Social Housing REIT plc (SOHO.L) Earnings Call Transcript & Summary

Good morning, everyone. We're just waiting for people to join. So we've kicked off the webinar. We're just going to wait, give people a couple of minutes to enter. So there'll just be a brief pause before we kick off the presentation. Just saying, luckily, quite a few people join us. We'll kick off probably in a minute or 2. For those who've just joined, we're just waiting for the full list of attendees to join and then we'll kick off the presentation. Give it another 30 seconds. Okay. We're looking at the list. I think we've got most people we're expecting. So we will kick off. And firstly, thank you all for joining the interim results presentation for the Triple Point Social Housing REIT for the period ending 30th of June 2021. We've got a number of slides we're going to run through. That should take about half an hour or so, and then we'll leave some time at the end to cover off some questions. Now we always like to start our presentation with a photograph of one of our properties. And this time, we've opted for the latest of our forward funding schemes to complete. As hopefully, you'll agree, it's a fantastic project located in Leith, in Edinburgh. We started work on this property well over 2 years ago, but it's been constructed out against the backdrop of COVID and the associated lockdowns. And of course, that's thrown up a number of operational obstacles. But despite all of that and despite some delays, it's completed on budget, and it's now delivering fantastic living opportunities to vulnerable adults with care and support needs in the Edinburgh and Leith area. It was commissioned by Edinburgh City Council. It contains 26 individual 1-bedroom adapted homes that enable people to move out of long-term institutional care facilities and live independently within a community. And it's reflective of the quality of project that can be unlocked through forward funding, and we've completed 21 similar projects since the fund's IPO just over 4 years ago. So turning to the next slide. Oh, sorry, one thing I should have said, is that you can submit questions through the Q&A function as we talk. And as I said at the end, we'll try and cover off as many of those questions as possible. So just in terms of the order of the day. So I'm Max Shenkman. I'm Partner and Head of Property Investment at Triple Point. I'll be talking you through some of the highlights to start with before handing over to Jacinta, who is the Fund Finance Director, who's going to talk us through the financial performance of the last 6 months. I'll then going to come back and give you a brief overview of operational performance before Freddie talks about ESG and social impact. At the end, I'm going to briefly dare step forward over the next 6 to 12 months and tell you what our focuses are. So on to the next slide, please. So on this first slide proper, we've tried to draw out the 6 most salient points about the strategy and the last 6 months. And the first point at the top there is that the specialist supported housing market continues to be personified by systemic undersupply and growing excess unmet demand. And this is borne out in the conversations we have with local authorities on a daily basis. It's borne out in the interactions we have with registered providers and care providers. It's reflected in the conversations we have with the Regulator of Social Housing. We appreciate there is a need of -- consumer-led need for more funding for specialist supported housing. And all of that is why we are absolutely convinced of private capital has a vital role to play in delivering the homes that vulnerable adults up and down the U.K. desperately need. And it's just mismatched between supply and demand that underpins the resilient nature of the income generated by our long-term inflation-linked leases. And again, that's why we've delivered on all of our dividend targets since IPO. So when we launched the funds, we set out to pay a 5p CPI-linked dividend, and that's exactly what we've done to the extent we've now delivered a cumulative return over the last 4 years of 26.5%. Now the investment focus of the fund has always been on additionality on creating more homes for people with care and support needs, either by building new homes or often adapting existing properties to make them suitable for specialist supported housing. And that in part is why we continue to perform well against the impact targets we set ourselves in conjunction with the good economy. And Freddie's going to talk a bit more about those on a later slide. Now there's sort of big news for the fund over the last 2 weeks or so is that last Friday, we announced that we had refinanced the entirety of the drawn portion of our existing relatively short-term floating rate debt with long-term fixed price