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Triple Point Social Housing REIT — Q323 DPS was fully covered

By Edison Group (Martyn King)Stock MarketsNov 16, 2023 13:00
Triple Point Social Housing REIT — Q323 DPS was fully covered
By Edison Group (Martyn King)   |  Nov 16, 2023 13:00
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With indexed rental growth continuing and rent collection recovering, Triple Point Social Housing REIT’s (SOHO’s) Q323 dividend was fully covered, and we expect this to continue. Meanwhile, while the board continues its focus on closing the share price discount to NAV, it has concluded that any further capital return is dependent on significant additional liquidity being generated through property sales.

  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.
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.

Rents growing and collection recovering

The Q323 DPS of 1.365p was 1.04x covered by EPRA earnings, a significant improvement from 0.80x in H123. On an adjusted earnings basis, excluding non-cash loan fee amortisation, we expect cover to have been slightly higher (H123: 0.81x). The increase in Q3 earnings is in line with our expectations, which in addition to indexed rent growth, include a recovery in rent collection and lower provisions against rent receivables, reflecting progress with SOHO’s two (of 27) underperforming tenants, while the broader portfolio continues to perform as expected. Parasol is paying all monthly rents due under its creditor agreement and Triple Point Social Housing REIT PLC (LON:SOHO) expects to conclude a creditor agreement with My Space by end-Q124. Q323 NAV per share was 2.2% lower at 108.9p (Q223: 111.3p) as result of property yield widening (16bp to a net initial yield of 5.84%), primarily relating to market-wide conditions and partly to the My Space and Parasol assets. NAV total return was -1.0% (+3.6% year to date). Our NAV/share forecasts are reduced c 3% in each of FY23 and FY24.

Continuing focus on closing the discount to NAV

The board remains focused on creating shareholder value, particularly on closing the material discount to NAV. It completed an accretive £5m repurchase programme in H1 and the subsequent sale of a four-property portfolio indicated a robustness of asset valuations and published NAV. Following consultations with shareholders representing c 21% of the share register, SOHO’s board has concluded that any further return of capital to shareholders is dependent on the generation of additional liquidity through asset sales. In turn, asset sales are dependent on market conditions and the board says that while it will continue to consider further asset sales, it is unlikely these will occur before the end of 2023.

Valuation: Still pricing in very significant risk

The FY23e yield is c 9%. We estimate that even a c 17% decline in FY24 income would support a fully covered DPS of at least c 4.5p, or a yield of c 7.7%, a c 50 basis point (0.5%) premium to the peer average.

Further details from the quarterly update

Fully covered dividend

The 2.43p reduction in Q3 NAV included a 2.48p portfolio valuation loss, while EPRA EPS of 1.42p fully covered the 1.365p Q2 dividend paid. A similar quarterly DPS was declared for Q3, in line with the full year target of 5.46p (unchanged on FY22).

  Exhibit 1: Reconciliation of Q323 NAV per share movement
Exhibit 1: Reconciliation of Q323 NAV per share movement

Q3 EPRA earnings is consistent with our H223 forecast, which includes a significant reduction in credit loss provisions compared with H123. The impact of this within the Q3 NAV is not at this stage clear. H123 EPRA EPS of 2.18p included 0.79p per share of credit losses. Our H224 EPRA EPS of 3.11p includes a reduction of 0.33p per share in credit losses and we forecast no further charge in FY24.

Continuing indexed rental growth is the other key driver of our forecast earnings growth, while at the same time underpinning capital values. Although we have reduced FY23 and FY24 NAV per share forecasts, the modest implied further yield widening (to net initial yield of c 6%) is more than offset by rental growth, generating increased values and NAV growth.

In order to align with Housing Benefit annual increases the company says that at least 65% of its 2024 annual rent increases will be linked to the September 2023 Consumer Price Index figure of 6.7%.

Dividend driven returns

Dividends paid have contributed all of the 3.6% year to date total return and have been the consistent driver of returns since SOHO listed in August 2017.

  Exhibit 2: Year to date NAV total return
Exhibit 2: Year to date NAV total return

During the period since listing, SOHO has delivered positive accounting/NAV total returns3 each year. Aggregate NAV total return to end-Q323 was 41.6%, or an annual average of 5.8%, with dividends paid accounting for more than 70% of the total. Capital returns have mostly been positive and have been significantly more robust than the wider UK commercial property market over the past year.

  Exhibit 3: NAV total return since IPO
Exhibit 3: NAV total return since IPO

Progress with Parasol and My Space

SOHO has leases with a diverse range of 27 approved providers (APs),[1] and the majority of these have performed steadily over the past year, successfully navigating the twin challenges of inflation and labour shortages well. However, as previously reported, two APs, Parasol (9.2% of H123 rents) and My Space (7.7%), fell behind with their rental payments over the course of 2022 and continuing through H123. As reported with the interim results, a creditor agreement is in place with Parasol, which is now paying all monthly rent due under the agreement.[2]

[1] SOHO refers to all its lessees as APs, of which 25 of the 27 are regulated by either the Regulator of Social Housing, the Care Quality Commission or Ofsted, representing 98% of the portfolio by rent roll. In this report we also refer to registered providers (RPs) or those registered with and regulated specifically by the Regulator of Social Housing. This applies to all SOHO’s SSH properties.

