LSL Property Services : Annual Report and Accounts 2023

Annual Report and Accounts 2023

Annual Report and Accounts 2023

Overview, Strategic Report and Directors' Report

Overview

1. Financial Highlights
2. 2024 Outlook
3. About LSL and Our Markets

1. Chair's Statement
2. Group Chief Executive Officer's Review

Strategic Report

1. Purpose, Strategy, Culture, Values and Business Model

1. Financial and Divisional Reviews:

1. - Financial Review

1. - Financial Services Division

1. - Surveying & Valuation Division
2. - Estate Agency Franchising Division

1. - Balance Sheet Review

1. Our Stakeholder Engagement Arrangements including s172 Companies Act 2006 Statement

1. Principal Risks and Uncertainties

1. Non-Financialand Sustainability Information Statement including TCFD and CFD reporting

1. Environmental, Social and Governance (ESG) Report

1. The Board and The Executive Committee

Directors' Report (including Corporate Governance Reports and Committee Reports)

1. Statement of Directors' Responsibilities in Relation to the Financial Statements
2. Report of the Directors

65 Corporate Governance Report including Nominations Committee Report

85 Audit & Risk Committee Report

92 Directors' Remuneration Report including Remuneration Committee Report

Financial Statements

114 Independent Auditor's Report to the Members of LSL Property Services plc

1. Group Income Statement
2. Group Statement of Comprehensive Income
3. Group Balance Sheet
4. Group Statement of Cash Flows
5. Group Statement of Changes in Equity
6. Notes to the Group Financial Statements

1. Parent Company Balance Sheet
2. Parent Company Statement of Cash Flows
3. Parent Company Statement of Changes in Equity
4. Notes to the Parent Company Financial Statements

Other Information

198 Definitions

203 Shareholder Information (including forward-looking statements information)

Directors' Report and Financial Review (including Business Review)

We are one of the largest providers of services to mortgage intermediaries and estate agency franchisees. We also provide surveying and valuation services to seven out of the eight largest lenders in the UK.

For further information about our Group, please visit our website: lslps.co.uk.

Forward-looking statements

This Report may contain forward-looking statements with respect to certain plans and current goals and expectations relating to the future financial condition, business performance and results of LSL. Further information about forward-looking statements can be found in the Shareholder Information section on page 203.

Financial Highlights

The Group's strategic transformation means our 2023 financial results are less directly comparable to 2022. Our key financial highlights are:

Overview

Group Revenue		Group Underlying
(Continuing operations only)		Operating Profit
		(Continuing operations only)
£144.4m		£10.3m
(2022: £217.5m)		(2022: £29.9m)

Strategic Report

Group exceptional costs

Net Cash

(Continuing operations only)

£(13.8)m £35.0m

(2022: £(48.3)m)

(2022: £40.1m)

		Restated2
Full year financial metrics1	2023	2022	Var
Group Revenue (£m)	144.4	217.5	(34)%
Group Underlying Operating Profit from total
operations3 (£m)	9.3	35.8	(74)%
Group Underlying Operating margin (%)	5%	11%	(600)bps
Group Underlying Operating Profit from
continuing operations4 (£m)	10.3	29.9	(66)%
Exceptional gains (£m)	9.3	0.7	nm
Exceptional costs (£m)	(13.8)	(48.3)	71%
Group operating profit/(loss) (£m)	3.7	(21.7)	117%
Profit/(loss) before tax (£m)	4.9	(23.8)	121%
Loss from discontinued operations4 (£m)	(46.1)	(36.5)	(26)%
Basic Earnings per Share5 (pence)	7.9	(26.0)	130%
Adjusted Basic Earnings per Share5 (pence)	7.6	27.6	(72)%
Net Cash6 at 31 December (£m)	35.0	40.1	(13)%
Final dividend per share (pence)	7.4	7.4	-
Full year dividend per share (pence)	11.4	11.4	-

Notes:

1. Stated on basis of continuing operations unless otherwise stated. Refer to notes 2 and 6 to the Financial Statements.
2. See note 36 to the Financial Statements for details regarding the restatement.
3. Group (and Divisional) Underlying Operating Profit is before exceptional items, contingent consideration assets and liabilities, amortisation of intangible assets and share-based payments. Refer to note 5 to the Financial Statements for reconciliation of Group and Divisional Underlying Operating Profit to statutory operating profit/(loss) for continuing, discontinued and total operations.
4. Following the conversion of the entire owned estate agency network to franchises in H1 2023, this was classified as a discontinued operation and is now presented as such in the Financial Statements. Refer to notes 2 and 6 to the Financial Statements.
5. Refer to note 12 to the Financial Statements for the calculation.
6. Refer to note 35 to the Financial Statements for the calculation.

