FINANCIAL STATEMENTS CHANGING LIVES CARING.RESPONSIVE.PASSIONATE. INCLUSIVE.DYNAMIC.HONEST. YEAR ENDED 31 MARCH 2015

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1 WE ARE MUIR CHANGING LIVES FINANCIAL STATEMENTS YEAR ENDED 31 MARCH 2015 CARING.RESPONSIVE.PASSIONATE. INCLUSIVE.DYNAMIC.HONEST. INVESTING IN PEOPLE AND COMMUNITIES

2 CONTENTS PAGE EXECUTIVE AND ADVISERS 2 CHAIRMAN S STATEMENT 3 5 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW 6 27 REPORT OF THE INDEPENDENT AUDITORS ON THE FINANCIAL STATEMENTS 28 INCOME AND EXPENDITURE ACCOUNT 29 BALANCE SHEET 30 CASH FLOW STATEMENT 31 NOTES TO THE FINANCIAL STATEMENTS Muir Group Financial Statements 1

3 EXECUTIVE AND ADVISERS BOARD Year / Date appointed Chairman Mr D. Booth 2011 (2000 to the Board) Deputy Chairman Mr L. Patterson BEd (Hons) 2011 (1997 to the Board) Members Mrs C. Babbs 2011 Mrs J. Chillery BA (Hons) Appointed 11/09/14 Mr R. J. Collinson LLB,BCL(Oxon) Retired 11/09/14 Mrs C. Dixson MBA, ACIS 2013 Mr P. Fieldsend BSc(Hons), MBA, FCMA, FIoD 2011 Dr D. J. Gardiner PhD, MSc, BA (Oxon) 2013 Ms A. Greaves MBASW Appointed 11/09/14 Mr D. Inglis BSc (Hons), MRICS Resigned 20/11/14 Mrs S. Kearns 2014 Mrs J. S. Kirk Resigned 15/05/14 Mr S. Natha BA (Hons) 2014 EXECUTIVE GROUP Chief Executive & Secretary Mrs C. Dixson MBA, ACIS 2013 Director of Finance & Central Services Mr A.R.D. Hunt 1991 Director of Housing Services Mr S. Scott BSc (Hons),MCIH 2003 Director of Development Mr D. Robinson MA,MCIH 2003 STATUTORY AUDITORS Beever & Struthers Chartered Accountants St George s House Chester Road Manchester M15 4JE INTERNAL AUDITORS Mazars 45 Church Street Birmingham B3 2RT PRINCIPAL SOLICITORS Devonshires 30 Finsbury Circus London EC2M 7DT PRINCIPAL BANKERS Lloyds Bank plc 8 Foregate Street Chester CH1 1XP REGISTERED OFFICE 80 Lightfoot Street Hoole Chester CH2 3AL Registered with the Financial Conduct Authority (Number 18632R) Registered with the Homes and Communities Agency (Registration number L2194) Affiliated to the National Housing Federation Muir Group is an exempt charity 25 August 2015 David Booth Chairman Muir Group Board Muir Group Financial Statements 2

4 CHAIRMAN S STATEMENT Welcome to my fourth and final Chairman s Introduction to the Financial Statements. We have had another very busy and successful year. Our people and governance We have seen a second year of change in membership of the Board. We were sorry to see Duncan Inglis resign due to him taking up a new appointment with the Homes and Communities Agency. We wish him well and thank him for his valuable contribution to the Board. Janet Kirk, who was also a tenant of the Association, has also resigned due to ill health and we will miss her dearly. On a positive note we have two new Board members who joined during the year. Jan Chillery and Alison Greaves both joined us in September. Jan is a solicitor and Alison has a background in finance and banking and is also a tenant of the Association. They will provide us with an appropriate balance of skills and experience and I welcome them both. I and Les Patterson (Deputy Chairman) intend to retire from the Board in September. We have between us served for over thirty years on the Board and seen the Association grow from strength to strength over that time. I am sure I speak for both of us when I say we have enjoyed every minute of our time at Muir and will miss not being involved. We have already recruited two new very able replacement Board members who will join the Board in September. The Board has elected David Gardiner and Clare Babbs as Chairman and Deputy Chairman respectively from September. The Association will be left in very capable hands for the future. These changes will mean that as from September, and as planned, the Association will be in full compliance with its adopted Code of Governance. It is also appropriate to note that the Association continues to be assessed as G1 and V1 by the Homes and Communities Agency. Our renewal of Governance is group wide and in addition to the above we say farewell to Board members from our subsidiary Friends of Muir Group. Les Patterson, who acted as Chairman for many years, Richard Hoffman, Robert Robertson, Adrienne Berkson and Julie Moore. Finally Richard Short is also retiring from our Audit and Risk Committee. A big thank you to you all for all you have done. Operational matters As I mentioned last year our supported and sheltered housing services have been facing some pressure from funding cuts. It has proven to be a difficult time for this area of our business. Our aim is to continue to provide services to tenants that are appropriate to their needs and financially sustainable. We believe that we have managed to make considerable progress in this aim and have either obtained funding from alternative sources or reduced our costs as appropriate. We still have some work to do but we have the area under control. The Board has continued to review the performance of each of its housing schemes and has developed an action plan to improve performance either by investment, disposal or transfer to other landlords. We continue to assess the geographical areas in which we operate and where appropriate will rationalise our stock holding. I am pleased to report that we completed 60 new homes for rent and sold 30 shared ownership homes. Sales performance has been very good and reflects our attention to selecting those schemes that meet our pricing, affordability and demand criteria. Muir Group Financial Statements 3

