Trading Update

RNS Number : 8064O

Triple Point Social Housing REIT

03 February 2023

 

3 February 2023

Triple Point Social Housing REIT plc

(the "Company", "SOHO" or, together with its subsidiaries, the "Group")

Trading Update

The Board of Triple Point Social Housing REIT plc and Triple Point Investment Management LLP ("Triple Point" or the "Manager") today provide a Trading Update for the twelve months ended 31 December 2022.

· The Group's portfolio of 3,456 units and 497 properties with a weighted average unexpired lease term of 25.3 years, demonstrated strong resilience during the period, underpinned by growing excess demand for Specialised Supported Housing which represents 88.5%[1] of the Group's portfolio by rent roll.

· 91.7% of rent due was collected for the period (31 December 2021: 99.8%), 25 of the Group's 27 lessees recorded no material arrears.

· The Board remain committed to its stated annual dividend target of 5.46 pence per Ordinary Share in respect of the financial year ended 31 December 2022.  

· 94.3% of the Group's portfolio by rent roll was leased to Registered Providers that are subject to regulatory protections and standards provided by the Regulator of Social Housing. In the properties which provide Specialised Supported Housing (88.5% of the portfolio by rent roll) a care provider, regulated by the Care Quality Commission ("CQC"), provides care to residents independently of the Registered Provider. For the remainder of the portfolio (rent roll), 4.1% is classified as Registered Care or Children's Services, and 7.4% is classified as Supported Housing.

· The portfolio recorded a strong weighted average rent increase of 6.7% during the twelve month period. 92.6% of the Group's leases are linked to CPI with the remaining 7.4% linked to RPI, and 5.1% of the Group's leases have caps .

o  For the financial year ending 31 December 2023, the Group will prudently apply a temporary one-year cap of 7% to its leases to Registered Providers. This accounts for the current high inflationary environment facing Registered Providers, but is consistent with both the UK government's 7% cap on social housing rent increases (despite Specialised Supported Housing being excluded from the cap) and the Group's highest historical weighted average annual rental growth rate (being 6.7% for the year 2022). The voluntary cap applied to the portfolio's leases for 2023 will continue to allow for material rental growth whilst ensuring that the Group's rent increases remain sustainable and in line with wider social housing sector policy.

· The Manager continues to actively engage with two of the Group's 27 lessees in relation to the Company's previously reported rent arrears (in 2022). The Group's latest reported Net Asset Value (as at 30 September), published on 23 November 2022, reflected the valuation impact of these isolated cases of rent arrears.

Whenever asset management decisions are made, the welfare of the individuals living in the Group's properties is at the forefront of the decision making process.

o  My Space Housing ("My Space") (7.9% of rent roll): in the Enforcement Notice published on 16 January 2023, the Regulator of Social Housing noted concerns around My Space's solvency. The Manager is actively looking to move properties away from My Space to alternative housing providers but notes the Regulator's request that My Space consider, amongst other things, the option of a business combination or merger which might negate the need to move properties. Were properties to be moved to an alternate housing manager, protecting the welfare of the residents of these properties would be the Group's principal concern. The Company notes lease terms may be amended as part of any transfer.

o  In order to establish a downside risk, the Board and the Manager requested the Company's valuer, Jones Lang LaSalle ("JLL"), to determine the potential negative impact on the value of the Group's property portfolio in the event that My Space were to go into administration. JLL have estimated this impact to be up to 38% of the value of the properties let to My Space or 2.4% of the Group's total portfolio valuation as of 30 September 2022.

o  Parasol Homes Limited ("Parasol") ( 9.6% of rent roll) : due to operational issues, in the latter half of 2022 Parasol failed to pay all rent due to the Group. Parasol is working to address these issues and the Manager expects to agree a rent repayment plan with Parasol, including for rent arrears, which it is hoped will see the Group's rent payments return to historical levels.

· In a rising interest rate environment, the Group continues to benefit from its £263.5 million of long-term fixed-priced debt with a weighted average coupon of 2.74% and a weighted average maturity of 10.6 years. The earliest debt maturity occurs in mid-2028.

· The Group continues to maintain significant covenant headroom within its credit facilities alongside additional liquidity in the form of £26.9 million of cash, and unencumbered properties with an aggregate valuation of £70.8 million as at 30 September 2022.

· The Company will seek to introduce a new risk sharing clause into its existing leases during Q2 2023 following ongoing consultation with stakeholders, including the Regulator of Social Housing. The implementation of the clause is intended to enhance the Group's Registered Provider lessees' compliance with the Regulator of Social Housing's standards.

· The Board continues to actively engage with its shareholders and is committed to addressing the current discount to the Company's Net Asset Value. In order to deliver value to shareholders, the Board and Manager are exploring making accretive share buybacks outside of a close period and the potential sale of a portfolio of the Group's properties. If the Group considered that a potential sale of a portfolio would be in the best interests of its shareholders, and conditional on such a transaction not having a material adverse impact on the Group's leverage position, the Board would seek to return capital from such a sale to its shareholders.

