VALUE FOR MONEY Self-Assessment 2017

Transcription

1 VALUE FOR MONEY Self-Assessment 2017

2 Contents Page 1 Introduction 1 2 Our VfM strategy 2 3 Our Approach to Delivering VfM 3 4 Achievements in the Year under Review 5 5 Targets for the Future 10 6 How Do We Compare with our Peers 12 7 Understanding the Return on our Assets 20 8 Social Investment and Social Impact 25 9 Board VfM Self-Assessment

3 VALUE FOR MONEY ANNUAL SELF-ASSESSMENT Introduction 1.1 The Board of Management and Executive Management Team have conducted a rigorous self-assessment of how Cobalt Housing is achieving value for money in delivering its purpose and objectives. This report provides our stakeholders with a summary of the findings of this self-assessment. 1.2 By providing a robust and evidenced based analysis of: what we are aiming to achieve how we allocate scarce resources between competing priorities how efficiently we use the resources available how good are our service standards and performance results how successful are we in achieving the desired outcomes we will demonstrate that Cobalt is an effective social business. What do we mean by VFM? 1.3 VFM is not just about costs, it is about getting the most from all the resources we have available. A high cost service can still be VFM if performance levels are also high and the results are good. Likewise a low cost service may not be VFM if its standards are low and the results are poor. 1.4 Good VFM is about competitive costs, high productivity and successful outcomes. The objective is to achieve the best balance between cost, quantity and quality and then to keep this under regular review. 1.5 The technical definition of VFM is the relationship between: Economy (how much we spend) Efficiency (productivity what we get for it) Effectiveness (the impact it makes satisfaction, PI s etc.) 1.6 Delivering value for money is not a separate or discrete function within the organisation. It should be integral to the way we work and part of the day job for everyone we employ or we work with. 1.7 At its core it is about being a well-run and effective social business. It is having a clear understanding of what we are here to achieve and then engineering our business in such a way to maximise its delivery. 1.8 In this report the Board of Management attempt to provide stakeholders with a whole organisation view of how Cobalt ensures that its assets and resources are being used as effectively as possible to deliver the aims of the organisation. 1

4 2 Our VfM Strategy 2.1 Cobalt has a strong track record in delivering improved VFM across its services. Improving VFM is a key business driver and our approach to achieving this is set out in our VFM strategy which opens with the following statements: We are here to deliver the best possible outcomes for our tenants and residents from the resources we have available. Our drive to deliver the widest range and highest quality of customer services possible makes value for money a corporate priority. The expectations and aspirations of our customers are increasing all the time. Improving VfM is therefore much more than good practice. Squeezing every last drop of value from the assets and resources we have available is the key to maximising our investment into our homes, neighbourhoods and services; this will help us improve performance and protect our financial viability. 2.2 Onward s VfM strategy provides the group-wide framework under which each member of the group develops their specific strategy for delivering the group s aims and objectives. Cobalt s VFM strategy sets out six key objectives: Effective governance Creating a VfM culture Promote the Board s role in determining our values, strategic direction and priorities for achieving VfM. Promote ownership and challenge by the Board and management of the VfM agenda, setting of ambitious targets for improvement. To embed VfM into the culture of Cobalt and make VfM an integral part of everything we do. Best use of our resources Best use of our assets Customer insight and scrutiny Effective partnerships To be the most successful business we can be, using our resources as effectively as possible, providing high quality services and achieving our objectives at the best possible price. Have a clear understanding of the financial and social returns from all our assets and use this information to make informed decisions on their management, improvement, redevelopment or disposal. Ensure our services are shaped around customers and that customers are fully involved in setting and scrutinising service priorities and standards Establish effective relationships with strategic partner organisations and other local service providers to deliver the best possible outcomes for our residents. 2.3 The Board reviews performance against the agreed VfM targets and objectives set in the previous financial year along with the targets set for the future. This approach has proved successful and while there is always more to do, Cobalt has an excellent track record of delivering improved VFM. This has had a positive impact on services to residents through improved performance and greater choice, re-investing efficiency gains into delivering extra. 2.4 Our VfM Strategy can be found at: Link to Cobalt VfM Strategy 2

