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Edited Transcript of GLV.I earnings conference call or presentation 28-Feb-20 8:30am GMT

Full Year 2019 Glenveagh Properties PLC Earnings Call

Mar 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Glenveagh Properties PLC earnings conference call or presentation Friday, February 28, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Conor Murtagh

Glenveagh Properties PLC - Director of Strategy & IR

* Michael Rice

Glenveagh Properties PLC - CFO & Executive Director

* Stephen Garvey

Glenveagh Properties PLC - Co-Founder, CEO & Executive Director

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Conference Call Participants

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* Colin Sheridan

Davy, Research Division - Industrials Analyst

* Ronan Dunphy

Investec Bank plc, Research Division - Research Analyst & Economist

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Presentation

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Operator [1]

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Hello and welcome to the Glenveagh Full Year Results Call 2019. My name is Molly, and I'll be your coordinator for today's event. Please note that this conference is being recorded. (Operator Instructions) I will now hand you over to your host, Stephen Garvey, to begin today's conference. Thank you.

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Stephen Garvey, Glenveagh Properties PLC - Co-Founder, CEO & Executive Director [2]

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Thank you, Molly, and welcome, everyone, to Glenveagh's full year results call. Joining me here today in Dublin are my colleagues Michael Rice, our CFO; and Conor Murtagh, Head of Strategy and IR. We are pleased to report on our progress for our second set of full year results.

To begin, please turn to Page 4 where we've set out our operational highlights, which demonstrate Glenveagh's strong progress in the period. During 2019, the group completed the sale of 844 units across 14 selling sites, where reservations and pricing remained strong throughout the year. In excess of 475 units, which are due for delivery in 2020, are now sold, signed or reserved, substantially underpinning the group's 2020 delivery target of 1,000 units.

The group was constructing on 17 sites in 2019 with 4 new due to open in H1 of 2020. Construction has concluded on our Herbert Hill, Proby Place and Holsteiner Park developments.

Construction price inflation, CPI, remains in line with our expectations with over 85% of our costs associated with 2020 deliveries now agreed. In terms of planning, the group has 29 applications at various stages of planning and design process totaling in excess of 6,000 units. During 2019, the group received 10 successful planning grants totaling 1,440 units and are now well set up to more than double the number of planned units in our portfolio during 2020.

Total site acquisition investment in the period was EUR 109 million covering over 2,600 units following 8 strategic additions to the group development land portfolio. This operational progress gives the team confidence that the business is well positioned to continue to meet its output targets beyond 2020.

Turning to Page 5. On Page 5, we've highlighted the financials for the period, which Michael will talk through in more detail later. Full year revenue of EUR 285 million primarily related to the sale of 844 units across our 14 selling sites. Gross margin of 18.1% demonstrates continued margin progression in our underlying housing margin, which was 17% in 2018.

The EUR 72 million of net increase in work in progress and EUR 50.5 million in net increase in development is in line with our continued ramp-up of the business. As outlined in our Investor Day, we'll start to see this investment in land decline significantly over the course of 2020 and '21 as the pace of sales exceeds new acquisitions on a euro basis. Net cash was $53 million as of the 31st of December with EUR 40 million drawn down from the group's debt facility to fund investment in land portfolio and work in progress.

Now please turn to Page 6 where we've outlined our achievements since IPO. So far, the group has successfully deployed in excess of EUR 700 million of capital towards assembling a landbank, which has targeted the deepest and most resilient segment of the market, which is starter homes in large urban centers. Alongside assembling an attractive land portfolio, the group has successfully ramped up its construction operations.

To date, we have opened 20 sites in total, delivered 1,100 units and have the same number of units currently under construction in 2020 in a sustainable and profitable way on multiple sites in multiple locations. This strategy has delivered units, revenues and profits, which have exceeded expectations in each of the years since IPO.

On Page 7, with Phase 1 of our IPO objectives now delivered, we outline the group's new reporting structure, which we recently unveiled as part of our Investor Day in January. Our focus remains on our core markets, which is suburban housing, urban apartments and partnerships. These 3 reporting segments will replace the former Homes and Living banners and will streamline communications to investors and allow each offering to be assessed independently of one another.

