe the return could be [indiscernible] home side of this and that's why we're attracted to it.

So I mean there's two angles on it. One is that the actual opportunity set, the amount of land that is coming to the market is larger, but it also plays directly into some of the -- your parts of the business, i.e. Suburban and [indiscernible] and maybe those operating as more synergy, [indiscernible].

And we see that, like if you look at our scheme in Balmoston in Donabate, we have tenure there of cost rental, social, affordable and private. People question whether it worked together. It's working really, really well. We've seen robust demand on the private side. We've seen all the state tenure coming to play together. And I suppose the strategic view for the business, if we can amalgamate suburban and partnerships to work closer together, the economies of scale are just more greater. You can run a site now of, instead of 100 units a year, you can run a site at 400 units a year. That has massive efficiencies, where land banks are adjoining, you can amalgamate them, you can do the master planning in one. You'll have different tenures, but those economies of scale really come into play. And that's where we're probably seeing those opportunities. The other big benefit, and something we've -- partnerships has been a long ways just as to get to where it is. It's now at full flight. As we called out the statement, ideally, we think we're probably on target to get two more partnerships by the end of the year, bring the business to about 3,000 units. The thing that we've really seen is where land adjoins us and the state are players in it. The opportunities to fast-track that delivery become greater when you are the adjoining land owner. And I suppose that's the other [indiscernible] that's plays as well.

And that's something you see in examples of where you had Suburban land, then had -- I don't know. Does it give you a foot in the door? Especially on the full position where would you...

It gives you the advantage to talk quicker. And as you know, we called out that we're now on the panel with the Land Development Agency. That opens opportunities to joint ventures automatically. Once you pass the procurement process, which we have, and I suppose it expedites those conversations where in [indiscernible] rolled it probably took us three to four years to get to the end line. This can do this in maybe 6 to 12 months. That's a game changer. And I suppose we've called this out where we think the partnership business can go. We see it as a huge opportunity. The states are going to play a pivotal role in housing going forward. Partnerships is going to be key there. And if we can get our partnership business to something of a similar scale of where suburban is today, that's the opportunity that we see in front of them, and trying to expedite that more.

I mean you commented in the statement that the transactions will underpin long-term operational growth and optimal returns for shareholders. Clearly, there's uncertainty around whether or not these deals go ahead. But if you were to get a sort of satisfactory amount of that land, I know you commented on returns already, but how would you like to see the investment impact on those two metrics?

I think that, look -- the main focus for us is driving -- obviously, gross margins is an element of it. But driving return on equity is the big thing for the business and I think we've tried to give a clear indication where we think the trajectory is now for the rest of the year. We're very happy with that. And I think there's a balance in the sense of two things. You can look the gross margin, but you can also refer a lot on return on capital employed or IRRs. We're certainly seeing the IRR model now tick up with -- it's particularly with the quantum of capital you can put in to these deals. So that's giving us more optimism about pulling some of these deals than what we could do. Very happy where our gross margins are. As we've said, suburban margin is ticking along, now expected to be well in excess of 20%, in that trajectory. And a lot of things have come into play with that in the sense of standardization, the optimizing and planning, all of that at play. But then this, the flywheel is spinning much faster now. We're getting those efficiencies as well as economies of scale. And when you blend that into the Suburban or a Partnership sites, it's getting that return on capital employed. If you forget that for both sites into -- and I'm kind of looking at somewhere between a 35% and 45%, because blending the both sites, there's added efficiencies. That really drives the business on, and that's where we're going to focus, particularly where you can bring the working capital in with you.

Understood. And I suppose with the potential of an increased investment in land, what looks the likely outlook now for shareholder returns for the rest of this year and maybe into next year?

So as we've said, the priority is, obviously, for us, capital allocation policy is very simple: land, work in progress or WIP, and then obviously manufacturing. Taking the last one manufacturing, pretty happy where that is. Don't really need to do anything on that front at this moment in time. We're doing about 50 units out of the factory a week. Very happy with those. We make small incremental investments in the future. WIP, this comes into play with Partnerships. The WIP is only starting to come through, and the cash flows of the Partnership now is starting to come through. It's been a bit slower than we would have liked. We would liked to issue them faster. But we know they're progressing really well and we're happy where that is. And then land, we've kind of said there might be one or two strategic assets that we do. I still think the business is well able to show off a lot of cash flow into the second half of the year, particularly what we stand to monetize. We haven't closed the door on it at all. And I think we were clear in the statement. We'll just be prudent of what we want to do and how we want to do it. But the minute, there's excess cash there, we will return to shareholders.

