Belvoir Group PLC

LSE:BLV

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[Operator]

Good afternoon, ladies and gentlemen, and welcome to the Belvoir Group PLC interim results investor presentation. Throughout this recorded presentation, investors will be in a listen only mode. [Operator Instructions] Given the attendance on today's call, the company may not be in a position to answer every question received during the meeting as how the company can with your questions and publish those responses where it's appropriate to do on the Investor Meet Company platform.

Before we begin, we'd like to submit the following poll. And as usual, I'm sure the company will be most grateful for your participation. And I'd now like to hand over to Dorian Gonsalves, our CEO. Good afternoon.

[Dorian Gonsalves, executive]

[indiscernible] Thank you very much for that kind of introduction, and hello to everybody. Some of you may have -- I'm sure you've listened to our presentations in the past, and we're going to stick to a sort of tried and tested format where I cover the first 1/3 of the presentation and talk about the key highlights and give you an introduction to the business or a reintroduction to the business. Louise, then because -- Louise, my CFO, then give us the middle section to talk about sort of finances and the numbers. And then I'll come back and do final 1/3 of the presentation, which is geared around the three markets that we operate in, that sales, lettings and mortgages. And also I'll share some sort of operational detail with you as well in the last 1/3. Then I'll wrap up. And hopefully, we'll have time to answer everybody's questions.

So first of all, an introduction to both myself and Louise. I've been in the property sector for 25 years, 18 full years with Belvoir just coming into 19th year. Louise, 21 years' experience on A-listed companies. A Board still of A-listed companies. 9 years with Belvoir.

When I sort of think back to what the business looked like 9 years ago, at that moment in time, we have just one brand. We haven't long listed and in terms of growth, profit growth and in terms of our sort of footprint across the country, the business now is almost completely different to how it looked 9 years ago.

We both have shares in the business as you can see. And we're going to have share options by means of LTIP going forward. And again, they're on the screen.

Our ticker is BLV. We closed in 2012, and I was the CEO at the time of the float. Market cap is a touch higher. The markets reacted reasonably well today to the results announcement. So it's nudged up a little bit, I think it's around sort of about GBP 84 million. And we've had 26 years of unbroken profit growth, that's profit after tax. And I'm sure that lots of our holders will be very pleased to see that we have increased our dividend by 25%, our H1 dividend to 5p from 4p, and that's paid sort of end of October.

We've also said in our statement that we are comfortably in line as far as H1 is concerned, and that we are comfortably in line as far as the full year is concerned. So hopefully, you'll see as we sort of run through the presentation, hopefully, you'll see that we -- as a business, we are outperforming the market in all three of the sectors where we operate, that's sales, lettings and mortgages, and I'll sort of try to explain why that is as the presentation unfolds.

Okay. So a reminder on the business itself. So we have -- we've acquired six property businesses since 2015. The first one was Newton Fallowell. So we started with the Belvoir brand, entirely franchised business at the time. We acquired Newton Fallowell in 2015, Northwood in 2016, Lovelle 2020, Humphreys, 2021 and the Mr and Mrs Clarke in 2022. So these are the six property acquisitions that we have made.

The -- well, that was the original brand. There was one very small brand that we acquired in 2015, [ Good Charles ] that we subsumed into Newton Fallowell. So we have made six acquisitions but Belvoir was the first brand.

The reason for the sort of multi-brand strategy is that we feel that we have become very good at franchising. Franchising is quite a niche industry. So we started out as franchisors who then decided to operate within the letting sector, not as letting agents who then decided to be franchisors if that makes sense. And if you can operate one franchise brand, we've proven to operate more than one, whether it's 2, 3, 4, 5, 6 or more.

The brands are different somewhat. They all operate in property, but Belvoir and Northwood are primarily residential lettings agents. So they look after properties on behalf of landlords. So 90% of the revenue through Belvoir and Northwood franchisees comes from lettings and just 10% coming from estate agency, whereas Lovelle and Newton Fallowell are based in the East Midlands where we are sitting now. So the majority of the property sales that we are generating are generally happening sort of in the East Midlands and Lincoln Shire area.

Nicholas Humphreys is a student lettings business with a sort of 6,000 to 7,000 student beds. And the Mr and Mrs Clarke is a small personal agent home run franchise, our first foray into sort of home run franchise models. It's a low-cost entry point and a relatively new acquisition for us. They are six property brands that comprise the Belvoir Group.

On the right-hand side of the slide, in 2017, we decided to expand our product set into financial services, i.e., mortgages. We've got lots of transactions happening within the business, some of which have mortgage opportunities attached to them. And as a franchisor, we also have to continually come up with new initiatives to keep our franchisees engaged and keep them excited and to give them a way to grow their business long term. And financial services, was added -- group back in 2017.

If you've been following our story, we have also made six acquisitions on the financial services side since 2017, two of which happened in the last 3 months, quite small ones. We first acquired a business with just 30 mortgage advisers back in 2017, run by a lady called [ Michele Brook ]. Michelle is still with us. She sits on the Board. She's overseeing the growth that we've experienced on financial services.

It's a complementary product. It's similar to franchising in that most of our advisers are self-employed. And I said a few minutes ago that we're outperforming the market in sales lettings and mortgages. And to me, if you said, look, Dorian, what do you pin that on? I personally think -- I think it's due to the self-employed element of our business model. So across all of the property franchise brands that you can see on the screen, all bar a couple that we own when we operate, the rest are run by franchises. It's their business. It's their future. It's their profit.

We take a cut of the revenue that's generated in return for providing products and services. And ultimately, the franchisees business and they operate within one of our brands. And that gives the business huge strength. We saw that during COVID where we performed extremely well. We performed well after the credit crunch all those years ago. And we are performing well again in a market where property prices are falling moderately and transaction numbers have dropped by about 20% actually on the estate agency side, but I'll come on to that later on.

