THIS ANNOUNCEMENT HAS BEEN DETERMINED TO CONTAIN INSIDE INFORMATION FOR THE PURPOSES OF THE MARKET ABUSE REGULATION (EU) NO. 596/2014.
25 March 2022
Triple Point Social Housing REIT plc
(the "Company" or, together with its subsidiaries, the "Group")
RESULTS FOR THE YEAR ENDED 31 DECEMBER 2021
The Board of Triple Point Social Housing REIT plc (ticker: SOHO) is pleased to announce its audited results for the year ended 31 December 2021.
| | 31 December 2021 | 31 December 2020 |
| | | |
| EPRA Net Tangible Assets per share (equal to IFRS NAV per share) | 108.27p | 106.42p |
| Earnings per share (basic and diluted) - IFRS basis - EPRA basis
|
7.05p 4.82p |
6.82p 4.61p |
| Total annualised rental income | £35.8m | £31.6m |
| Value of the portfolio - IFRS basis - Portfolio valuation basis
|
£642.0m £692.0m |
£571.5m £611.6m |
| Weighted average unexpired lease term | 26.2 yrs | 26.2 yrs |
| Dividend paid or declared per Ordinary Share | 5.20p | 5.18p |
Financial highlights
· EPRA Net Tangible Assets (equal to IFRS net asset value) per share of 108.27 pence as at 31 December 2021 (2020: 106.42 pence), an increase of 1.7%.
· Portfolio independently valued as at 31 December 2021 at £642.0 million on an IFRS basis (2020: £571.5 million), reflecting a valuation uplift of 8.7% against total invested funds of £590.4 million1. The properties have been valued on an individual basis.
· The portfolio's total annualised rental income was £35.8 million as at 31 December 2021 (2020: £31.6 million).
· Operating profit for the year ended 31 December 2021 was £35.2 million (2020: £30.2 million).
· Ongoing Charges Ratio of 1.54% as at 31 December 2021 (2020: 1.57%).
· The Company has paid dividends totalling 5.20 pence per Ordinary Share in respect of the year ended 31 December 2021, in line with the Company's target for the year. The dividend was 0.99x covered on an EPRA earnings run-rate basis as at 31 December 2021.
· In August 2021, the Group refinanced all of its £130.0m of drawn floating-rate debt and put in place £195.0 million of long dated, fixed rate, interest only sustainability-linked loan notes through a private placement with MetLife Investment Management clients and Barings. The Company was assigned an Investment Grade Long-Term Issuer Default Rating of 'A-' with a stable outlook, and a senior secured rating of 'A' for the new loan notes.
Operational highlights
· Acquired 44 properties (345 units) during the year for a total of £60.0 million (including costs) bringing the total investment portfolio to 488 properties.
· IFRS blended net initial yield of 5.25% based on the value of the portfolio on an IFRS basis as at 31 December 2021, against the portfolio's blended net initial yield on purchase of 5.90%.
· Further diversified the portfolio:
o 11 regions
o 156 local authorities
o 382 leases
o 24 Approved Providers
o 114 care providers
· As at 31 December 2021, the weighted average unexpired lease term ("WAULT") was 26.2 years.
· 100% of contracted rental income was either CPI or RPI linked.
Post Balance Sheet Activity
· The Company declared a dividend of 1.30 pence per ordinary share in respect of the period from 1 October to 31 December 2021, payable on or around 25 March 2022 to shareholders on the register on 11 March 2022.
· The Company acquired a further eight properties comprising 57 units in total for an aggregate consideration of approximately £10.0 million (including costs).
· On 8 March 2022, the Company announced that it had undertaken a consultation with a number of shareholders regarding a proposed change to the Company's investment policy. Having also been subject to a successful review by the Financial Conduct Authority, the proposed amendments to the investment policy will be put to a shareholder vote at the upcoming Annual General Meeting.
Notes:
1 Including acquisition costs
Chris Phillips, Chair of Triple Point Social Housing REIT plc, commented:
"If the pandemic has taught us anything it is that the intersections of health, economic and societal factors are more profound than ever. We cannot tackle these issues alone, but we can be a responsible participator in the wider system. By delivering on our investment strategy we seek to make a positive contribution to society while delivering sustainable financial returns for our shareholders."
FOR FURTHER INFORMATION ON THE COMPANY, PLEASE CONTACT:
| Triple Point Investment Management LLP (Investment Manager) | Tel: 020 7201 8989 |
| Max Shenkman | |
| Isobel Gunn-Brown | |
| | |
| Akur Capital (Financial Adviser) | Tel: 020 7493 3631 |
| Tom Frost | |
| Anthony Richardson | |
| Siobhan Sergeant | |
| | |
| Stifel (Joint Financial Adviser and Corporate Broker) | Tel: 020 7710 7600 |
| Mark Young | |
| Mark Bloomfield | |
| Rajpal Padam | |
The Company's LEI is 213800BERVBS2HFTBC58.
Further information on the Company can be found on its website at www.triplepointreit.com.
NOTES:
The Company invests in primarily newly developed social housing assets in the UK, with a particular focus on supported housing. The assets within the portfolio are subject to inflation-linked, long-term (typically from 20 years to 30 years), Fully Repairing and Insuring ("FRI") leases with Approved Providers (being Housing Associations, Local Authorities or other regulated organisations in receipt of direct payment from local government). The portfolio comprises investments into properties which are already subject to an FRI lease with an Approved Provider, as well as forward funding of pre-let developments but does not include any direct development or speculative development.
There is increasing political pressure and social need to increase housing supply across the UK which is creating opportunities for private sector investors to help deliver this housing. The Group's ability to provide forward funding for new developments not only enables the Company to secure fit for purpose, modern assets for its portfolio but also addresses the chronic undersupply of suitable supported housing properties in the UK at sustainable rents as well as delivering returns to investors.
The Company was admitted to trading on the Specialist Fund Segment of the Main Market of the London Stock Exchange on 8 August 2017 and was admitted to the premium segment of the Official List of the Financial Conduct Authority and migrated to trading on the premium segment of the Main Market on 27 March 2018. The Company operates as a UK Real Estate Investment Trust ("REIT") and is a constituent of the FTSE EPRA/NAREIT index.
CHAIR'S STATEMENT
Introduction
We entered 2021 with cautious optimism. While the challenges of the pandemic were still being laid bare on the centre stage, the global economic outlook was brightening. Countries across the world began vaccinating their citizens, lockdowns came to an end in the spring and as a global community, we embarked on a journey of learning to live with Covid-19. Despite the numerous challenges that the virus continued to pose to all of our stakeholders, this year was different.
We tackled 2021 armed with experience, knowledge and collective resilience. First and foremost we would like to recognise the work of our housing and care provider partners who continued to ensure the safety and wellbeing of our residents throughout a prolonged lockdown; during times when social distancing, restrictions, and staffing shortages posed significant challenges. On our part we aimed to ensure that our Approved Providers and care providers were supported, where possible helping them continue to operate effectively and to ensure minimal disruption. We continued to collaborate with local authorities and Commissioners to ensure referrals to our properties were made as efficiently and, most importantly, as safely as possible.
As I wrote to you this time last year I reported that despite all of its challenges, 2020 had been another year of strong performance for us. I am pleased to tell you that 2021 was more of the same. It has been another year where we have met our dividend targets and another year in which we continued to execute our investment strategy, working with our partners to provide homes to some of the most vulnerable members of society. Continuing to build upon our proven track record is something we strive for, but not something we take for granted. Each and every one of our stakeholders plays a vital role in allowing us to deliver our investment strategy and without them I would not be able to write to you today to report on this continued strong performance.
In December, the Department of Health & Social Care published its White Paper on Adult Social Care Reform "People at the Heart of Care"1. The paper highlighted the important role that wider Supported Housing plays, and must continue to play in delivering better resident outcomes within our social care system. Demand for social care continues to grow year on year. Estimates predict that at least 1.7 million more adults will require social care over the next 15 years. Recent analysis found that among those aged 18-64, requests for support rose from 500,000 in 2015-16 to 560,000 in 2019-202. There are more than 650,000 supported homes in the UK, of which approximately a quarter are specialised Supported Housing. The UK is lagging behind its peers in supporting people to live in Supported Housing generally. The United States, New Zealand and Australia each provide over 5% of their total populations with Supported Housing, compared with the UK's 0.6%3.
Over 10 years on from the Winterbourne View scandal, reports continue to come to light of vulnerable people remaining in inappropriate and expensive institutional care settings4. These reports continue to highlight not only the urgent need for more specialised Supported Housing to be provided throughout the UK, but for greater awareness of the benefits this type of accommodation has for residents, as well as their families and wider communities. Since our IPO in 2017, we have provided 3,424 new units of accommodation. Our properties provide value for money for the UK tax-payer when compared with traditional institutional care settings which cost the Government as much as £3,500 per resident, per week. This is compared with specialised Supported Housing which costs the Government on average £1,569 per resident, per week5.
Growing demand inevitably puts pressure on the wider social care delivery system as well as families and communities. I welcome the Government's acknowledgement in the Adult Social Care White Paper that as a country we must increase the supply of Supported Housing and that private capital, exactly such as ours, is vital to meeting this goal alongside our public sector partners.
As I remarked earlier in my statement, we are committed to continually applying what we have learnt as a Company on our journey so far. We learn every day, from listening to the needs of Commissioners, local authorities, our Approved Providers, care providers, residents and shareholders. Our investment strategy is predicated on doing good by doing well.
Environmental considerations have been at the forefront of our minds this year, brought further into focus as nations around the world gathered in Glasgow for the COP 26 summit. Over 72% of our portfolio already meets the Government's target Energy Performance Certificate ("EPC") level of 'C' but we know we can and must do more. In September we announced the launch of an ambitious initiative to fund the upgrade of all remaining properties within our portfolio to a minimum EPC rating of 'C' over the next few years.
The Investment Manager will provide a more detailed overview of our business and performance this year in its report. In the meantime, I have summarised some highlights from both our financial performance and our social impact performance before finishing with a reflection on the outlook for our business.
Social Impact
Social Impact is engrained in our decision making processes and is central to our business model. This set of results demonstrates our conviction that financial performance and social impact are mutually reinforcing. The independent Impact Report prepared by The Good Economy this year incorporates a new and enhanced monetisation methodology. This new methodology verifies that our properties have delivered £2.74 of Total Social Value for every £1.00 invested in the year to 31 December 2021. You can read more on the social value and impact that our properties create in the Impact Report prepared by the Good Economy, available separately on our website.
Each property we acquire is assessed to ensure it meets our ESG standards, providing value-for-money to local authorities, enhances resident outcomes and delivers a positive overall social impact. Integration of ESG standards at the core of our diligence processes means that we identify ESG risks early in the acquisition process, giving us an opportunity to engage on these issues early along with our stakeholders.
As focus has grown on social impact investing so too has the framework around it. We were early adopters of the Sustainability Reporting Standard for Social Housing (a metric we monitor our Approved Providers against) and we are a member of the Equity Impact Project. We were also a participant of the Green Lease Working Group for the Green Finance Institute. We look forward to continuing to contribute to these projects and to helping to shape the sector's impact framework along with other market stakeholders in the years to come.
Financial performance
During the year, we invested £60.0 million on in acquiring 44 new properties providing 345 new homes. Our acquisitions during the year were all in line with the existing portfolio's net initial yield. Covid-19 restrictions caused delays at times, but we worked with Commissioners and our Approved Providers to ensure residents were able to move in safely and as quickly as possible.