5 3 Or Approach to Delivering VfM 3.1 The Board is responsible for the Association s VfM strategy and for overall performance and its compliance with regulatory requirements. By this continual focus on VfM principles we embed this culture into our mainstream activity. 3.2 Cobalt s strategy to delivering VfM or what we prefer to call achieving success is based upon a simple but powerful approach of three key elements: Doing the right things: Having clarity of purpose and objectives agreed in the light of stakeholder expectations. Doing them in the right way Making the best use of all the assets and resources available to deliver expected standards of service quality. Delivering the right results Achieving the required outcomes and impacts in both financial and social value. 3.3 Value for money is a journey rather than a destination and while we have a strong track record in delivering improvements, there is always more we can achieve. Given the financial challenges ahead, making even better use of our resources has never been more important. 3.4 The Board delivers this through an integrated approach including the following actions: Integrated Approach to VfM i. Set budgets and business plans which include efficiency targets and improvements to services based on action plans. We engage in rigorous sensitivity analysis assessing all risks within the organisation and have adequate safeguards in place against such risks occurring. ii. iii. iv. VfM is embedded within the culture of the organisation through the Wise Spending and Golden Thread campaigns, as well as attendance at relevant seminars, conferences and training activities. VfM is part of our day-to-day activities and we encourage our staff to embed the thought process of treating the organisations money as their own, would they be willing to pay such a price for a particular service? Half yearly updates to board on performance against efficiency targets ensuring VfM objectives are being met and remain robust and relevant. Reporting to board on VfM developments, regulatory expectations and comparative cost results. Performance being closely monitored through regular analysis of KPI s against internal targets and comparatives and benchmarked against the sector averages and other registered providers. v. Comprehensive board review of our self-assessment to ensure consistency with published financial results and the publication of this self-assessment document. vi. Advice and reviews by external professionals as appropriate to help further enhance our VfM procedures and open them up to extreme scrutiny. 3

6 Corporate Objectives: Allocating Finite Resources 3.5 If we are to demonstrate that we are delivering value in money, it is first necessary to consider what the organisation is trying to achieve. Our purpose cascades from the objects set out in our rules, through our vision and values, into our key corporate objectives and finally into the impact we expect to have and the social value we aim to create. 3.6 Our objectives and expected outcomes are formulated with regard to the objectives and expectations of our stakeholders. These groups often have competing priorities, including some that may differ from our own. 3.7 Our tenants for example, quite rightly prioritise investment into their homes and the services they receive. The Government on the other hand, believes that the sector should set about reducing its running costs and use the resources to increase the supply of new homes. 3.8 The four year rent reduction from 2016 and 2019 will reduce our rents by around 12% in real terms. Not all the savings required will be found by doing the same things more efficiently. Difficult choices will need to be made as to where our reduced resources are directed. 4

7 3.9 The role of the Board is to reconcile the values and aspirations of our stakeholders with its own. In the diagram below we summarise the primary expectations of our key stakeholders and how we are delivering against them. How we prioritise our spending 3.10 Cobalt has a robust approach to decision making and how scarce resources are rationed between competing priorities. At a strategic level the Board and Executive Management Team agree the organisations corporate objectives We use a zero based approach to budget setting in which proposals are created from the ground up based upon actual business needs. The board and Executive Management Team scrutinise the initial budget submissions taking into account: a business case supporting any proposed growth or new initiative the link to corporate priorities an assessment of the current value for money indicators for the activity area targets for future improvement the expected financial or social return on the investment as appropriate 5

8 4 Achievements in the Year under Review Financial Performance 4.1 We have a strong track record of outperforming our business plan s financial expectations. This reflects our prudent approach to protecting our social assets. We make a surplus for a purpose and utilise our financial strength and capacity to deliver our business objectives and investment priorities. Income and expenditure account m m m m m Turnover Operating costs and cost of sale (17.0) (20.7) (19.7) (20.1) (16.8) Gain on disposal of housing property Operating surplus Net interest charge (1.7) (1.8) (1.6) (1.7) (1.7) Surplus on disposal of assets Surplus for the year after tax Financial Ratios Operating margin 40.8% 28.0% 30.2% 20.9% 31.0% Net margin 34.8% 22.0% 24.5% 16.0% 25.1% EBITDA margin 62.9% 49.4% 51.6% 43.9% 53.1% EBITDA (MRI) margin 48.4% 33.4% 31.6% 23.3% 20.2% EBITDA (MRI) Interest cover % 762% 522% 511% 328% 267% 4.2 Thanks to our competitive cost base and focus on improving VfM, far exceeded our financial targets. Despite our average rents falling by 1% we improved our bottom line and ended the year in a very robust financial position. Turnover and Operating Margins 4.3 Our aim is to maintain competitive and affordable costs and protect our financial viability. This is against current financial environment where our rents are going to reduce by 1% each year until Inflation is also expected to run ahead of target in the next couple of years. 4.4 In April 2016 our average rents reduced by 1% and our turnover for the year fell as a result. Our operating costs fell by more and our operating surplus improved. In 2016 our operating costs included one-off charges of 1.1m in relation to past service pension deficits and 6

