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Industrial and Provident Societies Act No. 22557R

(Registered with the Homes and Communities Agency No. LH2833)

EAST HOMES LIMITED

FINANCIAL STATEMENTS

31 March 2013

East Homes Limited Report and Financial statements for the year ended 31 March 2013

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Contents Pages Board members, senior staff, auditors and bankers 2 Operating and financial review and Board report 3 - 20 Independent auditors’ report 21 Income and expenditure account 22 Statement of total recognised surpluses and deficits 23 Balance sheet 24 Notes to the financial statements 25 - 61


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Board Members, Senior Staff, Auditors and Bankers Board Chair Johanna Holmes (resigned 20th May 2013) Paula Higson (appointed 20th May 2013) Vice Chair Sheila Lewis Treasurer Terry Price Other Members Dominic Jebb Philip Fearn Angela Williams Mehban Chowdery Andrew Newell Marianne Skelcher Shirley Watson June Barnes Senior Staff Director of Communities Pamela Gardner & Neighbourhoods Company Secretary Henry Potter Registered Office 29-35 West Ham Lane Stratford London E15 4PH Auditors Grant Thornton UK LLP 101 Cambridge Science Park Milton Road Cambridge Cambridgeshire CB4 0FY Bankers Barclays Bank plc Business Banking 1 Churchill Place London E14 5HP Registered under the Industrial and Provident Societies Act No. 22557R


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT The Board of East Homes Limited presents its report and audited financial statements for the year ended 31 March 2013. Principal activities East Homes Limited is part of the East Thames Group, and owns or manages in excess of 14,500 affordable homes and other property assets in east London and Essex. We provide homes for rent and affordable home ownership. We also own care homes which are operated by East Living Limited, a specialist subsidiary of the East Thames Group providing care & support activity, and a number of foyers providing accommodation to disadvantaged young people. The Association’s mission is to make a positive and lasting difference to the neighbourhoods in which it works. It does this by:

• Providing affordable homes for people in East London and Essex. This includes social rented homes and a range of affordable rented and home ownership options.

• Building quality new homes in East London and Essex and improving neighbourhoods.

• Providing quality housing services that meet the needs of our customers.

• Providing supported care and accommodation for people with more intensive needs,

including young people at risk of being made homeless, elderly people, people with mental health and learning disabilities and women fleeing domestic violence.

• Offering a range of programmes to help people get back into work or training, as well as

initiatives to strengthen communities. We know that providing a safe and well maintained home is the most important part of our work, but our philosophy has always been to do more than just housing and to help people improve their neighbourhoods and their lives. Our main operational subsidiaries East Place Limited - currently providing property management services. The company is one of three partners in Triathlon LLP, the vehicle established to deliver the athletes village for the 2012 Olympics, and post Olympics, converting the Athlete’s accommodation into affordable housing. East Thames Partnership Limited - A wholly owned subsidiary of East Homes Limited. The company is currently developing 195 units for private sale on the Ocean Estate in Stepney Green, East London. These subsidiaries are not consolidated within East Homes Limited financial statements as the parent company, East Thames Group Limited, publishes consolidated financial statements.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) Group objectives and strategy The strategic plan supports the delivery of the Group’s mission “to make a positive and lasting contribution to the neighbourhoods in which we work”. The current strategic plan is being revised to take account of the new operating environment and will run from 2013 to 2016. The strategic objectives for the year under review were: 1. Good housing services - work with our residents to establish and then to meet agreed

standards on housing service delivery and as a result improve the services we provide to them.

2. A strong and valued organisation – ensure that we remain an independent organisation valued by our stakeholders and with activities focused on making a real difference in East London and Essex.

3. Improving lives - deliver a range of services to our residents and other local people which

will improve their life chances by providing care and support and by providing access to training, employment and a range of community development opportunities.

4. Quality developments - contribute to the physical regeneration of the neighbourhoods in which we work and provide well designed and cost effective new homes to local people on low and modest incomes.

5. Olympic opportunities - contribute to the creation of a new and successful community at the Athletes' Village and help to ensure that the 2012 Olympics and its legacy has provided real benefits to local people.

We have made significant progress towards delivering the mission and achieving the aims set out in the strategic objectives. Many of the objectives have already been achieved. The following are the most notable achievements in 2012/13:-

• Helping our residents to deal with the impacts of welfare reform. We have offered free welfare benefits advice; directly contacted more than 500 residents at risk of being affected by the benefit cap and the ‘bedroom tax’; and offered them free employment and training programmes.

• Achieving Best Companies ‘Ones to Watch’ accreditation.

• Helping 223 people to find jobs and 130 people to take part in further education or training. This success was achieved through our employment and training programmes which provide a range of support for people wanting to find work.

• Completing 653 new homes, including the 576 we committed to with the Greater London Authority. These homes span a range of tenures including social rent, shared ownership, intermediate market rent and private sale.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued)

• Successfully managing the regeneration of the Ocean Estate in Stepney Green together with Tower Hamlets Council. The £220m regeneration completes in 2013/14. During 2012/13 we completed the refurbishment of existing council homes, started work on landscaping the estate and handed over the first phase of homes for sale.

• Obtaining planning permission and progressing the regeneration of the New Union Wharf estate on the Isle of Dogs. This is an East Thames estate and the investment will improve homes for existing residents and offer new homes and a wider range of tenure options in the future.

With our partners in the Triathlon Homes consortium we are on track to deliver 1,379 affordable homes on the East Village (the former Olympic Athletes’ Village). This includes 675 homes at social rent. The first residents are due to move in from late summer 2013.

Business and financial review The Board is pleased to report a surplus of £2.8m (2012: £1.7m) in yet another challenging year for the Association. We continued to provide quality housing services that represent value for money, and invested in our housing stock. The core business of providing quality landlord services remained financially robust in a climate where the external economic, political and regulatory environment continues to create uncertainty. The Association continues to strengthen the business by seeking to improve margins, achieve higher levels of customer satisfaction, strengthen controls and develop a performance culture across the Group. We have undertaken a number of significant changes to the business as part of the Group’s “Improving East Thames” programme. These changes have reduced the Group’s cost base by more than £9.4m through a combination of staff savings, improvements to processes and technology, and new partnering arrangements for repairs and planned maintenance services. The Association’s finances benefitted from the £250m bond issued in June 2012 via East Finance plc, a fellow subsidiary of the East Thames Group. This financing provides the Association with a much stronger and diversified funding position, allowing it to comfortably meet its near term funding requirements. £106.5m of the bond proceeds were also used to prepay existing bank loans. The results for the year were affected by property impairment charges of £3m reflecting the changes in values in a difficult property market. (see note 2) Turnover increased by 17% to £82.5m and operating expenses increased by 15% to £61.25m. Surpluses on property disposals increased by 20% to £2.93m. Net interest payable in the year increased to £21.3m (2012: £18.2m).


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) Total assets less current liabilities increased by £144m to £1,029m largely due to increased spend on construction of housing properties. Savills (L&P) undertook a full valuation of our housing stock at 31 March 2013. This valuation incorporates our full stock condition survey data, revisions to our target rents and detailed evidence on our housing management costs. Housing properties are shown in the accounts as follows: Properties held for letting are held at Existing Use Valuation for Social Housing (EUV-SH), shared ownership properties and rent now buy later are held at at EUV-SH less the net present value of the liability to repay Social Housing Grant, and properties under construction are held at cost less attributable Social Housing Grant. The value of the housing stock at 31 March 2013 was £916m (2012: £810m). During the year the Association operated a defined contribution Social Housing Pension scheme (SHPs), managed by the Pensions Trust. The previous final salary scheme was closed to new employees on 1 April 2008, and from 1st April 2008 to 31 March 2011 new employees had the opportunity to contribute to a money purchase pension scheme provided by Friends Provident. This scheme closed on 31 March 2011 and all members were transferred into the new defined contribution scheme. All new employees have the opportunity to contribute to the new scheme. The Association is consulting with the Pensions Trust at present on the increased level of contributions required in the future to maintain the previous scheme at the same level of benefits on retirement or whether to offer different contribution level options that may decrease the pension benefits on retirement. With a high proportion of staff not contributing to the current pension scheme the Association continues to prepare for the impact of auto-enrolment during 2013/14. A key priority for East Thames Group in 2012/13 was to ensure that our core housing management services remained strong and that we worked with our residents to improve all aspects of our service. This focussed approach, resulted in a strong operating performance across many areas of our business and the achievement of the Customer Service Excellence Award. We also had impressively low rent arrears at 3.58%; this was achieved despite the challenging economic climate.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) Association highlights - five year summary for the year ended 31 March

2013

2012

2011

Restated

2010

Restated

2009

£’000 £’000 £’000 £’000 £’000

Income and Expenditure

Turnover 82,485 70,640 63,318 79,616 77,428

Cost of sales and Operating costs (61,254) (53,212) (45,467) (63,671) (65,284)

Operating surplus 21,231 17,428 17,851 15,945 12,144

Net interest payable (21,334) (18,159) (19,797) (19,011) (16,617)

Surplus on sale of assets 2,932 2,441 4,820 3,976 7,308

Exceptional items - - - - -

Tax 9 (38) (63) 6 (284)

Surplus/(deficit) for the year 2,838 1,672 2,811 916 2,551 Balance Sheet Performance The following is a summary of the balance sheet for the Association over the last five years. Association highlights five year summary for the year ended 31 March

2013 £’000

2012 £’000

2011 £’000

Restated

2010 £’000

Restated

2009 £’000

Balance Sheet

Housing properties at valuation 915,804 809,992 767,428 744,865 696,157

Other tangible fixed assets 26,569 35,069 35,671 36,489 60,886

Investments 22,460 15,884 13,036 14,974 -

Long term debtor 32,012 17,852 - - -

Net current assets/(liabilities) 32,450 5,860 (22,972) 6,755 13,979

Total assets less current liabilities 1,029,295 884,657 793,163 803,083 771,022

Long term creditors 578,248

515,219

440,938

473,452

473,240

Provisions and other long term liabilities 1,040 648 576 593 275

Reserves 450,007 368,790 351,649 329,038 297,507

Total funding 1,029,295 884,657 793,163 803,083 771,022

Accommodation figures Total housing stock owned or managed at year end

15,146

14,608

12,756

12,739

12,723


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) Business review – key performance measures We have a number of key performance measures that monitor the delivery of the mission and the strategic plan objectives. The following are the performance results as at 31st March 2013.

Measure Actual Target Comments on performance Number of homes

12,183 None

Net promoter score1 – housing

15.8

15.0

The target was exceeded in this area.

Net promoter score1 – care and support

36.8

20.0

The target was well exceeded in this area, reflecting the ongoing positive work carried out within our care and support services.

Rent arrears (%)

3.58% 4.6% Rent arrears continued to be managed well, with the target being exceeded

Repairs completed on time (%)

91.1%

95%

The target was not met in this area. This was due to the restructuring of the repairs service and disengagement from the previous contracts. Satisfaction

with repairs service

62.53%

75%

Number of homes with valid gas certificates

99.99%

100%

The target was met in this area by a very slim margin. This was due to one home being without a valid certificate at year end as the contractors were unable to gain access to the property.

Development – homes handover

653

576

The target was exceeded in this area.

1 Net promoter score measures the customer experience by identifying the most satisfied and most dissatisfied customers. A score of 1 or above is a good result and a score of 50 would be defined as excellent. Value for money During 2012/13 we completed a transformation programme, improving the experience of the Group’s customers and enabling underlying and annualised savings of more than £9.4m to be achieved from 1 April 2013. We have identified further annualised savings of £2m to be implemented over the next three years. The following are the main actions that have or will deliver these savings:-

(a) implementation of effective vacancy management and voluntary redundancy packages supported by improved technology and shorter workflow processes that delivered annualised savings of £4.6m per annum.

(b) implementation of our strategic maintenance programme, delivering a holistic customer experience alongside responsive and planned maintenance services. This will deliver improved quality and savings of £4.2m per annum from 2013/14.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued)

(c) delivering change programmes with internal staff resources with capacity and skill building provided by a small team of consultant experts.