The final two of our 22 forward funding projects successfully completed this year. Since IPO, we have invested £53.7 million in total in these types of construction projects, which have provided 318 new, high quality and much needed homes in community settings for our residents. The numerous obstacles caused by Covid-19 and the associated lockdowns have caused delays on some of these developments, however, these have not come at a material financial cost to our shareholders. We hope to commence work on new forward funding projects over the course of 2022 as local authorities continue to signal demand for more of these long-term homes for people with care and support needs.
Since IPO, we have delivered cumulative total returns of approximately 31.1% representing an annualised return of 7.07% per annum.
Our acquisitions during the year were funded from existing cash and debt balances. We were delighted with the outcome of the debt refinancing reported earlier in the year which enabled us to put in place a new long-term debt facility, which locks in competitive interest rates for 10 to 15 years at a time of rising inflation. The refinancing also provided £65.0 million of further capital for investment into new specialised Supported Housing homes.
We were pleased to report that, as part of the refinancing, the Group received an Investment Grade Issuer Default Rating from Fitch of 'A-' (Stable Outlook) with a senior secured rating of 'A'. This is a positive endorsement of both the Group's investment thesis and the sector, that enabled the Group to pursue a broader strategy in relation to debt financing. The Group's new long-term, attractively priced, fixed-rate loan notes are reflective of this.
At the year end:
• we owned 488 properties, comprising 3,424 units, having cumulatively deployed £590.4 million since IPO;
• we had 24 Approved Providers, and a portfolio weighted average unexpired lease term of 26.2 years; and
• the portfolio was valued at £642.0 million on an IFRS basis, 8.7% above our total investment cost and reflecting an EPRA NIY of 5.20%.
I am pleased to continue to report this year that we have paid all target dividends in full as we have done since inception. Following continued deployment, at 31 December 2021 our dividend cover on a look through EPRA run-rate basis was 0.99x. We expect to announce our dividend target for 2022 in May as we have done in previous years.
Our EPRA earnings per share was 4.82 pence in the year (adjusted EPRA earnings on a cash basis was 5.14 pence) while IFRS earnings per share was 7.05 pence. Finally, the EPRA NTA and audited IFRS NAV per share was 108.27 pence, an increase of 1.7% since 31 December 2020.
All in all, we are proud of another set of strong financial results which builds on our performance to date.
Proposed amendments to the Group's Investment Policy
Today, alongside announcing our results, we have also published in our Notice of Annual General Meeting (AGM) and circular proposed changes to the Company's investment policy and investment restrictions.
The Company was one of the first listed investment trusts to invest equity directly into specialised Supported Housing in 2017. During that time, the sector has evolved, and as a responsible investor, we have moved forward alongside it. We have developed our leases to reflect the collective learnings of the sector and maximise their effectiveness. In 2019, we introduced a change in law clause into our new leases which facilitated proportionate risk sharing with Approved Providers if there was to be a material future change in housing benefit policy. We have also consistently increased the reporting onus on our Approved Providers, strengthened the Group's right to assign leases if an Approved Provider is underperforming and introduced "green" lease provisions. Collectively these changes have helped ensure that the Group's investments generate stable and sustainable financial returns for investors and deliver social impact.
The Company operates in a regulated sector and the Investment Manager maintains an ongoing dialogue with the Regulator of Social Housing alongside our Approved Providers. The Regulator has publicly commented on the risks associated with leases in the specialised Supported Housing sector. Increasingly, Approved Providers are looking to evolve the terms of the leases they enter into going forward, in part, to address the observations made by the Regulator. Simultaneously, over the last six months the Investment Manager has seen an increasing prevalence of new lease structures in the sector and the endorsement of those new lease structures by other investors.
The Company is proposing to change its investment policy and investment restrictions at this time to ensure it has the requisite flexibility to continue to be at the forefront of this evolving sector, allow our Approved Providers to accommodate points raised by the Regulator, and thereby remain an attractive partner.
Full details of the proposed changes are outlined in full in the Notice of AGM and, in summary, focus on:
· Removing the Company's minimum lease term restriction.
· Allowing the Company to selectively take on the cost of funding planned maintenance.
· Giving the Company the ability to enter into leases which are subject to upward only adjustments, tracking either inflation or central housing benefit policy.
Our mission remains clear. We remain determined to deploy our capital into good quality homes, leased to the best quality Approved Providers in the sector. These changes will enable us to do just that.
In formulating these changes the Company has carefully considered the impact that implementing them will have on its performance, income and capital return targets going forward. An initial pipeline of opportunities in excess of £15 million has been identified which incorporate lease terms compatible with the proposed changes. These opportunities are consistent with the Group's income and capital return targets and will be supported by formal valuation advice from the Group's independent valuer, JLL.
A resolution will be proposed at the Company's 2022 Annual General Meeting to approve these changes. If passed by shareholders, we will, as ever, be focused on the quality of our assets, the duration of our revenue streams and ensuring the Company continues to build on its success to date.
Outlook
If the pandemic has taught us anything it is that the intersections of health, economic and societal factors are more profound than ever. We cannot tackle these issues alone, but we can be a responsible participator in the wider system. By delivering on our investment strategy we seek to make a positive contribution to society while delivering sustainable financial returns for our shareholders.
I look forward to engaging with our shareholders in the weeks to come on the proposed changes to the investment policy and investment restrictions as we embark upon an exciting new chapter of continued growth for the Group in 2022.
Sadly, I cannot end without mentioning the deeply upsetting and ongoing situation in Ukraine. The Company is fortunate that its investment strategy is resilient and not directly impacted by the current conflict, however, the impending refugee and humanitarian crisis cannot escape our minds. We would like to take this opportunity to offer any support which we can to the wider sector in the coming months as the human impact of the conflict takes its toll.
I would like to thank all our advisers, and the Investment Manager, for their continued hard work and dedication to our investment strategy. Our corporate broker and joint financial adviser, Stifel Nicolaus Europe Limited, and our joint financial adviser, Akur Limited, as always have provided valuable and high-quality advice during the year. Alongside the Investment Manager, they have been instrumental in designing ways for the Group to continue to build upon its success so far and helping us to navigate plans for the Group's growth as I have announced today.
Finally, I would like to thank our shareholders for their continued support, as well as my fellow Board members for their ongoing commitment and assistance this year.
Chris Phillips
Chair
24 March 2022
Notes:
1 https://www.gov.uk/government/publications/people-at-the-heart-of-care-adult-social-care-reform-white-paper/people-at-the-heart-of-care-adult-social-care-reform
2 Centre for Workforce Intelligence (2011). Report. The Adult Social Care Workforce in England: Key facts
3 White Paper: "People at the Heart of Care"
4 https://www.bbc.co.uk/news/uk-england-59733934
5 https://www.mencap.org.uk/sites/default/files/2018-04/2018.052%20Housing%20report_FINAL_WEB.pdf
STRATEGY AND BUSINESS MODEL
The Board is responsible for the Group's investment objective and investment policy and has overall responsibility for ensuring the Group's activities are in line with such overall strategy. The Group's investment policy and investment objective are published below.
As noted in the Chair's statement, the Company is proposing a resolution at the upcoming AGM in respect of a change to its investment policy and investment restrictions. Further details can be found in the Notice of Meeting and combined circular. A copy of the Group's existing investment policy is set out below.
Investment Objective
The Group's investment objective is to provide shareholders with stable, long-term, inflation-linked income from a portfolio of social housing assets in the United Kingdom with a focus on Supported Housing assets. The portfolio comprises investments in operating assets and the forward funding of pre-let development assets, the Company seeks to optimise the mix of these assets to enable it to pay a covered dividend increasing in line with inflation and so generate an attractive risk-adjusted total return.
Investment Policy
To achieve its investment objective, the Group invests in a diversified portfolio of freehold or long leasehold social housing assets in the UK. Supported Housing assets account for at least 80% of the Group's gross asset value. The Group acquires portfolios of social housing assets and single social housing assets, either directly or via SPVs. Each asset is subject to a lease or occupancy agreement with an Approved Provider for terms primarily ranging from 20 years to 30 years, with the rent payable thereunder subject to adjustment in line with inflation (generally CPI). Title to the assets remains with the Group under the terms of the relevant lease. The Group is not responsible for any management or maintenance obligations under the terms of the lease or occupancy agreement, all of which are serviced by the Approved Provider lessee. The Group is not responsible for the provision of care to residents of Supported Housing assets.
The social housing assets are sourced in the market by the Investment Manager.
The Group intends to hold its portfolio over the long-term, taking advantage of long-term upward-only inflation-linked leases. The Group will not be actively seeking to dispose of any of its assets, although it may sell investments should an opportunity arise that would enhance the value of the Group as a whole.
The Group may forward fund the development of new social housing assets when the 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 in which:
(a) there is an agreement to lease the relevant property upon completion in place with an Approved Provider;
(b) planning permission has been granted in respect of the site; and
(c) 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 before the start of the lease.
For the avoidance of doubt, the Group will not acquire land for speculative development of social housing assets.
In addition, the Group may engage third party contractors to renovate or customise existing social housing assets as necessary.
Gearing
The Group uses gearing to enhance equity returns. The Directors will employ a level of borrowing that they consider prudent for the asset class and will seek to achieve a low cost of funds while maintaining flexibility in the underlying security requirements and the structure of both the Company's portfolio and the Group.
The Directors intend that the Group will target a level of aggregate borrowings over the medium-term equal to approximately 40% of the Group's gross asset value. The aggregate borrowings will always be subject to an absolute maximum, calculated at the time of drawdown, of 50% of the Group's gross asset value.
Debt will typically be secured at the asset level, whether over a particular property or a holding entity for a particular property (or series of properties), without recourse to the Company and having consideration for key metrics including lender diversity, cost of debt, debt type and maturity profiles.
Use of Derivatives
The Group may use derivatives for efficient portfolio management. In particular, the Group may engage in full or partial interest rate hedging or otherwise seek to mitigate the risk of interest rate increases on borrowings incurred in accordance with the Investment Policy as part of the Group's portfolio management. The Group will not enter into derivative transactions for speculative purposes.
Investment Restrictions
The following investment restrictions apply:
· the Group will only invest in social housing assets located in the United Kingdom;
· the Group will only invest in social housing assets where the counterparty to the lease or occupancy agreement is an Approved Provider. Notwithstanding that, the Group may acquire a portfolio consisting predominantly of social housing assets where a small minority of such assets are leased to third parties who are not Approved Providers. The acquisition of such a portfolio will remain within the Investment Policy provided that at least 90% (by value) of the assets are leased to Approved Providers and, in aggregate, all such assets within the Group's total portfolio represent less than 5% of the Group's gross asset value at the time of acquisition;
· at least 80% of the Group's gross asset value will be invested in Supported Housing assets;
· the unexpired term of any lease or occupancy agreement entered into (or in the case of an acquisition of a portfolio of assets, the average unexpired term of such leases or occupancy agreements) shall not be less than 15 years, unless the Investment Manager reasonably expects the term of such shorter lease or occupancy agreement (or in the case of an acquisition of a portfolio of assets, the average term of such leases or occupancy agreements) to be extended to at least 15 years;
· the maximum exposure to any one asset (which, for the avoidance of doubt, will include houses and/or apartment blocks located on a contiguous basis) will not exceed 20% of the Group's gross asset value;
· the maximum exposure to any one Approved Provider will not exceed 30% of the Group's gross asset value, other than in exceptional circumstances for a period not to exceed three months;
· the Group may forward fund social housing units in circumstances where there is an agreement to lease in place and where the Group receives a coupon (or equivalent reduction in the purchase price) on its investment (generally slightly above or equal to the projected income return for the completed asset) during the construction phase and before entry into the lease. Forward funding equity commitments will be restricted to an aggregate value of not more than 20% of the Group's net asset value, calculated at the time of entering into any new forward funding arrangement;
· the Group will not invest in other alternative investment funds or closed-ended investment companies (which, for the avoidance of doubt, does not prohibit the acquisition of SPVs which own individual, or portfolios of, social housing assets);
· the Group will not set itself up as an Approved Provider; and
· the Group will not engage in short selling.
