Southern Housing Group - Annual Bondholder Update September 2019
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Southern Housing Group
Annual Bondholder Update
September 2019
Liverpool Road, Islington
Contents
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
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 other 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 offered 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. 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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 or 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 entirety), which will contain the definitive terms of the transactions described herein and be made public in accordance with the Prospectus Directive and investors may obtain a copy of such final document from the National Storage Mechanism. The distribution of this Presentation and other information in connection with the Bonds in certain jurisdictions may be restricted by law and persons into whose possession this Presentation or any document or other 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 such jurisdiction. This Presentation and any materials distributed in connection with this Presentation are not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction. Southern does not accept any liability to any person in relation to the distribution or possession of this presentation in or from any jurisdiction. 2
1. 2018/19 highlights
• Established in 1901, Southern Housing Group is one of the largest housing associations in the UK
Over 28,000 • As at 31 March 2019 – 28,221 homes, with 78% of stock being sub-market rent
homes
• 409 new homes completed, plus two commercial assets
78% social
housing
• 1,266 homes under construction in 2018/19. Forecast delivery for 2019/20 – 480 homes
G1/V1 rating • 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
£230m premium resulting in a significant improvement to the weighted average cost of funds
turnover
• Strong balance sheet position and modest gearing:
37% gearing • £2.1bn of total group assets;
• £1.3bn of unused property security1; and
A3 (stable) • 37% gearing
rating
• 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
Strategic
Partnerships
• Secured £79m of government grant through Strategic Partnerships with Homes England and
Greater London Authority
G15 member
• Spruce Homes is used to manage additional private rent homes to mitigate the Group’s sales
exposure
4 1Market Value, subject to tenancies (MV-ST) valuation
2. Southern Housing Group overview
Montpelier Place, Brighton
5
Where we operate 6
Simplified Group structure
Bond Issuer
Southern Housing A charitable organisation and Registered
Group Limited Provider of affordable housing and
regulated by the Regulator of Social
(27,896 units) Housing
Southern Home Southern Space Spruce Homes Southern
Ownership Limited Limited Limited Southern Housing
Development
Construction Limited
(217 units) (94 units) (14 units) Services Limited
Registered Provider of Holds the Group’s interest Commenced trading in Provides construction Provides project delivery
affordable housing and in Triathlon LLP June 2017 providing services to the Group services to the Group
regulated by the homes for private rent
Regulator of Social and manages PRS
1/3rd share
Housing. This is the homes in the Group
principal development
vehicle Triathlon Homes LLP
Owns and manages 1,379
affordable homes at the
East Village Stratford, the
former Olympic Park
7
Updated governance structure
Alan Townshend
Executive Group Chief Executive
Management
Team
Amanda Holgate Chris Harris Oliver Boundy Yvette Carter
Executive Director Executive Director Executive Director Executive Director
8 Resources Customer Development & Commercial
Services Growth
Snapshot as at 31 March 2019
Over 78% of our housing stock is sub-market rent Stable stock management
1% 35000
No. of homes
11% 30000
25000
10% Sub Market Rent
Leasehold 20000
Shared Ownership 15000
PRS 10000
78% 5000
0
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19
Diversified stock type Social housing is the largest proportion of turnover (2018/19)
Property type
Bedsit / Single room / Studio 1,157
Flat - 1 bedroom 8,535 17%
Flat - 2 bedrooms 7,512 Social Housing Lettings -
Flat - 3 bedrooms 1,379 £159.9m
Flat - 4, 5, 6, 7, 8 bedrooms 129 Other Social Housing
13%
House - 1 bedroom 621 Lettings - £29.7m
House - 2 bedrooms 3,675
Non Social housing
House - 3 bedrooms 4,402 70% lettings - £40.9m
House - 4 bedrooms 671
House - 5, 6,7 bedrooms 140
Total Stock 28,221
9
Southern and ESG
Community Investment and Care Sustainability
SAP rating of Stock
19
4%
Community
Centres A
16% B
£400k Community
27%
grant partnerships C
budget
D
53% E
Financial skills Gardening F&G
team £2.38m neighbours
income scheme • Current average SAP rating of 71.8% for existing
generated stock and 83.1% for new homes, against a target of
71%
Mental
Health
• Energy efficiency health checks on all void properties
Diversity and Inclusion
£178k
754 people
Social value
helped into created • We undertake numerous projects, work with equality
work
organisations, and hold events in-house and across
our communities to raise awareness on inequality
and to ensure inclusion for all
239 people 2,168 people
supported via helped with • Train employees in equality, diversity and inclusion
the Financial financial skills
Skills Hotline and home best practice
energy advice
• 50 Equality, Diversity and Inclusion Champions
across the business
10Operating environment
Brexit uncertainties
• Brexit resilience paper and stress testing of Long Term Financial Plan.
