Triple Point Social Housing REIT — Enhancing investment flexibility

Triple Point Social Housing REIT (LSE: SOHO)

Currency in GBP

Last close As at 02/02/2023

GBP0.51

0.80 (1.60%)

Market capitalisation

GBP201m

Research: Real Estate

Triple Point Social Housing REIT — Enhancing investment flexibility

Triple Point Social Housing REIT (SOHO) will propose certain changes to its investment policy and restrictions at the next AGM to be held on 27 May 2022. The changes reflect the evolution of market practice and provide additional flexibility to pursue a strong investment pipeline, on terms compatible with SOHO’s existing return targets. We make no changes to our forecasts ahead of the release of FY21 results, expected in late March.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Triple Point Social Housing REIT

Enhancing investment flexibility

Change to investment policy

Real estate

9 March 2022

Price

86.9p

Market cap

£350m

Net debt (£m) at 30 June 2021

171.1

Gross gearing at 30 June 2021 (gross debt/gross assets)

31.5%

Shares in issue

402.8m

Free float

98.5%

Code

SOHO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.4

(12.5)

55.9

Rel (local)

15.4

(5.5)

54.0

52-week high/low

150p

82p

Business description

Triple Point Social Housing REIT invests primarily in newly built and newly renovated social housing assets in the UK, with a particular focus on supported housing. The company aims to provide a stable, long-term, inflation-linked income with the potential for capital growth.

Next events

FY21 results

Expected late March 2022

AGM

27 May 2022

Analyst

Martyn King

+44 (0)20 3077 5745

Triple Point Social Housing REIT is a research client of Edison Investment Research Limited

Triple Point Social Housing REIT (SOHO) will propose certain changes to its investment policy and restrictions at the next AGM to be held on 27 May 2022. The changes reflect the evolution of market practice and provide additional flexibility to pursue a strong investment pipeline, on terms compatible with SOHO’s existing return targets. We make no changes to our forecasts ahead of the release of FY21 results, expected in late March.

Year end

Total income (£m)

Edison adj. earnings* (£m)

Edison adj. EPS* (p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

12/19

21.1

12.3

3.50

105.4

5.10

0.82

5.9

12/20

28.9

17.7

4.90

106.4

5.18

0.82

6.0

12/21e

33.0

20.2

4.89

106.9

5.20

0.81

6.0

12/22e

37.9

22.4

5.56

112.6

5.39

0.77

6.2

Note: *As defined in Exhibit 1 of our last published report. **EPRA net tangible assets per share.

Evolving with market growth

The specialised supported housing (SSH) market has grown strongly in recent years in response to a shortage of housing for vulnerable adults with long-term care needs. During this period the market has evolved to meet the needs of approved providers (APs) of SSH and accommodate points raised by the regulator. In 2019, SOHO introduced a change in law clause into new leases, which facilitated proportionate risk sharing with APs should there be a material future change in housing benefit policy. After consultation with shareholders SOHO is now proposing changes to its investment policy and restrictions that will remove the minimum term on new leases (currently at least 15 years), allow it to selectively take on the cost of funding maintenance capex and give it flexibility to enter into new leases with upward-only rents linked to inflation or central housing benefit policy. We provide further details on the following page.

Positive outcomes driving demand

The proposed changes are aimed at providing SOHO with the necessary flexibility in signing new leases to maintain its position as a leading investor in the sector, remain an attractive partner to APs and support them in accommodating the points raised by the Regulator of Social Housing (RSH) in respect of long index-linked leases. SOHO says the changes are consistent with its existing income and capital return targets, while enhancing the ability of APs to respond to any potential changes in housing benefit. We currently see little prospect of this and, at both a national and local level, it is government policy to offer supported housing to more people. The shortage of SSH is widely forecast to increase yet, compared with the alternatives of residential care or hospitals, it improves lives in a cost-effective manner. This should benefit the security of contracted rents and long-term growth of the sector.

Valuation: Robust, attractive and growing income

We expect no change in dividend policy and FY21e DPS paid/declared of 5.20p represents a yield of c 6.0%, with good prospects for growth. Meanwhile the shares trade at an almost 20% discount to NAV. This is in our view attractive in a continuing low interest rate environment.

Further details on the changes

The SSH sector is regulated by the RSH. SOHO is not regulated but works closely with the RSH and the APs that are regulated. The RSH has commented publicly and regularly on the risks that long index-linked leases may pose to APs and the sector, particularly in circumstances where the government were to materially change its policy towards housing benefit. In order to satisfy the regulator’s concerns, APs have been seeking to evolve the terms of the leases entered into going forward. SOHO says that over the past six months it has observed an increasing prevalence of new lease structures in the market as well as their adoption by other investors in SSH property.

In this context, the changes that SOHO proposes to its investment policy and investment restrictions are aimed at providing it with the necessary flexibility to maintain its position as a leading investor in the sector, remain an attractive partner to APs and support them in accommodating the points raised by the RSH.