Moving to Page 8. We have outlined our main attractions of our complementary business units. Our suburban housing, which delivers suburban housing in highly -- is highly attractive as it targets the deepest parts of the market with the deepest demand.

As we continue to successfully execute our strategy of delivering affordable, high-quality starter homes in locations of choice, the group is well positioned to maximize sales in this segment. Moreover, the nature of the product allows for easier optimization of construction process, which allows Glenveagh to benefit from economies of scale as we continue to ramp up our deliveries. Our urban segment, which delivers urban apartments for institutional investors in the private rental sector, which represents a substantial opportunity for the group.

As Ireland has the lowest proportion of apartments in the EU, the structure occupier shift to rental and increasing urbanization rates have led to a substantial mismatch between supply and demand for urban accommodation. This environment has attracted a considerable number of institutional investors that are committed to forward fund or forward fund -- purchase of PRS units.

We are well positioned to accommodate such demand with early commitment from institutions, creating longer-term earnings visibility for the group. The first transaction of this type will be East Road where the group has now entered exclusively with a forward fund partner.

Our partnership segment is another highly attractive segment, whereby the group enters into an agreement with state agencies or local authority to build on land up -- build on their land at a reduced upfront cost. Over time, this will derisk Glenveagh's market exposure and provide both access to both landbank deliveries for suburban and urban segments. It gives us a strong return on capital profile, increased business resilience and will reduce risk. With considerable undersupply in both affordable and social housing in Ireland, the opportunity for Glenveagh's partnership is significant.

Overall, we believe these 3 business segments represent the best use of capital and operational resources going forward, and we are confident that the business is well positioned to capitalize on these opportunities.

I would now like to hand you over to Michael to discuss the financials for the period.

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Michael Rice, Glenveagh Properties PLC - CFO & Executive Director [3]

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Thanks, Stephen, and good morning, everyone. As Stephen has mentioned, Glenveagh has had another strong year in 2019. From a financial perspective, it was our first year of profitability. We have generated significant cash in the year and ended 2019 in a net cash position in only our second full year of operation.

If we can move to Slide 10. The total unit completions for the year were 4 -- were 844 units, a 207% increase on the prior year but also 16% higher than our market guidance of 725 units. We had guided the market to a higher completions number on our interim call last August. But even with that, 844 units was a great result.

Group revenue was EUR 284.6 million for the year with EUR 280 million of that related to our unit deliveries. The continued strong demand for our first-time buyer product is evident from our average selling price. When we exclude our PRS transaction in Herbert Hill, our ASP for the year was approximately EUR 305,000, which really supports our focus on the more affordable end of the markets.

Revenue include a consideration of EUR 4.3 million from a number of noncore site disposals, which continues to be a small feature of the business as our land portfolio matures. The group's gross profit for the year amounts to EUR 51.5 million, an increase of over 230% from EUR 15.3 million in the prior year. Our overall gross margin of 18.1% shows continued progression from 2018 where our underlying housing margin was approximately 17%.

The group's central costs for the year were EUR 19.6 million, which, along with the EUR 1.4 million of depreciation and amortization, gives total administrative expenses, pre-exceptional items, of EUR 21 million. The exceptional costs of EUR 1.1 million incurred in the year relate to redundancy and restructuring costs and costs associated with closing the Hollystown Golf Club, which we bought in 2018.

As expected, our net finance costs increased to EUR 2.7 million, in line with the greater utilization of our revolving credit facility, which predominantly finances our investments in work in progress. Overall, the group delivered a profit after tax of EUR 22.8 million, which showed significant progression from the loss of EUR 3.9 million incurred in 2018 and current year earnings per share of EUR 0.026.

Moving on to the balance sheet on Slide 11. The group has increased its land portfolio by a net EUR 50 million to EUR 668 million. And as explained at the Capital Markets Day last month, we do not envisage any further net investment in land and that the euro value of land on our balance sheet will decrease over the coming years.

The group has made a significant investment in work in progress, in line with continued ramp-up of the business, with a year-end balance of EUR 173 million, a net increase of EUR 72 million on 2018. The investment in the land portfolio and work in progress has been financed through a combination of the group's cash balances and our debt facility. And demonstrating the strong cash generation now within the business, we ended the year with net cash of EUR 53 million.

