Triple Point Social Housing REIT — Fully covered DPS

Triple Point Social Housing REIT (LSE: SOHO)

Last close As at 03/12/2024

GBP0.60

−0.10 (−0.17%)

Market capitalisation

GBP238m

More on this equity

Research: Real Estate

Triple Point Social Housing REIT — Fully covered DPS

Q324 DPS was fully covered by adjusted earnings and despite a delay in resolving rent collection with My Space, one of the two recent problem tenants, we expect this to remain the case. My Space has ceased its partial rent payments since June but rent collection on the assets re-tenanted from Parasol to Westmoreland is expected to increase. With a My Space resolution taking longer, our forecasts for FY24 are reduced but are sufficient to cover DPS., while the shares continue to yield more than 9%.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Triple Point Social Housing REIT

Fully covered DPS

Q324 update

Real estate

4 December 2024

Price

60.3p

Market cap

£239m

Net debt at 30 June 2024

£234.6m

Gross LTV at 30 June 2024 (gross debt/gross assets)

37.2%

Shares in issue

393.5m

Free float

99%

Code

SOHO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(6.7)

(4.6)

(1.2)

Rel (local)

(8.6)

(5.2)

(11.3)

52-week high/low

67p

55p

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

FY24 year end

31 December 2024

Analyst

Martyn King

+44 (0)20 3077 5700

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

Q324 DPS was fully covered by adjusted earnings and despite a delay in resolving rent collection with My Space, one of the two recent problem tenants, we expect this to remain the case. My Space has ceased its partial rent payments since June but rent collection on the assets re-tenanted from Parasol to Westmoreland is expected to increase. With a My Space resolution taking longer, our forecasts for FY24 are reduced but are sufficient to cover DPS., while the shares continue to yield more than 9%.

Year end

Total income (£m)

Adjusted earnings* (£m)

Adjusted EPS* (p)

NAV**/
share (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

12/22

37.4

19.6

4.87

109.1

5.46

0.55

9.1

12/23

39.8

18.3

4.61

113.8

5.46

0.53

9.1

12/24e

41.8

21.4

5.44

112.3

5.46

0.54

9.1

12/25e

41.4

22.9

5.99

117.3

5.75

0.51

9.5

Note: *Excludes revaluation movements and non-recurring items and adds back non-cash loan fee amortisation. **Throughout this report, NAV is EPRA net tangible assets per share.

Westmoreland transfer on track

Through H124, the vast majority of SOHO’s portfolio continued to perform as expected with just two (of 27) tenants in material rent arrears. Of these, Parasol continued to pay the rents agreed under its creditor agreement until August, when the assets leased to it were transferred to Westmoreland. SOHO says that for the period post-transfer to end-FY24, rent collection is expected to increase in line with previous guidance. Disappointingly, My Space, which had been making partial rent payments in H124 (we estimate less than half that due), has for now stopped all rent payments. SOHO continues to work towards a transfer of the assets to an alternative provider, which should see a substantial increase in the rents collected. Meanwhile, the agreed sale of a portfolio of properties for more than £20m, which had been expected to complete in November, has been delayed as the purchaser seeks to close on the funding. While the delay supports near-term rental income, it pushes back the expected, accretive share repurchases.

Reduced forecasts but fully covered DPS

Perhaps conservatively, we now assume no resolution to the My Space situation until mid-2025. As a result, our FY24 adjusted earnings estimate is reduced by 2% and FY25 by 6%, although we expect FY25 earnings to be growing as a result of indexed rent uplifts and the Westmoreland transfer. We assume the portfolio sale completes in early FY25, with £20m of share repurchases spread across the year. The My Space situation negatively affected the Q324 external property valuation, which decreased by £5.7m or 0.9%, with yield widening continuing to offset the positive impact of rental growth, as in H124. Q3 NAV per share fell 1.4% to 110.8p. We have adjusted our NAV forecast accordingly but still anticipate valuation growth in FY25, driven by rental growth, the impact of re-tenanting and a more favourable UK commercial property backdrop as interest rates moderate.

