Fitch Ratings has affirmed Triple Point Social Housing REIT Plc's (Triple Point) Long-Term Issuer Default Rating (IDR) at 'A-' with a Stable Outlook and its senior secured rating at 'A'.

The ratings reflect Triple Point's all-UK property portfolio of specialised supported housing (SSH) for special-needs tenants, which generate indirect state-sourced rental income. The leases with registered providers (RPs) provide stable rents with full repairing and insuring (FRI) lease terms, inflation-linked increases and void risks covered by RPs and care providers.

Fitch views two of Triple Point's RPs, who are not paying their full rents due, even though housing benefit continues to be paid to the RPs, as creating additional financial risk. Further examples of RPs providing this type of disruption to Triple Point's rental income would not be consistent with existing ratings. With a financial policy of a maximum gross loan-to-value (LTV) of 40% and no significant investments in the pipeline, Fitch expects Triple Point's net debt/EBITDA to remain under 8.5x and its EBITDA interest coverage to be about 4.0x.

Key Rating Drivers

Stable State-Sourced Rental Income: Triple Point does not receive state funding but benefits from state-sourced rental income (housing benefit) routed through RPs who lease SSH properties from Triple Point. Local authorities pay housing benefits (representing RP lease rent, service charges and maintenance cost) on behalf of SSH tenants to RPs. Subject to certain criteria, including acuity of care needs, SSH is deemed 'exempt' accommodation, which is exempt from general needs social housing rental caps. Rents for Triple Point's SSH accommodation are typically pre-agreed with local authority commissioners.

Long-Term Demand in SSH: Local authorities have the statutory obligation to house and care for special-needs tenants. Third-party studies have shown that SSH provided in the community is better and more economical than institutional alternatives or in-patient hospital placements. State funding for SSH limits the provision of services and oversupply of SSH.

Favourable Lease Structures: At end-2022, Triple Point's weighted average unexpired lease length was 25.3 years and about 78% of its rental income in 2022 were from leases over 20 years. Aside from this contractual longevity, the long-dated lease reflects the specialist nature of SSH properties, the likelihood of long tenure, and the long-term purpose of this accommodation. Triple Point's leases are FRI leases and linked to inflation indices, thus providing stable and increasing rental income. RPs and care providers are responsible for void risk.

Minimal Impact from Lease Changes: Fitch does not expect Triple Point's proposed lease changes to materially alter its business profile or financial obligations. These changes seek to address the Regulator of Social Housing's (RSH) criticism of some SSH-focused RPs' operational inflexibility should a change in government policy affect their ability to pay lease rent due.

A deed of variation is being rolled out to Triple Point's existing leases to include 'risk-sharing clauses'. This will provide an avenue for RPs and Triple Point to negotiate rents if there is a change in demand from local authorities or amendments in regulations affecting the way SSH rents are set. Fitch believes that a significant change in housing benefit mechanisms is unlikely.

Ongoing Regulator Concerns: Some of Triple Point's RPs have regulatory judgements from the RSH and account for about 78% of its 2022 rental income. These regulatory judgements, some in place since 2019, highlight the regulator's concerns over these entities' governance and financial viability, particularly since SSH RPs generate thin profit margins and incur maintenance costs. Many of these RPs have since professionalised their boards and improved their systems and profitability.

The RSH regulatory judgements do not impede the RPs' ability to receive housing benefit or pay rents to Triple Point. However, to date, the RSH has been slow in reviewing its previous judgements and acknowledging the improvements subsequently made. We believe that Triple Point's ability to reassign a lease to another RP partly mitigates the risk of an RP failure, although the potential rental loss or associated administrative costs may not always be fully recovered.

Rent Arrears Not Detrimental: Triple Point has concentration in its RP exposure with the largest RP and top five RPs representing 29.8% and 64.0% of 2022 rent roll, respectively. Rent arrears in 2022 amounted to 8.2% of its rental income, due to two RPs, My Space Housing Solutions and Parasol Homes Limited. These entities have been paying part of their rent to Triple Point and are in the process of negotiating a repayment scheme. The rent arrears did not affect Triple Point's 2022 leverage metrics and we believe that Triple Point may transfer these leases to other RPs. If a lease transfer takes place, it is unclear whether it would result in rents being re-set (lowered), or if previous rent arrears would be paid in full.

Slowdown in Development Spend/Capex: Triple Point typically acquires completed buildings with nominated tenants with care services in place, or provide forward funding when the property is pre-let. It funds its acquisitions with a mix of debt and equity and has a policy of a maximum LTV of up to 40%. Fitch expects Triple Point to maintain its net debt/EBITDA at below 8.5x, its portfolio LTV around 40%, and its EBITDA interest coverage at about 4.0x.

Neutral Effect from Asset Disposals: Triple Point is planning to dispose of a portfolio of assets and may consider using some of the disposal proceeds for share buybacks and early debt repayments. Due to the latter, we expect the impact on Triple Point's net debt/EBITDA to be neutral. Significant asset disposals without equally meaningful debt reduction may warrant a negative rating action. One of the reasons for the planned disposal is to achieve a sale price that is supportive of Triple Point's net asset value (NAV).