The investment limits detailed above apply at the time of the acquisition of the relevant asset in the portfolio. The Group will not be required to dispose of any investment or to rebalance its portfolio as a result of a change in the respective valuations of its assets or a merger of Approved Providers.
Investment Strategy
The Group specialises in investing in UK social housing, with a focus on Supported Housing. The strategy is underpinned by strong local authority demand for more social housing, which is reflected in the focus on acquiring recently developed and refurbished properties across the United Kingdom. The assets within the portfolio have typically been developed for pre-identified residents and in response to demand specified by local authorities or NHS commissioners. On acquisition, to date, the properties are subject to inflation-adjusted, long-term (typically from 20 years to 30 years), fully repairing and insuring leases with specialist Approved Providers in receipt of direct payment from local government (usually Registered Providers regulated by the Regulator of Social Housing). The existing portfolio comprises investments made into properties already subject to a fully repairing and insuring lease as well as forward funding of pre-let developments. The portfolio will not include any direct development or speculative development investments.
The Group is proposing amendments to its investment policy and investment restrictions, which if approved by shareholders, will enable the Group to enter into more flexible lease structures going forward. These more flexible lease structures may include entering into leases for shorter terms and, in certain cases, the Group may, selectively, take on the cost of funding planned maintenance on some properties.
Business Model
The Group owns and manages social housing properties that are leased to experienced housing managers (typically Registered Providers, which are often referred to as housing associations) through long-term, inflation-linked, fully repairing and insuring leases. The vast majority of the portfolio and future deal pipeline is made up of Supported Housing homes which are residential properties that have been adapted or built such that care and support can easily be provided to vulnerable residents who may have mental health issues, learning difficulties or physical disabilities. We are focused on acquiring specially or recently developed properties in order to help local authorities meet increasing demand for suitable accommodation for vulnerable residents (the drivers of this demand are discussed in the Investment Manager's report) Local authorities are responsible for housing these residents and for the provision of all care and support services that are required.
The Supported Housing properties owned by the Group are leased to Approved Providers which are usually not-for-profit organisations focused on developing, tenanting and maintaining housing assets in the public (and private) sectors. Approved Providers are approved and regulated by the Government through the Regulator of Social Housing (or in rare instances, where the Group contracts with care providers, the Care Quality Commission). The majority of the Group's existing leases with Approved Providers are linked to inflation, have a duration of 20 years or longer, and are fully repairing and insuring - meaning that the obligations for management, repair and maintenance of the property under those leases are passed to the Approved Provider. The Group closely monitors the long term risks to its portfolio, both physical risk, as well as the regulatory risks associated with climate change. In spite of the fact that the majority of the Group's existing leases are fully repairing and insuring, during the year the Group announced its sector-first retrofit programme to fund the upgrade of all properties in the Group to a minimum EPC of 'C' over the next few years. This commitment is a demonstration of the Group's commitment to the long-term continued performance and strength of its portfolio. As mentioned above, the Group has also now proposed amendments to its investment policy and investment restrictions, which if approved by shareholders, will enable the Group to enter into more flexible lease structures going forward. If approved by shareholders, the Group's future pipeline of assets may include opportunities on shorter lease terms and, in a continuation of the Group's commitment to the physical strength of its portfolio, would allow the Group takes on the cost of funding planned maintenance on newly acquired assets in certain circumstances. In each of these opportunities, the Group will ensure that these assets are consistent with its income and capital return targets.
The Approved Provider is also responsible for tenanting the properties. Typically, the Government funds both the rent of the individuals housed in Supported Housing and the maintenance costs associated with managing the property. In addition, because of the vulnerable nature of the residents, the rent and maintenance costs are paid directly from the local authority to the Approved Provider. The rent received from the local authority by the Approved Provider is then paid to the Group via the lease. Ultimate funding for the rent and maintenance comes from the Department for Work and Pensions in the form of housing benefit.
The majority of residents housed in Supported Housing properties require support and/or care. This is typically provided by a separate care provider regulated by the Care Quality Commission. The agreement for the provision of care for the residents is between the local authority and the care provider. The care provider is paid directly by the local authority. Usually the Group has no direct financial or legal relationship with the care provider and the Group never has any responsibility for the provision of care to the residents in properties the Group owns. The care provider will often be responsible for nominating residents into the properties and, as a result, will normally provide some voids cover to the Approved Provider should they not be able to fill the asset (i.e. if occupancy is not 100% it is often the care provider rather than the Approved Provider that will cover the cost). The Group receives full rent regardless of underlying occupancy, but monitors occupancy levels and the payment of voids cover by care providers, to ensure that Approved Providers are appropriately protected.
Many assets that the Investment Manager sources for the Group have been recently developed and are either specifically designed new build properties or renovated existing houses or apartment blocks that have been adapted for Supported Housing. The benefit of buying recently-developed stock is that it has been planned in response to local authority demand and is designed to meet the specific requirements of the intended residents. In addition, it enables the Group to work with a select stable of high-quality developers on pipelines of deals rather than being reliant on acquiring portfolios of already-built assets on the open market. This has two advantages: firstly, it enables the Group to source the majority of its deals off-market through trusted developer partners and, secondly, it ensures the Group has greater certainty over its pipeline with visibility over the long-term deal flow of the developers it works with and knows it will not have to compete with other funders.
As well as acquiring recently developed properties, the Group can provide forward funding to developers of new Supported Housing properties. Being able to provide forward funding gives the Group a competitive advantage over other acquirers of Supported Housing assets as it enables the Group to offer developers a single funding partner for both construction and the acquisition of the completed property. This is often more appealing to developers than having to work with two separate funders during the build of a new property as it reduces practical and relationship complexity. As well as strengthening developer relationships, forward funding enables the Group to have a greater portion of new build properties in its portfolio which typically attract higher valuations, are modern and have been custom-built to meet the needs of the residents they house, helping to achieve higher occupancy levels. The Group benefits from the Investment Manager's long track record of successfully forward funding a range of property and infrastructure assets. The Group will only provide forward funding when the property has been pre-let to an Approved Provider and other protections, such as fixed-priced build contracts and deferred developer profits, have been put in place to mitigate construction risk.
Since the Company's IPO, the Group has set out to build a diversified portfolio that contains assets leased to a variety of Approved Providers, in a range of different counties, and serviced by a number of care providers. This has been possible due to the Investment Manager's 18-year track record of asset-backed investments, its active investment in the Supported Housing sector since 2014, and the strong relationships it has enjoyed with local authorities for over a decade. These relationships have enabled the Group, in a relatively short space of time, to work with numerous Approved Providers, care providers and local authorities to help deliver new Supported Housing assets that provide homes to some of the most vulnerable members of society.
KEY PERFORMANCE INDICATORS
In order to track the Group's progress the following key performance indicators are monitored:
| KPI AND DEFINITION | RELEVANCE TO STRATEGY | PERFORMANCE | EXPLANATION |
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| 1. Dividend | | | |
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| Dividends paid to shareholders and declared during the year.
Further information is set out in Note 27. | The dividend reflects the Company's ability to deliver a low risk but growing income stream from the portfolio. | Total dividends of 5.20 pence per share were paid or declared in respect of the period 1 January 2021 to 31 December 2021.
(2020: 5.18 pence) | The Company has declared a dividend of 1.30 pence per Ordinary share in respect of the period 1 October 2021 to 31 December 2021, which will be paid on 25 March 2022. Total dividends paid and declared for the year are in line with the Company's target. |
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| 2. EPRA Net Tangible Assets (NTA) | | |
| |
| The EPRA NTA is equal to IFRS NAV as there are no deferred tax liabilities or other adjustments applicable to the Group under the REIT regime.
Further information is set out in Note 5 of the Unaudited Performance Measures.
| EPRA NTA measure that assumes entities buy and sell assets, thereby crystallising certain levels of deferred tax liability. | 108.27 pence at 31 December 2021.
(31 December 2020: 106.42 pence) | The EPRA NTA per share at IPO was 98 pence. |
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| 3. Loan to Value (LTV) | | | ||
| A proportion of our portfolio is funded through borrowings. Our medium to long term target LTV is 35% to 40% with a maximum of 50%.
Further information is set out in Note 20. | The Company uses gearing to enhance equity returns. The LTV covenant on the revolving credit facility with Lloyds is < 50%. | 37.6 % LTV at 31 December 2021.
(31 December 2020: 31.5% LTV) | Borrowings comprise two private placements of loan notes totalling £263.5 million provided by MetLife Investment Management and Barings. The £160 million revolving credit facility with Lloyds and NatWest was completely undrawn as at 31 December 2021. Since the year end, the Group cancelled a portion of this facility, such that it has been reduced to £50.0 million. |
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| | | | |
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| 4. EPRA Earnings per Share | | | |
|
| EPRA Earnings per share (EPRA EPS) excludes gains from fair value adjustment on investment property that are included in the IFRS calculation for Earnings per share.
Further information is set out in Note 36. | A measure of a Group's underlying operating results and an indication of the extent to which current dividend payments are supported by earnings. | 4.82 pence per share
(31 December 2020: 4.61 pence) | EPRA EPS increased by 4.53%.
.
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| | | | |
|
| 5. Adjusted Earnings per Share | | |
| |
| Adjusted earnings per share includes adjustments for non-cash items. The calculation is shown in note 36.
| A key measure which reflects actual cash flows supporting dividend payments. | 5.14 pence per share
(31 December 2020: 4.90 pence) | This demonstrates the Group's ability to meet dividend payments from net cash inflows. It represents a dividend cover for the year to 31 December 2021 of 0.99x. |
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| |
| |||
| 6. Weighted Average Unexpired Lease Term (WAULT) | | |
| |
| The average unexpired lease term of the investment portfolio, weighted by annual passing rents.
Further information is set out in the Investment Manager's report. | The WAULT is a key measure of the quality of our portfolio. Long lease terms underpin the security of our income stream. | 26.2 years at 31 December 2021 (includes put and call options).
(31 December 2020: 26.2 years) | As at 31 December 2021, the portfolio's WAULT stood at 26.2 years. |
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| |||
| 7. Adjusted Portfolio Earnings per Share | | |
| |
| The post-tax earnings adjusted for the market portfolio valuation including portfolio premium.
Further information is set out in Note 2 of the Unaudited Performance Measures. | The Adjusted Portfolio EPS reflects the application of using the portfolio value and reflects the potential increase in value the Group could realise if assets are sold on a portfolio basis. | 19.46 pence per share
(31 December 2020: 17.94 pence) | The Adjusted Portfolio EPS shows the value per share on a long-term basis.
The increase in the Adjusted Portfolio EPS from the previous period is reflective of the larger portfolio size. |
|
| 8. Portfolio NAV | | | |
| The IFRS NAV adjusted for the market portfolio valuation including portfolio premium.
Further information is set out in Note 1 of the Unaudited Performance measures | The Portfolio NAV measure is to highlight the fair value of net assets on an ongoing, long-term basis and reflects the potential increase in value the Group could realise under the special assumption of a hypothetical sale of the underlying property investment portfolio in one single transaction. | The Portfolio NAV of £486.1 million equates to a Portfolio NAV of 120.68 pence per Ordinary Share.