So that's really just a reminder of the business itself. We've got 335 franchisees operating from sort of shops and offices. So 335 locations on the property side. And on the mortgage side, we've got 321 advisers, giving a total of 487 locations. We have, in some locations, more than one adviser, if you're trying to add the numbers up there, but that's correct.

If you can push more -- correct, thank you. Just to give you an idea, I mentioned that we have acquired two small mortgage businesses in the last few weeks. One of them completed on the 24th of August and the other completed on the 6th of June. And we just issued on RNS to cover both of these businesses a week or so ago.

So they're very similar. BMA Bristol was and still is operating house and Mortgage Advice Bureau business, that's the front brand. As I'm sure you're aware, we operate under license to Mortgage Advice Bureau. So we contract with Mortgage Advice Bureau, and we get access to their website, to mortgage lenders, they look after our compliance, and they do a whole host of things in return for a cut of the commission that is earned from the lender.

In these two small businesses, they were previously operating as MIB. They're now operating under our balance. So we now support them, but they'll trade -- continue to trade as Mortgage Advice Bureau. Each one has a network of self-employed mortgage advisors. One has 20. The other has 21.

The consideration across these two businesses is about GBP 3 million. The profit contribute -- in fact, the consideration, apologies, is about GBP 2 million just over -- it was GBP 1 million net of cash --, and it's GBP 1 million net of cash for MAB Southwest revenue. That's just over GBP 3 million, but consideration about GBP 2 million. Profit contribution in a full year will be around GBP 600,000. So quite an attractive multiple. We've been may be opportunistic on one hand, but ultimately, this year has to -- that we are just making the most of.

On the other side of the slide, assisted acquisitions. If you haven't seen this before, this is where we help a franchisee on the property side to find and acquire one of their competitors. So it's mainly the acquisition of small lettings businesses. We've helped franchisees acquire 139 of these small businesses. That sounds like an exhausting metric with 139 and small businesses over, what, since 2014. It's very profitable for a franchisee to do this. it's very profitable for us because we get a percentage of the revenue that is acquired by the franchisee.

And the chart at the top just shows the sort of the growth. So we have two good years in 2018 and '19. And in each year, these assisted acquisitions contributed about GBP 600,000 of management service fee, MSF. Fell off a cliff during 2020 and 2021 due to COVID. And then we gradually sort of built back.

And the good news is that at this point in the year, up until the end of August, we have already completed some more acquisitions than we did in the full year last year. So we're expecting to have a reasonably good year on franchisee acquisitions. This is helping us to continually grow our managed book of lettings, which is recurring. And we are now managing about 75,000 residential properties, 2,000 of which have come from this strategy in H1 this year.

We have further deals in the pipeline, franchisee deals. We've got GBP 1 million of revenue of deals with sisters. And we've got another GBP 4.9 million of franchisee revenue under review. So these are opportunities that haven't quite become deals yet. And I'll keep you updated on that as the year progresses.

So just a few key highlights before I pass across to Louise. Very pleased to say revenue is up 3%, GBP 15.9 million. Profit before tax is up to GBP 4.4 million. That's up 10%.

Net cash. So if you followed our story for the last few years, you may remember that up until the end of last year, we were carrying debt mainly for the acquisition of the property network that we have bought. We are -- we finished the year net cash. We are still net cash on both of the acquisitions that have completed in the last few weeks have been bought with cash.

I mentioned the dividend earlier. So it's a 25% increase that has been generally well received. We're operating 487 locations in --, which is up 3%. And we're now at 321 mortgage advisers at this point after acquiring two small businesses.

We have sales, which I'll give you some more detail around this later on. House sales are down. So in terms of numbers of house sales, we are 15% down. So we have exchanged on 4,177. And that doesn't sort of translate to a loss of 15% of the state agency revenue, but I'll explain that a little bit later on. Managed properties, I've mentioned at 75,000, which is plus 2% on the same period last year.

So in general terms, metrics are up but they're certainly up against the backdrop of a challenging market on that on house sales. So house down, but ultimately, so is the market, and I'll talk in more detail shortly.

Over to Louise.

[Louise George, executive]

Okay. Hello. Sorry, I was just trying to click on the mute button and move the slide on at the same time.

So revenue in the first half was up 3%. As Dorian said, on the property side, in the property division, we saw revenue at GBP 7.3 million, which is actually down from GBP 7.7 million. So just to explain that movement downwards. We actually franchised out two of our corporate-owned offices when we acquired the Nicholas Humphreys network a couple of years ago. It came with three corporate-owned offices and about seven franchise offices.

So with -- we managed to franchise out the Burton office back in September and the Darby office in February. So that gave a movement that effectively converted the direct fee income of GBP 600,000 into a percentage of revenue being our management service fee of GBP 100,000. And I'll cover that in a little bit more detail shortly.

On the management service fee side, that's our key recurring revenue from franchisees. On the letting side, it was down -- it was -- sorry, it was up 8%, of which the like-for-like growth was 6% and the sales revenue and not surprisingly, was down. That was down 9%. And if we looked at it on a like-for-like basis, it would have been down 15%.

Financial Services was up 11% to GBP 8.6 million. And the acquisitions that we've done actually added 19% of growth in the first half. And when I talk about the acquisitions, if we look back to last year, we acquired the network time right at the end of May last year. So this year, we had effectively 5 extra months. And then this year, at the beginning of June, we acquired the business down in Bristol, BMA Bristol. And so we've had sort of about 3 weeks' worth of trading from that business. So that accounted for growth of 19%.

Meanwhile, the like-for-like Financial Services business went down 8%. But when you compare that to a 26% fall in the U.K. gross mortgage lending in that period, I think we'd consider that a good result.

On the gross profit, side, that was at GBP 9.3 million, down from GBP 9.4 million. Basically, the property division was down GBP 300,000, and the financial services was up GBP 200,000.

The overall gross profit margin is 58%, and that's down from 61% for the same period last year. And that reflects the increasing proportion of revenue from financial services. So basically, revenue on the property side, 100% of revenue falls through into gross profit whereas on the financial services side, we see quite a significant pay away at 75% going to the commission to the advisers and also fees payable to the leads from agencies. So there's quite a large pay away.