On Slide 12, our cash flow very much mirrors the movement on the balance sheet with the majority of cash outflows relating to our investment in inventories of EUR 118 million. But this has reduced significantly from the EUR 432 million spend in 2018, and this demonstrates the early stages of us no longer needing to be significant investors in land. We utilized our debt facility a lot more in 2019, and we drew down EUR 120 million and repaid EUR 80 million at various stages during the year to leave us with a EUR 40 million balance at year-end.

Slide 13 is one which we presented at the Capital Markets Day where I pointed towards earlier-than-anticipated revenues, profits and cash from our newly formed urban division due to our ability to forward fund these transactions with institutional investors. Along with today's announcements that we're in exclusive discussions on East Road allows us to give a bit more guidance.

The land sale element of East Road is now highly likely to happen this year, and we'll get our land value back with our margin in line with the overall deal and similar to the current margin in the suburban business. These revenues, profits and cash are at least 12 to 18 months earlier than previously anticipated.

Slide 14 shows our central costs, which for the year were EUR 19.6 million, which is just shy of 7% of revenue, but we reiterate our medium-term target to reduce this percentage below 4.5%. We demonstrated at the Capital Markets Day the wide range of initiatives that are ongoing in the business and that 90% of our overhead is construction focused. Our intentional investments and central costs to date is with the medium to long term in mind and will support our continued growth trajectory.

Moving to Slide 15. This slide deals with the majority of the backwards looking -- or sorry, we have already dealt with the majority of the backwards-looking information in Slide 15 as more forward looking and highlights our priorities in the coming years. We'll look to reduce our net investment in land, which I've mentioned already, and we'll give a little more color later in the presentation.

We have increased our unit output targets from 2022 onwards. We'll improve our operating margins through continued procurement efficiencies but also a number of initiatives, one of which is our supply chain integration. We'll forward fund our urban projects, and as mentioned, East Road would be first of those. And we'll continue to invest in working capital within the suburban division as we have great visibility on strong returns in that business segment. These areas of strategic focus will allow us to enhance our return on capital for shareholders.

Moving to Slide 17. This slide shows how our development portfolio continues to evolve over time. We remain GDA focused with 91% of our land in this location, which is an increase from 81% this time last year. Our focus on the starter home market is very strong with 97% of our suburban portfolio at EUR 350,000 or below. And this number will continue to increase as we sell the remaining noncore, higher-end developments such as Proby Place. The last line of this chart shows our very favorable exit optionality in light of the emergence of PRS both in urban apartments and suburban housing with 42% of our portfolio now available for PRS depending on institutional demand and pricing.

If we move to Slide 18. In line with my comments on no net investments in land and the euro investment decreasing, this slide demonstrates that our land capital per unit delivered reduces significantly over the next 5 years. In simple terms, we can deliver 4x the number of units with the same euro investment in lands that we currently have. This is key to improving the group's capital efficiency and driving return on capital employed.

And to finish, if we can move to Slide 20. We're giving greater clarity on Slide 20 as to the embedded site cost in our current portfolio. We continue to buy land well and have further decreased our site cost as a percentage of potential revenue to 15% from 22% at IPO. On the right-hand side, you can see the site cost percentage that has been coming through the P&L in the last 2 years, and comparing the 2 demonstrates that -- its further margin enhancement from simply bringing our post-IPO land into our active construction and selling portfolio.

I'll now hand you back to Stephen to bring you through some of the key operational activities.

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Stephen Garvey, Glenveagh Properties PLC - Co-Founder, CEO & Executive Director [4]

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Thank you, Michael. If you can please turn to Page 22. During our Investor Day in January, the group outlined our updated delivery targets. We are now delivering 12,000 units by 2024, which is over 30% exceeding our IPO objectives at the start, which gives us an annual run rate of 3,000 units by 2023.

This slide gives you a breakdown of where the units are coming from. Due to the size of the North Docklands portfolio, we've singled this out, EUR 110 million of capital. And our aim is to monetize it over the time frame of the project, which will commence this year.

Turning to Page 23. Our operational structure allows us to capitalize on the group's scale advantages and deliver efficiency across our 3 segments. We split suburban delivery into teams clustered around distinctive geographies. This is on top of an already established dedicated team to our site openings. Urban apartment delivery is a special skill set and that skill set exists in our business, which we have complemented with senior hires from the U.K. market. These teams are supported by central functions of underwriting, planning, design, procurement and corporate, which allows for more efficient delivery across the 3 segments.