(31 December 2020: Portfolio NAV £468.8 million equated to 116.39 pence per Ordinary Share)
| The Portfolio NAV per share shows a good market growth in the underlying asset value of the investment properties. |
| | | | |
| 9. Exposure to Largest Approved Provider | |||
| The percentage of the Group's gross assets that are leased to the single largest Approved Provider.
| The exposure to the largest Approved Provider must be monitored to ensure that we are not overly exposed to one Approved Provider in the event of a default scenario. | 28.3% at 31 December 2021.
(31 December 2020: 29.8%) | Our maximum exposure limit is 30%.
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| | | | |
| 10. Total Return | |||
| Change in EPRA NTA plus total dividends paid during the period.
| The Total Return measure highlights the gross return to investors including dividends paid since the prior year. | EPRA NTA per share was 108.27 pence at 31 December 2021.
Total return was 6.62% for the year to 31 December 2021.
(31 December 2020: 5.9%) | The EPRA NTA per share at 31 December 2021 was 108.27 pence. Adding back dividends paid during the year of 5.195 pence per Ordinary Share to the EPRA NTA at 31 December 2021 results in an increase of 4.80%.
The Total Return since the IPO is 31.1% at 31 December 2021. |
EPRA PERFORMANCE MEASURES
The table shows additional performance measures, calculated in accordance with the Best Practices Recommendations of the European Public Real Estate Association (EPRA). We provide these measures to aid comparison with other European real estate businesses.
Full reconciliations of EPRA Earnings and NAV are included in Note 36 of the consolidated financial statements and Notes 3 to 5 of the Unaudited Performance Measures, respectively. A full reconciliation of the other EPRA performance measures are also included in the Unaudited Performance Measures section of the Annual Report.
| KPI AND DEFINITION | PURPOSE | PERFORMANCE |
| | | |
| 1. EPRA Earnings per Share | | |
| EPRA Earnings per share excludes gains from fair value adjustment on investment property that are included in the IFRS calculation for Earnings per share. | A measure of a Group's underlying | 4.82 pence per share for the year to 31 December 2021.
(31 December 2020: 4.61 pence)
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| | | |
| 2. EPRA Net Reinstatement Value (NRV) per share | | |
| The EPRA NRV adds back the purchasers' costs deducted from the IFRS valuation. | A measure that highlights the value of net assets on a long-term basis. | £475.4 million / 118.08 pence per share as at 31 December 2021.
£463.3 million / 115.02 pence per share as at 31 December 2020. |
| | | |
| 3. EPRA Net Tangible Assets (NTA) per share | | |
| The EPRA NTA is equal to IFRS NAV as there are no deferred tax liabilities or other adjustments applicable to the Group under the REIT regime. | A measure that assumes entities buy and sell assets, thereby crystallising certain levels of deferred tax liability. | £436.1 million / 108.27 pence per share as at 31 December 2021.
£428.6 million / 106.42 pence per share as at 31 December 2020. |
| | | |
| 4. EPRA Net Disposal Value (NDV) | | |
| The EPRA NDV provides a scenario where deferred tax, financial instruments, and certain other adjustments are calculated as to the full extent of their liability. | A measure that shows the shareholder value if assets and liabilities are not held until maturity. | £434.0 million / 107.76 pence per share as at 31 December 2021.
£420.9 million / 104.50 pence per share as at 31 December 2020. |
| | | |
| 5. EPRA Net Initial Yield (NIY) | | |
| Annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property operating expenses, divided by the market value of the property, increased with (estimated) purchasers' costs. | A comparable measure for portfolio valuations. This measure should make it easier for investors to judge for themselves how the valuation of a portfolio compares with others. | 5.20% at 31 December 2021. |
| | | |
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6. EPRA 'Topped-Up' NIY | | |
| This measure incorporates an adjustment to the EPRA NIY in respect of the expiration of rent-free periods (or other unexpired lease incentives such as discounted rent periods and step rents). | The topped-up net initial yield is useful in that it allows investors to see the yield based on the full rent that is contracted at 31 December 2021. | 5.27% at 31 December 2020. |
| | | |
| 7. EPRA Vacancy Rate | | |
| Estimated Market Rental Value (ERV) of vacant space divided by ERV of the whole portfolio. | A "pure" percentage measure of investment property space that is vacant, based on ERV. | 0.26 % at 31 December 2021.
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| | | |
| 8. EPRA Cost Ratio | | |
| Administrative and operating costs (including and excluding costs of direct vacancy) divided by gross rental income.
| A key measure to enable meaningful measurement of the changes in a Group's operating costs.
| 20.91% at 31 December 2021. |
INVESTMENT MANAGER'S REPORT
Introduction
At the onset of the pandemic few could have predicted the devastating toll it has had or its prolonged impact. We have endured a second year of restrictions and the emergence of new variants posed continual risks. As we shifted our focus to learning how to live with Covid-19, important lessons emerged. It is critical that new ways are found to support the increasing burden on our National Health Service which was already operating under sustained pressures. With demand for adult social care services exacerbated by the pandemic, along with rising population growth, demand across the country for new specialised Supported Housing properties such those provided by the Group has never been more pressing.
The Group's investment strategy is underpinned by important fundamentals, including, increasing the supply of affordable housing in areas of demand and providing shareholders with stable, generally inflation-linked income. Delivering on these fundamentals has positive tangible benefits. Our properties provide specialist adapted homes with appropriate care for our residents. This in turn continues to be recognised as contributing to improving resident outcomes by providing greater independence and placing residents within their communities, close to friends and families.
Demonstrating our commitment to continual evolution and growth, in August we welcomed our new Director of Housing, Anne-Britt Karunaratne, who was previously an Executive Director of Housing & Customer Services of a large Registered Provider that provides over 20,000 social homes, mostly in the South East of England. She has brought a wealth of knowledge, experience and valuable insights to the team, and she further enhances our relationships with our Approved Providers. The team has now grown to over 25 people, each with a unique skill set and background. The team brings together expertise from a range of disciplines and backgrounds including finance, surveying, local authorities, Registered Providers, lawyers and accountants. With such a breadth of experience, the Group has continued to invest in new relationships, beginning relationships with 4 new Approved Providers. This year reflects another year of sustained strong performance for the Group which is illustrated in the results set out below.
As mentioned in our Chair's Statement, during 2021 the Group bought 44 new schemes for a total investment cost of £60.0 million (including acquisition costs) funded from existing cash and debt balances. These schemes provided 345 new units of accommodation to the Group's portfolio in 2021 alone, and meant that at 31 December 2021 the Group had 488 properties in total, comprising 3,424 units, leased to 24 Approved Providers, across 156 different local authorities with support in these homes provided by 114 care providers. The Group's deployment was slightly slowed at times due to construction delays, supply chain issues and the rising cost of materials impacting development costs. However, the Group was able to weather these challenges alongside its stakeholders and worked hard to deploy its capital into new, much needed, high-quality properties across the UK throughout the year.
The Group continues to focus on its robust due diligence processes and enhanced asset management programme, which together ensures that it safeguards the financial and operational resilience of its portfolio. Insights from every opportunity the Group assesses and every stakeholder it is engaged with are factored into these processes and they are constantly evolving to ensure that they represent best practice. Since the Group's IPO in 2017 over half of the deals that have been considered have been rejected. This demonstrates the Group's commitment to acquiring good quality homes and working with trusted counterparties to deliver its investment strategy.
Our investments continue to create positive social impact. The Group's third Impact Report, available separately, was commissioned to independently verify how the Group is delivering on these fundamentals. The report shows that, in 2021 alone, the Group delivered £84.8 million of direct fiscal savings and £105.8 million of social value (which is the monetary value ascribed to improving the wellbeing of residents. This year the report has been calculated using a new and established Wellbeing Valuation methodology developed by Simetrica-Jacobs which has been endorsed in HM Treasury Green Book and associated guidance. This new metric uses a new and enhanced monetisation methodology and is therefore not comparable to historic reports. The report confirms that for every £1.00 invested, the Group generates £2.74 in social value annually over the duration of the investment. The report also shows that 86% of residents sampled reported feeling satisfied with the quality of their home and 66% of residents sampled reported an improvement in their confidence since moving into their home. For further information, please see the Company's website for a copy of the full report.
As outlined in the Chair's statement we are announcing planned changes to the Group's investment policy and investment restrictions. The Chair has noted the reasons behind the proposed changes. The Chair also noted that, having been one of the first listed investors in 2017 we have witnessed the evolution of both the sector and its stakeholders. As a manager we first undertook due diligence on the specialised Supported Housing sector in 2013 before making our initial investment in 2015. Over the last 9 years we have seen the structures through which we make investment constantly iterate and develop, reflecting combined learnings and the evolution of a nascent asset class. Whilst this latest iteration requires a change of the Group's investment policy and investment restrictions we see it as a continuation of this process.
Most importantly it will enable us to remain focused on working with the best Approved Providers in the sector and investing into good homes for vulnerable adults.
Market Review
High levels of demand remained a central theme during 2021. The need for more adapted homes within communities is well known and is enshrined in both the Care Act 2014 as well as the Transforming Care Programme 2015. With the publication of the Department of Health's White Paper "People at the Heart of Care" the urgent need for the type of properties that the Group provides could not be clearer. This message was reinforced directly during the year through conversations with Commissioners, local authorities and care providers.
As the Chair reported in his statement, we are members of the Equity Impact Project which is being run by The Good Economy and Big Society Capital. The Equity Impact Project published its own White Paper on the standardisation of impact metrics for equity investors in social housing in July 2021. With the rise of impact investing in social housing we welcome the initiative to provide a consistent approach for investors to assess and report on how they are able to deliver social value through their investments. We have been working closely with The Equity Impact Project to test and pilot these metrics and are pleased to play a role in ensuring responsible stewardship of investing in the sector.
ESG considerations have dominated the wider housing market in the shadow of the Grenfell tragedy. Much attention has been focused on the Government's response and it is clear that there is still more to be done to provide a comprehensive solution to tackle rising building safety remediation costs, particularly for social housing. There has also been a spotlight on emissions data, highlighted following renewed commitments at COP 26 to the UK achieving its 2030 net zero target. As a responsible investor involved in the provision of social housing we are actively taking steps to ensure that our portfolio is as environmentally efficient as it can be. We have signed our first "green" lease which commits Approved Providers to reporting on and driving energy efficiency in our homes and we hope to sign more in the year ahead.
In September we announced a sector-first retrofit programme to fund the upgrade of all properties in the Group to a minimum EPC rating of "C" over the next few years. 72% of the Group's portfolio already meets this target and since our announcement in September 2021 we have made good progress to design the scope and the programme of works required to get to 100%. We have launched an initial pilot programme targeting 12 properties in the South East where we hope to begin work within the next 2 months. While environmental performance and energy efficiency is at the front of our minds in this endeavour, we are ensuring at all times that the needs and safety of residents is prioritised to make certain the right outcomes are delivered. Once the pilot has been completed, the outcomes and learnings evaluated, the Group will commence by rolling out a phased programme of works across our remaining targeted properties.
During the year, the Regulator continued to review Registered Providers which focus on managing specialised Supported Housing. As part of its ongoing strategy of reactive engagement, Pivotal Housing Association (0.6% of the Group's rent roll as at 31 December 2021), Hilldale Housing Association Limited (8.5% of the Group's rent roll as at 31 December 2021), Auckland Home Solutions C.I.C (4.7% of the Group's rent roll as at 31 December 2021), Parasol Homes Limited (9.6% of the Group's rent roll as at 31 December 2021) and Falcon Housing CIC (9.7% of the Group's rent roll as at 31 December 2021) each received non-compliant judgements or notices at one point during the year. The reasons for these notices generally cited concerns with respect to the providers' compliance with the Regulator's Economic Standards. The Group has been in regular contact with each of these Approved Providers since they received their regulatory notices. The Group is supportive of each of their active engagement with the Regulator in addressing the concerns it has raised. These judgements have not had a material impact on valuations, nor have they impacted rent collection. We continue to speak directly to the Regulator to ensure our investments reflect the latest regulatory guidance, but as a whole our Approved Providers continue to perform well, with growing financial strength and operational depth.