9 0.4m in impairment charges. In our operating costs were reduced by a one-off rebate of 2.1m in relation to pension deficits. After adjusting for all these one off factors, we effectively maintained our underlying operating surplus in VfM Efficiencies Gains Achieved in the Year 4.5 The Board set a relatively modest target for efficiency gains to be achieved last year of 193k. This target reflected the fact that our cost base was already in the lowest 25%. We are pleased to report however we exceeded this target and secured gains of 1.1m. VfM Activity Asset Management: Efficiencies on day to day repairs through: Increased use of Cobalt Plus in-house team vs contractor rates Full year impact of new PPP and PPV contracts from November 2015 Targeted cost reductions on void property works Reductions in tenancy failure and lower tenancy turnover Efficiencies achieved on major repairs through: Use of Cobalt Plus in-house team to carry out damp works and major plastering Reduced cost of other works Target Total Asset Management Administration: Efficiency gains on management and administration through: EMT saving reduction in directorates from four to three Perf and review - 1 role delete, 1 role redesigned and regraded Secondment efficiencies vacancies not back filled Asset management - 3 roles deleted Total Administration Capital and Development: Savings on capital reactive major repair works 135 Efficiencies on development through: Cost savings achieved at Parkstile Lane Cost savings achieved at Falcon Hey Total Capital and Development: Total Efficiencies 193 1,106 How were these gains been achieved? 4.6 The specific areas where gains were secured are described in the table above. In more general terms value for money in an integrated part of how we do business that manifests itself in the following ways: i. Challenging targets for annual improvement; ii. iii. iv. Effective scrutiny, measuring and monitoring; A culture of looking for ways to save money, improve efficiency and eliminate waste; Refining the way we are organised and restructuring to improve efficiency and reduce costs v. Best practice procurement and contract management; 7

10 4.7 It can be difficult to quantify efficiency gains from procurement, particularly where the service is new or has not been procured for some time. What we can do is demonstrate that the prices we pay are competitive and are subject to robust and regular market testing. The table shows that the 7.6m total value of contracts awarded in was 967k lower than anticipated in our budget and business plan. These savings are not claimed directly as efficiency gains however they clearly contribute to our VfM agenda. Service contract Contract value Anticipated savings Contract start date Contract end date Minor Adaptations 79,401 7,200 01/05/ /05/2020 Level Access Showers 497,432 91,372 01/11/ /10/2020 Grounds Maintenance 64,354 51,776 01/04/ /04/2017 Central Heating 1,066, ,178 01/08/ /03/2018 Solar Panel Pigeon Netting 36,720 15,936 01/07/ /03/2017 Independent Tenant Advisor 25,000 50,000 15/07/ /12/2016 Health and Safety Consultancy 43,400 27,894 01/08/ /08/2017 Door Entry Renewal and Servicing ,900 12,100 01/10/ /10/2020 Door replacement programme 2016/17 89, /11/ /02/2017 Gable View Rear Fencing ,384 27,616 03/04/ /06/2017 Gutter Cleaning Services ,453-1,453 03/10/ /10/2020 Mini Competition Window Renewal 319, /06/ /09/2017 ICT services ,095, ,351 01/04/ /03/2021 Void Security Services ,760 35,939 01/08/ /08/2020 Total 7,608, ,297 How do we use the gains we achieve? 4.8 We generate a surplus for a purpose and after paying our interest costs, our surplus operating cash is re-invested into our existing homes and into supporting the development of new homes. 4.9 Our total cash receipts of 29.2m exceeded our cash outflows by 8.9m and we reduced our net debt. Our aim is to fund at least 50% of the spend on developing new homes from operating cash flows and in we were able to funded the entire 100%. The 55 new homes that we completed are therefore debt free and making an immediately positive financial contribution. 8

11 4.10 These cash flows clearly demonstrate our capacity to support additional development activity and deliver more new homes. The reason why it has not been possible to utilise this capacity is the constraints of our existing funding facility Releasing this capacity is a priority for the board and we will renegotiate the terms of our current funding facility later in It will take time for us to gear up and identify appropriate development opportunities, but we are targeting increased activity in 2018 onwards. Five year view 4.12 Over the five years to March 2017 we had total cash resources available after running costs of 77.7m. We invested 56m into new and existing homes and after interest costs reduced our net debt by 12.4m We have added over 300 new homes to our portfolio over the last five years and funded all this from operating cash flows, grants and proceeds from property sales. Although this has made us much more resilient to the challenges we now face, it also shows that we have clearly not used all our financial capacity Although our existing loan facility is constraining our development activity, refinancing has been deliberately delayed to match the timing of demerger. It is worth noting that at current market rates we are saving around 500k a year in increased costs in respect of our existing borrowing. 9

12 5 Targets for the Future 5.1 The operating environment remains challenging and uncertain. Our rents will continue to fall until 2020 and the fall in sterling after the Brexit vote is adding to the real term impact as inflation increases. 5.2 Closer to home the board of Cobalt and Onward have agreed that Cobalt will leave the Onward group in September 2017 and operate as a standalone organisation. Maintaining a viable and affordable cost base and operating as effectively as possible will be critical to the success of the organisation moving forward. 5.3 Our Business Plan sets out eight key corporate priorities that the Board of Cobalt have determined are critical to our continued success. Corporate Priority Action VfM Impact Supporting tenants through welfare reform Closing the digital divide & go digital Neighbourhood and asset management Our repair offer Our customer service offer Financial funding and capacity Fit for independence Staff behaviours and competencies Providing help and support with budgetting, banking and other financial inclusion Overcoming barriers to access and improving digital services for our communities Active asset and neighbourhood management to address sustainability issues Expansion of our in-house Coblat Plus service Tenants and staff engage in setting our prioirites in light of rent cut and potential demerger Ensure we have access to sufficient long term funding to deliver our plans. Deliver a successful migration from Onward to independence Staff enjoy a positive working environment, feel valued and are motivated to got the extra mile Minimising the expected impact on rent collection costs and performance Improved efficiency and ability for residents to pay their rent Improved sustainability will drive lower repair costs and better VfM Lower costs, increased flexibility and capacity to meet service needs Our spending priorities match our capacity to delvier New funding will cost more but release our capacity to develop Replacement parent services will be more responsive and lower cost. Motivated and committed staff are key to delivering great outcomes 5.4 Each of these objectives has a key link back to the delivery of our VfM strategy and supports are overarching objective to deliver great VfM. Social and busines success Engineering our business to deliver the most we can from the resources available Improved VfM across all areas of the business 10