Directors' Report (including CorporateFinancial Statements

Governance Reports and Committee Reports)

Other Information

01

2024 Outlook

• 2024 has started strongly with improving sentiment and lower mortgage rates driving more activity across our core markets. We have seen an increase in mortgage approvals as well as housing transactions and the start of a normalisation in product mix in our mortgage business. These conditions have particularly benefited our Surveying & Valuation business, where there has been a very substantial increase in activity and profits.
• It was against this background of improving activity and Group trading that we issued a trading update on 6 March, since which time trading has remained ahead of expectations. At the end of Q1 2024, Group Underlying Operating Profit was materially ahead of the same period in 2023. This improved trading reflects better market conditions as well as the benefits of the new Estate Agency franchise model, improved lender contracts, and our decision to retain surplus capacity throughout the second half of 2023 in our Surveying & Valuation business.
• Although we retain a degree of caution, inflation data still suggests that interest rates will reduce in 2024, which would help support our markets. This, together with the strong performance since our recent trading update on 6 March, reinforces the Board's confidence, and our expectations for full year Underlying Operating Profit have increased further.

02

About LSL and Our Markets

About LSL

Unless stated otherwise, information in this section of the Report is as at 31 December 2023.

We are one of the largest providers of B2B services to the UK's property and mortgage market. We provide services to mortgage intermediaries and estate agency franchisees, and valuations to many of the UK's largest lenders. Details of our business model are included in the Purpose, Strategy, Culture, Values and Business Model section of this Report.

We have three Divisions:

• Financial Services
• Surveying & Valuation
• Estate Agency Franchising

Overview

Strategic Report

Financial

Services

One of the UK's

largest mortgage and insurance networks

Financial Services

Surveying &

Valuation

One of the UK's

largest surveying and valuation businesses

Estate Agency

Franchising

One of the UK's

largest providers of

estate agency

franchise services

Directors' Report (including Corporate

Governance Reports and Committee Reports)

One of the UK's largest mortgage and insurance networks

We provide compliance and other services to members of our Financial Services Network. Together, the PRIMIS Mortgage Network and The Mortgage Alliance (TMA) make up one of the UK's largest mortgage and insurance networks. Following our acquisition of TenetLime Limited in February 2024, PRIMIS increased its number of advisers to 2,913 and 1,153 firms, with a mortgage market share of more than one in ten UK purchases and remortgages.

Pivotal Growth

Pivotal Growth is a joint venture established in 2021 with Pollen Street Capital to execute a 'buy and build' strategy of mortgage brokers. Pivotal Growth has made a number of acquisitions and now has more than 400 mortgage advisers.

Surveying & Valuation

Our Surveying & Valuation Division includes e.surv, one of the UK's largest surveying and valuation businesses, and Walker Fraser Steele Chartered Surveyors, which services the Scottish market. e.surv is one of the UK's biggest employers of Royal Institution of Chartered Surveyors (RICS) registered surveyors, with 472 (FTE) surveyors, and counts seven of the UK's eight largest lenders amongst its clients. e.surv is rated Excellent on the review platform Trustpilot, with a score of 4.8 stars from over 5,000 verified reviews.

Since 1 April 2023, the Division also includes our asset management businesses, LSL Corporate Client Department and Templeton LPA, which were previously included in the Estate Agency Division (now the Estate Agency Franchising Division). They specialise in managing the sale of residential properties on behalf of corporate clients and property investors.

Estate Agency Franchising

We provide estate agency franchising services, such as brand marketing and commercial and IT support, to a network of over 300 territories across the UK. These territories are independently managed and operated by Estate Agency franchisees under various brands, including Your Move and Reeds Rains, as well as several local brands. All franchisees operating our brands won either Excellent or Exceptional status in Sales and/or Lettings at the EA Masters Awards, for inclusion in the Best Estate Agency Guide 2024.

