Clarion consults residents on RP consolidation plan

Circle came to Clarion with nine registered providers (RPs), all legally separate, with their own boards, properties, accounts and funding.

 

Merger year

Reporting its performance for the year to March 2017, the group said its operating margin remains strong despite a number of merger-related costs and “some very real cost pressures in [the] year principally arising from additional repairs and maintenance spend in Circle to rectify service failings in London”.

 

The group returned a 36.4 per cent operating margin for the year. Excluding the one-off costs, that figure increases to 41.2 per cent.

 

Mark Washer, chief financial officer, said creating the UK’s largest housing provider and laying the foundations for the future did come at a “huge amount of cost” in 2016/17, including efforts to recover “the underperformance in service delivery that was going on in Circle and continues to go on in parts of Circle”.

 

Costs also included a write-off on an enterprise resource planning (ERP) system. Both Affinity Sutton and Circle had change programmes underway pre-merger, each rolling out their own ERP platforms. Clarion will have one ERP. In addition, there were consultancy and legal fees.

 

The group plans to deliver 50,000 homes over 10 years, alongside its investment in its existing homes and a commitment to address failings in the Circle repairs service.

 

Its aim is to take the average cost per unit to Affinity Sutton’s pre-merger levels. Procurement and streamlining management structures and offices would all contribute to efficiencies, Mr Washer added.

 

Mr Washer said that despite all the challenges, Clarion has reduced the year’s cost per unit in real terms.

 

He added that the group is “very aware we’re in the spotlight in terms of the ambition we have set out.

 

“We’re very confident we have the financial strength and the ability on the ground... People will be looking at us and saying ‘are they going to deliver it?’ – and we are clear we can and we will,” he said. Speaking about the group’s immediate priorities, he said: “I think the challenge for this business is getting back to the sort of level of service delivery that we had always expected.”

 

Mr Washer said that the action plan put in place to transform service delivery has met its targets, and the group is taking further steps to ensure improvements are sustainable.

 

Stock and development

 

In terms of development, the group started 1,863 homes in the year and completed 1,340 units. Sales income was down from £223.8m to £135.7m, which Mr Washer said had been forecast. The CFO also pointed to an 8,000-home pipeline as of March 2017, which has since increased.

 

However, he added there was no need to rush into development or the stock plan to churn up to one per cent of total stock each year – equating to more than 1,000 homes – which the group set out to investors last year.

 

Clarion continues to explore potential new joint venture partners – which may include a multifaceted partnership approach with more than one organisation – having recently signed a strategic partnership with the Greater London Authority.

 

There is also a renewed focus on land acquisition.

 

Funding

Gareth Francis, director of treasury and corporate finance at Clarion, said after securing lender consents at merger – when loan arrangements, covenants and documentation were “harmonised” across the £3.3bn debt portfolio, supported by the release and recharge of 31,000 properties used as security – there is no further financial restructuring required around the consolidation.

 

He said it leaves the group “ready for issuance and ready for any negative impact that a drop in interest rates might have on mark to markets”.

 

Mr Francis said longer-term plans are a greater shift towards the capital markets. Clarion currently has a third debt capital markets and two-thirds bank debt, which Mr Francis is likely to “invert” over time.

 

Commercial business

The group has also invested £227m of debt and equity into its commercial arm, Latimer, representing 16.6 per cent of revenue reserves.

 

Mr Washer said this represents a ring-fenced vehicle for commercial activity, adding that "investors in the housing association will take a great deal of comfort from that, with the expectation that lending will be on a non-recourse basis".

 

There are a set of specific ‘golden rules’ for its private sales activity, including ensuring that the work in progress balance does not exceed £600m; that development sales do not exceed 40 per cent of turnover; that the housing associations’ investment in Latimer does not exceed 20 per cent of its revenue reserves; and that Latimer has at least £1.5 of equity and revenue reserves for every £1 it could potentially lose if house prices fell by 35 per cent.