The financial services itself, their profit margin -- gross profit margin was actually 23% compared to 22% last year. And if we were to look at it over the full year, we project it to be at about 25%. And this is because we get quite a large override from Mortgage Advice Bureau at the end of the year, which we don't account for until the end of the year when we know what it actually will be because it has a certain threshold.

Net profit before tax is up 10%. Net profit after tax was 4%, and that was despite the increasing tax rate in April this year. And as Dorian mentioned, we increased the dividend, which really reflects a strong cash generation now that we're net cash and increasing profitability.

So just moving on to the pin in a little bit more detail. I'll give you a little bit more detail around the gross profit. And the reason we do it, the gross profit line, because this it's a more appropriate comparison between the financial services division and the property division.

So the franchising out, the -- Humphreys offices, as I said, it reduced the gross income from the corporate offices by GBP 600,000, but it added GBP 100,000 in MSF given us a net impact of GBP 500,000 in gross profit. But if we look on the administration cost side, we actually reduced our overheads by GBP 0.5 million. So the net effect for the business was nothing at all. And it was absolutely in line with our franchising strategy.

On the management service fee side, it was up 4% to GBP 5.5 million. We saw MSF from lettings up by GBP 300,000, offsetting GBP 100,000 decrease in MSF from sales. The like-for-like growth on the letting side was 6%, and that compares to the U.K. rental index of about 5.5, 5.2. And the like-for-like decrease in sales of 15% compares to an 18% drop off in U.K. property transactions.

On the financial services side, gross profit was up 13% to GBP 2 million. The acquired [ FS ] businesses added GBP 300,000 and the underlying businesses were broadly the same.

So the gross margin ratio is something that we always report on. Lettings was at 58%, down from 60% in the first half of last year. And we can see there that sales has dropped down to 15%, whilst financial services is up to 21%.

On the admin costs, overall, they were down GBP 400,000 to GBP 5 million. That was a 7% decrease. As I said, the franchise -- has two corporate offices, reduced costs by GBP 0.5 million. We also spent GBP 200,000 less on corporate professional fees associated with acquisitions. That was a saving this year, slightly higher share-based payment charge added GBP 100,000. And meanwhile, the acquired businesses added GBP 200,000. And if we -- when we call those into account, the underlying overheads remained broadly the same.

As you can see there, profit before tax, up to GBP 4.4 million and the earnings per share up to 9p per share.

So this slide is a slightly different representation to one that we've shared at the full year results at the prelims looking at how the red being lettings, the green being sales and the blue being financial services. So this -- looking at the gross profit contribution from each of those income streams. And down the right-hand side here, you can see the milestones of where we've made various acquisitions.

So back in 2012, we were purely one brand, Belvoir, and we only did lettings. We started to do a trial on sales and introduced a little bit of sales in 2013. That started to build up mostly in 2015 when we acquired Newton Fallowell. That came a little bit of financial services, but that started to build up in earnest when we acquired Book Financial Services in 2017. And so we we've gone on with our last two acquisitions in 2023, which haven't really affected -- or one hasn't affected the first year -- first half numbers at all and the other one by very relatively small amount.

So over the period since 2017 to date, with actually -- financial services has actually made a contribution of GBP 17.7 million in gross profit. And that's against the total investment, including the last two acquisitions of GBP 12.2 million, but obviously, we've got all the upside from those acquisitions still to come.

So if we move forward and have a look at the balance sheet. On the balance sheet, we can see that the -- we've got the acquisition of BMA Bristol for GBP 1.1 million and netted off with the sale of Nicholas Humphreys Derby to the franchise -- to the branch manager to franchise it.

One of the areas I tried to explain is what we call the unearned indemnity commission, those -- the balances are affected by unearned indemnity commission, that being when we sell a life protection policy under financial services, we earn all the commission upfront. But it could -- if the client cancels within 4 years, there's a clawback on a straight-line basis.

So Mortgage Advice Bureau, themselves, they retain some of our commission in the bank account with our name on it. That's -- they're currently holding GBP 2.2 million of our funds. That's because they're the first line in -- with the unearned indemnity commission is called from them first and then they would recover it from us. We recognize that we have a liability of GBP 2.2 million, but we can recover GBP 700,000 from our advisers for whom -- where they have responsibility for that sale. So that makes up those fee balances.

We have -- at the half year, we had net cash of GBP 400,000. That compares to net debt at the end of June last year of GBP 2.5 million. And at the end of the year, we had our bank loans with still GBP 2 million, which we settled in March. But we do actually have a GBP 2 million overdraft facility in place to give us a little bit of headroom should there be any short-term requirements. And at the -- and on Friday, 1st of September, the bank balance was GBP 0.5 million.

Just move on and talk about the cash flow. Still highly cash generative, 91% of EBITDA converting to cash. You'll notice that the tax payment in the first half of this year was much higher than it was last year. This year is fairly normal. Last year, we had a -- there were some share options that were exercised in 2021, the effect that gave rise to a tax relief against the first half payment of corporation tax in 2022. So that's why last year was quite a lot lower.

On the investing activity side, we invested GBP 1 million in BMA Bristol, net of cash acquired. We lent GBP 0.5 million to the franchisee and taken on Nicholas Humphreys. And you can see that we continue to support -- to provide financial support to franchisees under the assisted acquisitions program. And as Dorian covered earlier, we've seen a lot more activity on that front and hence, the lending has up accordingly.

On the financing side, we repaid the loan of GBP 2 million in March, and we had a 5p dividend per share paid as a final dividend for 2022 payable in May. That was a total cost of GBP 1.9 million.

If I just give a little bit of an update on our ESG strategy. We had set up our 5-pillar strategy last year. And this year, we've been spending time formulating our decarbonization strategy. We've created a bespoke emissions modeling tool, which estimates changes in our carbon footprint up to 2030.