We also own other specialist businesses which support franchisees with related product services:

• LSL Land & New Homes provides a complete range of services for house builders, developers and investors of all sizes, which can be used by all franchisees.
• Homefast provides conveyancing panel management and support services to our franchisees and their customers.

Financial Statements

Other Information

03

About LSL and Our Markets

Our customers' end markets

Demand for our products and services is driven primarily by the UK mortgage market in the Financial Services and Surveying & Valuation Divisions, and by the UK housing and lettings market in the Estate Agency Franchising Division. In addition, our Financial Services businesses distribute significant numbers of protection assurance policies. There is some correlation between the UK housing and mortgage markets, although remortgages, product transfers and assurance products are significant parts of the mortgage market and are often not correlated with the housing market.

Mortgage market

Demand for mortgages reduced against a market backdrop of rising interest rates and higher mortgage costs in 2023, whilst the intermediary share increased slightly2:

• Total gross mortgage lending1 in 2023 was £224bn, 29% lower than the prior year (2022: £314bn) with a continued shift towards refinancing.
  Purchase mortgages accounted for only 59% of total lending (2022: 61%).
• The proportion of mortgage lending placed through financial advisers2 increased to 84% in 2023 (2022: 81%).
• Total mortgage approvals for house purchases3 were down 23% to 580,000 in 2023, with demand soft throughout the year due to affordability issues.
• Remortgage (and other)3 approvals were down 34% on 2022, while remortgage and other lending was 25% behind as consumers faced uncertainty in a volatile market throughout much of the year.

Housing market - residential sales and lettings

2023 saw a reduced housing market, with transactions at their lowest level for 11 years:

• UK housing transactions4 in 2023 were 1,019,000, down 19% (2022: 1,258,000).
• Transactions were down 18% in H1 2023 and 20% down year-on-year in H2 2023.
• At the end of 2023, average house prices in England and Wales5 were 3.9% lower than a year earlier.
• Private rental prices paid by tenants in the UK rose by 6.2% in the 12 months to December 2023, and increased by 5.8% excluding London6.

04

Overview

Total Mortgage Approvals for House Purchase	Remortgage (and other) Volumes
'000s	'000s

789	801	934	755	580	761	588	627
2019	2020	2021	2022	2023	2019	2020	2021
Total Mortgage Approvals				Total Gross Mortgage Lending
'000s					£bn

1,549	1,389	1,562	1,456	1,025	269	246	308
2019	2020	2021	2022	2023	2019	2020	2021

Sources:

1. New mortgage lending by purpose of loan, UK (Bank of England) - Table MM23 (30 January 2024).
2. New residential lending sold direct and via intermediaries (excluding product transfers), UK Finance - Table RL8 (16 February 2024).
3. Approvals for lending secured on dwellings, Bank of England - Table A5.4 (30 January 2024).
4. Number of residential property transaction completions with value £40,000 or above, HMRC (31 January 2024).
5. House price index, England and Wales, LSL Acadata (January 2024).
6. Index of Private Housing Rental Prices, UK, ONS (January 2024).

701	445
2022	2023

314	224
2022	2023

Strategic Report

Directors' Report (including CorporateFinancial Statements

Governance Reports and Committee Reports)

Other Information

05

Chair's Statement

I'm pleased to present the Annual Report and Accounts for the financial year 2023. I was appointed as Interim Non Executive Chair of the Board with effect from 26 February 2024 following the departure of David Barral. I have been on the Board as an independent Non Executive Director since February 2019. In this Report, you will find an in-depthreview of the Group's financial performance together with details of the significant strategic progress made to reshape the business. While much has been achieved to structurally improve the Group, the market backdrop has been very difficult, and this has had a material negative impact on our financial performance which is very disappointing and in no way reflects the potential of LSL. Our performance showed stability in the second half of 2023 and has improved significantly in 2024 as the Group captures the benefits of our transformation as well as the recovery in the housing market boosting demand.