5 CHAIRMAN S STATEMENT As part of its strategy to improve its services to tenants, shortly after the year end the Board purchased a contracting business OPBMS Ltd. The contractor has been successfully supplying services to the Association for over six years and has developed good working relationships and practices. We believe that purchasing the company will give the Association greater control over the cost, security and quality of services delivered to tenants. Our plans are to expand the services provided, improve integration between the Association and contractor and drive down costs and improve the quality of performance. Our plans for the future involve a project to redefine our provision of housing services to tenants. We will be overhauling the way in which we deliver our services to ensure residents can be better helped to cope with the changes brought about by Welfare Benefit Reforms. It is disappointing to report that the levels of satisfaction expressed by our tenants has dropped, details of which are described more fully in the Report of the Board and Operating and Financial Review. We will be carrying out an exercise over the coming year to explore why this is the case and to take appropriate action to improve performance in this area. Our subsidiary Friends of Muir Group continues to do its good works and has now passed the half million pound mark in distributing grants, donations and hardship payments to our tenants and communities since its formation. This work continues to generate social value and is appreciated by our communities. We will continue to aim to obtain and evidence value for money in all that we do and will focus on increasing our return on assets to allow us to invest in services to tenants and provide new homes. We are aware that we can do more and will do so. Financial performance and results Our surplus for the year was 4.4 million very slightly down on the previous year. We have used this surplus to assist in our investment in services to tenants and to provide much needed new homes. We have invested over 8 million into new homes and 2.6 million in capitalised major repairs to existing homes. We continue to benefit from access to loan facilities to back up our future development ambitions and to provide liquidity. Total facilities of 28 million are available. Our performance continues to be comfortably within our covenants to funders as illustrated by the charts included in the Report of the Board and Operating and Financial Review. Announcements in the Summer Budget and the right to buy On the 8 July the Chancellor of the Exchequer announced that there would be a major change to the way in which rents would be set for social housing. The previously agreed settlement, which we were lead to believe would be in place for ten years and which allowed rents to increase at 1% higher than the Consumer Prices Index is to be withdrawn. In its place there is to be a requirement that rents in social housing are to be reduced by 1% per annum for each of the next four years beginning on 1 April This is a serious and significant change for the Association and the sector as a whole which will require changes to our previously agreed plans. As a result the Board and Senior Management Team of the Association has revised the Association s Financial Plan accordingly. The revisions to the plan have been made with a view to achieving the following outcomes: Muir Group Financial Statements 4

6 CHAIRMAN S STATEMENT Maintaining our fundamental commitments to tenants Complying with our agreements with funders, and To continue to meet the Financial Viability Standard as set out by our regulator the Homes and Communities Agency. The resulting Financial Plan incorporates significant improvements in efficiency and cost savings which whilst substantial are in the view of the Board achievable and yet at the same time able to deliver the objectives listed immediately above. Additional details of the savings required are disclosed later in this report. The staff of the Association are aware of the above changes and are fully engaged in achieving the desired outcomes. The reduction in rent also stands to affect the mortgage or security value of the Association s housing assets. Whilst this is not an immediate threat, as the Association has considerable unencumbered assets, it does stand to affect borrowing and development capacity over the longer term. There were a number of additional announcements in the budget, lowering of the benefit cap, restricting housing benefit entitlement for young people, so called Pay to Stay and a range of other issues affecting our tenants. Each of these is important and we will examine how we will react to them but they are not as fundamental as the changes to the rent regime mentioned above and we are sure we can accommodate these changes. I also need to note that part of the Government s election manifesto was to extend the Right to Buy to housing association tenants. The precise details of how this will work are not clear but we will maintain a close watch on this and ensure we develop strategies to deal with this as the detail becomes clearer. The Board has also carried out appropriate stress testing so that they fully understand the risks that the Association faces. Conclusion It is clear from our analysis of the recent changes referred to above that the Association and sector face considerable challenges over the coming few years. The Board s view and that expressed by many in the sector, including funders is that there is no need to panic and that by taking the right decisions these changes can be successfully navigated. Finally I would like to thank all the staff and Board members I have worked with over my twenty year involvement with Muir, fifteen of which have been as a Board Member, and wish the Association all the best for continued success over the coming years. David Booth Chairman Muir Group Board Muir Group Financial Statements 5

