The test of a good agent is whether they exit a downturn in the housing market in better shape than they entered. Several larger agencies have thrown down the gauntlet; determined to grow despite the economic climate. But growth needs investment, and investment needs money, not always easy to come by in a world that still hasn’t recovered from the 2007 credit crunch.
Some chains are making a success of things, though. Belvoir has floated on London’s Alternative Investment Market, a junior division of the LSE, while Countrywide and LSL have been on the acquisition warpath, and Leaders made its first foray out of its southern heartland into East Anglia and continues to look for acquisitions to add to its portfolio.
While it’s possible to grow a business simply by reinvesting the profits from the business, getting the right funding can speed up growth considerably. Dorian Gonsalves, CEO of Belvoir, says that the funds from the IPO will allow the firm to increase its acquisitions from four or five a year to 12-15, and its franchised new offices from 10 a year to 15. “It’s much faster,” he says, “but it’s more of the same, which is what investors want to see, not veering off in a new strategic direction.”
Paul Weller, MD of Leaders, says that while Leaders was also focused on growth through acquisition, bringing in a new investor allowed them to step up the pace. In the early days, Leaders had bought a few businesses; between 2005 and 2010, with a fresh injection of private equity funds, it bought “getting on for 40 businesses,” Paul Weller says, “a dramatic acceleration.”
Big boys’ games
It’s not just lettings agents that are expanding, either, though obviously they’re benefiting from a more friendly economic climate. Even though LSL saw pretax profits halve in 2011, it has invested in acquisitions, notably that of Marsh & Parsons late last year.
Roger Leboff of City research house Edison says the mix of major strategic and bolt-on acquisitions has enabled LSL to increase its market share from 4.5 to 4.7 per cent, and calculates that if all the acquisitions made last year had been in the group for the full year, revenues would have been nearly 12 per cent higher and profit 20 per cent greater. He’s impressed by the acquisition of Marsh & Parsons, too, not only will it provide a platform for a “London ‘buy and build’ strategy”, he expects it to earn more than its finance cost this financial year, increasing LSL’s profits.
Although LSL’s debt rose from £4.9m to £38.4m last year, Leboff regards the firm as “highly cash generative”, and says current debt levels are “very comfortable”. He points to the fact that LSL has £75 million of agreed long term finance in place, so it could afford another Marsh & Parsons and not strain its balance sheet.
But Leboff also points to the fact that capital constraints can make life very difficult for agents. He believes Marsh & Parsons was handicapped by not having enough capital; “its former owners’ cash
flow priorities prevented it from taking advantage of some opportunities to open new branches,” he says. Its new ownership could help it grow much faster.
Countrywide spent £24 million last year on acquisitions, refurbishments, and new offices, particularly in the lettings sector. John Hards, MD, Countrywide Residential Lettings Division, says organic growth has been strong. “In just under two years, Countrywide has opened an additional 138 letting branches within its existing Estate Agency footprint, under the ‘New Start Programme’. We have plans to add a further 70 branches this year.”
We acquire lettings books to bulk up existing branches.” Jon Hards, Countrywide Residential
To this, Countrywide has added strategic acquisitions. For instance in Yorkshire, Countrywide bought Letmove.com in Wakefield, Blundells and Spencers in Sheffield, and Mike Jolly Estates in South Yorkshire. John Hards says, “We acquire lettings books to bulk up existing branches and increase their scale, as well as acquiring branch networks in locations where our coverage and market share are lower.” Countrywide made 12 lettings acquisitions last year, and Hards says the company plans to expand further in 2012, both organically and through acquisition.
Another agency that is determined to develop while others droop is Winkworth. Since listing on the AIM in 2009 Winkworth have expanded what was a tight family ship into a serious player, with over 90 offices in the UK, France and Portugal. Dominic Agace, CEO, says that the fact that transactions are now just 50 per cent of those at the market’s peak, they will continue to grow. How? Through bringing existing estate agencies into the Winkworth brand under franchise arrangements. “We don’t buy the business, they remain independent, just operating as one of our franchisees. We receive franchise royalties in return for giving the agencies, some of whom will have been competing in very tough local markets, a broader base. It’s a meeting of ambitions.”
Where’s the pot of gold?
While debt finance remains important, most growing firms are backed by the stock market or by private finance houses. Belvoir’s float raised £6.3 million of fresh capital; while some went to buy out one of the founders, the rest will be applied to expansion of the franchise network and the creation of wholly owned offices.
We don’t have huge assets, our assets are our goodwill, our brand and our people.” Dorian Gonsalves, Belvoir
Belvoir was oversubscribed by 20 per cent, and floated at 75p, and the share price has risen to nearly 80p, a successful result for investors. The price the company has to pay for its success, though, is a 7.5 per cent dividend yield – making it attractive to income investors and something of a rarity on AIM (less than a quarter of AIM companies pay a dividend).
Dorian Gonsalves says that moving to AIM made various demands. For instance, Belvoir needed to bring in a finance director, Carl Chadwick, who joined in August 2011, and other changes had to be made, but they were “part and parcel of gearing up to have a bigger future.”
We get royalties and the agents get a broader base. It’s a meeting of ambitions.” Dominic Agace, Winkworth
He believes equity is the best way for lettings agents to fund expansion. “Companies like us don’t have a huge amount of assets,” he explains. “The assets in your business are goodwill, brand and people. We could have borrowed, but that would have needed the owners of the company to provide security.” Equity investors, unlike banks, are focused on the opportunity for growth rather than simply on the repayment of their capital, so backing a firm like Belvoir is attractive.