Financial Review
We are pleased to present another strong set of financial results as highlighted earlier. The Group's continued strong financial performance is underpinned by an increase of annualised rental income leading to a look through dividend cover of 0.99x at the year end.
Touching on some of the key highlights:
The annualised rental income of the Group was £35.8 million as at 31 December 2021 compared to £31.6 million as at 31 December 2020. The Group is a UK REIT for tax purposes and is exempt from corporation tax on its property rental business.
A fair value gain of £9.0 million was recognised during the year on the revaluation of the Group's properties.
IFRS Earnings per share was 7.05 pence for the year, compared to 6.82 pence in 2020.
The EPRA EPS excludes the fair value gain on investment property and is measured on the weighted average number of shares in issue during the period. EPRA EPS was 4.82 pence for the year compared to 4.61 pence in 2020. Adjusted portfolio earnings per share were 19.46 pence for the year compared to 17.94 pence for 2020, where post-tax earnings were adjusted for a valuation on a portfolio basis (as opposed to individual property IFRS basis).
The EPRA NTA per share as at 31 December 2021 was 108.27 pence per share, the same as the IFRS NAV per share. The IFRS NAV adjusted for the portfolio valuation (including portfolio premium) was £486.1 million, which equates to a Portfolio NAV of 120.68 pence per share compared to the 31 December 2020 figure of £468.8 million which equated to a Portfolio NAV of 116.39 pence per share. .
At the year end, the portfolio was independently valued at £642.0 million on an IFRS basis compared to £571.5 million in 2020, reflecting a valuation uplift of 8.7% against the portfolio's aggregate purchase price (including acquisition costs). This reflects an EPRA net yield of 5.25%, against the portfolio's blended net initial yield of 5.90% at the point of acquisition. This equates to a yield compression of 65 basis points, reflecting the quality of the Group's asset selection and off-market acquisition process.
The EPRA ongoing charges ratio is calculated as a percentage of the average net asset value for the period under review. The ongoing charges ratio for the year was 1.54% compared to 1.57% in 2020.
The Group's properties were valued at £692.0 million on a portfolio valuation basis, reflecting a portfolio premium of 7.8%, or £49.9 million, against the IFRS valuation. The portfolio valuation assumes a single sale of the property-holding SPVs to a third-party on an arm's length basis with purchaser's costs of 2.3%.
The Group held cash and cash equivalents of £52.5 million at 31 December 2021 of which £0.6 million was restricted, compared to £53.7 million in 2020, of which £0.8 million was restricted, leaving available cash of £51.9 million as at 31 December 2021. During the year cash from operating activities increased by £0.2 million from £24.5 million to £24.7 million.
Debt Financing
As announced in the Interim Results, during 2021 the Group secured £195.0 million of new long-term, fixed-rate, interest only, sustainability linked loan notes through a private placement with MetLife Investment Management and Barings. The loan notes are divided into two tranches. Tranche-A has a value of £77.5 million, a tenure of 10 years and an all-in coupon of 2.403%. Tranche-B has a value of £117.5 million, a tenure of 15 years and an all-in coupon of 2.786%. Across both tranches, as at 31 December 2021, the weighted average term is 12.7 years and the weighted average coupon is 2.63%. The loan notes require the Group to maintain an asset cover ratio of 1.67x and an interest cover ratio of 1.75x.
The loan notes enabled the Group to refinance the full £130.0 million of debt that had been drawn under its £160.0 million revolving credit facility provided by NatWest and Lloyds. This means that all of the Group's drawn debt is now fixed-price (with a weighted average coupon of 2.74%) and long-term, and so offers strong protection against the ongoing risk of rising inflation and interest rates. In addition the loan notes were secured against a portfolio of properties at a day one LTV of 50% (compared to the 40% day one LTV of the revolving credit facility) which has enabled the Group to draw an additional £65.0 million of capital. As at 31 December, the Group's LTV was 37.6%, in line with the medium to long-term gearing target of 35% to 40% and the Group had £29.7 million of capital remaining for deployment.
As part of the re-financing all of the Group's loan notes have been rated. The Group obtained a first-time Investment Grade Long-Term Issuer Default Rating (IDR) of 'A-' with a Stable Outlook and a senior secured rating of 'A' from Fitch Ratings. This is a great endorsement of the Group's strategy and financial position. The new loan notes are also linked to sustainability targets agreed with the lenders that are to be maintained at all times by the Group.
Following the refinancing the revolving credit facility has remained in place and was undrawn at the year end. The facility runs until 20 December 2023 and has an unhedged, floating interest rate of 185bps over 3 month SONIA. For undrawn debt under the revolving credit facility the Group pays a commitment fee of 40% of the margin. Since the period end, the Group has cancelled a portion of its existing revolving credit facility, reducing from £160.0 million to £50.0 million in order to reduce commitment fees, but maintain flexibility around upcoming deployment opportunities. The facility remains undrawn and the Group continues to review the revolving credit facility in light of its current capital requirements.
In addition to the undrawn revolving credit facility and the new £195.0 million facility, the Group has a long-term, fixed-rate facility with MetLife Investment Management providing £68.5 million of loan notes secured against a defined portfolio of the Group's properties at a Day-1 LTV of 40%. The loan notes are divided into two tranches of £41.5 million and £27.0 million with maturities in 2028 and 2033 respectively. Across both tranches as at 31 December 2021, the weighted average term was 11.6 years and the weighted average coupon was 2.74%. The facility requires the Group to maintain an asset cover ratio of 2.00x and an interest cover ratio of 1.75x. At all times, the Group has complied with these debt covenants.
Further information is set out in note 20 of the financial statements.
Strategic Alignment and Asset Selection
Despite the continuing challenges presented by Covid-19 during the year, the Group continued to execute on its investment strategy by utilising its remaining equity and recently secured debt funding, allowing it to continue delivering inflation-protected income underpinned by a careful selection of secure, long-let and index-linked properties. During the year, the Group bought 44 properties for a total investment cost of £60.0 million (including acquisition costs). These schemes provide 345 new units of accommodation and saw the Group lease to 4 new Approved Providers.
In addition, as at 31 December 2021 the Group had outstanding commitments of £4.2 million (including acquisition costs) for contracts exchanged on three properties.
| Committed Capital | Total Funds (m) |
| Total Invested since IPO | £590.4 |
| Exchanges | £4.2 |
| Total Invested and Committed Capital | £594.6 |
Property Portfolio
As at 31 December 2021, the portfolio comprised 488 properties with 3,424 units and showed a broad geographic diversification across the UK. The four largest concentrated areas by market value were the North West (21.4%), the West Midlands (16.7%), Yorkshire (14.2%) and the East Midlands (11.5%). The IFRS value of the portfolio at 31 December 2021 was £642.0 million, compared to £571.5 million in 2020. The table below sets out the Group's portfolio at the year end:
| | 31 December 2021 | 31 December 2020 | Change in 2021 |
| Number of Assets | 488 | 445 | +431 |
| Number of Leases | 382 | 341 | +41 |
| Number of Units | 3,424 | 3,124 | +3002 |
| Number of Approved Providers | 24 | 20 | +4 |
| Number of Forward Funding Agreements | 22 | 22 | 0 |
| WAULT (years) | 26.2 | 26.2 | +0.3 |
1 One asset within the existing portfolio has been held for sale.
2 Unit adjustments have been made to assets within the existing portfolio as a result of ongoing asset management activities and one asset within the existing portfolio being currently held for sale.
In total since IPO, the Group has committed £53.7 million to forward funding schemes providing homes to 318 residents.
Rental Income
In total, the Group had 382 fully repairing and insuring leases (excluding agreement for leases on exchanged properties). The Group had a total annualised rental income of £35.8 million on its standing investments, compared to £31.6 million in 2020.
During 2021, the Group entered into leases with another four Approved Providers, increasing its total to 24. This enhanced the Group's counterparty diversification. The Group's three largest Approved Providers by rental income and units were Inclusion (£10.7 million and 932 units), Falcon (£3.5 million and 364 units and Parasol Homes (£3.4 million and 247 units).
As at 31 December 2021, the portfolio had a WAULT of 26.2 years in line with 2020, with 92.5% of the portfolio's rental income showing an unexpired lease term above 20 years. The WAULT includes the initial lease term upon completion as well as any reversionary leases and put/call options available to the Group at expiry of the initial term.
Rents under the leases are indexed against either CPI (92.6%) or RPI (7.4%), which provides investors with the comfort that the rental income will increase in line with inflation. Some leases have an index 'premium' under which the standard rental increase is based upon CPI or RPI plus a further percentage point, reflecting top-ups by local authorities. These account for 7.9% of the Group's leases. For the purposes of the portfolio valuation, JLL assumed CPI and RPI to increase at 2% per annum and 2.5% per annum respectively over the term of the relevant leases.
Outlook and Pipeline
We hope that the worst of Covid-19 is behind us but after the after effects of the virus still continue be felt across the housing, health and social sectors. . The recent government Adult Social Care White Paper places a clear emphasis on putting people at the heart of care. We are firm believers in stakeholder capitalism and people remain at the heart of all that we do. Our focus remains on delivering investing into properties which provide our residents with good homes in their community. Resident wellbeing remains at the forefront of our minds and permeates all aspects of our investment lifecycle, from property selection to counterparty evaluation and our robust asset management programme.
Our pipeline has over £100 million of live investment opportunities which will enable us to deploy the Group's remaining cash and debt balances. Should we obtain shareholder approval in amending the Group's investment policy and investment restrictions. £10 million of this £100 million will be allocated to an identified pipeline of more flexible lease terms would be compatible with the proposed changes to the Group's investment policy and investment restrictions.
As we learn to live with Covid-19 we remain committed to our goal of providing high-quality properties in community settings, providing shareholders with a resilient investment as inflationary pressures persist and, importantly, creating social impact through our properties.
We echo the Chair's remarks on the devastating situation in Ukraine. As the humanitarian crisis inevitably, and sadly, worsens, we emphasise our commitment to support in any way that we can in the coming months.
Finally, we look forward to deepening our existing relationships in the sector, working with new partners and providing additional much needed quality homes for residents in 2022.
Max Shenkman
Head of Investment
24 March 2022
PORTFOLIO SUMMARY
| Region | Properties | % of funds invested* |
| North West | 104 | 21.5 |
| West Midlands | 83 | 16.3 |
| Yorkshire | 60 | 14.2 |
| East Midlands | 56 | 11.3 |
| South East | 60 | 9.2 |
| London | 27 | 8.7 |
| North East | 45 | 8.3 |
| South West | 29 | 4.9 |
| East | 20 | 4.2 |
| Scotland | 2 | 1.0 |
| Wales | 2 | 0.4 |
| Total | 488 | 100.0 |
* calculated excluding acquisition costs
SUSTAINABILITY REPORT
Our ambition to be the leading UK Supported Housing investor, is to ensure that we embed and drive sustainability across the business.
Our business model seeks to ensure that our properties are suitable to meet residents' evolving needs and assist local authorities in meeting these demands for the benefit of the wider community. Our social impact is therefore at the heart of what we do, and we focus on investing where there is clear long-term social need. How we do this is summarised below and set out in further detail in the independent Impact Report available separately on the website. We maintain a robust corporate governance framework, and this is set out in further detail within our corporate governance report. We recognise the importance of environmental efficiency, which is becoming increasingly integral to our investment strategy, and we have set out how we execute this strategy in practice in further detail below.
