Sanctuary sets out restructure · 2017. 3. 6. · Restructure. As such, a group structural change...
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March 2016/Social Housing/7 News Interview 6/Social Housing/March 2016 Photography: Ed Maynard Sanctuary sets out restructure EBITDA margin – Sanctuary by operation 34.5 46.2 12.7 39.1 50.0 housing care student group support 30.0 40.0 10.0 5.0 45.0 25.0 10.0 35.0 15.0 0.0 % 7.3 Operating surplus 2015 Change /deficit £m % Housing accomm. 122.9 8.95 Sheltered & supported housing 14.1 13.71 Shared ownership 1st 5.2 126.09 tranche sales Student accomm. 11.8 6.31 Care homes * 10.9 12.37 Domiciliary care * -0.5 -138.46 *Extra care was moved from care homes to domiciliary care. This resulted in £1.3m of operating surplus being reclassified from care homes to domiciliary care. CEO David Bennett talks to Chloe Stothart about government policy changes, takeovers and supported housing Being the UK’s largest housing association has not made Sanctuary Group immune to the major reforms sweeping the housing sector. Following the July 2015 Budget and subsequent policy announcements, the group is planning some significant changes of its own, including a restructure to better show earnings across its different business streams. Sanctuary – which had 98,900 homes and a £624m turnover at the last financial year-end – is looking to acquire a house builder to deliver homes for sale and is also open to the takeover of other HAs. While the group has generally been publicity shy, the government’s branding of the sector as inefficient has prompted its CEO David Bennett to speak out. Mr Bennett says government criticism has failed to take account of whether or not individual associations develop homes or deliver socially important but low-margin services, such as supported housing. He says: ‘The risk at the moment is that by doing something worthwhile you are branded as inefficient. ‘I do think we [at Sanctuary] have always kept out of the public eye because there was no particular reason to be in it. But I think it is different now. I think it’s important for people to see what we have achieved and what we can achieve – and not throw the baby out with the bathwater in terms of policy.’ Restructure As such, a group structural change – which is subject to lender agreement – is partly aimed at demonstrating the efficiency of various streams of the business because it separates out the areas of high earnings – such as social housing – from the lower earning areas including care. It also reflects that Sanctuary will be building fewer homes for rent and more for sale. Under a new, not for profit parent organisation, there will be a series of subsidiaries, with social housing assets ringfenced. It is looking at one subsidiary for development activities, including homes for open market sale; another for commercial work, which comprises student accommodation, domiciliary care, telecare and market rented properties; another for the organisation’s 68 care homes for older people; and one for affordable housing, which also includes supported housing and maintenance. There is also the option that supported housing moves into its own subsidiary, possibly joined by telecare and domiciliary care. Mr Bennett says the group had wanted to reorganise for several years to better reflect the way it operates, but there had been reasons not to. For example, he says it could have meant an increased cost of funds for Sanctuary Housing Association, currently the rated parent organisation, which borrows at advantageous sector rates before lending to other parts of the group. However, the credit rating agencies have now warned the sector that if earnings fall, then ratings could fall too. This makes it important to demonstrate efficiency, which a clearer structure should help with. He also says Sanctuary should in fact be able to lower its costs of funds by reviewing its funding structure and treasury facilities, including the restructuring of some loans with restrictive covenants that it inherited when it took over other landlords. Meanwhile, the planned abolition of regulatory disposal consents under the Housing and Planning Bill would make it easier for Sanctuary to transfer properties into new subsidiaries, which means restructuring now makes more sense than before, he adds. Mapping earnings Sanctuary has business streams with a range of margins that are not clearly separated in the current structure. Sanctuary’s earnings before interest, tax, depreciation and amortisation (EBITDA) margin for care is 12.7 per cent, while supported housing is 7.3 per cent and social housing is 46.2 per cent. This takes the group figure to 34.5 per cent. ‘The only way we can properly present that and show the value within the commercial businesses is to separate them out completely,’ says Mr Bennett. He says the care and commercial subsidiaries have strong earnings when compared to their peers and therefore should be able to borrow at a good rate under their own name. For example, the EBITDA of the care business, while low compared to social housing, looks stronger in the context of a number of large, private care companies. The reorganisation also opens the way for Sanctuary to sell parts of the business should it wish to in future. ‘It is tidier [in terms of ] where people are employed and all the funding is clear, so if the parent wanted to sell the business we could sell it. It might be in the future, with different political changes, that the incentives are different and we may wish to put more money into something else,’ he says. Mr Bennett is confident lenders will be receptive to the restructure, saying it shows the group will ‘continue to grow and be successful in the light of whatever the prevailing policy is’. He adds there are few implications for staff apart from job title changes in the senior management team. It made about 150 