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Southern Housing retains A3 rating from Moody’s despite ‘weak’ profitability
Southern Housing has retained its A3 credit rating with Moody’s, helped by its “strong” balance sheet, but the agency flagged the landlord’s current “weak” margin and interest cover.
In an updated credit opinion, Moody’s pointed to the 80,000-home landlord’s size as a strength, along with its “very strong liquidity”. However, it also warned of financial challenges.
Like many of its peers, the London-based provider, which formed through the merger of Southern Housing Group and Optivo in late 2022, has been reducing its homebuilding plans. Extra spending on existing stock, the difficult London housing market and high inflation have all been factors.
In its new report, Moody’s also kept its outlook on Southern at ‘stable’, partly as the association’s “medium-term” risk had been mitigated by cutting its development programme, the agency said.
Southern still has plans to deliver 3,700 homes over the next three years, but it is not committing to new starts.
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Moody’s pointed to Southern’s increasing spending on its current homes as a challenge.
The landlord is expected to invest £310m annually on repairs, maintenance, building safety and decarbonisation over the next five years, according to Moody’s. This compares with an annual spend of £190m over the previous five years.
Around 15,000 of Southern’s homes will require retrofitting before 2030, the agency said.
Earlier this month, the association reported a 93% drop in annual surplus to £3m.
Moody’s said: “We note that higher than expected maintenance costs have been a key driver of weaker financial performance in fiscal 2024 and this remains a downside risk as it is challenging to accurately estimate costs for large building safety and retrofitting projects in advance.”
Moody’s also flagged that Southern’s operating margin slid to 12.4% in its last financial year, caused by inflation and contractor failures leading to sales delays and higher costs.
The landlord’s EBITDA MRI (earnings before interest, tax, depreciation and amortisation, major repairs included) interest cover – a key indicator for liquidity and investment capacity – also fell to 38.7% from 72.3% the year before, partly due to increased repairs spending.
However, the agency said: “Southern anticipates a rebound in operating margins to an average of 19% over the next three years as its delayed sites complete and it realises sales on these projects.”
Moody’s said the association’s performance will also be helped by social rents being allowed to increase to CPI+1% in the current financial year and lower inflation.
The agency also noted Southern’s “moderate gearing” and its £3.7bn of assets.
Despite a reduction in liquidity coverage in its last year, Moody’s said Southern has “very strong liquidity” and around 90% of its drawn debt is at a fixed rate.
Paul Hackett, chief executive of Southern, said he was “delighted” at retaining the A3 rating and stable outlook, which will give the landlord access to the “widest pool of bond investors”.
However, he admitted that the EBITDA MRI interest cover was “clearly not sustainable”, which was why it was stopping taking on new development.
He added: “Building affordable homes is in our DNA, but as the sector increases investment in existing homes, something must give and for the time being that has been new development.”
Earlier this week, the regulator upgraded Southern’s governance grade to G1, but kept its V2 rating for financial viability. The association was also awarded a C2 for the consumer standards.
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