13 5.5 The Board has set a target for efficiency gains of 950k to be achieved over the next three years. Service Area Target Target Target 000 Asset management Administration Capital & Development Total Cumulative Annual Saving We aim to deliver these targets by: Establishing new back office support functions for demerger in 2017 at a reduced cost Introduce improved ICT capabilities to support efficient ways of working Review the delivery of all our neighbourhood and asset services Secure cost efficiencies through outsourcing and partnership arrangements Explore options to optimise the balance of in-house and contractor repairs Improving neighbourhood sustainability Reducing instances of tenant damage and misuse of our homes 5.7 Achieving these efficiencies will allow the organisation to: Target resources towards further improvement of our homes and neighbourhoods Maintain service standards and quality in the face of falling rents Scale up the development of new homes with low or even no grant support Offset the additional cost of funding post re-financing Secure our viability and robust financial position as an independent organisation 5.8 Our current cost base, in the lowest 25% nationally, our culture of keeping costs down and quality up and our track record of securing year on year efficiency gains means we can look forward with confidence. 11

14 6 How Do We Compare with our Peers? 6.1 The Homes and Communities Agency analyses the financial performance of all registered housing providers and publishes global accounts for the sector. The sector results for 2017 are not due to be published until February Operating Margin 6.2 Operating margins in the sector have increased over the last four years. New accounting requirements make our results more volatile, but our trend results over the last three years compare favourably with the average in the sector. Net Margin 6.3 Our higher level of outperformance against the sector average is further evidence of our capacity to take on more borrowing. Our net margin is expected to fall in future years as we renegotiate our funding and utilise the additional development capacity this will release. EBITDA MRI Margin 6.4 This is the key measure of the underlying profitability of our core business. Thanks to the improved condition of homes, the current need for investment is low. Our 48% margin shows that our existing homes are generating significant net funds available to support the development of new homes. Putting ourselves in a position to utilise this capacity is a key priority for

15 Benchmarking our Headline Unit Costs 6.5 The Homes and Communities Agency also uses the Global Accounts data to identify standard measures of unit costs. The regulator is not mandating a right level of operating costs. They do seek assurance that if we have unusually high costs, we understand why this is the case and can justify it in pursuit of our business priorities or outcomes. 6.6 The table below shows that our total unit cost reduced by 21% and where in the lowest 25% nationally and regionally. We do have comparatively higher costs for Major Repairs and Other Costs and this is examined further below: Social Housing Unit Costs -> Total Mgt Services Mtce Major Repairs Other Cobalt , ,180 1, Cobalt , , Cobalt , Year on Year movement Change % -21.4% -38.3% % -17.4% -21.3% 2017 Cobalt Rankings National sector quartile Rank in the Northwest* 1 st 1 st 1 st 2 nd 3 rd 2 nd 5 th of 63 4 th of 63 2 nd of st of th of th of 63 * Ranking out of 63 Housemark registered providers based within the Northwest of England (2016 data) 2016 National Sector Average Social Housing Unit Costs -> Total Mgt Services Mtce Major Repairs Other Median cost 3,570 1, By converting the unit costs back to the total cost we can see the total value of the net saving or opportunity cost of our performance against the sector median. Social Housing Unit Costs -> Total Mgt Services Mtce Major Repairs Other Gap to Median -1, Total Spend Gap -7.0m -3.5m -2.0m -0.8m +0.6m -0.1m 6.8 Our total costs are the equivalent of 7.0m below the median average for the sector. There are two factors that it is worth adjusting for to reflect a more realistic position: 2.0m 2.1m Relates to service charges, which distorts the position (in our favour) as we have very few service chargeable homes Relates to a one-off cost reduction as our pension deficits were reassessed. 6.9 Even after adjusting for these items, our total cost base remains circa 2.9m lower than the average within the sector. 13

16 6.10 Our above average cost of Major Repairs and Other warrants further analysis to assure stakeholders that the added value or improved outcomes are commensurate with the additional cost. Major Repairs Analysis 6.11 Our 5.4m spend on major repairs was 0.6m above the average within the sector (based on unit costs). This reflected the board s aspiration to deliver improvements beyond those traditionally considered. Our total spend included 1.5m of optional works above and beyond traditional stock condition. The particular items are set out below: Works Activity Total Cost 000 Programme Rationale upvc Fascia & soffit renewal 1,043 Tenant kerb appeal and reduced future maintenance Security lighting 290 Tenant security priority from consultation Bedroom stock remodelling 72 Stock size mismatch post bedroom tax Boundary treatments 83 Tenant security priority from consultation Total Optional Works 1, These and previous optional works programmes have had a positive impact on the demand and desirability of our homes and estates. Feelings of pride and satisfaction with our neighbourhoods have also increased over time and tenancy turnover has reduced. 14