An important aspect of the Investment Manager's approach to ESG is the adoption of the Principles for Responsible Investment ('PRI'), which they signed up to in 2019. The PRI are designed to guide and demonstrate best practice ESG integration, and to promote alignment between the objectives of investors and wider society. The principles, which are voluntary, are intended to be actionable and measurable are detailed in the table below.
| | Principle | Summary of investment manager action |
| 1 | We will incorporate ESG issues into investment analysis and decision-making processes | As evidenced through our detailed approach to ESG due diligence and laid out in our ESG Integration Policy. |
| 2 | We will be active owners and incorporate ESG issues into our ownership policies and practices. | As evidenced through engagement with RPs and developers on processes that would benefit from improved ESG performance. For example, seeking developers to become signatories of the Considerate Code of Constructors. |
| 3 | We will seek appropriate disclosure on ESG issues by the entities in which we invest. | As evidence through our increasing expectations on those we work with, for example requesting developers to become signatories to the Considerate Contractors Code. |
| 4 | We will promote acceptance and implementation of the Principles within the investment industry. | As evidence through our involvement in the Sustainability Reporting Standard for Social Housing and the Equity Impact Project, and participation in the Green Lease Working Group for the Green Finance Institute initiatives which seek to drive industry best practice in ESG and impact. |
| 5 | We will work together to enhance our effectiveness in implementing the Principles. | As evidenced by the ongoing participation of the investment manager in collaborative initiatives, and in ESG innovation, such as our work towards improved energy efficiency. |
| 6 | We will each report on our activities and progress towards implementing the Principles | As evidenced through the detail we publish in our Annual Report, our ESG Integration Policy, our Impact Report and the Investment Manager's Group Sustainable Business Objectives report. |
In conjunction with the Board's endorsement, and in line with these principles, the Investment Manager has an ESG integration policy in place, directly relating to the Company's investments with the aim of ensuring value for investors, coupled with creating value for society and the environment. Within this policy, the Investment Manager has set out principles which it will seek to incorporate throughout its business, for example, to consider the impact of operations on local communities and to uphold high standards of business integrity and honesty.
Policy presents new challenges and opportunities for the real estate industry and the social housing market, with potentially profound implications for both owners and occupiers. A good investment strategy must incorporate environmental and social issues alongside traditional economic considerations. Impact assessment is central to our investment process and is further strengthened by the environmental, social and governance assessments in our due diligence.
Environment
When acquiring assets, we look closely at their environmental impact, and encourage a sustainable approach for new development as well as the maintenance and upgrading of existing properties.
For example, we require every property we acquire to have a minimum energy performance rating of at least a 'C' on an EPC for renovated properties and at least a 'B' on an EPC for new-build properties, notwithstanding the legal requirement for any privately rented properties to have a minimum energy performance rating of E on an EPC. A retrofit programme has also commenced to increase all our properties EPC ratings to a minimum of 'C'.
Through our rigorous due diligence process, the high standards we expect from developers and significant investment in the Supported Housing sector, we have been able to provide capital and expertise that has enabled parties in the industry to professionalise and to lead to further high-quality housing. Offering residents resource-efficient and adapted living areas is critical to ensure our investments are fit-for-purpose and sustain their value over the long-term. As a landlord, we consider the opportunities we have to help reduce running costs for our lessees and occupiers, increase resident well-being and contribute to the prosperity of a location through supporting new building design and development. Ignoring these issues when considering property management and investments would risk the erosion of income and value as well as missing opportunities to enhance investment returns.
Climate Change
The Investment Manager, in accordance with the FCA's ESG Sourcebook, is committed to the implementation of disclosures consistent with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) by 30 June 2024.
Social and Social Impact
Our properties provide multiple benefits to local communities. They provide residents with safe and secure accommodation, tailored to meet their individual care needs. They provide Approved Provider lessees with a way of growing sustainably, allowing them to expand the number of individual lives they support and improve and they provide employment for local carers, housing managers and builders. While development and refurbishment can cause some minor short-term disruption to an area, these activities help create employment and, at the same time, help alleviate the UK's housing crisis.
Further information on the impact and benefits to the community of our properties is set out in the Market Review section of the Investment Manager's Report.
Governance
The Group encourages best practice governance among all counterparties in order to minimise operational risks and encourage them to continually assess how they can contribute more to employees, residents, wider society and the environment, through compliance with legislation and regulations, and the adoption and implementation of issue-specific policies.
Wider Governance and sustainable business behaviours of the Group and Investment Manager
Business Relationships
The Group has a set of corporate providers that ensure the smooth running of the Group's activities. The Group's key service providers and the Management Engagement Committee annually reviews the effectiveness and performance of these service providers, taking into account any feedback received. The Group also benefits from the commitment and flexibility of its corporate lenders for its debt facilities and works with a selection of high-quality trusted developer partners to source the majority of its deals off market and to who forward funding is provided. Each of these relationships is important to the long-term success of the business. Therefore, the Group and the Investment Manager maintain high standards of business conduct by acting in a collaborative and responsible manner with all its business partners that protects the reputation of the Group as a whole.
Employees
The Group has no employees and accordingly no requirement to separately report on this area.
The Investment Manager is an equal opportunities employer who respects and seeks to empower each individual and the diverse cultures, perspectives, skills and experiences within its workforce. The Investment Manager places great importance on company culture and the wellbeing of its employees and considers various initiatives and events to ensure a positive working environment.
Health and Safety
The Group is committed to fostering the highest standards in health and safety. Before the Group acquires a property, we ensure it includes all installations necessary to minimise the risk to the vulnerable people who will live in it. Day-to-day responsibility for health and safety in our properties is then shared by the Approved Providers and care providers who manage the housing and provide care. Nonetheless, our Investment Manager still requests confirmation from Approved Providers that all properties remain compliant and visit properties to verify this. Every quarter the Board is provided with updates on the health and safety of our residents.
Diversity
We are an externally managed business and do not have any employees or office space. As such the Group does not operate a diversity policy with regards to any administrative, management and supervisory functions.
The Investment Manager has an Inclusion and Diversity Policy which outlines commitments including compulsory training for all employees on equality and diversity in the workplace and unconscious bias training. All staff are expected to conduct themselves to help the organisation provide equal opportunities in employment, and prevent bullying, harassment, victimisation and discrimination. Behaviours contrary to those outlined in the policy result in disciplinary procedures.
The Investment Manager are members of the Diversity Project, an initiative championing a more inclusive culture within the Savings and Investment profession and this further informs our approach to Inclusion and Diversity. Some of the Diversity Project's 5 Year Goals include:
• All member firms to support one or more graduate/school leaver recruitment programmes focused on socio-economic diversity.
• Gender pay gaps reduced by one third from their 2019 figures.
• 50:50 male:female graduate and school leaver recruitment.
Some of the initiatives used by Triple Point to support these goals are the 100 Black Intern Programme, Investment 2020 and Girls are Investors Programme.
Human Rights
The Group is not within the scope of the Modern Slavery Act 2015 because it has not exceeded the turnover threshold and is therefore not obliged to make a slavery and human trafficking statement.
The Board are satisfied that, to the best of their knowledge, the Company's principal advisers comply with the provisions of the UK Modern Slavery Act 2015.
The investment manager takes the risk of Modern Slavery extremely seriously. The manager's responsibilities as both an employer and investor are laid out in a separate and public Modern Slavery Act Statement available on the Triple Point website https://www.triplepoint.co.uk/approach-to-sustainability/116/.
STAKEHOLDER ENGAGEMENT
This section describes how the Board engages with its key stakeholders, how it considers their interests and the outcome of the engagement when making its decisions, the likely consequences of any decision in the long-term, and further ensures that it maintains a reputation for high standards of business conduct. The Group is committed to continual stakeholder engagement and implements a cycle of constant engagement at all stages of the Group's investment lifecycle.
Section 172(1) Statement
| Stakeholder | Why is it important to engage? | How have the Investment Manager/Directors engaged? | What were the key topics of engagement? | What was the feedback obtained and the outcome of the engagement? |
| Shareholders | Investment from our shareholders plays an important role by providing capital to ensure we can deliver of high-quality new housing into the Supported Housing market. Through the investment of private capital into an under-funded sector, we can achieve a positive social impact whilst ensuring our shareholders receive a long-term inflation-linked return. | The way in which we engage with our shareholders is set out in our Corporate Governance Report. | 1. Financial and operational performance.
2. The regulatory environment of the Supported Housing sector.
3. Environmental, social and governance considerations. 4. The Company's key service provider appointments, including the AIFM and broker arrangements.
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1. The Board and Investment Manager consider shareholder concerns when speaking to the Regulator and agreed to keep shareholders updated of any developments. We understand the importance of, and are committed to, working with Registered Providers to address the concerns of the Regulator. Refer to the Market Review in the Investment Manager's Report.
2. The Investment Manager has enhanced environmental, social and governance considerations within its investment process, and within its own business. Refer to Investment Manager's Report and the Sustainability Report. |
| Residents | Our strategy is centred on providing Supported Housing for our residents. We remain focused on providing homes to our residents which offer them greater independence than institutional accommodation, as well as meeting their specialist care needs. | The Investment Manager monitors resident welfare through engagement with Approved Providers. The Investment Manager receives quarterly reports from Approved Providers to ensure compliance with health and safety standards. Any concerns are raised to the Board. We do not generally engage with residents directly since they are vulnerable. Instead, day-to-day engagement is done by care providers and, to a lesser extent, Approved Providers. | We provide oversight of resident welfare by ensuring properties are safe and secure before residents move in by: monitoring compliance with health and safety standards; ensuring residents are looked after by competent counterparties; and requesting updates on any health and safety issues every quarter. | The Investment Manager actively engaged with care providers to ensure plans and processes were in place in respect of the Covid-19 pandemic, for the health and safety of the tenants, and that those plans continued to be fit for purpose
Resident issues raised as a result of engagement through care providers were addressed.
Compliance issues have been remedied and any necessary works have been undertaken.
The Group's investment decisions are informed by the long-term needs of our residents.
