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Belvoir Lettings: THE INVESTMENT CASE

Belvoir Lettings confident it can buck the property trend

Belvoir Lettings recently posted impressive half–year figures against a difficult backdrop for the UK property sector
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Belvoir Lettings PLC (LON:BLV) recently posted impressive half–year figures against a difficult backdrop for the UK property sector.

Profits at the Grantham-based business jumped 62% while its key income measure, management service fees (MSF), rose by 47% as the benefits of a major acquisition, Northwood, kicked in for the first time.

Tighter tax rules, a clampdown on letting fees and the impact of Brexit/weak pound on tenant demand have slowed the market but Belvoir bucked the trend and saw both transaction volumes and market share rise.

WATCH: Belvoir Lettings perfectly positioned for continued growth

300 UK offices

Anyone who has rented a house or flat will know how a letting agent works.

For a percentage of the rent, they will manage the property, taking care of all of the admin and essentially leaving the landlord free just to check the rent has been paid once a month.

Belvoir is a franchise letting agent, with 300 offices dotted around the UK that pay a percentage of their revenue (between 10% and 12%) a year in fees to be part of one of the current networks: Belvoir; Northwood; Goodchilds and estate agent Newton Fallowell.

The largest property franchise group in the UK, Belvoir is also one of the few still growing in the current challenging market.

Those 300 offices are double the number three years ago, but chief executive Dorian Gonsalves has no intention to stop there.

Each of the four networks individually has the potential to open hundreds of more offices and to increase its market share, he believes. And the group is working hard towards that ambition through its assisted-acquisition programme.

READ: Belvoir Lettings shrugs off property market wobbles

Win-win scheme

Under this scheme, Belvoir helps franchisees that want to expand by plugging any equity gap or shortfall (up to 30%) in their funding for a deal.

It’s a win-win for the franchisee and Belvoir, according to Gonsalves.

A typical franchise employs 4-5 people and looks after 250 properties but if a franchisee can acquire a similar business within its own area, it can just tack on the revenue without the cost sending profits climbing.

Belvoir meanwhile gets a boost from higher management services fees (MSF) from its franchisee and interest on its loan.

Twelve acquisitions have been funded this way this so far this year, generating £1.7mln of revenue for the franchisees and £188,000 in MSF.

This operational gearing helps explain the first half improvement where profits jumped to £1.73mln (£1.07mln) on revenues of £4.92mln, up 15%.

Purchase prices are based on one year’s sales and the deals in 2017 have seen Belvoir put up £332,000 in supporting loans.

Entrepreneurial franchisees

Gonsalves adds the entrepreneurial nature of the franchisees themselves makes them suited to this kind of deal and some are now on their second or third purchase.

He points to Northwood, which was acquired a year ago for an estimated £13mln subject to a two-year earn out. There was no such scheme in place before Belvoir acquired it and now half its network has registered an interest in an acquisition. Five of the twelve completed deals this year have come from Northwood franchises.

Dividend cover

How far Belvoir can support the scheme is obviously limited by its financial resources, but the business has no major capital upfront needs and generates cash.

The company is also one of AIM’s dividend payers but the level of cover is going up to provide a bit more flexibility, especially with estimated £4.3mln still to pay for the Northwood earn-out.

Payment was held at 3.4p at the half year, pushing cover up to 1.2 times though Gonsalves wants this to rise further to 1.5x. At 108p, the yield currently is a handy 6.3%.

A mortgage broking firm (Brooks) has just been acquired as well to allow it to offer financial services to buyers, sellers, tenants and landlords who want it, while the policy of helping landlords sell properties has also been expanded to boost client retention. 

Gonsalves appears relaxed about the tax (stamp duty, mortgage interest) changes to the lettings market and the incoming ban on letting fees.

Highly borrowed landlords will be affected but the underlying market is strong he says.

He points to the last two census reports where renting across the UK rose from 10% in 2001 to 20% in 2011. Another1.8mln private rented homes are forecast to be needed by 2025.

“Those numbers of properties are never going to be built,” he says, “not even a dent in it.”

He is even calm about the entry on online players into the property space, ‘the disruptors’.

Letting is a ‘labour intensive’ business, not easily digitised, he says.

“And while many estate agents are seeing transactions numbers falling along with fee values, our share is growing with market share on the up.

“Our letting portfolio is also growing, so we are bucking the trend on both sides.”

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September 13 2017
Belvoir Lettings recently posted impressive half–year figures against a difficult backdrop for the UK property sector

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