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

Good morning, everyone, and welcome to the annual results presentation for the Triple Point Social Housing REIT for the period ending the 31st of December 2022. Thank you so much for taking time out of your morning to come and attend our presentation. I'm Max. I'm a Partner and Head of Investment here at Triple Point. I'm joined today by Isobel, who's also a Partner and Chief Financial Officer; and Anne-Britt, who is Housing Operations Director. I'm going to kick things off by running you through some of the highlights of the last 12 months. And Isobel is going to take us through the financial performance of the company over the last year. I'm going to come back and talk about some of the key operational themes and points. And then I'm going to hand over to Anne-Britt, who's going to take us through how we think about record, measure and report on impact. And I'll conclude by looking forward with an outlook. But before getting into any of the key numbers, we just wanted to raise some of the fundamental points that we think define the strategy. So over the last 5 years, we've built up a really diversified portfolio of just under 500 properties located throughout the U.K. and leased to 27 different approved providers. Now most of those approved providers are registered providers, regulated by the regulator of social housing. And we think this promotes a really high degree of accountability and transparency as well as promoting strong operational performance. The valuations in this sector have proved to be really resilient over the last 12 months. And that, more than anything else, is down to the growing excess demand and limited supply of additional specialist supported housing properties. When we set up this strategy, we aim to provide investors with a really good protection against rising inflation, -- and we've done exactly that this year. We've delivered weighted average rental growth of 6.7%. Now it's important to recognize that these results come against a challenging backdrop in terms of the property market, interest rates have put pressure on property valuations. In addition, in our own sector, there's been judgments and notices put out by the regulatory and social housing in relation to some of our lessees, all of which has had an impact on the share price, such that it's now trading at a material discount to the net tangible asset value. And that is why we, the manager and the Board a laser-light focus on addressing that discount and are considering among other things, share buybacks and also a sale of some of the properties owned by the group. On this next slide, we're going to talk about some of the key financial indicators of the last 12 months. The EPRA net tangible assets per share increased by over 0.8p to 109.06p, reflecting really resilient and stable performance. In turn, the portfolio valuation increased by over GBP 25 million. This was partly down to additional acquisitions, but also down to increase in the value of the existing property portfolio. The dividend was increased by 5% last year, and we met the target of 5.46p. The LTV of the fund was down ever so slightly at 37.4%, reflecting the increase in the property portfolio. The weighted average unexpired lease term was 25.3 years. This has come in slightly, which is what we'd expect as the portfolio matures over time. Dividend cover was 0.92x, which is down relative to the previous year. And this in turn is down to a different rent collection, which was 91.8% for the year, and we'll come on to talk about why the rent collection dipped and what we're doing to address that dip later on in the presentation. Finally, the valuation net initial yield went out from 5.25% to 5.49%, and we're going to go into some more detail around why that was and how it evolved over the course of the year on the next slide. So here, you can see that we've split out the property valuations over the 4 quarters of last year. Now in the first half of the year, which is when most of our rent increases go through, strong rental growth drove an increase in the value of the property portfolio. And you can see that yields remained relatively flat at 5.3% in the first quarter and then 5.28% in the second quarter. In the third quarter, the net initial yields in relation to 2 registered providers, which had built up material rent arrears during that quarter were pushed out, and that caused the blended net initial yield of the portfolio to increase to 5.39%. Then in the fourth quarter of the year, reflective of wider trend in the real estate market, there was limited market yield softening across the entirety of the portfolio. But it's really important to recognize that the movement out was in yields was limited at between 10 to 25 basis points depending on the particular property. And all that meant was that the net initial yield of the portfolio at the end of the year was 5.49%. So on this next slide, we want to talk about the protections that we think the strategy offers investors against the risk of rising inflation and rising interest rates. Now all of our leases are linked to either CPI or RPI, with only 5% have caps on them. So you can see that in this year, and if you look at the bottom left-hand graph, that the weighted average rental growth was 6.7%. And looking back over the preceding 5 years, you can see that rental growth is broadly speaking, tracked inflation. Now this year, the government announced that they're going to cap, social housing rent increases at 7%, starting from April. Specialised Supported Housing is excluded from that cap, and yet we've decided to apply the cap to our leases and to our properties. That's because we think that this represents really strong rental growth, especially coming off the back of a 6.7% increase last year. And also it feels like the right thing to do in the mix of a cost of living crisis. In terms of interest rates, to put it safely, all of our debt is long-term and fixed price. The weighted average debt maturity is 10.6 years. And the weighted average fixed coupon is 2.74%. And you can see the first tranche of debt doesn't come up to be refinanced until 2028. On this next slide, we just want to spend a bit of time talking about what is the core of specialist supported housing. So the property is owned by the strategy responding to local needs. They're often enabling people with care and support needs to move out of either registered care homes or long-stay hospitals and live independently, often for the first time within a local community, which they can meaningfully engage and also become a part of. Now it's really important that the individual living in these properties receive the care and support on which they rely and that is typically provided by a third-party care provider regulated by the CQC. And the strategy itself and the long-term sustainability of the income streams generated by our properties is underpinned by the fact that excess demand is forecast to increase by over 125,000 homes by 2030. Finally, before handing over to Isobel, I just want to talk a little bit about the composition of the portfolio and it's highly regulated nature. So over 98.4% of our lessees measured according to the allocation of rent roll, a subject to specialist housing or care regulation. And if you look at the graph on the left-hand side, you can see what this means in practice. So 94.3% of our lessees are regulated by the regulator of social housing. And we think it's so important when delivering homes to adults with care and support needs for our lessees to be regulated by a specialist housing regulator. 3.8% of our properties are regulated by the Care Quality Commissioner and 0.3% are regulated by Ofsted, responsibility for regulating children's services in the U.K. Now 92.3% of our properties support is provided by a CQC regulated care provider. On the bottom right-hand side of this graph, you can see I've broken out our housing type -- so 88.5% of our properties, Specialised Supported Housing , I mean adapted homes, people with care and support needs and with that care provided by a third-party care provider. 7.4% is Supported Housing. So these are homes for people with support needs, but where that support is provided by the lessee itself. And finally, 4.1% of our homes are Registered Care or Children's Services. So I'm now going to hand over to Isobel, who's going to talk you through the numbers for the last 12 months.