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| Investment Manager | The Investment Manager is responsible for executing the Investment Objective within the Investment Policy of the Company. | The Board maintains regular and open dialogue with the Investment Manager at Board meetings and has regular contact on operational and investment matters outside of meetings. | In addition to all matters related to the execution of the Company's Investment Objective, the Board engaged with the Investment Manager on the structure of the Group, developments in the market and updates from the Regulator. | As a result of the engagement between the Board and the Investment Manager the Group has been able to execute its investment strategy and has considered what adjustments can be made to the Group's model that will uphold financial and governance standards while attracting further private investment long term. Additionally, the Investment Manager produces reports to the Board every quarter on various governance and operational matters at the Board's request. Capital allocation is also considered with regard to the views of the Board. |
| Approved Providers | Our relationship with Approved Providers is integral to ensuring rent received from the Local Authority is paid to the Group and that properties are managed appropriately to safeguard tenants. All of the Group's leases with Approved Providers are fully repairing and insuring - meaning that Approved Providers are responsible for management, repair and maintenance, in addition to tenanting the properties. | The Investment Manager maintains strong relationships with Approved Providers, having meetings every six months and are in regular dialogue on a variety of matters. Quarterly key performance indicator reporting is also provided. | The Investment Manager discussed a number of topics with Approved Providers including the policies and plans that were implemented in 2020 in response to the operational and financial risks associated with the Covid-19 pandemic, and that those plans continued to be fit for purpose: that properties are managed in accordance with their leases; financial reporting and governance; and specific property-related issues such as occupancy, health and safety issues, rent levels, management accounts and governance. | Refer to the Investment Manager's Report. |
| Care Providers
| Our residents receive care from care providers. It is important to ensure that our vulnerable residents receive the best possible care. In addition, the care providers share the cost of voids with Approved Providers so we engage with care providers to ensure our Approved Providers are able to pay our rent in the event of empty units. Therefore, care providers play an essential role in the occupancy levels of our properties and strong engagement with the Group ensures the best possible care for our residents. | The Investment Manager engages with care providers as part of its due diligence process and regularly meets and engages with our provider representatives when inspecting the Group's portfolio and looking at occupancy figures every quarter. | The Investment Manager engages with care providers on: the specific care and support requirements of residents including health and safety compliance (refer to Investment Manager's Report) property management by Approved Providers; financial and operational capacity for new schemes; occupancy levels; and financial performance. | The Investment Manager rejected deals where care providers did not meet the high-quality standards expected or where care providers were unable to demonstrate the financial strength to meet its obligations under a Service Level Agreement. Following engagement, scope of works were agreed with care providers to produce high quality, fit for purpose properties that meet the specific care needs of residents. To maintain the Group's reputation for high standards of business conduct, care providers were changed where the standard of care expected by the Group were not met or where engagement identified care providers in financial difficulties. |
| Local authorities | Local authorities are responsible for locating housing for the residents. The properties are assessed to ensure they meet high quality social and safety standards in order to ensure that referrals are made as efficiently and safely as possible from the local authorities. |
The Investment Manager engages with various departments within local authorities including Commissioners and Housing Benefit officers during its initial due diligence on a scheme as well as on an ongoing basis.
| The Investment Manager has ongoing engagement with local authorities at each stage of the investment lifecycle, particularly during due diligence to assess demand, commissioning requirements and rent levels.
Following acquisition, the Investment Manager retains an ongoing dialogue with local authorities to ensure they continue to meet ongoing commissioning requirements. | The Investment Manager listens to feedback from the local authorities in order to improve and upgrade properties and ensure that they meet ongoing commissioning requirements. In particular, the Investment Manager engages with Commissioners to ensure that properties meet the Government's target EPC level of "C".
An initial pilot programme to commence upgrades across 12 initial properties has commenced.
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| The Regulator of Social Housing | The Regulator regulates Registered Providers of social housing to ensure providers are financially viable and properly governed. It is important to ensure that the Regulator does not object to the way the Group invests and the way Approved Providers operate. | The Investment Manager is in regular contact with the Regulator through telephone calls and regular meetings to ensure new investments reflect the latest regulatory guidance. | Discussions with the regulator are focused on ensuring the market evolves in line with its requirements, how standards of Registered Providers can be improved and how to best address its concerns.
| The Investment Manager is working with Registered Providers to ensure the standards of the Regulator are met. Refer to the Investment Manager's Report. |
| Lenders | The Group's investments in social housing assets are partly funded by debt. Prudent debt financing is critical to achieve the target return promised to shareholders and to meet full dividend cover once equity proceeds have been fully deployed. Further, engagement with debt funders is also a significant signal to the sector that they are aligned with shareholders' interests e.g. long-term support of the social housing sector. The support of our lenders has ensured that we are in a strong financial position. | The Investment Manager engages with the existing lenders mainly via the reporting of financial and information covenants under the existing loan agreements on a quarterly basis. In addition, there are regular ad-hoc engagements in relation to general topics relating to the social housing sector as well as specific topics arising from the financial and operational performance of the Group's activities and future opportunities, and any other general matters affecting the relationship between the Group and the lenders. | The Group engaged on the following topics: financial and information covenant reporting and; active asset management activities undertaken by the Group e.g. any other portfolio performance enhancing activity that requires lenders' consent. The Group also engaged with the lenders in relation to the issue of £195 million of loan notes and a refinance of the existing Revolving Credit Facility to make sure sufficient debt capital is available into 2022 to meet deployment and dividend cover targets. There was also frequent liaison with lenders' rates desks in order to monitor the movement of the 3M SONIA forward curve as part of the Group's monitoring of interest rates for the unhedged Revolving Credit Facility. | The Group is fully compliant with its debt covenants. The Investment Manager's pro-active engagement with the Group's lenders is welcome by its lenders and to date no concerns in relation to the performance of its loans have been raised by the lenders. The Investment Manager successfully refinanced the existing Revolving Credit Facility. The Investment Manager successfully issued £195 million of loan notes. The Board continues to monitor compliance with debt covenants and keeps liquidity under constant review to make certain the Group will always have sufficient headroom in its debt facilities. In August 2021, Fitch Ratings Limited assigned the Group an Investment Grade Long-Term Issuer Default Rating of 'A-' with a stable outlook, and a senior secured rating of 'A' for the Group's new issued loan notes. |
Principal Decisions
Principal decisions have been defined as those that have a material impact to the Group and its key stakeholders. In taking these decisions, the Directors considered their duties under section 172 of the Act.
Issue of Loan Notes and refinance of existing revolving credit facility.
During the year the Group issued £195 million of long dated, fixed-rate, interest only sustainability-linked loan notes through a private placement with MetLife Investment Management clients and Barings.
The issue of loan notes enabled the Group to refinance the full £130 million drawn under its existing £160 million debt facility. The Board believed that the issue of loan notes and refinance of the existing debt facility was in the best interest of shareholders as it would provide additional capital and would allow the Group to continue to acquire further income-producing, specialised Supported Housing properties from the Group's pipeline and achieve a fully covered dividend. The Group maintained an active dialogue for the lender to appraise the Group's business model and its portfolio. The Board also considered that further funds available to be deployed into the Supported Housing sector would benefit the wider community.
In considering whether to approve the transaction the Board had regard to the interests of the Group's shareholders, lenders and the community.
Further details of the Group's debt financing are detailed in the Investment Manager's Report.
Initiative to upgrade EPC ratings of properties
During the year the Board considered a wide range of Environmental, Social and Governance matters and the Group's social impact.
The Board approved an initiative to upgrade all existing renovated properties within the Group to a minimum EPC rating of C. 72% of the Group's portfolio already meets this target and since our announcement in September 2021 we have made good progress in kickstarting the programme of works required to get to 100%. We have launched an initial pilot programme targeting 12 properties in the South East where we hope to begin works within the next 2 months.
RISK MANAGEMENT
The Board recognises that effective risk management is key to the Group's success and that a proactive approach is critical to ensuring the sustainable growth and resilience of the Group.
We operate in a low-risk environment, focusing on a single sub-sector of the UK real estate market to deliver an attractive, growing and secure income for shareholders. We have a specific investment policy, as outlined above, which we adhere to and for which the Board has overall responsibility. As our risk appetite is low, we do not undertake speculative development. Furthermore, we have experienced lessees in our properties and we possess a portfolio of high-quality assets with a robust WAULT.
As an externally managed investment company, we outsource key services to the Investment Manager and other service providers and rely on their systems and controls. The Board undertakes a formal risk review, with the assistance of the audit committee, twice a year to assess and challenge the effectiveness of our risk management and internal control systems. The Board regularly review the control reports of the key service providers and the external auditors note any deficiencies in internal controls and processes that have been identified during the course of the audit.
The Investment Manager has responsibility for identifying potential risks at an early stage, escalating risks or changes to risk and relevant considerations and implementing appropriate mitigations which are recorded in the Group's risk register. Where relevant the financial model is stress tested to assess the potential impact of recorded risks against the likelihood of occurrence and graded suitably. The principal risks that have been subject to this methodology are noted in the Risk Heat Matrix below. The Board regularly reviews the risk register to ensure gradings and mitigating actions remain appropriate.
As part of this risk management evaluation the Board has identified and undertaken a robust assessment of the Group's emerging risks by assessing upcoming or potential changes in the market or regulatory environment. The Board considers the likelihood of the emerging risk materialising and its potential impact on the Group. Emerging risks are regularly monitored, and to the extent possible or practicable, mitigating actions are implemented.
Our risk management process is designed to identify, evaluate and mitigate (rather than eliminate) the significant and emerging risks we face and continues to evolve to reflect changes in the business and operating environment. The process can therefore only provide reasonable, and not absolute, assurance. It does however ensure a defined approach to decision making that decreases uncertainty surrounding anticipated outcomes, balanced against the objective of creating value for shareholders.
The Board has not identified or been advised of any failings or weaknesses in our risk management and internal control systems.
Principal risks and uncertainties
The table below sets out what we believe to be the principal risks and uncertainties facing the Group. The table does not cover all of the risks that the Group may face. Additional risks and uncertainties not presently known to management or deemed to be less material at the date of this report may also have an adverse effect on the Group.
The Board has proposed amendments to the Company's Investment Policy and Investment Restrictions which, if approved by shareholders at the AGM, will enable the Group to enter into a broader range of lease structures, including: shorter leases; selectively taking on the cost of planned maintenance; and leases where upward only rent reviews are linked to either inflation or central housing benefit policy. The Board is currently considering the impact these proposed changes will have on the Company's principal risks and uncertainties and will provide an update at the time of the Company's interim results. However, given the limited amount of cash available for deployment in immediate term, the Board does not expect these changes will have a material impact on the Group's risks and KPIs, particularly its WAULT.
| Risk Category | Risk Description | Risk Impact | Risk Mitigation | Impact | Likelihood | Change in year |
| Financial | Expensive or lack of debt finance may limit our ability to grow and achieve a fully covered dividend | Without sufficient debt funding at sustainable rates, we will be unable to pursue suitable investments in line with our investment policy. This would significantly impair our ability to pay dividends to shareholders at the targeted rate. | When raising debt finance the Investment Manager adopts a flexible approach involving speaking to multiple funders offering various rates, structures and tenors. Doing this allows the Investment Manager to maintain maximum competitive tension between funders. After proceeding with a funder, the Investment Manager agrees heads of terms early in the process to ensure a streamlined, transparent fund-raising process. The Board also keeps liquidity under constant review to ensure that we have a level of protection in the event of adverse fund-raising conditions. | Moderate | Low | Stable |
| Financial | Floating rate debt exposes the business to underlying interest rate movements. | The Group's Revolving Credit Facility is currently non-hedged and therefore interest is payable based on a margin over SONIA. Any adverse movements in the SONIA forward curve could significantly impair our profitability and ability to pay dividends.
| The Group considers cash flow forecasts and ensures sufficient cash balances are held within the Group to meet future needs. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of financing through appropriate and adequate credit lines, and the ability of customers to settle obligations within normal terms of credit. The Group ensures, through forecasting of capital requirements, that adequate cash is available to fund the Group's operating activities.
Following the refinancing of the Revolving Credit Facility, all drawn debt is fixed price with the Group's 10-year and 15-year MetLife Investment Management tranches and the new Loan Notes having a fixed-rate coupon meaning they are insulated from interest rate fluctuations. In addition, the Board regularly reviews potential hedging arrangements which can be put in place at any time during the duration of the Revolving Credit Facility. | Moderate | Low | Decrease |
| Financial | Unable to operate within debt covenants | The borrowings the Group currently has and which the Group uses in the future may contain loan to value and interest covenants ratios. If property valuations and rental income decrease, such covenants could be breached, and the impact of such an event could include: an increase in borrowing costs; a requirement for additional cash collateral; payment of a fee to the lender; a sale of an asset or assets or a forfeit of any asset to a lender.
This may result in the Group selling assets to repay drawn loan amounts resulting in a decrease on Group's Net Asset Value. | The Investment Manager monitors loan to value and interest covenants ratios on an ongoing basis. In the unlikely event that an event of default occurs under these covenants the Group has a remedy period during which it can cure the covenant breach by either injecting cash collateral or equity funded assets in order to restore covenant compliance.