We started to implement some of our specific policies. For example, as cars are -- company cars come up for renewal, we're -- they're being replaced with electric cars and we've install -- obviously, installing electric charging stations in our central office car park. Once we're working towards decarbonization, we intend to offset our current usage against certain projects in the U.K. and abroad.

Moving away from the sustainability issues. On other aspects of ESG, we've conducted 98 training courses to nurture talent, that's both then for franchisees and for our staff, and we've carried out 172 audits of our franchisee businesses to ensure the highest professional standards.

So on that note, I shall pass you back to Dorian.

[Dorian Gonsalves, executive]

Great. Thanks, Louise So the -- as I said at the beginning, the final 1/3 of the presentation really centers around the operation itself, which is this slide. And the next time for the slides are really cover the property market and also the financial services sector. And hopefully, some of these slides will answer some of the questions that we've had come through. If not, we'll sort of tackle the questions at the end.

So first of all, property locations is pretty stable at 335. We're not reliant on opening new locations to drive growth across the franchise network. I just wanted to point that out. And just to give you an example of that, in the first half of this year, 20 franchisees exceeded revenue with GBP 0.5 million. So we've got 20 franchisees now online to achieve GBP 1 million of revenue or more from sort of single locations.

The average revenue across all of our franchisees, our property franchisees, is about GBP 320,000 a year. So you can see that if you're a property franchisee -- haven't to open in five locations to grow your business, you can stay in one location. And in theory, if your territory is big enough you can grow to a turnover of GBP 1 million from one location. If not, slightly more than that.

So point being, we're working with our existing franchisees to help them grow the business. It's much more risky to sort of cold start and open from scratch. That was something that we pulled away from a number of years ago.

So on the operational side, the average MSF, so as I said that the average revenue franchise is about GBP 320,000. It was a touch less than that the first half of this year, but I suspect they'll have a slightly better second half. But in -- terms, it's about GBP 320,000 per year.

The average MSF that we generated per franchisee in H1 was GBP 6,800. That's for the half year. The MSF rates that we charge are between sort of 10% and 12% depending on which franchise network the franchisee is in.

Number of mortgages, I touched on this earlier. So we ranged 10,252 mortgages in the first half, which is up 6% and average group income per adviser. So on the basis that the overall mortgage market fell back by about 28% in H1, our average income per adviser remained exactly stable, which is helpful. That just illustrates the point that I made earlier in the presentation that when you got self-employed individuals, no matter what's happening with the market around them, if the market slows down or changes or becomes tough for any reason, they sort of work harder and work smarter because they don't want their income levels to drop.

I think with great respect, if it was a sort of corporate managed network with branch managers, for example, employed advisers. When things get tough, it's fairly easy for us to come to leave and go and do something else for a different if you want running your own business. So we are underpinned by that self-employed element.

Across the property division, we opened in two new territories, both by existing franchisees. We helped 10 franchisees to sell their business and move on. Generally, that's at the point of retirement, not always, but in general terms. And we've got about another 10 resales in the pipeline. I suspect we'll finish the year similar to last year with maybe 20 to 25 franchises we sold throughout the year.

I've already mentioned the portfolio. The number of house sales was down 15% to 4,177 and that compares to an 18% reduction in overall U.K. house transactions. And I've got a slide on the sales market next.

Lettings to sales ratio. So if you move financial services to one side, and just look at our property revenue, 80% of our property revenue is recurring. It comes from residential lettings. And 20% of our property revenue comes from a state agency.

We've got 20 franchisees heading for GBP 1 million of revenue this year, and 64 franchisees now on two or more offices with 23 franchisees having three or more offices. The highest number of offices run by a single franchisee at present is six.

Across the financial services division, we're at 321 advisers. You can see the average group income per adviser. 10% the mortgages written in the first half of the year were for buy-to-let, which is down. It was 16% in H1 2022. I think landlords have had very cheap lending for a long period. I suspect that some landlords, I'm one of them, are just reducing their gearing. So that they're not particularly affected then by higher sort of borrowing costs. About half and also, you've got a mortgage about half of landlords haven't and that's a sort of split.

The ratio of purchase mortgages to remortgages last year in H1 was 60-40. In H1 this year, you will be surprised to see that, that shifted to about 50-50. So the number of purchased portages has come down. The number of remortgages has gone up as people actively want to do something to -- when they're falling off the end of previous fixed rates, of which were very low.

The average case size per mortgage that we're writing is GBP 1,249. And that's slightly down on last year, but that reflects the high portion of remortgages, which tend to be slightly less profitable.

Lending from group mortgages was at GBP 2 billion in the first half of this year. GBP 1.5 billion first half of last year. So that's just no view on some of the operational detail.

I've had a few questions on the rental market, and surprisingly. So I'll run through this slide, and I might grab 1 or 2 of the questions and then move on to state agencies. So first of all, more the slide showing, well, the thick blue line at the bottom shows rental growth across all tenancies. So that's new tenancies and its tenancies where the tenant hasn't changed to existing tenancies. Perfect blue line, and that's running at about 5%, up from 2% back in March 2017, which is where the graph starts.

The thick red line is rental growth on new lets. So if you are looking to rent a property today, chances are will be up against maybe 10 or 15 other people who also want to rent that same property. That's giving rise to an uplift in rental inflation on new lets. And rental inflation, interestingly, is running at double digits in most regions. And in fact, in Scotland, over the last 12 months, it's running at 15% inflation on new tenancies.

When you apply -- when you look at the whole of the rental market, including tenants where they haven't changed property, it's much more -- it's much lower than that. It's sort of circa 5%, and that's tracked by ONS.

And then the gray line just shows earnings growth. So you can see that sort of now sits in the middle of existing -- all tenancies, which in the bottom and rental growth on new lets at the top. It kind of sits in between that. Whereas if you look back at the start of the graph at March 2017, rent growth was just a touch higher than the other two -- lines.