[2] The creditor agreement sets a minimum level for monthly rent payments over a six-month period. At the end of the six-month agreement, full rent becomes due again.

SOHO hopes to finalise a creditor agreement with My Space by March 2024, required to help enable My Space to address its solvency position, and expects it to cover both the rent that will be due going forward and arrears. My Space has been in a process of significantly strengthening its leadership, including a new CEO and CFO as well as several new board appointments, which, while a positive development, is in our view likely to have lengthened the time taken to complete the agreement. Simultaneously, the company is working with My Space to move certain properties to alternative providers.

Further return of capital under consideration

The successful sale of four diverse properties, announced in early September, for £7.6m, just 3.6% below the 30 June 2023 book value, provided both supportive evidence of the robustness of published valuations and NAV and also demonstrated continued investor demand for specialised supported housing (SSH) properties.

Cash balances amount to £31.0m[3] compared with £23.8m at H123, or £31.7m adjusted for the proceeds of the now completed asset sale. Of the £31.0m, £5.1m is held in restricted bank accounts and a further £14.4m is held back for working capital purposes, leaving £11.5m freely available. This provides SOHO with a very limited opportunity to return capital to shareholders without increasing existing leverage[4] and the board has decided that any further return of capital is dependent on significant additional liquidity being delivered through property sales.

[3] As at the date of the trading update, 13 November 2023.

[4] Gross leverage at H123, defined as gross borrowing as a share of total gross assets, was 37.9%.

Capital return to shareholders offers immediate accretion, and to us it seems most likely that the focus will be on asset sales and capital return in the near term. Over the medium term, we continue to expect a pragmatic approach to further capital allocation, and we expect the company will continue to invest in its existing portfolio and remain open to additional opportunities where these are financially and strategically attractive. With the interim results, SOHO gave some details of a potential forward funding partnership with Golden Lane, a leading provider of SSH with strong regulatory credentials.

The valuation remains low in contrast to financial returns

Despite SOHO delivering low volatility and consistently positive accounting returns, its valuation remains low. FY23e DPS of 5.46p represents a yield of c 9%, while the shares are trading at a more than 40% discount to Q323 NAV.

  Exhibit 4: Trailing dividend yield
Exhibit 4: Trailing dividend yield
  Exhibit 5: Trailing P/NAV (x)
Exhibit 5: Trailing P/NAV (x)

Material discount to peer group

Compared with a selected group of companies that we would consider to be the closest peers to SOHO, investing in housing and healthcare properties, SOHO shares offer a noticeably higher yield than the average and trade at a significantly lower P/NAV ratio, despite its track record of positive financial and operation performance and delivery of material social benefit.

  Exhibit 6: Peer valuation and performance comparison
Exhibit 6: Peer valuation and performance comparison

SOHO’s closest comparator, Civitas, was acquired by Hong Kong-based property developer CK Asset Holdings[5] in June 2023[6] for 80p in cash. In recommending the offer, the board of Civitas commented that while it believed it undervalued the long-term prospects of the company, it recognised that Civitas, and its sector as a whole, was facing a number of challenges in sentiment, which the public markets were unlikely to overcome in the short to medium term. In this context, its decision was swayed by the immediate liquidity that the bid would provide to shareholders, with the opportunity to exit in full and in cash at a significant premium to the prevailing share price, in a time of macroeconomic uncertainty.

[5] Through its subsidiary, CK Bidco.

[6] The date at which the offer became unconditional. Civitas subsequently de-listed on 4 August 2023.

Taking the Civitas data as of 31 March 2023 (end-FY23), the bid represented a 27% discount to NAV, much narrower than the c 30% discount on which SOHO shares continue to trade. Including this with a range of portfolio metrics, we estimate the Civitas acquisition price to have been at least c 30–50% above the current SOHO rating, a strong indicator of value in the SOHO shares.

  Exhibit 7: SOHO is trading at a c 50% discount to the Civitas acquisition valuation
Exhibit 7: SOHO is trading at a c 50% discount to the Civitas acquisition valuation

Discounting an almost 20% decline in income

The average trailing yield of the peer group excluding SOHO is c 7.2%. Based on our FY24 forecasts, we estimate that SOHO could withstand a c 17% reduction in forecast income7 while still generating sufficient earnings to pay a fully covered DPS of c 4.5p, reflecting a yield of 7.7%, a 0.5% premium to the peer group.

[7] We previously calculated 20% based on the historically lower market cap and correspondingly lower DPS requirement.

  Exhibit 8: Dividend sensitivity to income
Exhibit 8: Dividend sensitivity to income

  Exhibit 9: Financial summary
Exhibit 9: Financial summary

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Triple Point Social Housing REIT — Q323 DPS was fully covered

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Triple Point Social Housing REIT — Q323 DPS was fully covered

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