17 Detailed Benchmarking with other North-West Providers 6.13 As members of Housemark we are able to compare our costs and performance with a wide range of other housing providers. The latest Housemark VfM dashboard below, plots our costs and performance for relative to 60 housing providers in the Northwest of England. The dashboard is not available at the time of writing this report No organisation has top quartile cost for all service areas, the same as no organisation is bottom quartile for all service areas. Cobalt has a mix of results for different activities. The value from benchmarking is not derived from the comparison, but from the use of the results to identify potential opportunities for improvement or learning from elsewhere This benchmarking information is by no means perfect. It includes a wide range of organisations who operate in diverse neighbourhoods and face a diverse set of challenges from ourselves. That said, it still provides valuable contextual information for service development and target setting The Cobalt board has understands its relative performance against each of the eight areas and assessed: How our cost and performance measures compare with our peers How much we would need to save to match median and low cost performers The gap between our performance and the median and top quartile performers The opportunity cost of our spending in terms of development capacity 6.17 A summary of this analysis is provided overleaf: 15

18 Function VfM Dashboard Cost Performance Opportunity Cost Target/Action Comparison Comparison 1 Responsive Repairs & Void Works Our total spend was 4.9m A unit cost of 824 Compared to the median average: +31 (+4%) unit cost +185k equivalent total cost Compared to upper quartile: +132 (+19%) unit cost +789k equivalent total cost Performance was strong: Our repair response times were top quartile Customer satisfaction with our repairs was top quartile Versus median: 45 new homes Reducing our costs to the median average (185k saving) would fund the equivalent of 45 new homes Versus UQ: 195 new homes Reducing our costs to the upper quartile (789k saving) would fund the equivalent of 195 new homes Deliver further savings through: The expansion of our in-house Cobalt Plus workforce Focus on reducing tenancy failures and improved sustainability Targeting customer damage and misuse Maintain current performance levels. 2 Rent Arrears and Collection Our total spend was 981k A unit cost of 164 Compared to the median average: +10 (+4%) unit cost +60k equivalent total cost Compared to upper quartile: +38 (+30%) unit cost +227k equivalent total cost Performance was below average: Our rent collection was 0.65% below average Our rent arrears were 4.9% above average Versus median: 15 new homes Reducing our costs to the median average (60k saving) would fund the equivalent of 15 new homes Versus UQ: 55 new homes Reducing our costs to the upper quartile (227k saving) would fund the equivalent of 55 new homes Examine options for savings through: The restructure of the operations directorate Efficiency gains through the new ICT provider Improve relative performance through: Better use of ICT Target resources on problem cases 3 Anti-social behaviour Our total spend was 526k A unit cost of 88 Compared to the median average: +26 (+42%) unit cost +156k equivalent total cost Compared to upper quartile: +42 (+68%) unit cost +251k equivalent total cost Performance was above average: Satisfaction with case handling was above average Satisfaction with case outcomes was below average Versus median: 38 new homes Reducing our costs to the median average (156k saving) would fund the equivalent of 38 new homes Versus UQ: 62 new homes Reducing our costs to the upper quartile (227k saving) would fund the equivalent of 62 new homes Examine options for savings through: The restructure of the operations directorate Efficiency gains through the new ICT provider 4 Major works and cyclical maintenance Our total spend was 7.5m A unit cost of 1,258 Compared to the median average: -164 (-12%) unit saving -981 equivalent total saving Compared to upper quartile: +152 (+14%) unit cost +909k equivalent total cost Performance was above average: Satisfaction with quality of homes was above average SAP rating was below average Versus median: None Our costs are 164k below the median so no opportunity cost. Versus UQ: 225 new homes Reducing our costs to the upper quartile (909k saving) would fund the equivalent of 225 new homes Deliver further savings through: The expansion of our in-house Cobalt Plus workforce Focus on reducing tenancy failures and improved sustainability Targeting customer damage and misuse Maintain current performance levels. 16

