Doc re.Draft Accounts

Incommunities Group Limited

Financial Report for the Year Ended 31st March 2020

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 2020.

These results are unaudited and are for information purposes only.

1. Headlines

1.1 During the year, the Group finalised its loan restructuring exercise (of which the Own Name Public Issue Bond in March 2019 formed a key part) with the restructuring of a relatively small existing bank loan. The loan restructuring exercise overall has significantly reduced interest payable, provided funds for an accelerated development programme, and reduced the Group's funding risk.

1.2 Also, during the year, the Group completed a number of new development schemes and sold all of its outstanding properties for sale. Details of the Group's property development activities are set out in Section 5. In addition, the Group completed the implementation of its Dynamic Repairs Scheduling system. This will significantly increase the efficiency with which the repairs service is delivered and have a corresponding beneficial effect on the future cost of the service.

1.3 Throughout the year, the Group has continued to focus and improve its Active Asset Management systems, streamlining its void management processes and reducing its void turnaround times leading to a significant reduction in voids rent losses. The programmed decommissioning of a number of the Group's 'tower blocks' continues and forms a key part of the asset management being undertaken. Of the Group's 11 tower blocks, three have now been demolished and the land cleared for redevelopment.

1.4 The Group is fully 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 2020 and the Statement of Financial Position as at 31st March 2020, 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 2020 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 2020 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 £101,351k (2019: £98,390k)

· Turnover from social housing lettings for the year is £93,474k (92.2%) (2019: £93,716k (95.2%))

· Operating surplus for the year is £25,985k (2019: £16,732k)

· Operating margin is 25.6% (2019: 17.0%)

· Net interest payable for the year is £11,657k (2019: £16,210k)

· Surplus for the year is £14,352k (2019: £144k (excl. Refinancing costs))

· Interest cover is 2.56 (2019: 2.27)

Balances and Capital Expenditure

· IGL owns and manages 22,991 units (2019: 23,148 units), this includes a leasehold interest in 1,106 units (2018: 1,112 units)

· Housing properties at cost (excluding accumulated depreciation) are £614,818k (2019: £600,198k)

· Investment in existing and new housing properties for the year is £20,155k (2019: £29,734k)

· New social housing units developed during the year is 109 (2019: 119)

· Total loans (net of loan issue costs) is £298,898k (2019: £302,945k)

· Gearing (Assets) is 46.4% (2019: 49.0%)

· Net debt per unit is £12,579 (2019: £12,775)

· Income and expenditure reserves are £38,652k (2019: £28,778k)

Other Information

· S&P Credit Rating (March 2020) is A+ (stable)

· Regulatory Judgement (November 2019) is G1-Governance, and V1-Financial Viability

3. Results Overview

3.1 The Group continues to generate the majority of its income from social housing activities. Although the Group has produced a significantly improved set of results in comparison with the prior year, these have still been impacted by the statutory reduction in rents of 1% for the financial year 2019/20. This is the fourth and final year of the current rent reduction regime and results are expected to improve further on a like-for-like basis going forward.

3.2 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 significantly better than budget.

3.3 The Group's financial covenants, including Interest Cover, Gearing (Assets) and Net Debt per Unit, all show improvement in comparison with the prior year.

3.4 The annual review of the S&P credit rating was announced in March 2020 as A+ (stable). This is an improvement on the original credit rating issued in March 2019 of A+ (negative). The Group's Regulatory Judgement was reconfirmed in November 2019 at the highest possible rating of G1-Governance, and V1-Financial Viability.

4. Comments on Results and Other Matters

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

"Incommunities is delighted to announce a solid set of results, improving our 'bottom line' and outperforming our budget. It is particularly pleasing to note a significant reduction in interest payable as a result of the loan restructuring exercise carried out over the past 18 months. Not only has this exercise reduced interest payable, it has also provided funds for an accelerated development programme, and reduced the Group's funding risk."

4.2 Geraldine Howley, Group Chief Executive, commented:

"We continue to improve our social housing services and the 'offer' we make to our customers. Most recently, this has been through such initiatives as the implementation of a Dynamic Repairs Scheduling system and an Active Asset Management system. These innovative advances will not only improve our services and the 'offer' we make to our customers, but should also have a beneficial effect on our financial performance. I am pleased to report that we are already experiencing this improvement with a significant reduction in our voids turnaround times and a resultant reduction in voids rent losses.

"The Group is fully aware of the potential effects of the Covid-19 pandemic on our business, and I can confirm we have taken the necessary steps to deal with this and mitigate the impacts. We continue to monitor the pandemic closely and make appropriate plans and take appropriate actions.

"On a personal note, after seventeen years as the Chief Executive of Incommunities Group Limited, I have taken the decision to retire at the end of 2020. This has been a difficult decision but, with the organisation in great shape following our recent successful bond issue, the roll out of the 2040 strategic plan and retaining the highest level of assessment from our regulator, the time is right for me to move on to a new chapter in my career."

4.3 The Group Board has appointed Julie Lawreniuk to Incommunities Treasury PLC, the bond issuer. Julie is a member of the Incommunities Group Board.

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 113 social housing and mixed tenure units over eight sites. Four of these units were built for outright open 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 intends to bid for 196 units under the Homes England CME. In addition, the Company continues to seek opportunities for land acquisition and housing development, which has the potential to generate surpluses through outright open market sale.

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 £298,898 (2019: £302,945). 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 2.56 (2019: 2.27) and Gearing (Assets) is 46.4% (2019: 49.0%).

7. Covid-19

7.1 As a result of the Covid-19 pandemic, the Group has revisited its budget and business plan for 2020/21. This has resulted in a very prudent reduction in forecast surplus for the year of some £7m. This is primarily as a result of additional provisions for voids and bad debts and the loss of income from the sale of social housing properties. These effects are expected to quickly reverse, and by year three of the business plan, the effects are expected to be negligible. The medium and long-term effects of the pandemic are judged to be minimal.

7.2 From an operational standpoint, the Group quickly arranged for its office based staff to work from home and this is now running smoothly. During the last few months, the Group has primarily concentrated on delivering emergency repairs and carrying out void repairs. This involved furloughing some of the Group's tradespeople. The Group is now working towards reopening its offices and reinstituting its normal repairs service.

7.3 The Group is expecting to sign-off its financial statements for the year ended 31st March 2020 in August 2020.

8. Outlook

8.1 Due to the Covoid-19 pandemic there remains some uncertainty about the future operating environment. However, the current economic environment remains relatively benign with low interest rates and low inflation. We anticipate that there will be some pressure going forward on wage increases, which form a significant element of our operating expenditure, but this should be manageable.

8.2 The Covid-19 pandemic aside, the business outlook is relatively positive with continuing opportunities for growth and development and the Group's improved operational and financial capacity to take advantage of these opportunities.

8.3 The Group is looking to sell £25m of its £50m retained bond to support its development programme and to allow it to take advantage of the opportunities available, where these compliment the Group's existing activities and meet with its strict appraisal criteria.

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 2020

*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 2020

Appendix 3

Key Financial Performance Indicators and Financial Covenants for the Year Ended 31st March 2020

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