PenArian Housing Finance PLC

Financial Update Summer 2023

Given the challenging external conditions, ClwydAlyn has performed well during 22/23. Its (unaudited) final year end position shows an operating surplus of £10.3m against a budgeted £11.1m. Final audited accounts will be presented to the board in September.

We maintained strong liquidity and ended the year with cash balances of £22m and received a further £16m in grant during the first week of April. Alongside this we had an undrawn £25m RCF with £20m subsequently received in May 23 from a deferred bond sale with a further £20m due in November 23.

It was a particularly turbulent year for the company, with some large movements in income and expenditure. However, we continued to benefit from strong relationships with Welsh Government (WG) which meant we supported some national initiatives and accessed significant grants.

We were awarded £1.7m in-year towards decarbonisation costs (and a further £4m spread over the following 2 years) along with £1m to set up a 'carbon zero hub' for North Wales providing advice and support to other housing associations and public bodies on decarbonisation.

We were also contracted to run the Welsh Government's refugee 'Welcome Centre' in Bangor. We did this to support the re-housing of vulnerable people in need. While the cost of £1.3m was fully covered by WG, we made no surplus, pulling our operating margin down. WG also agreed to a one-off bonus payment to all care staff to acknowledge their efforts during Covid. We paid this to staff and were reimbursed, but again this pulled our margin down.

We had around a dozen houses that were long-term voids and due for disposal. WG launched a scheme to provide houses for homeless people which offered 80% of the costs of refurbishing vacant properties. We took up the grant and refurbished the properties. This was a very positive outcome for us and our tenants but meant our property sales were £700k below budget.

Voids continued at a higher level, partly driven by an ongoing reluctance of families to place loved ones in care homes due to the impact of Covid. This improved significantly during the year but had a large initial impact. We are also seeing properties being returned requiring more work than in previous years, delaying the date they can return into stock. We have recruited additional trades staff and are reviewing our processes to try to speed up the turnaround time.

A review of our care portfolio in 21/22 concluded we should exit the specialist nursing care market. We received an offer for our only nursing home which was accepted and the 22/23 budget assumed disposal at the end of Q1. However, after a protracted process the buyer pulled out late in the day. We had to reinstate the income and expenditure into our forecasts causing income and expenditure to increase by £2m.

Our development plan had slowed significantly during Covid and began to pick up pace during the year with around 550 properties on site at the end of the financial year. This is significantly higher than previous years. Wales still has generous grant levels for new build, with grant typically 50-60% of any scheme. WG also launched a scheme to contribute to any additional costs incurred due to high inflation. It led to us accessing record amounts of capital grant from WG, with £53m paid to us in-year (including £16m received in the first week of April 23), equivalent to 18% of the total development grant available in the whole of Wales. A further 450 new homes have been submitted for planning or are being worked up to planning stage.

One contractor went into administration at the end of the year who had been due to deliver 177 homes for us. These contracts are currently being re-let.

ClwydAlyn does not rely on market sales, and other than disposing of a few surplus assets and some staircasing sales, is not exposed to the housing sales market. Our sales income for the year was £700k.

Approximately 60% of ClwydAlyn's income is derived from government sources - housing benefit, supporting people grant, council-funded care home placements and other contracts, which while being constrained by budget pressures in councils are low risk once awarded.

This leaves 40% paid by tenants directly to the company. Of this, 15% is paid by residents in care and extra care schemes and 25% from general needs. Given the increasing pressures we are seeing on residents, we are offering support and advice to ensure they can manage their rents and access benefits and other financial support.

The current economic turmoil has significantly impacted on costs for the business with utilities, fuel, materials and food all seeing significant rises. The budget contained a contingency amount to cover some of these costs and savings were identified to reduce expenditure.

We are also stepping up our investment in decarbonisation and have obtained over £1.7m of grant funding from Welsh Government in year to support this. Our board also agreed to set up a new joint venture company which will deliver a large part of our retrofit works. It will directly deliver some works but is also expected to work with the local SMEs and supply chains to grow the local market and capacity to deliver these works on behalf of both housing associations.

During the year we were approached by a small housing charity to take over their portfolio of 12 houses. This was agreed and the transfer will complete during 23/24.

Despite the pressures on our budget, the current year-end forecast is that we will only be £800k below our budgeted operating surplus of £11.1m.

In November the Welsh Government announced that housing associations could raise rents for 23/24 by up to 6.5%. This is similar to England and higher than ClwydAlyn had expected in its business plan. This means that while 2023/24 will be challenging, it is within the scope of existing planning scenarios.

Ratings

We were pleased that we retained our 'A Stable' credit rating with Standard and Poor's after their review in July 23. Our Moody's rating was reviewed in October 22 and remained at A3. Moody's announced that it was putting most housing associations on negative outlook due to the macro-economic climate and this included ClwydAlyn. However, underlying financial performance remains steady.

Treasury

ClwydAlyn was the first housing association in Wales to secure a publicly listed bond through PenArian Finance Ltd from the capital markets. The value of the Bond was £250 million of which £160 million refinanced existing debt with a further £90 million retained for future investment.

During 2021/2022 £25 million was drawn from the Bond. In May 2022 a further deferred draw down was agreed with £20 million received in May 2023 and £20 million due in November 2023. This funding was agreed ahead of the recent surge in interest rates and so is attractively priced.

In June 22 ClwydAlyn extended the existing bond which was due to expire with £25m still undrawn. In July 2022 ClwydAlyn carried out a tap on the Bond of £150 million which has increased the overall value of the Bond to £400 million with £175 million still available to draw.

During the year, the company's revolving credit facility was reduced to £25m and the interest cover covenant amended to exclude reference to major repairs.

Liquidity remains high with £32m of grant received in March / April 23 to forward fund development projects, £20m bond drawn down in May, the undrawn £25m RCF available and the remaining £20m deferred bond sale due in November. The weighted average cost of capital also remains low at 3.47% and all loans are at fixed rates mitigating the increasing interest rates.