Valuation: Not factoring in a rent collection recovery

We forecast FY24 DPS to be fully covered by adjusted earnings. This is reflected in a yield of more than 9%, while the discount to NAV remains more than 40%.

Changes to forecasts

Resolving tenant issues

During H124 rent collection increased to 93.3%, compared with 88.1% in H123 and 90.2% for FY23 as a whole. This improvement was primarily the result of the creditor agreement with Parasol (9.6% of H124 contracted rents or c £4.1m), as a result of which it paid 60% of the full contracted rent (with the balance reflected as a lease incentive), continuing up until the transfer of assets to Westmoreland in August. SOHO indicated that under the terms of the transfer, rent collected (from Westmoreland) would increase to between 75% to 85% of existing contracted rent during an initial stabilisation period (expected to last approximately 12 months from the date of transfer). It has confirmed that it expects rent collection for the post transfer period ending 31 December 2024 to be line with this. Beyond the stabilisation period, the company has said that it expects rent collection to increase further, to up to 90% of the existing contracted rent.

My Space accounts for just over 8% of contracted rents or c £3.5m pa. We estimate that less than half of this was paid in H124 with the balance fully provided for as an expected credit loss. The further reduction in collections from My Space in H224 is therefore reflected in our forecasts below as increased expected credit losses, in H224 and H125. From the beginning of H125 we assume a re-tenanting of the assets on similar terms to the Westmoreland transfer.

Continuing rental uplifts

All of SOHO’s rents are linked to either the CPI (92%) or RPI (8%) with an increasing overlay from SOHO’s new risk-sharing lease clause (for details see our March 2024 update), which has now been rolled out to most leases. The clause sets rent uplifts at the lower of the relevant inflation index and the prevailing government policy towards social housing rent increases. For 2025/26 and the years to 2030/31, the government has determined that social housing rents can increase annually by up to CPI plus 1% and is consulting on the appropriate term over which this policy should be extended. The new government has previously indicated that it expects social housing rents to increase by CPI plus 1% annually for the next 10 years. This means that SOHO’s rents should continue to track inflation even if the rate of uplift has moderated materially.

For the current year, two-thirds of SOHO’s rent reviews have been linked to the September 2023 level of CPI of 6.1%. In September 2024, the annual rate of CPI increase was 1.7% and this will be the basis for most of SOHO’s FY25 rent reviews. The September dip in CPI (the annualised increase to August was 2.2%) has a small impact on our forecasts, which had previously assumed 2.0%.

Exhibit 1: Forecast changes

Forecasts

Previous forecasts

Change

£m unless stated otherwise

FY24e

FY25e

FY24

FY25

FY24e

FY25e

Total income

41.8

41.4

41.7

41.4

0%

0%

Investment management fees

(4.7)

(4.6)

(4.7)

(4.8)

-1%

-5%

Administrative expenses

(3.6)

(4.0)

(3.6)

(4.0)

0%

0%

Expected credit loss

(3.2)

(0.9)

(2.6)

0.0

Net finance expense

(7.7)

(7.8)

(7.7)

(7.8)

0%

0%

EPRA earnings

22.6

24.2

23.1

24.9

-2%

-3%

Amortisation of loan arrangement fees

0.3

0.3

0.3

0.3

Exclude change in lease incentive debtor

(1.5)

(1.6)

(1.5)

(0.9)

Adjusted earnings

21.4

22.9

21.8

24.3

-2%

-6%

EPRA EPS (p)

5.75

6.34

5.86

6.50

-2%

-3%

Adjusted EPS (p)

5.44

5.99

5.55

6.35

-2%

-6%

DPS declared (p)

5.46

5.75

5.46

5.75

0%

0%

EPRA DPS cover (x)

1.05

1.10

1.07

1.13

Adjusted DPS cover (x)

1.00

1.04

1.02

1.10

-2%

-6%

EPRA NTA per share (‘NAV’)

112.3

117.3

115.2

120.9

NAV total return

3.5%

9.5%

6.1%

9.9%

Source: Edison Investment Research

Management arrangements

Following a review of the company’s investment management arrangements, in September, Atrato Partners was appointed as the new investment manager, in place of Triple Point Investment Management. The board will provide details of the new investment management agreement in due course but has indicated that it expects this to deliver significant cost savings whilst maintaining the existing high levels of service provision. The formal transition is expected in January 2025 and in the interim period the board, Atrato, and Triple Point are working together to effect a smooth transfer, including in respect of the company’s plans for the transfer of the My Space leased homes to a new provider.

