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

Good morning, and welcome to the Social Housing REIT plc Interim Results Investor Presentation. [Operator Instructions] I'd now like to hand you over to Adrian D’Enrico. Good morning, sir.

Good morning. Welcome to Social Housing REIT's interim results presentation for the period ending 30th of June 2025. Very briefly for compliance purposes, I would like to note this presentation is intended for professional investors only, does not cost you investment advice and a reminder that investing involves risk and the value of your investments may rise or fall. I'm Adrian D’Enrico. I'm joined by Michael Carey here at Toronto, and we are the Investment Manager for SOHO. To start, I'm just going to take it briefly back to basics. So SOHO invests in U.K. residential property. These are adaptive properties housing vulnerable adults. The sector is called specialized supported housing, or SSH for short, and SSH provides essential social infrastructure across the U.K. Our portfolio delivers a staggering GBP 71 million a year of savings to the U.K. taxpayer. Our fully repairing and ensuring leases generate inflation-linked income and unusually for U.K. real estate investments, we have uncapped rent reviews, which I'll touch on later. And finally, our portfolio is highly diversified with 492 properties across the whole of the U.K. When we presented our annual results in March, we set out our strategy for SOHO. Michael will talk you through our progress on these 3 key initiatives. I don't want to steal his thunder, but in short, it's working. Income is increasing as we resolve the tenant issues that were inherited in January. Costs are reducing materially with our new fee structure and our cost review and control. And that means that earnings are growing significantly and have the potential to continue to do so. Before I hand over to Michael, I'll just quickly summarize the unaudited results for the period ended 30th of June. Here, we set out those financial highlights for the company. Starting on the top left, 91.4% of contracted rent for the period was collected. Following the start of our cost reduction exercise, the EPRA cost ratio has fallen considerably to 16.5%. And the combination of increased rent and lower costs has delivered a 22% increase in earnings, up to 3.3p per share. You may recall that we have in May increased the dividend target by 3% to 5.62p per share, and that was the first increase since 2022. And even with that dividend increase, we have a dividend cover of 1.2x. Now we will, of course, make sure that we keep to the 90% distribution requirement, and this might require an upward adjustment once we finalize the full year results, and that's obviously a great problem to have. One of the company's greatest strength continues to be its sector-leading debt profile. As you can see, we have an average maturity of 8.1 years and an all-in fixed cost of 2.74%. And you'll be pleased to see that in June, Fitch reaffirmed the A- credit rating. Therefore, we don't have any concerns about finance costs or debt renewal. The combination of our low finance costs, progressing our key initiatives and our focus on cost reduction has started to deliver a clear path to earnings growth and dividend growth. I'll now hand you over to Michael to talk you through progress on our strategy in more detail.

