Countryside Partnerships PLC

LSE:CSP

Earnings Call Transcript

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Good morning, everybody. Thank you for joining us today for the Countryside Properties PLC full year results presentation. My name is Ian Sutcliffe, I'm the Group Chief Executive. And I'm joined today by Becky Worthington, our COO; and Mike Scott, our Chief Financial Officer. And together, we will take you through the presentation. As always, there will be an opportunity for questions at the end of the slides.Let me just start by saying, we are delighted to be presenting another set of excellent results. We have maintained our sector-leading growth in completions and earnings, while our return on capital employed, operating margin and cash generation have exceeded our expectations. With a record forward order book up some 40% at GBP 900 million on the previous year, we're well placed to continue our growth.Both of our divisions, Housebuilding and Partnerships, have performed exceptionally well. Partnerships just goes from strength to strength and has had a truly outstanding year, while our Housebuilding business has improved significantly on the back of more modest growth but with improved operational efficiency and continued capital discipline, we've seen an improvement in earnings.I'll now hand you over to Mike Scott to go through some of the numbers.

[Mike Scott, Group CFO & Director]

Thanks, Ian, and good morning, everyone. So 2018 has been another year of very good performance for Countryside, in which we've delivered strong growth, improved returns and added to our balance sheet resilience.Group operating profit was up 28% to GBP 211.4 million, and operating margin up 110 basis points to 17.2% as we started to drive operational efficiencies through the business. You can also see returns coming through strongly, with a return on capital employed at 37.1%, up 650 basis points on last year. Our strong balance sheet allowed us to fund the acquisition of Westleigh from our existing resources, and we still ended the year with GBP 45 million of net cash. I'll come back to EPS and dividend shortly, but you can see that both of these are also up significantly on last year.So turning to the summary of group income, and as usual, all of these numbers are presented on an adjusted basis, which includes our share of joint venture and associate results, and we set out a reconciliation in the back of your slide pack.Adjusted operating profit also excludes nonunderlying items, which this year were GBP 15.7 million, of which GBP 2.7 million were nonrecurring deal-related costs and the remaining GBP 13 million was deferred consideration and amortization in relation to the Westleigh acquisition.Group revenue grew by 20% to GBP 1.2 billion as our volume increased 27% to 4,295 homes. Private ASPs fell to GBP 402,000 as our geographical mix changed with a greater contribution from the North and the West Midlands in the year. And we also continue to focus on maintaining affordability for local owner occupiers.Operating margin increased by 110 basis points to 17.2%, and broadly 2/3 of this increase came from operational efficiencies, which Ian will talk about in more detail in a few minutes.Westleigh contributed 465 homes to the group in the second half and GBP 5 million of operating profits as we accelerated the integration there to build a solid platform for future growth.Net interest was broadly flat on last year with cash interest paid of GBP 3 million. And we also restated our 2017 interest costs in relation to our noncash nonunderlying item last year, and that had the effect of increasing 2017 retained profits by GBP 6 million and we've set out a bit more detail in the notes to the RNS release.The tax charge of plus GBP 8 million gave us an underlying rates in line with the statutory rates at 19%, and we expect to be at or slightly below the statutory rates in future years. And retained profits of GBP 161.2 million resulted in basic EPS of 36p per share, up 30%. And as you know, our policy is to payout 30% of adjusted earnings as a dividend, and therefore, our dividend was up 29% to 10.8p per share.We continue to manage the balance sheet carefully to ensure we retain flexibility and remain resilient through the economic cycle, and we remained our prudent -- maintained our prudent position on the balance sheet with adjusted gearing including land creditors of 10%, with land creditors being broadly flat on last year.The assets on both divisions improved this year as we maintained capital discipline across the business, and it's now at 4.8x in Partnerships and 1.4x in Housebuilding, taking the group asset turn up to 2.2x. This increase in asset turn combined with the operating margin improvement took ROCE up to 37.1%, well ahead of our expectations.So turning now to the group balance sheet and you'll see the main movement in the balance sheet this year is the recognition of goodwill and intangible assets on the acquisition of Westleigh. Of those, GBP 62 million was goodwill and GBP 53 million brand and customer-related intangible assets. And these intangible assets will be amortized over a period of 2.5 to 10 years.Our net investment and joint ventures remained broadly flat as we reinvested GBP 41 million of dividends received back into these sites, mainly at Acton in London, and Beaulieu Park and Chigwell in Essex, which between them delivered 295 units for the group this year.As we continue to grow the business, our work-in-progress increased by GBP 83 million, taking total inventories to GBP 750 million, with broadly half of this increase acquired through Westleigh.As I said, land creditors remained flat in the year and land overage increased GBP 13 million, representing the share of profits on some mainly Partnerships sites that we will pay to our partners in future years. And our part of that share is reflected in the higher Partnerships margin this year.Tangible net asset value remained broadly flat this year with the uplift from retained profits being offset by the recognition of the Westleigh intangible assets.So if we move on and look at the cash flow and you can see here the strong generation of cash by the business this year with GBP 163 million coming through operations. And we spent GBP 111 million of that in cash on Westleigh during the year. The remaining GBP 24 million for the acquisition is deferred until March 2020.On working capital, you can see here our continued investment in the Partnerships business of around GBP 50 million where we continue to invest in sites like Beam Park in Dagenham and Rochester Riverside in Kent to get them up and running, and that was offset by a reduction in working capital in Housebuilding as we manage work-in-progress and build efficiency in that division. So as I said, strong cash generation across the piece and we ended the year with GBP 45 million of net cash on the balance sheet. And we expect this strong cash generation to continue into 2019, and we'd expect year-end cash in 2019 to be around GBP 80 million.So just to remind you of our capital allocation policy then and we talked about this is at the Capital Markets Day in June. And during the year, we've delivered on all 4 parts of this policy. So we've invested to accelerate existing Partnerships sites, like Acton in London, and we're now active on 4 phases there. And we've also delivered organic growth in the underlying business in both divisions, and at year-end, had 115 sites under construction.During the year, we completed the acquisition of Westleigh, and obviously, if other opportunities arose that were similar, then we would look at them in the future.And finally, shareholder returns improved this year with a 29% in dividend. And as I said earlier, our policy remains to payout 30% of underlying earnings in dividend. And just in the near term with the heightened level of uncertainty in the market and the strong level of returns coming through the business, we don't propose to change the dividend policy at this point.Now finally, just before I hand you over to Becky, I wanted to also remind you of our medium-term guidance, which we're reconfirming today. We've had a really strong year this year and that positions us well to deliver these medium-term targets. And we still expect to deliver 10% to 15% completions growth, with a further 20% coming from the Westleigh acquisition in 2019.On margins, we outperformed in Partnerships this year despite some dilution from Westleigh because of a number of outperforming sites like Bow and Canning Town in East London. Now we expect this to trend back towards the medium-term guidance of around 15% next year, given the full year of Westleigh and the normalization of margin on those Partnerships sites.And as we said in the summer, our medium-term ROCE guidance is 35%-plus for the group, and as I said, we're reconfirming that today.So with that, I'll hand you over to Becky to take you through our operational performance.