Exhibit 2: Financial summary

Period ending 31 December (£m)

2020

2021

2022

2023

2024e

2025e

INCOME STATEMENT

Total income

28.9

33.1

37.4

39.8

41.8

41.4

Expected credit loss

0.0

0.0

(2.1)

(4.6)

(3.2)

(0.9)

Investment management fees

(4.1)

(4.6)

(4.7)

(4.7)

(4.7)

(4.6)

Other expenses

(2.2)

(2.1)

(2.9)

(3.2)

(3.6)

(4.0)

Operating profit/(loss) before revaluation of properties

22.3

26.2

27.5

27.0

30.3

32.0

Change in fair value of investment properties

7.9

9.0

8.3

15.5

(6.9)

1.8

Operating profit/(loss)

30.2

35.2

35.7

42.5

23.4

33.8

Net finance income/(expense)

(5.6)

(6.8)

(10.8)

(7.5)

(7.7)

(7.8)

PBT

24.6

28.4

24.9

35.0

15.7

26.0

Tax

0.0

0.0

0.0

0.0

0.0

0.0

Net profit

24.6

28.4

24.9

35.0

15.7

26.0

Adjusted for:

Change in fair value of investment properties

(8.0)

(9.0)

(8.3)

(15.5)

6.9

(1.8)

Loan arrangement fees written off

0.0

0.0

2.6

0.0

0.0

0.0

EPRA earnings

16.6

19.4

19.3

19.5

22.6

24.2

Interest capitalised on forward funded developments

(0.1)

0.0

0.0

0.0

0.0

0.0

Amortisation of loan arrangement fees

1.2

1.3

1.0

0.3

0.3

0.3

Change in lease incentive debtor

0.0

0.0

(0.6)

(1.5)

(1.5)

(1.6)

Company adjusted earnings

17.7

20.7

19.6

18.3

21.4

22.9

Basic & diluted average number of shares (m)

360.9

402.8

402.8

397.0

393.5

382.1

Basic & diluted IFRS EPS (p)

6.82

7.05

6.18

8.81

3.99

6.80

EPRA EPS (p)

4.61

4.82

4.78

4.92

5.75

6.34

Company adjusted EPS (p)

4.90

5.14

4.87

4.61

5.44

5.99

DPS declared (p)

5.18

5.20

5.46

5.46

5.46

5.75

EPRA EPS/DPS (x)

0.89

0.93

0.88

0.90

1.05

1.10

Company adjusted EPS/DPS (x)

0.95

0.99

0.89

0.85

1.00

1.04

EPRA cost ratio

23.3%

20.9%

21.1%

20.6%

19.8%

20.7%

EPRA NTA total return

5.9%

6.6%

5.7%

9.3%

3.5%

9.5%

BALANCE SHEET

Investment properties

572.1

641.3

667.7

675.5

648.4

650.7

Other receivables

0.0

2.3

2.9

4.2

5.8

7.4

Total non-current assets

572.1

643.6

670.6

679.7

654.2

658.2

Cash & equivalents

53.7

52.5

30.1

29.5

28.4

30.4

Other current assets

4.3

3.9

4.3

3.9

25.4

3.5

Total current assets

58.0

56.4

34.4

33.3

53.7

33.9

Trade & other payables

(5.0)

(3.7)

(3.1)

(2.7)

(3.3)

(3.2)

Other current liabilities

0.0

0.0

0.0

0.0

0.0

0.0

Total current liabilities

(5.0)

(3.7)

(3.1)

(2.7)

(3.3)

(3.2)

Bank loan & borrowings

(194.9)

(258.7)

(261.1)

(261.2)

(261.5)

(261.8)

Other non-current liabilities

(1.5)

(1.5)