Dominic Agace says that AIM has been very successful for them over the last two years, “It has been fantastic for our profile, AIM requires total transparency so our franchisees can be confident that they know what they are buying into”. And a positive set of results for 2011 should bring further confidence with sales, profits and dividends all up on 2010.
The right relationships
Other firms prefer to stay away from the stock market, but bring in private equity. Fine & Country is now looking to broaden its base by bringing in new equity partners.
We are self-financing,we are looking for talent. We are not looking for cash.” Matthew Pryke, Fine & Country
Matthew Pryke, managing director, explains that Fine & Country isn’t tempted by the stock market. “We are self-financing, we’re a private company, that’s always been the way it’s worked within the business.” But in order to secure the right businesses in growth economies where it’s not well represented, such as China, Singapore, and India, it needs to consider equity partnerships rather than its traditional licence arrangements.
“We are looking for talent,” he clarifies, “We are not looking for cash.” The constraint on Fine & Country is not finance, but the ability to find the right people and businesses.
And he says that while the stock market has its benefits – “it’s very appealing if you’re looking to get credibility or cash to fund an expansion drive” – it could also dilute Fine & Country’s entrepreneurial culture. “There’s a push and pull between the business wanting freedom to move quickly and take advantage of opportunities, and the stock market which wants transparency and oversight.”
Private equity funds provide another avenue of funding. Leaders, for instance, has had three successive private equity investors, first of all 3i, brought on board 15 months after the original management buyout “to fund a slightly faster acquisition programme.” By 2005 3i had changed its business plan to focus on larger companies, so a second buy-out brought in RO Group; and in 2010, RO Group exited with a profit, and Bowmark became Leaders’ third partner. (The Daily Telegraph reported this as a £48 million deal.)
Paul Weller says that while private equity firms aren’t particularly impressed by pure estate agents, they understand the attraction of the lettings business with its strong cash generation and recurring income streams. “We had interest from both trade buyers and private equity. It was actually private equity that set the higher value on the business,” he says. And though Leaders has been through three private equity owners, he still believes it’s better to stick with private equity rather than head for the stock exchange. “We have investors who understand and support our business strategy,” he says, “and we’re not subject to the whims and fickleness of the stock market. But you have to go in with your eyes open. At some stage they will want to take their money out.”
Leaders is particularly happy with Bowmark, a specialist firm which invests in the property business and understands it well. Since Bowmark came on the scene, Paul Weller says, Leaders has made 21 acquisitions in two years, roughly doubling the firm’s profits, “Number twenty-one is happening today!” he said happily when I spoke to him.
More finance will let Leaders grow faster. “We’ve turned the volume knob up a notch,” he says, “now we’ve got the capacity to do bigger acquisitions.” The acquisition of JSM, a 6 branch firm in East Anglia, is their largest to date, and sends the message that Leaders is moving outside its traditional areas.
Agents don’t have to grow, but many feel that stability is not a real option.’
Countrywide, which was listed on the stock market for a while, is now also in the hands of private equity investors, and John Hards says there are big advantages. “As a private company, we continue to take a long term view and invest in areas that make strategic sense,” he says. That might not be possible if the stock market wanted to see faster growth in profits at the expense of long term market share.
Growing by acquisition does make demands on the company, though. Paul Weller has an accountancy background and he points out that’s a big advantage if you’re buying businesses, but he also has the support of a good acquisitions team. He has ten people working purely on assessing and integrating acquisitions, and estimates it costs the firm around half a million a year. “You need that level of resource and skill to absorb acquisitions at the rate we do,” he says, “without getting indigestion. We turn down a lot of acquisitions; we have to be selective.”
Belvoir, too, uses its audit team extensively to analyse and assess acquisitions, and one member of the support team specialises in acquisition work. Dorian Gonsalves agrees that selectivity is important; he says, “So far this year my hit rate looks pretty good, but at least half of the opportunities we look at fall by the wayside” for one reason or another.
With the exception of Marsh & Parsons, most of the corporate deals of the last couple of years have been fairly small; mega-mergers seem to be off the agenda. That’s partly because estate and lettings agency remains a fragmented industry with relatively few sizeable targets. The fact that most agencies remain privately owned also makes larger takeovers more difficult to stage, compared, say, to the pubs sector, where many of the largest groups are stock exchange listed. Larger mergers might happen if some of the larger players become financially stressed over the next couple of years, though, or, possibly, if owners feel they can’t develop the business further with the resources they have.
We need to add sales to our rental portfolio or we will lose out, as we did in 1996-7.” Ian Wilson, Martin & co
Agents don’t have to grow, they could simply carry on trading the way they are. But many companies feel stability is not a real option. For instance Ian Wilson of Martin & Co believes the company needs to add sales to its rental portfolio, or it will lose out. He says he lost a third of his rental portfolio in 12 months back in 1996-7, when prices increased and landlords took profits on their portfolios, and the same could happen again. So Martin & Co needs to spend £1,500 a branch on developing estate agency, a total bill of over a quarter of a million pounds, and that’s before expanding the branch network.
Dorian Gonsalves says the lettings market is getting more competitive as more and more estate agents have entered the business, so Belvoir can’t afford to rest on its laurels. “If we didn’t have the funding,” he says, “we could easily have got behind the curve in terms of acquisition growth.”
While currently, Belvoir is making fairly small acquisitions, an AIM quote enables the company to go back to the market for further funds if a larger target becomes available. “One of our ambitions is to acquire a larger chain,” he says, “and we can move more quickly to raise money from shareholders than we could from a bank.”