Henry Boot PLC

LSE:BOOT

Earnings Call Analysis

Earnings Call Transcript 2023-Q2

[Timothy Roberts, executive]

And just before I start the formal part of the proceedings, just have a look at the image of that. That, believe it or not, is an industrial unit and that's our development at Rainham and it overlooks the Thames. You can see how -- it's a computer generated image, but it will look like this. You can see how green it is. It almost looks like an R&D technology park, doesn't it, that was being built in the 1990s and that is net 0 carbon. So that's the sort of quality of development that we're developing even on the industrial market. Nice to see a picture of what we do, isn't it?So good morning, everybody. So I'm going to do the normal running order with me covering our operational highlights, I'll then give a brief overview of our strategic targets and Darren is going to update on financials and land promotion and then I'll go through development, construction and finish off with outlook. So you can guess what I'm going to do. First of all, I'm going to talk you through our investment case and I know you're all familiar with this, but again I think that it's useful. We're focused on 3 long-term markets with positive structural long-term trends. And whilst our markets have slowed, I think that these results show that due to the quality of our sites, the quality of the schemes that we promote and the premium homes that we build that you can maintain encouraging levels of demand; it gives you resilience. More importantly, nothing that we've seen over the last 12 months shakes our belief in our 3 markets.We've continued our long record of managing our balance sheet effectively and you can see from the bar graph that the NAV just continues to remorselessly grow. With 97,000 plots and a development pipeline of GBP 1.26 billion all held at cost, we've also got ample opportunity as markets improve to hit our growth and return targets. And all this means we're confident enough to increase our dividend by 10%, which is 4.8x covered. And our TSR in the long term remains attractive. Over half 1, we made an operating profit of GBP 25.7 million and I'm going to go through it by subsidiary. On Land Promotion, the business sold 1,900 plots at an increased profit per plot of GBP 11,400 driven by a very profitable sale, a freehold sale at Tonbridge. Darren is going to go through that in more detail in a minute. But just to say for the right sites, there continues to be demand and we currently have 9 sites under offer.We're also growing our land portfolio, it's now at 97,000 plots and as planning gets tighter, we believe these plots will be in demand. Turning to property and development. We completed GBP 70 million worth of development share, 100% of that has been profitably presold. And we've maintained a high level of committed developments, again our share at GBP 186 million, nearly half of that is in industrial. Our investment portfolio has grown to GBP 112 million through retaining completed developments. It's again outperformed the CBRE Index. Stonebridge, our joint venture housebuilder, has achieved sales rates close to our target including over July and August at just under 0.5 houses per week per outlet and is on track to hit its target of 250 homes this year and that's showing an increase in volume of 40% from last year.On construction: operating profit of GBP 4.4 million is below budget, but that follows and is in line with the general slowdown in the industry. And all this means once you've deducted GBP 4.2 million of central operating costs, group operating profit, as I say, is GBP 25.7 million. And before leaving this slide, we also sold Banner Cross Hall at a premium to book and we'll be moving to our new head office in November and that's in Sheffield City Center. And these resilient results mean we still deliver on our medium-term objectives. Capital employed is nearly at GBP 413 million and is on track to grow to our GBP 500 million target. ROCE at 6.3% is expected to finish the year within our stated range. Our 5-year running average is now at 3,175 plots so it's getting close to the 3,500 plots medium-time target.To achieve development completions of circa GBP 200 million, you need to maintain a development program and in a slowing market, I think HBD has done well to maintain a committed program of GBP 186 million and as markets improve, we'll be able to scale the business by drawing down on its GBP 1.26 billion pipeline. In terms of investment portfolio, we made GBP 42 million of accretive sales over the last couple of years and there will be opportunities to grow the portfolio back up to the GBP 150 million target by retaining completed developments, but we're going to be patient in doing that. The demand for Stonebridge's premium homes endures. We expect to complete 250 homes in 2023 and we're planning for more in 2024. Therefore, on track to scale the business up to 600.We continue to make good progress against our responsible business strategy, including our NZC equality, diversity and inclusion targets. And what I will do at the full year is I'll give you a more detailed presentation on that. And in the interim, there are details in the appendices of your pack. But what I wanted to do today was just to show you a quick image of our new head office and the move from a large listed hall to a modern efficient open plan building with great ESG credentials. That's helping us in our ambition to be more progressive, more open, more diverse and a more environmentally responsible business.And with that, I'm going to hand you over to Darren.