Understood. Taking back to H1, probably a fewer completions than you would like to in H1 in terms of the mix and the overall. What was the driver of that any delays that might have been there? And how are you [indiscernible]; that to unwind in H2?

Very simply, obviously, the urban product completed, completed earlier, during the first half of the year, both 5 and 10 years in totality, give or take 3 [indiscernible] completed in the Suburban. An element of the Suburban just simply went to the right that it was complete or paved to work with government agencies, things like that, just didn't come through the system quick enough. So give or take, would have been much happier with about 100 to 150 units coming through. They're there. They're closing now. We're probably going to close as much in the month of July as we did for the first quarter. So look, it's not a big issue for us to catch it up. Pretty happy where things are. And the machine is getting much better.

You've obviously flagged a really nice suburban margin increase as well in and secondly, you did refer to [indiscernible] different factors there. But what are the main drivers giving you that this year?

Obviously, there's an element of, I suppose, we called this out probably 12 months ago, the way we would manage our order book and how we would build our order book. My team, we've managed that process very better in the last 12 months. So obviously, being able to catch an element of HPI, stock being much closer to be -- customer lined up with stock, much better at that. And so happy with that. I think probably seeing our costs under more control. The manufacturing and standardization is playing a much bigger role. Economies of scale are coming into play. Where we're really seeing it is the big sites. The big sites are just outperforming in controlling costs there. So really happy with that. Yes. And I think, look, we're just -- we've been doing it for a number of years. We've got it fine tuned. We're seeing land as a component not shifting the dial. So there's, for what we're buying land today and, obviously, what we can get out the door and what we can manufacture, we're pretty happy where margin compression can be. It has been a long time in the coming. I think the sea change you're seeing in the last 12 months is, the last number of years, we've been dealing with sites where -- the Suburban side, where we bought transformation and inherited the product. Now we're building our own product, and that's probably made a big difference, I think.

Maybe following on from that, the manufacturing facility is obviously something that's really hitting in stride this year. Are you satisfied with your performance of those? And how much more is there to go?

Yes. I think we're the biggest timber frame manufacturer in the country at this point in time. We spent about somewhere EUR 40 million to EUR 45 million on getting it there. It's gotten to a really good place. The timber frame operation represents, give or take, 20-odd percent of the superstructure. And with that box ticked, we're happy with that. If we want to go a bit faster, we can. It's not a huge job for us to add another 20-odd percent in the system. We're happy where things are. We might look at investing in new lines at a point in time just to get more efficiencies. But to give you an example, that lot this year is probably on track to produce, give or take, 1,000 units. In 2021, it was just 250. Same team, same site. What they're really seeing in this thing that they call out is the standardized way of going through the system. We were looking at it for a couple of weeks in production, where you'd have all standard product. They could do, say, 15 to 16 units. With standardized protocols into the system, it goes through the system at around 20 to 25 depending on the role and the week. So that's what we're seeing. So we're happy with that. Where we're looking at and probably the focus is to go after the high-value items, the external clad, the roof system, the groundwork. They are the ones that were kind of now high value. It's a 20% room that remove 8% of the cost. There are probably three or four items that we're probably now moving. As you know, regulations are going to change now, so removing [indiscernible] sites, there's a cost for that. That's going to feed through. The whole thing now is how much can you control that you recycle and reuse on the site without removing it. And that's probably where we're focused at this moment in time.

Sure. And just coming back to the 2 Partnership deals that you've now flagged over the last couple of months that have added so much to the pipeline on that business. Any chance to give us a little bit more on maybe what the time line is? Whether to bring them into the business and maybe even to get into construction of those?