Thank you, Adrian, and good morning, everyone. I'll now talk you through how we have implemented our strategy. So taking the key initiatives from full year results in turn and starting with EPS growth, we have increased income by 19%, and this is a result of 3 main factors. Firstly, proactive asset management, which includes both the successful assignment from Parasol to Westmoreland and the proposed assignment away from My Space, which I will talk you through later. Secondly, the great work our asset management team do on a day-to-day basis, which has resulted in 99% of rent being collected from the other approved providers, which really highlights the quality and need for Soho's portfolio. And then lastly, on income, we've had an average of 2% rental growth for the properties where the uplift has fallen within the period. Now Adrian will talk you through our uncapped inflation uplift later. But in a world where we can see higher inflation for longer, SOHO provides a really strong underpin for that higher rates environment. So our income is up. And on the next slide, we'll look at how we have reduced costs. So as Adrian mentioned, we moved to a market cap-based fee. And this has not only incentivized us properly, but it has also led to a GBP 1.1 million saving per annum. We've also undertaken a detailed line-by-line cost review, which has, of course, created cost savings, but more importantly, has provided much better value for money for SOHO shareholders. Now what does this mean? Well, as you can see, our EPRA cost ratio has materially reduced to 16.5%, which is appropriate for a fund as operationally intensive as SOHO. So our income is up and our costs are down. And of course, this means our earnings are also up, and they're up by 22%, which has resulted in a material increase in dividend cover from 1x to 1.2x. Now this has meant we've been able to increase our dividend for the first time since 2022. But more importantly, we've been able to return to a progressive dividend policy. So our second key initiative for full year results was resolving the tenant and portfolio challenges. So you may recall, we inherited 2 long-standing tenant issues, Parasol and My Space. So taking each of these in turn, Parasol leases were assigned to Westmoreland. And this has continued to perform well with 75% of the contracted rent being collected for this period. And I'm also now pleased to say that we expect rents to rebase at 90% of the contracted rent as the properties return to full FRI terms. And then My Space, you may recall that when we took over, they have been paying reduced rents since December '22. They stopped paying rent entirely in June '24 and enter CVA in March '25. However, I'm pleased to say they have now started to pay some rent again, albeit modestly, with 31% being collected for this period. But more importantly, before the CPA, we agreed an option to assign the leases to an alternative provider. And I'm happy to announce we've made significant progress with this with leases assigned to inclusion Group over the course of this year. And I think it's quite important to say and be clear with everyone that the My Space situation is arguably the most severe tenant issue to ever hit this sector and the resulting credit losses were due to the failure to take action sooner. Therefore, the good news is that despite this, we have a deliverable plan. And as the leases are assigned, we will see both earnings and value upside. Now on the next slide, I'll talk you through how we are mitigating any future credit losses. So starting on the left, you'll remember from full year results that it is crucial to get the property fundamentals right. Now this means the right property in the right location, the appropriate level of demand and an approved provider paying a sustainable level of rent. Now Adrian will talk you through this later, but 97% of SOHO's portfolio has exactly that and is performing. Secondly, and in the middle, the work our teams do to work with the approved providers to collect relevant data, which allows us to make informed proactive asset management decisions. And then lastly, on the right, if an issue is not resolvable, we take strong and decisive action to assign the properties to an alternative provider. On the next slide, I'll talk you through an example of where we have done exactly that. So we've had a nonmaterial issue with one of our approved providers, Pivotal, who we have 2 properties with. Now Pivotal got into financial difficulty in April. However, our asset management team were aware of these issues ahead of time, and we took the decision to assign the properties to an alternative provider. And I'm pleased to say that this transfer is due to complete in October. And as of today, we have continued to receive full rent. So this is a clear example of our approach working for shareholders. So you can take comfort that, yes, these tenant issues will come about, but the work we do will ensure that they do not lead to material credit losses in the future. So our final initiative in full year results was working on a long-term solution for approved provider credit risk. And we talked about how we are managing approved provider risk on a daily basis, you'll recall from full year results that we want to find a longer-term solution to mitigate this risk. And I'm sure many people will be familiar with this diagram, but just to take you through it again quickly. As you can see on the top left, rents are ultimately funded by the Department of Work and Pensions, which is paid by the local authority to the approved providers who lease the properties from SOHO. Therefore, what we have is a cash flow that is ultimately derived from central government. However, for that cash to make it to us, it has to pass through a weak counterparty. Therefore, what we need is some form of protection over SOHO's income to ensure that, that rent is paid through directly to SOHO and not used to subsidize other rent or costs within the approved providers' businesses. Now as we said before, this is not going to be an overnight solution, but we've made good progress so far. We have a paper produced by our legal counsel. We have consulted 3 of our main approved providers and also the regulator of social housing. And we will aim to keep the market up to date with progress on this key work stream. I'll now hand back to Adrian to talk through how we're optimizing SOHO's portfolio.