(d) implementation of a leadership and management development programme that will better equip staff to deliver in a more competitive environment.

(e) implementation of a new self service portal for residents which will complete later this year. This will give residents access to their own online records where they can update their details, check their rent account, report a repair and access a range of other services.

(f) Improved governance and delivery of the 2013/14 corporate plan which now prioritises investment to those that meet strict business criteria.

A value for money assessment will be published on our website in September 2013 in line with Housing and Communities Agency (HCA) requirements evaluating our success in meeting the business strategy, delivering value and making use of our resources. This statement will be aligned with the value for money strategy and the 30 year business plan. Capital structure, treasury policy and compliance with lenders covenants The Group treasury policy sets out the controls and parameters for treasury activities which are delegated to and approved annually by the Board of East Treasury Limited (the Group’s special purpose borrowing vehicle). The policy determines how all the Group’s subsidiaries operate in relation to treasury matters and East Homes Limited complies with these policies. The main objectives of the treasury policy are to ensure that the Association has sufficient cash to fund operational activities and new investments, to ensure the Association’s finances remain risk adverse, to ensure lenders’ covenant compliance is maintained and to ensure the Association uses its financial resources prudently. Loan Structure As at 31st March 2013, East Homes Limited had total loan facilities of £689.6m and outstanding loans of £572.1m with £117.5m of secured loan facilities available to draw down. The loan facilities were as follows:- Lender East Treasury Ltd (bank loans) £432.4m

Facility

East Finance plc (Sterling bond) £250.0m Orchard brook Ltd £5.8m The Housing Finance Corporation Ltd £1.4m Total

£689.6m

East Treasury Limited, which acts as a borrowing vehicle for the Association, had borrowed £314.9m of bank loans which were directly on-lent to East Homes Limited. East Finance plc issued a £250m bond which was also directly on-lent to the Association. The £314.9m of drawn bank loans consisted of £20.0m of revolving loans and £294.9m of term loans, including £50m of Lender’s Option Borrower’s Option (LOBO) loans which are subject to periodic re-pricing.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) Debt Repayment Profile The treasury policy prescribed by East Thames Group Limited for its subsidiary undertakings (together “the Group”) includes as an objective that the Association does not, within the near term, have to refinance material amounts of debt in any one year. The weighted average maturity of debt facilities across the Association is 25 years, or 21 years if the LOBO loans are cancelled at the first re-pricing dates. Fixed Charge Security All loan facilities are secured using individual properties owned by the Association. Loan facilities arranged by East Treasury Ltd and the bond arranged by East Finance plc are secured through the Prudential Trustee Company Ltd. All other loans are secured directly by the Association to the lenders.

In addition the Association has provided property security in favour of hedge counterparties as support for mark-to-market valuations of interest rate swaps. Financial risk management The Group uses various financial instruments, including loans and cash, and other items such as rental arrears and trade creditors that arise directly from its operations. The main purpose of these financial instruments is to provide finance for the Group’s operations. The existence of these financial instruments exposes the Group to a number of financial risks. The main risks arising from the Group’s financial instruments are considered by the directors to be interest rate risk, liquidity risk and credit risk. The Board review and agree policies for managing each of these risks and they are summarised below. Interest rate risk management The Group’s treasury policy seeks to protect the Association from adverse interest rate volatility, to provide an appropriate level of certainty of interest costs and to ensure that the Association is able to comply with the financial covenants attaching to financing agreements. This policy seeks to make prudent use of approved financing and investment instruments within the portfolio. The policy seeks to maintain at least 70% of Group debt outstanding at fixed interest rates whilst recognising that it may be necessary to operate either above or below this level on a shorter term basis.

The policy allows for a significant proportion of debt to be hedged by way of a combination of embedded fixes and stand-alone interest rate swaps including such swaps that can be cancelled at the counterparties’ option (cancellable swaps). This strategy recognises that, as interest rates start to increase over time, a portion of cancellable swaps will be called and cancelled by the counterparty banks. This will drive the underlying borrowings onto a variable LIBOR based interest rate.

Within the 31 March 2013 loan portfolio, 83% is hedged by way of embedded fixes or interest rate swaps (including cancellable swaps). These hedges give rise to a mark-to-market value that recognises the change in market interest rates since inception of the hedge as well as the value of the option component of the cancellable swaps.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) At 31 March 2013 the mark-to-market exposure on the £150m net notional of fixed interest rate swaps amounted to a £93.4m liability which is substantially secured by charging East Homes Ltd properties and £8.4m cash collateral in favour of the counterparty banks. A further £15m of interest rate fixes were embedded in the underlying loans as were contractual margins on certain floating rate loans. Together these carried a mark-to-market liability of £61.0m. Property security of £23.9m is provided in support of this mark-to-market liability. As interest rates increase it is anticipated that this mark-to-market value will reduce. The weighted average cost of debt, inclusive of margins and hedging activities was 4.7% as at 31 March 2013.

Lender Option Borrower Option (“LOBO”) loans amounted to £50m. No property security is required for the mark-to-market values of the fixed rate obligations embedded in these transactions.

East Homes raised £250m of new fixed rate debt during the year and repaid £106.5m of floating rate bank debt. The new debt originated from a 5.486% £250m 30 year sterling bond issued by East Finance plc, a fellow subsidiary undertaking, who immediately on-lent the funds to East Homes. To avoid becoming over-exposed to fixed interest rate obligations, East Homes simultaneously effected changes in its swap portfolio to leave it with fixed rate obligations of £472m, compared with £482m beforehand. Liquidity risk management The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and invest cash assets safely and profitably. The Group’s treasury policy requires that sufficient liquidity in cash and lending facilities are in place to fund the Association’s business activities for at least 12 months. Current projections indicate that the Association has sufficient committed funding facilities to comfortably fund its current development programme and other known requirements for at least the next 12 months. Cash management As at 31 March 2013 the Association had £21.9m of cash and deposits. The Group operates conservative investment parameters that state cash may only be invested with limitations by counterparty. The policy limits investment institutions to those authorised by the Financial Conduct Authority as UK deposit takers and which also satisfy the Group’s minimum credit rating criteria. Such deposits are primarily placed with the Group’s clearing bank.

Credit risk management The Group’s principal credit risk relates to tenant arrears. This risk is managed by providing support to eligible tenants with their application for Housing Benefit and to closely monitor the arrears of self-funding tenants. As noted previously, proposed changes to the benefits system has been identified as a key risk to the Group. Loan covenant compliance Loan covenants are all based on the results of the Association and relate to interest cover, gearing, and asset cover. These are monitored monthly and reported to lenders annually. The Association was in compliance with all covenants throughout the year ended 31 March 2013 for all loan facilities including the sterling bond. The results below are based on the most stringent bank covenant tests.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) Covenant Actual Covenant Gearing : % of borrowings to total assets 57% ≤70% Interest Cover (annual) : total interest as % net surplus 136% ≥95% Interest Cover (3 year rolling): total interest as % net surplus 139% ≥105%

Triathlon Homes LLP East Place Limited, a wholly owned subsidiary of the Association, has a one-third interest in Triathlon Homes LLP, a joint venture company. The other parties to the joint venture are First Base, an urban development and investment company, and Southern Housing Group. The maximum investment required by East Place is capped at £3.5m in the form of providing development services for which it will receive a commercial return and a one-third share of future surpluses arising from Triathlon. The principal activity of the partnership has been the construction of the Athlete’s Village for the London Olympics. After leasing the village to the Olympic Development Authority for the duration of the Olympics and Paralympics, the village will be redeveloped into 2,818 homes. A joint venture between Qatari Diar Real Estate Investment Company and Delancey will own 1,439 homes for private rented accommodation. The remaining 1,379 homes will be owned by Triathlon Homes and used for affordable housing in Stratford which the Association is expecting to manage. Risks and uncertainties Key risks Nature of risk Mitigation and management Welfare Reform

Under-occupation penalty (“bedroom tax”), universal credit and benefit cap are likely to affect rent collection, arrears and operating cash flow. The social effect of the reforms will impact on social and economic activities regeneration and housing management.

Detailed review of impact on customers, training staff, modifying rent collection procedures and information technology. Programme of communication and training for customers, staff and Board members. Re-assessed social and economic programmes. Business plan includes provision for risk of additional loss.

Further reductions of public spending

Additional cuts in revenue and capital funding will restrict the ability to build and grow the business and to build new homes. Adverse effect of any change to rent policy will impact on business plan and valuations.

Developing new initiatives to reduce the reliance on capital funding. The “Improving East Thames” programme was designed to improve operational efficiency and create the financial capacity to develop more homes.

Impact of FRS .

FRS 102 will have a major impact on the presentation of the accounts of all Registered Providers, and on the definition used to measure financial covenants

We have made an initial assessment of the impact of FRS 102 on the business plan and on financial capacity.

Housing market

New properties for shared ownership and outright sales

Prudent values are included in scheme appraisals and are supported by


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are exposed to adverse change in the property market. The Group’s business plan could be adversely affected by a material and sustained downturn in the property market.

independent professional advice. Close monitoring of actual and planned sale programmes is undertaken. We will develop alternative use plans in the event that expected values fail to materialise and / or sales are delayed.

Economic conditions

Increase in RPI or CPI would normally have a favourable impact on business plan. The cap on the annual increase in welfare benefits rents would result in a sub-RPI increase in rents combined with a RPI increase in costs. Reduction in LIBOR would increase mark to market exposure whilst an increase in LIBOR could increase interest costs and lead to cancellable swaps being called.

Business plan subject to extensive scenario modelling for a wide range of economic conditions. Of the total debt portfolio, 83% is hedged against adverse movements in interest rates. The section of this report on capital and treasury policy describes more fully how interest rate risk is managed.

Regulatory changes – limiting investment

Ring-fencing of social housing assets, combined with further reductions in grants and / or restrictions on affordable/ social rents would restrict capacity to invest in new homes.

The Board has considered mechanisms to ring-fence and protect social housing assets whilst maintaining a programme of regeneration and development. All scheme appraisals consider and model the risk of ring fencing and changes to the rent regime.

The year ahead - meeting the challenges and responding to the risks The Board has approved a new strategic and financial plan for 2013 to 2016. The plan is built on the success of the previous strategic plan with the objective of making people’s lives and local neighbourhoods better, through providing quality landlord services, building new homes, providing care or employment support. The mission of East Thames has not changed. The new plan reflects the impact of welfare reform on our communities and our plans, the condition of the UK economy and the coalition government’s policies to stimulate investment in new homes. The plan maintains our focus on the regeneration of east London and Essex and recognises that we are a social enterprise, a business and a registered social landlord. This means that our plans are designed to deliver the mission in a businesslike way, making best use of our resources, focussing on value for money and efficiency and paying close attention to risk. The strategic plan has three principal aims:-

(a) Aim 1 – helping our residents cope with a challenging external environment

(b) Aim 2 – working with our partners to regenerate east London and Essex neighbourhoods

(c) Aim 3 – continuing to improve our business, creating the capacity for growth.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) The business (financial) plans supporting the strategic plan have benefited from the efficiency savings that have been achieved and we envisage achieving further value for money savings. The plan continues to emphasise the need for further investment in new homes, whilst also recognising the need to ensure that social housing remains protected. The business plan has been modelled under a number of alternative economic scenarios and takes into account the strategic risks and uncertainties faced by the business, including being prepared for the impact of IFRS. In the forthcoming year the business will build on the success of earlier years, by embedding the new maintenance contract, consolidating changes to the customer service delivery model, further improving the system of internal controls and governance and continuing the delivery of the successful development programme. Statement of compliance In preparing this Operating and Financial Review and Board report, the Board has followed the principles set out in the Statement of Recommended Practice updated 2010. Board members and executive director The Board members and director are shown on page 2. The director is a member of the Group’s senior management team. She acts with authority delegated by the Board. The director’s remuneration package is included in note 10 to the accounts. Insurance policies indemnify Board members and officers against liability when acting for the group. Employees We are committed to valuing equality and diversity in all aspects of our work, from providing affordable housing and support services, to delivering social regeneration programmes. Equally, we recognise that as an employer, our practices must create an inclusive environment for all our staff, contractors, and Board members. We aim to eliminate unfair treatment and discrimination in the services we provide and to promote and value respect in everything we do. We expect everyone who works for us to share these values and support us in our aims. The Board has responsibility for health and safety. The group has prepared detailed health and safety policies and has in place education/ training programmes and systems to monitor the implementation and management of those policies. Donations East Homes made no charitable or political donations in the year (2012: £nil).