(1.5)

(1.5)

(1.3)

(1.3)

Total non-current liabilities

(196.4)

(260.2)

(262.6)

(262.7)

(262.8)

(263.1)

Net assets

428.7

436.1

439.3

447.6

441.8

425.8

EPRA net assets

428.7

436.1

439.3

447.6

441.8

425.8

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

402.8

402.8

402.8

393.5

393.5

363.2

EPRA NTA/IFRS NAV per share (p)

106.4

108.3

109.1

113.8

112.3

117.3

CASH FLOW

Net cash flow from operating activity

24.5

24.7

25.7

25.9

29.2

30.3

Cash flow from investing activity

(94.4)

(61.4)

(18.3)

7.6

(1.3)

21.2

Net proceeds from equity issuance

53.1

(0.0)

0.0

0.0

0.0

0.0

Loan interest paid

(4.6)

(5.6)

(7.2)

(7.2)

(7.4)

(7.4)

Bank borrowings drawn/(repaid)

29.4

65.0

0.0

0.0

0.0

0.0

Share repurchases

0.0

0.0

0.0

(5.0)

0.0

(20.0)

Dividends paid

(18.8)

(20.9)

(21.7)

(21.6)

(21.5)

(22.0)

Other cash flow from financing activity

(1.1)

(2.7)

(0.6)

(0.2)

(0.0)

0.0

Cash flow from financing activity

58.0

35.7

(29.6)

(34.1)

(28.9)

(49.5)

Change in cash

(11.9)

(1.0)

(22.2)

(0.7)

(1.0)

2.0

Opening cash

64.7

52.9

51.9

29.7

29.0

28.0

Closing cash (excluding restricted cash)

52.9

51.9

29.7

29.0

28.0

30.0

Restricted cash

0.8

0.6

0.4

0.4

0.4

0.4

Cash as per balance sheet

53.7

52.5

30.1

29.5

28.4

30.4

Debt as per balance sheet

(194.9)

(258.7)

(261.1)

(261.2)

(261.5)

(261.8)

Unamortised loan arrangement costs

(3.6)

(4.8)

(2.4)

(2.3)

(2.0)

(1.7)

Total debt

(198.5)

(263.5)

(263.5)

(263.5)

(263.5)

(263.5)

Net (debt)/cash excluding restricted cash

(145.6)

(211.6)

(233.8)

(234.5)

(235.5)

(233.5)

Net LTV (net debt/investment property)

25.5%

33.0%

35.0%

34.7%

36.3%

35.9%

Company gearing (gross debt/gross asset value)

31.5%

37.6%

37.4%

37.0%

37.2%

38.1%

Source: SOHO historical data, Edison Investment Research forecasts

General disclaimer and copyright

This report has been commissioned by Triple Point Social Housing REIT and prepared and issued by Edison, in consideration of a fee payable by Triple Point Social Housing REIT. 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 2024 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.

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General disclaimer and copyright

This report has been commissioned by Triple Point Social Housing REIT and prepared and issued by Edison, in consideration of a fee payable by Triple Point Social Housing REIT. 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 2024 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.

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United Kingdom

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Research: Investment Companies

Gresham House Energy Storage Fund — Improving prospects suggest discount is overdone

At the recent capital markets day, Gresham House Energy Storage Fund (GRID) detailed positive developments in H224, including growing capacity and rising revenues. It also revealed a three-year plan to achieve further growth and triple earnings, from an estimated £45–55m in 2025, to £150m in 2027. Funding is expected to come from a new project finance style arrangement based on contracted revenues. Subject to the successful conclusion of related refinancing, expected in Q125, the company plans to reinstate fully covered dividend payments from Q325. GRID is also negotiating an equity investment in one of its sites. This deal would potentially serve to confirm GRID’s valuation methodology, giving investors confidence that the current NAV is a realistic estimate of its true worth. GRID’s share price is currently at a significant, historically wide discount to NAV, but this deal, combined with other positive recent developments and GRID’s plans for further improvements in capacity and revenues, suggests the discount is excessive and likely to narrow significantly as the company’s plans are rolled out (see chart below).

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