Triple Point Social Housing (SOHO ) has ruled out a large return of capital to shareholders frustrated with their shares’ 45% discount, saying market market conditions for the property sales needed to drum up the cash are too challenging. 

Shares in the £232m real estate investment trust (Reit) have jumped 37% since their March 2023 low, partly in response to the £485m bid for rival Civitas Social Housing last May.

However, at 59.5p they are just over half their level at launch in 2017 and their August 2021 peak of 112.4p.

Chair Chris Phillips said the board remained focused on delivering value to shareholders and was making ‘good progress’ with the two tenants in big arrears, My Space and Parasol.

Although rent collection levels fell from 91.8% to 90.2%, they increased in the second half of the year after a creditor agreement struck with Parasol, which accounts for 9.7% of rent. This allows the housing association to adjust its payments according to the level of income it receives.

Payments from My Space, which makes up 8.1% of rent roll, also increased under a new chief executive who is working with the fund to improve rent collection.

The board of the Triple Point-managed fund undertook a £5m share buyback in the first half of 2023, but after selling four properties below market value at £7.6m in August did not use the proceeds to purchase more stock.

At year-end on 31 December, SOHO had a total cash balance of £29.5m, of which only £10.8m is available and unrestricted. Were the Reit to undertake a further return of capital with a corresponding paydown of debt, any such distribution to shareholders would be limited to around £5m, he said.

‘Any larger return of capital to shareholders would be dependent on significant additional liquidity being delivered through property sales. Given market conditions remain challenging, and the group’s strong capital structure, the board is not actively considering selling more properties in the short term,’ he said.

Total borrowings of £263.5m left the Reit with a loan to value of 37% with 9.6 years left to maturity on debt fixed at a weighted average interest rate of 2.74%.

Growing valuations

Despite the problems with My Space and Parasol, the net asset value (NAV) of the properties leased to housing associations grew 4.3% to 113.76p per share in 2023, most of it in the fourth quarter, annual results showed this month.

This was underpinned by a 2.3% like-for-like valuation increase in the year that reflected rental growth of 6.8% from leases nearly two thirds linked to inflation. This offset small price falls caused by property yields rising from 5.46% to 5.57%, while the £5m buyback programme added 1.3p to NAV per share.

With dividends included, the portfolio generated a total return of 9.3%. A fourth quarter dividend of 1.365p took the total to its target of 5.46p per share, giving the Reit a 9.3% yield. 

However, an increase in credit provisioning as a result of the decline in rent collection contributed to weaker dividend cover from earnings of 0.84 times, down from 0.92.

Philips said the progress made by My Space and Parasol improved dividend cover in the second half and payments were now covered on a run-rate basis. 

Triple Point’s head of investment Max Shenkman said the decision to keep leases with My Space reflected a significant strengthening of its senior management team and board.

Nevertheless, he was ‘considering moving a small number of the group’s properties currently leased to My Space to alternative registered providers’.

To ensure that rents are still affordable and problems no longer arise, SOHO implemented a new risk-sharing scheme in leases that aim to address regulatory concerns about long leases.

The clause allows tenants to request a reduction in rent if there is a change to central government policy that negatively impacts the level of rent paid, or a change in local government policy that impacts the commissioning of relevant properties.

So far, the clause has been implemented with one tenant, Inclusion Housing which holds 28% of leases, and the fund expects it to be applied to all leases by year-end

Shenkman said portfolio valuers and the trust’s lenders ‘do not expect the clause to have a detrimental impact on the valuation of the group’s properties’.

Deutsche Numis analyst Andrew Rees said the clause, along with other measures, was a ‘sensible step’ but it ‘clearly alters the risk return profile of the fund’.

Rees said the wide discount ‘reflects significant caution over the property valuation amid the evolving business model’.

‘We continue to believe that the sale of a significant portfolio of assets at a price in line with existing values, would be a meaningful tool to help reassure the market,’ he said.