Plymouth Community Homes (PCH) has been given an A+ rating by Standard & Poor’s (S&P), despite a fall in margins on the back of £12m in tower block costs.
The rating – with a negative outlook – comes as the association looks to deliver 600 new homes in Plymouth and the surrounding areas by 2022, largely through its flagship North Prospect regeneration scheme.
S&P highlighted strong enterprise and financial profiles, driven by solid operational performance, low levels of debt, and robust liquidity. It commented on PCH’s “low leverage” and “robust interest coverage”.
It said the strong profile was despite a narrowing in margins expected on the back of spending on the removal and replacement of cladding on the Mount Wise Towers, following the Grenfell Tower fire in 2017.
The note by S&P said PCH’s financial performance will be weaker than that of its peers, with forecast-adjusted EBITDA margins below 10 per cent in 2019/20, due to PCH having to support “high one-off costs of about £12m related to tower block upgrades”. The agency said it expects PCH’s margins to increase gradually afterwards.
Nick Jackson, director of business services and development at PCH, said: “This rating is testament to our handling of the re-cladding of the Mount Wise Towers, now supported by government funding, and our regeneration of North Prospect – both huge undertakings that carry financial risks.”
He explained that the housing association has secured grant funding for the full cost “but in the strict calculation of the metrics the grant funding is ignored”.
Mr Jackson added: “Receiving an A+ credit rating demonstrates our financial security to all those with an interest in PCH and is a good rating in the housing association sector.
“It is the culmination of many years of work to ensure that we make sound business and financial decisions – balancing the need to invest in our assets and communities and commit funds to development and regeneration, whilst continuing to provide excellent services to our residents.”
PCH was established in 2009 following a large-scale voluntary transfer from Plymouth City Council, when about 15,000 homes were transferred with a remit to improve the condition of its stock.
Mr Jackson said PCH has one of the lowest levels of debt in the sector and very low gearing compared to asset values, giving the association “strong balance sheet capacity”.
He said adjusted operating margins (EBITDA MRI equivalent) will reduce as the spend on tower blocks to remove cladding is incurred in the next financial year.
PCH had one of the highest costs of funds in the sector at one point, but repaid an expensive 30-year embedded swap and implemented a new capital structure in 2017 including private placements and term loans. The private placement attracted funding from US and Korean investors.
The refinancing reduced the group’s weighted average cost of capital from more than seven per cent to less than three per cent, and enabled the buy-out of the embedded forward fixed rate hedge in an existing £110m facility from RBS, completed at a cost of £38m.
Mr Jackson said the group felt it was the right time for a public rating, now that it has “established plans for the removal and replacement of cladding on the Mount Wise tower blocks and can focus on our future development plans”.
PCH does not have market sales but is planning to enter the market initially through joint ventures, as a means to cross-subsidise social and affordable housing. It is also planning to build more shared ownership homes.
S&P said PCH is moving to more shared ownership first tranches and open-market sales, linked to the North Prospect regeneration project.
Sales are set to remain below 15 per cent in the next three years, in line with PCH’s “golden rule” setup.
Mr Jackson said two of the five phases of North Prospect have been completed, two further phases are under way, and the final phase already has financial support from Plymouth City Council and the Housing Infrastructure Fund but is currently awaiting funding decisions from Homes England in order to proceed.
The aim is to keep the turnover from open market sales and shared ownership below 15 per cent of gross turnover, and the group has trigger points on the level of unsold equity, which prompt corrective action when reached.
The Regulator of Social Housing last month upgraded PCH’s financial viability rating from a V2 to a V1.