[Darren Littlewood, executive]

Thanks, Tim, and good morning, everyone. If I can now take you through our financial highlights. Despite challenging market conditions, revenue still grew 25% to GBP 180 million in the period reflecting the continued completion of strategic land transactions, delivery of our committed development program and growth of our housebuilder Stonebridge homes. On the back of this, gross profit remained resilient at GBP 40.8 million, only marginally down on that of the prior year. With the prior year having had the benefit of a significant oneoff joint venture residential land disposal, the group achieved an underlying profit before tax of GBP 23.3 million. And whilst earnings per share has decreased 42% to 14p, we have increased the interim dividend by 10% to 2.93p, in line with our progressive dividend policy and still almost 5x covered.With operating profit down 34%, our return on capital employed for the 6 months of 6.3% sees us on track to achieve the lower end of our medium-term strategic target of 10% to 15% this year. In 2023, we've continued to focus on delivering existing opportunities in our key markets with selective investments in new opportunities and tactical disposals from our investment property portfolio occurring since the half year. Within the portfolio, including investment properties held in joint ventures, values remained stable following the downward valuation movement seen towards the end of 2022. The increase of GBP 9 million in the period, therefore, being derived from the retention of an industrial asset from our development at Luton. Following the half year, we since disposed of 3 properties for just over GBP 11 million at an average 19% premium to their December book value.We've continued to invest in our growing housebuilders' land bank and work in progress adding some GBP 11 million to inventory and having invested GBP 4 million to delivering speculative developments. Inventories increased around GBP 6 million overall following disposals of GBP 9 million from strategic land. Net debt increased to GBP 70.8 million from these investments and also due to increased working capital requirements resulting from land sales on deferred payment terms to the major housebuilders. With gearing at 17.5%, we remain within our target range of 10% to 20%. We've got a secured borrowing facility of GBP 105 million and we will look to commence refinancing activities towards the end of this year with a view to having a revised facility in place early next year, well ahead of the facility renewal date in January 2025.Early discussions with all of our banking partners, 1 of which we've banked with for over 100 years now, have all been very positive. Finally, our net asset value per share increased 3% to 303p or 298p excluding the pension surplus. In terms of cash generation and the movement in net debt. The cash flow sees those recycled retained profits and funds from operating activities into continued investment for the future. We started the year with net debt of GBP 48.6 million. Having then achieved an operating profit of GBP 25.7 million adjusting for noncash items of GBP 2.1 million and paying interest costs of GBP 0.7 million, corporation tax of GBP 0.9 million and dividends of GBP 8 million; we ended with a cash inflow from operations of GBP 14 million overall.Our interest costs have remained low with our facility having a 1.4% margin over SONIA, each 1% of interest gives rise to a charge of around GBP 700,000 at current average debt levels. However, overall, our net interest cost benefits from funding returns on investments in joint ventures. We then made overall investments of GBP 30.4 million across all areas of our business, including adding to our investment property portfolio, growing inventories relating to the land bank and work in progress within Stonebridge Homes and delivering our committed development program. With working capital and other items increasing by GBP 15.8 million again reflecting loan disposals on deferred payment terms, we ended the period with net debt of GBP 70.8 million.If I can move on now to the operational review and start with land promotion. At 1,900 plots, low volumes in Hallam have been offset by a significant increase in gross profit per plot to GBP 11,400, allowing them to maintain their level of operating profit at GBP 17 million aided by a significant freehold disposal of land at Tonbridge mentioned by Tim, which I'll give you more of an insight into shortly. Whilst land values are reportedly softening down almost 3% in the year, we continue to see good demand for smaller sites in prime locations. Having taken 3 such sites to market in recent months, we've seen demand from up to 16 interested parties and despite the larger players now appearing some way down the list, values remain very sensible. We've continued to add to the portfolio, securing sites with the potential to deliver over 3,000 plots and ending with over 97,000 potential plots within the portfolio.Whilst comment period sales have reduced plots in the portfolio with planning permission, having 8,335 plots still in stock equates to almost 2.5 years' worth of sales and over 2,000 of those plots are currently under offer on 9 sites as Tim mentioned. With our portfolio all held at cost, no valuation gain on securing the planning permission on those plots is recognized until the land is sold. We anticipate demand for these plots will continue to increase as we see minimal relaxation in the planning system evidenced by recent announcements to tackle neutrality through the level in [ upbuild ], which would have been good news. Again the politics seems to have got in the way. We also have over 12,000 plots currently working through the planning system having achieved determination on 804 plots.This is already almost twice that achieved in the prior year, but remains lower than expected also demonstrating the continued difficulties in the planning system. Looking at this slide, we can see the geographic spread of our portfolio, which continues to be 1 of the largest strategic land portfolios in the country amongst the listed housebuilders. 78% of the portfolio is in the Midlands and south of the country where values tend to be higher in general and 25% of the portfolio is in the golden growth triangle of London, Oxford and Cambridge. We continue to see demand for quality sites in these prime locations albeit as expected smaller 100 to 200 unit sites are in the highest demand in the current climate. The chart of plots sold shows we are now getting closer to achieving our medium-term target of selling 3,500 plots per annum with the 5-year average now at 3,175 despite the low volume achieved in the year-to-date.The average gross profit per plot has increased in the period on the back of the freehold disposal at Tonbridge and demonstrates how this metric continues to vary with 10-year volume sales, land price inflation and location of sales within the U.K. Finally, just looking here, we can see the benefits of having an element of freehold land within the portfolio. In 2021 at our site in Tonbridge, we managed to acquire the freehold of the site, which we'd held under option since 2004. Having secured planning in 2022, we sold the site in 2 phases to Cala Homes; first phase being this year, the second phase to conclude early next year. On conclusion of that final sale next year, the site will have returned an impressive internal rate of return of 27% per annum as well as delivering new ecological habitat areas and wider community benefits including cycle ways and a contribution to public transport infrastructure.And now I'll hand you back to Tim, who will continue with Property Investment and Development.