This isn't in the slide deck, but from my point of view, I mean, the reason for this is that demand for rental properties is 57% higher now compared with the average over the last 5 years. It is very, very high for lots of different reasons. The supply of rental properties, i.e. number of properties available to rent today is 27% lower than the 5-year average.

Now that shouldn't be confused with the size of the private rented sector. So the size of the sector, i.e., the number of rental properties with people living in them is about the same size. There's anecdotal suggestions that some of the landlords with properties may have sold over the last year or 2. That hasn't been confirmed in any data yet, but it will be confirmed in English housing survey towards the end of the year. I suspect that some lenders have sold off for various reasons in the last year or so.

If you look at the last English housing survey, which is '21 to '22, it runs financial year, the size of the private rented sector had grown over that period by about 170,000 units. I suspect it's fallen back by a similar amount when we see the new English housing survey in December.

So demand is very strong. Supply in terms of available properties is very low. And as I mentioned, tenants are competing with maybe 10 or 15 other people to secure a property.

Now there isn't anything that, to me, that suggests that is going to change in the short to medium term. Governments are still making slightly kind of noises towards landlords, but that hasn't -- go, but that hasn't translated into sort of any action.

If rent inflation is to be curbed by any measures, really what needs to happen is that government needs to be more friendly with landlords, possibly sort of more impact on some of the -- these incentives that have been introduced over the last 6 or 7 years and encourage more landlords into the sector.

I suggest if that doesn't happen, I think there'll be a fair few cross renters. There are 13 million people renting in the run up to the election if rent inflation continues to run at these levels. But as I say, from my perspective, I can't see anything that we'll have -- bar affordability, there isn't anything that I can see that will curve that or increase supply.

Somebody asked on the questions is build-to-rent making a difference? No, is the short answer. The rate of growth of build-to-rent has slowed in the first half of this year. And there are around 250,000 build-to-rent units either complete. It's a significantly smaller proportion of that, that have been completed, either complete or in the pipeline. The size of the private rented sector in England is just shy of GBP 5 million. So it's a very small part of the sector.

And over the last few years, we've seen population increase to the tune of -- in the last few years, 2 million. And population is forecast to increase by 3 million over the next 10 years. And the private rented sector just isn't keeping up in terms of growth with population pressures and other pressures.

And interestingly, I mean, what we've seen in the past when property prices sort of fall back is that normally, the private rented sector takes the slack. So we've got a countercyclical side of the business. But actually, what's happening now if fewer people are buying properties and 18% -- there have been 18% fewer transactions in H1 compared to last year. So fewer people are buying. More people are therefore requiring rental properties because people need to live somewhere in the intervening period. So that's putting even more pressure on the rental side. We are a big letting agent. We manage a lot of properties. We continue to grow our managed portfolio.

And another question that we've had is with small landlords, is sort of pushing over a period of time. The average landlord in the private rented sector owns 1.8 properties. And no, there isn't really a shift away from small landlords to larger landlord. That isn't something that's happening. Right move did allude to the fact that they're dealing with sort of what they're seeing more sort of corporate landlords. But that's due to tax treatment landlords can incorporate at any point.

It doesn't mean that they're a bigger landlord. It just means that they're taking their portfolio of five properties and incorporated, therefore, they are, by some commentators, being called professional landlords. I would question that. I just think they're using a different vehicle because of -- for tax purposes.

So I hope that gives you a steer on the private rented sector, and I'll run through some more questions on that shortly. If we move on to the next slide, Louise, we have residential property sales. In many ways, it's easy to sort of see what's been happening with property sales. So I'll touch on house prices, first of all.

I mean, house price is the most pessimistic index of house prices and there are sort of 4 or 5 different high-profile indexes. Right there you see ONS, Nationwide, Halifax, just name a few. You've got sort of nationwide at the most pessimistic and saying that property prices have fallen by 3.8%. And the most optimistic actually is sort of ONS and they track sale completions, which are 5 months out of date, if that makes sense because completion is based on a property sale that happened 5 months before.

So there -- in terms of their index, they're saying that property prices are 1.7% higher than there were compared to that previous 12 months in their index. So somewhere between plus 1 point something and minus 3.8% is where the indexes show. And when the bottom line is, I think property prices will probably fall even further. Not too much, and I think they've been very resilient, but I suspect that we've got a little bit more to come on that side.

I also suspect that transaction numbers will remain about the same, sort of minus 20% up until the end of the year. At the start of this year, we forecast that the U.K. would see 20% fewer property transactions. And we took 20%. You may remember that we issued have we changed our numbers in January to reflect that. We said that we handle heart. We felt that we would see across the whole sector, 20% of the fewer transactions, and that's exactly what's being borne out in the numbers.

So what the graph showing is housing transactions in blue versus -- well, on the same chart, we've got the house price index. So you can see the sort of pattern of housing transactions. In the first half of this year, the U.K. saw about 490,000 sales complete. That was still versus almost 600,000 in the first half of last year. That's the year when it's 482,000. That's the year the sort of changing number.

So good news is, so on the back of that market, our MSF perform the state agency is down just 9%, which we think against, a market that's sort of 18% down is actually a pretty good result.

Okay. On to the sort of mortgage market. Now this is -- the graph is showing the U.K. mortgage market. It's not our mortgage lending numbers. We used this slide last time around, so we're using it again. And it just shows that house purchases in dark blue has transactions in gray at the top, I mean, you've got remortgages in red. So it just illustrates the fact that transaction numbers have fallen and also that there is a change in mix between house purchase mortgages and remortgages.

So gross U.K. mortgage lending in H1 this year was down 26%. And performance against that is plus 11%, and that's by means of acquisition. We haven't yet seen the upside of the two acquisitions that we've completed in the last few weeks. That will come in H2.

I mean, I think just a few sort of points. I mentioned that most of our advisers are self-employed. Therefore, they work harder in a more difficult market. And we also have a strong client database. So all of the acquisitions that we've made have come with many, many years of sort of clients that can be approached for remortgage reasons.

