business plan 2015-20

www.coastandcountryhousing.org.uk

Business Plan 2016-2021

(April 2016 Update)

Business Plan 2016-2020 | April 2016 Update2

Introduction .................................................................................................................................................. 3

Plan Assumptions ............................................................................................................................................. 4

Development ............................................................................................................................................... 9

Treasury Management .......................................................................................................................... 11

Financial Reporting Standard (FRS) 102 ..................................................................................... 12

Sensitivity Analysis and Stress Testing .......................................................................................... 12

Key Risks ........................................................................................................................................................ 13

Appendix ...................................................................................................................................................... 14

Contents

Business Plan 2016-2020 | April 2016 Update 3

Business Plan 2016-2020(April 2016 Update)

Introduction

Background

Strategic Context

This document is the latest revision of Coast & Country’s (the ‘Company’) Business Plan (the ‘Plan’).

This Plan updates the most recent version that was presented to, and approved by, the Company’s Board in October 2015.

The context for this Plan remains one of a challenging business environment. The first four years of the Plan are shaped by the 1% year on year reduction in the rent setting formula and contains an assessment of the progress made to date by the Company in realigning its operating cost base to these reduced income levels. The Plan demonstrates that the Company retains a platform of solid financial fundamentals upon which to base the delivery of its strategic objectives. These fundamentals are welcome and will equip the Company to address the numerous challenges faced by it and the sector in general. The realignment of the Company’s development strategy, in the wake of profound policy changes, in particular the shift away from a rental to an ownership agenda, is a key success factor in the delivery of this Plan.

Once approved by Board, this Plan is required to be submitted to the Company’s regulator, the Homes and Communities Agency (HCA) by 30th June 2016 and to the Company’s funders for approval.

In the Plan approved in April 2015 the Company set out its key corporate aims as follows:

Aim 1: To provide a quality offerAim 2: To support our communitiesAim 3: To expand our businessAim 4: To be a strong, independent viable Company.

Since last year, an updated Corporate Plan has been developed with a view to refreshing the Company’s objectives and aims. This work has reshaped the Company’s corporate objectives around the following three key aims:

Aim 1: Great customer experiencesAim 2: Great homes and placesAim 3: Great business delivery.

This revised Corporate Plan, along with strategies aligned to the delivery of these new Corporate Aims, will be submitted for approval to Board in the summer of 2016.

https://issuu.com/coastandcountry/docs/corporate_plan_2016_-_2020


Plan Assumptions

Interest RatesVariable rate assumptions have been changed since the 2015 Plan. The Company’s treasury management advisers, Savills, have recently reissued revised assumptions as guidance to the sector in the setting of its 2016 Business Plans. These assumptions have been incorporated into this Plan and reflect what continues to be a record period of low interest rates with the Bank of England Base Rate held at 0.5% since March 2009. There is a degree of consensus among economic forecasters that rates will continue at these record lows for some time.

The table below shows the new assumptions for interest rates compared to the Revised 2015 Plan:

As shown above, the rates for the key first five years of the 2016 Plan are forecast to be considerably lower than the Revised 2015 Plan. Indicative of the current low interest rate environment is the recent five year fixing of £20m of the Company’s variable rate debt at an ‘all in’ rate of 2.39%. Excluding the margin on the loan of 1.3% from this price shows how low rates currently are.

The above rates apply only to the Company’s variable debts. Of the £190m of borrowings at the start of the Plan, £140m is fixed at a range of rates so the impact of any increases in interest rates is limited to only £50m of the Company’s debt. The

The 2016 Plan has been compiled in the usual manner. The basis for the Plan is the current year Budget. Board approved the 2016/17 Budget in March. The Budget position is then updated with any changes in operating conditions such as sales forecasts. Using core planning assumptions, this revised Year 1 position in the Plan is then extrapolated across a 30 year planning horizon. This section of the Plan sets out these planning assumptions.