19 Function VfM Dashboard Cost Performance Opportunity Cost Target/Action Comparison Comparison 5 Lettings Our total spend was 395k A unit cost of 66 Compared to the median average: -18 (-21%) unit saving -108k equivalent total savings Compared to upper quartile: +nil (+0%) unit cost +nil equivalent total cost Performance was slightly below average: Void losses were better than average Relet times were longer than average Versus median: None Our costs are 108k below the median so no opportunity cost. Versus UQ: None Our costs are in line with the upper quartile so no opportunity cost Examine options for savings through: The restructure of the operations directorate Efficiency gains through the new ICT provider Streamline the void process to drive our inefficiency and minimise relet times. 6 Tenancy management Our total spend was 670k A unit cost of 112 Compared to the median average: +15 (+15%) unit cost +90k equivalent total cost Compared to upper quartile: +32 (+40%) unit cost +191k equivalent total cost Performance was above average: Tenancy turnover was better than average Overall satisfaction with services was better than average Number of evictions was worse than average Versus median: 22 new homes Reducing our costs to the median average (90k saving) would fund the equivalent of 22 new homes Versus UQ: 47 new homes Reducing our costs to the upper quartile (191k saving) would fund the equivalent of 47 new homes Examine options for savings through: The restructure of the operations directorate Efficiency gains through the new ICT provider Focus on reducing tenancy failures and improved sustainability 7 Resident involvement Our total spend was 323k A unit cost of 54 Compared to the median average: -9 (-14%) unit saving -54k equivalent total savings Compared to upper quartile: +14 (+35%) unit cost +84k equivalent total cost Performance was better than average: Views taken into account satisfaction better than average Diversity information held more complete than average Versus median: None Our costs are 54k below the median so no opportunity cost. Versus UQ: 21 new homes Reducing our costs to the upper quartile (84k saving) would fund the equivalent of 21 new homes Examine options for savings through: The restructure of the operations directorate Efficiency gains through the new ICT provider 8 Estate services Our total spend was 347k A unit cost of 58 Compared to the median average: -109 (-65%) unit saving -652k equivalent total savings Compared to upper quartile: -75 (-56%) unit saving +449k equivalent total saving Performance was better than average: Satisfaction with the neighbourhood was better than average Versus median: None Our costs are 652k below the median so no opportunity cost. Versus UQ: None Our costs are 449k below the upper quartile so no opportunity cost. Examine opportunities for further savings through: The expansion of our in-house Cobalt Plus workforce 17

20 6.18 Headline summary cost benchmarking against North West providers is shown in the table below: VfM analysis Cobalt Upper Quartile Housemark Comparators Median Bottom Quartile Cobalt Quartile 1. Housing management costs per home () nd 2. Responsive repair cost per home () st 3. (charged Void repairs to income cost per and home expenditure) () rd 4. Estates st 4. Major works cost per home () 1, ,021 1,309 3 rd 5. Cyclical maintenance per home () st 6. Overheads as % of turnover (%) 9.9% 10.6% 12.3% 15.1% 1 st 6.19 What this analysis tells us is that: Overall spend on housing management was below the median average in despite our higher cost of rent collection, anti-social behaviour and tenancy management. Spend on responsive repairs was below the median average. Spend on void repairs was above average. In 2013 we increased our standard of refurbishment, as part of a coordinated campaign to increase the sustainability of new tenancies. Tenancy failure has reduced dramatically and we are able to invest 29% more per void and spend just 17% more than our peers. Tenancy turnover Cost per Void Uplift vs median Total cost per Unit Uplift vs Median Housemark 2016 median 2, % 4, % % % 4, % % % 4, % % projected 6.60% 3, % % Spend on major works was slightly above average but spend on cyclical maintenance was top quartile Our back office support overheads are competitively priced and in the top quartile. Our rent arrears and relet performance does not compare favourably with our peers Resident satisfaction levels are amongst the best nationally, with the next tenant survey due to be completed in The above analysis relates to our performance in the year to March As described in section 4 earlier we achieved sizeable efficiency gains and cost reductions in the year to March These results will not be available until later in Although our overall cost base compares favourably with our peers, we are not complacent. We have three more years of reducing rents that will require a continued focus on ensuring our costs remain viable and affordable. 18

21 How our performance compares 6.22 If we are to determine whether or not VFM is being achieved, the second element we need to consider is the quality of service and outputs being delivered. The tables below show our performance in key areas of service delivery over the last five years: Performance 2012/ / / / /17 Quartile* Total current tenant rent arrears 8.5% 8.4% 8.9% 8.9% 8.6% 4 %age of rents and service charges 99.4% 98.5% 98.0% 98.6% 99.4% 3 collected * Predicted quartile based upon 2015/16 results of our peers Rent collection and rent arrears remain a challenge and although we saw improvements in performance is still below average. Unfortunately we anticipate further difficulties as reforms to the welfare state impact upon our customers ability to pay their rent. Performance 2012/ / / / /17 %age of rent lost on empty properties 1.0% 1.4% 1.3% 0.8% 1.0% 3 Average relet time in days (excluding major repairs) Quartile* 6.24 Our void losses and relet times deteriorated last year. This was largely due to operational difficulties experienced during the year where repair times were much longer than expected. This is not where we want to be and we are targeting improved performance in Performance 2012/ / / / /17 Quartile* % of repairs appointments kept 99.1% 99.0% 99.9% 98.1% 100% 1 Average days taken to complete a repair %age of homes with a valid gas safety certificate %age of properties meeting the decent homes standard % 100% 100% 100% 100% 1 100% 100% 100% 100% 100% On repairs our performance remains positive. Every property was covered by a valid gas safety certificate and all homes were compliant with decent homes. The length of time our tenants wait for repairs is comparable with the best performance in the sector Not all our performance results are where we would want them to be. We recognise that we operate in some deprived neighbourhoods, but this does not stop us from aspiring to match the best performers in the region. 19