Turning to Page 24, we have outlined our construction progress in the period. Glenveagh are now actively constructing on 16 sites, which are capable of delivering in excess of 4,800 units. Six site openings in 2019 included Barnhall Meadows, Silver Banks, Mount Woods, Bellingsmore, Oldbridge Manor and Dargan Hall. A further 4 sites are scheduled to open in H1 2020, which will include East Road and the commercial element at Castleforbes. CPI remains in line with our expectations, and our visibility on 2020 costs has increased to 85% or more.

Turning to Page 26. In line with our strategy of continuous supply chain integration, the group has entered into an exclusive multiyear open book supply agreement signed with one of the group's existing timber frame partners, KTF. In conjunction with that, the group has purchased a well-invested production facility in a strategic location, which will be leased to KTF as part of a multiyear supply agreement.

The purchase price of the facility and new manufacturing equipment was EUR 6.5 million. This facility measures 175,000 square foot and will be operational in Q2 and have an initial capability of delivering 800 units per annum in 1 shift.

Investing alongside our supply chain allows the group to lock in supply, drive program efficiencies, ensure Glenveagh benefits from the savings, which, at our scale and certainty of supply, brings to the supply chain. But most importantly, it allows the group to enhance the product that we can deliver. As a sign of further progress in the supply chain, the group's quarry for off-site disposal of inert materials is due to be operational from Q2 of this year, which further derisks the costs associated with groundwork and infrastructure on site and speeds up the process of the disposal.

Now turn to Page 27, please. From the outset, the group has been creating a sustainable business and at the core of it is its strategic objectives. Our environmental and social agenda continues to gain pace, along with the delivery of our strategic objectives.

Key to scaling the business for the long term has been our people. Growing the business from 75 people at IPO to over 330 today fostered a culture, which has not only empowered talent, but which has embraced equal opportunities, diversity and inclusion. We have a strong gender balance ratio compared to industry average and Glenveagh works closely with the Construction Federation on initiatives to encourage female participation in the industry.

Health and safety is at the heart of our operations. In 2019, the group achieved a Highly Commended Award from the ISNO (sic) [NISO] and a Grade A T Cert, but there is always more that can be done in this area as a market leader. It is incumbent upon us to continue to drive the health and safety agenda. With that in mind, the group is implementing the ISO 45001 occupational health and safety management.

Exceeding consumer expectations is central to the group's strategy of creating a home -- leading homebuilding platform in Ireland. Built around those objectives of access, quality and innovation, our customer service offering has brought a new professionalism to the industry. Customer satisfaction has been a KPI for the entire business since inception and drive an element of all staff's variable remuneration.

Despite there being no published benchmarks in Ireland, we engaged an independent external survey for our customers. Full variable remuneration is not paid to employees unless the equivalent of a 5-star status in the U.K. is achieved.

Contributing to sustainable communities are a key feature of our approach to both planning and design. In 2020, the group will commence work on its first urban brownfield regeneration projects in Dublin Docklands. This is the first project of its type to be delivered by the group and forms part of our portfolio of over 2,000 brownfield units, which will be delivered by the group between now and 2024. We are also pleased to confirm that the group has been shortlisted as a finalist in the residential category for the upcoming Irish Construction Excellence Awards.

The environmental sustainability of our housing is at the forefront of the business -- of our business decisions. All houses and apartments delivered by the group in 2019 had a Building Energy Rating of A3 or better. Glenveagh intends to replicate and improve on this in 2020 and through future periods. Suffice to say that continuing to create a sustainable business continues to be to the forefront of what we do as a company.

Now please turn to Page 29 where we outline our sales activity in the period. During 2019, the group completed the sale of 844 units, which was 16% ahead of our target across 14 selling sites. This included a number of PRS transactions namely our 90-unit development at Herbert Hill and 118 suburban housing units, which we sold to IRES at Taylor Hill and Semple Words. New suburban selling sites in 2019 included Blackrock Villas, Ledwill Park, Mount Woods, Semple Woods and Knightsgate. Moreover, we plan to add 6 further selling sites in 2020.