[Rebecca Jane Worthington, Group COO & Executive Director]

Thanks, Mike, and good morning, everyone.I'm going to talk you through the performance of the divisions, and then I'll hand over to Ian, who will pull it all together at group level. So first of all, turning to our Partnerships business. And this slide really highlights at a glance what an incredible year it's been for the Partnership business, both in terms of growth and outperformance of returns.So focusing on some of the detail. Completions were up 38% at 3,019 homes. And if I can just direct you to the stats on the left-hand side of the page, that growth came from both private and affordable tenures, with private homes up in line with total completions at 38%. On the tenure mix, we do get variations depending on the particular sites we're bringing through. Over the next couple of years, we expect an increasing element of private rental sector not leased given the target to deliver 5,000 homes in the North West and Midlands to Sigma over the next 3 years.Private average selling prices were 8% lower at GBP 318,000. This was driven by geographic mix with an increasing contribution from the West Midlands and Northern businesses, as well as the impact of the Westleigh acquisition.While a number of outperforming sites combined with significant operating efficiencies, margins were very strong in the year, up 70 basis to 17.4%. Given the nature of the Partnerships model with resetting viability and the increasing proportion of pure affordable from Westleigh, we do expect margins to reset to the targeted 15%.Net tangible asset reduced to GBP 64.2 million, with the GBP 111 million of cash being invested in intangible assets on the acquisition of Westleigh, as Mike has highlighted. And this means that operating profit in Partnerships is now nearly twice TNAV given the capital night -- capital-light nature of the business. And on that point, with an improving asset turn, which has risen to 4.8x, and increasing margins, we delivered a higher return on capital of 84%. But the resetting of a number of sites and phases, as I mentioned this year, it is right to think in terms of our previously guided range on ROCE of 50% to 70%.Whilst the Partnerships business delivered strong organic growth, this was enhanced with the acquisition of Westleigh business in April of this year, with its contribution of 465 homes and GBP 4.8 million of operating profit. The importance of this acquisition was both about gaining a foothold into the East Midlands region with its staff, supply chain and controlled plots of over 5,000 plots, but also the ability to build out satellite regions of South Midlands and Yorkshire into fully scaled businesses. This initial phase of ownership for us is being about setting up the business for this progression and that is reflected in the lower margin in the period. We've invested for future growth, including expanded new offices for the regions and investing in people for those regions too.We will expand the tenure mix in this business to include not just Westleigh's already stronghold and affordable, but also to bring forward larger sites with a mix of private rental sector and open-market housing. Because of the time it takes to bring sites from planning to production, it will be 2020 before we see the impact of this.During the year in addition to the net over 4,000 plots from the Westleigh acquisition, we secured 9,646 plots within the existing Partnerships business. This was more than 3x completions in the year, ahead of our 2x target. The big wins with 1,700 plots at North Leigh and Wigan, which will be a great backbone site for our Northern Partnerships business and Eastern Quarry in the Ebbsfleet Garden Village, which will initially comprise 2,600 homes in joint venture with Clarion with Homes England already on site delivering the infrastructure. Together, this meant that we have nearly 30,000 plots under our control, representing 10 years work at today's volumes all at the target returns and margins that we've set out on the slides.The scale of the opportunity is not slowing. In fact, it's accelerating as you can see from the 75,000 plots in the pipeline that we're tracking. There's been no real change in the competitive landscape, with our biggest competition still coming from housing associations. We'll continue to become more selective in the opportunities we target with the ambition of securing at least twice our annual utilization of plots each year. We've started the year in a very strong position, with bids in progress of 17,900 plots, of which we've already converted 2,150 with our win at Cambridge Road, Kingston. This regeneration will be as exciting as Acton, which is a site I think most of you have visited.Now looking at Housebuilding business, and you can see that we have consolidated last year's 53% growth in completions, delivering a further 7% uplift in the year. The real standout in the year though is the step-change that we've made in returns and operating margins, with margins rising 180% -- basis points to 18.4%. Ian is going to highlight some of the operational efficiencies in the year that have helped us drive this.So if I can direct you again to the left-hand side of the slide, you will see the private average selling price was broadly flat of GBP 512,000, which means the volumes flowed through into a 8% uplift in revenue.The higher operating margin on that revenue generated a 20% uplift in our operating profit to GBP 109.6 million. And the retained earnings from this flowed through into a 10% rise in our tangible net asset value to GBP 565.9 million. As well as operating efficiencies, we continued the discipline in managing our working capital, driving up asset turn, which delivered a 410 basis point increase in our return on capital to 25%.Ian will talk in a minute about group-wide initiatives on our operating efficiencies, but just to focus on some of the Housebuilding ones in more detail. The roll out of standard house types, where our planning permits means that we're up from 30% last year to 44% of completions being with standard house types in this business, and there is further to go on this initiative over the next couple of years.On legacy sites, we're now out of Mill Hill and we'll be out of the 2 remaining sites, being hosted in Harold Wood in the first half of 2019. This will be replaced with a pull through of strategic land. And during the year, we set up a new team in the west of London to extend our strategic land to all of our geographies around the M25, Home Counties.So turning to look at the strategic land in more detail, 85% of our land is sourced strategically, i.e. from long-term contracts that we bring through the planning process. Whilst this -- what this means is that although we have nearly 20,000 plots under our control, as you saw from Mike's cash flow, we are managing our working capital tightly and have reduced our own land bank at 7,000 -- sorry, 4,767 plots to only 4 years work at current volumes. As we previously said, we are looking to broadly maintain our controlled land bank at current levels, and that is what we did in the year, with around 1,300 plots brought in being about in line with completions.It's worth noting the inherent value in the land bank, with options on average priced at a 10% discount to open market value. Whilst around half the land bank has some level of planning status, we are under construction on all sites that have an implementable consent.And so now turning to group performance, let me hand you to over to Ian. Thanks.