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.
113. Operating performance
Ilford Works, Ilford
12Value for Money metrics
Reinvestment New Supply - Social New Supply - Non Social
7.7% 1.1% 0.50%
6.4% in 2017/18 0.30% in 2017/18 4.50%in 2017/18
Operating margin - social Operating margin - Overall Return on Capital Employed
23% 31% 3%
25% in 2017/18 32% in 2017/18 3% in 2017/18
Gearing ¹ EBITDA MRI Management cost per unit
37% 1.58x £1,735
39% in 2017/18 1.37x in 2017/18 £1,800 in 2017/18
1. Gearing calculated in line with RSH guidance
13Long 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.
Themes Sensitivities Scenarios Mitigations
Fall in house prices Board approved stress test Reduce major repairs
Development and Sales
Reduce reactive repairs costs
High inflation
Development and sales Pay freeze
stress test
Low inflation
Cancel capital investment in
Business Continuity technology (IT)
High LIBOR Recession scenario
Headcount freeze
Low LIBOR Cease further development
Macro Economic High cost scenario
-1% rent reduction Target off plan market sales
Arrears Double Tenure change
Black Swan Black Swan event Sale and leaseback of offices
Committed
Developments only Remove discretionary spend
14Development and growth strategy
Development strategy Stock/growth strategy
• Unchanged development strategy since May 2018 with • The Group intends to purchase up to 2,728 homes from
additional Homes England Strategic Partnership. GLA other housing associations between 2019 and 2027.
Strategic Partnership added in June 2019. These homes will all be social and affordable rent or
shared ownership.
• Maximum Board approved appetite for the development
of up to 7,429 homes between 2019 and 2027 and • Acquiring affordable stock from other organisations is an
acquisition of 2,728 low rent homes. efficient way to grow. Generally stock is valued with
reference to EUV-SH.
• 3 out of every 5 homes will be affordable.
• In April 2018, Southern Housing Group purchased 496
• Development will be at sustainable levels and in a highly homes for £43m in seven local authorities from Hyde
risk-controlled environment. The Group has the flexibility Group, its first major stock acquisition since 2015. A
to reduce the programme should development risk further 28 units were purchased for £2.1m from Hyde
increase to an unacceptable level. Group in April 2019.
• The Group has a development contractor framework • The Group’s geographical profile and the efficiency of
including Southern Housing Construction Ltd, our wholly service delivery are key to determining the acquisition and
owned in-house construction arm, which will be utilised as disposal strategy. This will ensure consolidation of
part of our strategy to control build quality and cost. geographical footprint and associated efficiencies.
• 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.
15Development and growth strategy
• 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
1,800
No. of units
No. of units
1,800
1,600
1,600
1,400 1,400
1,200 603
1,200
286
909
1,000 1,000
73 85 439
800 800 665
188 302 302
357 345 1,073
114 299
600 59 600
85 85
91 275 231 917 917
400 245 245 400
90
48 145
246 519 617
493 475 530 466
200 185 151 347 200 399
307 285 285
88 138 103 162
0 0
2019 2020 2021 2022 2023 2024 2025 2026 2027 2020 2021 2022 2023 2024 2025 2026 2027
Low Rent Shared Ownership
PRS Open Market Sales Identified Unidentified
16 Source: Management InformationDevelopment risk control framework
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
opportunities 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).