Major strategy progress against very challenging market conditions

The Executive and Senior Leadership Team has delivered major strategic progress during the year, with the radical restructure of both the Financial Services Division and the Estate Agency Division, with the previously owned and managed Estate Agency Division partially sold and the remainder fully converted into a franchise operation. These businesses are now business-to-businessplatforms with strong market positions, with significantly reduced costs, low capital requirements and potential for high cash generation.

The intense amount of work to deliver this transformation should not be underestimated and has been achieved against a very challenging market, where housing transactions were almost a fifth lower than prior years and new mortgage lending was down 29% versus 2022. I want to thank the entire team for their dedication, hard work

and commitment. I have no doubt that the Group will see the financial and operational benefits over the coming years.

Balance sheet strength and dividend

The financial strength of the Group has been significantly improved during the year, with cash disposal proceeds, new credit facilities put in place and lower future organic capital requirements following our restructuring. The combination of these factors alongside our regular review of our capital allocation structure, mean the Board has concluded the Group has excess capital and announce the implementation of a share buy-back programme of up to £7m. Furthermore with an expected material increase in profitability in 2024, and our improved financial strength, the Board is proposing to maintain the final dividend at 7.4 pence per share with total dividend of 11.4 pence per share for the year.

Board changes

After nine years of fantastic service, Bill Shannon retired from the Board on 25 May 2023. I would like to thank him for his hard work and dedication during this time and the rest of the Board appreciate his generosity during his handover.

After year end, David Barral, who was appointed as Chair to replace Bill Shannon on 25 May 2023 left the Board on 26 February 2024. I was appointed Interim Chair on

26 February 2024 with the search for a new Chair underway.

Simon Embley, whose term expires at the 2024 AGM, will step down from the Board on 1 May 2024 as he wants to focus his time on the expansion of Pivotal Growth. Simon has been a driving force behind the Group for many years and has made a huge contribution to its success. On behalf of the Board, I would like to sincerely thank Simon

for his contribution and we wish him well.

Looking forward

Market volumes remain below historic levels

and consumer confidence is fragile. The recent downward move in mortgage rates is helpful and we have seen some early signs of improvement in our end markets. Profitability

should improve materially for 2024 compared to 2023, reflecting the significant restructuring of the Group's cost base, a full year benefit of the new operating model for Estate Agency and a market recovery in Surveying & Valuation.

Our strong balance sheet provides the ability and confidence to seize organic and inorganic growth opportunities for the Group. Each Division has exciting future plans and the Board remains confident in LSL's long-term prospects.

Darrell Evans

Chair of the Board and the Nominations Committee

24 April 2024

06

Group Chief Executive Officer's Review

Overview

2023 was a year of significant progress with the Group's transformation to a structurally higher margin, lower capital intensity business now complete. We have restructured both our Financial Services Network and our Estate Agency Franchising Division which are now exclusively focused on business-to-businessservices, with a materially lower cost base and the potential for higher free cash flow generation. As a result of the work we have done, LSL is now well-positioned to driver greater shareholder value and to perform more consistently through market cycles, supported by a strong balance sheet.

With the benefit of the restructuring and transformation programmes complete, the Board and management are focused now on maximising the operational potential

in the business and ensuring that this potential is appropriately reflected in the wider perceptions of LSL. To that end, the Board also remains actively engaged with its shareholders with the common aim to drive shareholder value, including return on investment and capital management.

Our strategic progress has been delivered against a difficult market backdrop. Rising

interest rates and higher mortgage costs

significantly impacted the size and product

mix in the mortgage market whilst reducing housing transactions by 19%, impacting the financial performance in each of our Divisions. We ended the year with some early signs of green shoots in the mortgage and housing market as mortgage rates started to come down. Our full year results are slightly ahead of the Board's previous expectations, and I am pleased to report that 2024 has started strongly, with performance significantly ahead of prior year.

Our transformation programme has delivered material cost savings and reduced our

cost base by 50% on an annualised basis.

Combined with a new bank facility, disposal proceeds and enhanced financial flexibility due to the Group's strategic progress, we have strengthened our balance sheet further. We ended the year with £35.0m of Net Cash1.

Following the completion of our restructuring programme, the Board has reviewed

the Group's capital structure and capital allocation policies. Going forward the Board expects the Group's strong profit to cash

conversion dynamics it has historically

displayed to continue, and the Group to have

only small working capital requirements.

