7 June 2023

Residential Secure Income plc

 

("ReSI plc" or the "Company") 

 

Interim Results to 31 March 2023

 

Residential Secure Income plc (ReSI plc) (LSE: RESI), which invests in independent retirement living and shared ownership to deliver secure, inflation-linked returns, is pleased to announce its interim results for the six months ending 31 March 2023.

 

Commenting on ReSI plc's results, Robert Whiteman CBE, Chairman of ReSI plc said:

 

"ReSI remains well-placed, to meet continued enormous demand for affordable housing, enabling sustainable and growing, risk-adjusted returns over the long term.

 

We have continued to support residents, balancing rent increases and returns in a way which is sustainable for both residents and shareholders. This focus has been rewarded with 99% rent collection from 2,613 counterparties and resilient high-occupancy levels. These factors drive our secure income stream which has remained unaffected despite the impact of the macroeconomic environment on property valuations.

 

We are considering selective disposal of certain non-core assets, to reduce floating rate debt levels, and will then revisit the appropriate level for a fully covered and progressive dividend."

 

Ben Fry, Managing Director of Housing at Gresham House added:

 

"Our aim remains to deliver defensive long income for investors and meaningful social impact by providing high-quality, secure homes for our residents - and the fundamentals for this portfolio remain robust, with customer demand incredibly strong, given the economic circumstances."

 

Key Financial Metrics

 

Income	Six months to 31-Mar 23		Six months to 31-Mar 22			Change in Year
Like-for-like rental reviews	+6.2%		+4.2%			+2%
Rent Collection	99%		99%			-
Gross Rental Income	£13.6mn		£12.4mn			+10%
Net Rental Income	£8.8mn		£8.1mn			+8%
Adjusted EPRA Earnings1,2	£4.1mn		£4.2mn			-3%
Adjusted EPRA EPS1,2	2.2p		2.4p			-8%
Dividend paid per share	2.6p		2.6p			-
Dividend cover3	86%		96%			-10%
Changes in fair value of investment properties	£(28.5)mn		£5.0mn			-570%
Capital		31-Mar 23		30-Sept 22	Change in Period
IFRS net assets		£166.6mn		£201.4mn	-17%
IFRS NAV per share		90.0p		108.8p	-17%
IFRS Portfolio Valuation		£355.3mn		£374.8mn	-5%
EPRA NTA per share1		89.0p		106.1p	-16%
EPRA NTA Total Return1		(13.7)%		+3.3%	-10%
Loan to Value		52%		47%	+5%

 

 

Financial highlights - resilient earnings with inflation linkage of rental income, offset by increased energy costs in communal areas and floating rate debt costs

 

·       £35m of shared ownership acquisitions compared to previous year

·       6.2% rent review growth (includes shared ownership rent increases on 1 April 2023)

·       EPRA adjusted earnings¹ of £4.1 million (H1 22: £4.2 million) with strong rent growth offset by retirement cost increases, due to rising energy costs, increased floating rate debt costs and higher fund opex

·       EPRA Net Tangible Assets ("NTA") total return of (13.7)% (H1 22: 2.8%) to give 89.0p per share NTA

·       Valuations down 7.2% like-for-like with 50bps outwards yield shift, reflecting higher gilt yields

·       LTV of 52% (H2 22: 47%) supported by 21 year average debt maturity

·       Total dividends paid for the half-year of 2.6p per share (H1 22: 2.6p) with 86% dividend cover (H1 22: 96%)

 

 

Portfolio and operational highlights 

 

·       Diverse portfolio of 3,298 homes worth £355mn

o  £73mn reversionary surplus of vacant possession value compared to fair value (21% uplift)

·       Portfolio focused on direct leases with pensioners and part home owners

·       Rent collection of over 99% for half year (H1 22 99%)

·       Shared ownership portfolio 99% occupied or reserved

o  59 new homes acquired in period with 44 occupied and further 8 reserved

·       Record retirement occupancy of 94% (H1 22 93%)

·       Retirement net income flat due to 77% increase in energy costs for communal areas

 

 

Continuing to deliver Social and Environmental Impact

 

·       96% of directly rented properties now EPC-rated C or higher (H1 22: 94%), with the remainder on track for targeted minimum C rating by 2025, three years ahead of government target

·       Rent caps voluntarily implemented to protect resident affordability

o Shared ownership rent increases voluntarily capped at 7% increase in line with wage inflation

o Retirees benefiting from rent increase cap of 6%

o Further rent cap and rent freeze support provided to residents most in need

·       90% satisfaction levels with our in-house property management team4

 

Outlook

 

·       Acute need for more affordable homes with estimated need for £34bn5 of annual investment in the UK

·       Particular shortage of affordable homes for home ownership and suitable accommodation for independent later living for the growing elderly population

·       Accelerating tenanted shared ownership opportunities as housing associations look to fund increasing costs of investing in their existing stock whilst maintaining development programmes

·       Strong rental inflation linked growth expected to continue, underpinned by lack of supply and increasing demand which is expected to provide some uplift to H2 2023 dividend cover

·       Market transactional evidence suggests that downward pressure on valuations is starting to ease, however, valuations naturally remain sensitive to movements in gilt yields which have moved out further post period end

·       Focused on operational improvements to the retirement portfolio and sale of non-core assets

 

Notes:

[1] Alternative performance measures

2 EPRA adjusted earnings is EPRA earnings adjusted for income and costs which are not recurring and is equivalent to IFRS profit after tax before one-offs and valuation adjustments.

3 Dividend cover measured as Adjusted EPRA earnings per share divided by dividend per share

4 Source: ReSI Homes Customer Survey

5 British Property Federation, and Legal & General, 2022

 

 

Interim Report and investor webinar        

 

ReSI plc will host an online webinar and Q&A session to discuss the results this morning, 7 June 2023, at 11:00am (BST). Registration is available at: https://greshamhouse.zoom.us/webinar/register/WN_cQCDXpbBTtCiD5e3uub1NQ

 

The accompanying presentation will be made available shortly after the webinar on the Gresham House website.

 

A copy of the pdf Interim Report is available on the Company's website at

https://greshamhouse.com/real-assets/real-estate-investment/residential-secure-income-plc/ where further information on the Company can also be found. The Interim Report has also been submitted to the National Storage Mechanism and will shortly be available at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.

 

For further information, please contact:

 

Gresham House Real Estate Ben Fry Sandeep Patel	+44 (0) 20 7382 0900
Peel Hunt LLP Luke Simpson Huw Jeremy	+44 (0) 20 7418 8900
KL Communications Charles Gorman Charlotte Francis	[email protected] +44 (0) 20 3995 6673

 

About ReSI plc

 

Residential Secure Income plc ("ReSI plc" LSE: RESI) is a real estate investment trust (REIT) focused on delivering secure, inflation-linked returns with a focus on two resident sub-sectors in UK residential - independent retirement rentals and shared ownership - underpinned by an ageing demographic and untapped and strong demand for affordable home ownership.

 

As at 31 March 2023, including committed acquisitions, ReSI plc's portfolio comprises 3,298 properties, with an (unaudited) IFRS fair value of £355mn.

 

ReSI plc's purpose is to deliver affordable, high-quality, safe homes with great customer service and long-term stability of tenure for residents. We achieve this through meeting demand from housing developers, housing associations, local authorities, and private developers for long-term investment partners to accelerate the development of socially and economically beneficial affordable housing.