Chris Phillips, Chair of SOHO, said: "The Board recognises the ongoing resilience of the Company's portfolio, notwithstanding the sector-wide pressures social housing providers are experiencing. SOHO's focus on Specialised Supported Housing, and excess demand for more homes underpins our confidence in the Group's outlook. The proposed amendments to existing lease clauses are aimed at strengthening the compliance of the Company's Registered Provider partners. The Board and the Manager are focused on delivering value to shareholders, and are exploring  making accretive share buybacks and the potential sale of a portfolio of the Group's properties."

Max Shenkman, Head of Investment, Triple Point, said: "Over the last five years, we have built a UK wide portfolio of properties leased to a diversified range of counterparties most of whom focus on providing long-term Specialised Supported Housing to people with care and support needs. Other than in two isolated instances, our lessees have adjusted to the impact of a changing macroeconomic and operating environment effectively, despite the rising cost of providing their services. We continue to actively manage two isolated cases of material rent arrears in our portfolio. We believe in proportionate specialist industry regulation and its ability to enhance governance and service provision in social housing. This, in turn, supports the sustainability of the portfolio's cash flows and returns to SOHO's shareholders."

COMPANY AND MANAGER COMMENTARY

1.  Portfolio Performance and Valuation

91.7% of rent due and generated by the Group's portfolio of 497 properties was collected during the period.

Properties that provide Specialised Supported Housing make up 88.5%[2] of the Group's portfolio by rent roll. In all of these properties a care provider regulated by the CQC provides care to residents independently of the Registered Provider who is responsible for providing housing management services. Based on data received by the Manager from lessees, the Company estimates that, for those lessees, the average care hours received by residents is over 40 hours per week, considerably above guidance around the levels of care expected in Specialised Supported Housing.

During 2022, rising inflation had a significant impact on the cost of operating social housing properties. The majority of the Group's lessees have adjusted to the impact of a changing macroeconomic and operating environment effectively, as demonstrated by the resilience in the portfolio's performance. If, as forecast, inflation slows over the course of the current financial year, the peak of these challenges should have passed.

On a like for like basis, we expect the Company's property portfolio valuation as at the 31 December 2022, provided by JLL, to reflect some negative adjustment compared to the end of the prior quarter (30 September 2022: £672.2 million), predominantly reflecting an outward movement in some social housing yields. We expect this movement to be limited relative to other commercial property markets due to excess demand for Specialised Supported Housing, coupled with a continued lack of supply.

2.  Portfolio Composition and Regulatory Protections

2.1. Lessee Regulgation and Care Provision

25 of the Group's 27 leases are regulated by either the Regulator of Social Housing, the CQC or Ofsted, representing 98.4% of the portfolio's rent roll. The majority of the Group's lessees are therefore subject to strong, specialist housing, care or, in relation to two properties, children's services regulation.

88.5% of the Group's properties benefit from a separate care provider, regulated by the CQC. The care provider delivers care and/or support to the residents living in the Group's properties. A further 3.8%, of the Group's properties are leased directly to a care provider regulated by the CQC, meaning that over 92.3% of the Group's properties have care and support provided by a CQC registered care provider.

The provision of care and support is contracted directly between the Local Authority and the care provider. Separately, where the care provider is not the lessee, the care provider will typically enter into a service level agreement with the relevant Registered Provider which, amongst other things, will usually see the care provider underwrite the rent of any unoccupied units in the property. These contracts typically last for between 5 to 10 years. Of the Group's properties, 408 properties or 82% benefit from this voids cover.

On average, the Group's lessees are 17 years old, and they were typically established to provide homes in the community to adults with care and support needs.

Regulator	Lessees	Portfolio Composition By number of properties	Rent Roll (%) As at 31 December 2022
Regulator of Social Housing (RSH)	18	460	94.3
Care Quality Commission (CQC)	5	29	3.8
Ofsted	2	2	0.3
Sub Total (Subject to specialist Regulation)	25	491	98.4
Community Interest Groups or Charities (Not subject to specialist care or housing regulation)	2	6	1.6
TOTAL	27	497	100.0

2.2. Portfolio Diversification and Monitoring

The Group has seven lessees each representing 5% or more of the Group's rent roll and which together represent 74.3% of the Group's rent roll as at 31 December 2022. All these lessees are Registered Providers. Except for Inclusion Housing CIC which represents 29.4%, none of the Group's other lessees represent more than 10% of rent roll.

Despite a changing macroeconomic and operating environment, most of the seven lessees that represent 5% or more of the Group's rent roll have demonstrated an improvement in net profitability in their latest management accounts shared with the Manager. The Manager receives and analyses management accounts for all of these seven lessees and does the same for lessees representing 99.1% of the portfolio (by rent roll).  