So as we work to resolve the specific tenant challenges that Michael has just outlined, it's important to see them in the context of SOHO's extensive nationwide portfolio. Here, you can see some summary statistics of that portfolio. It comprises 492 properties, and that offers homes for up to 3,412 vulnerable levels right across the U.K., as you can see on the map. As you remember from our annual results in this sector, schemes with occupancy rates of 80% or higher are profitable for our lessees. You'll be pleased to see that our homes continue to be well used. Occupancies remain stable above this threshold at 86%. As we resolve the challenges that we've just discussed, that will increase further. We've grown the portfolio's contracted rent to GBP 43.2 million during the half, benefiting from inflationary uplift and also proactive management. Now our homes are, of course, safe and well maintained, but we also want to make sure that they're efficient and comfortable for our residents. 74% of them already have an EPC rating of C or higher, and that's above the U.K. national average of D. But we're looking to continue to improve on this with our EPC upgrade program, which I'll talk you through quickly. Following a successful pilot, which saw 30 homes upgraded, we've now started work on the portfolio-wide rollout. Over the next 3 years, the program will improve 657 homes, bringing them to an EPC of C or above, meeting that target level ahead of the expected 2030 deadline. We've already done 60 retrofit assessments, works have been instructed and 3 properties have already seen their ratings improve. So we've hit the ground running. Based on our experience from the pilot, the majority of the cost of approximately 60% on average will be funded through the U.K. government's ECO 4 scheme, and that reduces the cost expected to be incurred by SOHO to just GBP 2.5 million. Now these works will not only benefit our residents in the environment, but they're also expected to be accretive to value or NTA, with valuers increasingly factoring building efficiency into their assessments. So as we future-proof our homes, we're also future-proofing shareholder value. Now a key strength of the sector and the lease arrangements we have in place are the inflation linkages of our rents. Over recent months, whilst inflation has started to decline, people are a little bit more nervous about inflation remaining higher for longer. If that happens, SOHO will be protected for 3 key reasons. Firstly, 100% of our rental income is inflation linked, and all of our leases benefit from annual reviews. Secondly, the vast majority have uncapped uplifts. So in that higher for longer inflationary environment, SOHO's rents track and benefit from that inflation. And thirdly, our uplift are underpinned by government policy. So the government's recent rent settlement confirmed annual increases of CPI plus 1 until at least 2036. And that rent settlement, therefore, not only provides confidence to our future cash flows, but it also highlights how important social housing and specialized supported housing is within the U.K. residential market. So we have an established diversified portfolio, and it will continue to deliver long-term growing income. And that portfolio was valued at the 30th of June at a net initial yield of 6.42%. Over the first half of the year, we have seen a revaluation adjustment of 20 basis points, which reflects a GBP 14.5 million decline. We believe the net initial yield now reflects market pricing for our assets. But what I really want to focus on this slide is the relative value because frankly, it's incredible compared to the other living sectors. We believe the yield differential offered by specialized supported housing is really compelling. So whilst we continue to resolve the tenant challenges, we're also working to optimize our portfolio of properties. We received 494 of them when we took on the management of SOHO at the start of this year and immediately commenced a property review, selling 2 vacant schemes that we had in the Southwest. Through lots of hard work, I'm pleased to confirm that we've already completed that full portfolio review. And we must say that on the whole, we've been pleasantly surprised by the quality of the assets. As you can see, 97% of the properties are performing well. Of the remainder, we have identified 5 we're already undertaking asset management initiatives to enhance their performance, and there are just 12 which we'll look to sell, which is clearly just a small fraction of the portfolio. By acting decisively and exiting these poorer quality nonperforming properties, we're optimizing the portfolio for growth or sale. Now of course, our capital allocation decisions are guided by our cost of capital, and we'll remain disciplined and simply do what's best for shareholders. So while share buybacks and portfolio sales will remain under constant review, we're also considering factors such as share liquidity, maintaining our LTV at the appropriate level and supporting the overall strategy of SOHO to deliver for vulnerable adults and shareholders. At present, it's worth emphasizing we are very much in a buyer's market, and we're seeing really strong opportunities for deployment. That includes recently developed stabilized schemes, which are available for us to move on quickly. At current pricing, those investments that we're assessing would be accretive to shareholder returns. Taking advantage of those opportunities will let us diversify our counterparty exposures, bring in new compliance approved providers, drive the dividend importantly and make the portfolio as attractive as it can be. So what does that look like in practical terms? Well, as we exit those weaker nonperforming properties, we'll bring in more best-in-class assets like this one. This is the latest addition to our portfolio up in Chorley and Lancashire, and it reached practical completion of Fortnight ago. It's led to Golden Lane Housing who are rated D1, G1 by the regulator of social housing, and that's the highest level available. It's a high-quality, purpose-built scheme with integrated safety and comfort adaptations. 12 residents with learning disabilities have already been identified and they're starting to move into their new homes in the next few days, first residents actually moving in tomorrow. Chorley is a great example of the quality of the homes that our residents deserve, but also the types of property and counterparties that will help SOHO deliver for its shareholders. I'll pass you back to Michael now to summarize the outlook for SOHO going forward.