 

ReSI plc's subsidiary, ReSI Housing Limited, is registered as a for-profit Registered Provider of social housing, and so provides a unique proposition to its housing developer partners, being a long-term private sector landlord within the social housing regulatory environment. As a Registered Provider, ReSI Housing can acquire affordable housing subject to s106 planning restrictions and housing funded by government grant.

 

About Gresham House and Gresham House Real Estate

 

Gresham House is a London Stock Exchange quoted specialist alternative asset manager committed to operating responsibly and sustainably, taking the long view in delivering sustainable investment solutions.

 

Gresham House Real Estate has an unparalleled track record in the affordable housing sector over 20 years, with senior members having an average of c.30 years' experience.

 

Gresham House Real Estate offers long-term equity investments into UK housing, through listed and unlisted housing investment vehicles, each focused on addressing different areas of the affordable housing problem. Each fund aims to deliver stable and secure inflation-linked returns whilst providing social and environmental benefits to its residents, the local community, and the wider economy.

 

Further information on ReSI plc is available at www.resi-reit.com, and further information on Gresham House is available at www.greshamhouse.com

 

Purpose

 

Residential Secure Income plc (ReSI or the Company) (LSE: RESI) is a real estate investment trust (REIT) focused on delivering secure, inflation-linked returns in two sub-sectors in UK residential housing; independent retirement rentals; and shared ownership, which are underpinned by an aging demographic and untapped, strong demand for affordable homes.

 

Our purpose is to deliver affordable, high-quality, safe homes with great customer service and long-term stability of tenure for residents. We achieve this through meeting demand from housing developers (housing associations, local authorities and private developers) for long-term investment partners to accelerate the development of socially and economically beneficial affordable housing.

 

ReSI's subsidiary, ReSI Housing Limited (ReSI Housing), is registered as a for-profit Registered Provider of social housing, and so provides a unique proposition to its housing developer partners, being a long-term private sector landlord within the social housing regulatory environment. As a Registered Provider, ReSI Housing can acquire affordable housing subject to s106 planning restrictions and housing funded by government grant.

 

Strategic report

Investment case

 

 

Why ReSI?

 

ReSI delivers 97% inflation-linked income, which is generated from affordable and secure rents and supported by strong market drivers in shared ownership housing and independent retirement living.

 

Secure long-term inflation-linked income Dividends paid quarterly

 

ReSI's business model is:

Supported by Strong market drivers Ageing population, declining home affordability, supportive government policy

Creating Measurable impact Providing affordable high-quality, energy efficient homes for life, and addressing elderly loneliness

Executed by An expert manager c.60-person housing team with over 20-year track record in UK housing

 

ReSI's income is:

Diverse ·      3,298 households diversified across ages and stages of life

Asset-backed ·      Underpinned by c.£428mn home value with 21% uplift from reversionary surplus ·      Subsidised shared ownership rents secured by homebuyers' stake

Affordable ·      Low retirement rents (in line with Local Housing Allowance) paid from pensions and welfare ·      c.£15mn government grant supports subsidised rents for shared ownership

 

 

 

 

 

 

 

 

 

 

 

 

Portfolio snapshot

We invest in UK affordable homes to deliver secure, inflation-linked income

3,298	£355mn	935
Homes	Value of investment property	Unique UK property locations
30 September 2022: 3,284	30 September 2022: £383mn including £9mn committed acquisitions See note 12 on page 43	30 September 2022: 926

 

£17.2mn	4.8%	2,613
Annualised net rental income	Annualised net rental yield*	Counterparties
Year to 30 September 2022: £16.5mn  See note 10 Supplementary Financial Information on page 61	30 September 2022: 4.4% See note 10 Supplementary Financial Information on page 61	30 September 2022: 2,608

 

* Alternative performance measure

 

Portfolio split by region	Number of properties
East Midlands	74
East of England	840
Greater London	472
North East	19
North West	259
Scotland	5
South East	800
South West	592
Wales	53
West Midlands	91
Yorkshire and The Humber	93
Grand Total	3298

 

 

Portfolio split by valuation

Independent Retirement Rentals	£209mn	59%
Shared Ownership	£125mn	35%
Local Authority	£21mn	6%
Total	£355mn	100%

 

 

 

Our portfolio focus

Residential Secure Income plc (ReSI) has diversified, secure, inflation-linked income streams from residential sub-sectors with strong supply and demand imbalances and supportive property fundamentals.

 

	Independent Retirement Living Housing (£209mn GAV / 2,240 Homes / 59% of portfolio)	Shared Ownership Housing (£125mn GAV / 769 Homes / 35% of portfolio)
Driver	§  Booming and increasingly lonely older population	§  Huge untapped demand for affordable homeownership
Summary	§  Let to elderly residents with affordable rents and assured tenancies §  Provides fit-for-purpose homes for retired people, allowing them to maintain their independence without care provision	§  Homebuyers acquire, from ReSI, a share in a residential property and rent the remainder §  Helps house buyers acquire homes they would otherwise be unable to buy §  Capital grant funding from government drives a c.40% living-cost discount compared to market level rents
Rent growth	§  Increase with RPI each year, generally capped at 6%	§  Increase contractually by RPI+ 0.5% each year
Secure income	§  Secure rental income paid from pensions and welfare	§  Subsidised, below-market rents §  Homebuyer equity stake
ReSI origination advantages	§  Scale: UK's largest private independent retirement rentals business §  Specialist in-house 30-person team with over 20-year track record	§  ReSI Housing - for-profit Registered Provider of Social Housing
Average vacant possession value	§  c.£110,000 per home	§  c.£334,000 per home(6)
Net yield	§  5.4%	§  3.5%(5)
Average debt coupon	§  3.5%	§  1.1% (4)
Levered yield	§  6.7%	§  8.7%(5)
Average customer stay / length of lease (1)	§  6 years	§  249 years
Like-for-like rental reviews (2)	§  5.8%	§  7.0% applied on 1 April 2023
March 2023 occupancy	§  94%	§  99% (3)
Rent collection	§  100%	§  99%

 

 

(1) Assuming no staircasing

(2) Represents the rent growth for homes that were occupied and eligible for a rent review during the six months ended March 2023. Including all homes that were occupied during H1 2023, Independent Retirement Like-for-Like reviews would be 2.3%. Shared ownership rents increased on April 1 2023, after the half-year ended March 2023

(3) Includes 8 homes reserved as at 6 June 2023

(4) 1.1% average blended coupon over the remaining loan term, with principal increasing with RPI + 0.5% (with a 0.5% floor and 5.5% cap)

(5) Based on 1 April 2023 rents

(6) Shared ownership vacant possession value includes both the value of ReSI's 63% average equity position, and the 37% owned by the residents

 

Financial Highlights

Income

(16.2p)	(13.7%)	(14.9%)
IFRS Earnings Per Share	Total Return (on Opening NTA)*	Total IFRS Return (on Opening NAV)
Period ended 31 March 2022: 4.5p See note 11 on page 41	Period ended 31 March 2022: 2.8% See note 11 Supplementary Financial Information on page 62	Period ended 31 March 2022: 4.2% See note 12 Supplementary Financial Information on page 62

 

£4.1mn / (3%)	2.2p	2.6p
Recurring profit before change in fair value and property disposals*	EPRA Adjusted Earnings Per Share*	Dividend per share
Period ended 31 March 2022: £4.2mn See note 11 on page 41	Period ended 31 March 2022: 2.4p See note 11 on page 41	Period ended 31 March 2022: 2.6p

* Alternative performance measure

CAPITAL

90.0p / -17.3%	£355mn	3.7%
IFRS Net Asset Value per share	Value of investment property	Of the total number of shares held by the Fund Manager, current and founder directors of the Fund Manager, and directors of ReSI as at the date of this report
30 September 2022: 108.8p See note 24 on page 54	30 September 2022: £383mn inc. £9mn committed acquisitions. See note 12 on page 43	(30 September 2022: 3.3% or 6.4mn shares)
52%	21 Years	89.0p / -16.1%
Loan-to-value Ratio (LTV)	Weighted Average Remaining Life of Debt	EPRA Net Tangible Asset Value (NTA) per share*
30 September 2022: 47% See note 13 Supplementary Financial Information  on page 63	30 September 2022: 22 years	30 September 2022: 106.1p See note 24 on page 54

 

* Alternative performance measure

Chairman's Statement

Rob Whiteman CBE

Chairman

 

"ReSI remains well-placed, to meet continued enormous demand for affordable housing, enabling sustainable and growing, risk-adjusted returns over the long term.