172018/19 – 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).
250
200
No. of units
150
100 207 2018/19 LTFP
185
Actual Delivery
50 93 88 78 88
57 48
0 2
0
Low Rent Shared PRS Open Market Commercial
ownership Sale
18Case 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)
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
204. Financial performance
Dalmeny Avenue, Islington
21Financial profile
Five year trends
Social housing turnover
Gearing¹ vs. covenant (%)
250 100% 100%
87%
82%
£m
78% 78% 90%
70%
200 80% 80%
70%
150 60% 60%
230 50%
100 185 200 200 40%
178 40%
152 155 156 155 160
30%
50 20% 32% 33% 34% 33% 35%
20%
0 0% 10%
2014/15 2015/16 2016/17 2017/18 2018/19 0%
Social Housing Income Total Income Social Housing Income 2014/15 2015/16 2016/17 2017/18 2018/19
50% Operating margin % Interest cover² vs. covenant
450%
45%
400%
40%
350% 381%
35%
30% 300%
32% 32% 32% 32% 31% 250% 302% 299% 308% 294%
25%
20% 200%
15% 150%
10% 100%
5% 50%
0% 0%
2014/15 2015/16 2016/17 2017/18 2018/19 2014/15 2015/16 2016/17 2017/18 2018/19
22 1. Gearing per covenant definition
2. Adjusted operating surplus, - simplified calculationFinancial performance
Key financial indicators
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%)
23 1. Gearing calculated in line with RSH guidanceFinancial performance Group results 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%) 24 Source: Southern Housing Group Annual Accounts
Treasury overview
Recent developments Debt maturity profile as at 30 June 2019
• Group issued £300m public bond in October 1400
£m
Drawn Committed
2018, with £100m retained, at a coupon of 1200
3.50%
1000
• Group issued the £100 retained bond, in
two tranches, in May 2019 800
600
Average cost of funds
400
• As at 30 June 2019 ACOF was 4.30% 200
Liquidity policy 0
Within One 1-2 Years 2-5 Years >5 Years Total
year
• Sufficient liquidity to cover the next 18 months
of committed cash flows excluding sales Funding mix as at 30 June 2019 (£m, drawn)
• Maintain sufficient liquidity headroom to cover
debt requirement under a stressed scenario
• Monitored fortnightly through capacity tracker
and reported to the Executive Management 38% Term Loan
Team 45%
Aggregate Bond
Liquidity position as at 30 June 2019 Public Bond
Cash £ 67m
Undrawn RCFs £633m 17%
Liquidity £700m
All Revolving Credit Facilities (£633m) are currently
undrawn
25Moody’s rating overview
Strong investment grade rating
Rating Agency Effective From LT Issuer Rating
Moody’s September 2019 A3 (Stable)
Key ratings drivers – Moody’s, September 2019
“…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
Scale and strong gearing, the ratio will remain strong relative to A3-rated peers. Southern will benefit from the more
Balance Sheet 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.”
“Southern’s liquidity position will remain solid despite the planned increase in capex… The liquidity
Strong liquidity
policy is strong and tailored to the organisation’s risks, calling for at least 18 months of forecast net
and robust
expenditure, which includes interest and principal repayments and excludes market sales proceeds…
financial
Southern has strong financial reporting including robust stress testing with quantified and credible
management
mitigating actions.”
“The sector’s credit quality will continue to benefit from the strong regulatory framework and oversight
Strong industry by the Regulator of Social Housing. The regulator maintains strong oversight through quarterly returns,
dynamics long-term business plans, annual reviews, and undertaking In-Depth Assessments of entities where
deemed necessary.”
26 Source: Moody’s Credit Opinion 3 Sept 2019Credit highlights
1
Leading housing association with over 28,000 homes serving over 72,000
customers
£200m
turnover
2 Core business is social housing
70% of
turnover
3 Strong financial position and balance sheet
37% Gearing
Partner with
4 Carefully targeted growth strategy Homes England
and GLA
5 Relationships with over 40 Local Authorities
G15 member
6 Strong and effective governance
G1/V1 rating
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