Year 2016 Plan Revised 2015 Plan

2016/17 1.5% 3.0%

2017/18 2.0% 3.5%

2018/19 2.25% 4.0%

2019/20 2.75% 5.0%

2020/21 3.5% 6.0%

2021/22+ 6.0% 6.0%



InflationBoth core inflation measures, the Retail Prices Index (RPI) and the Consumer Prices Index (CPI) are critical to how the Plan assumes both income and costs increase over the 30 year duration of the Plan. As with interest rates, Savills have produced their RPI inflation forecasts for the 2016 business planning round and these are set out in the table below:

The above table shows an expectation of higher average RPI levels in the next five years than envisaged in the Revised 2015 Plan, before the restoration of the unchanged long term RPI assumption of 2.5%. This hardening of RPI in the medium term is a challenge for the Plan, coinciding as it does with the 1% rent reduction regime for broadly the same duration.

CPI levels which have, until recently, driven the rent setting formula are rendered somewhat academic for the next four years now that the year on year 1% rent reduction regime has commenced from April 2016. We are incorporating a CPI assumption of 2.4% for Year 5, followed by the reversion to a long term assumption of 2.0% for the remainder of the Plan.

A key decision for the Plan for Year 5 and beyond is whether we assume the return of the CPI+1% formula that was the ten year settlement prior to the introduction of the four year 1% rent reduction regime from April 2016. There are persuasive arguments on both sides of this debate. Those who argue that future rents should increase at ‘flat’ CPI claim that future governments will continue to drive efficiencies from the sector, as well as looking to restrain the cost to the Exchequer of the burgeoning housing benefit bill. Those who argue for the restoration of the CPI+1% formula claim that this will enable the sector to boost much needed housing supply by leveraging future revenues to build in a ‘no grant’ environment.

Year 2016 Plan Revised 2015 Plan

2017/18 2.8% 2.0%

2018/19 3.0% 2.4%

2019/20 3.1% 2.5%

2020/21 3.1% 2.5%

2021/22+ 2.5% 2.5%

fixed rate terms of £40m of this £140m will expire over the next three years. Assuming the continuation of this low interest rate environment there will be further opportunities to reduce the Company’s average cost of debt by entering into further attractive fixed rates along the lines of the one recently concluded.

The long term assumption for interest rates in the Plan has been retained at 6.0%. The increase from the 3.5% to 6.0% in 2021/22 looks unlikely and represents something of a spike but is a prudent assumption that anticipates the eventual restoration in the long term of a more orthodox interest rate environment than has been experienced in the last seven years.


Based upon discussions with a range of stakeholders, including local peer organisations, this base Business Plan has assumed the reintroduction of CPI+1% for rents from Year 5. It does so to demonstrate the increased development activity that could be undertaken by the Company in this eventuality. In a sense, the argument as to whether CPI+1% should be included or excluded from base Plans is moot. Any organisations that include CPI+1% must be able to demonstrate, via stress testing, a viable future without the return of the 1%. Those who exclude the 1% inflator must be able to demonstrate its plans in the event of the 1% being reinstated.

This Plan recommends the reversion to the CPI+1% rent increase formula from Year 5 of the Plan. This decision will be revisited each year as the rent reduction period evolves and robust stress testing of both scenarios will be a permanent part of the annual business planning environment over the next four years.

Management and Maintenance CostsThe Revised 2015 Plan estimated cumulative reduced income of £16.1m due to the four year 1% rent reduction regime. Among other responses, for example reduced development activity, the Revised 2015 Plan also identified the need for compensating reductions in the Company’s management and revenue maintenance costs.

The Revised 2015 Plan identified the need to reduce cumulative Management Costs from 2016/17 to 2019/20 to £44.8m. The 2016 Plan demonstrates progress against this objective with equivalent cumulative Management Costs of £44.4m, £0.4m ahead of the target, achieved despite higher RPI assumptions for Management Costs. This position reflects the work carried out to date in reviewing and reducing operating costs in general, the biggest project being the 2016 staffing restructure. The figures in the Plan are a prudent estimate of the savings that will be achieved once the new structures are finalised.

Management Costs are forecast to increase in line with the above RPI levels, the exception being staff costs which are forecast to rise by RPI+0.5%. This planning assumption is retained as it is driven by the need to demonstrate an achievable and prudent plan. Current, and planned, initiatives in continually reviewing the Company’s operating cost base suggest that this Plan’s assumptions can be improved upon further in future years.