 

We have continued to support residents, balancing rent increases and returns in a way which is sustainable for both residents and shareholders. This focus has been rewarded with 99% rent collection from 2,613 counterparties and resilient high-occupancy levels. These factors drive our secure income stream which has remained unaffected despite the impact of the macroeconomic environment on property valuations.

 

We are considering selective disposal of certain non-core assets, to reduce floating rate debt levels, and will then revisit the appropriate level of a fully covered and progressive dividend."

 

 

ReSI's portfolio is handpicked to provide high-quality affordable accommodation for vastly undersupplied markets and by doing so to deliver defensive long-term income for investors and meaningful social impact. Our customer demand continues to be incredibly strong, whether providing affordable homeownership for young families and key workers through shared ownership or providing fit-for-purpose homes for independent living in retirement.

 

ReSI has delivered strong like-for-like rent reviews with growth of 6.2% whilst maintaining retirement occupancy at 94% and virtually fully occupying our shared ownership portfolio. Rent collection continues to exceed 99%, underpinned by direct leases with a highly diversified resident base comprising 2,613 counterparties, affordable rents, and shared ownership equity stakes averaging c.37%. Given the sharp and significant spike in inflation and interest rates, we have continued to balance rent increases with shareholder returns, in a way which is sustainable both for our residents and for our shareholders. We have aimed to support residents through a difficult period where pay increases may have lagged spiking inflation, which has in turn supported occupancy and rent collection levels.

 

Nevertheless, ReSI is not immune to the continuing wider economic challenges. Specifically, higher energy bills to heat and light communal areas have contributed to a 13% operating cost increase in our retirement housing portfolio, keeping retirement net income flat year on year. Together with increased interest expenses on the 10% of our debt which is floating rate, and increased overheads, Adjusted Earnings have reduced by 3%.

 

As a result, dividend cover declined to 86% after re-achieving full coverage in Q4 2022, which justifies the Board's decision to keep the dividend per share flat in order to absorb extraordinary cost increases.

 

As with all long-term income assets, our investment valuations have been impacted by rising gilt yields, but our strong rental growth has partially mitigated this with a 7.2% like-for-like decline to £355mn, taking EPRA NTA to 89.0p per share down from 106.1p at 31 September 2022. Market transactional evidence suggests that downward pressure on valuations is starting to ease, however, valuations naturally remain sensitive to movements in gilt yields which have moved out further post period end.

 

ReSI is now the custodian of homes for 3,298 households, and we will continue to balance returns with affordability for our residents. Our retirement portfolio leases are contractually capped at 6.0%. We have voluntarily capped our inflation-linked rent increases in shared ownership to 7.0%, as opposed to the contractual RPI+0.5%. Furthermore, ReSI continues to invest to improve our homes' energy efficiency helping to keep residents' energy bills affordable.

 

Market outlook

 

Despite recent operational challenges and macroeconomic headwinds, the fundamentals underpinning ReSI's business model, and our longer-term outlook, remain positive.

 

The UK's structural housing shortfall continues and most of the population lives in areas where home purchase is unaffordable for average earners, with an estimated need for £34bn[1] of annual investment over the next decade to begin addressing the shortfall. Persistent inflation, rising mortgage rates and the consistent demand for a permanent home have increased demand for shared ownership as the most affordable homeownership option (particularly in light of the Help to Buy programme's end in March 2023). The UK population demographic is rapidly aging and social isolation can have a material impact on the health of the elderly, driving demand for independent retirement accommodation.

 

Housing associations, who have historically been the primary investors in affordable housing, are now dealing with rent caps on their social and affordable rent portfolios in addition to allocating c.£10bn for fire safety and c.£25bn to upgrade the energy efficiency of their social rented stock by 2030. These financial pressures impact their ability to continue to fund their 43,000 homes per year development programmes, with many now looking to bring in partners to acquire some of their existing 200,000 shared ownership homes. This is continuing to drive demand and opportunity for further long-term investment into the sector - both to fund new homes and acquire existing shared ownership portfolios providing capital to housing associations to invest back into their social rented stock.

 

Financial outlook

 

As the owner of a for-profit registered provider and as the UK's largest provider of private independent retirement rental homes, and with an experienced and capable fund management team, the Board believes that ReSI remains well positioned to deliver affordable housing to residents and deliver long-term, inflation-linked returns to investors.

 

It has been a stated objective of the ReSI Board to grow the Company, however, the public capital markets have changed substantially in a short amount of time, and while the Company's share price has performed better than many of its listed peers, we recognise that ReSI's shares are currently trading at a significant discount to net asset value.

 

This is particularly disappointing given the scale of investment opportunities now available, particularly in shared ownership, given the work by the Fund Manager to create this market, and the ability for these to enhance returns to shareholders over the medium term. The Board has considered undertaking further share buy-backs but given current cash levels, does not consider it in shareholders' best interests to increase leverage to support buy-backs.

 

Instead, the Fund Manager is exploring the sale of non-core assets. This would enable repayment of floating rate debt and leave ReSI with only its long-term debt that has a weighted average maturity of 21 years. While assets sales would reduce ReSI's adjusted earnings, we expect they will increase sustainability of income given the removal of exposure to interest rate moves.

 

The Board continues to seek to pay a progressive dividend which is more than covered. To ensure that ReSI can continue to grow sustainably despite the current economic conditions, the Board will revisit the appropriate level of dividend following any asset sales, and in the light of the then prevailing economic and market conditions. ReSI remains well-placed, to meet continued enormous demand for affordable housing, enabling sustainable and growing, risk-adjusted returns over the long term.

 

As always, the Board is grateful for the support of shareholders, including their 99% support at our continuation vote in January 2023.

 

 

Rob Whiteman
Chairman
Residential Secure Income plc

6 June 2023

 

KPI Measures

Income returns

 

ReSI's key performance indicators (KPIs) are aligned to our business strategy. These measures are used by the Board and senior management to actively monitor business performance.