7 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW The Board presents its report and audited consolidated financial statements of the Association and its subsidiary undertakings for the year ended 31 March OVERVIEW OF THE BUSINESS AND PRINCIPAL ACTIVITIES Muir Group owns or manages services to over 5,000 homes across a wide geographical area, often in small towns and cities and in rural communities. The Association provides a diverse range of housing solutions to meet the needs of customers including: General needs accommodation to rent, for people who cannot afford access to rent or buy on the open market. A range of supported housing services including accommodation based services provided directly or indirectly through specialist organisations and other non residential support services. Products for customers who wish to purchase their own home but are unable to afford open market prices, including shared ownership and rent to homebuy. During the year the number of properties in management increased by 69. At the end of the year 71 homes were in the course of construction. The table below (Fig1.1) shows the number of homes managed over the last five years: Fig 1.1 Homes owned or managed General needs 4,385 4,322 4,174 4,136 4,044 Rent to Home Buy Supported Shared ownership Leasehold for the elderly Leasehold management Supported owned but managed by others Total 5,428 5,359 5,224 5,184 5,054 Muir Group Housing Association Ltd is the parent organisation of the Group. The table below (Fig 1.2) shows all the members of the Group as at 31 March 2015, their legal status, principal activity and the basis of the Association s control. Fig 1.2 ORGANISATION STATUS PRINCIPAL ACTIVITY BASIS OF CONTROL Friends of Muir Group Ltd Companies Act Registered Charity Fund Raising and Community Projects Control Over Board Membership Future Plus Homes Ltd Co-operative and Community Benefit Societies Act Development Activities Control Over Board Membership Open Door Homes Ltd Companies Act Commercial Development Activities Control Over Board Membership At present Future Plus Homes Ltd and Open Door Homes Ltd are not trading. Consolidated Financial Statements are prepared for the Group. At its meeting on 16 July 2015 the Board agreed to strike off Open Door Homes Ltd and to cancel the registration of Future Plus Homes Ltd. Muir Group Financial Statements 6

8 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW OBJECTIVES AND STRATEGIES The objectives and strategies of Muir Group are set out in our Corporate Plan that is reviewed annually and approved by the Board. The Corporate Plan outlines our vision and mission and our mission goals. Our vision and mission is investing in people and communities changing lives. This plan was drawn up following the appointment of our Chief Executive in September 2013 and was prepared in consultation with staff, residents and other stakeholders and approved by the Board. Our strategic priorities to help us to pursue our vision and mission, included within the Corporate Plan, are the following: Strengthen our offer to existing customers - invest in our existing residents, customers and communities and support the vulnerable. Improve our customer service offer and the customer experience and meet changing expectations Ensure consistency where it matters, diversity where justified and a clear and fair offer to all customers whilst driving efficiency and offering value for money Continue to invest in staff, board members, volunteering residents and systems Continue to achieve excellence in Governance Remain financially strong protect income, generate income where possible, ensure funding streams adequately support growth, understand and reduce the operational cost base; substantially improve our value for money offer Continue to selectively develop new homes Understand the performance of assets social and financial return; where appropriate consider options appraisal Consolidate and prioritise areas of operation; consider appropriate opportunities for growth Remain independent Be more proactive and raise our profile; endeavour to be and be seen to be a sector leader We believe that there is continued and rising demand for our products and it is our objective to provide more homes and create more communities in which people will want to live. We will therefore seek to provide new homes whenever possible, but with due recognition that development must be financially sustainable. Muir Group has a strong financial base that it will use to further its objectives to provide new homes but will only do so in so far as this is sustainable and does not compromise our capacity to fulfil our obligations to existing residents. PERFORMANCE FOR THE YEAR UNDER REVIEW The surplus for the year was just over 4.4 million very slightly down on the previous year when the surplus was 4.5 million. The financial performance of the Group over the last five years is contained in the table below (Fig 1.3). The table contains the summary results from the Group s Income and Expenditure Account and Balance Sheet together with a number of key financial indicators that are monitored on a regular basis. The overall position shown is one of strength and stability, a key objective of the Group. Muir Group Financial Statements 7

9 Fig 1.3 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW Income and Expenditure Account M M M M M M Turnover Operating costs (19.8) (18.3) (19.8) (16.5) (16.6) (16.7) Cost of sales (2.2) (1.0) (1.4) (1.2) (0.1) (1.0) Operating surplus Surplus on sales of assets Net interest charge (2.2) (2.3) (2.0) (2.4) (2.4) (2.6) Surplus for the year before tax Balance Sheet M M M M M M Housing properties Social housing and other grants (110) (110) (109) (108) (105) (100) Other tangible fixed assets Net current assets / (liabilities) 1 (1) (2) Total Creditors due after one year Reserves Total Statistics Operating surplus as a % of turnover Net surplus as a % of turnover Operating cost per home 3,752 3,513 3,910 3,268 3,375 3,458 Income cover % Interest cover % Debt per home 13,041 12,765 12,032 11,687 11,942 10,887 Gearing % Income and Expenditure - important facts: Surplus Surplus for the year was 4.4 million broadly in line with the previous year. Of the surplus, 285 thousand resulted from surpluses on property sales not developed for outright sale. Income Turnover was 2.2 million higher. Of this increase 1.1 million was in respect of turnover from shared ownership sales. The balance of the increase of 1.1 million was generated from increases in income from lettings. Fig 1.4 Analysis of Turnover m 82% Rents receivable Service charges Sales income Other income m 84% 7% 3% 8% 9% 4% 3% Muir Group Financial Statements 8