[Timothy Roberts, executive]

Thanks, Darren. So property and development, which comprises HBD and Stonebridge, you can see it made an operating profit of GBP 8.5 million. HBD completed on GBP 70 million share of developments and that's all being successfully presold. We maintained a high level of committed development at GBP 186 million, 98% of the development costs are fixed. Included in our GBP 1.26 billion pipeline is GBP 50 million for the first phase of our mixed use campus Golden Valley, which is next door to GCHQ at Cheltenham. We expect to sign a Funding Agreement for this first phase with the council over the next half and then we expect to also put a planning application in and we hope to be on site in the summer of 2024 on the first phase. The investment portfolio has outperformed with a capital return of 0.8% as a result of growing rental values in industrial and also the investment markets stabilizing.Our total property return over the 6 months of 3.3% was better than the index at 2.5%. The portfolio is made up primarily of high quality retained developments, but with some investments which have clear development potential held on shorter leases. So despite that mix, we benefit from a healthy weighted average lease length of 10.6 years. Past half 1, as Darren said and I mentioned, we sold 3 smaller assets plus Banner Cross Hall for GBP 11 million at an average premium of 19% to the December 2022 valuation. Now looking at the committed program in more detail. First of all, you can see that we've committed to 3 industrial schemes totaling 700,000 square feet, the majority of which has been presold. The only speculative scheme is at Rainham and I'm going to go through that on the next slide.On industrial generally whilst occupier take-up has slowed from the record levels seen during the pandemic, demand does remain resilient due to structural drivers. Rental growth, for example, over half 1 at the index level has been 3.6%. So consequently, we do expect to commit to more industrial development over the second half. Next we've got urban, residential and commercial. Post half 1, we completed on TDT and that is the fourth phase of our successful Chocolate Works development at York. And then you've got Setl and Island and I'm going to update you again on those on the next slide. Total estimated profit on all of the schemes is GBP 24 million equivalent to an average profit on cost of 15%, of which only GBP 4 million has been taken and that's being taken on Walsall Spark and it's being taken as we carry out the local authority funded remediation works.And once those works are completed next year, we expect to exercise our option to buy that site, which is right in the heart of the U.K.'s national motorway network. Now I said I'll just talk to you a bit more detail on some of the schemes. And this also I think slide gives us an example of how we create value and I think it also shows the quality of the development that we're promoting. So from left to right, I think I've got that right. Power Park, Nottingham, might not have got that right. First on Power Park, Nottingham. We acquired the site, got planning and secured forward funding, completing it recently and it crystallized a 22% profit on cost. On Rainham, that's a high quality NZC scheme, it's the photograph that I started the presentation with, serving London and it's made up of 4 units ranging in size from 40,000 to 170,000 square feet. It's in an 80-20 JV with Barings so our share of GDV is GBP 24 million.And we're currently following up 750,000 square feet of requirements and typically we'd expect to do lettings on a scheme like this either side of PC and PC is early next year. Our appraised rent is GBP 15 per square foot. I think that that's great value for industrial within Greater London and am encouraging the team to beat those rents. On Setl, as originally planned, we'll be looking to sell around 1/4 of the 102 apartments pre-Christmas with the majority released when customers can inspect the completed building in April next year. This is a high quality building with communal services situated in the trendy Jewellery Quarter in the center of Birmingham and our agents Knight Frank believe we will be able to sell those apartments in line with our GBP 32 million GDV and that's GBP 475 per square foot, potential profit 15%.And then finally, Island. This is another prime NZC scheme in the center of Manchester in a 50-50 JV this time with the