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) Going concern The Association’s business activities, its current financial position and factors likely to affect its future development are set out within this Operating and Financial Review (OFR). The OFR also sets out some of the key business challenges, and major controls to mitigate resultant risks. The Association has in place long-term debt facilities (including £117.5m of undrawn facilities as at 31 March 2013) which provide adequate resources to finance near-term committed reinvestment and development programmes, along with the Group’s day to day operations. After making enquiries, the Board has a reasonable expectation that the Association has adequate resources to continue in operational existence for the foreseeable future, being a period of at least twelve months after the date on which the report and financial statements are signed. The Board and Group Executive review the business plan and Risk Map on a regular basis ensuring that all material risks are managed and mitigated as far as possible. For this reason, it continues to adopt the going concern basis in the financial statements. Internal controls assurance The Board has overall responsibility for establishing and maintaining the whole system of internal control and for reviewing its effectiveness. This applies for all companies within the East Thames Group.

The Board recognises that no system of internal control can provide absolute assurance or eliminate all risk. The system of internal control is designed to manage risk and to provide reasonable assurance that key business objectives and expected outcomes will be achieved. It also exists to give reasonable assurance about the preparation and reliability of financial and operational information and the safeguarding of the Association’s assets and interests.

In meeting its responsibilities, the Board has adopted a risk-based approach to internal controls which are embedded within the normal management and governance processes. This approach includes the regular evaluation of the nature and extent of risks to which the Association is exposed and is consistent with best practice.

The process adopted by the Board in reviewing the effectiveness of the system of internal control, together with some of the key elements of the control framework includes:- Identification and evaluation of key risks Management responsibility has been clearly defined for the identification, evaluation and control of significant risks.

The Association has an overall Risk Management Strategy which is reviewed annually and produces risk maps which identify key risks. These risks are scored in terms of impact (including reputational image) and probability both in terms of the initial risk and the residual risk once adequate control measures are in place.

Our Risk and Compliance Team continue to oversee risk issues and lead an Officer Risk Forum whose role is to co-ordinate risk maps across the Association to ensure consistency of approach and the use and embedding of best practice.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) The Group Executive and officer Risk Management and Development Panels regularly consider reports on significant risks facing the Association. The Group Chief Executive/ relevant Director are responsible for reporting to the respective Board(s) any significant changes affecting key risks. Monitoring and corrective action A process of control, self assessment and regular management reporting on control issues provides hierarchical assurance to successive levels of management and to the Board. This process continues to be developed to ensure a rigorous approach and includes actions for ensuring that corrective action is taken in relation to any significant control issues. Control environment and control procedures The Board retains responsibility for a defined range of issues covering strategic, operational, and financial and compliance issues including treasury strategy and new investment projects. The Association has adopted the National Housing Federation Excellence in Governance – Code for Members. Adherence to this code is reviewed annually to ensure that the Group complies and is at the forefront of best practice. The Internal Audit team and the Risk & Compliance teams continue to monitor the implementation of agreed management actions arising from the year’s Internal Audit programme and other internal audit work. They have a central role in ensuring internal control compliance. The Risk & Compliance Team also have a role in reviewing existing and new policies and procedures ensuring these are embedded across the Association and have the oversight of our delegated authority system.

During the course of the year, the final elements of a specific action plan arising from an external review of internal controls, (started in 2009), were completed. Information and financial reporting systems Financial reporting procedures include detailed budgets for the year ahead and forecasts for subsequent years in the form of 5 and 30 year plans. These are reviewed and approved by the Board. The Board also regularly reviews key performance measures to assess progress towards the achievement of key business objectives, targets and outcomes. The Chief Executive Support Unit co-ordinates our approach to performance management and to measuring the critical success factors of the business. The internal control framework and the risk management process are subject to regular review by Internal Audit which is responsible for providing independent assurance to the Board via its Group Risk Management and Audit Committee. The Group Risk Management and Audit Committee consider internal control and risk regularly during the year. Fraud, Theft and Bribery The Group has a Prevention of Fraud, Theft and Bribery policy which covers the prevention, detection and reporting of such instances along with the recovery of assets. The Association operates a zero tolerance policy in relation to fraud, theft and bribery and reports all such confirmed instances to the relevant authorities. An officer Fraud, Theft and Bribery panel oversees cases to ensure that these are reviewed and monitored, investigated in a timely manner, and lessons learnt.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) The Fraud, Theft and Bribery Register is reviewed on an on-going basis through the Association’s Risk Management and Audit Committee, and annually reported to the Board. Instances of theft against the Association as a whole and/or residents have occurred during the course of the year and have been fully investigated and reported to the police as appropriate. Regulatory Intervention In April 2013, our principal regulator the Homes and communities Agency issued their regulatory judgement on the Association. The judgement maintains the current rating for viability (V2) but downgraded our rating for governance (G3). The principal reason for this downgrade was that some of our tenants were paying a higher rent than the calculated target rent; we have thoroughly investigated this and have now established that this applies to 146 tenants. The total overcharge was £31000.The Board is taking this matter seriously and we are working with the HCA to implement changes that will move our governance rating to (G1). Sources of Assurance There are a number of internal and external sources of assurance which have been used in compiling this statement, some of which have been mentioned above. In summary these sources are: Strong management structures and clear accountability Board / Group Risk Management and Audit Committee oversight of the organisation’s

business Management assurances Management reports on operational and financial matters Management reports on operational and financial controls Risk management activity Control and risk self assessment Internal and external audit Key performance indicators linked to business plans Quality management systems such as Investors in People Regulatory reports

The Board has received the Group Chief Executive’s annual report which has been endorsed by the Group Executive, has conducted its annual review of the effectiveness of the system of internal control and has taken account of any changes needed to maintain the effectiveness of the risk management control process. The Board confirms that there is an on-going process for identifying, evaluating and managing significant risks faced by the Association. This process has been in place throughout the year under review, up to the date of the annual report, and is regularly reviewed by the Board.


- 18 -

OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) Code of governance The Association continues to comply with the main provisions of the National Housing Federation Code of Governance. As part of our annual compliance review some elements of best practice have been identified which will enhance our compliance and we are taking these forward, these are however not fundamental and do not affect our overall assessment. Board meetings of the Group are conducted jointly with those of East Homes, East Living and East Potential. At 31st March 2013, each of the Boards of these subsidiaries had two independent Board members with the Board of East Homes having an additional three resident Board members. This structure enables Board members to make decisions about the future direction of the Group as a whole, whilst also exercising their governance responsibility for each entity. As explained under Regulatory Intervention on page 17, the Homes and Communities Agency rated governance as G3, largely as a result of non-compliance with the Rent Standard within the Regulatory Framework. In light of this rating, the Board has commissioned a review of the Group’s compliance with the Regulatory Framework and this has highlighted some limited areas for further improvement. Separately, the Board is in the process of further streamlining its governance systems, membership and processes to ensure that they remain compliant with best practice and support the delivery of the business plan objectives.


- 19 -

OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) Statement of the responsibilities of the board for the report and financial statements The Board is responsible for preparing the report and financial statements in accordance with applicable law and regulations. Industrial and Provident Societies Act requires the Board to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). Under the Industrial and Provident Society legislation the Board must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs and income & expenditure of the association for that period. In preparing these financial statements, the Board is required to:

• select suitable accounting policies and then apply them consistently;

• make judgements and accounting estimates that are reasonable and prudent;

• state whether applicable UK Accounting Standards and the Statement of Recommended Practice (SORP) Accounting by Registered Housing Providers Update 2010, have been followed, subject to any material departures disclosed and explained in the financial statements; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Association will continue in business.

The Board is responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Association and enable it to ensure that the financial statements comply with the Industrial and Provident Societies Acts 1965 to 2002. It is also responsible for safeguarding the assets of the association and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. In so far as each of the directors is aware:

• there is no relevant audit information of which the association’s auditors are unaware; and

• the directors have taken all steps that they ought to have taken to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information.

The Board is responsible for the maintenance and integrity of the corporate and financial information on the Association’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Annual general meeting The annual general meeting will be held on 23rd September 2013 at 29-35 West Ham Lane, Stratford, London E15 4PH.


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OPERATING AND FINANCIAL REVIEW AND BOARD REPORT (continued) External auditors A resolution to re-appoint Grant Thornton UK LLP will be proposed at the forthcoming annual general meeting. The Report of the Board was approved by order of the Board on 12 August 2013 and signed on its behalf by:

Henry Potter – Group Company Secretary


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Independent auditor's report to the members of East Homes Limited We have audited the financial statements of East Homes Limited for the year ended 31 March 2013 which comprise the income and expenditure account, the statement of total recognised surpluses and deficits, the note of historical cost surpluses and deficits, the reconciliation of movements in Association’s funds, the balance sheet and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the housing association’s members, as a body, in accordance with regulations made under Section 9 of the Friendly and Industrial and Provident Societies Act 1968. Our audit work has been undertaken so that we might state to the housing association’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the housing association and the housing association’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of the board and the auditor As explained more fully in the Statement of Responsibilities of the Board, set out on pages 19-20 the Board is responsible for the preparation of financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors.

Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB's website at www.frc.org.uk/apb/scope/private.cfm.

Opinion on financial statements In our opinion the financial statements:

• give a true and fair view of the state of the association's affairs as at 31 March 2013 and of its income and expenditure for the year then ended;

• have been properly prepared in accordance with the Industrial and Provident Societies Acts, 1965 to 2002, the Housing and Regeneration Act 2008 and the accounting Direction for Private Registered Providers of Social Housing 2012.

Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Industrial and Provident Societies Acts, 1965 to 2002 requires us to report to you if, in our opinion:

• a satisfactory system of control over transactions has not been maintained; or • the association has not kept proper accounting records; or • the financial statements are not in agreement with the books of account; or • we have not received all the information and explanations we need for our audit.

Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Cambridge September 2013


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Income and expenditure account For the year ended 31 March 2013

Note 2013

£’000

2012

£’000 Turnover: continuing activities 2 82,485

70,640

Cost of sales 2 (7,230)

(1,365)

Operating costs 2 (54,024)

(51,847)

Operating surplus: continuing activities

21,231

17,428

Surplus on property disposals 4 2,932

2,441

Interest receivable 7 1,949

384 Interest payable 7 (23,283) (18,543) Surplus before tax & exceptional items

2,829

1,710

Tax on surplus on ordinary activities 8 9

(38)

Surplus for the financial year after tax & exceptional items 26 2,838

1,672

The notes on page 25 to 61 form part of these financial statements. .