10 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW Expenditure Total operating costs have increased by 1.5m or 8%. This increase was largely driven by an increase in major repairs expenditure that was not capitalised. Much of this expenditure had resulted from safety work required following detailed fire risk assessments. Interest costs were 1.2 million lower than budget, and reflected lower rates on variable borrowings. Total interest costs were 2.2 million in addition to which 235 thousand of interest costs were capitalised as part of the cost of housing properties. Impairment of housing properties to the value of 80 thousand has been included. Fig 1.5 Analysis of Operating Expenditure (including cost of sales) m m Response maintenance Planned maintenance Major repairs 13% 10% 25% 14% 8% 10% 4% 17% 8% 4% Management costs Service costs Depreciation Development costs Cost of sales 3% 6% 28% 18% 15% 4% 8% 5% Other costs Balance Sheet - important facts: Capital expenditure on additions to housing properties (including component replacements) in the year was over 10.7 million (2014: 12.8 million). The total cost of housing properties at historic costs (net of depreciation) is 221 million. Total Social Housing and other grants now total over 110 million. 4 million was drawn down from funders and debt of 1.8 million was repaid. Statistics explained: The statistics shown in the table at Fig 1.3 above are monitored on a regular basis by the Board to ensure compliance with lenders covenants. The charts below (Figs 1.6 and 1.7) show the actual statistics for gearing and income cover in graphical form and compare them to the limits agreed with lenders. The limit for gearing (that is the proportion of loans in relation to reserves plus social housing grants shown in the balance sheet) is that it should be no more than 70%. The chart indicates the Group is comfortably within the limit. The limit for income cover (that is total income as a proportion of operating costs, less depreciation of housing properties, plus the cost of component replacements, plus interest) is that it should be at least 105%. The Association continues to operate effectively within the limit. Muir Group Financial Statements 9

11 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW Fig 1.6 Gearing Gearing % Actual Limit Fig 1.7 Income cover Income cover % Actual Limit CAPITAL STRUCTURE AND TREASURY POLICY The Group is financed by way of Social Housing Grants received from government bodies, long term loan facilities from banks, building societies and the bond market, and retained reserves. The relative proportions are shown in chart below (Fig1.8) Fig 1.8 Sources of funding Muir Group Financial Statements 10

12 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW The primary purpose of our Treasury Strategy is to ensure the Group has sufficient finance facilities in place to fund its commitments as and when they fall due, and to be able to deal with the risk of a material increase in interest rates. The strategy and policy are regularly updated in conjunction with the Group s Treasury Advisers and reviewed by The Board. The Association s investment activity is governed by strict counterparty credit criteria and investment limits, the primary objective being the preservation of capital, as opposed to the maximisation of returns. Repayment structure of long term loan facilities The Group is liable to repay the capital elements of its long term loan facilities in line with the chart shown below (Fig 1.9). Repayment is by way of a mixture of amortising (over the period of the loan term) and bullet (single repayment at the end of the loan term) profiles. The Group currently has over 1,800 properties that are free of mortgage and are estimated to have a security value of approximately 46 million. The chart below (Fig 1.9) indicates that capital falls due for repayment fairly evenly over the next thirty years apart from a bond repayment of 4.5 million in 2019 and a final bullet repayment of 40 million in Fig 1.9 Cumulative Loan repayments Millions As at 31 March 2015 the Group had undrawn borrowing facilities in place of 28 million (2014: 32 million). Management of the cost of interest payable The Group s interest rate costs are determined by the underlying loan agreements and subsequent contract variations. The interest costs arising can be variable (changeable in line with movements in underlying interest rates) or fixed for a period according to the terms of those agreements. It is the Group s policy that the proportion of total outstanding debt which is exposed to variable costs of funds is targeted to be between 10% and 40% over the longer term. Exposure to long term variable costs of funds at 31 March 2015 was 47%. The Association has plans to decrease its exposure to variable rates in the near future. Muir Group Financial Statements 11