With a clear prioritisation of organic growth in our existing three Divisions, the Group only needs to hold a small net cash position, of up to £10m. Cash above this level after dividends and capex requirements, expected to be £3- 5m per annum, will be considered excess and returned to shareholders.

Capital allocation will prioritise organic growth measured against a risk adjusted return above the Group's cost of capital. While not a priority, the Board will continue to assess inorganic growth, using the same criteria of risk adjusted returns above the Group's cost of capital.

Given this framework, the Board has concluded that LSL currently has £7m of excess capital at this time, reflecting cash requirements for Pivotal, contingent consideration for TenetLime, and Estate Agency franchise restructuring costs as

previously disclosed. The Group plans to return this through a share buy-backprogramme which it intends to commence imminently.

I would like to thank all my colleagues for their continued hard work and exceptional support in the transformation of the Group.

Group results

The Group's performance was naturally affected by the headwinds that impacted the mortgage and housing markets whilst the significant transformation activity completed in the year does means that our 2023 financial results are less directly comparable

to 2022.

Group Revenue from continuing operations2 was £144.4m (2022: £217.5m). After adjusting for disposals and discontinued operations

in Estate Agency2, revenue was 10%3 below prior year in a new lending market that was 29% lower by value and a housing market down 19%.

Group Underlying Operating Profit from continuing operations2,4 was £10.3m (2022: £29.9m) and Group Underlying Operating Profit from total operations2,4 was £9.3m (2022: £35.8m). These figures include costs carried in Surveying & Valuation above

demand, losses in businesses disposed of

in the period and one-off cost-of-living payments for lower-paid staff.

Strategic priorities and development

The Group has made substantial progress implementing its strategy to simplify the business, reduce earnings volatility, and focus investment in high growth areas.

Following this restructuring the Group now has a strong platform across all three of its Divisions to further develop strategic

priorities for each business and leverage our market-leading positions as lending and housing activity recovers from a difficult market in 2023.

Estate Agency franchising model Perhaps the most significant development came in May 2023 when we confirmed our plans to convert our entire owned Estate Agency network to a franchising model and

in doing so LSL has become one of the largest providers of estate agency franchise services in the UK. The execution of the change has gone well, and we are ahead of the plans we set for reducing costs and increasing margin.

With the completion of the conversion of our Estate Agency business to a franchise model during 2023, we are now focused on further enhancing our franchising expertise to bring on new partners and develop our services for our franchisees.

Prior to the announcement of our franchising programme, in January 2023, we announced the sale of our London estate agency business, Marsh & Parsons, for total consideration of £26.1m5 at an attractive multiple. We did not consider Marsh & Parsons was suitable for our franchising

operation.

Focus on B2B in Financial Services

The first half of 2023 also saw us take the last steps to focus financial services activity exclusively on business-to-businessservices, through our PRIMIS Network and TMA mortgage club. The disposals announced in April 2023 of our mortgage, protection, and general insurance brokerage firms, Embrace and First2Protect, to Pivotal Growth, followed on from transactions in January 2023 when we similarly sold our new build focused brokerage businesses, RSC and Group First, to Pivotal Growth. These transactions simplify

our Financial Services Division, reducing

costs and reducing earnings volatility, whilst

Strategic Report

Directors' Report (including CorporateFinancial Statements

Governance Reports and Committee Reports)

Other Information

07

Group Chief Executive Officer's Review

retaining LSL's capability to capitalise on B2C opportunities through our equity share in Pivotal Growth.

Increasing scale in the Financial Services Network

In August, we took the opportunity to add further scale to our PRIMIS Network business, announcing the acquisition of the TenetLime mortgage and protection network. This deal, which adds more than 250 advisers across over 150 firms, completed on 2 February 2024, building on our share of over 10% of the UK house purchase and remortgage markets. The transaction will be earnings enhancing in 2024.

We have already successfully carried out the migration and onboarding of the firms, and the current financial performance is in line with our plan. We remain on track to achieve our investment hurdle target for this acquisition.