Cost reduction targets for Revenue Maintenance Costs were also applied to the Revised 2015 Plan with cumulative Revenue Costs from 2016/17 to 2019/20 of £58.7m. The 2016 Plan currently estimates Maintenance Revenue Costs over the four year period of £59.2m. Whilst these costs are £0.5m higher than the Revised Plan, once the staffing restructure is completed we are confident that the revised operating cost base for maintenance activity will be an improvement on the 2016 Plan position.



The table below shows cumulative Management and Maintenance Costs compared to the Revised 2015 Plan:

The above position demonstrates that the Company is on course to deliver its operating costs reduction targets identified in October 2015. At the time these targets were high level and aspirational in nature. Since then both actual 2015/16 financial results and the 2016 staffing restructure work have added substance to these plans and provide increased confidence that they can be delivered and exceeded.

Year 2016 Plan (£m) Revised 2015 Plan (£m) Diff (£m)

2016/17 25.8 25.8 0.0

2017/18 25.0 25.7 0.7

2018/19 25.6 25.2 (0.4)

2019/20 27.2 26.8 (0.4)

Cumulative 103.6 103.5 (0.1)

Stock Condition CostsUpdated 30 year stock condition information is included in the Plan with planned investment activity smoothed where deemed necessary to optimise delivery. 2016/17 constitutes the final year of the current five year stock condition cycle. Later in 2016 we will be commissioning valuers to carry out the five yearly stock condition survey that is required by the Company’s funders. The 2017 Plan will therefore include this updated survey which will be complemented by the Company’s own stock condition data.

Rent Loss – Voids and Bad DebtsThe Revised 2015 Plan incorporated the following rent loss assumptions:

• Void loss 3.0% • Bad debts 1.75%

This combined 4.75% rent loss provision was deemed a prudent response to various challenges faced by the Company both in terms of demand issues in some of our areas of operation and the threats posed by welfare reform changes.

We have reviewed these areas closely for 2016 and have arrived at the following assumptions:

• Void loss 3.0% • Bad debts 1.9%


Other Social Housing Income

Non-Social Housing Income

Right to Buy (RTB)

The Company’s void performance has been strong in the face of ongoing challenges so the 3.0% void loss assumption has been retained. Bad debt losses have been increased to 1.9%, from 1.75%. Although actual performance remains better than this assumption, as the outcomes of welfare reform activity take hold the Company feels it prudent to increase this assumption further. The ‘Rent First’ objective of the Company’s Customer Services Strategy is a key initiative aimed at outperforming these planning assumptions over the medium term.

In addition to the Company’s core social housing lettings business, some of its activities are categorised as ‘Other Social Housing Activities’ as defined by the HCA. Income from first tranche shared ownership sales is one of these activities and will be covered in the Development section of this Plan. In addition, activities such as income from the Company’s Garden Scheme, most of its Independent Living Service (ILS) activity and water rates commission comprise its ‘Income from Other Social Housing Activities’. This amounts to approximately £1.5m of turnover in 2016/17 and is forecast to generate surpluses of circa £0.6m in the first five years of the Plan.

Non-Social Housing Activities relate primarily to the Company’s outright sales activities and income from commercial properties, shops and garages, and a range of sundry income such as work by the finance team on behalf of other organisations are included in this category. In 2016/17 the Plan envisages £1.1m of ‘Income from Non-Social Housing Activities’ will be generated with a forecast cumulative surplus over the first five years of the Plan of £4.0m.

We have assumed 30 RTB sales for the first ten years of the Plan, with sales and selling price assumptions based upon averages over the last three years of activity. We have consulted with our peers in the region to gauge whether to adjust our assumptions for the introduction of Voluntary Right to Buy (VRTB), which is currently being piloted by five organisations. Our peers have forecast little if any changes in RTB sales.