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Thank you, Becky. Now if I may, let's move on to strategy and outlook. We've previously mentioned that aside from our balanced business model of Partnerships and Housebuilding, we made some key strategic choices 5 years ago, which are really now starting to pay off. The first of these was a pursuit of a mixed 10-year delivery model, which has the benefits as picked up by Sir Oliver Letwin in his recent review of not just accelerating the rate of growth, but also providing a resilience throughout the cycle.Now as you heard earlier, we grew our -- total completions by 27% during the year, and we plan to increase this in the forthcoming year. Due to the balanced nature of the Partnerships business, private for sale makes up only 46% of the total completions during the year, with the balance being made up of affordable and PRS, which are both forward-funded, therefore reducing the capital employed.With the full year impact of our Westleigh acquisition, which is predominantly affordable and further growth in PRS from the expansion of our relationship with Sigma, we anticipate that private for sale will account for only around 35% of total completions in the forthcoming year.Looking forward from year-end into the current year, we ended the year with a record forward order book, some GBP 900 million worth, 40% up on the prior year, and importantly, representing around 75% of the anticipated completions that we intend to make during financial year '19. Unsurprisingly seeing the strongest growth from the Partnerships division, up 62%, fueled by both the organic growth, and indeed, the Westleigh acquisition, while Housebuilding continues to grow at healthy 11%.Now while the private forward order book was down against the record previous year, this has been more than offset in strong growth in both PRS and affordable sales and reflects our anticipated change in tenure mix in the forthcoming year.The private average selling price in the forward order book is broadly flat at GBP 386,000, just about the same as the same order book last year. But interestingly, the use of Help to Buy is slightly less at 53% and the underlying house price inflation slightly higher than we've seen in '18. So the quality of the private for sale order book remains very strong.Moving across to sales rate. This is a chart many of you have seen before. And our private for sale homes grew some 20% year-on-year. And this strong performance was driven by the continued increase in the number of open sales outlets, up to 60 at the year-end from 47 in the prior year. Now part of this growth again came from the acquisition of Westleigh, which added 7 of those are open sales outlets. But the remainder came from the pipeline of the 55 sites that we had under construction through that period. We anticipate this going forward, and as you see from the chart, we have 55 sites under construction that are yet to deliver sales outlets. So again, the future looks very resilient.The wider political uncertainty despite everything in the market hasn't impacted the overall sales rate, and at 0.8%, it's only marginally less than the prior year at the top end of the range that we expected. Now it's also worth remembering at this point that with 46% of our homes being private, this implies a build-out rate of around 80 homes per year per site when the other tenures are taken into account. And quite frankly, that's just about as fast as we can grow at site level in terms of construction.Moving into average selling prices, a number -- another of the major choices that we made within our strategy 3 years ago was to focus on private sales on first-time buyers and to manage our average selling prices to ensure that our homes remain relatively affordable for local owner occupiers. Overall, our average selling price reduced from GBP 430,000 a year ago to GBP 402,000 during the year. And this reflected both the strategic change, and indeed, the change in geographical mix as more private for sale came through in the Midlands and the North.Now we continue to see underlying house price inflation of around 2%, but with very differing impacts at different price points across the country. The strongest area of demands are at the lowest house -- lowest price points, and those under GBP 250,000, predominantly in the North and Midlands, and we've seen very strong growth of around 11% year-on-year. Between GBP 250,000 and GBP 600,000, the growth has been more modest at 2.5%. Now these 2 price points account for something like 90% of the total private completions we made during the year. And first-time buyers account for 63% of the total private completions that we made. And as a consequence, Help to Buy was used on 62% of the private completions.Above GBP 600,000, the market clearly has been more difficult due to affordability, stamp duty changes, but particularly the difficulties in the second-hand market, which has slowed, impacting the dependent sales chains from our trade-up customers. However, we've only seen very selective use of discounting and use of increased incentives with very few par exchanges. Indeed at year-end, we only have 2 par exchange properties on our books.So Mike touched on earlier that we've seen an improvement in terms of the operating efficiency on our sites. We've seen build cost inflation continuing to run at between 3% and 5% across the business. And