So we flagged, obviously, with the two [indiscernible] Balmoston is its name, give or take, 2,000 units, we've flagged one at AGM, and then we've obviously -- the one at AGM is working its way through legals. And then obviously, we're in advanced negotiations on the fourth one. Likely timing is Q3 going into Q4. One of them already has permission on it. The other one has a phased permission, and pretty much not too far off our own stock. We'd like to be in a position, hopefully, maybe start construction probably very, very late in the year. But the thing is they would feed into the system for 2025. So that's where we'd be.

And coming back to the point you have made and previously made about the size of the Partnerships business and how big it could be, clearly, and you increased the pipeline, plays very much into what you can do on a volume basis going forward. So you still have conviction that that's the part business that's going to provide the most incremental growth maybe into the medium term?

Yes. I'd look at this very simply. We're nailed on the 2,000 suburban units, give or take. And we know we can do that. As I said, it's quite limited what you can add on in suburban because the structure of the national planning framework and things like that. Where the real growth phase can be is obviously in the partnership side. I've kind of said that my view is that these are obviously big sites. They are not small. So a site and a partnership site could be the same as two or three [indiscernible] sites. If we could get to a position ideally that we could have 8 to 10 of these on the go at any point in time, you obviously need to have a pipeline as well to feed into the system. And so we're very conscious how to find the balance in that. But my view is, obviously, the returns are slightly different in the sense that there's more return on capital employed with the partnership side, but there's more gross margin with the suburban site. We'll try and get the best of both worlds. And if you can amalgamate these together, I don't see why the business can't have 8, maybe 10 of these on the go at any point in time. They're a 300 to 400 unit site a year. There are going to be a mix of you're going to have an element of owned-door housing, but you're going to have an element of urban. I think your urban business is going to amalgamate into your partnership side because, if you logically think about it. The state has the best part of 150. I would say, coming on 200,000 plots of land, because they're very active in the market themselves, identifying new locations. And I think the states are now very much led it to the point that they're going to put their capital in. They're going to put their land in and I think you're going to see them play that role of they're going to be able to view that we're going to do 10,000, 15,000, of the 50,000 that has to be done a year, and we'll do that through those vehicles. So I think it's a big growth area for us, and I think we're best placed to do it.

And sticking with that urban side, maybe the amalgamation of it, you've obviously spoken about the 2, 3 [indiscernible] to what extent you're confident they'll close before the end of this year? And I assume that they are state bodies of some sort, ends up.

Yes. The state are playing the biggest role in the Urban at this point of time. I think that's when you see the commencement that you see what's on the go with the state. I think, yes, we're very confident that they will definitely be. Ideally, we're trying to bring them in on September of this year. Obviously, getting on the [indiscernible] with LDA, fast-forward the likes of the [indiscernible] Docklands [indiscernible] -- I think the minister has come [indiscernible] news that before we were even talking about it. So that's progressing really well. And then obviously, the other one is with one of the approved housing bodies. So yes, happy where things are. I think that won't be done for Q3, maybe start Q4. I think that's where we think of it.

The net debt level at half year, probably higher than it has been in previous years. You've already spoken a little bit about the cash flow opportunities that there is in H2. Is there anything really that sticks out that's going to change that [indiscernible] things?

Yes. I think you have to know what the business is doing this year versus last year, what kind of completions. Pretty similar to what we are for last year. But remember, the business is just much bigger. And we're doubling the size of EPS at 2x. It's a much bigger business. So I wouldn't be too worried about that. Obviously, massive cash flows into the second half of the year. I think the business, as it evolves, and particularly the ways the order book will go, how much will be in state, private, et cetera, et cetera, we can probably run an element of a higher level of debt at points in time, the business certainly can support that. So yes, it's not a major concern.

Great. There's actually a couple of questions that have come in. So I don't take any responsibility for these, but I'll go through them anyway. The first is, where would you like to drive return on equity, return on capital in the COVID years with the follow-up of where you'd like EPS to be as well.

