Annual Financial Report

Incommunities Group Limited

Financial Report for the Year Ended 31st March 2021

Incommunities Group Limited ('Incommunities', 'the Group') is one of the leading providers of affordable housing in the UK and is pleased to announce its consolidated results for the year ended 31st March 2021.

Incommunities Treasury PLC is a wholly owned subsidiary of Incommunities PLC.

This report is for information purposes only.

1. Headlines

1.1 The financial year was characterised by the impact of Covid-19 pandemic with a national lock-down being introduced just days before the start of the financial year. In response the Group:

· Prioritised services to customers based on essential repairs and health and safety maintenance adopting safe systems of work

· Paused and then re-configured construction and other non-essential maintenance in a safe working environment

· Adopted changes to operations to overcome, as far as practical, disruption to the re-letting process

· The results include a £1.2m payment from the Government's Coronavirus Job Retention Scheme

· Equipped and supported over 300 office-based staff to enable them to work from home

1.2 In May 2021 the Group's Business Plan was revised to reflect the potential impact of the pandemic and the post-Brexit economic environment. The forecast surplus was reduced in anticipation of increased void losses, losses arising from difficulties in collecting arrears and reduced surpluses on the sale of social housing properties.

1.3 The recoverability of income was not adversely affected by the pandemic and the void losses were only marginally higher than the pre-pandemic forecast. Delays to routine / non-essential maintenance reduce the overall expenditure to budget, particularly over the first 4 months of the financial year.

1.4 During the year, the Group issued £25m of the £50m retained bond. The issue was oversubscribed and achieved a price of 90 basis points over gilt, providing a yield of 1.785%

1.5 Also, during the year, the Group completed 115 new homes, 96% of the target for 2021/22. Details of the Group's property development activities are set out in Section 5.

1.6 Despite the operational challenges facing the Group, it continues to address the weakest performing housing assets and, following an initial delay due to restrictions the planned demolition of 5 high rise tower blocks was completed early in 2021. By the year end 8 of the 11 high rise tower blocks earmarked for demolition were demolished with the contractors clearing the remaining 3 in the first quarter of 2021. The land is being cleared for redevelopment for mix tenure housing. The cost of demolition was provided for in the 2020/21 accounts. The programme of reviewing weaker performing assets continues and the Group has identified a further number of assets to be subject to formal option appraisal in 2021/22 and has included impairment costs of £3,010k to reflect this position in the 2020/21 accounts.

1.7 The Group has been aware of the potential effects of the Covid-19 pandemic on its business and has taken the necessary steps to deal with this and mitigate the impacts. Details of the Group's actions in relation to the pandemic and the potential effects are set out in section 7.

2. Financial and Operating Highlights

2.1 The Statement of Comprehensive Income for the year ended 31st March 2021 and the Statement of Financial Position as at 31st March 2021, together with the comparatives for the prior year are set out in Appendix 1.

2.2 Other supporting financial information for the year ended 31st March 2021 and the corresponding comparatives are set out in Appendix 2.

2.3 A number of key financial performance indicators and financial loan covenant calculations, based on the results for the year ended 31st March 2021 and the corresponding comparatives are set out in Appendix 3.

2.4 The financial and operating highlights are as follows:

Income and Expenditure

· Turnover for the year is £99,970k (2020: £101,351k)

· Turnover from social housing lettings for the year is £95,051k (95.1%) (2020: £93,474k (92.2%))

· Operating surplus for the year is £16,429k (2020: £25,985k)

· Operating margin is 16.4% (2020: 25.6%)

· Net interest payable for the year is £11,481k (2020: £11,657k)

· Surplus for the year before tax is £4,978k (2020: £14,351)

· Interest cover is 1.43 (2020: 2.23)

Balances and Capital Expenditure

· IGL owns and manages 22,651 units (2020: 22,991 units), this includes a leasehold interest in 1,117 units (2020: 1,106 units)

· Housing properties at cost (excluding accumulated depreciation) are £618,436k (2020: £614,818k)

· Investment in existing and new housing properties for the year is £20,288k (2020: £20,155k)

· New social housing units developed during the year is 115 (2020: 109)