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Statement of total recognised surpluses and deficits For the year ended 31 March 2013

Note 2013 £’000

2012 £’000

Surplus for the financial year

2,838

1,672

Unrealised surplus on revaluation of housing properties 26 78,346

16,744

Unrealised deficit on revaluation of investments 26 33

(1,275)

Total recognised surpluses for the year 81,217 17,141

Note of historical cost surpluses and deficits For the year ending 31 March 2013

2013 £’000

2012 £’000

Reported surplus on ordinary activities 2,838

1,672

Excess of actual depreciation over historical cost depreciation 26 1,155

1,017

Realisation of property revaluation surpluses/(deficits) of previous years 26 346

(319)

Historical cost surplus for the year 4,339

2,370

Reconciliation of movements in Association’s funds For the year ending 31 March 2013

2013 £’000

2012 £’000

Opening total funds 368,790

351,649

Total recognised surpluses relating to the year 81,217

17,141

Closing total funds 450,007

368,790


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Balance Sheet at 31 March 2013

Note

2013

£’000

2012

£’000

Fixed Assets

Tangible fixed assets

Housing properties at valuation 11 915,804 809,992 Other fixed assets 12 26,569 35,069

942,373 845,061 Investments Investments in subsidiaries 13a - - Investments in properties 13b 22,288 15,674 Investments – shared equity 13c 172 210 Investment: 11 Home Buy/Home Start loan 20,018 21,388 Home Buy/Home Start grant (20,018) (21,388)

22,460 15,884

Debtors: due after one year 14 32,012 17,852

Total Long Term Assets 996,845 878,797 Current assets Properties for sale 15 16,617 5,433 Debtors 16 31,186 23,791 Cash at bank and in hand 17 21,869 17,431

69,672 46,655

Creditors: amounts falling due within one year 18 (37,222) (40,795)

Net assets 32,450 5,860

Total assets less current liabilities 1,029,295 884,657

Creditors: amounts falling due after more than one year 19 578,248 515,219

Provision for liabilities 24 1,040 648

579,288 515,867

Capital and reserves Share capital 25 - - Revenue reserves 26 43,373 39,034 Restricted 26 79 79 Revaluation reserve 26 406,555 329,677

450,007 368,790

1,029,295 884,657 The financial statements were approved by the Board on 12 August 2013 and signed on its behalf by:

Board Member Board Member Company Secretary


- 25 -

Notes to the financial statements 1 ACCOUNTING POLICIES Basis of accounting The financial statements of East Homes Limited (the “Association”) are prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP), and the Statement of Recommended Practice: Accounting by Registered Social Housing Providers Update 2010 and comply with ‘The Accounting Direction Social Housing in England from April 2012’. The financial statements contain information about East Thames Ltd as an individual company and do not contain consolidated financial information as the parent undertaking of a group. The company has taken advantage of the exemption under Section 14(1) of the Friendly and Industrial and Provident Societies Act 1968 as it, and its subsidiary undertakings, are included by full consolidation – in the consolidated financial statements of its ultimate parent company, East Thames group Ltd, which are publicly available. Turnover Turnover comprises rental income receivable in the year, management fees, income from shared ownership first tranche sales, sales of properties built for sale, and other services included at the invoiced value (excluding VAT) of services supplied in the year, and revenue grants receivable in the year.

Revenue Recognition Rental income is recognised from the point when properties under development reach practical completion or otherwise become available for letting. Rental income is recognised net of rent and service charge losses from voids. Fee income is receivable when the conditions for receipt of the fees under the relevant contractual agreements have been met. Income from first tranche sales and sales of properties built for sale is recognised at the point of legal completion of the sale. Revenue grants are receivable when the conditions for receipt of agreed grant funding have been met. Value added tax The Association charges value added tax (VAT) on some of its income and is able to recover part of the VAT it incurs on expenditure. The income and expenditure account includes VAT to the extent that it is suffered by the Association and not recoverable from HM Revenue & Customs. The balance of VAT payable or recoverable at the year- end is included as a current liability or asset.


- 26 -

Notes to the financial statements 1 ACCOUNTING POLICIES (continued) Interest payable Interest is capitalised on borrowings to finance developments to the extent that it accrues in respect of the period of development if it represents either:

(a) interest on borrowings specifically financing the development programme after deduction of social housing grant (SHG) in advance; or

(b) interest on borrowing of the Group as a whole after deduction of interest on SHG received in advance to the extent that they can be deemed to be financing the development programme.

Other interest payable is charged to the income and expenditure account in the year. Derivatives The Association uses interest rates swaps to reduce its exposure to future increases in the interest rates on floating rate loans. The notional principal is not reflected in the Association’s balance sheet. Payments made under interest rate swaps are recognised in the payment period and adjusted against interest payable on the loans. Pensions The Association participates in a funded multi-employer defined benefit scheme, the Social Housing Pension Scheme (SHPS). It has not been possible to identify the share of underlying assets and liabilities belonging to individual participating employers. The income and expenditure charge represents the employer contribution payable to the scheme for the accounting period. From the 1st April 2008 defined benefit schemes have been closed to new employees and existing employees not already in the scheme; these employees are eligible to contribute to a defined contribution scheme run by the Pension Trust. Employer contributions to the pension scheme are charged to the income and expenditure account as incurred. Housing properties Housing properties are principally properties available for rent, shared ownership, rent-now-buy-later and intermediate/market rent. Completed housing properties in all tenure types are stated at Existing Use Value for Social Housing (EUV-SH). Full revaluations of the properties are undertaken every three years and interim valuations are carried out where there are indications of a significant change in value. Housing properties under construction are stated at cost less related social housing grant and other capital grants. Cost includes the cost of acquiring land and buildings, development costs, interest charges incurred during the development period and expenditure incurred in respect of improvements.


- 27 -

Notes to the financial statements 1 ACCOUNTING POLICIES (continued)

Works to existing properties which replace a component that has been treated separately for depreciation purposes, along with those works that result in enhancing the economic benefits of the assets, are capitalised as improvements. Economic benefits are enhanced if work done result in an increase in rental income, a reduction in future maintenance costs or a significant extension to the useful economic life of a property. Shared ownership properties under development are split proportionally between current and fixed assets based on the element relating to expected first tranche sales. The first tranche proportion is classed as a current asset and related sales proceeds included in turnover. The remaining element is classed as fixed asset and included in housing properties at cost, less any provisions needed for depreciation or impairment. Donated Land Land donated by local authorities and others is added to cost at the market value of the land at the time of the donation. Where the land is not related to a specific development and is donated by a public body, an amount equivalent to the increase in value between market value and cost is added to other grants. Where the donation is from a non public source, the value of the donation is included as income. Social Housing Grant Social Housing Grant (SHG) is receivable from the Homes & Communities Agency (the HCA) and is utilised to reduce the capital costs of housing properties including land costs. It is allocated to the land and structure components of the associated asset in proportion to their cost. Grant receivable in respect of identifiable components is allocated to those components.

SHG due from the HCA or received in advance is included as a current asset or liability. SHG received in respect of revenue expenditure is credited to the income and expenditure account in the same period as the expenditure to which it relates.

SHG released on sale of a property may be repayable but is normally available to be recycled and is credited to a Recycled Capital Grants Fund or Disposal Proceeds Fund and included in the balance sheet in creditors. SHG repayable in certain circumstances is included as a current liability until it is repaid. The repayment of SHG is generally subordinated to the repayment of housing loans by agreement with the HCA. Where individual components are disposed of and this does not create a relevant event for recycling purposes, any grant which has been allocated to the component is released to the income and expenditure account. Upon disposal of the associated property, the group is required to recycle these proceeds; as such a contingent liability is disclosed to reflect this. Other Grants Other grants include grants from local authorities and other organisations. Capital grants are utilised to reduce the capital costs of housing properties including land costs. These include amounts attributable to land donated by public authorities. Grants in respect of revenue


- 28 -


expenditure is included in the income and expenditure account when conditions have been met. Depreciation of housing properties Freehold land, shared ownership properties and assets held in the course of completion are not depreciated. Shared ownership properties are not depreciated because it is immaterial on the grounds that the shared owner has the significant equity and is responsible for the maintenance of the property. Properties held on leases are amortised over the life of the lease or their estimated useful economic life, if shorter. The Association separately identifies the major components which comprise its housing properties, and charges depreciation so as to write-down the cost of each component to its estimated residual value, on a straight line basis, over its estimated useful economic life. Where SHG has been allocated to a component, the depreciable amount is arrived at on the basis of original cost, less the proportion of SHG and other grants attributable to the component, less residual value. Excess grant attributable to structure costs, is allocated to components. Depreciation is calculated using the valued amount of the property and its components. Depreciation is charged to the income and expenditure account and the excess of actual depreciation over historic cost is included in the statement of historic cost surpluses and deficits, credited to the revenue reserve and debited against the revaluation reserve. The Association depreciates the major components of its housing properties over the following years:

Kitchens 20

Years

Bathrooms 30 Boilers 15 Other heating systems 30 External doors and windows 30 Roofs 60 Electrical installations 30 Structure 60-150

These useful economic lives apply equally to the Association’s rented and supported housing and care stock of housing properties. Properties held on leases are amortised over the life of the lease or their estimated useful economic life if shorter. Impairment Housing properties which are depreciated over a period in excess of 50 years are subject to impairment reviews annually. Other assets are reviewed for impairment if there is an indication that impairment may have occurred.


- 29 -


Any impairment is recognised in the income and expenditure account to the extent of the excess of the assets carrying amount exceeds the recoverable amount. Recoverable is the greater of its net realisable value (being the sales value less costs) and value in use. Value in use is after taking into account any planned internal subsidy.

Any Impairment arising from a reduction in prior year valuation uplifts is recognised as a reduction in unrealised surplus on the revaluation of housing properties and accounted for within the statement. Other tangible fixed assets Other fixed assets include commercial property, investment property, offices, plant and machinery and motor vehicles. All other classes of other tangible fixed assets are stated at cost less depreciation. Depreciation is provided evenly on the cost of service charge assets and other tangible fixed assets to write them down to their estimated residual values over their expected useful lives on a straight line basis over the following years:

Freehold offices other than Head office Years

25

Head office 50

Lifts 25

Office furniture and improvements 7

Service equipment 5

Motor vehicles 4

Computer equipment 3

Major software 5 - 7 Capitalised works are depreciated in accordance with the Group’s depreciation policy. Leased Assets Rentals payable under operating leases are charged to the income and expenditure account on a straight-line basis over the lease term. Properties for sales (including share ownership properties) Completed properties for outright sale and properties under construction are valued at the lower of cost and net realisable value. Cost comprises materials, direct labour and direct development overheads. Net realisable value is based on estimated sales price after allowing for all further costs of completion and disposal. First tranche shared ownership sales are included in turnover. First tranche elements of shared ownership housing properties are disclosed as properties for sale within current assets and are stated at the lower of cost and net realisable value.


- 30 -


Subsequent tranches are dealt with in the same way as fixed asset property sales and shown as a separate item after operating surplus in the Income and Expenditure Account. Properties for sale within current assets also include other development for sale such as properties for outright sale. Starter Homes Initiative Where properties built for sale are disposed of during the year, the disposal proceeds are included in turnover, and the attributable costs are included in cost of sales. The Association receives grant via the Homes and Communities Agency to enable key workers to purchase their own homes. The loan is included in Fixed Asset Investments at cost together with the associated grant. Investment and commercial property Properties held for their investment potential are accounted for as investment properties under SSAP 19 “accounting for investment properties”. These properties are recorded at their current market value and because value is of prime importance, these are not depreciated. Commercial property under construction is recorded at the lower of cost and net realisable value, and on completion will be treated as investment properties. Changes in current market value are taken to the revaluation reserve.

Current asset investments Current assets are stated at the lower of cost and net realisable value. Liquid resources are readily disposable current asset investments. They include some money market deposits, held for more than 24 hours that can only be withdrawn without penalty on maturity or by giving notice of more than one working day. Taxation The Association is registered under the Industrial and Provident Societies Acts, and has charitable/public benefit objectives. The majority of the Association’s activities are not subject to Corporation Tax. The charge for taxation is based upon any taxable profit for the year and takes into account deferred tax where applicable. Provisions Provisions are recognised when the Association has a present legal or constructive obligation as a result of past events, it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be estimated reliably. Reserves The Association establishes restricted reserves for specific purposes where their use is subject to external restrictions in accordance with the wishes of the funder or donor, and designated reserves where reserves are earmarked for a particular purpose.


