Only a few days ago I warned on this blog that I felt there was a looming problem with the increasing profusion of social housing investment trusts.
See : here
Surprise, surprise but within just a few days I found out that another social housing investment trust is about to arrive on the London market. This new one is called the Triple Point Social Housing REIT and it’s looking to raise £200m at IPO (subject to a minimum £100m raise).
I’ve pasted in the detailed investment strategy explainer below plus the time table – if all goes to plan we’ll see it hit the specialist funds market early August.
Now, I don’t intend to rehash all my moans and groans about social housing funds except to say that I hope decent, quality private capital is being raised to help a vitally important strategic, public service. We need more social housing, lots of it and if the private sector can help with new developments, all the better.
But of course, we all know that by and large the risky stuff of new developments will be left to the public sector, and the private sector will cherry pick the existing quality assets – assets that can produce a steady, inflation linked income yield.
The putative fund is targeting a 5% dividend yield to be paid quarterly and increasing annually thereafter in line with inflation. The core investment is in the supported living segment: typically, older patients with chronic issues as well as younger patients, many with learning difficulties or the physically handicapped. The portfolio will comprise investments into operating assets and the forward funding of pre-let developments.
The good news is that the fund already has a seed portfolio of five assets, from an outfit called Pantechnicon Capital, a company within the Triple Point Group, at a purchase price of £17.9m, equal to a 6% Net Initial Yield.
According to Numis this portfolio of properties “are located predominantly in and around town and city centres in the Midlands and the North of England and are leased to Inclusion Housing CIC as Approved Provider for an initial term of 20 years, extendable to up to 60 years. The Seed Portfolio has been independently valued at £18.46m by Jones Lang LaSalle”.
Fees seem sensible at 1.0% on net assets up to £250m, with tiers of 0.9% £250-500m, 0.8% £500m-£1bn and 0.7% over £1bn).
To repeat – I’ve pasted in the main fund strategy below if you do want to take a closer look
So, what are my observations?
First off, I have to say that I know Triple Point well and rate them highly. Currently, as an asset manager, they have total assets of over £450m and they are very active in a number of specialist niches including alternative finance, and tax efficient investing (including VCTs). They’ve always struck me as innovative people with a strong record in complex financial products. That background in tax efficient structures means that they also understand how to deal with complex investments that require thorough due diligence.
The dividend target of 5% I suppose is also sensible and on an initial skim through, the fund looks to be sensibly structured.
But I would make the following general observation.
We’ve seen a great deal of activity in the supported living segment of the social housing space. My partner works extensively in this area for the NHS and her client book is very typical of the average client – lots of younger patients with LD or physical disabilities plus the obvious older patients with dementia for instance. At the weekend, I inflicted my Twenty Questions process on her about the whole sector.
I came away more than a little alarmed.
The bottom line is that there isn’t an inexhaustible supply of quality supported housing and much of it is not in state of the art purpose built accommodation. The standard model seems to be smaller or individual units where a care agency manages the intensive help with the property usually owned by another housing association (HA). Payment sources are varied with direct Treasury support for some patients through managed personal budgets through to local authority social services departments budgets – and we all know what’s happening to those budgets currently.
The big message – and warning – is that in effect the investor must understand the credit risk of the care support business as well as the housing association they work with. There are a great many specialist outfits out there all struggling with increased minimum wages and impossible demands on individual staff. An investment in supported housing is all about about investing in the people who provide the front-line care – it’s not just about the credit worthiness of the people who own the buildings.
Cock ups and service meltdowns are common and many housing associations in this space are under intense financial pressure. In particular many of the smaller HAs aren’t big enough to seek support from the wholesale capital markets and thus their financing is usually sub optimal i.e more expensive than the huge mega housing associations.
Thus, the opportunity.
But standards are threatened across the board largely because of tight funding levels and many care agencies and HAs are in trouble. I wouldn’t be surprised if we’ll soon encounter a slew of undercover journalists’ investigations about care standards across the supported living sector. That will inevitably have a knock-on effect on the whole business sector. Thus, boasts of very long leaseholds could become problematic if the service delivery starts falling apart. i.e your main underlying customer goes bust.
So, on paper, I can see why supported living accommodation is popular and I can see that it will require more investment.
More importantly, many NAVs and supporting yields are based on a valuation model which is based on discounted cash flow models derived from existing payments. Sometimes there’s a real discrepancy between the open market value of a property (usually lower) and the value from an inputted DCF model (many times higher). That discrepancy is fine if those future cashflows stay stable (or grow) but if there is a crisis in provision, cash flows could falter and valuations revert to the open market model, implying NAV hits.
I’m sure that all the social housing funds – Triple Points planned fund included – have a good argument that says I’m too much of a cynic but let’s just say that I remain to be convinced.
What this nation needs is a for a big fund provided by someone like L&G or a state pension outfit to roll up its sleeves and get building a city’s worth of mainstream social housing (not supported nor affordable rents) for those in most need. That means lots of development risk, working with housing associations but the scale of the operation should help to mobilise investors. This kind of exercise will require many billions, if not tens of billions but the end return – say 3 to 5% per annum – should be safe, secure and inflation linked. That’s what we need now but it doesn’t look like we’ll actually going to get it………unless of course Corbynomics takes charge and the City is ‘forced to cooperate’.