redundancies following the Budget, which were largely voluntary and mainly from central services. Sanctuary has identified savings of £11.8m for 2016/17 and plans to increase its annual savings by roughly £5m a year for the following three years to reach £27m, largely to protect itself from the compounding effects of the social housing rent cut, which is set to start in April 2016. Mr Bennett says some of the cuts are ones Sanctuary would prefer not to make, such as reductions in training and community investment budgets. It also invested in a new IT system which has enabled it to save money in finance and information services. Another financial change is Sanctuary’ decision to adopt EU IFRS rather than FRS 102 under new accounting rules. While the move gives it the option of listing parts of its business, Mr Bennett describes that as more of a benefit than a driver for the choice of accounting standard. Mr Bennett says: ‘I would not be at all surprised if there are listings of subsidiary vehicles [by HAs] in the future. We would want to not rule anything like that out.’ Development plans Until 2015, Sanctuary’s development programme was principally social rented housing. But despite the board’s desire to continue building the tenure, the post-Budget revised programme submitted to the Homes and Communities Agency (HCA) in October 2015 was mainly shared ownership, some market rent and very little rented accommodation due to low grant levels. At present about 16,000 of the 24,000 homes Sanctuary plans to build in the next decade are shared ownership. However, it is now likely to tweak this so that it builds less shared ownership and more Help to Buy following a large number of housing associations increasing the amount of shared ownership in their development programmes. ‘We think the market will be swamped with shared ownership because everyone is doing the same things,’ says Mr Bennett. He adds that buyers tend to prefer Help to Buy and only go for shared ownership once it is sold out. He acknowledges that more build for sale brings more risk, but adds: ‘We have the skills and resources and track record so I think if other people can build houses and make a success out of that then I think we should be able to as well. There has just not been the incentive [before].’ The rest of the 24,000 are made up of about 3,000 affordable rented homes to replace those expected to be sold through Right to Buy – although this could change depending on sales levels and the availability of funding for the discount from council property sales. The remainder is made up of outright sale, market rent and care home development. A growing amount of this new development will be built by Sanctuary’s own construction arm, which has built about 40 homes over the last few years. Since the association will be building far more housing for sale, which puts it in competition with private housebuilders, Mr Bennett says it makes sense for it to have a housebuilder arm, rather than buying properties from housebuilders and paying their profits – a margin it could keep if it built the homes. It is now on the lookout for a contractor or developer it could buy as a means to build up the business. If Sanctuary makes additional money from home sales then Mr Bennett says the board would probably want to spend it on foyer schemes, for example, which help homeless young people. Sanctuary is also now reviewing how to make its supported housing service more efficient, having already reduced the amount of support services it provided a year ago and cut back on loss-making work. It follows government plans to cap housing benefit at the local housing allowance rate and the rent cut, from which supported housing only has a year reprieve while the government undertakes its own review. Mergers Another form of growth for the group is HA takeovers. Sanctuary has taken over three notably troubled associations – Shaftesbury in 2007, Carr Gomm in 2010 and Cosmopolitan in 2013 – and has merged with several other HAs over the years (see graph, below). Mr Bennett is an enthusiast for rescue-based mergers and thinks they work better than negotiated takeovers that are not in trouble as the talks can be long-winded. He describes the new ‘merger code’ as a ‘waste of time’, as it does not address the key barriers, such as the ‘vested interest’ of employees and boards. ‘We did [Cosmopolitan] much quicker than anybody is going to do a negotiated merger. I think with a situation like that it is clear what the reasons are what the motives are.’ He adds: ‘We can sort them out and it adds to our strengths because we end up with the assets, we rationalise the cost base and the governance arrangements and you end up with something that is rather good. ‘So although everybody was scared to death of Cosmopolitan, we could see it for what it was and it has worked out really well for us.’ He adds they would be interested in doing more rescue mergers. ‘I hope there aren’t too many [failures] but over the years they are bound to happen. I do think it is inevitable that if you relax regulation the risk of that increases,’ he says. Sanctuary Group – turnover growth 1990 700 600 500 400 300 200 100 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 group turnover £m £14m Deansgate Housemartin Sanctuary Scotland Sanctuary Care and Home Care South Hackney Estates stock transfer £16m £20m £39m £48m £56m £65m £81m £90m £100m £109m £112m £119m £132m £136m £135m £170m £226m £307m £344m £365m £405m £432m £474m £592m £624m Ardler and SMS Ashley Homes Cumbernauld Riviera Beth Johnson, Hereward Housing and Asra Midlands Shaftesbury Housing, Charter Community Housing and Rochford Carr-Gomm and Heart of England Tenants First, LNT and Asra Care homes, Asra stock disposal Cosmopolitan Housing Group
Transcript of Sanctuary sets out restructure · 2017. 3. 6. · Restructure. As such, a group structural change...
