Southern Housing Group Annual Bondholder Update September 2019 - - PowerPoint PPT Presentation

Annual Bondholder Update

September 2019

Southern Housing Group

Liverpool Road, Islington

• 1. 2018/19 highlights

Page 4

• 2. Southern Housing Group overview

Pages 5 - 11

• 3. Operating performance

Pages 12 - 20

• 4. Financial performance

Pages 21 - 25

• 5. Credit highlights

Pages 26 - 27 2

Contents

Disclaimer

The information contained in this investor presentation including the presentation slides and any related speeches made or to be made by the management of Southern Housing Group Limited (“Southern”) any questions and any answers thereto or any related verbal or written communications in respect thereof (the “Presentation”) has been prepared to assist interested parties in making their own evaluation of Southern. This presentation and a proposed offering of bonds of Southern (the “Bonds”) is believed to be in all material respects accurate and does not purport to be all-inclusive. This Presentation and its contents are strictly confidential, are intended for use by the recipient for information purposes only and may not be reproduced in any form or further distributed to any other person or published, in whole or in part, for any purpose. Failure to comply with this restriction may constitute a violation of applicable securities laws. By reading this Presentation, you agree to be bound by the following

• limitations. Neither Southern nor any of its representative directors, officers, managers, agents, employees or advisers nor any investment bank involved in the offering of the Bonds or their respective affiliates,

advisers or representatives, makes any representations or warranty (express or implied) or accepts any responsibility as to or in relation to the accuracy or completeness of the information in this Presentation (and no one is authorised to do so on behalf of any of them) and (save in the case of fraud) any liability in respect of such information or any inaccuracy therein or omission therefrom is hereby expressly disclaimed, in particular, if for reasons of commercial confidentiality information on certain matters that might be of relevance to a prospective purchaser has not been included in this Presentation. No representation or warranty is given as to the achievement or reasonableness of any projections, estimates, prospects or returns contained in this Presentation or any other information. Neither Southern nor any

• ther person connected to it shall be liable (whether in negligence or otherwise) for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in or omission

from this Presentation or any other information and any such liability is expressly disclaimed. This Presentation includes certain statements, estimates and projections prepared and provided by the management of Southern with respect to the anticipated future performance of the group. Such statements, estimates and projections reflect various assumptions by Southern’s management concerning anticipated results and have been included solely for illustrative purposes. No representations are made as to the accuracy of such statements, estimates or projections or with respect to any other materials herein. Actual results may vary from the projected results contained herein. The Bonds have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or the laws of any state or other jurisdiction of the United States, and may not be

• ffered or sold within the United States, or for the account or benefit of, U.S. Persons (as such terms are defined in Regulation S under the Securities Act), absent registration or an exemption from, or in a

transaction not subject to, the registration requirements of the Securities Act and applicable state laws. This Presentation is made to and is directed only at persons who are (a) “investment professionals” as defined under Article 19 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the “Order”) or (b) high net worth entities falling within article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). Any person who is not a relevant person should not act or rely on this Presentation or any of its contents. Any investment or investment activity to which this Presentation relates is available only to and will only be engaged in with such relevant persons. MiFID II product governance / Professional investors and ECPs only target market – Solely for the purposes of each manufacturer’s product approval process, the target market assessment in respect of the Bonds has led to the conclusion that: (i) the target market of the Bonds is eligible counterparties and professional clients only, each as defined in Directive 2014/65/EU (as amended, “MiFID II”); and (ii) all channels for the distribution of the Bonds to eligible counterparties and professional clients are appropriate. Any person subsequently offering, selling or recommending the Bonds (a distributor) should take into consideration the manufacturers’ target market assessment; however, a distributor subject to MiFID II is responsible for undertaking its own target market assessment in respect of the Bonds (by either adopting or refining the manufacturers’ target market assessment) and determining appropriate distribution channels. Note that no key information required by Regulation (EU) No 1286/2014 (as amended “PRIIPS Regulation”) has been prepared as the Bonds are not intended to be made available to retail investors (as defined in MIFID II) in the European Economic Area. The information presented herein is an advertisement and does not comprise a prospectus for the purposes of EU Directive 2003/71 /EC (as amended) (the “Prospectus Directive”) and/or Part VI of the Financial Services and Markets Act 2000. This Presentation does not constitute or form part of, and should not be construed as, an offer to sell, or the solicitation or invitation of any offer to buy or subscribe for, Bonds in any jurisdiction or an inducement to enter into investment activity. No part of this Presentation, nor the fact of its distribution, should form the basis of, or be relied on in connection with, any contract or commitment