 

Adjusted EPRA earnings* (£mn)

Net rental income (£mn)

Like-for-like rental reviews (%)

EPRA cost ratio (%)*

(Loss)/Profit before tax (£mn)

 

H1 2022	H1 2023	H1 2022	H1 2023	H1 2022	H1 2023	H1 2022	H1 2023	H1 2022	H1 2023
4.2	4.1	7.6	8.3	4.2	6.2	37%	41%	7.8	(30.0)

 

KPI definition
Adjusted EPRA earnings, excluding valuation movements on investment assets and debt, and other adjustments, that are one-off in nature, which do not form part of the ongoing revenue or costs of the business.	Gross rental income after deducting property operating expenses including ground rent paid.	Like-for-like average growth on rent reviews across the portfolio.	Administrative and operating costs (including costs of direct vacancy) divided by gross rental income.	(Loss)/Profit before tax is a statutory IFRS measure as presented in the Group's Consolidated Statement of Comprehensive Income.
Comment
H1 2023 earnings impacted by higher finance costs on floating rate debt and higher operating costs in the retirement portfolio because of increased energy costs in communal areas.	Increase of 9% delivered during the period as a result of organic growth from the portfolio due to rent increases and acquisitions in H2 2022.	6.2% like-for-like rental reviews growth achieved for properties that were eligible for rent increases during the six months ended March 2023, adjusted for shared ownership rent increases which occurred on 1 April 2023.   This growth reflects the 6.0% rent increase caps on retirement leases, as well as the 7.0% cap implemented for shared ownership rent increases which took effect on 1 April, 2023.	H1 2023 cost ratio impacted by higher operating costs in the retirement portfolio because of increased energy costs in communal areas.	Decreased profit before tax driven by property valuation loss reflecting market repricing due to higher interest rates and increased valuation of debt. The repricing of real estate assets has been rapid and significantly faster than in previous property cycles. We expect the attractive characteristics of residential property assets, in conjunction with the supply / demand imbalance and lack of affordable housing, to continue to appeal to a wide range of property investors resulting in relatively resilient yields compared to other property sectors.
Notes
See note 11 to the financial statements	See note 5 to the financial statements	See Glossary on page 65 for definition and calculation basis.	See note 7 Supplementary Financial Information	See Consolidated Statement of Comprehensive Income on page 31.

 

*  Alternative performance measures

 

Capital returns

 

The following KPIs focus on ReSI's strategic priority to increase overall income returns and improve the resilience and efficiency of the business model which will support increasing dividend distributions.

 

EPRA NTA per share* (pence)

IFRS NAV per share (pence)

Total Return on NTA (%)*

Loan to Value (LTV) (%)

Weighted Average Remaining Life of Debt (Years)

 

FY 2022	H1 2023	FY 2022	H1 2023	H1 2022	H1 2023	FY 2022	H1 2023	FY 2022	H1 2023
106.1	89.0	108.8	90.0	2.8	(13.7)	47	52	22	21

 

KPI definition
EPRA NTA (Net Tangible Assets) is the market value of property assets, after deducting deferred tax on trading assets, and excluding intangible assets and derivatives.	IFRS NAV (Net Asset Value) per share at the balance sheet date.	Return on NTA is total return for the year, prior to payment of dividends (excluding movements in valuation of debt and derivatives), expressed as a percentage of opening NTA.	Ratio of net debt to the total assets less finance lease and cash on a consolidated Group basis	Average remaining term to loan maturity.
Comment
16.1% reduction in the six months to 31 March 2023 driven by fair value through profit and loss movements.	Returns of minus 17 pence per share in the six-month period reflecting property valuation decline and debt valuation.	Returns of minus 13.7% in H123 reflecting property valuation decline and debt valuation.	Increase in LTV reflecting outward valuation yield shift as a result of market repricing due to higher interest rates and macro-economic environment	21 years remaining life of debt reflecting the long-term nature of ReSI's fixed and inflation-linked debt.
Notes
See note 2 Supplementary Financial Information for reconciliation from IFRS to EPRA performance measures	See Consolidated Statement of Financial Position	See note 11 Supplementary Financial Information for calculation.	See note 13 Supplementary Financial Information for calculation.	See note 16 for information on the Group's Borrowings

 

* Alternative performance measures

 

 

 

Fund Manager's Report 

Ben Fry

Managing Director Housing

 

"Our aim remains to deliver defensive long-term income for investors and meaningful social impact by providing high-quality, secure homes for our residents - and the fundamentals for this portfolio remain robust, with customer demand incredibly strong, given the economic circumstances."

 

The first six months of FY23 have seen a continuation of the challenging macroeconomic environment driven by a sharp and severe increase in inflation, repeated interest rate increases and the consequential impact on the cost of living. We have sought to insulate both shareholders and residents from this environment by balancing inflation-linked rent increases with support for those residents with difficulties affording rent or mortgage bills.

There have been two consequences of significantly higher inflation and interest rates for ReSI.  While we have delivered strong like-for-like rent review growth, very high occupancy and collection levels, we have also experienced higher energy bills on communal areas within our retirement portfolio. Secondly, higher interest rates have impacted both our debt costs, and the gilt yields which form a key component of valuations.

Our rent review growth has been strong at 6.2%, including 7% rent increases on the shared ownership portfolio effective from 1 April 2023. 45% of the portfolio experienced rent reviews in the first half, driving 2.9% like-for-like rental growth in the period. This rent growth reflects the underlying strong demand for our affordable homes and our decision to cap inflation-linked rental increases in order to protect affordability for our residents when their incomes are under pressures not seen in recent decades.

This rental growth, combined with the full impact of previous shared ownership acquisitions, helped ReSI increase net rental income by 8% to £8.3mn, despite managing 13% higher costs in our retirement portfolio, driven by increased energy costs in the communal areas, that kept retirement net income flat.

Adjusted EPRA earnings, before valuations, reduced by 3% to £4.1mn with net rental income growth offset by increased interest expenses on our £21mn floating rate debt (10% of total debt), as well as higher professional, legal and audit fees.

As with many other REITs and investment companies, the increase in gilt yields has directly impacted our portfolio valuations, which are down 7.2% like-for-like for the half year to March 2023. This valuation reduction has driven a total EPRA return of (13.7%) taking EPRA NTA to 89.0p per share. While valuations naturally remain sensitive to moves in gilt yields, as at period end we see downward pressure on valuations starting to ease, with inflationary pressures which are hopefully nearing their peak, even if they remain stubborn.

These valuation headwinds have increased the LTV of the Company to 52%. While this is broadly in line with the Company's 50% medium-term target, it includes £21mn of floating rate debt that is no longer as accretive to the Company's returns and is not in line with our strategy to derisk the balance sheet through long term amortising debt. This debt was originally put in place to provide flexibility to the Company ahead of an intended fundraise, which is no longer possible due to market conditions which have the Company continuing to trade at a significant discount to its Net Asset Value. Our proposed sale of certain non-core assets, as referred to in the Chairman's statement, will allow ReSI to de-leverage its more expensive floating rate debt, leaving a strong balance sheet reinforced only by ultra-long debt with an average maturity of 21 years.

These sales will reduce Adjusted Earnings but should reduce volatility and increase the sustainability of our income through the removal of exposure to interest rate moves. Following any asset sales, we will work with the Board to rebase the dividend, targeting a higher level of dividend cover to support a progressive dividend that grows sustainably in line with ReSI's underlying inflation-linked rents.

Rising inflation and the cost-of-living crisis continue to impact the life of our residents, but they are relatively protected compared to their peers. The shared ownership model helps partially insulate residents from cost-of-living pressures:  rents are rising less than mortgage costs; mortgage rates remain well below our portfolio stress-test levels, and our shared owners have only 37% of the exposure to mortgage rate increases compared to full-ownership mortgages. Our retirement residents typically fund rent payments with income from an inflation-linked pension, and benefit from tailored accommodation that helps to address loneliness. Across the whole portfolio our continued efforts to improve our homes' energy efficiency is helping to reduce our residents' energy bills and we have capped rent increases in the period to protect resident's affordability.