Thank you, Max, and good morning, everyone. Turning to the statement of comprehensive income. Rental income for the year increased by 12.6% to GBP 37 million. This has been driven by a combination of index-linked rental uplift across the portfolio and deployment of GBP 20 million into income-generating assets. The expected credit loss of GBP 2.1 million is reflective of the rental arrears built up during the year for 2 of the groups approved providers and the probability of the recovery of those arrears. Expenses have increased by 14%, which is primarily linked to higher inflation and around GBP 400,000 of additional property expenditure. This represents an ongoing charge ratio of 1.6% compared to 1.54% in 2021. And the network cost ratio of 21.1% compared to 20.91% in 2021. The fair valuation gain on investment property was GBP 8.2 million, which was largely driven by the rental uplift linked to inflation. And the net finance costs have increased year-on-year due to increased borrowing of GBP 65 million and GBP 2.6 million of RCF costs written off when the facility was canceled. Net profit was GBP 24.9 million and represents adjusted earnings of 5.03p, which equates to 0.92x dividend cover. Previously, we reported dividend cover on a look through contracted rental income basis. This year, because of a dip in rental collection, we have moved to reporting dividend cover on historic adjusted earnings to demonstrate the impact that rental -- have on the dividend cover. Most of our tenants continue to pay full rent and combined with rental uplifts in 2023 capped at 7%. We expect dividend cover to improve. Turning to the statement of financial position. The gross asset value increased to GBP 705 million in the year, driven by the increase in the value of investment properties. The net asset value increased to GBP 439 million, which equates to a net tangible asset value of 109.06p per share. The cash balance of GBP 30 million after allowing for restricted cash and working capital lease GBP 30 million of unrestricted cash. And the group's debt profile at the year-end was GBP 263 million of long-term fixed rate debt across 2 loan notes facilities with MetLife and Barings. As already discussed, the RCF was fully canceled during the year as the recent increase in [indiscernible] made the facility nonaccretive to investor returns. The group's loan-to-value of 37.4% remains firmly within our target range. Turning to the next slide. The EPRA net tangible asset bridge highlights the components of the net tangible asset growth during the year. The one-off expense relating to the cancellation of the RCF is a nonrecurring expense that is impacted NAV by 0.65p. The increase in property valuation of 2.06p per share has been driven by rental uplift during the year. Turning to the next slide. The total accounting return is a combination of net asset value growth and dividends paid during the year. Since IPO, the accounting return was 37.4%. For the year, the accounting return was 5.7%. And finally, we expect to announce our dividend target for 2023 in May. Thank you. I'll hand you back to Max.