We have reviewed the work of the VRTB pilots as well as the various steering groups established by the National Housing Federation (NHF) on VRTB. Despite continued assurance that organisations will be fully compensated at market value for the loss of any properties through VRTB, there is still a shortage of tangible information as to how the arrangement will actually work in practice. In addition the Company’s definition of ‘Total Income’ in its loan covenants includes the proceeds from RTB sales. We do therefore need to be cautious in the levels of RTB that we forecast. If we take a view that RTB levels will increase significantly we will be locking such targets into our covenant performance which may impact covenant compliance if such levels do not transpire. We will continue to monitor the progress of VRTB closely, modelling its impact in terms of capital receipts, replacement development assumptions and impact on long term income and will perform the required sensitivities and stress tests to the Plan as more concrete detail emerges.



Development

Development Units 2016 Plan Revised 2015 Plan April 2015 Plan

Units Units Units

Affordable Rent 518 481 1,144

Shared Ownership 48 76 138

Outright Sales 115 161 269

Empty Homes 148 99 99

Total 829 817 1,650

Development Assumptions

Outright Sales

As stated in the Revised 2015 Plan approved by Board in October 2015, levels of planned development activity have been significantly reduced compared to the programme envisaged in the April 2015 Plan. This was primarily because of the impact of the four year rent reduction regime which required a scaling down of long term development aspirations in order to ensure the Company’s continued compliance with its fixed loan repayment profile. The table below summarises development activity in the 2016 Plan, with the equivalent 2015 Plans’ figures included for comparison:

The table shows a programme of 115 outright sales. This figure relates exclusively to the potential build out of the remainder of the Muston Road, Filey scheme. This scheme is now approximately two thirds complete. The remaining third comprises 115 outright sales units. At the time of compiling this report an Options Appraisal report is being compiled on this scheme. Whilst not pre-empting the outcome of this work, the Plan, for completeness, has assumed the build out, and delivery, of this scheme over the next four years.

Affordable Rent and Shared OwnershipThe Affordable Rent category in the above table consists of 518 units, supplemented by 48 units of shared ownership, in the following key categories:

• Extra Care (224 units, all affordable rent)• Section 106 activity (71 affordable rent, 6 shared ownership units)• Aspirational activity (223 affordable rent, 42 shared ownership units).


The above programme, included in the Company’s 2015/18 Affordable Homes Programme (AHP) bid, comprised an ambitious project to deliver the Extra Care needs in the Redcar and East Cleveland local authority area. Of this programme, the 12 unit Ellerbeck Court scheme has been delivered and work has commenced on the 64 unit scheme at Wheatacres, with completion to take place in 2017. However, government announcements regarding the impact of rent reduction and the uncertainty over the impact of Local Housing Allowance caps on supported schemes places the delivery of the remainder of these schemes in serious jeopardy. We are working with our local authority partner to keep this programme alive and it has been retained in the Plan at this point. However, the combination of the uncertainty over the future for supported housing provision, combined with the timing of the Company’s Peak Debt cast material doubt over the feasibility of delivering the remainder of this programme.

Development Units 2016 Plan Revised 2015 Plan April 2015 Plan

Units Units Units

Ellerbeck - 12 12

Wheatacres 64 64 64

Newbury Rd, Brotton 25 25 25

Luke Senior 40 40 40

Westfield 60 60 60

Wykeham 35 35 35

Total 224 236 236

Extra CareIncluded under Affordable Rent in the table is the following Extra Care programme:

Section 106 Activity

Aspirational Activity

Empty Homes

In the light of the uncertainty around the Extra Care programme the Company has sought to progress a pipeline of Section 106 activity. This strand of work offers a value for money option to continue to increase the supply of good quality affordable accommodation. Section 106 activity remains currently significant. 77 units are included in the Plan, including 6 shared ownership units. The Company is open to increasing this activity should further opportunities present themselves.

265 units of aspirational development activity have been built into the Plan over the 30 year period, incorporating 42 shared ownership units.

The Company has an established track record of bringing empty homes back into use. We envisage the potential to expand the current 100 unit of Empty Homes Purchase and Repair activity by transferring resources from the Lease and Repair strand of the programme.