The Manager's Housing Team of 24 people are focused on monitoring the performance of the properties, lessees and care providers within the Group's portfolio. Since launch properties have been inspected by the Manager's in-house surveyors every two years and this is complemented by quarterly and bi-annual operational, financial and compliance surveys as well as frequent engagement with senior management teams.

2.3. Regulatory Engagement

The Company's focus is on leasing Specialised Supported Housing properties to Registered Providers regulated by the Regulator of Social Housing (per paragraph 2.1 above). Over the last five years, the Regulator of Social Housing has actively engaged with Registered Providers operating the long-lease model in the Specialised Supported Housing sector.

Of the Group's 18 Registered Provider lessees, three have over 1,000 units and 15 under 1,000 units. Typically, Registered Providers with under 1,000 units are subject to a lower level of regulatory oversight.

However, due to the Regulator of Social Housing's focus on the Specialised Supported Housing sector, all of SOHO's Registered Providers have been subject to relatively intensive engagement, which promotes a greater degree of accountability and transparency in the sector.

The Company and the Manager welcome the ongoing engagement by the Regulator of Social Housing as it ultimately serves the best interests of the Company's tenants and shareholders. We believe that improvements in the governance and operations of the Group's lessees is bought about by strong regulation and, combined with the active asset management undertaken by the Manager, strengthens portfolio performance.

All regulatory judgements and notices concerning the Group's Registered Providers have been reported by the Group in various announcements dating back to May 2018. In nearly all cases we believe that the Regulator of Social Housing's engagement has promoted improvements in both the governance and operations of these organisations.

Following engagement with key stakeholders, including the Regulator of Social Housing, and in order to complement the work done by the boards and management teams of the Group's lessees, the Company will seek to implement a new risk sharing clause in the Group's existing leases. The clause is aimed at strengthening the compliance of the Company's Registered Providers by addressing some of the general risks raised by the Regulator of Social Housing in relation to long leases.

3.  Outlook

The Group remains focused on providing Specialised Supported Housing to people with care and support needs throughout the UK.

The Company expects the Specialised Supported Sector to maintain its ongoing resilience due to its strength in recessionary periods relative to other commercial property sectors, which in turn is underpinned by the growing excess demand for more Specialised Supported Housing in the UK.

The majority of the Group's lessees continue to perform in-line with our expectations. Other than in relation to two of the Group's 27 lessees, rent collection remains consistent with historical levels. The Company and Manager will continue to engage positively and collaboratively with our lessee partners to help them respond to both inflationary pressures and the observations around their compliance made by the Regulator of Social Housing, as evidenced through the voluntary implementation of the 7% rent increase cap and the proposed roll out of the new risk sharing clause respectively.

ENDS.

FOR FURTHER INFORMATION ON THE COMPANY, PLEASE CONTACT:

Triple Point Investment Management LLP (Manager)   Tel: [phone]

Max Shenkman

Isobel Gunn-Brown

Akur Capital (Joint Financial Adviser)   Tel: [phone]

Tom Frost

Anthony Richardson

Siobhan Sergeant

Stifel (Joint Financial Adviser and Corporate Broker)   Tel: [phone]

Mark Young

Mark Bloomfield

Rajpal Padam

Madison Kominski

NOTES

The Company focuses on investing in newly developed social housing assets in the UK, with a particular focus on specialised supported housing. The majority of the assets within the portfolio are subject to inflation-linked, long-term, Fully Repairing and Insuring ("FRI") leases with Approved Providers (being Housing Associations, Local Authorities or other regulated organisations in receipt of direct payment from local government). The portfolio comprises investments into properties which are already subject to a lease with an Approved Provider, as well as forward funding of pre-let developments but does not include any direct development or speculative development.

There is increasing political pressure and social need to increase housing supply across the UK which is creating opportunities for private sector investors to help deliver this housing. The Group's ability to provide forward funding for new developments not only enables the Company to secure fit for purpose, modern assets for its portfolio but also addresses the chronic undersupply of suitable supported housing properties in the UK at sustainable rents as well as delivering returns to investors.

The Company is a UK Real Estate Investment Trust ("REIT") listed on the premium segment of the Official List of the UK Financial Conduct Authority and is a constituent of the FTSE EPRA/NAREIT index.

Additional information on regulation

The Specialised Supported Housing sector is regulated by the Regulator who carries out assessments on registered providers either through a scheduled In-depth assessment ("IDA") or reactive engagement. When a registered provider passes the 1,000-unit threshold, it automatically becomes subject to a detailed IDA by the Regulator.

The IDA assesses compliance with the requirements of the Governance and Financial Viability Standard. The outcome of an IDA results in the Regulator publishing a formal grading (V 1-4 for Viability and G 1-4 for Governance, where V1-2 and G1-2 are considered "compliant" ratings, and V3-4 and G3-4 are considered "non-compliant" ratings), known as a regulatory judgement.

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[1] Including Specialised Supported Housing properties at affordable rents.

[2] Including Specialised Supported Housing properties at affordable rents.

 

END

 

 

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