Funds own description of opportunity
“Focus on Supported Housing with secure, long-term and inflation linked leases
- The Company will principally look to acquire and hold (either directly or through SPVs) the freehold or long leasehold of supported social residential properties in the UK. Each asset will be subject to a lease or occupancy agreement with an Approved Provider for terms ranging from 20 years to 25 years, with the rent payable thereunder subject to adjustment in line with inflation.
- At least 80 per cent. of the assets owned by the Group (once fully invested) will be Supported Housing properties, typically providing accommodation for older people or the most vulnerable members of society, such as those with learning disabilities, mental health problems and people with physical or sensory impairment.
- Supported Housing properties owned by the Group will be leased to an Approved Provider and a care provider regulated by the UK Government’s Care Quality Commission may be retained (by the Local Authority) to provide care to the tenant. The Group will not be responsible for the provision of care to occupants of Supported Housing assets.
Stable and growing income streams
- Due to the vulnerable nature of Supported Housing tenants, the Approved Provider will receive rent in the form of housing benefit directly from the relevant Local Authority, with Local Authorities in turn receiving funding directly from central Government (the Department of Work and Pensions) – this security of revenue allows the Approved Provider to sign a long term upward only inflation-linked lease with the Company.
- Net initial yields in the Supported Housing sector typically range from 5.5 per cent. to 6.5 per cent. and are linked to CPI (and occasionally RPI) with enhanced returns for forward funded development assets.
- Following deployment of the Net Proceeds of the Issue and associated gearing, the Company is targeting a covered dividend equal to 5 per cent. of the Issue Price per Ordinary Share1, 2in respect of the Company’s first full financial year, to be paid quarterly and increasing thereafter in line with inflation.
Forward funding but no speculative development
- The Group will forward finance the development of new Social Housing assets when the Delegated Investment Manager believes that to do so would enhance returns for Shareholders and/or secure an asset for the Group’s Portfolio at an attractive yield.
- Forward funding will only be provided in circumstances where there is an agreement to lease in place with an Approved Provider, planning permission has been granted in respect of the site and the Group receives a return on its investment (at least equivalent to the projected income return for the completed asset) during the construction phase and prior to the commencement of the relevant Lease.
- Forward funding is expected to increase the deal flow available to the Company and give greater certainty over the longer term deal flow to the Group, as developers are often willing to grant exclusivity over their forward pipeline of developments.
- The Company will not acquire land for speculative development of Social Housing assets.
The Delegated Investment Manager has strong relationships and an extensive and successful track record, investing over £1 billion across a diverse range of sectors delivering strong income
- Triple Point Investment Management LLP (part of the Triple Point Group) has been appointed as the Delegated Investment Manager of the Group.
- Triple Point Group is a specialist investment firm founded in 2004, currently with over £470 million assets under management, returning £134 million to its investors during the last two years, in line with the applicable investment mandates.
- Over the last 10 years, Triple Point has invested over £1 billion in across a diverse range of investment sectors, including property, central and local government, NHS Hospital Trusts and infrastructure including lease and asset finance
- Fees payable to the Delegated Investment Manager: 1.0 per cent. on NAV up to £250 million, 0.9 per cent. on NAV from £250 million to £500 million, 0.8 per cent. on NAV from £500 million to £1 billion and 0.7 per cent. on NAV above £1 billion. No performance, acquisition, exit or property management fees. 25 per cent. of total fees per annum (net of any applicable tax) payable in Ordinary Shares.
Seed Portfolio and identified pipeline of over £200 million of predominantly off-market investment opportunities
- The Group has agreed to acquire, subject to Admission, a seed portfolio of five Supported Housing assets from Pantechnicon Capital Limited, a company within the Triple Point Group, at a purchase price of £17.9 million, equal to a 6 per cent. Net Initial Yield.
- The Seed Portfolio properties are located predominantly in and around town and city centres in the Midlands and the North of England and are leased to Inclusion Housing CIC as Approved Provider for an initial term of 20 years, extendable to up to 60 years.
- The Seed Portfolio has been independently valued at £18.46 million by Jones Lang LaSalle.
- The Delegated Investment Manager has identified a significant number of assets, primarily off-market, which it believes meets the requirements of the Company’s Investment Objective and Investment Policy. The Delegated Investment Manager is conducting discussions with potential vendors for the Group to acquire or develop an additional £200 million of assets.
- The Delegated Investment Manager will target operating assets and forward funded opportunities but will not undertake any direct development or speculative development.
- The Company aims to deploy funds raised within nine months of Admission.
|Placing and Offer for Subscription||2017|
|Latest time and date for receipt of completed Application Forms and payment in full under the Offer of Subscription||11.00 a.m. on 3 August|
|Latest time and date for receipt of placing commitments under the Placing||3.00 p.m. on 3 August|
|Other key dates|
|Results of the Issue announced||7.00 a.m. on 4 August|
|Admission and crediting of CREST accounts in respect of the Issue||8.00 a.m. on 8 August|
|Share certificates dispatched in respect of the Issue||week commencing 14 August or as soon as possible thereafter|