The quality of ReSI's operational business model, with individual resident contractual relationships, very strong rent collection of almost 100%, and very high levels of occupancy, reflects our focus on the under-served markets of affordable purpose-built retirement living and providing affordable homeownership to young families and key workers. This continues to give us confidence in our portfolio of 3,298 homes. We believe that the shared ownership portfolio's investment thesis will continue to prove out as rents uplift with direct inflation-linkage and de-risk through residents staircasing and repaying mortgages over time.

 

Financial review

 

Total Return

EPRA NTA total return was a negative 14.5p per share (-13.7%) for the half year, driven by a reduction in like-for-like investment property values following increases in gilt yields.

This negative 14.5 pence per share EPRA return, comprises:

-       2.2p of Adjusted EPRA earnings (see note 11 - adjusted earnings per share), with recurring income of £4.1mn; less

-       15.3p reduction in valuation on investment property as assessed by Savills representing a 7.2% decrease on a like-for-like fair value basis to a total of £355mn as at 31 March 2023. This valuation decrease was primarily driven by a c.50 bps increase (inclusive of 1 April 23 rent reviews in shared ownership) in the weighted average valuation yield since September 2022; and

-       1.2p impact of USS debt indexation (£2.2mn), reflecting the index linked nature of the debt which follows the increase in shared ownership rent reviews up to a cap of 5.5%; less

-       0.2p one-off costs (c.£400k), attributable to aborting fundraising in Autumn 2022, following the Company's share price moving from a premium to substantial discount in NAV rendering equity raising dilutive to shareholders.  

 

The movement in the NTA position during the half year, from 106.1p to 89.0p per share, is after total dividend payments of 2.6p per share (£4.8mn).

 

Movement in NTA pence per share for the six-month period

 

NTA at 30/09/22	106.1
Net income	2.2
Movement in Fair Value of Investment Properties	-15.3
One-off costs	-0.2
Debt indexation	-1.2
Dividend paid	-2.6
NTA at 31/3/23	89.0

 

 

 

A total IFRS return of -16.2p per share (-14.9%) was delivered for the half year. The difference to EPRA NTA returns reflects an increase in the fair value of debt (IFRS) of 1.6p (£2.9mn) versus the amortised cost value of debt (EPRA) caused by reducing credit spreads in the period, partly offset by an increase in revaluation of trading properties of 0.1p (£0.2mn). IFRS NAV decreased by 18.8p after dividends paid.

 

 

Movement in IFRS NAV at 31 March 2023 (pence per share)

 

NAV at 30/09/22	108.8
Net Income	2.2
Movement in Fair Value of Investment Properties	-15.4
Movement in fair value of debt	-2.8
One-off costs	-0.2
Dividend paid	-2.6
NAV at 31/03/23	90.0

 

 

 

 

 

 

 

 

 

 

 

Statement of Comprehensive Income

 

Adjusted Earnings reduced by 3% to £4.1mn with 8% net rental income growth offset by increased interest expenses on our £21mn floating rate debt (10% of total debt), as well as higher overheads which are explained further below in the Fund Manager's Report. 

 

	H1 2023	H1 2022	Variance
	(£'000)	(£'000)
Net rental income	8,768	8,096	+8%
First tranche sales profits	231	336	-31%
Net Finance Costs	(3,132)	(2,775)	+13%
Management fees	(1,051)	(907)	+16%
Overheads	(700)	(528)	+33%
Adjusted Earnings / Adjusted EPRA Earnings	4,116	4,222	-3%
Adjusted EPS	2.2p	2.4p	-8%
Dividend Coverage	86%	96%	-11%
Property Valuation movements	(28,502)	4,975
Debt Valuation movements	(5,187)	(1,033)
One-offs	(405)	(328)
IFRS (Loss)/Earnings	(29,974)	7,836	-483%
IFRS EPS	(16.2p)	4.5p	-462%

Net Rental Income:

Net rental income before ground rents (NRI) grew by 8% year-over-year to £8.8mn, driven by four underlying factors:

-       flat income in retirement of £5.4mn with strong rental reviews growth of 5.8% offset by 13% cost inflation;

-       shared ownership rent growth of 5.5% to £1.8mn;

-       full occupancy and annualised income of our like-for-like shared ownership portfolio; and

-       shared ownership acquisitions from the investment of our £15mn fundraise in February 2022 providing £0.4mn

These four factors were also underpinned by:

-       consistent rent collection of over 99%.

 

H1 2022 Net Rent	£8.1mn
Shared ownership - acquisitions	£0.4mn
Shared ownership - leasing	£0.1mn
Shared ownership - rent growth	£0.1mn
Retirement - rent growth	£0.3mn
Retirement - cost inflation	-£0.3mn
H1 2023 Net Rent	£8.8mn

 

 

 

 

1. Top-line retirement growth offset by cost pressure:

-       Income growth delivered: £0m / 0% / 0.0 pence per share[2]

Retirement rental revenue grew 5.6% year-over-year to £10.1mn, up from 3.4% in the prior year. This was driven by rental caps of 6% applied to the RPI linked rental increases, combined with ReSI supporting residents in financial hardship with rental freezes or reduced increases. We believe our decision to cap rental increases is the right one, to both protect our residents and support the long-term stability of our income. These moves generated an annual saving for residents of c.£0.5mn / c.£690 per resident.

Revenue growth was offset by 13.1% year-over-year operating expense growth to £4.6mn, which was primarily driven by 77% increase to c.£0.53mn in the energy costs for common areas as well as a 15% increase in property management fees as we restructure the team.  This resulted in flat net income over the period.

Occupancy continues to improve to a record 94%, reflecting the great customer service of ReSI's in-house property manager, ReSI Property Management Limited (RPML).

Looking forwards, we are working closely with RPML across several asset management initiatives, in order to boost income and offset cost inflation including:

-       restructuring the property management team to take advantage of technology;

-       re-tendering repairs and maintenance contracts to increase value-for-money on unit refurbishments;

-       improving retirement re-letting timing to continue driving occupancy growth, which involves improving start times on refurbishment works for unit turnovers; and

-       completing capital works and energy efficiency improvement projects

 

2. Strong and accelerating rent growth in shared ownership:

-       Income growth delivered: £0.1mn / 5.5% / 0.1 pence per share[3]

Shared ownership rents increase annually on 1 April generally with RPI + 0.5%, and grew by 5.5% like-for-like to £1.8mn compared to the same period last year.

This year rents were due to increase by 12.4% on 1 April, however we have capped this increase at 7% (by way of a rebate), in line with wage growth and the inflation rate excluding the impact of energy bills. This cap will help to protect affordability for our residents when their incomes are under pressure like never before. This decision is entirely in our control but matches the cap that the government has applied to general needs social housing properties. The impact of this 7% rent increase will be reflected in our income over 12 months from 1 April.

 

3. Full occupancy and annualised impact of our shared ownership portfolio:

-       Income growth delivered: £0.1mn / 0.1 pence per share[4]

Demand for ReSI's shared ownership properties remains robust, reflecting its position as the most affordable form of homeownership. ReSI benefited from full-period income from Clapham Park and Auckland Rise units that leased during H1 2022, and the same-store portfolio owned by ReSI at September 2022 is fully leased.

