Triple Point Social Housing REIT — DPS commitment maintained despite challenges

The trading update provides some key information about financial performance to 31 December 2022 (FY22). The board remains committed to its FY22 DPS target of 5.46p of which three interim dividends, each of 1.365p, have already been declared and paid. All SOHO’s leases are indexed to inflation1 and rents increased by a weighted average 6.7% during the year. However, due to two lessees (My Space and Parasol Homes, 7.9% and 9.6% of rent roll, respectively) falling into arrears in respect of a part of their rents for the year, 91.7% of rent due was collected (H122: c 96%). The other 25 of SOHO’s 27 lessees recorded no material arrears. With all debt long-term and fixed-rate, with an attractive weighted average coupon of 2.74% and a weighted average maturity of 10.6 years, income is fully protected from interest rate increases.

SOHO says that Parasol Homes continued to pay some of the rent due in the latter half of 2022, but not all, because of operational issues that it is working to address. The company expects to agree a rent repayment plan with Parasol, including for rent arrears, as it seeks to return rent payments to historical levels.

The problems at My Space are more significant and complex, as we discuss below, and at this stage, insolvency cannot be ruled out. Although this is just one of the potential outcomes, SOHO is nevertheless actively looking to move properties away from My Space to alternative housing providers. Given the regulator’s request to My Space that it consider the potential for a business combination or merger, this may not be fully necessary. Whatever the decision, SOHO says that protection and welfare of the residents would be its principal concern and in that respect the company notes that it may be necessary to amend lease terms as part of any transfer.

To establish the downside risk, SOHO requested the company’s independent valuer, Jones Lang LaSalle, to determine the potential negative impact of My Space entering administration. The valuers have estimated this to be up to 38% of the value of the properties let to My Space or 2.4% of SOHO’s total portfolio valuation as of 30 September 2022. Although not specified, we would expect this to take account of potential new lease incentives or reduced rent levels that a property transfer may incur.

For FY23, SOHO says that it will prudently apply a temporary one-year cap of 7% to its leases to its RP lessees. We think this a sensible approach in the current inflationary environment, allowing for material rent growth while ensuring that these remain sustainable and in line with wider social housing policy. Although SSH is excluded, the UK government has capped social housing rent increases to 7% for 12 months from 1 April 2023.

The company will also seek to introduce a new risk-sharing clause into its existing leases during the first half of 2023 following ongoing consultation with stakeholders, including the Regulator of Social Housing (RSH). The clause is intended to enhance the ability of RPs to address a key regulatory concern about long-term lease risks to RPs. We believe this could be an important development and expect further details with the FY22 results announcement.

As noted above, we expect SOHO to report FY22 results during March 2023. Ahead of this we have not updated our forecasts, published on 4 October 2022. Compared with those forecasts, rent increases are stronger but this is more than offset by reduced rent collection. Also not in our published forecasts, we expect the property yield widening that has affected almost every sector of the UK commercial property market to have affected the valuations of SOHO properties and NAV, although compared with the broader property sector, index-linked rents, long leases (c 25 years) and strong underlying demand for homes should significantly mitigate the underlying impact. However, some additional specific impact from the properties leased to My Space and Parasol seems likely.

The board is committed to addressing the current significant share price discount to net asset value. It is examining the potential for accretive share buybacks outside of a close period, for which the balance sheet provides some scope. At end-H122, the gross loan to value ratio (outstanding debt/gross assets) was 37.6%, within the company’s medium-term 35–40% target. Unencumbered assets amounted to c £70m at the 30 September valuation. Additionally, it will consider the potential for asset sales to fund a capital return provided this would have no material adverse impact on the company’s leverage position.

For readers who are less familiar with the regulation of RPs and SSH, we provide a summary below.

In December 2022, the RSH noted that My Space (MS) was subject to regulatory intervention or enforcement action, both in relation to its governance and financial viability, and that it was in the process of serving an enforcement notice, published in January 2023. The enforcement notice reiterates the previously expressed concerns of the RSH and directs MS to undertake certain actions within clearly specified timeframes. These actions are focused on resolving MS’s solvency position, ensuring its rents are compliant with government policy for social housing rents and that MS becomes compliant with regulatory standards. The RSH also believes that MS has failed to manage its affairs with the appropriate degree of skill, independence, diligence, effectiveness, prudence and foresight required to ensure its viability is maintained and that social housing assets are not put at undue risk.

Without knowing the specifics, we suspect that MS’s integrated (housing and support) business model may have complicated its ability to satisfy the RSH with respect to the rent standard. SOHO notes that operating such a model is not common for its tenants.