while our Partnerships business model gives us some protection against this, as build costs are factored into the priority margin calculations, we have focused right across the business on improving operational efficiency, particularly in our Housebuilding division, which has had excellent results this year.We've targeted 5 main areas for improvement during the year, and you can see on the chart at the side, the results we've achieved. The principal savings of common procurement, and this is being driven by the increase in the use of standard house types, which now across the total group account for 64% of our completions. But we've also been helped by scheduling our work across our larger sites in a more strategic way, firstly, to obtain better pricing and continuity of pricing from subcontractors, but also to ensure a reduction in the prelim costs of managing the sites.We also targeted a reduction in variation orders. These are in fact changes that are made when the construction process is underway, again with good success, and that is being assisted by a progressive use of standard detail as well as standard house types. While customer care costs have risen slightly, we've had more success in recovering some of these costs back from subcontractors where that's been appropriate.Overall, we think operational efficiency has contributed 71 basis points or 2/3 of the overall improvement we've seen across the business. And this operational efficiency will continue to be a focus as we move into the forthcoming year.Now with the growth that we've achieved over the past 4 years, we've had a very clear focus to manage build quality, and we need to retain that focus on the key measures we've previously spoken about. Build quality itself is measured by the NHBC key stage assessment remains very good at 0.22 and well ahead of the industry benchmark. This is effectively seeing 1 reportable item per 5 key stage inspections by the NHBC.Our health and safety record has been excellent over recent years, and full year '18 saw another good performance with our accident incident rate less than half the industry average.Regrettably, however, I am very sad to inform you that last Friday post our year-end, we suffered a fatality at one of our large Partnerships sites where a subcontractor was tragically killed by a forklift truck. Full investigation is currently underway by both ourselves and the health and safety executive. But at this stage, we extend our deepest condolences to the friends and family of the deceased.Our customer satisfaction score at 84.6 while still being solidly in 4-star builder territory has slipped versus the prior period end, and we've already taken steps to address this. We have given responsibility at Executive Committee level to Graham Cherry to drive best practice across the group, and we will include targets for customer satisfaction improvement for all staff in the FY '19 bonus scheme.So just moving on to current environment, despite everything you may read in the media, demand for homes remains robust. Our strategy has positioned us well to meet the areas of the greatest demand and benefit from government policy. Affordable housing has been a political focus in the past 3 years, and we're seeing increased demand from housing associations and local authorities who are utilizing additional grant funding and the increased borrowing capacity to increase their stock.PRS output is also set to increase. You heard earlier, we've signed a 5,000-unit agreement with Sigma, the PRS REIT, to deliver homes over the next 3 years across predominantly Partnership sites in the Midlands and the North.As far as government is concerned, we welcome some certainty around the end of Help to Buy. Our business is well positioned to manage that change. And the Letwin Review simply echo the strategy that we've been reporting for the last 3 years.Coming right up-to-date with current trading. The first 7 weeks of our year post the end of September have remained robust in line with prior year and at the top end of our anticipated range. Visitor flows have increased due to the growth in number of sales outlets. And while slightly down on a per-site basis, the quality has remained good with both gross reservations slightly higher and cancellation rates slightly lower than the previous year.The second-hand market, as I said earlier, remains difficult and it's impacting trade-up discretionary buyers as holding independent change together is proving difficult at higher price points. We anticipate there may be further bumps in the road in sentiment as impacted by the wider political environment. But with full employment, wage growth and good mortgage availability, we do not envisage a collapse in either sales volumes or sales values.So in summary, we have delivered our fourth consecutive year of sector-leading growth of both volume and profit. And the quality of our earnings in terms of operating margin and return on capital employed has continued to improve each year. We've exceeded the targets that we set ourselves at our IPO 3 years ago, and both divisions have performed beyond our expectations. And with the excellent visibility of future growth and a record forward order book, we remain confident of achieving further growth as laid out in our medium-term guidance.Now that concludes today's presentation, and I'll now open the floor to any questions that you may have. Thank you.