Thanks, Adrian. So to conclude, if you only remember 2 things in this presentation, we'd like you to take away that we have the potential for significant further earnings growth and material capital upside. So taking earnings growth first, our dividend yield is already 8.2% and is well covered. And I want to emphasize again our uncapped inflation uplifts, which are extremely valuable in an economic environment, which may well deliver higher inflation for longer. When you combine that with our work to maximize the rents from the My Space properties, we have the potential for significant rental growth. And then when you remember that with our low cost of debt for another -- for a further 8 years, the potential for material earnings growth is really exciting. At the same time, we're continuing to work hard to turn around the perception of this sector. As I'm sure many people are aware, there have been a lot of well-publicized missteps by others in the past, but we are doing this properly. This, combined with portfolio optimization, will either be recognized by the public markets or will create the opportunity for a private market takeout at an attractive level for shareholders. That concludes today's presentation. We'll obviously now open up the floor for questions, and thank you for listening.

[Operator Instructions] That's great. I'd like to remind you recording of this presentation along with a copy of the slides and the published can be accessed via investor's dashboard. As you can see, we have received questions throughout today's presentation. What I'll do is I'll hand back to the team, and then I'll pick up from you at the end.

Thank you. Take them in no particular order. So there's a question here about occupancy remaining stable at 86%. I'm asking what steps we are taking to improve that further and will that add to earnings? Michael, do you want to summarize that one?

Yes. I think it's -- well, I think it's important to note that a lot of that vacancy sits within the My Space properties. So obviously, our team is working alongside My Space today, but we're also assigning those properties from My Space to inclusion. And as those properties go across to inclusion, inclusion will improve the occupancy of those, which will then in turn improve the rental income on those properties, and we think there's about GBP 1 million of upside of rental income upside on those particular properties. So that should take us above the 90% in terms of occupancy and add another GBP 1.5 million on the rental income line.

Thank you, Michael. Great question. I think everyone is worried about the economy at the moment. Do we have any concerns about the upcoming budget and the potential impact on the company? I think the government's recent rent settlement, which was part of the affordable housing program, which was stated earlier in the year, is another GBP 39 billion coming through to social and affordable housing, which does, of course, include specialized supported housing. So we are liaising with them to see how we can bring more capital into the sector. In terms of day-to-day operations, I think the biggest point was what we touched on in the presentation, the confirmation of a 10-year rent settlement taking us through to 2036 is obviously key to support the inflation-linked leases that we have and our approved providers claim on that same basis. It also really importantly lets them claim costs on those same basis. So as those costs increase, they're able to submit those claims increasing on a yearly basis by CPI + 1%, and that maintains their margin. So we think it's a win-win. It's positive clearly for shareholders, but it's also positive in terms of supporting the approved provider counter parties. Other than that, I think the labor government being in position, I think, has really sort of focused everyone's minds just in terms of the good that social infrastructure can provide. And I think there's greater support now for sectors such as specialized supported housing. So we don't see any negative impacts on the horizon, but we continue to monitor that to ensure that we position ourselves well. And as Michael said, we're obviously championing the benefit of what social housing or specialized supported housing can deliver. And as I touched on the start, our portfolio delivers GBP 71 million of tax savings per year. So clearly, there's a key advantage for the government continuing to support not just from a financial perspective, but also because it provides simply the best outcomes for the residents that we're able to house within our portfolio. A question on the dividend, Michael, if you want to take this one, just in terms of the first time increased it since 2022. And are we confident that we're able to maintain it at that level?