The consideration payable is expected to be up to £11.6m consisting of an initial payment of £5.7m, a further payment of up to £4.6m, calculated by reference to the number and turnover of appointed representative firms 12 months following completion and an expected payment of £1.4m for assets which form part of TenetLime's regulatory capital.

Investment in management

Our Financial Services Division has welcomed a new managing director bringing significant experience in the mortgage network market as well as a number of other senior executives. These appointments follow the retirement of long-standing colleagues, and I would like to thank them for their contribution to LSL.

Surveying & Valuation contract renewals I am delighted to report that our Surveying

• Valuation Division extended its contract to supply surveying and valuation services to Lloyds Banking Group to September 2028, underpinning our leading market position. We also secured an improvement in terms and allocation with another major lender as well as contracts with a number of other smaller players. We continue to explore new business opportunities in data and direct-to- consumer services.

Pivotal Growth joint venture

It is now three years since we launched Pivotal Growth, our joint venture with Pollen

Street Capital (PSC), established to execute a buy and build strategy in the mortgage and protection intermediary markets. Working with Pollen Street Capital allows the Group to cap its maximum investment whilst benefiting from Pollen Street's considerable experience of executing similar strategies in related markets. Our joint aim is to build the business together with a view to an exit event over

• three-to-six-yearperiod after launch. All major strategic decisions require agreement by both LSL and PSC.

The advantages of a buy and build strategy include economies of scale, synergies between acquired companies, deployment of integrated technology and the potential for a larger and scalable business to benefit from enhanced multiples on exit.

Following a slower than expected start, as Pivotal maintained a disciplined approach to deal price, it has acquired 12 businesses and currently has over 400 advisers, making it one of the largest mortgage brokers in the UK. This includes three acquisitions made in 2024, including that of John Charcol, a firm with 150 advisers. Pivotal's scale improves its ability to win new distribution agreements, drive synergies and make it a more compelling proposition for future acquisition partners. The acquisitions made to date have integrated and synergies are being delivered.

We have invested £11m in Pivotal since 2021 and we estimate that we could make further investment of up to £15m over the next three years by way of equity and loan notes, subject to the timing and size of deal flows and the introduction of any external debt.

We continue to closely monitor Pivotal's performance to maximise returns for shareholders and it remains on track to deliver returns comfortably ahead of the Group's WACC.

In addition, Pivotal offers further potential opportunities for our PRIMIS mortgage network, including developing services for larger brokers and assisting other PRIMIS members to capitalise on additional new business opportunities, for example in some specialist mortgage sectors.

Pivotal's financial performance has steadily improved as it has increased in scale and moved out of its establishment phase. Pivotal is expected to be profitable in 2024.

Capital structure and capital allocation An Investment Committee is in place to review investment proposals and the performance of previous investments against the original businesses cases and Group hurdle rate and to identify any learnings for future capital allocation decisions. The work of the Investment Committee allows the Board to assess the Group's projected near and medium-termcapital requirements. This facilitates an appropriate capital structure and capital allocation policy, taking into account economic conditions, the Group's improved resilience to market cycles and organic and inorganic opportunities.

Following the completion of the major strategic programmes by the business in 2023, the Investment Committee has reviewed the Group's capital structure and capital allocation policies.

The Board has held a cash balance for some time given recent uncertain markets and to provide financial flexibility to take advantage of any material inorganic opportunities. After reviewing its cash flow requirements and the high cash generating nature of our business model, the Board has concluded the Group requires up to £10m of net cash.

The Board prioritises organic growth investments that deliver risk adjusted returns above the Group cost of capital and paying an attractive dividend to shareholders.

Our end markets are large, and the Board sees significant attractive organic growth opportunities over the medium term. While not a priority today, inorganic investments are assessed against the same criteria. The Group's WACC is 12% (post tax). Today, the Board's focus is on optimising returns in our core businesses and driving organic growth in our large addressable markets. This will require modest capital expenditure that will be funded by free cash flow generation. Other cash requirements such as contingent consideration for TenetLime, Estate Agency restructuring costs, and further investment in Pivotal Growth, will also be funded by free cash flow generation. Any excess capital will be distributed to shareholders.

Capital expenditure and investments We remain committed to investing in the business to support growth. During the year, we deployed capital in the Divisional restructuring and transformation

08