[Gavin Jago, Analyst]

Just a couple of questions if I could, please. The first one is on just a little bit more granularity on the private forward order book. I was just kind of digging around with the numbers and from a like-for-like basis, if you stripped out Westleigh, your sites was up by 13%.

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Yes.

[Gavin Jago, Analyst]

But your value is down. Your house price inflation in that, is that all kind of the top end, which is kind of missing from forward order book. Is that all that's fallen away?

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Not really, Gavin. I think ultimately, you look at the forward order book in totality. And yes, in absolute numbers, it's slightly down. But if you remember, a year ago, we talked about many of our sites come in waves. Why? Firstly, you got the affordable and you got the PRS. And then as you construct and complete the homes, you get the private for sale. What, to some degree, going through that wave when next year will largely be about growth in affordable and PRS. The other piece of the jigsaw is simply having the product to sell. And one of the complications of taunting first-time buyers in utilizing Help to Buy is that you can only sell 6 months out. And many, many of our sites are now not providing product until the second half of this year. So as we look through the forward order book, yes, it will reflect a growth in private sales next year because the percentage is going down. I don't mean to say the absolute total is going down. It's not. But it does also reflect the fact that some of that product will be second half loaded. We expect the profile of price points to not be dissimilar in the full year as it is to this year.

[Gavin Jago, Analyst]

And just the second was just around kind of, like I said, a little bit more granularity on the most recent sales rates, obviously, the 7 weeks has been strong but can you give us a feel for what's happened in November versus October maybe on a regional basis as well?

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Yes. I mean, the change is pretty clear. I mean, what I'm trying to avoid is to get into a week-by-week trading statement because sometimes, you have good weeks and sometimes, you're having different weeks. If you take it right across, the November numbers have probably been slightly stronger than the October numbers. There isn't a lot difference to be honest going through the piece. We've got more product availability coming on because we have some larger site launches. So our Element site in North London, our Rochester Riverside site, our New Avenue site in Southgate, all new Partnership sites coming on in the last few weeks have obviously boosted the interest level. On the whole, it's being pretty good. And I think I said to many of you at the trading statement update, July and August wasn't great. And I didn't know whether it was the weather. I didn't know whether it was the World Cup. I didn't know whether it was a beginning of a long political uncertainty. That's not being reflected in the trading we've seen since September. And one of your colleagues said to me, "You seem a little bit more upbeat than you were at the trading statement." And I think that's true because that summer malaise hasn't continued.

[Jonathan Matthew Bell, Director]

Jon Bell from Barclays. I think I've got 2. The first one, could you talk a little bit more on your investment that you've made in Westleigh? We can see some slight dampening impact on margins. Did any of that affect deferred consideration? Is it struck on an earnout basis? Or is it just completely independent of that? And then secondly, just thinking about customer satisfaction scores. Is that -- could you tell us why you think that's happened? Is it handover times as a consequence of the growth of the business in the period? Or is there anything else going on?

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Well, let me take the one on customer care first, Jon. And I'll let Becky answer on the Westleigh investment piece. The customer care scores, clearly, we -- where we are very good at customer care. We are outstanding. We have several regions that not just operate at 5-star level, but operate at 100% customer care. And these are regions such as the Millgate, our top-end brand, which you've kind of expect, but also our Partnership South business in the West of London. These are 100% customer care, high-volume business serving sites like Hamswell, South Oxhey and indeed, the various phases of Acton. So there is no reason why we can't choose much higher customer care scores consistently across the group. Our challenge is to identify the 2 or 3 regions that for different reasons have fallen behind. I think with Westleigh, the scores have been lower that we inherited with the Westleigh business. I think where areas have grown rapidly, like our Homes business in the East and our Manchester business in the North, there is a growth element that says, you've got to keep on top of the quality and particularly, the timeliness of delivery and the finessing of the customer care. But our process isn't broken. The customer journey that we use across the business can deliver 100% results. The mandate I've given to Graham Cherry, executive from a committee level yesterday is to say, we've got to have that consistency across the business. Because this brand deserves to be a 5-star house builder and to go backwards on a key measure isn't acceptable. So we are focusing on timeliness of delivery, the quality of finessing of the handover and closing out any defects that are post the handover. And at that point, then we want to get consistency across the piece. I suspect because we've included it in the bonus targets, you'll see an improvement next year.