• r investment decision whatsoever. Any purchase of the Bonds should be made solely on the basis of the final Prospectus to be prepared in connection with the Bonds (which supersedes the Presentation in its

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• ther information referred to herein comes should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any

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2

• 1. 2018/19 highlights
• Established in 1901, Southern Housing Group is one of the largest housing associations in the UK
• As at 31 March 2019 – 28,221 homes, with 78% of stock being sub-market rent
• 409 new homes completed, plus two commercial assets
• 1,266 homes under construction in 2018/19. Forecast delivery for 2019/20 – 480 homes
• In October 2018, the Group issued its debut £300m public bond, of which £100m was retained, at a

coupon of 3.50%. In May 2019, the Group placed the full amount of retained bonds at a pricing premium resulting in a significant improvement to the weighted average cost of funds

• Strong balance sheet position and modest gearing:
• £2.1bn of total group assets;
• £1.3bn of unused property security1; and
• 37% gearing
• Board approval to develop up to c. 7,500 new homes and to purchase c. 2,500 of low rent stock

from 2019 to 2027

• Secured £79m of government grant through Strategic Partnerships with Homes England and

Greater London Authority

• Spruce Homes is used to manage additional private rent homes to mitigate the Group’s sales

exposure

4

Strategic Partnerships

G15 member 37% gearing 78% social housing £230m turnover G1/V1 rating Over 28,000 homes

A3 (stable) rating

• 2. Southern Housing Group overview

Montpelier Place, Brighton 5

Where we operate

6

7

Southern Housing Group Limited (27,896 units) Southern Home Ownership Limited (217 units) Southern Space Limited (94 units) Triathlon Homes LLP Spruce Homes Limited

(14 units)

Southern Housing Construction Limited Southern Development Services Limited

A charitable organisation and Registered Provider of affordable housing and regulated by the Regulator of Social Housing Registered Provider of affordable housing and regulated by the Regulator of Social

• Housing. This is the

principal development vehicle Commenced trading in June 2017 providing homes for private rent and manages PRS homes in the Group Provides construction services to the Group Owns and manages 1,379 affordable homes at the East Village Stratford, the former Olympic Park Holds the Group’s interest in Triathlon LLP

1/3rd share

Provides project delivery services to the Group

Simplified Group structure

Bond Issuer

8

Updated governance structure

Executive Management Team

Alan Townshend Group Chief Executive Chris Harris Executive Director Customer Services Oliver Boundy Executive Director Development & Growth Amanda Holgate Executive Director Resources Yvette Carter Executive Director Commercial

Snapshot as at 31 March 2019

9 Over 78% of our housing stock is sub-market rent Stable stock management Diversified stock type Social housing is the largest proportion of turnover (2018/19)

• No. of homes

Property type Bedsit / Single room / Studio 1,157 Flat - 1 bedroom 8,535 Flat - 2 bedrooms 7,512 Flat - 3 bedrooms 1,379 Flat - 4, 5, 6, 7, 8 bedrooms 129 House - 1 bedroom 621 House - 2 bedrooms 3,675 House - 3 bedrooms 4,402 House - 4 bedrooms 671 House - 5, 6,7 bedrooms 140 Total Stock 28,221

5000 10000 15000 20000 25000 30000 35000 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 70% 13% 17% Social Housing Lettings - £159.9m Other Social Housing Lettings - £29.7m Non Social housing lettings - £40.9m 78% 10% 11% 1% Sub Market Rent Leasehold Shared Ownership PRS

Southern and ESG

10

• Current average SAP rating of 71.8% for existing

stock and 83.1% for new homes, against a target of 71%

• Energy efficiency health checks on all void properties
• We undertake numerous projects, work with equality
• rganisations, and hold events in-house and across
• ur communities to raise awareness on inequality

and to ensure inclusion for all

• Train employees in equality, diversity and inclusion

best practice

• 50 Equality, Diversity and Inclusion Champions

across the business Community Investment and Care Sustainability Diversity and Inclusion