Yes. So obviously, we've increased it on the basis that is forward-looking. And so I think as Adrian said, its 97% of this portfolio is performing. The property fundamentals are right, rent and payment occupancy at a high level. So despite that, we still allow for a certain level of tenant defaults every year. And running those numbers, we are still able to cover the dividend on that basis moving forward. I think having cheap debt is a massive factor in being able to do that. But yes, look, it accounts for the quality of the portfolio. It accounts for any tenant defaults along the way, and that's fully modeled over a 10-year period.

Perfect. I think the next one actually over to you again, Michael, what have been the changes in future lease arrangements mentioned in the interim report. I think this is in relation to when we're talking about the work that we've been doing to try and look for an update or a refresh of the model that could see the regulator be increasingly happy with the lease-based arrangements that the approved providers sign up to...

Yes. So I mean it's important to note that the ongoing discussions that we're having with approved providers, with our legal counsel, with the regulator of social housing. And we are looking at 3 or 4 different options. It is, as I said, what you ultimately have is a government cash flow that passes through the improved provider to get to us as landlord and the approved provider -- some approved providers in the past, clearly, there's been certain issues where our rent, for example, has been used to subsidize other landlords rent. So we are looking at how we can have some form of visibility and protection over that cash flow to know that when the rent is received from the local authority through housing benefit and goes to the RP, we know that that's then going to get passed through to us as landlord. So it's likely to be something like a segregated account that we have visibility over. But we are -- like I said, we're at the early stages of those discussions, but that's the type of control/visibility that we're looking at.

That answers. Very good question. Please, can you detail your acquisition criteria and what size of deals you're willing to absorb? So we do have a small amount of free cash available. As we talked to, we're considering every option. So buybacks remain on the table. I can probably combine this with another question. So we're driven by our cost of capital. And quite simply, we look and compare between the 2 to see what the benefit to shareholders be from a buyback versus what a new investment will be able to deliver marginally at the moment, given that buyer's market is slightly in favor of acquisitions versus buybacks. And for all of the other characteristics we talked to, obviously, we want to maintain share liquidity, keep the LTV at a sensible level and also continue to grow the strategy and the portfolio is attractive as it can be for growth, we hope, but also just in case of sale is required. So in terms of the individual assets that we're looking for, Chorley is a really good example of it. We're looking to diversify the portfolio. So we want to bring in new compliant group providers and Golden Lane are a great example of that. There are a number of other parties we're having conversations with. We've actually seen a number of -- sorry, developers become unwitting investors. So we're able to take already stabilized, so that's practically completed developments that have now become occupied by residents so they're immediately income producing. So we avoid that development J-curve. And in terms of the quality of the properties, we're looking for those best-in-class, so purposely built for specialized supported housing rather than adaptations. It ranges based on the cohort that you're looking to house. So truly is a flatted scheme, which works really well for the cohort, which is lender's [indiscernible] cohort -- in some instances, they may be brand new, but it's a full spectrum and typically lot sizes. We never see in specialized support of housing schemes, which are above maybe GBP 2.5 million, GBP 3 million, GBP 4 million. So we can't do extremely large developments because we need to consider what works best for the residents. But typically, we're able to acquire at the moment at yields which are very favorable and provide the best outcome versus buybacks. But we continue to monitor that as it evolves. And as with all things, we'll simply do what's in the best interest of shareholders of SOHO. Michael, the uncapped lease structure, maybe the public finances position, I think it's probably a point that we touched on a bit in terms of the benefit to the public purse, which makes this an obvious choice for the government to continue to support. But I don't know if you've got anything else to embellish for Ashley's question.