I also think that there was a much, much higher demand for bespoke advice now from an intermediary compared with 2 years ago. If you felt a sort of 2% fixed rate 2 years ago, you may have just called you -- said, look, just can you talk me a deal or can you just leave me on the sort of the current rate. Whereas now, I think that most clients are shopping around to see what deals are available to them for obvious reasons because rates are going up.

I'm sure you have your own thoughts, but we tend to feel that rates -- the bank rate may top out towards the end of the year. If that does happen, that will give an impetus not just to the house sales market, but also to the mortgage market, too.

So we've been through on the mortgage side, it actually has been difficult really for the last 9 to 12 months following the mini budget. But as you can see, we've continued to grow the business regardless.

That kind of brings me to you a wrap up really before I move on to sort of questions. So why invest? We have proven multi-brand franchise model. Franchising to me is a fantastic method of supporting people who want to work for themselves, but they don't want to have the hassle and the grief and the risk of deciding the entire business model on their own, so they can join our model, use our systems train, use our support, use our acquisition support, use our technical knowledge to grow a small business with -- through an established brand. So a proven multi-brand franchise network.

And we've got a history of a strong financial growth, so 26 years of unbroken profit after tax. Although I appreciate you haven't met them, we've got a very strong and stable team of Directors and managers who sit beneath the Board, who run each part of the business, some of whom have been with me for 15 or 16 years. These very, very skilled people.

We've got a high degree of recurring revenue. So 15% of our gross profit comes from recurring lettings, 21% comes from financial services. Although it's not on this slide, 15% of our gross profit comes from a state agency sort of the smallest part comes from property sales.

And as I said at the very beginning, we've made 12 corporate acquisitions since 2015. Six on the property side, six on the financial services side. And we remain very acquisitive. We've got a good plan for the future, and we'll continue to deliver results. What we have said in our release is that we are constantly in line obviously with the first half. And we're also comfortably in line for the full year. We have already said that to the market just to give you the best reassurance that we have.

So what I'm going to do now is I'm going to run through some of the questions. If I read them out, some I'll pass across to Louise and some I'll tackle.

[Dorian Gonsalves, executive]

So I think I'll do the -- we've had a couple of sort of pre-submitted questions. I think it's only fair to deal with those first of all.

So the first question, given the U.K. lettings industry, consolidating in previous years and expecting to do so into the future, what is our thought -- what are our thoughts on the use of excess cash in an environment where there are not adequate acquisitions to deploy capital? It's a good question. I think that, first of all, persisted acquisitions are the most profitable thing that we can do. And that's why we help franchisees to grow their revenue by means of acquisition. It's very profitable because we get a cut of that revenue with very little cost to set against it. So that is number one in terms of our choice.

I think we've also instigated, in terms of use of capital, we have undergone a small share buyback in the last few months, which you may have seen documented by means of RNS'. We may consider special dividend, I guess. It might make something we may consider. But ultimately, we have just increased our dividend, which has gone down very well with some of the comments support that.

So yes, corporate acquisitions fit alongside really franchisee acquisitions that if we got targets and we can acquire businesses at 3 to 4x multiple like the two that we just done, why wouldn't we, I guess, is my question back. But clearly, it depends on what opportunities we have going forward. We are very cash generative, and we are, as a Board, considering various options for use of cash. That was the first question.

That's for -- there's a follow-up question. Same person said, what kind of metrics do we look at when evaluating acquisition? Louise, do you want to mention -- this is a corporate acquisition. Do you want to just go for that one?

[Louise George, executive]

Yes. We slightly look for geographical fit and whether it's obviously whether they're going to be accretive to the business, whether like, on the financial services side, how they deal with our financial services business. Certainly, on the financial services side, we favor networks or made up the self-employed advisers as opposed to employee advisers. In fact, I'd go as far as saying we would actively avoid any where their employee advisers.

And on the property, obviously, we're looking at the franchise element, which is why we acquired Nicholas Humphreys and Lovelle. They were both actually -- they took their geographic box in terms of they were relatively close to where we're based. But that's less important on the property side. It was a franchising that was quite important there. And both of them were substantially franchise-based.

[Dorian Gonsalves, executive]

Brilliant. Thanks, Louise. The second sort of pre-submitted question, I'll just read it out. So forgive me, so you frequently mentioned the potential tailwind from increased regulation like the rent reform build, right? You've recently mentioned that senior shift from small animals to larger professional companies. I'm assuming you're more geared towards the smaller landlords than the larger ones, therefore, doesn't this mean that increased regulation could end up being a headwind for Belvoir in sort of a tailwind?

As a follow-up, can you provide some details regarding a typically landlord that works with Belvoir in terms of how many properties they own?

The typical landlord at Belvoir is the easiest one, anywhere between 1 and 10 properties. Very few of our franchisees like to work with larger landlords for lots of reasons. They don't want to pay agents' fees. In some cases, they want to discount. It's not profitable.

And if you deal with an order with 50 properties, it can be a threat to a small franchise business when they're turning of about GBP 300,000 a year. So it's kind of between 1 and 10.

The typical landlord in the U.K., I mentioned this earlier, owns -- fully average, number of properties by landlord in the U.K. is 1.8. So the sector consists of small landlords. There aren't that many sort of large landlords in the sector.

Will that become a headwind rather than a tailwind? I disagree. I think there are 160 rules and it's a legislation that the landlord needs to follow to correctly manage property. And I personally think that a lot of landlords who aren't using an agent are just ignoring the legislation. It's as straightforward as that.

Government for the same. There's cross-party support for tighter regulation of property management. So I think it's the opposite. I think that more landlords partially as a result of rent-to-reform bill, which is due for its second reading at some point in the next few weeks.

I think past due to these regulations, the more landlords will say, look, for the sake of how much you cost, which isn't very much, can you just look after the property for me and all of the headache that comes with it, and that's what we're good at.