March 2016/Social Housing/7
NewsNewsNewsNews Interview
6/Social Housing/March 2016
Phot
ogra
phy:
Ed
May
nard
Sanctuary sets out restructure
EBITDA margin – Sanctuary by operation
34.5
46.2
12.7
39.1
50.0
housing care studentgroup support
30.0
40.0
10.0
5.0
45.0
25.0
10.0
35.0
15.0
0.0
%
7.3
Operating surplus 2015 Change /deficit £m % Housing accomm. 122.9 8.95
Sheltered & supported housing
14.1 13.71
Shared ownership 1st 5.2 126.09tranche sales
Student accomm. 11.8 6.31
Care homes * 10.9 12.37
Domiciliary care * -0.5 -138.46*Extra care was moved from care homes to domiciliary care. This resulted in £1.3m of operating surplus being reclassified from care homes to domiciliary care.
006-007.SH.MAR.news.indd All Pages 02/03/2016 10:21
CEO David Bennett talks to Chloe Stothart about government policy changes, takeovers and supported housing
Being the UK’s largest housing association has not made Sanctuary Group immune to the major reforms sweeping the housing sector.
Following the July 2015 Budget and subsequent policy announcements, the group is planning some significant changes of its own, including a restructure to better show earnings across its different business streams.
Sanctuary – which had 98,900 homes and a £624m turnover at the last financial year-end – is looking to acquire a house builder to deliver homes for sale and is also open to the takeover of other HAs.
While the group has generally been publicity shy, the government’s branding of the sector as inefficient has prompted its CEO David Bennett to speak out. Mr Bennett says government criticism has failed to take account of whether or not individual associations develop homes or deliver socially important but low-margin services, such as supported housing.
He says: ‘The risk at the moment is that by doing something worthwhile you are branded as inefficient.
‘I do think we [at Sanctuary] have always kept out of the public eye because there was no particular reason to be in it. But I think it is
different now. I think it’s important for people to see what we have achieved and what we can achieve – and not throw the baby out with the bathwater in terms of policy.’ RestructureAs such, a group structural change – which is subject to lender agreement – is partly aimed at demonstrating the efficiency of various streams of the business because it separates out the areas of high earnings – such as social housing – from the lower earning areas including care. It also reflects that Sanctuary will be building fewer homes for rent and more for sale.
Under a new, not for profit parent organisation, there will be a series of subsidiaries, with social housing assets ringfenced. It is looking at one subsidiary for development activities, including homes for open market sale; another for commercial work, which comprises student accommodation, domiciliary care, telecare and market rented properties; another for the organisation’s 68 care homes for older people; and one for affordable housing, which also includes supported housing and maintenance.
There is also the option that supported housing moves into its own subsidiary, possibly joined by
telecare and domiciliary care. Mr Bennett says the group had wanted to reorganise for several years to better reflect the way it operates, but there had been reasons not to.
For example, he says it could have meant an increased cost of funds for Sanctuary Housing Association, currently the rated parent organisation, which borrows at advantageous sector rates before lending to other parts of the group.
However, the credit rating agencies have now warned the sector that if earnings fall, then ratings could fall too. This makes it important to demonstrate efficiency, which a clearer structure should help with.
He also says Sanctuary should in fact be able to lower its costs of funds by reviewing its funding structure and treasury facilities, including the restructuring of some loans with restrictive covenants that it inherited when it took over other landlords.
Meanwhile, the planned abolition of regulatory disposal consents under the Housing and Planning Bill would make it easier for Sanctuary to transfer properties into new subsidiaries, which means restructuring now makes more sense than before, he adds.
Mapping earningsSanctuary has business streams with a range of margins that are not clearly separated in the current structure.
Sanctuary’s earnings before interest, tax, depreciation and amortisation (EBITDA) margin for care is 12.7 per cent, while supported housing is 7.3 per cent and social housing is 46.2 per cent. This takes the group figure to 34.5 per cent.
‘The only way we can properly present that and show the value within the commercial businesses is to separate them out completely,’ says Mr Bennett. He says the care and commercial subsidiaries have strong earnings when compared to their peers and therefore should be able to borrow at a good rate under their own name. For example, the EBITDA of the care business, while low compared to social housing, looks
stronger in the context of a number of large, private care companies. The reorganisation also opens the way for Sanctuary to sell parts of the business should it wish to in future.
‘It is tidier [in terms of] where people are employed and all the funding is clear, so if the parent wanted to sell the business we could sell it. It might be in the future, with different political changes, that the incentives are different and we may wish to put more money into something else,’ he says.
Mr Bennett is confident lenders will be receptive to the restructure, saying it shows the group will ‘continue to grow and be successful in the light of whatever the prevailing policy is’.
He adds there are few implications for staff apart from job title changes in the senior management team. It made about 150 redundancies following the Budget, which were largely voluntary and mainly from central services.