debt so that now all of the drawn debt within the fund is long term and fixed price. And that -- and those fixed prices are at attractive rates, such that the weighted average interest rate across all of our facilities is 2.74%, and that adds fantastic protection against the risk of rising inflation and rising interest rates. And then finally, as part of that refinancing, we undertook a ratings process with Fitch. And we're delighted to announce that they awarded SOHO an investment-grade A- rating, which is fantastic endorsement of the strategy and also the financial position of the fund. If we turn to the next slide, we can just touch on a few of the key performance indicators. And Jacinta will go into a bit more detail around some of these when she talks us through the financial results. But in terms of properties, we now earn 458, that's up by 13 since the end of last year. Those properties generate an annualized rental income of GBP 33.5 million. Now that meant that at the end of the period, the dividend was fully covered on a look-through basis. As part of the recent refinance, we have increased the LTV of the debt against the security pool from 40% to 50%, which has reduced dividend cover slightly, because it's unlocked an additional GBP 65 million worth of capital that needs to be deployed into income-producing assets, but we've got a really strong pipeline, and we'll talk about our plans for doing that on a later slide. The investment value of the portfolio is GBP 596.3 million. The blended net initial yield is 5.28%. The weighted average unexpired lease time is 25.8 years. Obviously, that's come down slightly since the end of the year as the portfolio matures. The dividend per ordinary share. So we just announced the second dividend of the year. So for the 6 months, it's going to be 2.6p. That reflects a 0.4% increase on last year, and the reason it's 0.4% is because we linked our dividend increases to the February CPI figure, because that's the figure that governs increases in housing benefit, and that's the figure that governs the increases in the majority of the rents in our leases. And then finally, the NAV of the business is 106.42p, which is the same as it was at the 31st December, and that's because the evaluation gains we've experienced over the period have been offset by the fact that for a large portion of the 6 months, we were paying a slightly uncovered dividend. But again, Jacinta is going to talk about that more when she gets into the financial results. We go to the next slide. I just want to give a bit more detail upfront about the new debt facilities we put in place. So we unlocked GBP 195 million worth of long-term fixed rate sustainably-linked debt through loan notes provided by a private placement with Barings and MetLife. These facilities are split across 2 tranches, and the blended all-in fixed rate across those 2 tranches is 2.634%, so really attractively priced. And the average term of the 2 tranches blended is 13 years. And as I said earlier, a large portion of this GBP 195 million worth of debt will be used to repay the GBP 130 million drawn portion of the group's RCF. But the RCF will remain in place post refinance available for the group to draw down, should it want to, up until December 2023. As I mentioned earlier, the LTVs increased from 40% to 50% in terms of the debt versus the security pool, which has unlocked this additional GBP 65 million worth of capital. Now the loans are sustainably-linked loan note, so that means that we have agreed in conjunction with the lenders, MetLife and Barings, sustainability targets against which the security pool will be measured on a quarterly basis. And then finally, with this additional gearing, the group's gearing has increased from 31.5% to 37.7%, which is in line with the group's target of 40% and well above -- well below, sorry, the group's maximum of 50%. So finally, if you turn to the next slide, just to give a bit more detail about that Fitch rating. So it's a relatively protracted process with Fitch. And at the end of it, the group was awarded an A- rating. The loan notes, both the new loan notes and the existing MetLife loan notes put in place back in 2018 were awarded an A rating. And in their accompanying note, which is available publicly, Fitch highlighted the fact that the majority of the funds income comes from -- indirectly from central government through housing benefit. They highlighted the fact that specialist supported housing is both cheaper and typically better for individuals than alternatives such as institutional care. They highlighted the long-term nature of the leases of the funds, and they also talked about the relatively low gearing ratio of the funds. So that's some of the highlights of the rating there. I'm now going to hand over to Jacinta to talk about the performance of the fund.