4. Shared ownership acquisitions:

-       Income growth delivered: £0.4mn / flat on pence per share basis[5]

ReSI's earnings grew by c.£0.4mn from recent capital deployment into shared ownership investments and letting activity (excluding the impact of first tranche sales).

H1 2023 results include the full impact of ReSI's £24mn acquisition of 182 fully occupied homes from Orbit last March, and 21 homes from HSPG last September. Both of these acquisitions were occupied and immediately income generating, providing immediate earnings enhancement for ReSI.

ReSI also acquired 59 new homes (£11mn) from Brick by Brick that were delivered on phased basis between September 2022 and March 2023 as they reached construction completion. At the date of this report, 44 were occupied, with 8 reserved ahead of resident move-in and 7 remaining available, representing a take-up rate of c.6 units a month. Overall, the shared ownership portfolio is 99% sold or reserved. This leasing activity illustrates the depth of demand for shared ownership, which continues to play an essential role in helping mid-to-low earners onto the housing ladder. We expect this demand to further increase in this macroeconomic environment which is characterised by high inflation and rising interest rates, particularly with the Help-to-Buy programme having ended in March 2023.

These acquisitions were funded by £15mn of equity raised in February 2022 and debt drawn on the USS credit facility in March 2022, and are expected to be earnings accretive to ReSI's financial performance on a fully stabilised basis. The transactions with Orbit Group and Brick By Brick were repeat transactions with counterparties transacted with during FY 2021 - evidencing the growing strength of ReSI's relationship network.

5. Consistent rent collection:

ReSI's cash flow is supported by a highly diversified set of income streams from residents who pay affordable rents. Our retirement residents typically pay their rent from pensions and savings, and residents benefitted from a 10.1% increase in state pensions in April 2023, compared to the 6% rental growth caps in place across our retirement portfolio. On average, ReSI's shared ownership residents own c.37% of their homes and generally pay below-market rent. The remainder of ReSI's rental income comes from local authority housing, which is leased to Luton Borough Council. ReSI has no leases with asset light, lease funded, housing associations or charities.

ReSI's rent collection rate exceed 99% in H1 2023 and the affordability of ReSI's rents, as well as the strength of creditworthiness in ReSI's counterparties has helped keep rental arrears at c.1% of rent roll in H1 2023. To address those arrears, we are working with residents to find solutions that benefit both parties, which can include buying back part of shared owners' home equity to provide liquidity, helping retirement residents utilise all government welfare resources and subsidies available to them, or occasionally helping residents find local authority accommodation if they cannot afford to remain living in their home.

First tranche sales profits

First tranche sales profits reduced by 31% to £0.2mn. This reflects the gain on cost we recognise by selling a portion of a shared ownership home to the occupiers and is thereafter replaced by ongoing net rental income from the shared owner. The reduction in this line reflects the ongoing maturity of ReSI's business and increased quality of income streams.

 

Net finance costs

Net finance costs increased by 13% to £3.1mn, caused by a 21% increase in interest on borrowings to £2.6mn, with ground rent expenses remaining at £0.5mn. Interest expenses have been driven by the 3% average increase in SONIA year on year on ReSI's £21mn of floating rate debt, as well as £20mn long-term debt drawn from USS in March 2022 to finance shared ownership acquisitions.

 

ReSI is exploring the sale of non-core assets in order to pay-down its short-term floating rate debt and leave the Company with long-term fixed or inflation-linked debt with a weighted average maturity of 21 years.

 

Administrative and other expenses

Administrative and other expenses, including management fees and other costs of running the Group, were £2.1mn (six months to 31 March 2022: £1.5mn). The year-on-year increase has been predominately driven by £0.3mn of exceptional costs recognised in the period in relation to an aborted equity raise. Prior to the market dislocation, in September 2022, the Company was well advanced with preparations for an equity raise to enable the execution of accretive shared ownership acquisitions which were under exclusivity.  

Management fees have also increased to £1.0mn (six months to 31 March 2022: £0.9mn) year on year, reflecting the impact of February 2022's fundraise as well as a higher NAV than 12 months ago. The management fee is measured in advance based on the prior quarter NAV, with an annual adjustment ensuring the fee for the full financial year is charged in reference to an average NAV over the full financial year. Accordingly, the management fee is expected to reduce and for the full year ending 30 September 2023 be broadly aligned with financial year ending September 2022.  

The balance of the increase, in administrative and other expenses, is attributable to costs related to investment in the regulation and governance of our Registered Provider of Social Housing, ReSI Housing, as it grows and matures. ReSI Housing is the regulated entity which holds all of ReSI's shared ownership homes and is registered with the Regulator of Social Housing.

Dividend coverage:

 

ReSI's dividend was 86% covered by recurring income in H1 2023, reflecting an 11% year-on-year decline in dividend coverage.

Dividends paid were flat on a per share basis but increased in absolute quantum by the 8% increase in share count, reflecting the £15mn share issuance in February 2022. Rental income increased by 10% year on year, but this was more than offset by inflationary increases in retirement property expenses, increased floating rate interest costs and increase in fund operating expenses, to leave Adjusted Earnings down 3% and reduce dividend cover by 11%.

We anticipate some uplift in H2 2023 dividend coverage resulting from the 7% shared ownership rent increases on 1 April 2023, completion of lettings in the shared ownership portfolio, further rent increases in retirement, and operational initiatives that RPML is currently pursuing to reduce retirement operating costs.

 

Valuations

During the period, we have seen significant disruption to the UK property investment market due to macroeconomic and geopolitical issues. A significant increase in interest rates has driven a sharp increase in cost of capital and pushed property yields higher.

Valuers have been quick to reprice, to this higher rate environment, with valuation declines reported almost indiscriminately across the listed REIT space. We expect that higher quality assets generating stable income flows, such as the ReSI portfolio, will stabilise more quickly and prove more resilient. Furthermore, in addition to the stable income generation, ReSI's portfolio naturally benefits from valuation tailwinds, due to the chronic undersupply in affordable housing across the demographic spectrum in the UK.

Savills Advisory Services Limited (Savills) are appointed to value the Company's property investments, in accordance with the Regulated Investment Company requirements, on a quarterly basis. ReSI's property valuation, as assessed by Savills, decreased by £28.5mn during the half year - a 7.2% decrease on a like-for-like fair value basis to a total of £355mn as of 31 March 2023. This was driven by c.50 bps increase (inclusive of 1 April 23 rent reviews in shared ownership) in the weighted average valuation yield applied to the portfolio, with both shared ownership and retirement valuation yield shifts of c.50 bps to 5.4% and 3.5% respectively. This shift in valuation yields partly reflects rental growth of 6.2% on 1,477 properties (45% of portfolio) driving 2.9% like-for-like growth for the six months to 1 April 2023. Valuations of course remain sensitive to moves in gilt yields, but we see downward pressure on valuations starting to ease.

