Directors' valuation of the Investments portfolio

The Directors’ valuation decreased by 7% to £1,068 million (2018: £1,151 million), as the number of disposals in the year and negative operational performance, including re-evaluation of the military housing portfolio, more than offset the unwind of discount. The number of projects in the portfolio decreased to 69 (2018: 74).

The Group invested £64 million (2018: £58 million) in new and existing projects. Cash yield from distributions amounted to £65 million (2018: £89 million) as the portfolio continued to generate cash flow to the Group net of investment.

The business continued its strategy of maximising value through recycling equity from operationally proven projects, whilst preserving interests in strategic projects that offer opportunities to the wider Group. Demand for high-quality infrastructure assets in the secondary market continues to exceed supply and the Group will continue to sell investment assets timed to maximise value to shareholders.

In 2019, the Group received: £6 million from a sale of its 50% interest in Borden Data Centre in Canada; £25 million from the sale of its 50% interest in the ITE College West project in Singapore; £17 million from the sale of its entire 50% interest in the North Island Hospitals project in Vancouver Island, Canada; £14 million from the sale of its 100% interest in the student accommodation project at the University of Iowa in Iowa City; £7 million from the sale of its 100% interest in the student accommodation project at the University of Nevada, Reno; and £33 million from the sale of its interests in five multifamily housing projects (Ranch at Pinnacle Point, Dallas 5 Portfolio, Mobile Alabama portfolio, Evergreen portfolio and Townlake of Coppell). Unwind of discount at £87 million (2018: £96 million) is a function of moving the valuation date forward by one year with the result that future cash flows are discounted by one year less. Operational performance movements resulted in an £86 million decrease, primarily as a result of the re-evaluation of the military housing portfolio.

The methodology used for the Directors’ valuation is unchanged, producing a valuation that reflects market value and which therefore changes with movements in the market. Cash flows for each project are forecast based on historical and present performance, future risks and macroeconomic forecasts and which factor in current market assumptions. These cash flows are then discounted using different discount rates based on the risk and maturity of individual projects and reflecting secondary market transaction experience. As in previous periods, the Directors’ valuation may differ significantly from the accounting book value of investments shown in the financial statements, which are produced in accordance with International Financial Reporting Standards (IFRS) rather than using a discounted cash flow approach.

The Investments portfolio is slightly more weighted to North America (UK 48%, North America 52%) at 31 December 2019. Within the UK, roads is still the largest sector, whilst in North America US military housing represents the majority of the portfolio. The Investments portfolio includes over £900 million of projects that have completed the construction phase and are operational.

Discount rates applied to the UK portfolio range between 7% and 10.5% depending on project risk and maturity. The implied weighted average discount rate for the UK portfolio is 8.3% (2018: 8.5%). Discount rates applied to the North American portfolio range between 7.5% and 10.6%. The implied weighted average discount rate is 8.3% (2018: 8.2%). Consistent with other infrastructure funds, Balfour Beatty’s experience is that there is limited correlation between the discount rates used to value PPP, and similar infrastructure investments, and long-term interest rates. In the event that interest rates increase in response to rising inflation, the impact of any increase in discount rates would be mitigated by the positive correlation between the value of the UK portfolio and changes in inflation. A 1% change in discount rate would change the value of the UK portfolio by approximately £52 million. A 1% change in the discount would change the value of the North American portfolio by approximately £75 million.

Movement in value 2018 to 2019

£m

2018

Equity invested

Distributions received

Sales proceeds

Unwind of discount

New project wins

Gains on sales

Operational performance

 

Foreign exchange

2019

 

UK

491

31

(19)

(25)

38

9

(21)

514

North America

660

33

(46)

(77)

49

13

16

39

(19)

554

Total

1,151

64

(65)

(102)

87

13

25

18

(19)

1,068

Portfolio valuation December 2019
Value by sector

Sector

2019

No. projects

2018

No. projects

2019

£m

2018  

£m

Roads

13

13

206

205

Healthcare

3

3

112

109

Student accommodation 4 4 59 43
OFTOs 3 3 53 50
Waste and biomass 4 4 60 41
Other 4 5 24 43
UK total 31 32 514 491
US military housing 21 21 453

532

Healthcare and other PPP 2 4 17 35
Student accommodation 5 7 40 46
Residential housing 10 10 44 47

North America total

38

42

554

660

Total

69

74

1,068

1,151

Value by phase

Phase

2019

No. projects

2018

No. projects

2019

£m

2018 

£m

Operations

62

64

954

1,003

Construction

5

7

114

130

Preferred bidder 2 3

18

Total

69

74

1,068

1,151

Value by income type ​

Income type 

2019

No. projects

2018

No. projects

2019

£m

2018  

£m

Availability based 

22

25

389

414

Demand - operationally proven (2+ years)

38

40

517

614

Demand - early stage (less than 2 years) 9 9 162 123

Total

69

74

1,068

1,151