Thank you, Max. So starting with the statement of comprehensive income on Page 8. The rental income for the period was GBP 15.9 million, which represents a 19% increase on the rental income for the same period in the prior year. This is a result of both continued deployment and annual inflationary rental uplift, the majority of which take place in April, but are linked to the February index rate. The main reason for the increase in expenses in comparison to the prior period is due to the increase in the management fee, which increased in line with the increase in NAV following the equity raise last October. The fair value gain was 0.75 million, which was lower than the comparative period due to slower deployment and lower inflation rates on the rental uplift. The operating profit was GBP 13.2 million and the net profit was GBP 10.5 million after net finance costs, which includes amortization of loan arrangement fees of GBP 0.5 million. The net profit resulted in an earnings per share of 2.6p. EPRA earnings per share, which excludes the fair valuation gain, was 2.3p, which is an 8.5% increase on the comparative period. And adjusted EPRA earnings per share, which adds back amortization of loan arrangement fees and deduct capitalized interest on forward funded projects where applicable, was 2.42p, a 7.5% increase on the comparative period. As for the key highlights on the left of the page today, the ongoing charges ratio has reduced to 1.53%, following the increase in average net assets over the period. And the EPRA cost ratio has reduced to 21.52% as a result of the increase in rental income. The graph on the bottom left illustrates that we have reached the dividend cover on an EPRA earnings run rate basis, including exchanges at the 30th of June, as Max has previously mentioned. Moving on to the statement of financial position on Page 9. As at the 30th of June, the IFRS investment property valuation was GBP 596 million. Cash and cash equivalents was GBP 28 million. And as at 31st of August, the cash balance is GBP 96 million, of which GBP 71 million is available to deploy. Total GAAP has increased to GBP 631 million, following the increase in the investment property valuation. There were no further debt drawdowns in the period, and so noncurrent liabilities remained at GBP 196 million. However, as Max has already discussed, we have now refinanced the existing RCF, and I will go into more detail around this on the debt overview on Page 12. The IFRS NAV per share and EPRA net tangible assets have remained at 106.42p since year-end. This is a result of the dividend for the period not being quite fully covered, but which has been offset by the fair value gain on investment property. The graph on the bottom left of the page highlights the group's consistent LTV ratio to date since first the coming years in July 2018. Moving on to the next page, fund trajectory. This graph shows a cumulative return to investment since IPO, which comprises the increase in NAV per share and the increase in dividends per share. The NAV per share has increased from 98p at IPO to 106.42p at June, an increase of 8.6%. And the cumulative dividend per share paid between March 2018 when the first dividend was paid and June 2021 is 17.57p. The increase in NAV and dividend per share combined represent an overall cumulative return of 26.5%. On the next page, we have an overview of the property valuation. The top graph compares to the total funds invested since IPO of GBP 553 million against the IFRS valuation of GBP 596 million as well as the portfolio premium valuation of GBP 640 million. The IFRS valuation represents a fair value uplift of 7.7% against total funds deployed. The portfolio premium valuation reflects a premium of 7.3% against the IFRS valuation, which would increase NAV by GBP 43.7 million. The portfolio valuation assumes a single sale of the SPVs to a third party on an arm's length basis. Turning over to Page 12, we have the debt overview. As at 30th of June, the group had GBP 68.5 million of fixed rate loan notes with MetLife and a GBP 160 million RCF with Lloyds & NatWest, of which GBP 130 million had been drawn. This position was unchanged from the 31st of December. The LTV was 31.5%, weighted average term was 4.7 years, and the weighted average interest rate was 2.32%. However, as already mentioned, on the 26th August, the group secured GBP 195 million of long-term fixed rate debt from Barings and MetLife, allowing the group to refinance the GBP 130 million of drawn RCF funds. On the right of the page, you can see the effect of the refinance on the borrowing metrics. Following the refinance, LTV is now estimated to be 37.7%, which is in line with the group's target of 40%. Aggregate debt drawn now stands at GBP 263.5 million. Importantly, weighted average term to maturity has increased to 11.9 years, and the weighted average interest rate is now 2.74%. I will now pass you back to Max, who will present the operational overview.

So on this next slide, you can see the investment highlights of the last 6 months and quite a few of these have always -- already been referred to, so I'm not going to dwell on those. So we've acquired 13 properties during the period itself. 12 of those properties were new specialist supported housing, so continuing our focus on additionality on creating more homes to vulnerable adults throughout the U.K. In March, we completed the final of our forward funding projects. That scheme I was talking about or that property I talked about started in Edinburgh. We completed 22 to date. That was the final of our current batch of forward funding projects. But with this additional capital that's been unlocked through the refinance, we hope to start work on more forward funding schemes over the coming months because of the fantastic quality of home they released into our portfolio and they provide to individuals. Rent collection remained really consistent, so we collected 100% of rent due during the period. And then looking forward, with that additional GBP 65 million and with the remains of last year's equity raise, we've got GBP 71.1 million left to deploy. Now fortunately, that's against a pipeline in excess of GBP 150 million. And if you turn to the next slide, we'll