Q124 NAV, including DPS paid, 1.5%
Triple Point Social Housing REIT PLC (LON:SOHO)’s Q124 NAV per share was 114.15p, up 0.39p or 0.3% in the period. The portfolio value increased by £1.3m, adding 0.31p per share to NAV, with a 19bp increase in the blended portfolio net initial yield more than offset by annual rent increases, mostly linked to the September 2023 Consumer Price Index (CPI) figure of 6.7%. During Q124, rent collection increased relative to 2023, when it was 90% covered by adjusted ‘cash’ earnings (and fully covered on a run-rate basis by early FY24). Retained earnings added 0.08p to Q1 NAV per share, implying that the DPS paid was fully covered (c 1.06x) by EPRA earnings. Compared with EPRA earnings, SOHO’s adjusted ‘cash’ earnings measure deducts movements in the lease incentive debtor, which are difficult to predict. For FY23, EPRA EPS was 4.92p and adjusted EPS 4.61p and we anticipate a further impact this year, including from the transfer of assets from Parasol to Westmoreland.
Asset sales and share repurchases
SOHO previously announced it was looking to transfer all of its 38 homes leased to Parasol, one of its two struggling tenants, to Westmoreland, following several months of due diligence. The company continues to make progress with My Space, where it is supporting the management team in delivery of its turnaround plan and rent payments are increasing. Also, SOHO intends to make further portfolio sales this year and is currently in the process of agreeing heads of terms in relation to the sale of a portfolio. The proceeds will support further share repurchases, while also maintaining a suitable level of leverage. We have reduced our DPS forecasts for FY24 and FY25 but our earnings forecasts are unchanged, notwithstanding the uncertainties about the impact of asset sales, the property transfer, and the expected creditor agreement with My Space. At the current price, share repurchases are accretive to both NAV and earnings.
Valuation: Uncertainty masking recovery potential
The targeted DPS represents a yield of 9% and, despite a share price recovery from a low point of c 42p in April 2023, the shares continue to trade at an almost 50% discount to NAV.
Additional details and recent developments
Strong tailwind from rent reviews
Rent reviews continue to be strong. All rents are annually indexed to the lower of inflation2 or, under the terms of the new lease clause, government housing benefit policy. For FY24, 65% of lease uplifts are linked to the September 2023 CPI annual rate of increase of 6.7%, mostly taking effect in the first half of the year. The balance of reviews, spread across the year, will reflect the prevailing level of inflation.
1 100% of contracted rental income is indexed either to CPI (92.5%) or RPI (7.5%). An index premium applies to 7.5% of leases, which increases the standard annual indexed rental uplift by 1%, and the uplifts on 4.9% of rental income are capped and collared.
DPS guidance increases our forecast DPS cover
We had previously forecast a c 4% increase in FY24 DPS to 5.70p, 100% covered by adjusted earnings and 109% covered by EPRA earnings. We now forecast FY24 DPS in line with SOHO’s unchanged target of 5.46p, with a slower progression in FY25. Without changing our earnings forecasts this increases DPS cover to 1.04x in FY24 and 1.09x in FY25 on an adjusted earnings basis.
Our forecasting assumptions regarding Parasol and My Space
At end-FY23, 38 of SOHO’s almost 500 homes were leased to Parasol, representing 9.7% of the total rent roll. A further 34 properties, representing 8.1% of rent roll, were leased to My Space. With the FY23 results the company made clear that, while it was working with the new Parasol leadership team towards agreeing an equitable long-term agreement, if this was not possible, it had already agreed terms with an alternative provider.
Our last published forecasts included assumptions, in respect of rent collection and rent levels, about the outcome of the creditor agreement and ongoing discussions with Parasol, and about the creditor agreement being negotiated with My Space. With few details of the creditor agreements available, we said that our assumptions should be seen as illustrative, and this remains the case following the transfer of properties to Westmoreland. Our best guess is that some combination of rent adjustment and additional lease incentive remains valid. For now, we make no change to this element of our forecasts, while retaining the existing caveats.
The impact of disposals and share repurchases
Following the August 2023 sale of a small portfolio of assets for £7.6m at close to book value, SOHO swiftly concluded a £5m share repurchased programme, acquiring and cancelling c 9.3m shares (c 2% of the total) at an average c 53p, at a highly accretive discount of c 53% to prevailing NAV.
The company has provided no indication as to the likely scale of further asset sales and share repurchases but given the persistent discount, we expect it will be on a larger scale than previously. However, this is not reflected in our forecasts. While we expect an asset sale and share repurchase programme to be accretive to EPS and NAV per share on a full-year basis, the need to sell assets ahead of completing repurchases is likely to dull the nearer-term impact. This is a factor that the board has considered in setting the FY24 DPS target.
The illustration below, indicates how asset sales, combined with debt reduction and share repurchases, are likely to be accretive on a full-year basis. It is based on our existing FY25 forecasts and reflects a full annualised impact, of a £25m disposal at a yield of 6%. The proceeds are deployed in debt reduction (maintaining an unchanged net loan-to-value ratio) and share repurchases at the current share price. The number of shares outstanding is reduced by 7% to 365 million. Adjusted EPS would be enhanced by 3% and NAV per share by 4%.
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