Profit and cash flow performance
The annual change in the valuation of our equity release assets is generally the most significant single element in arriving at our operating result under IFRS. As our asset revaluations do not involve either income or expenditure, we do not regard the IFRS Consolidated Income Statement as the most meaningful measure of the Group’s annual profit performance.
The Consolidated Cash Flow Statement provides in our opinion a better measure of our annual financial performance, provided that the format is adjusted to take into account that our main source of cash is derived from the sale of our investments when properties fall vacant, as follows:
|
|
Year to
30 April
2008
£000 |
Year to
30 April
2007
£000 |
| Sale of investment properties |
4,379 |
4,339 |
| Sale of shared equity loans |
437 |
311 |
| Net cash outflow before changes in working capital and provisions |
(2,220) |
(1,253) |
| Net cash generated (before interest, tax and dividends) |
2,596 |
3,397 |
Proceeds from asset sales were 3.5% higher than in 2007 on sales of 46 units (2007: 38 units). The gross sale prices achieved averaged 4% more than the prior year’s valuations of the properties sold. Other income grew by 10.7% to £555,000 (2007: £501,000).
The main contributor to our increased cash outflow before changes in working capital and provisions were administrative expenses, which have increased from £1,933,000 in 2007 to £2,933,000 in the past year. They include the operating costs of The Home & Capital Trust Group for the full period; in the prior year only the costs for the eight month period following acquisition were included. Also, in the expectation of increasing activity, we have invested in the future through increasing our marketing expenditure, the benefits of which are just beginning to be realised. Included in our administrative expenses are costs of £251,000 representing professional fees on acquisitions worked on during the year.
Bank finance
Borrowings, which have increased by £15.8m during the year to £25.7m, were the main source of financing our investment programme during the year. During the year we also increased our facilities by £15.5m, substantially in the form of demand facilities, and reduced our interest margin. The nature of this bank financing reduces the overall cost of borrowing at times when our gearing is low and we have substantial asset cover for our facilities. Further information on our capital management strategy and bank finance is provided in Note 18 to the Financial Statements.
Risks
The main financial risks affecting the business are as follows:
- Interest rate risk
- Working capital and liquidity risk
- Residential property market risk
- Longevity risk
The nature of these risks, and the measures taken by the Group to mitigate them, is discussed further in Note 18 to the Financial Statements.
We are conscious that reputational risk to our business, and the equity release industry as a whole, is potentially significant. If any equity release transaction written by another operator in this market is found to have been written without due consideration for the customer, we are aware that this may bring the whole market into disrepute and be harmful for our business. Our approach to mitigate this risk and contribute to industry standards follows under Corporate Responsibility.