Great. Thank you, Isobel. Well, I'm now going to talk about the key operational themes of the last 12 months. So at the start of the presentation, we talked about how rent collection had dipped to 91.8%. And on this slide, we want to talk about the active steps that we're putting in place to address those arrears. But before getting into that detail, it's worth reminding everyone that 25 of our 27 lessees have no material rent arrears. Now in terms of those 2 registered providers that have built up arrears with regards to My Space, which make up 7.9% of the group rent roll, we've taken the decision to move properties away to an alternative registry provider, and we're going through the process of providing that register provider with the information that they need to be sure they can provide the services and support to the individuals living in those properties, which is absolutely critical when moving properties from one approved provider to another. In terms of Parasol Homes, they take up -- they make up 9.6% of the group's rent roll. Now they've put in place a new board, and they have been changes in their senior management team. And we've had good engagement with both, and we believe that material steps have been taken to address the operational reasons behind why arrears built up in the second half of last year. And over the coming weeks, we're looking to put in place a plan that will see rent payments increase and also a repayment plan in relation to arrears that built up in 2022. Now the approach we're taking to Parasol and My Space is reflective of our active portfolio management. There are 24 people in the housing team at Triple Point, all of whom are focused on optimizing the performance of the fund. And the critical thing about that team is they come from a range of experience and background. So I have a fund management background. But within that team, there are people with strong local authority and registered provider backgrounds as well as legal, financial and surveyors. And this team has a 7-year track record of strong portfolio management that's defined by an active approach, whereby we engage proactively with approved providers to address any issues that crop up within the portfolio efficiently and in a way that is long-term sustainable. This ad hoc proactive engagement is complemented by routine engagements through property inspections, through surveys and through regular meetings with approved provider boards and management teams. Now taking a step back and looking at the diversified nature of the portfolio. You can see on the left-hand side that we've got a really good geographical spread, -- lots of properties in England, but also some in Scotland and Wales as well. Now this year, we've added 3 new lessees to our portfolio base, adding even further diversification to a number of approved providers that we work with and who are responsible for managing the properties owned by the group. So throughout the presentation, we've talked about the benefits that we think active and visible regulation has on the performance of our portfolio. Now 94.3% of our lessees are regulated by the regulator of social housing. And 10 of our 18 lessee -- provider lessees have been deemed noncompliant by the regulator, meaning that judgments or notices have been issued about them. Now the really important point to make is that broadly speaking, those lessees have engaged collaboratively with the regulator. And as a consequence of that, real improvements have been made in both their governance and their operations, which will ultimately long-term drive the financial viability of their organizations. Looking forward, we continue to have direct engagement with the regulator. We think it's so important when investing in this sector to engage with the regulator directly to understand their key concerns and priorities as well as make them aware as the evolution of our structure and investment model. We expect our lessees to continue to engage proactively and constructively with the regulator and this will continue to drive operational performance. And finally, we're really excited to be rolling out a new lease clause during Q2, which is designed to help address some of the key risks that the regulators identified about the long lease model. And on this next slide, we're going to provide a bit more detail on what that clause looks like. But firstly, why are we rolling out these clause. We're rolling out this clause to help the Boards of our register provider lessees evidence compliance with the regulators standards. So this clause is aimed at addressing some of the regulators' concerns around the long lease model. Now the really important thing about this clause is it doesn't just apply to new leases, but we're going to roll it out throughout our existing leases as well. We've made really good progress in that regard over the last few months. We've engaged with valuers, lenders and of course, the registered provider boards and also the regulatory of social housing, the strong support for this clause amongst our key stakeholders. So what does this clause do? Well, it's looking to rebalance the risk in terms of local and central government policy change. So if there's a change in the amount of rent available to Specialised Supported Housing or if there is a change in local commissioning strategy, then our lessees will have the ability to engage with us to renegotiate rents to reflect those changes. So on this final slide before I hand over to Anne-Britt, we just want to give an example of the impact that Specialised Supported Housing can have on individual's life. And here, we've been up to see Emma, who lives in Leeds supported living in Gildersome, and we spent some time chatting to Emma. And here, you can see some of the feedback she's given us on what it feels like to live in this development. And Emma talked about her spacious flat, that's modern and that she can make reflective of her personality. The short it makes, the really important point that she has access to the care and support on which you rely. So a really good example of what Specialised Supported Housing can help to achieve. Now I'm going to hand over to Anne-Britt, who's going to talk us through how we report and measure Impact.