Great Manchester Pension Fund and our share is GBP 33 million of GDV. It offers 91,000 square feet of Grade A office accommodation and it will complete in Q3 of next year. And although we're already talking to occupiers, the real launch of the building was only in July of this year and currently we're following up 400,000 square feet of requirement and there is interest in buildings with good ESG credentials. So turning to Stonebridge, our premium housebuilder. It's achieved sales rates close to our target through half 1 and over the summer months. During half 1, sales rates averaged 0.48 against a target of just over 0.5 and in July and August it was actually running at 0.52. Sales price against budget in half 1 was plus 1.2%.Against the same market, we're pleased with this performance and I believe the demand is because of the premium quality of homes that we offer and the well-located sites that we are developing. Supply chain restraints and cost inflation at 8% is easing although we do think that it will continue to eat into our margins. Up to the end of August, 97% of this year's target is effectively sold so no surprise we believe we're going to hit our target of building 250 homes this year. Now we're not insensitive to market conditions, but our plan based on the present level of demand is to increase volume again next year. We're therefore taking the opportunity to buy some more sites. And in this regard, the level of bidding in sites has become less aggressive and vendors are definitely interested in dealing with people like Henry Boot with a great reputation. But we're finding sensible deals, we are not finding cheap deals.In terms of margins, our gross margins remain in the mid- to high teens although cost inflation, as I say, might eat into that as the year goes on. And in the medium term, as the slide shows, as we scale up the business, we expect our gross margins to be at 20%. The Construction segment like the rest of the industry has been impacted by cost inflation and supply constraints yet has remained profitable. Remember, this is just a small part of the group accounting for just 2% of capital employed. As I reported last time, construction has experienced challenges on 2 of its large urban development sites in Sheffield, that's Kangaroo Works and Block H. Kangaroo Works completed in August and Block H should fully complete in the next month. So we will be able to draw a line under those challenging schemes. Our GBP 47 million refurbishment Cocoa Works in York is on budget and on track for completion in early 2024.There is work around, but we remain selective on what work we will do. So we expect our turnover to be below our target for this year. Banner Plant is trading marginally below expectation although it has had a pretty good summer and Road Link continues to perform well. And that gets me to outlook. There's no doubt that the rapid increase in short-term rates is reducing demand across all 3 of our markets and there is more uncertainty around the timing of strategic land sales and of course the cost of funding all development schemes has risen. More positively, we're seeing cost pressures ease and signs suggest this will continue at least for the rest of the year. Planning I'm afraid to say remains very difficult. Whilst we're not immune to these pressures and difficulties, I believe our focus on high quality real estate affords us a degree of resilience.Hallam promotes high quality significant sites, the majority in the South of England, many of them around the golden growth triangle. As planning gets tighter, these sites are going to be in demand. HBD delivers institutionally quality development with an increasing emphasis on strong ESG. The majority of our pipeline is industrial where we believe demand will endure. And SBH builds premium homes in affluent locations. In a tough market, we're pleased that in effect 97% of this year's target has been sold and we will increasingly turn our attention to carrying on the scaling up of the business in 2024. Our balance sheet offers the same quality and resilience so this is going to allow us to continue to invest in land both for Hallam to promote and to scale up Stonebridge. It will also allow us to continue to commit to HBD's quality development program. And all of this means we have the confidence to increase the dividend by 10% and we also remain confident that we'll hit our medium-term strategic growth objectives. Thank you.