13 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW VALUE FOR MONEY Introduction The Association is required to comply with the regulatory framework for the sector as issued by the Homes and Communities agency (HCA). The regulatory framework contains a specific standard dealing with Value for Money (VFM) and how registered providers are expected to address this issue. The Standard expects us to have a strategy for optimising value for money and systems to ensure that this strategy is delivered. The Standard also requires us to publish an annual self-assessment demonstrating how we are achieving value for money in meeting our business objectives. This assessment must include a description of past gains and future plans, an appreciation of the cost of delivering services and an understanding of the return generated from our assets. This section of our Operating and Financial Review is a summary of the highlights and main points taken from our full self-assessment that will be published on our website in September and to all our stakeholders via the appropriate channels. How do we approach VFM The Association has adopted a Strategic Review and Corporate Plan Redefining Excellence. This plan contains a number of strategic priorities identified earlier in this review many of which are focused on improving our service offer to residents and focusing on improved value for money, driving efficiency, understanding and reducing operational costs and understanding the return from our assets and improving those returns. Strategy Our strategic approach to VFM is therefore driven by this Corporate Plan and the priorities that are included. In addition we have a number of other strategies that complement the plan and these include strategies for VFM, procurement and development. Our approach is to focus on four main features, board control, tenant satisfaction, sustainable growth and understanding our costs and assets, controlling them and driving through efficiency gains. All Board Members (irrespective of their experience and background) undergo training to make them aware of the regulatory requirements in respect of the VFM standard and the expectations of our regulator. They are also trained to understand how important it is for us to be able to assess the financial and social return from our assets in order to achieve our objectives. The Association is going through two major changes that will significantly affect our costs in the short term. These changes are a complete renewal of our housing management systems and a restructuring of the way in which sheltered and supported housing services are delivered and funded. These changes have increased our budgeted operating costs per unit for 2015 by approximately 5%. We consider that post 2015 we will see significant improvements in operational performance which will lead to a reduction in costs. Muir Group Financial Statements 12

14 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW Responsibilities and ownership Whilst a number of our staff have specific roles in monitoring and recording VFM we see it as an integral part of everyone s role, (staff and board members) to work towards achieving VFM. Our Board attaches great priority to VFM and has set up a Strategic Sub Group to progress and monitor the specific issues arising from Assets, Performance and VFM and also to assess the return from the Association s assets. The Board monitor this position every quarter. We have a Performance Manager dedicated to ensuring that VFM is firmly embedded within the Association s systems and a Service Improvement Team that develops new and existing systems. At executive level, VFM is woven into the functioning of the Senior Management Team and the Joint Leadership Team (consisting of the Chief Executive, Directors and Heads of Service). All decisions are taken with VFM in mind. The Personal Development Reviews of all staff contain a significant focus on achieving VFM and asking how they have or can contribute to efficiency gains. In this way we consider VFM to be firmly at the forefront of all activities. Our approach to VFM involves our residents via our two Regional Residents Forums and our Scrutiny Panel. The Forums are used for detailed consultation on the Association s strategic plans and provide a resident focused view and challenge across all areas of activity. The work of the Scrutiny Panel involves them selecting an area of service and reviewing it in fine detail and proposing resident focused recommendations for improving the quality, style or value for money of the service. We have set specific targets for improving our VFM over a period of time without compromise to the levels of tenant satisfaction that we currently achieve. These include maintaining or improving our relatively high levels of resident satisfaction and reducing our operating cost per unit by 2% in 2015/16. Reporting and communication The Board see it as essential that all our stakeholders, staff, board members, residents, leaseholders and partners receive regular information on our progress and performance. This is achieved by a variety of means including regular monthly reports to Board and residents through our intranet, our website, newsletters for residents and staff team meetings. How we compare The table below (Fig. 1.10) shows the Association s operating performance for rent collection and loss for the period and that of the sector as a whole. The source data is obtained from the HCA publication 2014 Global Accounts for Housing Providers. We perform consistently well on voids. Our arrears figures have improved consistently year on year to the point where we perform better than average. It is important to note that as a result of 31 March falling on a Tuesday which results in a full week rental charge being reflected in the level of arrears, but only two days cash collection for that week, the position shown by the year end financial statements will be much higher at 7.5%. The figure used for comparison purposes in the table below of 4.0% was measured at the end of the week beginning 31 March Muir Group Financial Statements 13

15 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW Fig Operational performance Indicator Voids Muir 1.6% 1.3% 1.3% 1.3% Sector average n/a 2.0% 1.9% 2.0% Bad debts Muir 1.4% 1.3% 1.6% 1.0% Sector average n/a 1.0% 0.9% 0.8% Current tenant arrears Muir 4.0% 4.2% 4.6% 4.9% Sector average n/a 5.1% 5.3% 5.4% Source: HCA 2014 Global Accounts of Housing Providers, averages taken are for traditional providers whenever available. Key: Better than average Below average Our financial performance and how it compares to the sector average is included in the table below (Fig 1.11). Our performance overall across the range of indicators compares favourably with the sector for Gross rents are 11% lower than average and management costs 1.5% higher. Routine and planned maintenance costs were 11% lower than average in Expenditure on major repairs over the two years 2014 and 2015 when taken together are approximately 4% higher than the average for Operating margins have fallen this year from 26% to 22.6% which brings it 3.4% below the sector average. Net surplus % has dropped from 17.2% but remains close to the sector average. Indebtedness per unit and debt to turnover are much less than the sector average which gives better interest cover ratios. Effective interest costs are also lower than the sector average. The overall financial position is one of stability. Fig Financial performance Indicator Muir Muir Performance Sector Gross rent Operating margin 22.6% 26.0% 26.1% Net surplus margin 15.5% 17.2% 15.5% Debt to turnover 243% 255% 397% Debt per social housing unit 13,041 12,765 26,540 Effective interest cost 3.56% 4.60% 4.8% Management cost per unit 1,058 1,048 1,033 Routine & planned maintenance cost per unit ,000 Major repairs cost per unit Source: HCA 2014 Global Accounts of Housing Providers, averages taken are for traditional providers whenever available Key: Better than average Below average Average Muir Group Financial Statements 14