- 31 -


Revaluation reserves The difference between the market value of investment properties and the historical cost carrying value is credited to the revaluation reserve. When the properties are revalued, the difference between the valuation and carrying value of housing properties is also credited to the revaluation reserve. Cashflow Statement The Association is exempt for the requirements of FRS 1(Revised) to prepare a cashflow statement as its results are included in the consolidated financial statements of East Thames Group Limited which includes a cash flow statement. Going Concern On the basis of the assessment of the Association’s financial position and resources, the Association’s directors have a reasonable expectation that the Association will be able to continue in operational existence for the foreseeable future. For this reason, it continues to adopt the going concern basis in the financial statements.


- 32 -

Notes to the financial statements 2 PARTICULARS OF TURNOVER, COST OF SALES, OPERATING COSTS AND OPERATING SURPLUS

Turnover £’000

Cost of Sales £’000

Operating costs £’000

2013 Operating surplus/ (deficit) £’000

2012 Operating surplus/ (deficit)

£’000

Social housing lettings

71,358

-

47,277

24,081

21,688

Other social housing activities

First tranche shared ownership sales 8,585 7,230 - 1,355 110

Abortive costs - - 140 (140) (24)

Gift Aid 1,518 - - 1,518 -

Donation to East Thames Group - - 2,635 (2,635) (1,518)

Litigation costs - - - - (2,355)

Impairment on schemes in the course of development

- - 1,700 (1,700) (747)

Total 81,461 7,230 51,752 22,479 17,154

Non-social housing activities

Sale of properties developed for sale – Outright sales

- - - - 145

Commercial income 1,024 - 864 160 273

Impairment on investment properties 1,341 (1,341) (144)

Impairment on investment in shared equity

67 (67) -

Total 82,485 7,230 54,024 21,231 17,428


- 33 -

Notes to the financial statements 3 PARTICULARS OF INCOME AND EXPENDITURE FROM SOCIAL HOUSING LETTINGS

Housing Accommodation

£’000

Foyers

£’000

Supported Housing

£’000

Temporary Social

Housing £’000

Shared Ownership

& RNBL £’000

Affordable Housing

£’000

2013 Total

£’000

2012 Total

£’000

Rent receivable net of identifiable service charges 42,049 2,595 3,211 - 12,871 552 61,278 58,283

Service income 1,932 1,383 1,681 - 1,790 40 6,826 6,313 Revenue grants

164 - 10 - 2 - 176

160 Void fees - - - - - - - - Nomination fees - - - - 21 - 21 42 Sales & Marketing fees - - - - - - - 435 Other income 1,830 - 745 - 480 2 3,057 2,810 Turnover from social housing lettings 45,975 3,978 5,647 - 15,164 594 71,358 68,043 Services 1,860 1,243 1,902 - 1,808 40 6,853 6,421 Management 13,112 831 1,029 - 4,135 177 19,284 19,824 Rent payable to landlords - - 217 - 1,294 - 1,511 1,823 Routine maintenance 5,240 517 675 - 941 19 7,392 6,782 Planned maintenance 3,712 291 736 - 198 5 4,942 5,338 Rent losses from bad debts 469 - 29 (28) 21 - 491 496 Revenue element of major repairs expenditure 294 59 152 - 2 - 507 (291) Housing property depreciation 5,778 - - - 519 - 6,297 5,962

Operating costs on social housing lettings 30,465 2,941 4,740 (28) 8,918 241 47,277 46,355 Operating Surplus on social housing lettings 15,510 1,037 907 28 6,246 353 24,081 21,688

Void losses 480 272 398 - 651 34 1,835 1,416


- 34 -

Notes to the financial statements 4 SURPLUS ON PROPERTY SALES

Sales

Proceeds

£’000

Cost of Sales

£’000

Social Housing

Grant transferred to RCGF &

DPF £,000

Social Housing

Grant repaid

£’000

2013 Surplus

£’000

2012 Surplus

£’000

Sales of older

and shared ownership properties 7,129 2,436 1,979 - 2,714

2,171

Home buy 116 9 82 - 25 138

Starter Homes Initiative – current year sales 1,405 - 1,202 10 193 132

8,650 2,445 3,263 10 2,932 2,441


- 35 -

Notes to the financial statements 5 UNITS OF ACCOMMODATION IN MANAGEMENT

2013 Units

2012 Units

Social Housing Owned

Social Rent 7,645 7,515 Affordable housing 132 34 Supported housing and housing for older people 1,691 1,535 Low cost home (shared) ownership 1,659 1512 Rent now buy later 430 381 Social Homebuy 21 18 Temporary social housing - - Intermediate Rent 410 410 Total owned 11,988 11,405 Accommodation managed for others General housing 80 80 Supported housing and housing for older people 115 111 Temporary social housing - 17

Total accommodation managed for others 195 208 Total social housing managed 12,183 11,613 Non Social Housing Owned

Offices and Community centres 95 86 Market and Commercial rent 101 115 Garages and parking bays 629 759 Long Leased Properties 110 - Units unavailable for letting 5 22 Static Homebuy 50 52 Play Grounds 39 20 Freehold services 21 52 Open spaces 47 41 Other - 13

Total owned 1,097 1,160

Accommodation managed for others

Offices and Community centres 5 5 Market & Commercial rent 159 142 Long leased properties 742 693 Open Spaces - 4 Homebuy 290 294 Starter Home Initiatives 335 369 Fixed equity 38 38 Management duties only 72 72 Support Services only 216 217 Other 9 1 Total accommodation managed for others 1,866 1,835 Total non social housing managed 2,963 2,995

Total social and non social housing 15,146 14,608


- 36 -

Notes to the financial statements 6 OPERATING SURPLUS

The operating surplus is arrived at after charging:

2013 £’000

2012 £’000

Depreciation of housing properties 6,297

5,962

Depreciation of tangible assets 952

926

Impairment on schemes in the course of development 1,700

747

Impairment on investment properties 1,341 144 Impairment on investment in shared equity 67 - Operating leases land and buildings 1,421

1,421

Fees payable to the Association’s auditor for audit of the financial statements 27 30 Fees payable to the Association’s auditor for non audit services

30 70

7 NET INTEREST PAYABLE AND SIMILAR CHARGES

2013 £’000

2012 £’000

Interest receivable 1,998

418

Interest receivable transferred to the RCGF/DPF (49) (34) 1,949 384 Interest payable on loans and leases:

Repayable in more than five years (25,483) (20,092)

Interest payable capitalised on housing properties under construction 2,494 1,510 Interest payable capitalised on commercial properties under construction 278 131 Amortisation of loan issue costs (572) (92)

(23,283) (18,543)

Capitalisation rate used to determine the finance costs capitalised during the period

5%

5%


- 37 -

Notes to the financial statements 8 TAXATION ON SURPLUS ON ORDINARY ACTIVITIES

2013 £’000

2012 £’000

United Kingdom Corporation Tax: Current tax on income for the year -

37

Adjustments in respect of prior years (9) 1

Tax on profit on ordinary activities (9) 38

2013 £’000

2012 £’000

Current tax reconciliation:

Profit on ordinary activities before tax 2,496 1,710 Theoretical tax at UK corporation tax rate 24% (2012: 26%) 599 445 Effects of:

Profits not chargeable to taxation (599) (408) (Over)/under provision in prior years (9) 1 Current tax on profit on ordinary activities (9) 38

9 EMPLOYEES Number of employees expressed in full-time equivalents at end of year

2013 £’000

2012 £’000

Administration 154 197 Staff remuneration by band Number of

staff 2013 Number of staff 2012

Pay Band

£60000 - £70000 4 2 £70001 - £80000 1 3 £80001 - £90000 2 - £90001 - £100000 1 - £100001 - £110000 - - £110001 - £120000 - - £120001 - £130000 1 1 TOTAL 9 6


- 38 -

Notes to the financial statements 9 EMPLOYEES (continued)

2 013 £’000

2012 £’000

Staff costs Wages and salaries 6,184 6,508 Social Security costs 684 664 Other pension costs 368 373 7,236 7,545 East Homes Limited participates in SHPS (the Scheme). The Scheme is funded and is contracted out of the State Pension Scheme.

SHPS is a multi-employer defined benefit scheme. Employer participation in the Scheme is subject to adherence with the employer responsibilities and obligations as set out in the ‘SHPS House Policies and Rules Employer Guide’. The Scheme operated a single benefit structure, final salary with a 1/60th accrual rate until 31 March 2007. From April 2007 there are three benefit structures available, namely:

Final salary with a 1/60th accrual rate.

Final salary with a 1/70th accrual rate.

Career average revalued earnings (CARE) with a 1/60th accrual rate.

From April 2010 there are a further two benefit structures available, namely: Final salary with a 1/80th accrual rate. Career average revalued earnings (CARE) with a 1/80th accrual rate.

A defined contribution benefit structure was made available from 1 October 2010.

An employer can elect to operate different benefit structures for their active members and their new entrants. An employer can only operate one open defined benefit structure at any one time. An open benefit structure is one which new entrants are able to join. East Homes Limited has operated the final salary with a 1/60th accrual rate for active members as at 31st March 2008. The Trustee commissions an actuarial valuation of the Scheme every three years. The main purpose of the valuation is to determine the financial position of the Scheme in order to determine the level of future contributions required, in respect of each benefit structure, so that the Scheme can meet its pension obligations as they fall due. From April 2007 the split of the total contribution rate between member and employer is set at individual employer level, subject to the employer paying no less than 50% of the total contribution rate. From 1 April 2010 the requirement for employers to pay at least 50% of the total contribution rate no longer applies. The actuarial valuation assesses whether the Scheme’s assets at the valuation date are likely to be sufficient to pay the pension benefits accrued by members as at the valuation date. Asset


- 39 -

Notes to the financial statements 9

EMPLOYEES (continued)

values are calculated by reference to market levels. Accrued pension benefits are valued by discounting expected future benefit payments using a discount rate calculated by reference to the expected future investment returns. During the accounting period East Homes Limited paid contributions at the rate of 8.2%. Member contributions varied between 8% and 10%. As at the balance sheet date there were 40 active members of the Scheme employed by East Homes Limited. The annual pensionable payroll in respect of these members was £1.486m. It is not possible in the normal course of events to identify on a consistent and reasonable basis the share of underlying assets and liabilities belonging to individual participating employers. This is because the Scheme is a multi-employer Scheme where the Scheme assets are co-mingled for investment purposes, and benefits are paid from total Scheme assets. Accordingly, due to the nature of the Scheme, the accounting charge for the period under FRS17 represents the employer contribution payable. The last formal valuation of the Scheme was performed as at 30 September 2011 by a professionally qualified Actuary using the Projected Unit Method. The market value of the Scheme’s assets at the valuation date was £2,062 million. The valuation revealed a shortfall of assets compared with the value of liabilities of £1,035 million, equivalent to a past service funding level of 67.0%. The Scheme Actuary has prepared an Actuarial Report that provides an approximate update of the funding position of the Scheme as at 30 September 2012. Such a report is required by legislation for years in which a full actuarial valuation is not carried out. The market value of the Scheme’s assets at the date of the Actuarial report was £2,327 million. The Actuarial Report revealed a shortfall of assets compared with the value of liabilities of £1,241 million, equivalent to a past service funding level of 65%. The financial assumptions underlying the valuation as at 30 September 2011 were as follows:

Valuation Discount Rates: % p.a. Pre-Retirement 7.0 Non Pensioner Post Retirement 4.2 Pensioner Post Retirement 4.2 Pensionable Earnings Growth 2.5 per annum for 3 years, then 4.4 Price Inflation 2.9

Pension Increases: Pre 88 GMP 0.0 Post 88 GMP 2.0 Excess Over GMP 2.4

Expenses for death-in-service insurance, administration and Pension Protection Fund (PPF) levy are included in the contribution rate.


