Places for People Group Ltd - Summary: Places for ...
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Summary: Places for People Group Ltd. Primary Credit Analyst: Karin Erlander, London (44) 20-7176-3584; karin.erlander@spglobal.com Secondary Contact: Jean-Baptiste Legrand, London (44) 20-7176-3609; jb.legrand@spglobal.com Table Of Contents Key Rating Factors Outlook Rationale Key Statistics Ratings Score Snapshot Related Criteria WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 10, 2019 1
Summary: Places for People Group Ltd. Issuer Credit Rating A-/Stable/-- Key Rating Factors Enterprise Profile Low-risk earnings and moderate exposure to open-market sales support the strong enterprise profile. • U.K.-based housing association Places for People Group Ltd. (PfP) maintains its focus on low-risk activities, although a significant proportion of its revenues comes from non-social housing rent and leisure facility management. • We understand that the group intends to reduce its exposure to more volatile open-market sales activities. • The group's asset quality remains very strong. Financial Profile Low-margin activities and relatively high debt underpin the adequate financial profile. • Revenues are increasing with the full-year consolidation of acquired units, while margins remain low compared with those of peers focused solely on social housing. • Debt has increased with the consolidation of Luminus, but we forecast a gradual reduction throughout the next two years. • The group's liquidity remains very strong, following solid funding activity in recent months. Outlook The stable outlook reflects our view that the steady revenues from the social housing business will continue to cover PfP's interest expenditure, and that sales risk will remain below 30% of total revenues. Downside Scenario We could lower the rating on PfP if we believe that the risk in its fundamental core business has heightened. This could occur if management is unable to respond to external pressure, turns its focus away from the core social housing business, or increases its exposure to riskier market sales activities. We could also lower the rating if we believe that the likelihood of support from the U.K. government will not extend to the whole group in a timely manner, particularly considering the large non-social housing business revenue streams at PfP. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 10, 2019 2
Summary: Places for People Group Ltd. Upside Scenario We could raise the rating if we believe there is a marked sustained reduction in PfP's exposure to market sales, and at the same time, PfP maintains the financial performance of the social housing business. An upgrade would also be contingent on PfP's loan-to-value (LTV) ratio reducing to sustainably below 70% and interest coverage improving materially. Rationale We think that U.K.-based housing association Places for People Group Ltd. (PfP) will maintain its focus on low-risk activities, although a significant proportion of its revenues comes from non-social housing rent and leisure facility management. We consider that the number of units are increasing with the consolidation of acquired units, and understand that the group intends to reduce its exposure to open-market sales activities, but forecast that margins will remain low compared with those of peers focused solely on social housing. While debt has increased with the consolidation of Luminus, we forecast a gradual reduction throughout the next two years. We assess the group's liquidity as very strong, following solid funding activity in recent months. We factor into the rating one notch of uplift above PfP's stand-alone credit profile, reflecting our view that there is a moderately high likelihood that the U.K. government would provide extraordinary support in the event of financial distress. This assessment is based on PfP's social housing business, which plays an important role in the government's public policy mandate. Our assessment also considers the link between PfP and the U.K. government, via the Regulator of Social Housing, to be strong. As a national registered provider of social housing, PfP owns and manages close to 200,000 homes across the U.K. This includes retirement and care homes, affordable and private rental homes, and shared ownership homes. The population in England continues to grow, with the latest estimate from the Office for National Statistics indicating growth of 0.6% annually for many years to come. This growth, combined with our assessment that PfP's social rent is less than 65% of the prevailing market rent, supports our view that demand for PfP's properties will remain solid. This assessment is also supported by PfP's very low vacancy rates. That said, PfP's non-social housing activities--such as leisure, property management, building, and construction--operate at much thinner margins, which weighs on the group's consolidated financial metrics. For example, the leisure business contributes about 20% to total turnover, but only about 5% to the operating surplus. This results in weaker financial performance, with projected EBITDA margins of about 22%-25%, below those of peers. However, we consider this part of the group's business as low risk, with minimal capital investment or debt needs. We understand that PfP is scaling back its development of units for sale on the open market. This is because of the downturn in the housing market, particularly in and around London, and because the strategic partnership with and funding initiatives by Homes England encourage housing associations like PfP to build more social and affordable housing. We project that the group's S&P Global Ratings-adjusted EBITDA margins will remain less than 25% throughout the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 10, 2019 3
Summary: Places for People Group Ltd.
next two years. However, we foresee a steady but gradual strengthening over time thanks to higher rents when the
new social rent settlement begins on April 1, 2020, and a lower proportion of sales activities.