16% 53% 27% 4%

SAP rating of Stock

A B C D E F&G

£400k grant budget Gardening neighbours scheme £178k Social value created

754 people helped into work

2,168 people helped with financial skills and home energy advice 239 people supported via the Financial Skills Hotline Financial skills team £2.38m income generated 19 Community Centres Community partnerships Me Ment ntal l Heal ealth

Operating environment

11 Fire safety

• Safety for our customers has always been and remains of upmost importance for Southern Housing Group;
• We have made significant progress in replacing combustible cladding on our sole high rise building with this type of

cladding in Reading;

• Accelerated fire safety work including replacement of external doors along with dedicated building managers for our high

rise blocks;

• 100% of critical fire safety actions completed and 99% of Fire Risk Assessments completed; and
• Additional fire measures being implemented on new developments including sprinklers.

Government policy

• In response to the Social Housing Green Paper we engaged with over 400 residents.
• Implementing plans to strengthen resident scrutiny and involvement through governance structure.
• The Group considers responses to government policy and utilises G15 as required.

Brexit uncertainties

• Brexit resilience paper and stress testing of Long Term Financial Plan.

• 3. Operating performance

Ilford Works, Ilford 12

Value for Money metrics

Reinvestment

7.7%

6.4% in 2017/18 New Supply - Social

1.1%

0.30% in 2017/18 New Supply - Non Social

0.50%

4.50%in 2017/18 Operating margin - social

23%

25% in 2017/18 Operating margin - Overall

31%

32% in 2017/18 Return on Capital Employed

3%

3% in 2017/18 Gearing ¹

37%

39% in 2017/18 EBITDA MRI

1.58x

1.37x in 2017/18 Management cost per unit

£1,735

£1,800 in 2017/18

13

• 1. Gearing calculated in line with RSH guidance

Long Term Financial Plan stress testing

• The purpose of stress testing is to consider risk in the operating environment and the vulnerability of our Long Term

Financial Plan to these risks. This allows us to plan mitigating actions for any adverse financial impacts, protecting social housing assets and informing future strategy and risk appetite.

• The Board are continuously engaged in the process of risk management with specific sessions to ensure the sensitivity

testing and multi-variate analysis are aligned with the risk appetite of the Group. 14

Themes Sensitivities Scenarios Mitigations Development and Sales Fall in house prices Board approved stress test Reduce major repairs Reduce reactive repairs costs High inflation Development and sales stress test Pay freeze Business Continuity Low inflation Cancel capital investment in technology (IT) High LIBOR Recession scenario Headcount freeze Macro Economic Low LIBOR High cost scenario Cease further development

• 1% rent reduction

Target off plan market sales Black Swan Arrears Double Black Swan event Tenure change Sale and leaseback of offices Committed Developments only Remove discretionary spend

Development and growth strategy

• Unchanged development strategy since May 2018 with

additional Homes England Strategic Partnership. GLA Strategic Partnership added in June 2019.

• Maximum Board approved appetite for the development
• f up to 7,429 homes between 2019 and 2027 and

acquisition of 2,728 low rent homes.

• 3 out of every 5 homes will be affordable.
• Development will be at sustainable levels and in a highly

risk-controlled environment. The Group has the flexibility to reduce the programme should development risk increase to an unacceptable level.

• The Group has a development contractor framework

including Southern Housing Construction Ltd, our wholly

• wned in-house construction arm, which will be utilised as

part of our strategy to control build quality and cost.

• Southern Housing Group will continue to focus the

development strategy in core geographic areas where it can provide efficient and comprehensive services to its communities and customers. 15

• The Group intends to purchase up to 2,728 homes from
• ther housing associations between 2019 and 2027.

These homes will all be social and affordable rent or shared ownership.

• Acquiring affordable stock from other organisations is an

efficient way to grow. Generally stock is valued with reference to EUV-SH.

• In April 2018, Southern Housing Group purchased 496

homes for £43m in seven local authorities from Hyde Group, its first major stock acquisition since 2015. A further 28 units were purchased for £2.1m from Hyde Group in April 2019.