talk in a bit more detail about that pipeline. So you can see, actually, if you look at the cumulative total on the far right of that graph, the pipeline over the next 4 quarters has an aggregate value of GBP 173.9 million. We split it out over the 4 quarters. Obviously, there's a greater weighting towards the earlier quarters, over which we have more visibility. It's really important that the pipeline is substantially greater than the amount of capital we've got to deploy because pipelines are attritional. We remain selective. And indeed, we projected over GBP 800 million worth of properties since we IPOed over 4 years ago. The majority of properties in that pipeline will be individual homes that have been adapted to make the suitable specialist supported housing or have been built, especially specialist supported housing that come from developers that we work with before, so again, additional properties. However, we have recently secured exclusivity over a really attractive portfolio of operating assets, of high-quality operating assets, with the consideration for the portfolio is around GBP 23 million. It contains 22 properties, 192 units. And most importantly, it gives us access to a really high-quality new registered providers partner as well as a pipeline of future developments to work on. And it's going to help with the deployment of that additional GBP 65 million worth of capital that's been unlocked through the debt raise. So moving on to the next slide. We can see the geographical diversification of the portfolio. It remains relatively well-diversified portfolio. Not much has changed since 6 months ago in terms of the spread of that portfolio, still a slight bias towards the Midlands and the North of England, 2 properties in Scotland, 2 in Wales, and then a growing presence in the south of England. If we go to the next slide, you can see the rate of different lessees we have in our portfolio. So we've added 2 new housing managers to our portfolio over the last 6 months. We now have 22 different lessees that manage properties owned by funds. The majority of those lessees are specialist registered providers that focus on managing supported housing. However, we also [ lease ] a couple of properties directly to care providers, then we'll see I think 2 charities in there, but also specialized in managing specialist supported housing properties. Now we engage with all of our lessees on both an ad hoc and structured basis. So on an ad-hoc basis, through various teams in our 26 strong social housing team, we're talking to management, boards and housing managers on a weekly and sometimes even daily basis, but that's complemented by structured engagement. So on a monthly, quarterly and biannual basis, we will have 4 more management meetings. We will undertake site visits. There will be compliance surveys. There'll be a provision of management information. So it's really important to have that blend of ad hoc interaction and then structured engagement. So of course, really important to recognize that the Regulator of Social Housing remains active in the subsector of social housing. They continue to engage with a number of the lessees within our portfolio, irrespective of size in order to drive up accountability and to promote greater transparency. And 3 judgments or notices were issued by the Regulator in relation to registered providers in our portfolio over the last 6 months, and we are working with those organizations to help them address some of the issues raised by the Regulator. If we move on to the next slide, I'm going to hand over to Freddie to talk about ESG and social impact.

Thank you, Max, and good morning, everybody. If we go to the next slide, we can see the first of 4 slides about ESG impact. Our investment strategy is built on delivering a positive social impact. At the same time, it's generating strong financial performance. But there are a number of different things we are doing to make sure that we are always held up to our own very high impact standards, and we are doing what we can to maximize the impact we deliver. So this first slide is a summary from our second impact report, which was conducted by The Good Economy, who are well-known social impact consultants in the social and affordable housing space. That report will be available on our website today, and you can see here some of the highlights they have picked out from their audit of our funds. So you can see that 36% of our units have been built since the year 2000. You can see that nearly 70% of our units are new social housing units, meaning we are adding to the overall supply of social housing in the U.K. You can see that just over 70% of our units are already meeting the government's energy efficiency target of an EPC, or Energy Performance Certificate, rating of C. And you can see importantly that for every GBP 1 we invest, we generate nearly GBP 4 in social value. And that figure comprises both the monetary value ascribed to improving the well-being of residents according to established methodologies, but also the direct fiscal savings because as we will see on a later slide, our type of accommodation is typically cheaper than the alternatives. It's worth reading that report in full, because you'll see that we are held up against 6 different metrics. We are measured against those, which are the degree to which we are increasing the supply of social housing, the degree to which we are meeting a social need, the quality of the partnerships and the people we work with the counterparties, the sustainability of our investments, the value for money we are generating for government and also the degree to which we're improving the well-being of our residents. If we go on to the next slide, we can see a summary of some of the ESG impact projects we are working on. There's a real focus on environmental efficiency as there is across the wider economy, and it is probably the fastest-growing area of our ESG and impact work. We now make sure that all new investments already meet the government's target of an EPC of C. We are working with consultants to better assess the flood risk for our portfolio to make sure that in a range of different future climate scenarios, our properties will be insulated