Yes. I think Adrian covered it with public finance point earlier as well. And then as Adrian said, this is a significant saving to the public purse. And it's going to be always going to be the most efficient use of public money when housing adults. I think there's also in terms of the uncapped nature, obviously, this is -- when the model is working correctly, it's a pass-through, right? So it's passed through from housing benefit to the RP. So it's just a point that it doesn't put any undue pressure on the RPs because those uplift that they will be receiving from HP just passed through to us as a landlord.

Perfect. Thank you. And I think I'm happy to take any more, but I think the final question in the inbox. What were some of the reasons of the prior operator stopping paying SOHO rent? I think Michael touched on it. If we pick on the My Space example, I think structural challenges and financial challenges they had elsewhere in their business meant that they were prioritizing fixing problem elsewhere in their portfolio and therefore, the rent wasn't being received by us. And that's why, as Michael has outlined, the restructuring and protection of the rental income, which is due for our properties -- due for properties to our share -- to then be passed on to our shareholders is absolutely key for us going forward. That was the worst-case scenario, as Michael outlined, just in terms of My Space, but it's something that we're working with the regulator, with the approved providers and with our legal counsel to see whether we can tweak that model and give us extra visibility and extra protection. So work in progress, but certainly, we hope to be able to give some more news to the market over the coming months. A couple of questions. You mentioned a couple of times the sale of the company. Is that something that we are seriously pursuing? Michael?

Yes. It's not something we are actively pursuing. I think when we were -- just for everybody's benefit on the call, we were appointed as investment manager from January 1. It was managed by somebody else beforehand. When we came in, we were very open to say that we're genuinely agnostic as to what the right path for SOHO was moving forward. The reality is at the moment, it's a small cap REIT with a market capitalization of GBP 275 million. We're doing everything we can to narrow that discount. I think we're at about 25% discount today. We're doing everything we can to try and get back to NAV. The reality is that either the public markets recognize that and if they don't recognize that, then it will become attractive to private buyers. I think we -- probably most of you will agree, we're not going to say a small cap REIT forever. So it's either going to be recognized one way or the other, but it's not something we're actively pursuing. No.

Thank you. And one more question. So there are some changes to the Board announced. Is there any impact on day-to-day operations? No. I think a number of those Board members have been in place since the inception of SOHO 7 or 8 years ago. So there's naturally going to be a transition coming through. So it's probably an acceleration of some of those transitions that we'd expect to see. As with everything, new manager, some new Board composition is a reinvigoration of SOHO and a fresh intent as we take it forward. As Michael said, hopefully, to growth, but we'll see whether that decision is made for us in terms of whether the public market is the right place to SOHO. But we certainly have ambitions to close that discount, get to a point where we continue to grow the portfolio and deliver more of these much needed homes. So I think we've got a shortfall of 30,000 homes expected over the next 10 years, and we'd love to help deliver a solution for those levels.

That's great. Well, thank you very much for answering those questions from investors. Of course, the company can review all the questions submitted today, and we will publish a response on the Investor Meet Company platform. But just before redirecting investors to provide with their feedback, which is particularly important to you both, Michael, can I just ask you for a few closing comments.

Absolutely. I think as I said before, if there's anything you take away from this, we think obviously, earnings have improved already. We're up 22%, and we think there's further earnings upside there. And obviously, we do a lot to improve the portfolio, as Adrian mentioned, through that portfolio optimization strategy, which we think will deliver material capital upside to shareholders. So yes, if there's anything to take away today, the earnings growth potential and the optimized upside potential.

That's great. Well, Michael, Adrian, thank you once again for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order the management team can better understand your views and expectations. On behalf of the management team of Social Housing REIT plc, we'd like to thank you for attending today's presentation, and good morning to you all.