22 Outcomes and what our customers think of our services 6.27 The key to demonstrating VFM is to achieve efficiencies and improve or maintain high customer satisfaction at the same time. All our services measure satisfaction on an ongoing basis, to ensure we are delivering what our tenants want and to the standard they expect Periodically we conduct a survey of all tenants, to ask nationally defined questions. The last survey was carried out in 2014 at which time our key satisfaction results were amongst the best of any provider in the country. A new survey is being undertaken in Tenant Survey Results Quartile Trend Overall satisfaction with the services provided by Cobalt? How satisfied are you that your views are taken into account Satisfied with the way landlord deals with repairs and maintenance Satisfaction with the quality of your home Satisfaction with the area / neighbourhood as a place to live Do you think the rent you pay represents value for money? How likely would you be to recommend Cobalt to family or friends 85% 91% 93% 93% 95% 1 st 49% 79% 84% 85% 86% 1 st 79% 85% 92% 89% 91% 1 st 85% 91% Not asked 90% 91% 1 st 65% 80% 83% 84% 89% 1 st 74% 83% 86% 88% 89% 1 st % 94% No data 7 Understanding the return on our assets 7.1 The properties that Cobalt owns are an extremely valuable social asset. It is vital therefore that we make the best use of the resources that they represent. A key element of the regulatory requirements in relation to VfM is the need to clearly demonstrate: An understanding of the return on assets and a proactive approach to managing those assets 7.2 The Group-wide Asset Management Strategy Guide Asset Management Our Approach establishes the requirements across the Group to have a much more dynamic approach to using our resources, to maintain and develop our homes and services, delivering on business objectives and meeting residents expectations. 7.3 This approach to active asset management has evolved through our comprehensive asset management framework. Our aim is to have an on-going understanding of our assets and to identify long term performance through systematic analysis to deliver continuous improvement in terms of return on assets. 20

23 Financial returns on our assets 7.4 Our headline financial results demonstrate a significant improvement in the headline returns and contributions from our assets in the last 12 months. Properties Number of homes managed 6,019 6,002 6,028 5,906 5,878 Financial Statistics Operating margin 40.8% 28.0% 30.2% 20.9% 31.0% Net margin 34.8% 22.0% 24.5% 16.0% 25.1% Return on Net Assets (RONA) 5.7% 3.8% 4.3% 3.6% 5.2% Return on Capital Employed (ROCE) 6.7% 4.8% 5.3% 5.0% 6.7% EBITDA Margin 62.9% 49.4% 51.6% 43.9% 53.1% EBITDA (MRI) Margin 48.4% 33.4% 31.6% 23.3% 20.2% 7.5 Our operating surplus generated on social housing (left chart below) increased from 8.7m to 11.7m last year. The operating surplus on lettings per property (right chart) increased from 1,455 to 1,949. This represents strong underlying performance as our rents fell by 1% in The average of 1,949 includes a range of results from our different neighbourhoods. This enables us to identify trends and assets that are potentially performing perform less well. The chart below demonstrates that while some areas are less profitable, all our neighbourhoods make a positive financial contribution. 21

24 4.3% 4.3% 4.5% 4.5% 4.7% 20.7% 21.3% 24.0% 24.9% 26.1% 71.1% 70.4% 67.6% 66.7% 65.3% 4.0% 4.0% 3.9% 3.9% 3.9% Asset Performance Evaluation (APE) 7.7 The Group uses financial and non-financial indicators to inform strategic decision making on future investment, usage and retention or disposal of particular assets. This approach evaluates the predicted financial performance of all Onward Homes member s stock based on their Net Present Value (NPV). This is being used to help us understand and improve over time the return on our assets including: Measuring the long term performance of our properties Modelling analysis of our assets value and contribution Providing an objective baseline from which to make investment decisions Identify properties requiring an option appraisal The profile of our homes 7.8 Reflecting our heritage as a transfer association, Cobalt has maintained its focus as a specialist in General Needs Housing. All but fifteen of its housing properties are general need homes for rent with the majority being semi-detached or terraced family homes with gardens front and rear. Property Type 2017 Number General Needs Housing 6, % Low cost home ownership 3 - Used by Tenant Associations 2 - Non-Social Housing Market Rents 8 0.2% Total Homes Owned 6, % % 7.9 As a result of the bedroom tax many of those on the list for social housing are no longer deemed to qualify for larger homes even where there are no smaller homes available. This is a real challenge for us as a high proportion of our homes are three bedroom. Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Cobalt Social Housing By Bedsize 1 Bed Properties 2 Bed Properties 3 Bed Properties 4 Bed + Properties 7.10 We are addressing the resultant supply and demand imbalance through the development of smaller homes and the targeted conversion and remodelling of existing homes. This still represents a significant risk to our business and unless the bedroom tax is repealed or amended, it will take many more years for us to address. 22