[Rebecca Jane Worthington, Group COO & Executive Director]

And so turning to Westleigh and deferred consideration. GBP 24 million of the consideration on acquisition is deferred, of which GBP 4 million is related to a gross profit earnout target. We are currently working on an assumption in terms of our accounting that we will be paying that out in full because we believe with a lot of work that has fallen over the last 6 months, we've really set the business up to perform over the next period. I know I mentioned we are now really establishing a strong base in each of those 3 regions. So South Yorkshire, East Midlands, which is already very well established in -- and the Solihull base in South Mids that we're really building a strong platform for growth. It is worth saying -- Mike mentioned about the fact that we had some nonunderlying charges and that impacted an acceleration from a P&L point of view of some of those deferred consideration costs.

[Christopher James Millington, Analyst]

Chris Millington at Numis. I have 3 questions. One is kind of a bit of a check-in question also. You've given the HPI summary and it was 11% below GBP 250,000. I presume there's some regen effects in there or something like that. I just wondered if you could break it down for us. So that's number one. The second one is just about the PRS order book. It's moved up a lot, I presume that's the Sigma deal. Can you just talk us through how that's likely to kind of manifest itself over the next few years? Because I assume it's quite a big ramp-up to do the 5,000 units. And the last one is another quick question about Westleigh on whether or not your thought process about kind of moving up to group average margins over time has changed and whether or not the tenure mix you hope to kind of show is any different just from having it for a bit longer.

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Okay, Chris. Well, look, again, I'll get back to the Westleigh question and she can answer that one at the end. But let me talk a little bit about the HPI under GBP 250,000. The first thing to remember is that's exclusively partnership and exclusively -- I think I'm correct in saying, exclusively the North and the Midlands. So it's in the area of lowest starting price point, probably strongest demand. And we are taking areas that in many cases are just urban wastelands and turning them into, hopefully, places people love as they -- as the strat plans suggests. We do get a significant part of that being uplift in terms of the regeneration effect of areas simply becoming safer and nicer places today. And you can see that in its most extreme example on our Tower Hill site and Caribbean Liverpool why it's too dangerous to the subcontractors to go on site when we started and indeed, we have 2 subcontractors attacked on that site, where it's now a slightly mixed tenure community where house price is growing to reflect the safer nature of the area. So it's not surprising. But at the end of the day, you got to back. But it is a lower starting point for the percentage multiple to come out. So it's a combination of those things. As far as PRS is concerned, PRS is predominantly the Sigma deal, but not exclusively the Sigma deal. Because what we've seen in terms of the housing associations in the South is we've seen people like London & Quadrant and Notting Hill and Clarion wanting to grow their PRS portfolios directly. So we've done deals with the largest housing associations to take parts of the larger Partnership sites and deliver the PRS. Just a point to remember on this, the reason we can do this is because of the partnership model allows the growth development value to go into the priority profit piece and ultimately, impact the land value at the end of it. You can't do that if you bought the land assuming it's going to be private for sale because it just don't balance the overall margin. As far as the delivery on Sigma is concerned, it's a framework agreement as well as the first one that we pulled together with them. It identifies an aspiration to deliver up to 5,000 homes over the next 3 years. And we broadly do that in 3 equal chunks. Now again, it's identifying large opportunities in some of these big sites. So Becky mentioned 1,700 plots on the site at North Leigh in Wigan. And I've got to tell you, my hand's running cold what are the thoughts of 1,700 private plots in Wigan. It's not that. It's 1/3, 1/3, 1/3. And 1/3 will be forward funded by our housing association partner, 1/3 is forward funded by Sigma and each will deliver something in the order of 600 plots and there'll be about 600 private plots phased over about 10 years. So it allows us to tackle the big infrastructure sites in partnerships with the town -- with the council at Wigan and have a surety of view going through that we do not typically had because the sites have generally been smaller in the north. But it's a phase delivery. We're not obligated to build any sites that aren't economic and they prefunded pre-costed and presold before we break ground on them.

[Rebecca Jane Worthington, Group COO & Executive Director]

So turning to the Westleigh margin. It was a little lower this year, and that was driven by a couple of things. One is that we have been investing for its growth, but also we had to bring it in line with plc controllable governance as well. And that work is being done. In its current form, we see it's the 10% operating margin business and it's -- that's the risk return against a predominantly affordable business. And in time, we would expect to get it to our 15% target margin that we stated for Partnership. But that's really going to come through a drive in changing mix, which, as I mentioned, really the 2020 outlook. So I think it's only from there onwards, you start to see that move upwards.