In its trading update, SOHO has provided additional details of the breakdown of its portfolio, highlighting its focus on properties that provide SSH (88.5% of portfolio rent roll), all of which are leased to Registered Providers (RPs), regulated by the Regulator of Social Housing In each of these, a care provider, regulated by the Care Quality Commission (CQC), provides care to residents independently of the RP, which is responsible for providing housing management services. Among all SOHO’s 27 tenants, referred to collectively as approved providers, c 94% of rent roll is leased to providers that are subject to regulatory protection and standards provided by the RSH (18 lessees), the CQC, also the main regulator of care providers (five), and Ofsted (two). The remaining two lessees are community interest companies where regulation is administrative only. In addition to the 88.5% of SOHO’s rent roll that comes from properties supporting SSH, a further 4.1% supports registered care or children’s services, and 7.4% is classified as supported housing.

SSH is aimed at (and is defined by) providing a high level of care and support to vulnerable individuals, who may typically have mental health issues, learning difficulties or physical disabilities requiring a significant level of care and support, in appropriately designed or structurally altered properties. Driven by demographic trends and government policy, the average age of those living in SSH is generally young (60% of residents in SOHO homes are less than 40 years old and 82% are less than 50 years old2), with the likelihood of requiring support for decades to come. Based on data provided by lessees, in relation to those lessees, SOHO estimates the average care hours received by residents is over 40 hours per week, considerably above guidance around the levels of care expected in SSH. The high level of care and the nature of commissioning are among the features that differentiate SSH from supported housing.

As with SSH, where supported housing works well, residents are provided with suitable accommodation and support to which they may not have otherwise had access. However, there has been considerable focus on aspects of some parts of the sector that do not work well. This includes concerns over instances of poor-quality accommodation, a lack of support provision and high rents.

Improvements are also required across the broad SSH sector, but regulatory authority and responsibility is clearer. Over the last five years, the RSH has actively engaged with RPs that operate a long-lease model in the SSH sector. Many non-compliant regulatory judgements/notices have been issued across the sector (see below), in part reflecting its strong growth in recent years and the challenge this has presented for the development of management and governance structures, as well as capital resources, to keep pace. As SOHO is a leading private sector investor in SSH, working with some of the fastest-growing providers, 103 of SOHO’s 18 RP lessees (27 lessees in total) have been issued with regulatory judgement/notices. Regulation of the social housing sector has provided stability to the sector, to the benefit of all stakeholders, and SOHO welcomes the ongoing engagement by the regulator. It believes that improvements in the governance and operations of most of its lessees result from this strong regulation combined with its own close engagement with them and active asset management. SOHO notes that despite the challenge of inflation, most of the seven lessees that represent 5% or more of rent roll have demonstrated an improvement in net profitability in their latest management accounts shared with it.

Supported housing encompasses a wide range of housing that combines housing with support for people with different needs, such as older people, people with disabilities and people with complex needs. Exempt accommodation is a category of supported housing that is exempt from locally set caps on housing benefit, recognising that housing costs are higher. While housing costs are covered, subject to the claimant’s personal circumstances, by the uncapped level of housing benefit, the housing benefit cannot be used to fund the cost of care, support or supervision. Providers fund the care they provide through charitable or commissioned funding, providers’ surpluses or by charging the resident a service charge, unless the resident is eligible for a state-funded care package. The level of care that should be provided is not clearly defined but is expected to be ‘more than minimal’.

SSH is a particular type of supported social housing designed to provide care-based accommodation to some of the most vulnerable in society. This typically includes those with acute long-term or lifelong care needs relating to mental, physical and learning disabilities, and autism, but may also include those suffering from domestic abuse, substance abuse and homelessness. It is common for care to be provided by a third party, contracted directly with the commissioning local authority. The care provider, in turn, secures a suitable property. Care costs and housing costs, including property service charges, are paid separately to the care provider and the property provider (by-passing the home resident).

All funding for approved SSH schemes comes from central government and is distributed via the local authorities that commission the services. SSH provision is therefore not reliant on the level of local authority funding. An important distinction of SSH is that the level of rent that an individual living in SSH may claim is set on a bespoke basis according to their needs and is exempt from the social rent rules that normally apply to housing benefit awards. To fall within the exempt rent legislation, SSH homes must fulfil several criteria including:

There is no single central regulator of supported accommodation. If the accommodation is provided by a housing association, in most cases it will be registered with the RSH as a RP and will be subject to the associated regulatory requirements. Through this framework, the RSH seeks to promote a viable, efficient and well-governed social housing sector able to deliver homes that meet a range of needs.

In summary, the objectives of the RSH are to:

In seeking to meet these goals, the RSH has set ‘economic standards’ and ‘consumer standards’. The RSH proactively seeks assurance that the economic standards are being met by providers. The consumer standards are currently monitored on a reactive basis.

The three economic standards are:

The regulatory judgements (applicable to RPs with more than 1,000 units) and notices (applicable to RPs with less than 1,000 units) that are published by the RSH represent its official view of an RP’s compliance with the governance and financial viability standards. These range from 1 to 4 (eg G1/V1 or G4/V4), with 1–2 representing levels of compliance and 3–4 levels of non-compliance. Regulatory notices are issued in response to an event of regulatory importance (for example, where an RP is found to have breached a consumer standard that has or may cause serious harm) that it needs to make public.