16 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW The table below (Fig 1.12.) shows the results of our resident satisfaction surveys carried out over the last two years and compares them to data extracted from the HouseMark STAR survey benchmarking portal. The comparator group selected is all traditional housing associations and the statistics % quoted for Peers is benchmark upper quartile for the preceding year. Fig Resident satisfaction levels Area of satisfaction Muir Peers Q Muir Peers Q Overall service provided 83% 90% 3Q 91% 91% 2Q Overall quality of home 87% 88% 2Q 91% 89% UQ Your neighbourhood as a place to live 87% 88% 2Q 88% 89% 2Q Your rent provides VFM 82% 87% 2Q 90% 87% UQ Your service charge provides VFM 61% 74% LQ 70% 78% 2Q The way we deal with repairs 84% 87% 2Q 88% 87% UQ We listen to your views and act upon them 64% 76% LQ 82% 76% UQ Source: HouseMark STAR Survey benchmarking portal. % for Peers represents performance to achieve upper quartile. Key Upper quartile UQ Third quartile 3Q Second quartile 2Q Lower quartile LQ In 2014 / 2015 the Association made significant changes to the way that it collects satisfaction information from customers, moving away from a single telephony based method to a multi channel approach where the majority of responses were received by or SMS text message. This change in approach has coincided with a drop in satisfaction levels across all STAR core survey questions as illustrated in Fig It is not yet clear whether the change in approach and the results are related. Whilst disappointing, it is appropriate to note that the results in four of the seven categories remain above the Median in Quartile 2. However, as an organisation that strives for upper quartile results significant emphasis has been placed on gaining a detailed understanding of these results and in taking and planning corrective action to improve the customer experience. Detailed analysis of the results has highlighted some common themes regarding levels of satisfaction with the services provided, namely: Speed of response and communication Desire to have improvements made to the property Operational issues relating to the responsive repair service Muir Group s Corporate Plan includes a number of strategic objectives aimed at improving the customer experience. Specifically, but not exclusively these are: Re-modelling our frontline housing service Re-modelling of our frontline Housing Service to include renewed and clear expectations about the levels of service our customer should receive from April 2016 onwards. Our customers were instrumental in determining what our new service offer should be and will equally help design our renewed customer service standards and expectations. Muir Group Financial Statements 15

17 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW Increased annual investment in our homes In 2015/16 we have increased the levels of annual expenditure on planned maintenance work to our properties by 390 thousand (10%). Taking control of our responsive repairs service In April 2015 the Association created its own in-house contractor by acquiring its existing provider of responsive repairs in the North West, OP Building Maintenance Services (OPBMS). One of the key drivers behind this decision was for the Association to have much greater control over the levels and quality of the repairs service provided to our customers. Plans are already in place to work collectively to improve the customer experience and also to scale up the OPBMS operation to include planned improvement works in the North West. Muir Group s Board will receive biannual reports on the levels of customer satisfaction from April 2015 onwards to ensure that this important measure of service delivery is scrutinised and monitored more closely. Achievements in 2014/15 Money advice Our investment in an additional full time post to provide money advice to tenants has resulted in 137 new cases being opened and a range of positive outcomes being achieved. Over 362 thousand of personal debt of tenants has been successfully rescheduled allowing tenants to be better placed to pay their rent. The result of this work has prevented potential eviction in 25 cases producing a saving of between 175 and 250 thousand. Volunteers We conducted an exercise to identify the value gained from volunteering work undertaken by residents of our Scrutiny Panel and Regional Residents Forums (during 2013/14). The calculation was based on the hours of volunteering completed minus the resources invested to support the volunteers using an on-line toolkit called VIVA (Volunteer Investment to Value Audit). Our return on investment, for every 1 invested, was This simply meant that for every 1 the organisation spent on volunteering, we got 2.53 back in the value of the work carried out. Going forward, we also hope to capture voluntary work carried out by members of Friends of Muir Group and volunteers from our supported housing schemes who have worked with residents on a number of initiatives. By doing so we would expect to see an improvement in our return on investment ratio. Supported and sheltered housing services During the year the Association has lost funding from supporting people contracts and other sources to the value of 340 thousand per annum. This loss of income has created a number of challenges for the Association to provide what is an appropriate service to tenants but at the same time one that is financially sustainable over the medium to longer term. We have successfully generated additional income from other sources of 205 thousand and made reductions in staffing costs of 183 thousand. Some additional expenditures have also been incurred to ensure services are appropriate but the majority of schemes are now on a sustainable footing for the medium term. We will keep this area of the business under review to ensure schemes remain sustainable. Muir Group Financial Statements 16