Derivation Summary

Triple Point, like Civitas Social Housing Plc (A-/Stable, also a UK SSH provider) and Assura Plc (A-/Stable, UK GP surgeries), is a commercial for-profit private-sector REIT, and is therefore not rated under Fitch's 'Government-Related Entities Rating Criteria' (September 2020), with no rating uplift for government support.

Similar to Civitas, Assura, Annington Limited (BBB/Negative, UK Ministry of Defence (MoD) housing), Triple Point indirectly receives most of its rental income from the state - and in its case, mainly through housing benefit. Like its UK peers, it has an identifiable rental component of pass-through income from its tenants, typically agreed with state authorities at the time of commissioning the long-term asset. This leaves Triple Point with a weighted-average lease length of 25.3 years at end-2022 with SSH RPs, Civitas 22.7 years with SSH RPs, Assura 11.8 years with GP NHS partnerships, and Annington much longer with a MoD covenant.

If the immediate lessee of Assura, or an RP of Triple Point or Civitas were to fail, Fitch believes that income would continue to be received, as the income profile has typically been agreed with government entities, the local niche assets remain necessity-based and, for the latter two entities, the sitting tenant needs ongoing specialist care and housing. In both cases the government or municipality would not want these investments capitalised on its balance sheet.

For the UK entities, maintenance risk remains with the lease counterparty. Whereas Assura has void risk, Triple Point, Civitas and Annington do not.

The 'A' rating category is appropriate for Assura, Civitas and Triple Point, which operate with low thresholds for financial leverage as REITs. The latter two entities' similar assets have a net income yield (NIY) of around 5.5%, which, after operating expenditure, results in an EBITDA/investment property yield of around 4%. Both have similar management investment agreement fee structures.

Unlike UK housing associations, Fitch does not rate Triple Point under its 'Public Sector, Revenue-Supported Criteria' (April 2023) as it operates as a for-profit private-sector entity and is not regulated by the RSH.

The Standalone Credit Profile (SCP) of a traditional asset-backed UK RP, which has a 'Stronger' assessment for revenue defensibility, operating risk, financial profile, and with 8x net debt/EBITDA, may be rated towards the upper end of the 'a' rating category, prior to government-support assessment.

Triple Point has a lower non-state-supported credit profile than housing associations as it does not have access to capital grants from Homes England (or the inherent recycling of capital grants through asset disposals), nor can it sell its assets significantly above book value (assets held by RPs are at depreciated cost, and given their non-specific nature they can be disposed of at market value often at least at double the book value) and therefore operates in a different ecosystem to asset-backed RPs, which allow for different rating assessments.

RPs and Triple Point benefit from stable CPI- or RPI-linked rents from necessity-based housing assets, with Triple Point having a higher percentage of housing benefit receipts. RPs assume void risk. LTV ratios are difficult to compare as RPs do not revalue their housing stock. To continue to expand its portfolio and retain its equity-weighted capital structure, Triple Point relies on periodic equity issuance, whereas to some extent, RPs churn their portfolios.

Key Assumptions

Fitch's Key Assumptions Within Our Rating Case for the Issuer:

Inflation-indexed rents to increase 5%, 3% and 2.5% in 2024, 2025 and 2026, respectively, in line with Fitch's Global Economic Outlook published in June 2023

Further rental loss in 2023 due to rent arrears from two RPs

Investment management fee of around 1.2% - 1.4% of NAV

Asset disposal to conclude in 2023 with proceeds used to repay debt and undertake further share buybacks

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

The current rating is capped by Triple Point's overall risk profile, including target LTV and sector ecosystem

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

Net debt/EBITDA above 9.0x on a sustained basis

Significant financial losses resulting from poorly managed SSH RPs

EBITDA net interest cover below 2.0x

Consolidated LTV above management's 40% target

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

Sufficient Liquidity: Triple Point had GBP30 million of readily available cash at end-2022 and no near-term debt repayments as its next debt maturity is in 2028. All debt is at fixed interest rates. Additionally, Triple Point has minimal capital commitments. Proceeds from its proposed disposal of assets may be used to fund share buybacks and early debt repayment.

Triple Point does not have a revolving credit facility for liquidity purposes. Cash is regularly upstreamed from secured debt-financed property-owning vehicles to the parent entity.

Secured Debt Rating Uplift: Triple Point's secured debt rating has a one-notch uplift from its IDR. All of Triple Point's debt is secured in two separate ring-fenced financings, each with its own asset pool and financial covenants. Each SPV upstreams its post-interest cash surpluses to the parent company on a quarterly basis and the parent can then downstream cash to any of the SPVs to resolve any breach in the LTV, asset cover or interest cover covenants.

Issuer Profile

Triple Point is a private-sector provider of bespoke SSH for special-needs tenants. The listed REIT had an investment portfolio totalling GBP669.1 million at end-2022 with 497 properties (3,456 units) spread across the UK.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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