[Timothy Roberts, executive]

We're going to start off with any questions from the room, please. Christen's first off.

[Christen Hjorth, analyst]

Christen Hjorth from Numis. Three questions from me, if that's okay. So the first one just on land. I know that business has done a good job historically of underpinning for future profitability through exchanges, et cetera. Obviously you pointed to the plots and sites under offer. But just what more could be done as we progress through the rest of the year to underpin 2024 results in Hallam given the tougher backdrop? The second one is just on property development and just as to the confidence around the shape of the pipeline given the macro situation and just how quickly those projects can be pulled down. I'm assuming the key issue is funding for a lot of them, but just [Technical Difficulty] And then I suppose the final one just on the medium-term targets. It's been a few years since you set them. Just when you think GBP 500 million of capital employed should be achievable and what you'd need to see to deliver a ROCE at the top end of the range?

[Timothy Roberts, executive]

Okay. All right. So I'll have a go on the last 2 and you have a go on what we've got in store for land. So I suppose the quick question to answer is the medium-term targets and we set those out in 2021. I'm pleased with the progress and there's nothing that we've seen that suggests that we won't hit those medium-term targets. And Christen, you've asked me this before and I'm always a bit coy and tight on the exact date because it feels a bit too contrive, doesn't it, for me to give you a specific date. But when we set them out in 2021, we were doing a 5-year business model. Now you're not going to see anything printed saying we expect to hit these dates in March 2026, but that's broadly our ambition. It's the medium term and I think of the medium term being around 5 years and we are on target for doing that, which I think if you think about the environment that we see since the beginning of 2021 is no mean feat.Now in terms of the pipeline and I think that you're also picking the funding of it. I think development is definitely going to be more challenging and development is going to be more challenging because the funding markets are going to be more selective over what they fund and the cost of funding has gone up and you all know that. Now I think that we are at an advantage to many of our competitors. One, because of the quality of the schemes that we promote and two, the fact that 2/3 of our development pipeline is in industrial and you can still get funding for industrial development. So I think that we will be able to carry on our model of some developments being funded by institutions. I think that we will also draw down over the next year or so and do more industrial development and actually a lot of that will be funded by occupiers who are buying those schemes off us.And then you all know how resilient the Henry Boot balance sheet is and as Darren's known one of the banks for over 100 years, which is truly remarkable, because I could have sworn he was in his 40s; we'll be able to draw down on our facilities. So I think, Christen, we will navigate our way through some of the difficulties of the funding market, but we've definitely got a good pipeline. And as you well know, but it's more for perhaps people who are listening in, it's all held at cost. Darren, on the land.