- 40 -


The valuation was carried out using the following demographic assumptions: • Mortality pre-retirement – 41% SAPS S1 Male / Female All Pensioners (amounts), Year of

Birth, CMI_2009 projections with long term improvement rates of 1.5% p.a. for Males and 1.25% p.a. for Females

• Mortality post retirement – 97% SAPS S1 Male / Female All Pensioners (amounts), Year of

Birth, CMI_2009 projections with long term improvement rates of 1.5% p.a. for Males and 1.25% p.a. for Females

The long-term joint contribution rates required from April 2013 from employers and members to meet the cost of future benefit accrual were assessed at:

Benefit Structure

Long-term Joint Contribution Rate (% of pensionable salaries)

Final salary with a 1/60th accrual rate 19.4


Career average revalued earnings (CARE) with a 1/60th accrual rate

18.1


Career average revalued earnings (CARE) with a 1/80th accrual rate

9.7

If an actuarial valuation reveals a shortfall of assets compared to liabilities the Trustee must prepare a Recovery Plan setting out the steps to be taken to make up the shortfall. Following consideration of the results of the actuarial valuation it was agreed that the shortfall of £1,241 million would be dealt with by the payment of deficit contributions as shown in the table below:

From 1 April 2013 to 30 September 2020

A cash amount (*) equivalent to 7.5% of Members’ Earnings per annum (payable

monthly and increasing by 4.7% per annum each 1st April)

From 1 October 2020 to 30 September 2023

A cash amount (*) equivalent to 3.1% of Members’ Earnings per annum (payable

monthly and increasing by 4.7% per annum each 1st April)

From 1 April 2013 to 30 September 2026

£30,640,000 per annum (payable monthly and increasing by 3% per annum each 1st

April; first increase on 1st April 2014)


- 41 -


The contributions of 7.5% will be expressed in nominal pound terms (for each Employer), increasing each year in line with the Earnings growth assumption used in the 30 September 2008 valuation (i.e. 4.7% per annum). The contributions of 3.1% will be calculated by proportioning the nominal pound payment at the time of the change. Earnings at 30 September 2008 (for each Employer) will be used as the reference point for calculating these contributions. These deficit contributions are in addition to the long-term joint contributions rates as set out in the table on page 40. The Scheme Actuary will provide an approximate update on the funding position of the Scheme as at 30 September 2013. Such a report is required by legislation for years in which a full actuarial valuation is not carried out. The results of this approximate update will be available in spring 2014 and will be included in next year’s Disclosure Note. Employers that participate in the Scheme on a non-contributory basis pay a joint contribution rate (i.e. a combined employer and employee rate). Employers that have closed the defined benefit section of the Scheme to new entrants are required to pay an additional employer contribution loading of 2.5% to reflect the higher costs of a closed arrangement. A small number of employers are required to contribute at a different rate to reflect the amortisation of a surplus or deficit on the transfer of assets and past service liabilities from another pension scheme into SHPS. New employers that do not transfer any past service liabilities to the Scheme pay contributions at the ongoing future service contribution rate. This rate is reviewed at each valuation and new employers joining the Scheme between valuations up until 1 April 2010 do not contribute towards the deficit until two valuations have been completed after their date of joining. New employers joining the Scheme after 1 April 2010 will be liable for past service deficit contributions from the valuation following joining. Contribution rates are changed on the 1 April that falls 18 months after the valuation date. A copy of the Recovery Plan, setting out the level of deficit contributions payable and the period for which they will be payable, must be sent to The Pensions Regulator. The Regulator has the power under Part 3 of the Pensions Act 2004 to issue scheme funding directions where it believes that the actuarial valuation assumptions and/or Recovery Plan are inappropriate. For example, the Regulator could require that the Trustee strengthens the actuarial assumptions (which would increase the Scheme liabilities and hence impact on the Recovery Plan) or impose a schedule of contributions on the Scheme (which would effectively amend the terms of the Recovery Plan). A response regarding the 30 September 2011 valuation is awaited. As a result of pension scheme legislation there is a potential debt on the employer that could be levied by the Trustee of the Scheme. The debt is due in the event of the employer ceasing to participate in the Scheme or the Scheme winding up.


- 42 -


The debt for the Scheme as a whole is calculated by comparing the liabilities for the Scheme (calculated on a buy-out basis, i.e. the cost of securing benefits by purchasing annuity policies from an insurer, plus an allowance for expenses) with the assets of the Scheme. If the liabilities exceed assets there is a buy-out debt. The leaving employer’s share of the buy-out debt is the proportion of the Scheme’s liability attributable to employment with the leaving employer compared to the total amount of the Scheme’s liabilities (relating to employment with all the currently participating employers). The leaving employer’s debt therefore includes a share of any ‘orphan’ liabilities in respect of previously participating employers. The amount of the debt therefore depends on many factors including total Scheme liabilities, Scheme investment performance, the liabilities in respect of current and former employees of the employer, financial conditions at the time of the cessation event and the insurance buy-out market. The amounts of debt can therefore be volatile over time. East Homes Limited has been notified by The Pensions Trust of the estimated employer debt on withdrawal from SHPS based on the financial position of the Scheme as at 30th September 2012. As of this date the estimated employer debt for East Homes Limited was £10.8million. The estimated contributions for the 2013/14 year are £78k to the final defined benefit scheme and £79k to the defined contribution scheme. Growth Plan East Homes participates in The Pensions Trust’s Growth Plan (the Plan). The Plan is funded and is not contracted-out of the State scheme. The Plan is a multi-employer pension plan. Contributions paid into the Plan up to and including September 2001 were converted to defined amounts of pension payable from Normal Retirement Date. From October 2001 contributions were invested in personal funds which have a capital guarantee and which are converted to pension on retirement, either within the Plan or by the purchase of an annuity. The rules of the Plan allow for the declaration of bonuses and/or investment credits if this is within the financial capacity of the Plan assessed on a prudent basis. Bonuses/investment credits are not guaranteed and are declared at the discretion of the Plan’s Trustee. The Trustee commissions an actuarial valuation of the Plan every three years. The purpose of the actuarial valuation is to determine the funding position of the Plan by comparing the assets with the past service liabilities as at the valuation date. Asset values are calculated by reference to market levels. Accrued past service liabilities are valued by discounting expected future benefit payments using a discount rate calculated by reference to the expected future investment returns. The rules of the Plan give the Trustee the power to require employers to pay additional contributions in order to ensure that the statutory funding objective under the Pensions Act 2004 is met. The statutory funding objective is that a pension scheme should have sufficient assets to meet its past service liabilities, known as Technical Provisions.


- 43 -


If the actuarial valuation reveals a deficit, the Trustee will agree a recovery plan to eliminate the deficit over a specified period of time either by way of additional contributions from employers, investment returns or a combination of these. The rules of the Plan state that the proportion of obligatory contributions to be borne by the member and the member’s employer shall be determined by agreement between them. Such agreement shall require the employer to pay part of such contributions and may provide that the employer shall pay the whole of them. East Homes does not pay contributions to the Growth Plan. Members paid contributions at the rate of their choice. It is not possible in the normal course of events to identify on a reasonable and consistent basis the share of underlying assets and liabilities belonging to individual participating employers. The Plan is a multi-employer scheme where the Plan assets are co-mingled for investment purposes, and benefits are paid from the total Plan assets. Accordingly, due to the nature of the Plan, the accounting charge for the period under FRS17 represents the employer contribution payable. The valuation results at 30 September 2011 were completed in 2012 and have been formalised. The valuation of the Plan was performed by a professionally qualified Actuary using the Projected Unit Method. The market value of the Plan’s assets at the valuation date was £780 million and the Plan’s Technical Provisions (i.e. past service liabilities) were £928 million. The valuation therefore revealed a shortfall of assets compared with the value of liabilities of £148 million, equivalent to a funding level of 84%. The financial assumptions underlying the valuation as at 30 September 2011 were as follows:

% Per annum

Investment returns pre-retirement 4.9 Investment return post-retirement

Actives / deferrers 4.2 Pensioners 4.2

Bonuses on accrued benefits 0.0 Inflation: Retail Prices Index (RPI) 2.9 Inflation: Consumer Price Index (CPI) 2.4 In determining the investment return assumptions the Trustee considered advice from the Scheme Actuary relating to the probability of achieving particular levels of investment return. The Trustee has incorporated an element of prudence into the pre and post retirement investment return assumptions; such that there is a 60% expectation that the return will be in excess of that assumed and a 40% chance that the return will be lower than that assumed over the next 10 years. The Scheme Actuary has prepared a funding position update as at 30th September 2012. The market value of the Plan’s assets at that date was £790 million and the Plan’s Technical Provisions (i.e. past service liabilities) was £984 million. The update, therefore, revealed a


- 44 -


shortfall of assets compared with the value of liabilities of £194 million, equivalent to a funding level of 80%. If an actuarial valuation reveals a shortfall of assets compared to liabilities, the Trustee must prepare a recovery plan setting out the steps to be taken to make up the shortfall. The Regulator has the power under Part 3 of the Pensions Act 2004 to issue scheme funding directions where it believes that the actuarial valuation assumptions and/or recovery plan are inappropriate. For example the Regulator could require that the Trustee strengthens the actuarial assumptions (which would increase the Plan liabilities and hence impact on the recovery plan) or impose a schedule of contributions on the Plan (which would effectively amend the terms of the recovery plan). A copy of the recovery plan in respect of the September 2011 valuation was forwarded to The Pensions Regulator on 2 October 2012, as is required by legislation. Following a change in legislation in September 2005 there is a potential debt on the employer that could be levied by the Trustee of the Plan and The Pensions Act 2011 has more recently altered the definition of Series 3 of the Growth Plan so that a liability arises to employers from membership of any Series except Series 4. The debt is due in the event of the employer ceasing to participate in the Plan or the Plan winding up. The debt for the Plan as a whole is calculated by comparing the liabilities for the Plan (calculated on a buy-out basis i.e. the cost of securing benefits by purchasing annuity policies from an insurer, plus an allowance for expenses) with the assets of the Plan. If the liabilities exceed assets there is a buy-out debt. The leaving employer’s share of the buy-out debt is the proportion of the Plan’s liability attributable to employment with the leaving employer compared to the total amount of the Plan’s liabilities (relating to employment with all the currently participating employers). The leaving employer’s debt therefore includes a share of any ‘orphan’ liabilities in respect of previously participating employers. The amount of the debt therefore depends on many factors including total Plan liabilities, Plan investment performance, the liabilities in respect of current and former employees of the employer, financial conditions at the time of the cessation event and the insurance buy-out market. The amounts of debt can therefore be volatile over time. When an employer withdraws from a multi-employer defined benefit pension scheme which is in deficit, the employer is required by law to pay its share of the deficit, calculated on a statutory basis (known as the buy-out basis). The calculation basis that applies to the Growth Plan was amended due to a change in the definition of money purchase contained in the Pensions Act 2011 but the regulations that will determine exactly how the change will apply in practice are still awaited. As the law stands, it is not yet clear whether the statutory calculation should include or exclude Series 3 liabilities. However, based upon current advice, the most likely interpretation is that Series 3 liabilities will have to be included in the calculation of an employer’s debt on withdrawal. Owing to this situation, we have included 2 figures/calculations, namely:

• The cost of withdrawal if we include Series 3 liabilities in the calculation • The cost of withdrawal if we exclude Series 3 liabilities from the calculation


- 45 -


If an employer withdraws from the Growth Plan prior to the implementation of the regulations, the debt will be calculated on both bases and we would request payment of the higher amount with any adjustment being made when the regulations are implemented. East Homes has been notified by The Pensions Trust of the estimated employer debt on withdrawal from the Plan based on the financial position of the Plan as at 30 September 2012. As of this date the estimated employer debt for East Homes was £28k. The estimated contribution for the 2013/14 year is £126k. 10

DIRECTORS, MEMBERS AND SENIOR STAFF EMOLUMENTS

The Directors of the Association as defined under the Accounting Direction for Private Registered Providers of Social Housing 2012 are its Management Board, the Managing Director and any other person who is a member of the senior management team. Basic

salary £’000

Pension contributions

£’000

Total 2013 £’000

Total 2012 £’000

Director of Resident Services (resigned 08/04/11)

- - - 3

Director of Communities & Neighbourhoods 122 39 161 157

122 39 161 160 The emolument of the highest paid director, the Director of Communities & Neighbourhoods, excluding pension contributions was £122k (2012: £123k). The Director of Communities & Neighbourhoods is an ordinary member of the pension scheme and has no enhanced or special terms and does not have an individual pension arrangement to which East Homes Limited or any of its subsidiaries make a contribution. The Director of Communities & Neighbourhoods is part of Group Executive for East Thames Group. Her salary also covers work performed for other Group entities. Other directors are remunerated by other group entities. The fees payable to members of the Board were £38k (2012: £31k). Remuneration for the Chair of the Board is borne by the parent company. Board expenses are borne by the parent company. These totalled £19,568 (2012: £17,163) and include the expenses of East Homes’ directors.


