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 senior secured rating at 'A'.

The ratings reflect Triple Point's property portfolio of specialised supported housing (SSH) for special-needs tenants. Its assets are supported by long-term contractual terms directly with registered providers (RPs) that lease the properties from Triple Point, and by rents indirectly paid by the government in the form of housing benefit.

With equity funding raised historically and a policy of maximum gross loan-to-value (LTV) at 40%, Fitch expects Triple Point's net debt/EBITDA to remain under 9.0x with interest cover of 3.5x-4.5x under Fitch's rating case of rising interest rates.

Key Rating Drivers

Long-Term SSH Demand: Triple Point provides SSH for special-needs tenants whose local authorities have a legal duty to house and care for them. Third-party studies have shown that this type of SSH, provided in the community, is better and more economical than remote institutional alternatives or inpatient NHS hospital placements. Rents for Triple Point's SSH accommodation are typically pre-agreed with local authority commissioners. Registered care providers have long-term contracts with regulated housing associations/RPs who lease properties from Triple Point. State procurement and funding for SSH limits the provision of services and possibility of over-supply.

State-Sourced Rental Income: Triple Point, as the property owner and not the care provider, does not receive any public funds for the provision of care. But it indirectly receives its portion of the state-funded housing benefit routed through the RP. On behalf of the SSH tenants, state entities pay housing benefit (representing RP lease rent, service charges and maintenance costs) and separately other costs for care services including the care provider's fees and void costs.

Stability from Lease Structure: At end-March 2022 Triple Point's weighted average lease length was 26.2 years. Over 90% of its rental income in 2021 was derived from leases over 20 years, reflecting the specialist nature of this type of properties, the high acuity of care required and the long-term purpose of these properties. The RP and care provider are responsible for any void risk.

Limited Impact from Lease Changes: Recent amendments to Triple Point's investment policy allow the REIT to enter into new shorter-term leases, assume some maintenance costs, and to index rents to inflation or housing benefit changes. Fitch does not expect these changes would materially alter Triple Point's business profile or financial obligations.

Counterparty Exposures to RPs: Triple Point has 24 RPs in its portfolio, with some concentration in the largest RP at 29.9% of 2021 income. Regulatory judgments from the Regulator of Social Housing (RSH) have raised governance and financial viability issues with certain RPs (representing around 80% of its rent roll). Fitch believes Triple Point's ability to re-assign a lease to another RP can largely address the risk of RP failure, although the potential rental loss or associated administrative costs may not always be recovered fully or in a timely manner. Lease re-assignments are a preferable outcome as they ensure the least disruption to the individuals living in the properties.

In early 2018 when the RP Westmoreland was in financial distress, Triple Point pro-actively transferred the entity's leases to another RP, Inclusion Housing CIC, with no reduction in these leases' rent.

RSH's Regulatory Judgements: RSH's judgements, some in place since 2019, showed that some RPs' boards would benefit from greater professional expertise and better systems to quantify and manage assumed risks. Many entities have since changed their boards, their reporting, and improved their profitability.

Furthermore, unlike other RPs that own their housing stock, SSH RPs operate under lease-based models that have tighter margins between rents and costs such as maintenance and voids, and CPI risk over long-term leases. Reflecting the regulator's concern in its judgements, most of Triple Point's leases have lease negotiation mechanisms in place should there be a change in government policy to housing benefit's exempt rent, even though such a change is not expected.

Equity-Funded Structure: Triple Point typically acquires completed buildings with nominated tenants with care services in place, or provides forward funding when the property is pre-let. It funds its acquisitions with a mix of equity and debt, and has a policy of a maximum LTV of up to 40%. At 40% LTV (gross debt basis), the equivalent net debt/EBITDA is about 8.5x. Triple Point has raised equity of GBP153 million (2018) and GBP55 million (2020). Access to equity depends on market conditions, but Triple Point does not have any near-term capital commitment to meet should the market not be conducive for equity issuance.

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 forms of government support.

Like Civitas, Assura, Annington Limited (BBB/Stable, UK Ministry of Defence (MoD) housing) and SBB - Samhallsbyggnadsbolaget i Norden AB (BBB-/Positive, including Nordic community service buildings), 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 26.2 years at end-March 2022 with SSH RPs, Assura 11.9 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 and, in SBB's case too, the government or municipality does 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 (end-2020: 1.6%), Triple Point, Civitas and Annington do not.

The 'A' rating category is appropriate for Assura, Civitas and Triple Point who operate with low thresholds for financial leverage as REITs. The latter two entities' similar assets have an NIY of around 5.2%, which, after operating expenditure, results in an EBITDA/investment property yield of 4.3% and 4.1%, respectively - both having similar management investment agreement fee structures. Triple Point's cost base should improve with economies of scale.

Unlike UK housing associations, Fitch does not rate Triple Point under its IPF Revenue-Supported Criteria as it operates as a for-dividend 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 (which although diminishing in usage, currently average around GBP55,000 per property, 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 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 rise by 3% per year to 2025 despite 2022's higher rent rise

Investment management agreement fee continues at around 1% of balance sheet net asset value such that EBITDA/investment property improves to 4.4% by 2025 from 4% in 2020/2021

Property acquisition spend of GBP35 million in 2022, followed by GBP100 million a year to 2025, with a rent yield on cost of 5.5%. This increases the portfolio to over GBP1 billion by end-2025 from GBP0.6 billion in 2021

Periodic equity raises consistent with the REIT's policy of maximum 40% LTV

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Fitch believes that the current rating is capped by Triple Point's overall risk profile, including target LTV and the 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 target 40%

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

Comfortable Liquidity: Triple Point had readily available cash (excluding reserved cash for six-months debt service for its first segregated secured financing and other small restricted cash) of about GBP52 million at end-2021. The REIT does not have any debt maturing in 2022 or 2023 and the earliest maturity of its secured non-amortising private placements is in 2028. Triple Point currently has an undrawn GBP50 million facility, which would mature in December 2023 with a one-year extension option.

Secured Rating: Triple Point's secured rating is one notch above the IDR. All of Triple Point's debt is secured and are in three segregated secured financings, each with their own asset pools broadly representative of the group's profile. Each segregated financing receives its rents, and after paying its periodic interest expenses and retaining cash for six months of debt service, the remaining cash is up-streamed to the debt-free parent whose main obligation is the dividend. This cash can be down-streamed to a special-purpose vehicle for its liquidity or any LTV covenant cure, if needed.

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

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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