[Darren Littlewood, executive]

Yes. So then on the underpin of land, clearly we've not got the level of exchanges we've seen for '24 currently as we perhaps had in previous years moving forward. But you have just heard me talk about the Tonbridge site which Phase 2 is currently settled in next year, which is an incredibly profitable scheme at 27% ARR, really nice part of the world for that one. We've also just heard in recent days not quite time to redraft the announcement, but we've just exchanged on 100 plots on another scheme. We've got the 9 sites that are under offer with 2,000 plots in total working through and we believe we've just got another site under offer for another 500 plots. So there are a lot of moving parts as always.The team are also working on several sites to take to market for next year, including 1,000 plots at our Coventry development where we sold 250 plots this year, another fantastic scheme. So we're still very hopeful that by the time we get to the year-end, we will have more exchange going into next year, but also that we've got already a good underpin from a few sites to start next year with and plenty more in the tank to be pulling forward to come through for next year. I think it's a really credible result actually that Hallam have achieved in this first half year compared to for example what others are kind of saying in the market. And it also goes to the 3 that we put in the market in the last few months where 16 bids on one side for me is absolutely phenomenal especially given the market conditions we're currently in. So the appetite is still there for decent locations prime sites.

[Timothy Roberts, executive]

Adrian?

[Adrian Kearsey, analyst]

Adrian Kearsey, Panmure Gordon. I'll just leave it at one if I may. You got the banking facility sort of in negotiation. The pricing will be what the pricing will be. But in terms of the way that you're talking to the banks in terms of the structure, should we expect it to be a similar type of facility in terms of how it is put together?

[Darren Littlewood, executive]

I think so, Adrian, I mean it's early days in terms of the conversations at the moment. We're not out in the market. We're just really teeing them up to start thinking about that. We're about to embark on the group strategy review, which will give us a guide into kind of medium-term requirement for debt funding within the business. I think initial conversations are suggesting that 5-year money might be as cheap or broadly similar at the moment to 3-year money. So we might consider locking in for a bit longer than we have done in previous times, but that will be to some extent driven by the rate. And I think we will again look to not take the full facility upfront.We'll have some kind of accordion arrangement to allow for the projected growth in the group so that we're not paying for everything on day 1. And I think one thing that we will have a little more focus on this time around and how it's structured is potentially to introduce an element of hedging into the group's facility. So historically, we've probably been in a position where we might have returned to cash minimal debt. I think going forward with the development pipeline we've got, the investments we're making in Stonebridge homes, we can perhaps have a bit of visibility on an underlying debt level that we can then put some hedging on the top of.

[Clyde Lewis, analyst]

Clyde Lewis at Peel Hunt. I've got 3, if I may; 2 really around land, 1 on the sort of balance of option versus freehold land coming through. Clearly Tonbridge is free home land, but beyond that, is there going to be a sort of shift in mix one way or the other over the next sort of 12, 18 months? Second one around land was I suppose the attitude of landowners at the moment to sell. Where are they in their thought processes? Are they more or less active? Obviously land prices you're indicating sounds like they're not moving very much at the moment, certainly not downwards so we'll see on that front. And then the last one was probably really around sort of construction and sort of tender levels. You've indicated revenue is going to be down on previous expectations. But I'm just trying to sort of work out whether that's just because you can't make the margins work or whether there is less work out there to do as well?