PfP has high debt of £2.9 billion, resulting in an adjusted debt-to-EBITDA ratio of more than 17x, but we forecast that
its earnings will increase faster than its debt, such that the ratio improves over the next two years. We incorporate
PfP's high LTV ratio (at cost) of 78% into our debt assessment.
Conversely, we assess the group's EBITDA interest coverage as relatively solid, at 1.3x, and as strengthening over the
next two years. We view the coverage of interest payments from the social rent and other low-risk businesses as a
strength that somewhat mitigates the risk from property market cyclicality.
We view PfP's financial policies as more aggressive and its risk tolerance as slightly above peers'. This view
incorporates PfP's exposure to derivatives (cross-currency swaps that could be subject to cash collateral calls), high
debt burden relative to core earnings, and large amount of unsecured debt.
We consider that PfP has a very strong liquidity position thanks to its high cash levels, substantial amount of undrawn
bank lines, and strong access to capital markets. In our base case over the next 12 months, we estimate that sources of
cash of more than £1.1 billion will cover uses by about 2.1x.
Liquidity sources include:
• Current cash of around £90 million;
• Cash from operations of close to £180 million;
• Capital grants of about £70 million; and
• Undrawn fully secured committed facilities expiring beyond 12 months exceeding £640 million.
Liquidity uses include:
• Capital expenditure on repairs and the development of new affordable housing of close to £300 million; and
• Net asset purchase outflows of about £10 million.
Key Statistics
Places for People Group Ltd. Selected Financial Indicators
--Year ended March 31--
(Mil. £) 2018a 2019e 2020bc 2021bc 2022bc
Number of unites owned or managed 198,640 206,838 207,859 208,881 209,902
Vacancy rates (%)* 1.0 1.0 N.A. N.A. N.A.
Arrears (%)* 5.5 5.5 N.A. N.A. N.A.
Revenue§ 738.8 810.9 850.0 802.0 829.1
Share of revenue from nontraditional activities (%) 58.0 57.0 57.0 53.0 53.0
EBITDA§† 150.7 168.0 176.6 178.5 191.7
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 10, 2019 4Summary: Places for People Group Ltd.
Places for People Group Ltd. Selected Financial Indicators (cont.)
--Year ended March 31--
(Mil. £) 2018a 2019e 2020bc 2021bc 2022bc
EBITDA/revenue §†(%) 20.4 20.7 20.8 22.3 23.1
Interest expense** 124.0 141.9 137.5 140.6 141.5
Debt/EBITDA §†(x) 19.2 17.4 17.1 17.2 16.0
EBITDA/interest coverage§†** (x) 1.2 1.2 1.3 1.3 1.4
Capital expense† 147.2 229.1 237.5 156.8 109.3
Debt 2,896.0 2,922.7 3,019.0 3,062.3 3,060.6
Housing properties (according to balance sheet 3,599.9 3,749.5 3,961.8 4,102.0 4,193.7
valuation)
Loan to value of properties (%) 80.4 77.9 76.2 74.7 73.0
Cash and liquid assets 170.6 124.7 120.1 131.9 158.5
*Rent and service charge. §Adjusted for grant amortization. †Adjusted for capitalized repairs. **Including capitalized interest. a--Actual.
e--Estimate. bc--Base case reflects S&P Global Ratings' expectations of the most likely scenario. N.A.--Not available.
Ratings Score Snapshot
Places for People Group Ltd. Ratings Score Snapshot
Industry Risk 2
Economic fundamentals and market dependencies 4
Strategy and management 3
Asset quality and operational performance 1
Enterprise profile 3
Financial performance 5
Debt profile 4
Liquidity 2
Financial policies 4
Financial profile 4
S&P Global Ratings bases its ratings on non-profit social housing providers on the eight main rating factors listed in the table above. S&P Global
Ratings' "Methodology For Rating Public And Nonprofit Social Housing Providers," published on Dec. 17, 2014, summarizes how the eight factors
are combined to derive each social housing provider's stand-alone credit profile and issuer credit rating. For social housing providers generating
more than a third of its consolidated revenues from open market sales, we also refer to the "Key Credit Factors For The Homebuilder And Real
Estate Developer Industry."
Related Criteria
• General Criteria: Guarantee Criteria, Oct. 21, 2016
• General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
• Criteria - Governments - General: Methodology For Rating Public And Nonprofit Social Housing Providers, Dec. 17,
2014
• General Criteria: Group Rating Methodology, Nov. 19, 2013
• General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 10, 2019 5Summary: Places for People Group Ltd. • General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Additional Contact: EMEA Sovereign and IPF; SovereignIPF@spglobal.com WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JULY 10, 2019 6
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