Sanctuary has identified savings of £11.8m for 2016/17 and plans to increase its annual savings by roughly £5m a year for the following three years to reach £27m, largely to protect itself from the compounding effects of the social housing rent cut, which is set to start in April 2016.Mr Bennett says some of the cuts are ones Sanctuary would prefer not to make, such as reductions in training and community investment budgets. It also invested in a new IT system which has enabled it to save money in finance and information services.
Another financial change is Sanctuary’ decision to adopt EU IFRS rather than FRS 102 under new accounting rules. While the move gives it the option of listing parts of its
business, Mr Bennett describes that as more of a benefit than a driver for the choice of accounting standard.
Mr Bennett says: ‘I would not be at all surprised if there are listings of subsidiary vehicles [by HAs] in the future. We would want to not rule anything like that out.’
Development plansUntil 2015, Sanctuary’s development programme was principally social rented housing. But despite the board’s desire to continue building the tenure, the post-Budget revised programme submitted to the Homes and Communities Agency (HCA) in October 2015 was mainly shared ownership, some market rent and
very little rented accommodation due to low grant levels. At present about 16,000 of the 24,000 homes Sanctuary plans to build in the next decade are shared ownership.
However, it is now likely to tweak this so that it builds less shared ownership and more Help to Buy following a large number of housing associations increasing the amount of shared ownership in their development programmes.
‘We think the market will be swamped with shared ownership because everyone is doing the same things,’ says Mr Bennett. He adds that buyers tend to prefer Help to Buy and only go for shared ownership once it is sold out. He
acknowledges that more build for sale brings more risk, but adds: ‘We have the skills and resources and track record so I think if other people can build houses and make a success out of that then I think we should be able to as well. There has just not been the incentive [before].’
The rest of the 24,000 are made up of about 3,000 affordable rented homes to replace those expected to be sold through Right to Buy – although this could change depending on sales levels and the availability of funding for the discount from council property sales. The remainder is made up of outright sale, market rent and care home development.
A growing amount of this new development will be built by Sanctuary’s own construction arm, which has built about 40 homes over the last few years.
Since the association will be building far more housing for sale, which puts it in competition with private housebuilders, Mr Bennett says it makes sense for it to have a housebuilder arm, rather than buyingproperties from housebuilders and paying their profits – a margin it could keep if it built the homes.
It is now on the lookout for a contractor or developer it could buy as a means to build up the business.
If Sanctuary makes additional money from home sales then Mr Bennett says the board would probably want to spend it on foyer schemes, for example, which help homeless young people.
Sanctuary is also now reviewing how to make its supported housing service more efficient, having already reduced the amount of support services it provided a year ago and cut back on loss-making work. It
follows government plans to cap housing benefit at the local housing allowance rate and the rent cut, from which supported housing only has a year reprieve while the government undertakes its own review.
MergersAnother form of growth for the group is HA takeovers. Sanctuary has taken over three notably troubled associations – Shaftesbury in 2007, Carr Gomm in 2010 and Cosmopolitan in 2013 – and has merged with several other HAs over the years (see graph, below).
Mr Bennett is an enthusiast for rescue-based mergers and thinks they work better than negotiated takeovers that are not in trouble as the talks can be long-winded. He describes the new ‘merger code’ as a ‘waste of time’, as it does not address the key barriers, such as the ‘vested interest’ of employees and boards.
‘We did [Cosmopolitan] much quicker than anybody is going to do a negotiated merger. I think with a
situation like that it is clear what the reasons are what the motives are.’
He adds: ‘We can sort them out and it adds to our strengths because we end up with the assets, we rationalise the cost base and the governance arrangements and you end up with something that is rather good.
‘So although everybody was scared to death of Cosmopolitan, we could see it for what it was and it has worked out really well for us.’
He adds they would be interested in doing more rescue mergers.
‘I hope there aren’t too many [failures] but over the years they are bound to happen. I do think it is inevitable that if you relax regulation the risk of that increases,’ he says.
Sanctuary Group – turnover growth
1990
700
600
500
400
300
200
100
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
200
0
200
1
200
2
200
3
200
4
200
5
200
6
2007
200
8
200
9
2010
2011
2012
2013
2014
2015
grou
p tu
rnov
er £
m
£14m
Deansgate
Housemartin
Sanctuary Scotland
Sanctuary Care and Home Care
South HackneyEstates stock transfer
£16m £20m£39m £48m £56m £65m
£81m £90m £100m £109m £112m £119m £132m £136m £135m£170m
£226m
£307m£344m
£365m
£405m£432m
£474m
£592m
£624m
Ardler and SMS
Ashley Homes
Cumbernauld
Riviera
Beth Johnson, Hereward Housing and Asra Midlands
Shaftesbury Housing, Charter Community
Housing and Rochford
Carr-Gomm and Heart of England
Tenants First, LNT and Asra Care homes, Asra
stock disposal
CosmopolitanHousing Group