18 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW Friends of Muir Group Our subsidiary, Friends of Muir Group (FoMG), is funded by the Association via an annual donation. These funds are used to benefit people living in Muir s communities by supporting and investing in projects and activities that make a positive difference. The Group has continued to make a significant contribution to the creation of social value through its work. Since it was established in 2002, FoMG has awarded over half a million pounds to a wide range of projects that have helped improve the quality of life for Muir s residents and the communities in which they live. In the past year alone FoMG approved 60 donations totalling over 28 thousand. Development Through the affordable homes programme, by charging up to 80% of market rents on re-let conversions, we have generated additional rental income of 60 thousand per annum. This has been used to help support our development programme by replacing grant that would otherwise have been required of over 700 thousand. We completed 60 new units of affordable housing during the year and 30 shared ownership sales. Return on assets We have continued with our review of poorly performing schemes and disposed of two general needs units that were not fit for purpose and where investment was not going to be value for money. In addition a large supported scheme of 22 units was sold as it was assessed as not fitting the strategic requirements of the local authorities supporting people strategy. Overall the Association has generated over 600 thousand in recycled capital grant to invest in new housing provision. Savings and efficiencies Our VFM register recorded gains and savings of over 146 thousand in 2014/15. The savings ranged from small detailed savings to the tune of a few hundred pounds up to significant savings of 108 thousand for reclaimed VAT. Many of the smaller savings were initiated by operational staff as part of their focus on reviewing VFM in their areas of activity and a few examples of cashable savings are included below: Renegotiation of contracts within our Human Resources department - 7 thousand Challenging energy suppliers bills - 8 thousand Review of external storage requirements - 4 thousand Replacing printed materials with on line alternatives - 15 thousand We introduced an electronic payslip system - 1 thousand Whilst the above examples are relatively small individually, taken together they become significant and illustrate that VFM is embedded at all levels of the Association. We have been able to secure large procurement savings from our involvement with Procurement for All (PfA) a purchasing consortium that we joined in 2006 as a founder member. The savings are calculated in accordance with an HCA approved methodology and compare the cost in 2014/15 with a baseline cost established in The savings using this methodology were 1.1 million equivalent to a 33% saving on components such as windows and doors, kitchens, bathrooms and central heating systems. These savings allow the maintenance budget to go further and are calculated to be the equivalent of 236 new kitchens or 337 new central heating systems. The Board set the Management Team a target to save 350 thousand against the agreed budget for management expenses in 2014/15. This was successfully achieved by close control of spending and restricting the use of contingency funds. The resources saved were redirected to other areas of the business such as planned maintenance and work on fire risk assessment remediation works. Muir Group Financial Statements 17

19 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW Treasury management We have been able to negotiate a reduction in margin on one of our loan facilities. This has only a modest effect of 4 thousand per annum at present but has the potential to be as much as 60 thousand in future years. Our plans for the future in 2015/16 and beyond Preparing for welfare reforms We will continue to plan and prepare for welfare reforms and learn from those who have experienced it already. We will prioritise resources to ensure we are able to make the transition for us and our residents as smooth as possible. Restructuring the Housing Services Department The Association s Corporate Plan sets a new and exciting direction for the organisation to re-focus on providing excellent value for money services to our customers. Our new vision and mission of Investing in People and Communities, Changing Lives makes it clear that we will respond to the changing needs of our customers and communities and support them through delivery of better services and targeted investment. As an organisation we understand that our customers are facing unprecedented challenges and for this reason our Re-defining Excellence programme has commenced with a fundamental review and restructure of our frontline housing services. Our new re-modelled housing service will, more than ever, place our staffing resources and teams at the heart of the communities we serve. Frontline housing and management resources are being reallocated locally where they can have the greatest impact. Additional office based resources and improvements in ICT support are being employed to ensure that community based staff are more visible, accessible and can focus their efforts on making a difference in our communities and in our customers homes. This project will also see a new emphasis on Social Investment being introduced to the organisation with aims to: Promote digital and financial inclusion Promote health and wellbeing initiatives amongst residents and communities Help residents access training, education and skills services Promote pathways to sustainable employment Run a national volunteer programme to support our social investment work The combination of a new frontline housing service and a focus on social investment activity will realise real social and financial returns and benefit for customers and the Association. Supported and sheltered housing services Whilst we have achieved much in 2014/15 in putting our supported and sheltered housing services on a sustainable footing we will continue to pursue our strategy of achieving financial sustainability across the remainder of our schemes covered by this service. We will firstly seek to replace lost income through other sources or means and where this is not possible, adjust the service to meet the available resources taking into account the needs of our residents. Where appropriate we will consider an alternative use for any asset in this portfolio that is not capable of achieving sustainability including disposal and reinvestment. Muir Group Financial Statements 18