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

I think -- just to add to that, Chris, just a bit more color. The Westleigh sites are typically smaller sites. They're being typically in the 50 to 70 unit range. And what you can't do is you can't replan those sites to be mixed tenure. They're just not big enough. So the change in tenure mix at Westleigh is predicated by bringing larger sites in that you can add the mix tenure too, rather than simply just replacing sites -- plots on smaller sites.

[Clyde Lewis, Analyst]

Two from me, please, Ian. Firstly, on the replanning, you touched there on what you could do on the bigger sites. Can you just maybe talk us through what you are doing on the more expensive private orientated sites, particularly in the Southeast again to try and drive the mix to more affordable end , I suppose? And the second one was on -- again -- and Becky mentioned obviously the ongoing demand or the increased demand on activity and interest levels from local authorities on NHAs for the Partnership activity. As you look at those opportunities coming through, how are you thinking about your preferred tenure mix? Are you thinking you want to take more private? Or are you thinking you want to take less private and less capital? Just in terms of your thought processes at the moment given the current market backdrop.

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Yes. I think with the market opportunity, Clyde, I think that the opportunity hasn't really slowed at all. I mean, as Becky had showed you in the slides, the number of sites coming forward is increasing. And I don't want to mislead you that we'll bid on all of that 75,000 pipeline kind of goal, we won't. We simply haven't got the resources to do that nor would we want to do. But it does allow us to be selective about the ones that we go for. And where things like the Cambridge RoadEstate this day come up, then absolutely, we want to be all over those because they are -- as Becky said, they're perhaps another Acton, this Cambridge Road Estate. And to have that for 10 years is just fantastic. The model that we operate on closed out well particularly in London with GLA's desire to have the minimum of 50% affordable housing. In fact, what we're seeing them come to us is come back to us on existing large sites pushing us to put more density on. So places like Acton and a theme park at Dagenham, we've had approaches from the GLA to increase the density and in some cases, by several hundred units on the sites. The tenure mix works because the effect to the land value takes the hit on the margin and they, GLA and the board, are both very open to doing that. So we continue to see the mix being a blend. We see that for a minimum of about 40% private and that the economics work. Because if you don't have the profit from the private, you can't deliver the infrastructure, the amenity and the other tenure mixes without going negative on the land value. So there is a minimum sort of threshold, but that's the direction we see going. As far as the planning is concerned in terms of the replan of sites and the price positioning, we started this journey 4 years ago. And you probably remember me talking at the time when the government was talking about starter homes as being targeted at 450,000 in the south and 300,000 in the regions. And we started to change our mix to be ready for that then. So places like Beaulieu park at Chelmsford, we moved away from the GBP 600,000 and GBP 700,000 houses into the GBP 300,000, GBP 400,000, GBP 500,000 houses. Practically on sites in the north and Gateacre in Liverpool is a great example. We have product that was up to GBP 500,000 in Liverpool, which was too much. So we went back, replanned that partner site into GBP 300,000 houses. And this means in the north 3 and 4-bed houses rather than bigger 5-bed houses. And that mix is just flowing out the door. Now I'd like to say it was great foresight for where the Help to Buy limits were going to come in at. It wasn't then. It was kind of a strategy that we've chosen. But the Help to Buy regional limits, they are actually going to fall right in line with where our strategy is. So we welcome the certainty for the Help to Buy is going to exit, and we actually think in the period for the first scheme up to 2021, there will be a surge in demand as we reach that deadline. And again, in the -- to the deadline in '23, even at the reduced levels. And we don't think that's going to significantly impact our mix or output. So we could benefit from an uptick in demand from both those periods. Kevin?

[Kevin Malcolm Cammack, Building and Construction Analyst]

So Kevin Cammack at Cenkos. Just going back to the slides a minute and in relation to the goodwill, the intangibles on Westleigh. Two things really. Firstly, I think I'm right in deducing that in Partnerships, your calculation of the return on capital employed excludes any goodwill. You don't include that figure, do you, in the calculation?

[Rebecca Jane Worthington, Group COO & Executive Director]

So the transaction didn't impact funds employed for which we calculate -- we used to calculate the return on capital because we used cash and we put it in intangible, but you still have the cash side impact of it. So Westleigh hasn't artificially increased our return on capital because we used -- essentially because it's calculated off the basis of we called TNAV, tangible net operating asset value. And thus then...

[Kevin Malcolm Cammack, Building and Construction Analyst]

So it's simply the whatever $30 odd million of tangible asset that appears in the calculation coming from Westleigh. Is that correct?

[Rebecca Jane Worthington, Group COO & Executive Director]

That's right. But the other half of it is that we put in GBP 111 million of cash indirectly. And that cash element in effect because of its impact debt line can impact our ROCE. So we won't -- so therefore, if we haven't spent the cash, we would have GBP 111 million more cash on the balance sheet, which will still come back to the [same team] you know of, which would still given the same return on capital broadly, except for any other Westleigh impact.