So [ David D ] said that some companies are building to let company. I think I covered that one by saying build-to-rent is still relatively small. It's about 250,000 units either completed or in the pipeline. And if my numbers are right, I think build-to-rent completions are still sub-100,000. So it's a relatively small part, but necessary over time.

David D asks again, and this is quite a common question. it appears that many small landlords are selling off their rental properties due to new regulations. Is this effect in the company in the number of available rental properties?

It hasn't affected our portfolio. We still got growth on -- as far as the rental portfolio is concerned. And if you look at the size of our managed book over time, we're not seeing any evidence of a mass exodus.

So just to use your word, many small landlords are selling. Some of them will not, I suggest it's the honey geared landlords who are frustrated with higher borrowing costs.

If you're a landlord with 20 to 30 properties, they're not one of our clients. With very high sort of gearing, I'm not surprised that you're looking to sell off some properties to work to rebalance your portfolio. But as I say, we tend to deal with smaller landlords who if rates -- mortgage rates do change, we feel that reasonably well placed to weather that storm and rates obviously have changed.

And David D again, I'm -- order. I'm really pleased to increase the dividend. I suspect that will positively affect the share price.

It has, I think, a bit today, so thank you.

Another question is, how do we find integrating new mortgage brokers with the Belvoir brand works? I'm assuming there is a big feed of potential property buyers.

That's actually still a work in progress. And although there was in this particular day or hope that when we next do the round of the next round of presentations that will include a slide to explain the tech solution that we're currently working in partnership with MAB to help us extract mortgage business from our brand -- from our network of property agents. So that's a work in progress, David. But that's a seriously good opportunity for us in the future.

[ John H ] says good management. I hand you to read this --. Good management over this period. Thank you very much. I'll pass that one on.

John H again. My question is, what is the current interest rate charge to franchisees for the assisted acquisitions ? Yes. And if rate is a lot greater than the Bank of England's rate, would this deter franchisees from making further acquisitions due to the high interest?

[Louise George, executive]

So we -- for most of the time I've been at Belvoir since 2014, we've charged 8.45 over base. And obviously, base is being pretty low during that period. But when we started to see the base rate increasing, we didn't want our franchise owners to be deterred from doing assisted acquisitions or to make the assisted acquisitions more challenging for them by having the high financing cost from us.

So it's a discussion -- they're still signing up to 8.45 over base. But our discretion, we're capping it off at 10.7%. So we've still got some headroom between what the base rate is and what they would pay, but it's a lot less than they would pay we're getting it from a third party. And obviously, that is purely because we just do not want franchisees deterred from making those acquisitions.

[Dorian Gonsalves, executive]

Just to take the question on to that Louise, somebody else's said, you found 23% of the total consideration for franchisee acquisitions in H1. Is this typical percentage? Would we like it to be more or less? And where else the franchisees going for funding?

[Louise George, executive]

Yes, it's interesting because it is higher than it was in the years -- the previous years, including the years pre-COVID where it got down to around 9% or 10%. And that's because we were helping franchisees access alternative funding sources. Of course, with our rate kind of being capped at 10.7%, it's more attractive to them to take what we will lend to them than to take the money from elsewhere. And for us, it's a bit of a balancing act because we want to make sure that we're not exposed too much.

With the way we say to franchisees, we are prepared to lend up to 50%. But in the main, it tends to -- it's coming out in -- to '23. Some franchisees have got successful businesses and they've got their own supply of cash to fund these acquisitions, and they don't need to go out for lending and some of them are accessing lending elsewhere. But we would not want the lending issue within reason, we would not want it to store people from doing the assisted acquisitions.

[Dorian Gonsalves, executive]

While [indiscernible] a couple of questions. If you can maybe have a look at the question from [ Horisto ], Louise, while I'm sort of doing these two.

So Alistair asks, you're a franchise in property, so franchisor and increasingly a franchisee in financial services. Why the different approaches?

I mean it's a good question. I think -- there are a few parts to the answer. I think once it suits us, it's less risky. We like the Mortgage Advice Bureau. We believe that we get good value from our relationship with Mortgage Advice Bureau. And a lot of our mortgage advisers love the MAB brand. It helps them sell products to clients. It is a strong brand.

And I think that really is the crux of it. MAB have been very supportive with sort of our growth strategy. If the alternative is that we do something and we become directly authorized and we have our own sort of system. When we sort of -- I'm not saying we'd never consider that. We -- the mortgage advisers are our advisers and we choose to contract with MAB. And If we choose to contract with that means that we could, in theory, we choose to do something different in the future.

We have a long-term contract with MAB. And as a Board, we -- 100% -- with the relationship. So I think just different businesses require a different approach is the short answer.

[ Sam ] has asked what do we charge from managed services to landlords? What does this cover? And how does that compare in terms of other providers?

I won't go into too much detail, Sam, because we can talk quite a lot about property management, but happy to talk separately. But in general terms, franchisees charge between 10% and 12% per month to manage a property. Now there are two different ways of charging.

One is agents charge in the U.K., you've got within the [ M25 ] and you've got --. So within the M25, agents typically charge a much higher fee upfront and a much lower fee for property management. We tend to use the outside of London model, which is to charge for a low set of fee and a higher management fee. We just find that kind of works for us and works for landlords.

So 10% to 12%, tax deductible and it's pretty much turnkey service or landlord can hand the keys across. And we will deal with maintenance, we'll deal with the tenant calls at 3:00 in the morning, we'll deal with pretty much everything in terms of property management.

I'm a landlord, Sam. And I think if you're a small landlord with one property, let's say, and you haven't been through a scenario where you tend starting the rent or tenants be completed maintenance or you can't get maintenance contractors to do jobs on properties because maintenance contracts are generally stacked out with work at the moment.

If you've not been through any difficult scenarios, you probably wouldn't appreciate the strength of having an agent sitting between you and your tenant, especially if a tenant doesn't pay the rent. If your tenant doesn't pay the rent on a property, they're not going answer calls from a private landlord who calls to say, would you mind. But in terms of whether you go if a tenant doesn't pay, again, that's where your agent sort of steps in and deals with the technical side of that.