 

 

Balance Sheet

 

	31-Mar-23	30-Sep-22	Variance
	(£'000)	(£'000)
Total Investments	355,333	374,785	-5%
Inventories - First tranche Shared Ownership    properties available for sale	1,817	1,203	+51%
Cash and cash equivalents	9,906	15,984	-38%
Borrowings amortised cost	(203,107)	(194,701)	+4%
Other	827	(787)	-205%
EPRA Net Tangible Assets	164,776	196,484	-16%
EPRA NTA per share (pence)	89.0	106.1	-16%
EPRA Net Disposal Value (NDV)	185,435	225,455	-18%
EPRA NDV per share (pence)	100.1	121.8	-18%
IFRS NAV	166,635	201,388	-17%
IFRS NAV per share (pence)	90.0	108.8	-17%
Book Value of Debt	195,664	189,705	+3%
Reversionary Surplus (excluded from NTA)	73,190	47,971	+53%
Reversionary Surplus per share (pence)	39.5	25.9	+53%

 

 

Investment valuations declined by £19.5mn (6%) reflecting a £28.5mn (7.2%) like-for-like decline caused by a c.50 bps increase in the weighted average valuation yield and the completion of £9mn of new shared ownership acquisitions from Brick By Brick.

 

Inventories reflect the amount of unoccupied shared ownership properties that are expected to be sold to shared owners and are held at cost. The 51% increase reflects the acquisition of 59 vacant shared ownership homes between September 2022 and March 2023, with 23 remaining vacant on 31 March of which 8 have subsequently been occupied and a further 8 are reserved.

 

Total borrowings (amortised cost) increased by £8mn over the six-month period to £203mn as of 31 March 2023, reflecting quarterly indexation on the USS credit facility as well as an increase in short term borrowings for committed acquisitions.

 

The EPRA NTA and IFRS NAV measures exclude the reversionary surplus in our portfolio which stands at £73mn. This represents the difference between the market value of our assets used in our balance sheet and the value we could realise if they became vacant. Overall, our portfolio is valued at a 17% discount, on average, to its reversionary value.

 

 

Financing and Capital Structure

ReSI has c.£203mn (notional value) of debt in place, of which 90% is either long-term fixed rate or inflation-linked. This represents a 3% increase in fair value of debt since September 2022, reflecting changes in fair value on the inflation-linked USS debt resulting from recurring indexation (£2.2mn).

LTV has increased by 5% from 47% to 52% over the last six months ahead of our target of 50% leverage. 4% of this LTV increase was driven by a 7.2% decline in ReSI's property valuations since September 2022, with 1% driven by the impact of recurring quarterly indexation on the USS credit facility.

Our reversionary loan-to-value is 47% when taking into account the £428mn vacant possession value of the portfolio. This £73mn reversionary surplus (compared to £355mn of fair value) represents the difference between the market value of our assets used in our balance sheet and the value we could realise if they became vacant. Overall, our portfolio is valued at a 17% discount, on average, to its reversionary value.

	H1 2023	FY 2022
Total debt	£196mn	£190mn
LTV (target 50%)	52%	47%
Leverage on reversion value	46%	42%
Weighted average fixed-debt coupon (49% of ReSI's debt)	3.5%	3.5%
Weighted average inflation-linked debt coupon (41% of ReSI's debt)	1.1%[6]	0.9%
Weighted average maturity	21 years	23 years

 

Capital stack

	H1 FY 2023
Debt	£196mn
Equity	£141mn
Grant Funding	£15mn
Reversionary Surplus	£73mn
Total	£425mn

 

 

The drop in property investment values and increase in debt fair value has narrowed headroom in the Santander working capital facility's loan-to-value covenant which is £8mn drawn and represents 4% of ReSI's outstanding debt balance. As at 31 March 2023, the working capital facility's LTV covenant was 53%, with c.£12mn of property value headroom (3%) before a covenant breach is triggered. We estimate that ReSI's weighted average valuation yield would need to shift outward by a further c.20bps for this valuation loss to be realised, on top of the c.50bps (inclusive of 1 April 23 rent reviews) widening since September 2022.

However, market transactional evidence as at period end suggests that we may be past the worst of valuation yield movements. Furthermore, taking into account ReSI's high-quality assets generating stable income flows, and the speed at which valuers have marked down portfolios across the listed REIT sector, we believe ReSI's portfolio is well placed to provide resilience against further material outward yield shifts.

As a wholly proactive measure, ReSI has held positive discussions with Santander in relation to the LTV covenant. Santander acknowledge the strong long-term and income generating fundamentals of the ReSI property portfolio; accordingly, they are open to relaxing the LTV covenant until yields stabilise. Execution of the change to the LTV covenant is expected to conclude by the end of June (subject to credit approval).Additionally, we are actively exploring the sale of non-core assets in order to pay-down our short-term floating rate debt. This would leave the Company with long-term fixed or inflation-linked debt with a weighted average maturity of 21 years.

ReSI's other LTV covenants and ICR covenants still have ample headroom and ReSI's USS debt on its shared ownership portfolio is fully amortising and so does not have a loan-to-value debt covenant.

 

	Loan Covenants by Portfolio[7]
Covenant	Shared Ownership / USS	Retirement / Scottish Widows	Local Authority / NatWest	Total Portfolio / Santander
Current debt balance[8]	£83mn	£94mn	£12mn	£8mn
LTV - Threshold	N/A	<59%	<60%	<55%
LTV - Reported	N/A	45%	42%	53%
Value - Headroom (%)	N/A	23%	30%	3%
Value - Headroom (£)	N/A	£47mn	£9mn	£12mn
ICR / DSCR - Threshold	>0.95x	>2.0x	>2.5x	>1.5x
ICR / DSCR - Reported	6x	3x	3x	3x
NOI - Headroom	85%	33%	21%	53%
SONIA Interest Rate - Breach Threshold[9]	Fixed-rate	Fixed-rate	>4%3	30%

 

ReSI currently has £17mn of remaining liquidity available via its working capital facility as well as £5mn of unrestricted cash. Near-term debt maturities consist of £12.1mn of floating rate NatWest debt, which matures in October 2023. We expect to fully repay the loan in H2 2023 with proceeds from asset disposals, at which point ReSI's floating-rate-debt exposure will consist of borrowings on the revolving working credit facility.

 

Social and Environmental:

We remain committed to delivering measurable social and environmental impact for the benefit of our residents and the UK.

This year shared ownership rents were due to increase by 12.4% on 1 April, however we have voluntarily capped this increase at 7% (by way of a rebate), in line with wage growth and the inflation rate excluding the impact of energy bills. This decision is entirely in our control but matches the cap that the government has applied to general needs social housing properties. The 7% rent cap is projected to save residents c.£204,000 over the next 12 months.

Our retirees benefit from the rent increase cap of 6% being applied to all directly rented retirement properties, which currently generates annualised savings of c.£464,000 as at March 2023. In addition, further rent caps and rent freezes have been provided to residents who are most in need, representing £38,000 of annualised benefit as at March 2023.

The rental increase caps we offer to residents highlight ReSI's commitment to ensuring housing remains affordable for our residents. We believe this will help residents stay with ReSI for longer, which should help us to deliver long-term, stable returns to investors.

Our in-house property manager, RPML, received resident survey feedback indicating c.90% resident satisfaction rates across our retirement and shared ownership portfolios. More generally, we aim to continue delivering high-quality of service to our residents as a best-in-class provider of affordable housing.

ReSI continued to invest in improving the energy efficiency of its retirement portfolio and is targeting upgrading all directly rented properties to at least a C by 2025, three years ahead of the government target with 96% now at this target. For the whole portfolio, 85% of the properties are rated C or higher, leaving ReSI well ahead of the average for the social sector and the overall UK housing market[10].

Management Team Transition

Gresham House has recently hired three senior real estate investment professionals to join the Housing team to bolster resources, experience and help to drive further growth and to work with me and the existing team.

Mike Adams is the newly appointed Managing Director of the expanded Gresham House Real Estate business and will be ultimately responsible for all Real Estate strategies.