- 46 -

Notes to the financial statements 11 TANGIBLE FIXED ASSETS – HOUSING PROPERTIES Housing

properties held for letting

Housing Properties

under construction

Shared ownership and

Rent to buy properties held

for letting

Shared ownership and

Rent to buy properties

under construction

Total

Valuation

£’000 £’000 £’000 £’000 £’000

At 1st April 2012 616,459 111,758 144,079 25,174 897,470

Additions 4,350 53,902 918 16,899 76,069 Tenure change transfers (116) (7,709) 116 9,427 1,718 Intragroup transfer - (819) - - (819) Transfer to properties for sale (213) (2,061) (9,049) (3,249) (14,572) Transfer to group entity - - - - - Works to existing properties 3,777 - 18 - 3,795 Interest capitalised - 1,403 - 1,091 2,494 Schemes completed 79,915 (79,915) 37,160 (37,160) - Disposals (376) - (3,917) - (4,293) Redevelopment transfer (223) 132 - 47 (44) Valuation adjustment 5,285 - (6,253) - (968)

As at 31st March 2013 708,858 76,691 162,071 12,229 960,849

Depreciation and impairment

As at 1st April 2012 - 3,880 - - 3,880

Depreciation charged in year 5,778 - 519 - 6,297 Depreciation change of tenure (71) - 71 - - Impairment provision in year - 1,700 - - 1,700 Released on disposal (43) - (2) - (45) Redevelopment transfer (44) - - - (44) Valuation adjustment (5,620) - (588) - (6,208)

At 31st March 2013 - 5,580 - - 5,580

Social housing and other grants

At 1st April 2012 - 74,668 - 8,930 83,598

Additions 11,883 13,474 4,256 1,588 31,201 Tenure change transfers (42) (4,564) 42 4,564 - Transfer to properties for sale - (360) - - (360) Schemes completed 51,100 (51,100) 7,735 (7,735) - Disposals (176) - (1,692) - (1,868) Valuation adjustment (62,765) - (10,341) - (73,106)

At 31st March 2013 - 32,118 - 7,347 39,465

Net book value At 31st March 2013 708,858 38,993 162,071 5,882 915,804

At 31st March 2012 616,459 33,210 144,079 16,244 809,992


- 47 -

Notes to the financial statements 11 TANGIBLE FIXED ASSETS – HOUSING PROPERTIES (continued) 2013

£’000 2012

£’000 Expenditure on works to existing properties Improvement works capitalised 939 623 Components capitalised 2,856 2,434 Amounts debited/(credited) to income and expenditure account 507 (291)

4,302 2,766 2013

£’000 2012

£’000 Total accumulated capital and revenue social housing grant receivable

Capital grants 616,508 588,105 Revenue grants 175 160

616,683 588,265

2013 £’000

2012 £’000

Housing properties comprise: Freehold land and buildings 915,449 809,637 Long leasehold land and buildings 355 355

915,804 809,992 Completed housing properties held for letting are stated at Existing Use Value for Social Housing (EUV-SH) and shared ownership properties and Rent Now Buy Later (RNBL) are stated at EUV-SH less the Net Present Liability to repay Social Housing Grant. Housing properties have been valued by professional valuers, FPD Savills, Chartered Surveyors. The last valuation of completed housing properties was prepared as at 31 March 2013 in accordance with the Appraisal and Valuation Manual of the Royal Institution of Chartered Surveyors. The analysis of the carrying value of housing properties, split between valuation and cost is as follows:

£’000 Completed properties at valuation 870,929 Housing properties under construction at cost 44,875

915,804


- 48 -

Notes to the financial statements 11 TANGIBLE FIXED ASSETS – HOUSING PROPERTIES (continued)

In the valuing of housing properties, discounted cash flow methodology was adopted and key assumptions included. Discount rate (real) 5.5% Annual inflation rate 2.5% Level of annual rent increase 0.5% The carrying value of the housing properties that would have been in the financial statements had the assets been carried forward at historical costs less SHG, depreciation and impairment is as follows: 2013

£’000 2012 £’000

Historical cost 1,226,427 1,161,734 Social housing grant (616,508) (588,105) Other capital grants (41,482) (40,912) Depreciation and impairment (58,211) (51,458) 510,226 481,259 Home Buy and Starter Home Initiative 2013

£’000 2012 £’000

Long term investment in properties 21,388 22,552 Decrease in investment in properties (1,370) (1,164)

Cost of HomeBuy and Starter Home Initiative 20,018 21,388

Less: Social Housing Grant (20,018) (21,388) - - Impairment The Association considers individual schemes to be part of separate Income Generating Units (IGU’s) that are grouped by Boroughs when assessing for impairment, in accordance with the requirements of Financial Reporting Standard (“FRS”) 11- Impairment of Fixed Assets and Goodwill. During the year the Association recognised impairments of £1.7m (2012: £747k) using the value in use methodology at a discount rate of 5.5% on two development schemes. £1,100k relates to a development scheme at Chobham Farm, London E10, where the acquisition cost was increased as a result of settling planning and profit overages with the vendor. A further development scheme at Bromley-by-Bow, London E3, which is jointly owned with another Registered Provider, has been impaired by £600k as a result of anticipated negative returns on the Group’s share of the affordable homes on this site.


- 49 -


TANGIBLE FIXED ASSETS – OTHER

Freehold office £’000

Plant, equipment & furniture

£’000

Total £’000

Cost/Valuation

At 1st April 2012 39,110 557 39,667 Transfers in the year (7,673) (102) (7,775) Disposal (72) (289) (361) Additions - 227 227

At 31st March 2013 31,365 393 31,758

Depreciation At 1st April 2012 4,235 363 4,598 Disposal (72) (289) (361) Charged in year 952 - 952

At 31st March 2013 5,115 74 5,189

Net book value

At 31st March 2013 26,250 319 26,569

At 31st March 2012 34,875 194 35,069 13 INVESTMENTS a) Subsidiaries 2013

£ 2012

£

East Place Limited

East Thames Partnership Limited.

1

2

1

2

3 3 East Homes Limited holds 100% of the ordinary share capital of these subsidiaries. The profit for the financial year and net assets of both these subsidiaries are not significant.


- 50 -


INVESTMENTS (continued)

b) Properties

Investment Properties completed

£’000

Investment Properties

Under construction

£’000

Total £’000

Cost/Valuation

At 1st April 2012 11,898 3,776 15,674 Additions 889 1,108 1,997 Tenure changes 7,673 (1,718) 5,955 Impairment (1,341) - (1,341) Valuation of adjustment 3 - 3

At 31st March 2013

19,122 3,166 22,288

At 31st March 2012 11,898 3,776 15,674 Impairment A further impairment charge of £1.3m is recognised in respect of floors 4 and 5 of the Association’s head office at West Ham Lane. c) Shared equity 2013

£’000 2012 £’000

Cost 172 210 To progress modernisation of the Ocean Estate several properties were decanted. In two cases an incentive payment in the form of a loan was made to a leasehold tenant to cover the shortfall in the purchase price of a new property. The full purchase price of the two properties was £717k; East Homes provided shared equity loans of £203k plus expenses under the same principles as the HomeBuy scheme. Impairment During the year an impairment charge of £67k has been recognised on one of the shared equity properties. The latest independent valuation for this property is £79k against a former book value of £147k. The difference of £67k, which is primarily due to weakness in the commercial property market, is considered to be impaired and has been recognised as such.


- 51 -


DEBTORS: DUE AFTER 1 YEAR

The Association has provided interest bearing loan facilities of £34.35m to East Thames Partnership Limited for the purpose of allowing it to develop housing for outright sale. The interest rate on these loans ranges from 5.5% to 7.5%. Development costs due from East Thames Partnership Limited.

2013 £’000

32,012

2012 £’000

17,852

15

PROPERTIES FOR SALE

2013 £’000

2012 £’000

Completed properties for sale to other registered social landlords 1,751 174

Properties under construction for sales to other registered social landlord 72 -

Properties under construction for sales – other 2,377 2,378

Shared ownership properties – completed 4,534 2,171

Shared ownership properties – under construction 7,883 710

16,617

5,433 16 DEBTORS: DUE WITHIN 1 YEAR 2013

£’000 2012

£’000

Due within one year:

Arrears of rent and service charges 3,371 3,504

Less: Provision for bad and doubtful debts (988) (1,142) 2,383 2,362

Other debtors 24,083 11,529

Corporation tax

Prepayments and accrued income

9

715

-

993

Amounts due from group companies 3,996 8,907

31,186 23,791


- 52 -

Notes to the financial statements 17 CASH AT BANK AND IN HAND Cash at bank and in hand includes restricted cash of £3.5m (2012: £3.5m). The restricted cash is deposited with Barclays Bank as a security for group’s obligation under the East village project. As such this £3.5million can not be accessed for general use in business unless alternative form of security is provided. 18 CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

2013 £’000

2012 £’000

Loans (note 22) 6,126 69

Rent and service charges received in advance 1,907 1,852

Social Housing grants received in advance - 2,385

Corporation tax - 37

Amount due to group companies 14,868 10,190

Other taxation and social security 110 177

Other creditors 1,125 1,561

Accruals and deferred income 8,745 22,349

Retentions and uncertified work 752 661

Recycled capital grant fund (note 20) 2,259 380

Disposal proceeds fund (note 21) 1,330 1,134

37,222 40,795

19 CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR

2013 £’000

2012 £’000

Loans (note 22) 562,283 499,978

Accruals and deferred income 3,101 3,310

Recycled capital grant fund (note 20) 5,980 5,440

Disposal proceeds fund (note 21) 345 1,485

Retentions and uncertified work 854 1,372

Amount due to group company 1,696 308

Leasehold creditors 3,989 3,326

578,248 515,219


- 53 -

Notes to the financial statements 20 RECYCLED CAPITAL GRANT FUND

2013 £’000

2012 £’000

At 1st April 2012 5,820 3,166

Grants recycled 3,081 2,872

Interest accrued 36 21

Purchase/development of properties (698) (239)

Balance at 31st March 2013 8,239 5,820 Due within one year (2,259) (380) Due more than one year 5,980 5,440

£7.8m of the fund is due to the Homes & Community Agency and £0.4m is due to the Greater London Authority.

21 DISPOSAL PROCEEDS FUND

2013 £’000

2012 £’000

At 1st April 2012 2,619 2,526

Net sale proceeds recycled 182 160

Interest accrued 13 13

Purchase/development of properties (1,139) (80)

Balance at 31st March 2013 1,675 2,619 Due within one year (1,330) (1,134) Due after more than one year 345 1,485

Total funds are due to the Greater London Authority.