[Timothy Roberts, executive]

Okay. Well, we're going really mix it up. I'm going to do the land promotion questions and you can do the construction. Completely cover the business, don't we? So first of all in terms of the shift in the portfolio mix, I think that it's going to stay. We got about 10% freehold and then the rest is obviously promotion and options and you're an analyst, you can model all of that. And again, we've modeled it and we like the mix because the freehold every so often, but actually if you look at the stats, consistently gives us boost to the profit. So we like that, but it's quite capital intensive. So we've got to manage our capital because we're a growing business and we've got competing opportunities to invest. So that mix we think can give us a good return on capital employed and also it means that we're not going to be using up too much of the group's capital. And then in terms of the landowners attitudes, I think the pricing has come down and we quote Savills and Knight Frank have got a different figure. Knight Frank is a more volatile index, isn't it?So we consistently give you Savills so their land prices are nearly 4% down over 6 months. And I think that what's also happened is although that might be at headline level when we're buying and the housebuilders when they're buying office, they're definitely pushing out the payment profile. So the net effect is that the prices are falling. In terms of landowners, they remain a pretty stoic bunch and they can see that demand for land has softened, but they can also see that we are making a real meal of the planning system. So if they've got land with planning, they rightly believe that that is a precious commodity. So they will not just sell it at knockdown prices. So you're not getting a flood of land coming on the market and because you're not getting a flood of land coming on the market because of landowners' views and the planning difficulties, I think that that is the thing that means that you're not having the volatility in the land price that you might have seen 20 years ago. And then construction?

[Darren Littlewood, executive]

Yes. So in terms of construction, tender levels I think as a nation, the U.K. has seen a slight decline in the amount of activity that's being reported out there in the construction market. However, I think it's fair to say we as a business are still seeing a good level of opportunities coming forward. But in recent times, 12, 18 months, we've seen a big shift towards preconstruction service agreements as a method to tender, which effectively is there's a quick tender to pick a chosen partner and then you spend a lot more time working up the detail; design cost plan, derisk to a great extent the project before starting.And what we've seen over the last 12 months that has driven the impact to our revenues is that our clients are taking much longer to get through those PCSAs and actually to a start on site and that's been impeding us to a degree. Ordinarily once you're in a PCSA, you got to get to the right budget, but there's much more likelihood of you doing the work. So I think we've got about GBP 84 million or GBP 85 million currently working through PCSAs that we will hope to be starting imminently and into next year. I think more recently what we're now seeing as well is almost a shift away from that PCSA model and it does go in cycles. We've seen it before, we'll see it again. But we're moving back to a kind of single stage tendering opportunity; much more competitive, but much quicker to get to a position where you can actually start on site and delivering the work.

[Samuel Cullen, analyst]

Sam Cullen from Peel Hunt. I've got 3 also. I guess kind of related to your point on freehold land. Can you talk a bit about the challenges you might face in kind of continuing to grow Stonebridge in a softer market and the level of capital you'd want to invest to kind of grow the volumes with probably inherently lower sales rates than you might have been 18 months ago so kind of how much work in the ground, et cetera? And then Tim, can you give some numbers maybe and it's probably an impossible example, but the spread of values between good and bad ESG buildings? You kind of mentioned it in your [indiscernible] there's high demand for good rated buildings basically. And then lastly, Darren, just if you could just remind. I didn't get all the numbers in terms of the moving parts with the sensitivity to rate moves in terms of the interest cost you're paying and then getting back also some new leases?

[Timothy Roberts, executive]

Sam, just so I'm answering the right question. Just regards to the Stonebridge, you want to know how...

[Samuel Cullen, analyst]

The freehold land you say it's profitable, but it's more capital intensive because you hold on to it longer. But you want to grow Stonebridge, but sales rates in the market have fallen from 0.6 to 0.4 or 0.5 to grow the business as rapidly as you wanted in the past, you need more land.

[Timothy Roberts, executive]

So yes, good question. So with Stonebridge perversely and actually logically, we tend not to buy freehold. So the freehold is in the Hallam part of the business and we will buy a piece of land at a reduced value. It's not like a cultural value and then we might hold it for 10, 12 years. Tonbridge was not a good example of that, was it, because we bought that in 2021.

[Darren Littlewood, executive]

'21, '22. We had an option for a long time on it last year.