[Kevin Malcolm Cammack, Building and Construction Analyst]

The other thing staying on that same point, the GBP 30-odd million of tangibles came again -- I can't remember the exact number, but is 5,000? Is that the number in my head? Plots that Westleigh came in?

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Yes. It's not -- it's 5,000 plots. And it's effectively that it controls through contracts coming through, but...

[Kevin Malcolm Cammack, Building and Construction Analyst]

So these weren't acquired costs, is it not?

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Generally not. It did have some bits in there, Kevin, and it's got work in progress in there, which is the other bit.

[Kevin Malcolm Cammack, Building and Construction Analyst]

Okay. Okay. That's fine. The second question I had was just around the -- I think there's GBP 15 million, GBP 16 million of land profit and commercial profit. Could you give us any sort of guidance on direction of that and the...

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Yes. I mean, what we've said -- and I think we said this about 3 years ago at the IPO, we have an ongoing income stream that comes from commercial profits, which are typically -- so let me give you example. There were 2 commercial sales during the year. One is the parade of shops, the investment value -- the parade of shops in the ministry and the community center, that Beaulieu Park. So we've sold off the investment value of the lease on the commercial property. Second one was Medipark, our joint venture at Cambridge, which is where AstraZeneca and the like was. And then the second half of the profit of a development that we did there. So we're not commercial developers. So it's ancillary commercial avenue. And that probably makes up half of the land in commercial sales. The other bit, we've got our associate position at Vista where we don't build where we churn out a piece of land each year and that maps it's way through. And then there will be some sites -- and then maybe 1 or 2 of these coming through in future years as well. We bring to a large strategic site, but feel that we don't need all of that site in order to meet our needs. A good example of that is we've sold a piece of land at Beaulieu Park to the joint venture partner, L&Q, for instance. So that considered the land sale. But land sale activity per se is not our core business. This is ancillary income. And I think if you're typically thinking of it as being GBP 60 million of revenue, GBP 15 million to GBP 20 million of profit on an ongoing basis, broadly, what it's been in the last few years and I think what it will be looking into the future.

[Kevin Malcolm Cammack, Building and Construction Analyst]

And last question. I'm just sort of quite interested to know what your views are on the likely success of -- or the likely output that local authorities might achieve now they're about to be uncapped housing budget and whether or not that is something that Countryside will play a part in or whether you think you've got enough on your plate on these bigger things that you don't really need to worry about that.

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

Well, we're not, Kevin -- we're not a D&B contractor. So if somebody Barking and Dagenham, one of the housing associations want -- simply want to build there to do single-margin contract. And that's not us. I'm sure some of the construction companies will do that. The big thing about both the local authority and the land housing association is they don't have the development capability. So it's okay them having the money. But ultimately, if they want somebody to master plan it, somebody to see the development through or somebody just to manage the contracts they just don't have that resource in house? So we have seen increased appetite already. And I think we talk to some in the presentation. And local authorities are saying, "You now what, we'd like to take the rental housing. We'd like to take the PRS housing because we've got now the capacity to keep it within our own books, within our own stock and we'll contract directly with you." So good example of that is our site at Waltham Store at Feature 17 at Waltham Store. The local authority there at Waltham first want to buy all the next phase of the development. They want to buy it directly and keep it on their own stock. Now we said, "So that's great." Because by the time we deducted the marketing cost, we've deducted 2 or 3 percentage points on the margin for the sales and opening cost, that does our job for us. And because they are able to now add ground to it and they've got the capacity to borrow against it, that brings that -- and that's quite an attractive thing for us to do. The difficulty I think with the housing associations and where we've seen them in the competitive bid situation for Partnership is they're not bounded by the same soft financial targets that we are. So we will see them in a large ups from -- up from -- some -- we'll see them struck to give we would never do. And in that case, we just hold on and let them get on with it because ultimately, they've still got to make a return out of it. And the opportunity is so wide, we don't have to participate in the crazy deal scenario.

[Kevin Malcolm Cammack, Building and Construction Analyst]

So theoretically, then it should actually help you.

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

I think, it should. I think it...

[Kevin Malcolm Cammack, Building and Construction Analyst]

Yes, stronger. And financially, your model works better directly with the local authority than it probably does with the housing sector.

[Ian Calvert Sutcliffe, Group Chief Executive & Executive Director]

I think it works well with both. But I think there's a dawning realization, whatever their political ambition to develop is, the dawning realization is, is they don't have the capability, the skill set or the ladder props to deliver it directly themselves. So that we would argue the right route to do that is a Partnerships-style deal where we both share the upside and the downside, though there's some authorities feel like they can do it all themselves. And simply, we just won't participate with those authorities.Well, if there are no more questions, can I just thank you for your participation today. You have our contact details, please contact us if there is anything that you feel we haven't covered today or you'd like to discuss further. Thank you very much.

[Operator]

Ladies and gentlemen, this completes today's call. Thank you for joining, have a lovely day.