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Research: Real Estate
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.
Triple Point Social Housing REIT |
Enhancing investment flexibility |
Change to investment policy |
Real estate |
9 March 2022 |
Share price performance
Business description
Next events
Analyst
Triple Point Social Housing REIT is a research client of Edison Investment Research Limited |
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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**/ |
DPS |
P/NAV |
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
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Research: TMT
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