20 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW Asset management review On 1 April 2015 the Association purchased a maintenance contractor. The contractor had been providing services to the Association for many years primarily on responsive and voids repairs. The Association proposes to use this wholly owned subsidiary to continue to provide these services to the Association but also to expand those services into other areas of maintenance such as renewals of kitchens, bathrooms and other elemental housing components. The Association has formed a VAT Group which is expected to lead to reductions in cost to the Association. In addition we expect to be able to help better control the quality of the service delivered to our residents. We anticipate that there are considerable opportunities for savings in administration and integration by the two organisations working more closely together and anticipate these to be realised in cashable savings over the coming years. Development Despite the recent announcements in the budget the Association wishes to continue to provide new homes for rent and sale on shared ownership terms and will adjust it s plans to make this possible. New housing systems In 2014 we began the renewal of the Association s housing management and asset management systems. Our current systems have been in place for over fifteen years and need to be upgraded. We have negotiated a contract with our existing suppliers to be a first adopter of a new up to date system based on latest technology. Whilst this presents some risks we believe that these are adequately controlled. We have achieved a significant discount on price as a result of being the first adopter. This investment will increase costs in the short term however we expect to improve efficiency as a result of the implementation of new systems that will lead to improved services to residents and reduced costs. Efficiency gains will be made by reduced duplication of information processing, more flexible working away from offices and a complete re-engineering of information and administration processes. Service charges Our Resident Scrutiny Panel has reported during the year and identified additional information that they would like to be given to tenants to allow them to understand better what their service charge is intended to cover. We have agreed an implementation timetable with the Panel. We do not make a full recovery of service costs through our service charge system. We have begun a process of review on a scheme by scheme basis to seek to rectify this position. Adjustments to charges made to residents began in April 2015 but we anticipate that this process may take a period in excess of a year to complete. Savings and efficiencies We will review our tariffs for energy supplies to ensure we are achieving the most favourable rates to suit our circumstances. We will be going out to full OJEU procurement for insurance services during 2015/16. Traditionally this has given rise to savings on existing costs. The current cost of services is 330 thousand per annum. It had been intended to carry out this review in 2014/15 however the renewal terms offered to extend the current long term agreement were considered acceptable and the review was deferred. We will review our procurement of legal and other professional services following a delay to last years procurement programme. A number of ICT services, mobile phones and data communication contracts will also be reprocured. Muir Group Financial Statements 19

21 REPORT OF THE BOARD AND OPERATING AND FINANCIAL REVIEW In 2015/16 we plan to review employee terms and conditions including all benefits and pensions arrangements. We have a range of employee initiatives that will also fall into the review. Total payroll, pension and ancillary costs are currently over 5 million or 25% of operating costs. In addition in 2015/16 we will review our arrangements for the administration and procurement of fleet vehicles. Prior to the Summer Budget announcements the Board and Senior management Team had instigated a programme to completely review the Association s cost structure and seek out additional savings and value. As a result of the reduction to rents this review has been given a greater priority and has become a key objective going forward. The Association plans to make savings and efficiency gains over the next three years sufficient to meet the following objectives: To maintain our fundamental commitments to tenants To comply with our agreements with funders, and To continue to meet the Financial Viability Standard as set out by our regulator the Home and Communities Agency. The target for savings to be made is approximately 11% of the combined total of operating costs and interest payable. This is equivalent to approximately 3 million by 2020, allowing for inflation. The Board has set new targets (overriding previous targets) for this to be achieved and will review progress on a quarterly basis. The Association has also revised its Financial Plan to take these changes into account. The Plan shows that subject to the indicated savings being made the Association can continue to comply with the stated objectives and still maintain an adequate safety margin above funders covenants for the foreseeable future. The plans have been submitted to funders and no undue comments have been received. Return on Assets Our asset values and returns are listed in the table below (Fig 1.13). The tables show the return from our assets as a whole. What we are seeking to do is understand how each of our individual assets contributes or detracts from the returns so that we can optimise those returns to best meet our objectives. Fig Assets and returns Historic cost Book value m m Turnover m Operating surplus m Surplus m Operating margin % % Yield Historic cost % Book value % Gross (turnover/ value) 12.8% 25.7% Operating (operating surplus / value) 2.9% 5.8% Net (surplus / value) 2.0% 4.0% The Association has in place a system we call our Strategic Asset Performance Model (SAP). This model is designed to measure the relative performance of the Association s assets and to measure the return on investment. The model includes measures of current and future income and costs for each scheme taking into account stock condition, location, profitability and social factors. Muir Group Financial Statements 20