From Conventional Loans to Index-Linked Finance Tim Jackson Resources Director, Golding Homes

What am I going to cover? Index-linked financing – what is it? Impact on capacity Key risks Benefits Risk Management

Experience of sale and leaseback 2 deals completed 1 was to raise additional finance for the Group 1 was to fund stock acquisition – 190 properties

Sale and leaseback – what is it? RP sells long lease to investor for a lump sum – probably around £100k a unit but the exact price will affect the ability to pay, after management and maintenance costs, the annual sublease payments in the next bullet point Investor simultaneously sells a sublease for say 48 years in return for an annual lease payment which starts low (I can’t disclose the exact figure) The annual lease payment goes up by rpi or cpi each year At the end of the 48 years the leases collapse and the RP can buy the properties back for £1 This means in effect the annual lease payments include capital repayments In accounting terms this is all on balance sheet and the lump sum at bullet point 1 is treated as a loan

Benefits Relationship and documentation very different from a bank, e.g.. far fewer default clauses – this is a key benefit Very security efficient – only interest is the legal interest in the lease – no other security required. Asset cover is effectively 75%-80% versus lenders who seek 110% upwards ‘Security’ in place day one

Benefits (continued) Very little else in treasury portfolio benefits the business if inflation is low Will pricing rise as much as loan pricing if interest rates go up? Cash flows match rents Makes sale and leaseback great for stock acquisition – cash positive day one

Sale and leaseback – capacity issues No financial covenants, so gearing of no concern to the investor So if it can be done in a part of the group that does not impact on the group’s gearing it can enhance capacity Very useful if gearing is constraining for non-financial reasons, e.g. lender re-pricing needed to change historic gearing covenants Works well where a deal can ‘stand alone’, i.e. cash flow positive day 1 – e.g. stock acquisitions Useful if security is a limiting factor

Risks/Issues CPI/RPI increases Very long agreement Asset security cover inefficient in later years Accounting is odd ‘Jam today’ – brings forward future surplus Cash flows – so reduced strength in later years It’s different! Regulatory interest

Risk Management – Supporting a separate lease vehicle Key risk is not meeting lease payment Deal must be solid in the first place, i.e. really strong cash flows, i.e. buffer between net income and lease payments Raise extra cash, use to acquire stock to increase rental income with no lease payment attached Other RP’s can give vehicle additional stock to increase income Parent has resources to support vehicle (RP)

Risk Management (continued) Transaction can be novated to other RP’s in the group Limit the amount of index linked funding to the group Inflation collar on lease uplift Stress testing, etc. Property substitution

Enhancing the leaseback model Proactive investor CPI escalator Security release Shorter lease period and bullets repayment Some fixed element Range of tenure types

Summary Challenge is to stretch but protect finances As new sources of finance emerge, how diversified should our funding sources be – managing multiple agreements and relationships is risky Real need for treasury systems and processes Link between development risk and treasury risk has never been greater