[Timothy Roberts, executive]

So there we either played it blind or we got a bit lucky, a bit of both. But with Stonebridge on hold, we are doing conditional deals on getting planning. We work towards getting planning and then we will buy the site once we've got planning and we're almost ready to go on site. And again to help our capital work harder, they will be typically phased purchases and that's how we manage it. And by its nature, Sam, because we are -- so at the moment the land bank will give us probably 2.5 years of sales. We have to feed that business with more immediate sites, but they will still be conditional on planning. And then in terms of ESG, it's difficult to be categoric. So some of the agents have talked about getting a 10% premium on rental values, but there's not a lot of data.So if you look at Manchester, Manchester there will probably be 2 true NZC buildings that are in the market at the moment. I don't know how many there are in London now, but there might be half a dozen. And then as you go away from the Londons, the Birminghams and the Manchesters of the world; there will not be many. Instinctively I think that there will be that sort of premium on the rents. I think that what is just as interesting is that the funds have definitely got targets to buy ESG quality buildings and because of the low level of stock that's being developed, they are finding it hard to buy. So I think that if they meet those targets, then they'll have to be bidding competitively to get the product. So I think that there will be a double premium.You'll get a premium on the rent, might be around 10% and that's what the agents think at the moment, and then there will be a premium on the yield. And then I think moreover, I think that the ESG rated buildings will be more liquid, they'll be in more demand. And to give you an idea on Island, the construction costs were 10% more because you obviously try to diminish the footprint of the building and you diminish the operating emissions from the building and that's just the costs, it doesn't flow through to the land. So if you can even get a 10% premium on the rent and the yield stays the same, you are more than covering your cost of developing the building.

[Darren Littlewood, executive]

Okay. And then just finally on kind of interest costs and the sensitivity there. So 1% increase in base rate at our current average debt levels would cost us about GBP 700,000. Given we're some years currently out, we've got a 1.4% margin on that, call the all-in rate about 7% means that we've probably got an annual interest cost of around GBP 5 million at this point in time. But around 50% of our debt is then used to fund joint ventures where we have funding arrangements in place. So we get about 50% of our interest cost back and covered through that arrangement.

[Timothy Roberts, executive]

Alastair?

[Alastair Stewart, analyst]

Alastair Stewart from Progressive. Two sort of interrelated questions. You mentioned the up to 16 bidders on a site, roughly what size was the site? And you said that the volume housebuilders were towards the bottom. Can you just give a sort of indication of how many volume builders are near the bottom? Are the rest housing associations, midsized regional private builders, et cetera? And also the deferred terms you mentioned, are they kind of deferred in, say, 2 or 3 big chunks over the life of the site or is it really paying on the DRIP literally plot by plot? And also related to that, is there a quid pro quo from your part that you can get an extra few quid out of them on that land sale?

[Darren Littlewood, executive]

So in terms of that particular loan, the site was just below 100 units so still a fair sized site brought down the bottom end of what we're seeing the appetite is for at the moment. In terms of the volume housebuilders, they were all on the list. I think 1 was in the Top 5, 1 was in the mid area and the rest were all in the bottom 5 in terms of the bids that were coming forward from them. I don't recall there being any social housing providers on the list. So they were all midsized regional housebuilders that were bidding in the competition. And then on the deferred payment terms, I'd say historically yes, you get a little bit of a premium built in upfront for the deferred payment terms and I think they will still be doing that in terms of how they're putting their bids together from a competitive perspective. But given where interest rates are, I certainly think that's coming at a bit more of a discount to us particularly as they then push the time out and you've seen the movement in working capital that we're having to then potentially arguably fund because of the way that they're behaving.

[Alastair Stewart, analyst]

And in terms of the actual...

[Timothy Roberts, executive]

It's more like 3 chunks. It's not on kind of like groups and plots.

[Darren Littlewood, executive]

And again it's down to the size of the schemes. It might be 2 chunks on a smaller site so 100 units.

[Timothy Roberts, executive]

Good. Okay. So have we got any questions on the phone or the web?

[Operator]

[Operator Instructions] There are currently no questions on the phone.

[Unknown Executive]

No questions on the webcast either so back to you, Tim, for closing remarks.

[Timothy Roberts, executive]

Okay. Well, just good to see you all. Thank you very much.