Thanks, Max, and good morning, everyone. It continues to be as important to us as [ STO ] that your investment and our homes have a real impact and to make a positive difference. And they do, for you and for us to know that we are getting things right, we're externally assessed by the good economy, an impact advisory firm that independently measures our performance twice a year. The good economy's latest report sets out continuing improvement across a range of impact objectives, including resident well-being and social return on investment. We are in a strong position. Just over 70% of our homes are already meeting the government's target for energy efficiency with EPCs [ of sea and above ]. For context, the national average is 44%, so we're already ahead of the curve. The remaining 30% of our homes that don't yet meet that target will do as they form our ECO retrofit project, where we will be carrying out the additional work to ensure that every SOHO home meets that EPC standard [ of sea and above ]. The retrofit pilot study has been progressing through the planning and investigative stages on the property side as well as the consultation and information shown on the people side, and we will soon be starting work on site. We are also progressing our Triple Point net zero road map, and we have appointed the Carbon Trust to support us in this process. Our Scope 1, 2 and 3 footprint has been calculated and verified by the Carbon Trust. So we now have the baseline data that you can see here, and it's against this that we will be setting our future net zero pathway targets. As part of continuing both the development of our sustainability reporting and our own understanding of long-term climate-related risks and opportunities, the TCFD report is now included in the SOHO annual report. And here, we have the risk matrix. As you can see, the risk with the greatest financial impact and highest likelihood is transition risk #1, efficiency regulations. The detail around this risk is set out in our TCFD report. The synopsis is that the greatest risk is the government legislation, all homes meeting the required EPC ratings. And of course, we are already working to mitigate this with our retrofit program that I mentioned earlier. We have also linked in with Climate X, who specialize in global climate risk data analytics. Climate X have been working on an analysis that details the climate risk to the SOHO portfolio and the high-level data is now set out in our annual report. The climate analysis will also give us the ability to drill down into each SOHO home. We will then have a clear view of each individual risk and how they contribute to the overall climate value at risk value. And I'm now going to hand you back to Max.

Thanks, Anne-Britt. I'm now going to conclude by looking forward. So in terms of valuations, we expect Specialised Supported Housing property valuations to continue to show real resilience, especially when compared to commercial property sectors. We expect the majority of our lessees to continue to perform in line with our expectations. But of course, we remain really focused on the active asset management we're currently engaged with in relation to addressing the rent arrears that built up over the course of last year. We're really excited to be rolling out the new risk-sharing tools with our existing group of lessees in our existing leases. We've got to finalize the rollout of our 7% rent cap as well. Finally, as noted earlier on in the presentation, in order to address the discount we are currently considering along with the Board share buybacks and the portfolio sale of properties owned by the company. So that's the presentation over. I'd now like to open up the floor to any questions people might have.

The one question we received so far, are there any lessons to be learned from the recent rent arrears to help avoid this happening with other RPs in the future?

Well, we're always looking to learn from the experiences we built up over the last 5 years in terms of managing the company's portfolio. In relation to the issues experienced by the 2 RPs that we've talked about earlier on, we think they are specific to those 2 organizations. But of course, we will bear any learnings in mind when it comes to the ongoing monitoring of the performance of our wider portfolio of registered provider lessees.

Another question that we've received. The new lease clause will obviously address many of the key concerns of the regulator over the long leases. Will it address all the matters that have led to noncompliant ratings of providers or are there further issues to resolve?

I think as the landlord, we can certainly be helpful in terms of enabling register provider Boards to address some of the concerns of the regulator. And with this new lease clause, we are trying to address as many as we can that are within our gift to help with. There are other issues or observations made by the regulator that the RPs themselves lead to address.

I'll pause for any final questions...

Great. Well, thank you, everyone, for joining this morning. It's been my pleasure to be able to update you on SOHO's performance. Thank you very much.