- 54 -


DISPOSAL PROCEEDS FUND (continued)

Grants from the Recycled Capital Grant Fund and Disposal Proceeds Fund are used to build more affordable homes and to meet local and regional housing priorities. On larger schemes use of these funds offers better value for money, therefore less funding is required from central government. 22 DEBT ANALYSIS

2013 £’000

2012 £’000

Due within one year:

Royal Bank of Scotland plc (‘Orchardbrook’) loan 63 58

East Treasury Ltd loan 6,050 -

THFC loans 13 11

6,126 69

2013 £’000

2012 £’000

Due after more than one year:

Royal Bank of Scotland plc (‘Orchardbrook’) loan 5,698 5,769

East Treasury 307,300 492,846

East Finance Bond

Other loans

247,934

1,351

-

1,363

562,283 499,978

Loans are repayable as follows:

2013

£’000

2012

£’000

Repayable on maturity* 51,250 51,250

Repayable by instalments

Within one year 6,126 69

Between one and two years 6,134 69

Between two and five years 18,460 10,004

After more than five years 486,439 438,655

568,409 500,047 * £ 1.25m THFC maturity date 02/09/2019 * £ 50m Barclays LOBO’S maturity date 09/02/2068


- 55 -

Notes to the financial statements 22 DEBT ANALYSIS (continued) As at 31 March 2013 the Association had loan facilities totalled £689.6m. These facilities include £432.4m of bank loans provided through East Treasury Limited and a £250m sterling bond provided through East Finance plc. Summary details are as follows: Lender Facility

East Treasury Ltd: Barclays Bank PLC £ 207.5m Nationwide Building Society £149.9m Lloyds Banking Group plc £ 75.0m

East Finance plc £ 250.0m Orchardbrook Ltd £ 5.8m The Housing Finance Corporation £ 1.4m Total £ 689.6m As at 31st March 2013 total outstanding loans amounted to £572.1m (2012: £502.2m). With the inclusion of £3.7m of unamortised issue costs the balance sheet total loan balance amounted to £568.4m (2012: £499.6m). During the year Association borrowed the full £250m bond proceeds from East Finance plc and repaid a net £180m to East Treasury Ltd, with the difference primarily applied to fund development of housing properties.

The loan portfolio benefits from having secured favourable interest margins on its bank borrowings and entering into hedging arrangements, resulting in a 4.7% average rate of interest on the loan portfolio, as swapped, at 31 March 2013. At 31 March 2013 the net mark-to-market exposure on £150m of interest rate swaps amounted to a £93.4m liability which is substantially secured by charging East Homes Limited properties and £8.4m cash collateral in favour of the counterparty banks. As interest rates increase, it is anticipated that this exposure will reduce. Of the interest rate hedges £110m are cancellable with staggered option dates ranging from 2013 to 2030. If cancelled the interest rates on the underlying debt would revert to a LIBOR basis. The exposure to potential changes in interest rates is monitored and in particular the possible outcomes should the cancellable swaps or Lender’s Option Borrowers Option (“LOBO”) loan facility be cancelled. The first LOBO call date on a £15m tranche passed on 9 February 2013 without any re-pricing being signalled by the counterparty bank. This tranche now remains subject to annual call options on each anniversary until 2068. The re-pricing option attaching to the remainder of the £50m LOBO consists of a £20m tranche in 2018 and a £15m tranche in 2023 and periodically thereafter until 2068.


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Notes to the financial statements 23 ANNUAL OBLIGATIONS UNDER OPERATING LEASES

2013 £’000

2012 £’000

Operating leases on land and buildings which expire:

Within one year - -

In the second to fifth years inclusive 1,300 1,300

Over five years 121 121 24 PROVISION FOR LIABILITIES

2013 £’000

2012 £’000

At 1st April 2012 648

576

Transfer from income and expenditure account:

New and increased provisions 686 124

Utilised in the year (294) (52)

At 31st March 2013 1,040 648

Comprising:

Dilapidation fund 841 648

Other provisions 199 -

1,040 648 The dilapidations provision represents the estimated costs of property improvements that the Group is required to perform under the terms of property leases; these leases run until 2015. Other provision relates to potential estimated operational liabilities arising from contractual obligations identified during the financial year. 25 SHARE CAPITAL

2013 £

2012 £

Shares of £1 each issued and fully paid:

At 1st April 2012 25 24

Shares issued during the year - 7

Shares surrendered during the year - (6)

At 31st March 2013 25 25 The shares provide members with the right to vote at general meetings but do not provide any rights to dividends or distributions on winding up.


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Notes to the financial statements 26 RESERVES ASSOCIATION

Revaluation Housing

properties £’000

Revaluation Investments

properties £’000

Restricted £’000

Revenue £’000

Total £’000

As at 1st April 2012

328,733

944

79

39,034

368,790

Surplus for the year - - - 2,838 2,838

Property revaluation adjustment 78,346 33 - - 78,379

Transfer in respect of depreciation on revalued properties

(1,155) - - 1,155 -

Transfer in respect of realised loss on disposal of revalued properties

(346) - - 346 -

At 31st March 2013

405,578

977

79

43,373

450,007

Restricted reserves comprise

2013

£’000

2012

£’000

Gift Aid 79

79

79 79 The Association plans its financial affairs to ensure that each year revenue income exceeds revenue expenditure. This policy ensures that the Association has a margin of safety to manage unexpected expenditure or shortfalls in income. The annual surpluses ensure that East Homes Limited is able to meet its commitment to providers of private finance and continues to provide social housing. Unlike commercial organisations the Association’s rules prevent the distribution of reserves. Instead these are applied to furthering the Association’s aims and objectives. At 31st March 2013 the Association’s reserves were all used in financing investments in social housing.


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Notes to the financial statements 27 FINANCIAL COMMITMENTS

2013 £’000

2012 £’000

Capital Commitments

Expenditure contracted for but not provided in the financial statements 91,465 167,617

Expenditure authorised by the Board but not contracted for 98,999 8,054

190,464 175,671

The expenditure will be funded from loan facilities (117.5m) which are in place at the date of signing the accounts, grants (20.1m) and operating cash flow (52.9m). The Group’s Treasury Management policy requires a minimum of funding facilities for fifteen month’s trading activities which are monitored by weekly and monthly cash flows. Some of these commitments extend over a longer period and the Group ensures that it has adequate resources to finance this expenditure by quarterly updates of its 30 year business plan. 28 CONTINGENT LIABILITIES The Association has provided certain financial guarantees in connection with trading obligations of East Regen Limited, a subsidiary undertaking of the Association’s parent company. At 31 March 2013, these guarantees amounted to £22.7m (2012: £15.8m). The Association receives capital grant from the Homes and Communities Agency, which is used to fund the acquisition and development of housing properties and their components. In certain circumstances upon disposal of grant funded properties the Association is required to recycle this grant by crediting the Recycled Capital Grant Fund. At 31 March 2013, the Association has disposed of components, which had received £9.03m (2012: £8.7m) of grant funding. Although the disposal of these components has not given rise to a relevant event for the purposes of recycling the grant (as the Association retains the property asset) it does have a future obligation to recycle such grant once the property is disposed of. As the timing of any future disposal is uncertain, in accordance with Financial Reporting Standard (“FRS”) 12 – Provision, Contingent liabilities and Contingent Asset, no provision has been recognised in these financial statements. 29 PARENT UNDERTAKING East Thames Group Limited, a charity registered under the Companies Act 2006 and registered with the Homes and Communities Agency as a Registered Provider, assumes responsibility as the parent company for its operating subsidiaries including East Homes Limited. The results of the company are included in the consolidated account of East Thames Group Limited d, its ultimate parent undertaking which is registered in England. A copy of its accounts can be obtained from its registered office, 29-35 West Ham Lane, Stratford, London E15 4PH.


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Notes to the financial statements 30 RELATED PARTIES At 31 March 2013 there were three members on the Board who had tenancy agreements or leases with the Association. The tenancy agreements have been granted on the same terms as for all other tenants, and the housing management procedures, including those relating to management of arrears are applied consistently to these tenants. East Treasury Limited acts as the borrowing vehicle for East Homes. Interest charges on these borrowings totalled £7.38m in the year. The Association’s finances also benefitted from a £250m bond issued by East Finance Plc, a fellow subsidiary of the East Thames Group. £106.5m was used to prepay existing loans East Thames Group Ltd recharges a fair proportion of the Group’s overheads consisting of the running costs of the Group’s head office at West Ham Lane, and shared services such as Finance, Human Resources, IT services, Internal Audit, Risk Management, Health & Safety, Marketing etc, to each of the Group’s entities. Group overheads totalled £14.6m in the year of which East Homes was charged £8.89m based on a Board approved basis for sharing Group overheads. East Homes made a donation of £1m to East Living Ltd, a fellow subsidiary, to meet its running costs, and £1.6m to East Thames Group Ltd as a contribution towards the “Improving East Thames” programme on the basis that East Homes would be the primary beneficiary of future efficiencies and savings from the programme, notably in reduced cost of asset management and repairs services. East Homes also received a sum of £1.52m in the form of gift aid from its subsidiary, East Thames Partnership Limited which was set up for the development of housing for open market sale at the Ocean Estate in Stepney, East London. A fellow subsidiary East Potential Limited which undertakes social and economic regeneration activity, supplied various services totalling £1.16m to East Homes clients. All other financial transactions with fellow subsidiaries within the Group arose in the normal course of business. The purchase and sales ledgers for the entire Group are held within the parent company, and all transactions analysed and posted on an entity basis. 31 FINANCIAL ASSETS AND LIABILITIES The Board policy on derivatives and financial instruments is explained in the Operating and Financial review and Board Report. Financial assets Other than short-term debtors, financial assets held are cash deposits and cash at bank. These are sterling denominated and the interest rate profile at 31 March was:


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Notes to the financial statements 31 FINANCIAL ASSETS AND LIABILITIES (continued)

2013 £’000

2012 £’000

Floating rate 15,143 14,450 Financial assets on which no interest is earned 6,726 2,981 21,869 17,431 The financial assets on which no interest is earned comprise current bank accounts. The remaining financial assets are floating rate, attracting interest at rates that vary with bank rates. Financial liabilities excluding trade creditors – interest rate risk profile The Association’s financial liabilities are sterling denominated. After taking into account various interest rate swaps, the interest rate profile of the Association’s financial liabilities at 31 March was:

2013 £’000

2012 £’000

Floating rate 100,000 70,000 Fixed rate 468,409 430,047 Total loans (note 23) 568,409 500,047 The fixed rate financial liabilities have a weighted average interest rate of 4.7% (2012:4.6%). The weighted average period for which the interest rates are fixed is 27 years (2012: 30 years), or 17 years (2012: 13 years) if the hedge counterparties exercise their option to cancel the fixed rate hedge contracts (swaptions) at their earliest call dates. The weighted average interest rate of these swaptions is 4.3% (2012: 4.2%). The floating rate financial liabilities comprise bank loans that bear interest at rates based on the one-month LIBOR plus a lender’s margin. The debt maturity profile is shown in note 22. Borrowing facilities The Association has undrawn committed borrowing facilities of £117.5m. The total facilities available at 31 March in respect of which all conditions precedent had been met were as follows: 2013

£’000 2012

£’000 Expiring in one year or less 6,126 69

Expiring after more than one year but not more than two years 6,134 69

Expiring after more than two years 556,149 499,909

568,409 500,047


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Notes to the financial statements 31 FINANCIAL ASSETS AND LIABILITIES (continued)

Fair values of financial assets and liabilities 2013 2012 Book

value £’000

Fair value £’000

Book value £’000

Fair value £’000

Primary financial instruments held or issued to finance the Association’s operations

Financial assets 21,869 21,869 17,342 17,342

Short-term financial liabilities and current portion of long-term borrowings (6,126) (6,126)

(69)

(69)

Long-term borrowings (562,283) (682,476) (499,979) (572,295)

Derivative financial instruments held to manage the interest rate profile - (93,455)

-

(74,769)

Total (546,540) (760,188) (482,706) (629,791) The fair values have been calculated by discounting cash flows at prevailing interest rates. Gains and losses on hedges As explained in the Report of the Board, the Association uses interest rate swaps to manage its interest rate profile. Changes in the fair values of these instruments, used as hedges, are not recognised in the financial statement until the hedged position matures. An analysis of these unrecognised gains and losses is as follows:

Gains £’000

Losses £’000

Total net

gains / (losses)

£’000

Unrecognised gains and losses on hedges at 31 March 2013

-

(93,455)

(93,455)

Of which:

Gains and losses expected to be recognised in 2013-14 - - -

Gains and losses expected to be recognised in 2014-15 or later

-

(93,455)

(93,455)

€¦ · east homes limited is part of the east thames group, and owns or manages in excess of...

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