Mike Adams joined with Burak Varisli in February 2023 and, Sandeep Patel joined in December 2022 as the divisional finance director.

Alex Pilato will fully retire on 9 June, completing a transition that commenced in March 2020 with the sale of the Fund Manager to Gresham House. Alex continues to have a very strong interest in the success of ReSI with significant shareholdings.

 

Summary and outlook:

ReSI continues to see enormous demand for affordable homes, with a particular shortage of affordable homeownership routes for young families and key workers and fit for purpose homes for independent living through retirement, demand which ReSI is well placed to meet.

ReSI has delivered strong like-for-like rental review growth of 6.2%, inclusive of 7% rent increases on the shared ownership portfolio effective 1 April 2023, with continued high occupancy, rent collection stable at almost 100% and good demand for new homes reflecting our focus on individual resident contractual relationships.

This positions ReSI well for the future but the short-term positive impact above has been more than offset by inflationary increases in retirement property expenses, increased floating rate interest costs and an increase in fund operating expenses, to leave Adjusted Earnings down 3% and reduce dividend cover by 11%.

We are focused on operational improvements to the retirement portfolio, working closely with RPML, our dedicated in-house property management team, to drive earnings whilst exploring the sale of non-core assets to allow ReSI to pay down its floating rate debt and leave the Company with long-term fixed or inflation-linked debt with an average maturity of 21 years. We will then work with the Board to rebase the dividend, likely targeting a higher level of dividend cover to support a progressive dividend that grows sustainably in line with ReSI's underlying inflation-linked rents.

Valuations have been impacted by rising gilt yields, and of course remain sensitive to future moves, but we see downward pressure on valuations starting to ease, while inflationary pressures are hopefully nearing their peak.

With strong demand, inflation-linked rents and wide support for more investment in affordable housing the outlook for ReSI remains strong.

 

Ben Fry
Managing Director, Housing

6 June 2023

 

Environmental, Social and Governance

The Board and the Fund Manager believe that sustainable investment involves the integration of Environmental, Social and Governance (ESG) factors within the investment process and that these factors should be considered alongside financial and strategic issues during assessment and at all stages of the investment process.

 

The Board and Fund Manager recognise their responsibility to manage and conduct business in a socially responsible way and many of the Company's investors, residents and other counterparties have the same values. Good governance and social responsibility require that the Company seeks to implement a collaborative approach to understanding and improving environmental and social performance. The Fund Manager is responsible for engagement on ESG matters and dedicates a significant amount of time and resource to focusing on the ESG characteristics of the properties in which it invests. Such ESG factors, which were traditionally not part of financial analysis, are incorporated and prioritised as part of the investment and due diligence process through the ESG decision tool, which has been developed by Gresham House's dedicated Sustainable Investment Team. Ongoing monitoring of ESG related risks is carried out through investment reviews.

 

The Fund Manager also gives appropriate consideration to corporate governance and the representation of shareholder interests. This is applied both as a positive consideration, and also to exclude certain investments where the Fund Manager does not believe the interests of shareholders will be prioritised.

 

Gresham House has a clear commitment to sustainable investment as part of its business mission, exemplified by being awarded the Green Economy Mark from the London Stock Exchange and being a signatory to the UK Stewardship Code.

 

Based on its Sustainable Investment Framework, Gresham House has developed a range of policies and processes for all asset classes which the Fund Manager uses to integrate sustainability into its investment approach. More details can be found in the Housing Sustainable Investment Policy here.

 

Housing Sustainable Investment Framework

The Fund Manager, with support from Gresham House's dedicated Sustainable Investment team, has developed the Housing Sustainable Investment Framework to structure analysis, monitoring and reporting of ESG issues and opportunities within the lifecycle of our investments. The Housing Sustainable Investment Framework addresses the most material themes for housing investments from the broader Gresham House Sustainable Investment Framework.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal Risks and Uncertainties

The Board recognises the importance of risk management in achieving ReSI's strategic aims.

 

The principal risk and uncertainties for the Group continue to be those outlined on pages 80 to 86 of the Annual Report for the year ended 30 September 2022 and the Board expects those to remain valid for the remainder of the financial year.

 

An assessment of any changes to the risks in the six months ending 31 March 2023 are listed below:

 

Risk	Risk mitigation	Party responsible	Party responsible for monitoring	Change in risk since 2022 Annual Report
Real estate
Significant or material fall in the value of the property market	• ReSI's aim is to hold the assets for the long-term and generate inflation-linked income • ReSI focuses on areas of the market with limited exposure to the wider property market • ReSI's portfolio aims to address chronic undersupply therefore is underpinned by strong valuation tailwinds	N/A	Board	Increased
Increase on ReSI's floating rate debt is payable based on a margin over SONIA	• Floating rate debt as a proportion of total debt is 10% •We aim to hedge prudently our SONIA exposure, keeping the hedging strategy under review to balance the risk of exposure to rate movements against the cost on implementing hedging instruments •ReSI is targeting the sale of non-core assets which will enable full repayment of floating rate debt	N/A	Board	New
An adverse change in our property valuations may lead to a breach of our banking covenants. A severe fall in values may result in us selling assets to reduce our loan commitments, resulting in a fall in our NAV	• We manage our activities to operate within our banking covenants and constantly monitor our covenant headroom on Loan to Value and Interest cover	N/A	Board	New

 

 

 

 

 

Directors' Responsibilities in respect of the Interim Accounts

 

 

Each of the directors, whose names are listed on page 68, confirm that to the best of their knowledge:

 

§ the condensed set of financial statements has been prepared in accordance with IAS 34 as adopted by the United Kingdom; and

 

§ the Strategy and Performance overview on pages 8 to 11, the Fund Manager's Report and Key Performance Measures on pages 12 to 23, Principal Risks and Uncertainties on page 25 and the Related Party Disclosure on page 56 (note 26) include a fair review of the information required by DTR 4.2.7 and DTR 4.2.8 of the Disclosure and Transparency rules of the United Kingdom's Financial Conduct Authority namely:

 

(a)  an indication of important events that have occurred during the first six months since 1 October 2022 and their impact on the condensed financial statements and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

 

(b)  disclosure of any material related party transactions in the period are included in note 26 to the condensed consolidated financial statements.

 

The Interim Report has been reviewed by the Company's auditor and was approved by the Board of Directors on 6 June 2023.

 

For and on behalf of the Board

 

 

 

 

 

Rob Whiteman

Chairman

6 June 2023

 

 

Independent Review Report to the members of Residential Secure Income plc

 

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2023 is not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 March 2023 which comprises the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Financial Position, the Condensed Consolidated Cash Flow Statement, the Condensed Consolidated Statement of Changes in Equity, and related notes.

Basis for conclusion

We conducted our review in accordance with International Standard on Review Engagements (UK) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" ("ISRE (UK) 2410"). A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with UK adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with UK adopted International Accounting Standard 34, "Interim Financial Reporting".

Conclusions relating to going concern

Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.

This conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410, however future events or conditions may cause the Group to cease to continue as a going concern.

Responsibilities of directors

The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.          

In preparing the half-yearly financial report, the directors are responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the review of the financial information

In reviewing the half-yearly report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statement in the half-yearly financial report. Our conclusion, including our Conclusions Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.

 

Use of our report

Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent.  Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.

 

 

BDO LLP

Chartered Accountants

London, UK

6 June 2023

 

 

BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).

 

 

Financials