25 Active asset management 7.11 Cobalt uses a proactive approach to asset management that attempts to maximise the long term return on its assets which includes: Option appraisal for alternative use In we converted our final five rent to homebuy properties to general needs. We also remodelled a further 48 general needs properties and reduced the number of bedrooms from three to two. The converted homes are more affordable and more popular and our experience to date is that subsequent tenancy failure rates are significantly lower. Neighbourhood regeneration We are working in partnership with Liverpool City Council and the Department of Communities and Local Government (DCLG) to explore regeneration options for an estate, including privately owned property. In March 2017 we received grant funding of 415,000 from DCLG to support master planning. This partnership approach is the key to improving living conditions where we are significant but minority owner. Planned investment into our homes and neighbourhoods Our holistic approach to asset management looks beyond traditional stock condition to encompass the wider environment of our homes and enhancing kerb appeal. In we invested a further 4.0m taking our total over the last five years to 27.2m. Improvements delivered in the last year include: New rain water goods, fasciae and soffits in upvc Boiler upgrades and central heating renewal upvc double glazing upgrade and renewal This investment will maintain the quality and standard of our properties for rent and safeguard our future income streams. Capital Works to Existing Homes 2012/ / / / /17 m m m m m Boundary works Fascia, soffits & rain water goods Roofs Central heating Windows & doors Kitchens Bathrooms Thermal rendering Other programmes The investment needs of our homes have been falling year on year as their condition improves. Our stock condition projections indicate that comparatively low levels of investment are needed in the medium term. This will help to maintain our EBITDA MRI margin and net cash generation from our existing homes. 23

26 Development Activity 7.13 Despite the constraints placed on us by our funding facility, we have actively pursued development opportunities that fit with our neighbourhood regeneration and asset management strategies. Our development programme factors in the need for smaller homes and flexibility of future use. Wherever possible the layout of our new homes is designed to be readily convertible between from one to two bedrooms or two to three bedrooms In we took handover of 55 new homes, taking our total development over the last five years to 307 new homes. Homes Completed or Acquired 2012/ / / / /17 Total General Needs for Rent Shared Ownership Our total spend on development has been 29.5m over the last five years with 6.6m being funded by grant. Development Spend 2012/13 m 2013/14 m 2014/15 m 2015/16 m 2016/17 m Total m Gross Cost Less Grant (2.2) (1.4) (2.2) (0.5) (0.3) (6.6) Net Development Spend The draft final total scheme costs for the two schemes that completed is 6.48m versus an original projected spend when approved at feasibility stage of 6.96m. This overall projected cost reduction of 471k equates to cost saving of 6.8%. Scheme Unit Nos. Feasibility TSC 000 TSC 000 Gain/ (Loss) 000 Gain/ (Loss) % Falcon Hey 34 4,034 3, % Parkstile Lane 24 2,921 2, % Total 58 6,955 6, % Funding Constraints 7.17 As previously described in Section 7, we have the financial capacity to increase our level of development. However, this is not possible under the constraints of our existing funding facility. Releasing this capacity is a priority for 2017 with the board looking to develop a further 250 to 500 new homes in the next five years. 24

27 8. Social Investment and Social Impact 8.1 It is well understood that having a good quality home with security of tenure helps people with improved health and wellbeing, the potential for higher educational achievement and improved self-esteem in turn leading to better employment prospects. We continue to drive to get better results for our customers as some residents suffer disproportionately from poor health, low educational attainment and higher levels of unemployment. We are committed to continuing to invest to improve the neighbourhoods in which we work and to improve the opportunities that are available for our residents. 8.2 In addition to meeting the long term accommodation needs of over 6,000 social housing tenants and their families, we create significant social impact and social value through our work. In we made a direct social investment of 1.24m into key areas of activity that promote: Sustainable tenancies Community cohesion Improved life chances & opportunities Financial inclusion Social Investment Activity Anti-social behaviour 299 Financial inclusion & welfare benefit advice 216 Community regeneration (net of grant support) 122 Resident involvement and empowerment 112 Property adaptations 208 Free gardening & handyman service 87 Environmental improvements 196 Total Social Investment 1,240 Sustainable Tenancies 8.3 We invest a huge amount of staffing and financial resource into giving new tenants the best possible chance of making a success of their tenancy with us. In the last year we successfully met the housing need of 414 new tenants and their families. By helping them to settle into their new homes our investment in pre-tenancy support has seen starter tenancy failure reduce significantly. Examples of our tailored approach include: Reusing furniture where possible, helping new tenants take up their tenancy in a timely manner and giving them a positive start to their tenancy. Tailored property incentives providing items such as carpeting, laminate flooring, decoration vouchers and paint packs. Timely and effective response to any dissatisfaction or issues raised. Visits and courtesy calls after move in, making sure tenants have settled in and any issues are dealt with as soon as possible so the tenancy is sustained. Transfer inspection visits to check on property condition and to provide appropriate advice including promotion of mutual exchange as an alternative to transfer 25