Treasury ManagementThe Company has a £215m loan facility with a funding syndicate led by the Nationwide Building Society. £194m of this facility is currently drawn. As at the start of the Plan period, the Company had cash surpluses of £13.8m which are invested in a range of deposit accounts.

This Plan envisages a sustained programme of investment activity over the next two years that will take borrowings to a peak of £211.1m by the end of 2017/18, in line with the Peak Debt of the same amount in the same year. As well as meeting the Peak Debt provision this Plan also complies with the Loan Repayment Profile that was fixed in 2015. The loan facility is paid off in full by 2040/41, again in line with our funders’ requirements.

£140m of the £194m drawn loan is at fixed rates and maturities as detailed in the table below:

The Company’s Annual Treasury Strategy (ATS) will be reviewed by Board in July.

Fixed Rate Value Fixed Rate Rate Including Margin (%) Maturity Date

£10m 4.77 5.67 2 Oct 2016

£10m 5.66 6.56 26 July 2017

£10m 4.90 5.80 2 Oct 2017

£10m 5.61 6.91 6 Dec 2019

£20m 1.09 2.39 26 April 2021

£20m 4.19 5.49 30 Sept 2022

£20m 4.30 5.20 30 Sept 2028

£20m 4.19 5.49 30 Sept 2033

£20m 4.04 5.34 1 Oct 2036

£140m - - -

As can be seen from the above, the Company’s development activity, like most of the sector, is facing a range of challenges. Rent reduction, welfare reform legislation and the increased emphasis on the ownership agenda have all placed significant strain on the strategic direction previously set, as exemplified by the Company’s Extra Care programme. In common with all companies in the sector that are committed to developing much needed affordable homes, the current environment offers the potential for tactical opportunities such as S106 activity, whilst the wider development strategy is assessed in the light of new priorities.


Financial Reporting Standard (FRS) 102

Sensitivity Analysis and Stress Testing

This Plan sees two major changes in terms of format. Firstly in our accounting for the Company’s housing portfolio at a valuation rather than at historic cost, and secondly for accounting in accordance with FRS 102.

Key sensitivities applied to the Revised Plan are detailed in the Appendix 1 to this report.

Valuation Accounting

FRS102

For its annual financial statements, the Company has always measured its housing portfolio using the valuation basis of Existing Use Value for Social Housing (EUV-SH). The Business Plan should follow the same approach and this is the first Business Plan in which we have done so.

The Company’s housing properties are therefore valued on the EUV-SH, basis whereby any revaluation losses, or gains, will be processed to the income statement in the year that they crystallise.

Compounding this new look for the Plan’s financial statements is the introduction of FRS102. This new accounting standard requires changes to the accounting treatment of certain items. For example, Social Housing Grant (SHG) which was formerly netted off the cost of the fixed asset to which it related, is now required to be released to the income statement when the conditions relating to the grant, in effect the completion of the property the grant has been obtained for, have been met. This leads to the Company’s surplus increasing to the extent that such grant conditions have been met, rather than reflecting an increase in the Company’s underlying profitability. Also, revaluation gains or losses on housing properties are now required, under FRS102, to be disclosed in the income statement.

There are presentational changes to the Plan in addition to the accounting changes with the Income and Expenditure Account and Balance Sheet renamed as the Statement of Comprehensive Income (SCI) and the Statement of Financial Position (SOFP) respectively.



Key RisksThe Company’s core financial fundamentals are solid. Significant levels of surplus cash, available and secured borrowing facilities, reducing operating costs and strong performance in voids and income management, all contribute to a sound operating platform and provide assurance that the Company is well positioned to deliver on its core business planning objectives.

The Company has a robust and embedded risk management framework which includes the submission of the Corporate Risk Register to Board on a quarterly basis. Included in this Register is Corporate Risk CR12, the ‘risk that the Company is unable to achieve Business Plan assumptions’. A narrative update is provided to Board on a quarterly basis of the range of mitigation activities relating to this risk. The section below offers supplementary thinking on this risk.

All key risks will be subjected to review, assessment and mitigating actions via on-going stress testing and sensitivity analysis of this Plan.