• The Group’s geographical profile and the efficiency of

service delivery are key to determining the acquisition and disposal strategy. This will ensure consolidation of geographical footprint and associated efficiencies. Development strategy Stock/growth strategy

Development and growth strategy

16

• No. of units
• No. of units
• Maximum Board approved appetite to develop up to 7,429 and purchase up to 2,728 homes between 2019 and 2027

Target development tenure mix Development pipeline

Source: Management Information

88 138 103 307 493 519 347 285 285 185 246 151 275 357 345 231 245 245 48 91 59 73 85 114 85 85 90 145 188 603 286 439 302 302 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2019 2020 2021 2022 2023 2024 2025 2026 2027 Low Rent Shared Ownership PRS Open Market Sales 475 399 530 617 162 466 299 909 1,073 665 917 917 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2020 2021 2022 2023 2024 2025 2026 2027 Identified Unidentified

Development risk control framework

17 Managing development and sales risk

• Track record – Open market sales margins FY19 45% (FY18 30%) and first tranche shared ownership sales margins

FY19 25% (FY18 18%).

• Capability – strong development and sales function including a new business team that are generating land
• pportunities to support our growth aspirations and exploring working in partnerships with local authorities and house

builders.

• Supply chain – established procurement framework and in-house construction company.
• Appetite – to grow the provision of good quality and reliable homes and services. South-east focus, sales price points

sub-£700 psf, balanced with stock purchase.

• Governance – Board-approved investment appraisal and Scheme Acceptance Criteria process aligned to Long Term

Financial Plan assumptions, capacity monitor and Standard Assessment Procedure (SAP) for energy ratings, delegations greater than £20m are to the highly experienced Group Development Committee and greater than £50m to the Group Board.

• Mitigation – management as private rent through Spruce Homes (dedicated PRS subsidiary) and change to other

tenure options (shared ownership/London living rent).

2018/19 – first year of growth strategy

• 409 homes, plus 2 commercial units, were completed in 2018/19 compared with 435 in the 2018/19 Long Term

Financial Plan;

• 1,266 homes under construction in 2018/19 with a further 2,174 units identified;
• Development in line with May 2018 approved Long Term Financial Plan;
• Forecast delivery for 2019/20 - 480 homes (14 social rent; 121 affordable rent; 181 shared ownership; 91 private

rent; and 73 open market sales - 66% social tenures). 18

93 207 57 78 88 185 48 88 2 50 100 150 200 250 Low Rent Shared

• wnership

PRS Open Market Sale Commercial

• No. of units

2018/19 LTFP Actual Delivery

Case studies of recent development (1)

The Artisan, Hove Total number of homes 42 Homes for shared ownership 10 Homes for open market sale / private rent 32 Date completed October 2018 Average Sales Price psft £524 19

Case studies of recent development (2)

20 Featherstone Old Street - London Total number of homes 65 Homes for shared ownership 11 Homes for affordable rent and social rent 19 Homes for open market sale 24 Homes for private rent 11 Date completed August 2018 Average sales price psft £1,113 The Refinery, Knights Road Silvertown E16 Total number of homes 76 Homes for shared ownership 60 Homes for affordable rent 16 Date completed July 2019 Average Sales Price psft £627

Dalmeny Avenue, Islington

• 4. Financial performance

21

Financial profile

Five year trends

22 Social housing turnover Gearing¹ vs. covenant (%) Operating margin % Interest cover² vs. covenant

£m

32% 32% 32% 32% 31% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 2014/15 2015/16 2016/17 2017/18 2018/19 32% 33% 34% 33% 35% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2014/15 2015/16 2016/17 2017/18 2018/19

1. Gearing per covenant definition 2. Adjusted operating surplus, - simplified calculation

152 155 156 155 160 185 178 200 200 230 82% 87% 78% 78% 70% 0% 20% 40% 60% 80% 100% 50 100 150 200 250 2014/15 2015/16 2016/17 2017/18 2018/19 Social Housing Income Total Income Social Housing Income 302% 299% 308% 381% 294% 0% 50% 100% 150% 200% 250% 300% 350% 400% 450% 2014/15 2015/16 2016/17 2017/18 2018/19