In conclusion and turning to Page 33, we have shown that our business model is working as sales and construction numbers continue to progress well as our operational infrastructure continues to build momentum. The demand/supply imbalance continue to exist for prospective homebuyers, and this is the opportunity Glenveagh intends to capitalize with our advantages in both infrastructure and operational expertise.

Our focus will remain on our complementary verticals of delivering starter homes, PRS units across our portfolio and mixed tenure projects in collaboration with both local authorities and state agencies in order to seize the scale opportunity in the underserved Irish housing market.

I have every confidence in the continuation of our successful ramp-up, given the expertise, the work ethic and the experience of all members of the growing Glenveagh team that have delivered for the company and its customers and we've continued to do so as we move into 2020 and beyond.

With that, I am happy to turn the call over to any questions you may have, and thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Colin Sheridan calling from Davy.

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Colin Sheridan, Davy, Research Division - Industrials Analyst [2]

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Just a few questions for me, if I can. And the first one just relates to East Road. I suppose you refer in your statement this morning to the 448 units that is -- are likely to be pre-funded on that site. I mean compared to the planning permission that you received there for EUR 554 million, I mean, we would have been aware that there was maybe 10% verified contribution there. I just wonder if you could just help us with the kind of additional kind of 50 units in the middle there and what might be happening with those?

And then just on build costs, I mean, you've obviously given some solid guidance there, but it's very interesting to see the timber frame deal this morning. I'm just wondering if you could talk a little bit more about as in terms of how that will help you mitigate any build cost inflation going forward, what effect it might have on margin. And maybe then, just for context, what kind of percentage of the overall ASP of the standard has that timber frame might make up?

And then finally, just I suppose standing back a little at the time of your IPO, clearly, your target was to ramp up from 250 to 725 in 2019, which I think was seen as pretty ambitious at the time, but the 844 that you delivered is clearly well ahead of that. I just wonder if there's any couple of factors, in particular, you'd point to, which has helped you kind of materially outgrow the market then during that period.

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Stephen Garvey, Glenveagh Properties PLC - Co-Founder, CEO & Executive Director [3]

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Thanks, Colin. I hope I remember them all, all 4 of them. I'll deal with East Road first. So yes, you're correct. And right, there was 554 units of planning. Obviously, by choice, we've retained approximately 106 units out of that development. And obviously, that's our choice. We're obviously looking at various exits and maybe something like we did in Herbert Hill is an option for us down the road, but that's for us to work out.

Obviously, the people that we're talking for at the moment are very excited about their -- the proportion of the site that they're taking. They see this as a big opportunity for us and are quite comfortable with us retaining 106 units.

On the timber frame, on 2 fronts, obviously, yes, we've talked about a lot of this a lot where we were trying to integrate the supply chain. And I suppose we've all indicated that we would like to control as much of the supply chain as possible as we see that as maximizing our returns into the future.

Obviously, doing 800 units a year will give us certainty of delivery as we ramp up to delivering, say, 1,400 units to 2,000 units. We have certainty of supply. I suppose the biggest thing for us is, and this is part of the supply agreement, is the product that comes out of that factory and that's really key to us.

A lot that we talk about is the innovation that we're trying to run as a business and better ways of doing things. So that's something that we're really looking at. As a percentage of the overall product, so if you took a standard 3-bedroom home at 1,200 square foot and on a super structure basis, it probably represents around 20% to 25% of the overall product on the build cost.

So overall, that's quite a big opportunity. And I suppose the big thing for us is it's not chase the low-value items, it's chase the high-value items is what really we go after. So we think there's big opportunity.

On the build cost overall and what the opportunity for us there is, I suppose, by controlling the supply chain to a certain degree, it gives us better certainty of maybe not totally reducing cost for controlling the costs as they might move to the market. So if -- we would say, "Oh, if the market is seeing 5%, we see a better opportunity of controlling our inflation, our construction price inflation around 2.5%."

Just on the momentum of the market last year. And I suppose we would have indicated pretty early from August, we felt pretty confident about delivering 800 units. A couple of factors that were at play there. Obviously, we've got good velocity numbers out of some of the sites. Some of our sites that we might take a number of 50 or 60 units. Probably, we're able to deliver 100 units, and that's due to a number of elements. The likes of the PRS transactions that we completed with IRES obviously gave us better velocity.

