Annual rent growing; capital values rising; long-term market fundamentals strong; and low cost, long-dated debt in place. It sounds too good to be true for a UK real estate investment trust in this current climate, but these are the key attributes of social housing landlord Triple Point Social Housing Reit (SOHO ).

It seems odd, then, that the company’s share price has been languishing at a materially wide discount to net asset value (NAV) for an extended period of time – even more so than the rest of the real estate sector, which has been hamstrung by high interest rates. Last week SOHO’s discount was nearly 53% to its estimated NAV, while the average discount in the UK property sector was 33%.

SOHO’s rental income is indirectly backed by the government. It pays housing benefit to registered social housing providers to cover rent for an individual tenant who may have some form of disability or long-term care need. SOHO owns the specially adapted property and rents it under a long-term lease to the registered provider.

The model is tried and tested, despite concerns about the financial strength of some of the registered providers, and had been effective in attracting crucial private investment into the sector to grow the number of much-needed beds.

It seems unlikely that a potential change in government later this year would bring about significant change to the current model, or even bring social housing back under public control, due to the sheer financial resources required to fund this.

Private investment into the sector has dried up recently, however, due to interest rate rises choking off lines of funding. Even before this, sentiment towards the two listed social housing investors SOHO and Civitas Social Housing (which was taken private last year) tumbled after a short-seller attack on Civitas in 2021.

This is at a time when the need for specialised supported housing and pressures on the NHS to free up beds are at their greatest. The Care Policy and Evaluation Centre has forecast that demand for this type of housing in England will reach 320,000 beds by 2038, a 21.2% increase from the 264,000 in 2023.

On the supply side, Mencap states that a significant undersupply has resulted in a substantial number of people with long-term care needs living with elderly parents and thousands with a learning disability being placed in inpatient units, miles away from their families. Research shows that care provided in the community, as opposed to an institutional care setting, vastly improves quality of life and life outcomes for residents.

Wide discount

There are aggravating factors for SOHO’s discount, of course. Two of the company’s 27 registered provider tenants are in material rent arrears – leading to a rent collection level of just over 90% for 2023.

Those two companies – Parasol (accounting for 9.7% of SOHO’s rent roll) and My Space (8.1%) – suffered failings in governance and financial viability, but positive outcomes are on the horizon. SOHO announced last week that it is looking to transfer all 38 properties currently leased to Parasol to another registered provider, Westmoreland Housing Association, which it expects to complete by September.

Regulatory action has forced most registered social housing providers to improve their corporate governance and strengthen their balance sheets. This seems to have been the case for My Space, where a new management team has a turnaround plan in place that SOHO expects will result in an increase in rent payments. Westmoreland, which had come under the regulator’s spotlight in 2020, has since turned things around and now has a six-strong independent board and generates a recurring annual surplus.

The negative headlines that have plagued the UK residential sector in recent years have not helped SOHO, either. In 2021, SOHO’s peer Civitas was the subject of a short-seller report that revealed the non-disclosure of directors’ interests in ‘opco-propco’ deals. The rest of the claims surrounding the strength of the tenants were flimsy. Mud sticks, however, and SOHO was dragged down by this.

More recently, the valuation scandal and suspension of trading in Home Reit, which was focused on homeless accommodation (loosely as it transpires), have not helped investor sentiment towards SOHO, despite it being a different investment proposition.

Civitas decided to chuck the towel in, selling the company to CK Assets for £485m in a take-private deal in 2023. This was finalised at a 44% premium to its share price at the time and a 27% discount to NAV. A re-rating in SOHO’s shares did not materialise, however, and the company remains overlooked – unfairly, in our opinion.

Fundamentals strong

Contrary to the wider real estate sector, SOHO’s portfolio value has grown over the last two years, despite the higher interest rate environment, with its NAV up 4.3% last year. Its portfolio at the end of 2023 was worth £678.4m, up from £669.1m at the end of 2022 and from £642.0m at the end of 2021. This is despite the portfolio net initial yield moving out 46 basis points (0.46%) over the two years.

Strong rental growth over the period through its inflation-linked leases – of 6.7% in 2022 and 6.9% in 2023 – more than offset the outward yield movement weighing on property valuations. The company expects rental growth in 2024 of between 5% and 6%, as the lagged effect of higher inflation from last year is applied to leases.

The board will reveal its dividend guidance for 2024 at the annual general meeting this Thursday, but a current dividend yield of close to 9%, which was uncovered for the whole of 2023 because of the rent arrears of Parasol and My Space earnings but was covered at the end of the year on a ‘run-rate’ basis, currently looks attractive.

Meanwhile, its balance sheet is the envy of the sector. It has a long-weighted average debt maturity of 9.6 years at a low, fixed rate of 2.74% and no repayment until 2028.

To tackle its wide discount, the company has said it will make further sales from its portfolio (after it sold four properties for £7.6m in August 2023) and use the proceeds to repurchase shares. This will hopefully facilitate a deserved re-rating of its share price and in time allow it to get back to growing and investing in much-needed social housing.

Richard Williams is a property analyst at QuotedData. James Carthew is away.

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