The removal of SOHO’s minimum lease term (15 years unexpired or 20–25 years at inception for new lease agreements) will accommodate APs seeking shorter lease lengths. Long average lease lengths have to date been a feature of the sector, but we do not expect shorter leases to have any material impact on cash flows, and therefore on property valuations. Cash flows are underpinned by the positive demand-supply balance in the sector as well as the relatively young age of current and prospective residents. A young resident can be expected to live in their home for many years and the commissioning local authority has no incentive to move them from either a care or financial perspective. SOHO says that it has carefully considered the impact that the proposed changes may have on its performance and that the returns expected from an identified pipeline of acquisition opportunities, incorporating the changes, are consistent with the existing income and capital return targets. This conclusion is supported by independent valuation advice from Jones Lang LaSalle.

Current leases are typically fully repairing and insuring (FRI), but SOHO is seeking authority to selectively take on the cost of funding planned maintenance. This will give it additional flexibility in respect of shorter leases, where APs might not expect to have to undertake planned maintenance during the life of the lease.

To date, leases have included annual upward-only rent increases linked to CPI. The changes allow for new leases to specify rent uplifts linked to CPI or to central housing benefit policy. This will further address the points raised by the regulator in respect of long-term lease risks but, based on historical experience, is unlikely to have any practical impact on medium-term rent growth. SSH rents are exempt from housing benefit rent caps that apply to general needs social housing and are set on a bespoke basis according to the needs of the individuals that receive it. SOHO expects that rents will continue to rise broadly in line with inflation. Publicly available data show that general needs social housing rent increases have historically at least matched CPI inflation. From 2001/02 to 2014/15, the maximum permissible increase was set at CPI plus 0.5% pa. Rents were then reduced by 1% pa for four years before increases were restored at CPI plus 1.0% pa from 2020/21. It is important to note that SSH rents were not subject to the rent reductions.

Continuing acquisitions from strong pipeline

Despite the evolution of lease structures in the market observed by SOHO, it has continued to acquire properties in recent months within the existing investment parameters, from a strong pipeline of opportunities that amounted to more than £150m coming into H221.

Disclosed H121 investment activity comprised the completed or exchanged acquisition of 41 additional properties (c 270 individual units) for c £40m (before costs). All the properties were acquired on new or existing FRI leases with annual upward-only rent uplifts linked to CPI. All have lease lengths of at least 20 years and a portfolio of 19 properties included within the total was acquired with existing lease terms of between 56 and 60 years (with tenant break options at years 25 and 50).

The H221 acquisition total is slightly below the c £47m included in our estimates but we do not expect this to have a material impact on FY21 income and it should be made up during FY22. We will review our forecasts when the FY21 results are released.

Exhibit 1: Financial summary

Period ending 31 December (£m)

2018

2019

2020

2021e

2022e

2023e

INCOME STATEMENT

Total income

11.5

21.1

28.9

33.0

37.9

38.7

Directors' remuneration

(0.3)

(0.3)

(0.3)

(0.3)

(0.3)

(0.3)

Investment management fees

(2.3)

(3.9)

(4.1)

(4.5)

(4.6)

(4.8)

General & administrative expenses

(1.9)

(1.8)

(2.2)

(2.1)

(2.2)

(2.2)

Total expenses

(4.5)

(6.0)

(6.6)

(7.0)

(7.1)

(7.3)

Ongoing charge ratio (OCR)

0.0

0.0

0.0

0.0

0.0

0.0

Operating profit/(loss) before revaluation of properties

7.0

15.1

22.3

26.1

30.8

31.4

Change in fair value of investment properties

14.5

11.8

7.9

3.8

22.8

23.6

Operating profit/(loss)

21.5

26.9

30.2

29.9

53.5

55.0

Net finance income/(expense)

(1.6)

(3.2)

(5.6)

(6.8)

(9.4)

(9.4)

PBT

19.9

23.7

24.6

23.0

44.2

45.6

Tax

0.0

0.0

0.0

0.0

0.0

0.0

Net profit

19.9

23.7

24.6

23.0

44.2

45.6

Adjusted for:

Change in fair value of investment properties

(14.5)

(11.8)

(8.0)

(4.3)

(22.8)

(23.6)

EPRA earnings

5.4

11.9

16.6

18.7

21.4

22.0

Interest capitalised on forward funded developments

0.0

(0.1)

(0.1)

0.0

0.0

0.0

Amortisation of loan arrangement fees

0.0

0.5

1.2

1.0

1.0

1.0

Company adjusted earnings

5.4

12.3

17.7

19.7

22.4

23.0

Change in valuation of property held for sale

0.0

0.0

0.1

0.5

0.0

0.0

Edison adjusted earnings

5.4

12.3

17.7

20.2

22.4

23.0

Basic & diluted average number of shares (m)

237.6

351.1

360.9

402.8

402.8

402.8

Basic & diluted IFRS EPS (p)

8.37

6.75

6.82

5.72

10.96

11.32

Basic & diluted EPRA EPS (p)

2.27

3.39

4.61

4.65

5.31

5.47

Basic & diluted company adjusted EPS (p)

2.29

3.50

4.90

4.89

5.56

5.71

Edison adjusted EPS (p)

2.29

3.50

4.91

5.02

5.56

5.71

DPS declared (p)