Financial performance

Key financial indicators

23 2018/19 2017/18 Movement Tangible fixed assets - housing properties £1.925m £1,840m £85m Social Housing Lettings Interest Cover 1.18x 1.36x (0.18x) Social housing % of turnover 70% 78% (8%) Gearing1 37% 39% 2% EBITDA MRI 158% 137% 21% Operating margin - social 23% 25% (2%) Operating margin - overall 31% 32% (1%)

• 1. Gearing calculated in line with RSH guidance

Financial performance

Group results

24 Statement of Comprehensive Income (£m) 2018/19 2017/18 Variance Turnover 230.5 199.7 30.8 Operating costs (168.6) (150.6) (18.0) Operating surplus 61.9 49.1 12.8 Gain on disposal of fixed assets 9.7 11.2 (1.5) Surplus on revaluation of investments 0.6 3.0 (2.4) Surplus on operations 72.2 63.3 8.9 Share of operating surplus from JVs 0.04 0.06 0.02 Net interest payable (31.3) (29.3) (2.0) Derivative and restructure costs (1.5) 7.20 (8.7) Surplus before taxation 39.4 41.3 (1.9) Taxation (0.8) 3.6 (4.4) Surplus for the year 38.6 44.9 (6.3) Social housing operating margin 23.2% 25.6% (2.4%) Overall operating margin 31.3% 31.7% (0.4%)

Source: Southern Housing Group Annual Accounts

Treasury overview

25

200 400 600 800 1000 1200 1400 Within One year 1-2 Years 2-5 Years >5 Years Total £m Drawn Committed

• Group issued £300m public bond in October

2018, with £100m retained, at a coupon of 3.50%

• Group issued the £100 retained bond, in

two tranches, in May 2019 Recent developments Debt maturity profile as at 30 June 2019 Funding mix as at 30 June 2019 (£m, drawn) Average cost of funds

• As at 30 June 2019 ACOF was 4.30%

Liquidity policy

• Sufficient liquidity to cover the next 18 months
• f committed cash flows excluding sales
• Maintain sufficient liquidity headroom to cover

debt requirement under a stressed scenario

• Monitored fortnightly through capacity tracker

and reported to the Executive Management Team

38% 17% 45% Term Loan Aggregate Bond Public Bond

All Revolving Credit Facilities (£633m) are currently undrawn Liquidity position as at 30 June 2019 Cash £ 67m Undrawn RCFs £633m Liquidity £700m

Moody’s rating overview

Strong investment grade rating

26 Rating Agency Effective From LT Issuer Rating Moody’s September 2019 A3 (Stable) Key ratings drivers – Moody’s, September 2019 Scale and strong Balance Sheet “…a large and influential London-based housing association… Southern will retain its strong balance sheet inclusive of a planned increased in debt over the next three years… Despite the increase in gearing, the ratio will remain strong relative to A3-rated peers. Southern will benefit from the more supportive capital grant environment in England. Through Strategic Partnerships with Homes England and the Greater London Authority, the group has secured a total of £79 million of government grant for approximately 2,000 new homes.” Strong liquidity and robust financial management “Southern’s liquidity position will remain solid despite the planned increase in capex… The liquidity policy is strong and tailored to the organisation’s risks, calling for at least 18 months of forecast net expenditure, which includes interest and principal repayments and excludes market sales proceeds… Southern has strong financial reporting including robust stress testing with quantified and credible mitigating actions.” Strong industry dynamics “The sector’s credit quality will continue to benefit from the strong regulatory framework and oversight by the Regulator of Social Housing. The regulator maintains strong oversight through quarterly returns, long-term business plans, annual reviews, and undertaking In-Depth Assessments of entities where deemed necessary.”

Source: Moody’s Credit Opinion 3 Sept 2019

Credit highlights

27 2 Core business is social housing 3 Strong financial position and balance sheet 4 Carefully targeted growth strategy 5 Relationships with over 40 Local Authorities 6 Strong and effective governance 1 Leading housing association with over 28,000 homes serving over 72,000 customers

Partner with Homes England and GLA

G15 member G1/V1 rating 37% Gearing

     

70% of turnover £200m turnover