It sounds like [indiscernible]. I suppose I'll give you my best sense of where I think things are on return. I'll deal with return on equity in the broader context of it. Return on equity, 15% was never a ceiling, but it was a big milestone to get to particularly where the business was. And we're there, thereabouts, so really happy with that. And obviously, if you get the efficiencies into the business, there's 2 ways to go. Make the business efficient. We're showing how we can do that. We strategically might invest now for this moment in time to grow returns, profiles, which obviously will feed into profitability as well. So I kind of think we've been crystal clear where we think the business can go. The two fronts is the land bank will hover over the medium term around the 400, we might -- most likely will come back. But if we can get the working capital and the forward funding with the Partnership side, really excel that and amalgamate some sites. Obviously, we can be more efficient on that side and obviously, that drives the ROE. As we said, EPS, we're very happy with the EUR 0.17 for this year. I would say a lot of models probably had a buyback earlier in the year. Obviously, we're very confident we can get there without a buyback because of the difference it make at this stage of the year. So we've seen the progression in the profitability of the business. Long term, we think there's ability to grow. As I said, that's why we're kind of -- our focus now was opening up those opportunities, particularly where we're seeing the business excel, that can ultimately drive profitability to shareholders over the long term.

The other question that came in, I think maybe picked up on the example of the site that you were talking about, roughly, what's the ticket price for a 1,000-unit size? The person is then just asking whether the sites you're looking are without planning?

Does he want all of the answer for this? I called out, and I'm just using it as an example, strategic assets, as I said, they're big sites. They're not small. But we've seen the benefits of it. And to give a little example of just one site that we're seeing on the -- in our own portfolio. We have a site in Dublin 15 where we're selling an average of about 10 units a week. We also have demand then from the state coming in with the tenure mix. On that site at the moment, at this moment in time, we're -- and it's not a state secret, I think Mike [indiscernible] out and about vocal about this site, we're doing about 15 to 16 units a week in it. So these things make real -- they make a real difference. And that's probably running faster than it should be expected. But if you're buying, 1,000 units as a round number, give or take, 10% of NDVs around 35,000 site, but that's what people shouldn't focus on. It's actually bringing the Partnership site adjoining it with you, and then bringing the working capital, that makes a huge difference. And that's why I say, land is the irrelevant equation in this anymore. It's actually the working capital that's going to move the dial from here on if we think.

Yes. Understood. And maybe to finish off then, planning has been tricky in Ireland for a long time, and it's clearly been something that you've been exposed to as well, must have been very pleasing to be able to come and have most -- almost all of next year's targets already with planning in place. Where have you seen improvements there? And what should we be looking for next on the planning side?

I think 2022 was a dismal year for us. We got not a single decision [indiscernible]. It was the remnants of the SHD period that came in 2016 or '17. And obviously, the SHD process collapsed. In fairness, the government replaced it with LRD. I think the difference was we decided how frustrated we were in 2022, that we will go with LRD quickly. And we launched into the system. We've got 4,000, 5,000, 6,000 units through last year. We've seen the momentum carry through. And I think the board on both [indiscernible] local authorities have been crystal clear, LRD is the new process. adapt to it, get on with it, and you'll get through the system. You mightn't like every decision of it, but the time lines are crystal clear. We're also seeing, where SHD was consistently exposed to judicial review, LRD is not. There is one or two that are obviously going through, but because it gets its airing through local authority process first, maybe FI or further information, then to the board, I think representation is much fair. And I think the public accept, while there's being 3 bodies or 2 bodies that now reviewed it, I'm much happier with it. I might not fully agree with it, but I'm not going to challenge it to court. That's been a sea change. Obviously, the planning bill is going to come in probably to the back end of the year potentially, whatever elements of getting at it. The planning bill is going to obviously give more certainty. It's going to control cost for judicial reviews. What I think the process, in fairness to what they've implemented, has taken the worst part of SHD, [indiscernible] taken the best part of the old system, amalgamated together, being very clear about it. The one thing we've encouraged the government to do is resource the system. They have in fairness resourced the system. And if you have the people there to deal with applications in a timely manner and time is a critical thing here, treated the right [indiscernible]. And I think that's where we've seen it. And so that gives us positivity. If we buy a site today and we know all the goods, the bads and the uglies about it, to bring it through the system, we have a certain time frame, that allows you plan much better into the future. So I'm happy.

Great. Well, I think that's all we have time for at this stage. So thanks, everybody for joining us. Thanks very much, Stephen, for coming in. If you want to follow up with any questions, again, my e-mail address on the top right-hand side, you can let me know and we can then pass them for any further questions you might have to the company as well. So thanks, everyone, for joining us, and have a good rest of the day.