5.00

5.10

5.18

5.20

5.39

5.47

Company adj. EPS/DPS

0.46

0.69

0.95

0.94

1.03

1.04

BALANCE SHEET

Investment properties

324.1

472.3

572.1

649.2

672.0

695.5

Other receivables

0.0

0.0

0.0

0.0

0.0

0.0

Total non-current assets

324.1

472.3

572.1

649.2

672.0

695.5

Cash & equivalents

114.6

67.7

53.7

44.0

45.1

46.2

Other current assets

3.4

4.3

4.3

5.7

6.3

6.3

Total current assets

118.0

72.0

58.0

49.8

51.4

52.5

Trade & other payables

(9.0)

(8.1)

(5.0)

(5.8)

(6.6)

(6.6)

Other current liabilities

0.0

0.0

0.0

0.0

0.0

0.0

Total current liabilities

(9.0)

(8.1)

(5.0)

(5.8)

(6.6)

(6.6)

Bank loan & borrowings

(67.4)

(165.0)

(194.9)

(260.9)

(261.9)

(262.8)

Other non-current liabilities

(1.6)

(1.5)

(1.5)

(1.5)

(1.5)

(1.5)

Total non-current liabilities

(68.9)

(166.5)

(196.4)

(262.4)

(263.4)

(264.4)

IFRS net assets

364.2

369.7

428.7

430.7

453.4

477.0

EPRA net assets

364.2

369.7

428.7

430.7

453.4

477.0

Period-end basic & diluted number of shares (m)

351.4

350.9

402.8

402.8

402.8

402.8

Basic & diluted IFRS NAV per share (p)

103.6

105.4

106.4

106.9

112.6

118.4

Basic & diluted EPRA NTA per share (p)

103.6

105.4

106.4

106.9

112.6

118.4

CASH FLOW

Net cash flow from operating activity

5.4

16.3

24.5

27.2

31.0

31.4

Cash flow from investing activity

(160.6)

(135.5)

(94.4)

(74.4)

0.0

0.0

Net proceeds from equity issuance

106.0

0.0

53.1

(0.0)

0.0

0.0

Net proceeds from C share issuance

46.6

0.0

0.0

0.0

0.0

0.0

Loan interest paid

(1.6)

(2.9)

(4.6)

(5.9)

(8.4)

(8.4)

Bank borrowings drawn/(repaid)

58.0

111.1

29.4

65.0

0.0

0.0

Share repurchase

0.0

(0.4)

0.0

0.0

0.0

0.0

Dividends paid

(10.1)

(17.8)

(18.8)

(20.9)

(21.5)

(22.0)

Other cash flow from financing activity

(1.2)

(3.5)

(1.1)

(0.6)

0.0

0.0

Cash flow from financing activity

197.8

86.6

58.0

37.6

(29.9)

(30.4)

Change in cash

42.6

(32.6)

(11.9)

(9.6)

1.1

1.1

Opening cash

54.8

97.3

64.7

52.9

43.3

44.4

Closing cash (excluding restricted cash)

97.3

64.7

52.9

43.3

44.4

45.4

Restricted cash

17.3

3.0

0.8

0.7

0.7

0.7

Cash as per balance sheet

114.6

67.7

53.7

44.0

45.1

46.2

Debt as per balance sheet

(67.4)

(165.0)

(194.9)

(260.9)

(261.9)

(262.8)

Unamortised loan arrangement costs

(1.1)

(4.1)

(3.6)

(2.6)

(1.6)

(0.7)

Total debt

(68.5)

(169.1)

(198.5)

(263.5)

(263.5)

(263.5)

Net (debt)/cash excluding restricted cash

28.8

(104.4)

(145.6)

(220.2)

(219.1)

(218.1)

Net LTV (net debt/investment property)

NA

22.1%

25.5%

33.9%

32.6%

31.3%

Company gearing (gross debt/gross asset value)

15.5%

31.1%

31.5%

37.7%

36.4%

35.2%

Source: Triple Point Social Housing historical data, Edison Investment Research forecasts


General disclaimer and copyright

This report has been commissioned by Triple Point Social Housing and prepared and issued by Edison, in consideration of a fee payable by Triple Point Social Housing. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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General disclaimer and copyright

This report has been commissioned by Triple Point Social Housing and prepared and issued by Edison, in consideration of a fee payable by Triple Point Social Housing. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Research: TMT

CentralNic Group — VGL acquisition follows a strong FY21

Through a programme of investment in systems and staff, CentralNic deliver 39% organic revenue growth in FY21, with gross revenues rising 71% y-o-y to US$411m. Net revenues rose 58% to US$118m, with gross margins easing to 29% (FY20: 31%). Adjusted EBITDA rose 57% to US$46m, with margins falling to 11.3% (FY20: 12.2%). Tightening margins are a factor of changing product mix, with the privacy-safe Online Marketing division growing 133% y-o-y versus 17% for Online Presence. CentralNic has also completed the €60m acquisition of VGL, a product comparison website, funded by a £42m placing (at 120p per share), a €21m bond issue, with a £3m open offer outstanding.

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