So I think we do a good job for a relatively small amount of money. And some landlords agree with that. Some landlords will disagree. About half of landlords use agent and about half don't use an agent. But as I said earlier, governments were keen to see the half level landlords who don't use an agent, they're keen for those landlords to operate correctly. And I suspect that some of them over time will sort of migrate across two agents.

[ Scott ] has asked is there a limit to the size of the franchise loan book we're comfortable with?

It's actually been quite a lot higher -- at the moment. I mean we originally raised money on the market many years ago to provide loans to franchisees. It's been as high as GBP 5 million. So we've got plenty of headroom. And no, I think we would happily sort of give loans to franchisees with a sort of lending criteria if they need it for acquisitions because it's still profitable or concerned.

[Louise George, executive]

So I'll pick up the question from [ Risto ], which is really good question. It had me -- it did have me thinking about it here. So the underlying average returns.

So I would say that, that works out around sort of 33%. When I look at the -- have to exclude the most two recent ones, obviously, because I haven't contributed yet. But if I look at where we were last year and do a bit of an adjustment for full year, the time acquisition, I would say that against what we've invested in them, what we bought them at, we're getting a 33% return. And certainly based on the two we've acquired this year, I think that will continue.

And the other part of the question was how they were leveraged. I think all of the acquisitions that we've done on financial services have been acquired from cash. Well, obviously -- and obviously bank debt -- I guess on book property bank debt but mostly cash. So- -- no, actually, I'd say even book, I think was cashing yes, book was cash as well. There will be in cash.

And then the underlying growth rate. So it's very quite difficult because businesses have come on at different times. But looking back at book, I would say that book is -- profitability is up 3x since 2017. And certainly, the number of advisers has doubled.

On the acquisition that we made in 2018 of [ MAB Gloster ], that's actually the number of advisers have pretty much doubled. And in terms of their contribution, that's probably up by 2.5x. So the underlying -- the organic, if you like, growth in those businesses has been quite substantial. It's not all growth on the financial services from acquisitions at all.

[Dorian Gonsalves, executive]

Great. Thanks, Louise. And if you would mind taking look at the one from Mark, while I do this one would be great. So the -- so this is from [ Michael] . So if we have the choice of acquisitions in both property and in financial services, a different gross profit percentages, which division will add a greater absolute level of cash profit, i.e., should you be favoring acquisitions in one division over the other?

I think it's interesting one. I think we -- on the property side, there aren't that many property franchise network to acquire, good quality ones. So I'm afraid that we just really have the luxury of sort of picking from lots of other franchise networks. However, I mean, we -- after doing 139 franchisee acquisitions and 12 corporate acquisitions, in our sector, we are recognized as being a good buyer of businesses. So we do get to hear about our businesses if networks are looking to sell.

So given the choice, I mean, we're very passionate about franchising. We'll see more franchise acquisitions, if we can, but there just aren't many of them to choose from.

And I think on the FS side, as we mentioned earlier, we've been a little bit opportunistic this year. But we did say we wouldn't be at the start of the year because we think it's a good use of cash and at the multiples that we bought them out, as I mentioned earlier, why wouldn't we.

So let's just -- sorry not to be too clear on that, Michael. This isn't -- we don't have the luxury of a list on both sides kind of pick or choose from. But I think personally, I would like to be sort of acquiring more property franchise network, but they're pretty tough to get hold of. And at the moment, we've had opportunities on the FS side, if I helps.

So first, I just wanted to thank us for the answer to the question, Louise. That's one for you, they're all things go to you. And then do you want to handle the last one, Louise. That's from Mark...

[Louise George, executive]

Yes, the one return on capital employed. I guess we -- I wouldn't say it's a big measure of profitability for us. I wouldn't say it's something we track diligently. It's -- we don't have -- we don't need to employ much -- other than when we do make specific acquisitions. And certainly, in terms of -- is tracking around 25%, 26%, which seems quite a sensible return from our viewpoint, but it isn't something that we track diligently, I wouldn't say.

[Operator]

That's great. Dorian and Louise, thank you very much indeed. In fact, you've answered every question submitted from investors this afternoon, and thank you to all for your very kind engagement. Dorian, I know investor feedback -- and Louise, I know investor feedback is particularly important to you both, and I'll shortly redirect those on the call to give you their thoughts and expectations. But I wondered before doing so, if I may, Dorian, just come back to you for a few closing comments.

[Dorian Gonsalves, executive]

Yes, absolutely. I think -- thank you for that, Mark. I think just to say sort of looking forward. So at some point, over the next 12 months, the property sales market will start to improve. And I imagine that would be when Bank of Finland read tops out. So we will start to see some improvement on the property sales side at some point in the next 12 months.

I think similar on the mortgage side, over the last 12 months, if you look at the challenges that we faced and all mortgage businesses have faced over the last 12 months, it's been pretty tough, 14 interest rate rises, and we have mini budget, et cetera. What we'll continue to do is grow our network of advisers. So again, when the mortgage market starts to improve, which I expect it will over the next 12 months and we're also a perfectly place to with a good springboard for growth.

And then finally, on the letting side, I don't want to say that we've got sort of growth -- going forward. But I think anybody who's following the sector will see 13 million people need somewhere to live. We're currently looking up to 75,000 properties, and that number continues to grow by acquisition on behalf of the franchisees. And we will, as a business, continue to support them to do that.

[Operator]

That's great. Dorian and Louis, thank you once again for your time this afternoon and for updating investors, but could I please ask investors not to close this session as we'll automatically direct you for the opportunity to provide your feedback in order that the company can better understand your views and expectations. This may take a few moments to complete, but I'm sure it'll be greatly valued by the company.

On behalf of the management team of Belvoir PLC, we'd like to thank you for attending this afternoon's presentation. Good afternoon to you all.