Finance Director's Report 2022

3 Highlights

• Total assets - £109m (2021: £107.7m)

• Total liabilities - £30.2m (2021: £29.2m)

• Total comprehensive income - £1.6m (2021: £508k)

Overview

2022 will be remembered as a year for needing to remain stoic, preempt issues, collaborate and find solutions. Following a period with no developments completing, therefore no significant cash injections or weighty returns, the Company was focused on ensuring the first phase of Horizon completed, with apartments handed over to purchasers, to realise the first slice of profits from this development by the year end.

As the significant impact felt on the Horizon project from Covid 19 receded, a new wave of pressures from rising inflation, labour shortages, high interest rates and the cost of living crisis all presented challenges to overcome, causing availability pressure on both labour and supplies, as well as concern over purchasers’ ability to complete on their pre-sales contracts with significant increases in mortgage rates.

Despite all best efforts, including forward buying and storage of construction materials and securing labour from off island to supplement constraints in the local labour supply, we narrowly missed our target of East Block completion pre year end, and therefore our budgeted initial share of net income from this phase of the development project was deferred to January 2023.

The economic backdrop and poor outlook had an unavoidable impact on our inventory, resulting in an impairment on IFC 6 of £1.4m as a result of weakening yields and rising interest costs during construction. However, the need to protect finances from interest rate exposure was discussed early on and due to an interest rate swap entered into in January with a low interest rate, the value of the swap of £3.15m created an unrealised gain which is recognised in the Consolidated Statement of Comprehensive income for the year.

Total comprehensive income before dividend was £1.6m, against a comparative position of £508k in 2021 and a budgeted profit for 2022 of £2.28m. Despite increased returns on the previous year, we are disappointed to return a below budget result, but given the economic downturn and significant commercial and operational pressures facing the Company, the contained expenditure and opportune gains made are very pleasing.

Development profits not realised this year are not lost and have already been realised in 2023. Unlike a retail industry, as a developer we inherently have periods of high and low profitability depending on the stage and mix of projects being undertaken and delivered and 2023 will see a healthy year of profits.

Overview (continued)

The Company’s Net Asset Value lifted by £0.4m, due to retained earnings, after dividend distributions to the Government of Jersey of £1.2m.

Total assets increased by £1.4m due to further investment in inventories and the capitalisation of the swap derivative. Cash balances were lower as a result of the £15.5m Revolving Credit Facility drawn down at the end of 2021 being expended on construction works on IFC 6, that correspondingly increased inventories.

Total liabilities increased only marginally as retention liabilities for the construction contract built up and the construction debt financing for IFC 6 starting to be drawn.

The year end cash position was broadly as budgeted, ending higher than anticipated, with £13.7m total cash at bank and short-term deposits.

This leaves the Company in a strong position to finance recurring operational activities over the coming year, as well as to progress with our future development projects, namely at South Hill, to be known as Westward, and South West St Helier Waterfront, planning determination for which we are hoping for in 2023 so that we can make the next steps in moving these projects forward.

Income and Expenditure review

Total comprehensive income for the year of £1.6m reflects an improvement of £1.1m on 2021 results, despite a £651k shortfall on the budgeted 2022 position.

Income

Compared to 2021, car park income increased by £191k and whilst income from investment properties and inventory fell compared to the prior year, due to backdated rent review boosts in 2021, actual was slightly up on budget levels, indicating the full opening up of life and return to work post Pandemic.

Revenue from contracts with customers fell due to a drop in service charge income, in direct and equal proportion to the fall in service charge expenditure, due to fewer significant work costs to be recovered during the year.

The increase in finance costs and yield slippage on IFC 6 was also reflected in the impairment of inventory in 2022, compared to an upward revaluation of Investment properties in 2021, when a total fair value increase of £745k was reflected in income for the year. See Note 5 on pages 79-81 for more details. The impact of soaring inflation and predicted economic decline contrasts sharply with the confidence felt at the end of 2021, before the Ukraine War and energy crisis. Fair value adjustments, both increases and impairments, are not accounted for in the budget, and this year is a good example of how it is difficult to foresee macroeconomic impacts.

Expenditure

Turning to costs, total salary costs were significantly lower than budget, by £561k, partly due to some expenses capitalised to development projects in inventories and partly due to delayed recruitment of new staff members required to support the increasing activities of the Company.

Overall total salary costs increased by 28% compared to 2021, representing the full year impact of two additional team members in September and October 2021 and the recruit at Director level in April 2022, further strengthening the Executive team in preparation for the significant pipeline of developments over the next decade.

The other main variance in expenses related to costs incurred in management of the Estate, which were £217k higher than 2021, and £269k lower than budget. Some previously planned projects delayed due to Covid 19 restrictions were carried out, however expenditure on other planned works were delayed until 2023 to line up with the increased revenues in the Company.