Development Activity and Peak Debt

Income

An area of particular challenge regarding the delivery of this Plan is the interaction between the Company’s development strategy and its obligations regarding Peak Debt. Some of the strong fundamentals above, particularly increased operating cash surpluses, have had the effect of complicating the Company’s desire to utilise its borrowing facilities in accordance with the 2017/18 Peak Debt requirement. This is further exacerbated by the various challenges faced by the Company’s development strategy. The impact of policy changes on the Extra Care programme, the shift to an ownership rather than rental model at national level and operational challenges at individual scheme level all threaten the Company’s ability to carry out its planned investment activity in the timescales dictated by the current 2017/18 Peak Debt requirement. There is a risk that the pace of planned development activity lags behind the timing of Peak Debt, with the potential outcome being reduced development activity and the failure to utilise available borrowings in furtherance of the Company’s development strategy.

There remain significant threats to the Company’s income stream from a range of sources. The on-going impact of welfare reform legislation, including the introduction of Universal Credit (UC), threatens the timely collection of the Company’s rental income. Demand challenges in the Tees Valley area places increasing pressure on lettings and void loss. Rent reduction places significant pressure on income streams in the medium term. The developing RTB agenda likewise casts significant doubt on the stability of income in the long term.

The Company is acutely aware of the individual and collective threat of this range of risks to its rental income. This document points to the plans in progress to ensure the Company’s cost base is aligned to its revised income expectations in the light of rent reduction. The Company continues to secure healthy revenue streams from non-rental activities such as outright and shared ownership sales and income from its ILS. Relevant opportunities for income maximisation in line with the Company’s values and objectives will be pursued to maintain the Company’s track record of financial viability.


Appendix 1: Sensitivities Table

No. Sensitivity

Peak Debt

Peak Debt (£m)

Movement from Peak Debt (£m)

Year Repayment Year

Base Case 211.2 0.0 2 25 2040/41

1 Rents CPI +0% from Year 6 211.2 0.0 2 40+ -

2 1% Increase in RPI Years 2-5 211.6 -0.4 2 29 2044/45

3 1% Reduction in RPI Years 2-5 210.6 0.6 2 25 2040/41

4 1% Increase in Variable Int. Rates Years 2-5 212.0 -0.8 2 26 2041/42

5 2% Increase in Total Voids and Bad Debts Years 2-5 213.0 -1.8 2 28 2043/44

No. Sensitivity

Statement of Comprehensive Income Surplus Years 2-5 (2017/18-2020/21)

17/18 (£000)

18/19 (£000)

19/20 (£000)

20/21 (£000)

Cum (£000)

Var to Base

(£000)

Base Case 13,011 12,976 7,649 5,842 39,478 -

1 Rents CPI +0% from Year 6 13,011 12,976 7,649 5,365 39,001 -477

2 1% Increase in RPI Years 2-5 12,822 12,577 7,038 4,802 37,239 -2,239

3 1% Reduction in RPI Years 2-5 13,201 13,371 8,249 6,847 41,668 2,667

4 1% Increase in Variable Int. Rates Years 2-5 12,164 11,935 6,590 4,667 35,356 -4,122

5 2% Increase in Total Voids and Bad Debts Years 2-5 12,040 11,965 6,573 4,660 35,238 -4,240



Multi-Variable Sensitivities Table

Scenario 1 2 3 4

Applied from year 5

Applied from year 5

Applied from year 5

Applied from year 5

CPI As BP As BP As BP As BP

RPI -0.25% -0.25% As BP -0.25%

LIBOR -0.50% -1.50% +0.5% -1%

Rental Increases As BP +0.5% -0.5% As BP

Management Costs RPI +0.5% -0.50% +0.5% Staff Cost Inflation RPI +0.5%

Repairs and Maintenance RPI +0.5% -0.50% +0.5% RPI +0.5%

Development Cost Inflation As BP As BP +0.5% RPI +0.5%

Voids and Bad Debts Voids and Bad Debts at 2%

© COAST & COUNTRY 2016

www.coastandcountryhousing.org.uk

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01642 771300

14 Ennis Square, Dormanstown, Redcar, TS10 5JR

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