against the risk of floods. We are working with consultants to start calculating the embodied carbon of our investments, making sure that not only are our properties minimizing their emissions during the holding period, but we are also going to minimize emissions during the construction period. Our work specification is being updated to make sure our properties are more resilient in the face of the physical effects of climate change, flooding and heat waves, that sort of thing. And our template leases introduced green clauses to make sure that even though we don't have operational control of these properties on a day-to-day basis, our lessees are doing what they can to improve the environmental efficiency of our properties. And some of those clauses include making sure our lessees are using renewable energy suppliers to make sure they are accessing grant funding to drive up environmental efficiency to make sure they are replacing white goods with more energy-efficient white goods. And finally, we are members, group members of the recently published Equity Impact Project, which is an important cross-sector initiative for all equity investors in social and affordable housing, making sure that all these investors are reporting against impact metrics in the same standardized way. And that project is now in its pilot period, and we expect in due course to publish against the template form of reporting, which will be a powerful way to drive comparability, drive transparency and ultimately drive up social impact. If we go to the next slide, we can see our most exciting and newest ESG impact project. So we are launching a sector-first initiative to bring our entire portfolio up to the government's target of an EPC of C or above. We have been working with specialists, environmental consultants and contractors to work out what work needs to be done and to calculate the cost of bringing our entire portfolio up to those standards. And we will work on this over the months and years ahead to make sure that we can bring our portfolio up to those standards using grant funding wherever possible. Already 71% of our portfolio meets those targets, as I mentioned earlier, which compares favorably to the market, but we want to bring entire portfolio up to those standards, installing insulation, draught-proofing, double-glazing, energy efficient appliances and solar panels, wherever we need for each individual property. And the reasons we are doing this project, the reasons we're so excited about it, reasons we're working well ahead of government regulatory compliance, is that we know that building is the second largest source of emissions in the U.K. So we want to help combat climate change. We want to reduce fuel poverty for our residents by making our properties more environmentally efficient. We want to improve living comfort. And we expect all of these benefits to be reflected in our property valuations in due course. If we move on to the next slide, we can see a slide about Winterbourne View. So 10 years ago was the Winterbourne View Care scandal, which I'm sure many of you have heard about. There were a number of abuses within a private hospital, a long-stay hospital for people with long-term care needs. And that scandal accelerated government policy to move people with long-term care needs out of hospitals and into their own homes in the community. And 10 years on, Mencap have published a report assessing government's progress against their stated targets. And sadly, there's not been enough progress as we would like. Mencap calculated that the average length of stay in an inpatient setting for people with long-term care needs is 5.6 years compared to the government target of 32 days. Mencap also calculated that since March 2015, nearly 10,000 people with learning disabilities and autism have been admitted to inpatient units, which is the equivalent of 4 admissions a day. And the 2 figures on the right are important figures. They show that, according to Mencap, the average government saving for moving people out of hospitals and into their own home and community is about GBP 2,000 per person per week, and that saving is about GBP 200 per person per week compared to care home. So if you multiply those cost savings across a number of weeks in the year and the number of people in our portfolio, you can see that our portfolio is generating significant annual savings for government, which is reflected in our Impact report I mentioned earlier. I will now hand over to Max, who will wrap up looking at the outlook for our fund. You're with me, Max?

Thanks, Freddie. And just a reminder, if you've got any questions, please submit them through the Q&A function and we'll try and cover them off at the end. So just to conclude the presentation itself by looking forward. So what are our focuses over the set next 6 months? Well, we are those like -- focused on deploying the capital we just unlocked. We released recent debt raise into high-quality new income-producing properties in order to get the dividend back to being covered as quick as possible, in order to provide really high-quality homes to vulnerable people within their communities. We'll continue to engage with the lessees in our portfolio when they've got concerns or issues that have been identified by the Regulator of Social Housing to promote better performance. We'll continue, as Freddie was talking about, to focus on the ESG and Impact targets that we have set ourselves with The Good Economy, both in terms of putting all new properties that we're looking to acquire through an ESG and impact filter, but also they're making sure and monitoring the performance of the existing portfolio against clearly-defined metrics and goals. And then finally, as Freddie said, we want to make sure that we're setting our own standards when it comes to energy efficiency. We want to make sure that we're really ahead of government legislation that's coming down the track. So we're going to begin to invest into the energy efficiency of our portfolio well ahead of time.

Great. Okay. Well, I think that's all we've got time for today. So yes, thank you very much. Thank you.

Thanks, everyone. Thanks for joining.

Thank you. And apologies to [indiscernible].