I think, though, what it really shows is we've had the strategy. The strategy is really working. The key for us is open the sites as quickly as possible. And if you look at the numbers that we started with this year, out of 475 units reserved by the end of February, which is ahead of last year because last year, we came out with 451 units in the middle of March, which also excludes -- we have done no PRS at the moment as well. So we feel very confident that overall, there's good momentum into the market at the start of the year. And what's really probably working for us is those site openings we're getting already are delivering the product.

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Operator [4]

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The next question comes from the line of Ronan Dunphy calling from Investec.

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Ronan Dunphy, Investec Bank plc, Research Division - Research Analyst & Economist [5]

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Just firstly, maybe just a question about your urban product and selling into the PRS sector. And if we end up in a situation here where there is a rental freeze as introduced by whatever government we ultimately have, I'm just wondering about your thoughts on how deep or resilient that institutional demand is and whether your plans might be impacted at all by some form of legislation of that form.

And then secondly, just looking at the sites or -- that you're opening at the moment or maybe that are at design stage, and from your experience over the last couple of years, has that altered your thinking at all in terms of maybe unit mix in terms of more 2 beds versus larger properties, trying to keep the asking price lower? And just sort of how your thinking has evolved there over the last couple of years?

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Stephen Garvey, Glenveagh Properties PLC - Co-Founder, CEO & Executive Director [6]

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Yes. Thanks, Ron. I suppose, yes, there's a lot of talk about rent freeze in the overall market. And I suppose I described it -- some people had -- well, that's only really putting the patient into -- on life support. It's not really sorting or curing the problem. And the cure to the problem is actually more supply in the system will bring more sustainable rent over the long term.

Interestingly, like we've had inbounds from institutions since the election, overall, they remain very confident in the overall Irish market, which is reassuring. Obviously, there's a little bit of uncertainty. And obviously, it's going to take time to form a government. But in the end of the day, the only real cure to stabilizing and reducing rent is more supply, so I don't think the rent freeze will cure that.

Overall, we're quite confident, I suppose. The big thing for us is if you look at the rent market that we're more active in, it's more up the affordable end. But if you look at our Docklands development or developments in Cork or across the portfolio, they're more about affordable rates and not -- they're not high-end rents, so we're more confident on that front.

I think if you talk to institutions, what institutions would really like to see is actually a certain degree of rent stabilization. And from there, they can be a little bit more aggressive on their yield. So that's comforting on their stage. The thing that sticks out to them is, no matter what, there's a fundamental supply/demand imbalance. There's an exodus of the domestic mom-and-pop landlord, as I described it from the market, which is somewhere between 5,000 and 6,000 units per year, but institutions are only replacing them in somewhere around 3,000 to 3,500 units.

So that -- the supply/demand advantage is just going to remain there for the foreseeable future. What really should be done is how do you incentivize more suppliers to bring more products into market, which will be good for rent in the long term.

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Conor Murtagh, Glenveagh Properties PLC - Director of Strategy & IR [7]

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Unit mixes and the changes.

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Stephen Garvey, Glenveagh Properties PLC - Co-Founder, CEO & Executive Director [8]

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Unit mix, yes, I think there's a lot of things that are obviously at play here, like, I suppose a big thing we would look at is -- obviously, the existence of the macroprudential rules, and we look at the average industrial wage of a couple and say, "Look, we need to design product that's affordable to them."

The other aspects that are at play there also is, you obviously have the national framework plan, which has outlined the density across all land now, which is just key that you have to stick to. And if you look at our more (inaudible), it's a minimum density of 35 units to the hectare. So that would have an implication for the product that you supply.

Obviously, there's various innovations that we're looking at, how could you streamline that supply and how could you make it a better product. But to the heart of what we're trying to do is, how can you make this as affordable as possible.

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Operator [9]

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(Operator Instructions) It looks as though that final question has been removed from the queue. We have no further questions on the phone lines. At this point, I will hand the call back over to your host.

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Stephen Garvey, Glenveagh Properties PLC - Co-Founder, CEO & Executive Director [10]

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Thank you, everyone, and look forward to seeing you on the road. Thank you.

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Operator [11]

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Thank you for joining today's call. You may now disconnect your lines. Hosts, please stay connected.