· Total loans (net of loan issue costs) is £289,868k (2020: £298,898k)

· Gearing (Assets) is 43.7% (2020: 46.4%)

· Net debt per unit is £12,132 (2020: £12,579)

· Income and expenditure reserves are £21,629k (2020: £39,847k)

Other Information

· S&P Credit Rating (March 2021) is A+ (negative)

· Regulatory Judgement (November 2019) is G2-Governance, and V1-Financial Viability

3. Results Overview

3.1 The Group continues to generate the majority of its income from social housing activities. The full year outturn, although ahead of the initial projection is lower than the previous year, reflecting a reduction of £1.4m in turnover. The Group has also increased investment cost in existing stock (in line with the long-term asset strategy and has accounted for a £3,010k impairment charge for assets identified as due for option appraisal and additional £281k in relation to other assets, total £3,291k. In contrast 2019/20 had some impairment "write back" and a credit in bad debts of £649k.

3.2 There has been a significant year on year increase in the pension fund deficit with West Yorkshire Pension Fund, an LGPS pension. The primary causes of this increase relate to the pension fund actuarial assumptions used for the valuation of pension fund liabilities. These included a reduction in the discount rate, increases in future salary growth, inflation expectations and an increase in fund membership longevity. These changes are a reflection of the rate of return on pension investments, the current economic outlook and demographic assessments.

3.3 The loan restructuring exercise has resulted in a significant reduction in interest payable. This has contributed towards a significant improvement in the surplus for the financial year in comparison with the prior year. The surplus for the year is better than budget.

3.4 The Group's financial covenants, including Interest Cover, Gearing (Assets) and Net Debt per Unit, are well within the funders' requirements.

3.5 The annual review of the S&P credit rating was announced in March 2021 as A+ (negative). This is a deterioration to the rating issued in March 2020 of A+ (stable), reflecting the challenges facing the sector and the Group relating to future investment requirements for Health and Safety compliance and the push for carbon reduction.

3.6 The Regulator of Social Housing published two Regulatory Judgements for the Group during 2020/21. In October 2020, the Group was downgraded from G1 to G2 for failing to implement Rule changes correctly for its two housing subsidiaries, the judgement was affirmed by the Regulator in December 2020. The Group self-reported the error to the Regulator. In response the Group engaged KPMG to advise on steps to strengthen risk management and assurance and the Board has orchestrated a comprehensive review of assurance frameworks with a view to achieving G1/V1 at the earliest opportunity.

4. Comments on Results and Other Matters

4.1 Greg Robinson, Assistant Chief Executive - Resources, commented:

"Incommunities is pleased to announce a solid set of results, in what has been an exceptional year. The issue of our £25m retained bond was a success and provides increased long term, low-cost fixed rate capital to support the Group in its objective to invest in existing housing stock and provide more new homes for our customers."

4.2 Rachael Dennis, Group Chief Executive, commented:

"The past year was undoubtedly overshadowed by the pandemic and lockdown restrictions, and our top priority throughout has been to ensure our colleagues, customers and communities are safe; whilst continuing to ensure continuity of much-needed services to our customers. As an organisation, our business continuity plans were quickly deployed, and colleagues worked closely with partner organisation to deliver services and support to our customers in difficult circumstances.

"The Covid-19 pandemic accelerated our move to more agile ways of working and our response gives us firm foundations on which to develop new ways of supporting and engaging with colleagues and customers.

"Despite the economic and sector challenges of the past year, we are well positioned to tackle both short-term uncertainty and long-term growth. This is an exciting time to lead Incommunities as we move forward with aligning our strategic aims and business focus, alongside mapping and developing our workplace culture."

5. Property Development Programme

5.1 The Group develops its housing properties through a dedicated subsidiary, BCHT Development Company Limited. During the year, the Company developed 115 social housing and mixed tenure units over seven sites. None of the units were built for outright market sale. The Group also commenced the development of 25 family homes at the site of a former sheltered housing scheme, as well as the acquisition and refurbishment of two empty homes through Homes England CME (Continuous Market Engagement).

5.2 During this year, the Company has a development target of 188 units. As part of the Homes England Affordable Homes Grant Funding Programme 2021-26, the Group has submitted a bid for over 600 units via Strategic Partnering with Together Housing. The Group has also submitted a joint bid via Thirteen Housing Group for 207 units, 105 of which are designated for Incommunities within the partnership.

5.3 Following the loan restructuring exercise, the Group is seeking to accelerate its future property development programme. Further announcements on the Group's proposed future programme will be made in due course.

6. Funding Facilities

6.1 During the year, the Group, through its subsidiary Sadeh Lok Limited, signed off a restated facility agreement for £20m with Royal Bank of Scotland. This represents the final stage of the Group-wide debt restructuring exercise, which included the issue of the £250m own name, public issue bond on 21st March 2019.

6.2 Total loans (net of loan issue costs) stand at £289,868 (2020: £298,898). The reduction in loans during the year primarily represents the repayment of revolving bank facilities as part of the Group's cash management strategy. The Group has deliberately kept its cash balance high at the year-end as a hedge against any unexpected consequences of the Covid-19 pandemic.

6.3 At the year end, the Group's consolidated loan portfolio is made up as follows:

6.4 Interest Cover is 2.06 (2020: 2.56) and Gearing (Assets) is 43.7% (2020: 46.4%).

6.5 The Group signed its financial statements for the year ended 31st March 2021 in September 2021. These are available on the Investor Portal on the Incommunities Webste https://www.incommunities.co.uk/

8. Outlook

8.1 The Covid-19 pandemic aside, the business outlook is relatively positive with continuing opportunities for growth and development. Following the Governance Downgrade the Group has embarked on a comprehensive review of risk management and assurance. In addition, it has decided to consolidate the Group parent with the two housing subsidiaries to simplify the Group structure.

8.2 The appointment of a new Chief Executive in February 2021 has been followed by a review of the corporate strategy with an emphasis on developing core business efficiency and enhancing the Group's performance culture. The Group recognises the challenge raised by future stock investment and meeting the challenge of environmental sustainability and is equally committed to ensuring the development programme is progressed.

Enquiries: Please contact Greg Robinson, Assistant Chief Executive - Resources, on 01274 257 013 or at [email protected]

Disclaimer

The information in this announcement has been prepared by Incommunities Group Limited and is for information purposes only. The Results Announcement should not be construed as an offer or solicitation to buy or sell any securities issued by the Parent, the Issuer or any other member of the Group, or any interest in any such securities, and nothing herein should be construed as a recommendation or advice to invest in any such securities.

This unaudited announcement contains certain 'forward-looking' statements reflecting, among other things, our current views on markets, activities and prospects. Actual and audited outcomes may differ materially. Such statements are a correct reflection of our views only on the publication date and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. Financial results quoted are unaudited. We do not undertake to update or revise such public statements as our expectations change in response to events.

Appendix 1

Consolidated Results for the Year Ended 31st March 2021

*Comparatives making up the operating surplus have been changed to correspond with the current year's presentation

Appendix 2

Other Financial Information for the Year Ended 31st March 2021

Appendix 3

Key Financial Performance Indicators and Financial Covenants for the Year Ended 31st March 2021

Notes

1 Turnover from social housing lettings / Turnover

2 Operating surplus on social housing lettings / Turnover from social housing lettings

3 Revenue and capital social housing costs (excl. Depreciation and amortisation) / Total units owned and managed

4 Operating surplus / Turnover

5 Adjusted operating surplus / Net interest payable

(Adjusted operating surplus = operating surplus + depreciation of housing properties + depreciation of other assets - capitalised major repairs - amortisation of government grants)

6 Surplus / (Deficit) for the year (excl. Refinancing costs) / Turnover

7 Operating surplus / Total assets less current liabilities

8 Adjusted operating surplus / Net interest payable

(Adjusted operating surplus = operating surplus + depreciation of housing properties - capitalised major repairs - amortisation of government grants)

9 Net financial indebtedness / Historic cost of properties (excl. accumulated depreciation)

(Net financial indebtedness equals total loans - cash and cash equivalents)

10 Net financial indebtedness / Total units owned