During the year to 31 December 2021, no debt covenants have been breached. | High | Low | Stable |
| Property | Default of one or more Approved Provider lessees | The default of one or more of our lessees could impact the revenue gained from relevant assets. If the lessee cannot remedy the default or no support is offered to the lessee by the Regulator of Social Housing, we may have to terminate or negotiate the lease, meaning a sustained reduction in revenues while a replacement is found. Additionally, were a care provider not to renew the service level agreement with a lessee, this may result in a lessee having to cover rental payment on void units without receiving the corresponding payment from the care provider. | Under the terms of our investment policy and restrictions, no more than 30% of the Group's gross asset value may be exposed to one lessee, to mitigate against the risk of significant rent loss . Were a lessee to default or were the Group to believe it likely that a lessee would default the Group would look to move the affected properties to another Approved Provider with whom the Group have a good relationship to ensure that both the provision of housing to vulnerable individuals and the income stream associated with the properties were preserved. In addition, the lessees are predominantly regulated by the Regulator of Social Housing, meaning that, if a lessee was to suffer financial difficulty, it is likely that the Regulator of Social Housing would look to ensure that the vulnerable residents did not have to be rehoused. However, an Approved Provider may seek to renegotiate the lease.
The Investment Manager has continued to monitor the implications of the pandemic with regards to the Group's Registered Providers and care providers. The Investment Manager has remained in regular communication with counterparties and monitored financial strength, occupancy and referrals closely. | Low to Moderate | Moderate | Stable |
| Financial Risk
(NEW) | Higher than projected levels of inflation may impact Approved Providers | The Group's leases contain upward only rent reviews, generally linked to inflation (typically CPI).
Annual rental uplifts will be higher than projected as a result of increased inflation in 2022.
| The Investment Manager closely monitors inflation levels. There has been a strong historical correlation between inflation and central housing benefit policy which has generally tracked CPI + 1%.
The annual rental increases in the Group's leases are linked to increases in central government housing benefit allocations. These tend to increase in line with CPI, and so the inflationary risk is largely mitigated. | Moderate | Low | |
| Property | Forward funding properties involves a higher degree of risk than that associated with completed investments | Our forward funded developments are likely to involve a higher degree of risk than is associated with standing investments. This could include general construction risks, delays in the development or the development not being completed, cost overruns or developer/contractor default. If any of the risks associated with our forward funded developments materialised, this could reduce the value of these assets and our portfolio. | Before entering into any forward funding arrangements, the Investment Manager undertakes substantial due diligence on developers and their main subcontractors, ensuring they have a strong track record. We enter into contracts on a fixed price basis and then, during the development work, we typically defer development profit until work has been completed and audited by a chartered surveyor. We are limited by our investment policy which restricts us to forward funding a maximum of 20% of the Group's net asset value at any one time. Ultimately, with these mitigating factors in place, the flexibility to forward fund allows us to acquire assets and opportunities which will provide prime revenues in future years.
As at 31 December 2021, all forward funding agreements had reached practical completion. | Low to Moderate | Low | Decrease |
| Regulatory | Risk of an Approved Provider receiving a non-compliant financial viability or governance rating by the Regulator | Should an Approved Provider with which the Group has one or more leases in place receive a non-compliant rating by the Regulator, in particular in relation to viability, depending on the further actions of the Regulator, it is possible that there may be a negative impact on the market value of the relevant properties which are the subject of such lease(s). Depending on the exposure of the Group to such Approved Provider, this in turn may have a material adverse effect on the Group's Net Asset Value until such time as the matter is resolved through an improvement in the relevant Approved Provider's rating or a change in Approved Provider. | As part of the Group's acquisition process, the Investment Manager conducts a thorough due diligence process on all Registered Providers with which the Company enters into lease agreements, which takes account of their financial strength and governance procedures.
The Investment Manager has established relationships with the Approved Providers with whom it works. The Approved Providers keep the Investment Manager informed of developments surrounding the regulatory notices.
The Group has leases in place with five Approved Providers that have been deemed non-compliant by the Regulator. These assets did not suffer from an impairment in value as part of the Q4 valuation by the Group's independent Valuer.
| Low | Moderate to High | Stable |
| Regulatory | Risk of changes to the social housing regulatory regime | Future governments may take a different approach to the social housing regulatory regime, resulting in changes to the law and other regulation or practices of the Government with regard to social housing. | As demand for social housing remains high relative to supply, the Board and the Investment Manager is confident there will continue to be a viable market within which to operate, notwithstanding any future change of Government. Even if Government funding was to reduce, the nature of the rental agreements the Group has in place means that the Group will enjoy continued lessee rent commitment for the term of the agreed leases. | High | Low to Moderate | Stable |
| Regulatory | Risk of not being qualified as a REIT | If the Group fails to remain in compliance with the REIT conditions, the members of the Group will be subject to UK corporation tax on some or all of their property rental income and chargeable gains on the sale of properties which would reduce the funds available to distribute to investors. | The Group intends to continue to operate as a REIT and work within its investment objective and policy. The Group will retain legal and regulatory advisers and consult with them on a regular basis to ensure it understands and complies with the requirements. In addition, the Board oversees adherence to the REIT regime, maintaining close dialogue with the Investment Manager to ensure we remain compliant with legislation. | High | Low | Stable |
| Corporate | Reliance on the Investment Manager | We continue to rely on the Investment Manager's services and its reputation in the social housing market. As a result, our performance will, to a large extent, depend on the Investment Manager's abilities in the property market. Termination of the Investment Management Agreement would severely affect our ability to effectively manage our operations and may have a negative impact on the share price of the Company. | Unless there is a default, either party may terminate the Investment Management Agreement by giving not less than 12 months' written notice. The Board regularly reviews and monitors the Investment Manager's performance. In addition, the Board meets regularly with the Manager to ensure that we maintain a positive working relationship. | High | Low | Stable |
| Financial | Property valuations may be subject to change over time | Property valuations are inherently subjective and uncertain. Market conditions, which may impact the creditworthiness of lessees, may adversely affect valuations. The portfolio is valued on a Market Value basis, which takes into account the expected rental income to be received under the leases in the future. This valuation methodology provides a significantly higher valuation than the Vacant Possession value of a property. In the event of an unremedied default of an Approved Provider lessee, the value of those assets in the portfolio may be negatively affected.
Any changes could affect the Group's net asset value and the share price of the Group. | All of the Group's property assets are independently valued quarterly by Jones Lang LaSalle, a specialist property valuation firm, who are provided with regular updates on portfolio activity by the Investment Manager. The Investment Manager meets with the external valuers to discuss the basis of their valuations and their quality control processes. Default risk of lessees is mitigated in accordance with the lessee default principal risk explanation provided above. In order to protect against loss in value, the Investment Manager's property management team seeks to visit each property in the portfolio at least every two years since it has been acquired, , and works closely with lessee to ensure, to the extent reasonably possible, their financial strength and governance procedures remain robust through the duration of the relevant lease.
| Moderate | Moderate | Stable |
| Financial Risk
(NEW) | Non-payment of voids cover by care providers | If a care provider gets into financial difficulty and is unable to pay contracted voids cover to an Approved Provider this could have a negative impact on the financial performance of the Approved Provider which ultimately could impact its ability to pay the Group its rent. This risk is compounded if there is low occupancy in a property. | The Investment Manager closely monitors the performance of the care providers to ensure that they are financially viable and performing well. Should a care provider get into financial difficulty, the Group works with a wide range of care providers who could provide services and therefore meet the voids payment.
Occupancy is also closely monitored and the Investment Manager works with Approved Providers and care providers to ensure occupancy. | High | Low | |
Emerging Risks
Change in social housing legislation
In November 2020, the UK Government released the Social Housing White Paper which set out a number of measures intended to provide residents with a greater voice and influence, to improve the quality of social housing, with a particular focus on building and resident safety. The sentiment of these proposals is welcomed by the Board and the Investment Manager. There is currently no timetable from the Government to deliver on the measures.
The Regulator of Social Housing has committed to engage with all stakeholders on the proposed reforms outlined in the White Paper in preparation for any future legislation that could be implemented.
The Board will continue to monitor the potential changes in legislation. The Investment Manager engages regularly with the Regulator of Social Housing to ensure that it is informed as soon as possible of any likely changes to the regulatory regime.
Ukraine-Russia Conflict
In late February 2022, Russia began an invasion of Ukraine with devastating consequences for the country's citizens and has major implications for wider humanity, the global economy and capital markets. Whilst the full impact of the conflict is yet to be fully understood, the possibility of increased fuel inflation and rising gas prices is highly probable. The Group has no direct exposure to Russia or eastern European territories, and would not be directly impacted by increased energy prices given both the inflation linked nature of its rental income and the FRI nature of its leases. The Board will continue to monitor any impact this could have on the Group and our stakeholders.
GOING CONCERN AND VIABILITY
Going Concern
The Strategic Report and financial statements have set out the current financial position of the Group and Parent Company. The Board has regularly reviewed the position of the Company and its ability to continue as a going concern in Board meetings throughout the year. The Group has targeted high-quality properties in line with yield expectations and will continue to analyse investment opportunities to ensure that they are the right fit for the Group.
The Group has invested £590.4 million up to 31 December 2021, and £10.0 million (including acquisition costs) since the year end. The cash balance of the Group at year end was £52.5 million, of which £29.7 million was readily available for use. This is the cash balance at 31 December 2021 less any funds that are committed for future deployment, retentions, or working capital requirements. As stated in the Strategic Report, the Investment Manager has identified a visible pipeline of over £100 million of attractive investment opportunities for acquisition over the next 12 months.The Board has evaluated the financial position of the Group and plans in order to fund the Group's investments to 31 March 2023. Income generated from the Group's portfolio of assets is expected to substantially facilitate the payment of dividends to shareholders at the targeted rate. Based on this, the Board believes that the Group is in a position to manage its financial risks for the foreseeable future.
Impact of Covid-19
To date, Covid-19 has not impacted the Group's ability to continue as a going concern for reasons discussed below. As a result, the Directors believe that the Group is still well placed to manage its financing and other business risks and that the Group will remain viable, continuing to operate and meet its liabilities as they fall due despite the risk of Covid-19.
The Directors have performed an assessment of the ability of the Company to continue as a going concern, which includes the impact of Covid-19, for a period of at least 12 months from the date of signing these financial statements. The Directors have considered the expected obligations of the Company and its subsidiaries for the next 12 months and are confident that all will be met.
In considering the ability of the Group to continue as a going concern, the Directors also considered the impact of Covid-19 on their tenants. Tenants of the Group are Approved Providers who receive their housing benefit from local authorities, before it is passed to subsidiaries in the form of rental income. local authorities have confirmed they will not stop helping vulnerable people or paying for essential services during this time, and therefore the Directors do not foresee any issues in rent collection, however in the event of a downturn in revenue, variable costs would be reduced to enable the Group to meet its future liabilities. 99.8% of rental income due and payable for the period ended 31 December 2021 has been collected. 97.16% of all rent due and payable at 28 February 2022 has been collected.
The Directors have also considered reverse stress testing and the circumstances that would lead to a covenant breach. The property portfolio valuation at 31 December 2021 is based on a blended net initial yield of 5.21% for Norland Estates Limited, and 5.87% for TP REIT Propco 2 Limited. Yields would have to move by 239bps for Norland Estates Limited and 142bps for TP REIT Propco 2 Limited before valuations fell to a level at which the asset cover ratio covenant was breached. The interest cover ratio would need rental income collection to fall to 36% before the covenant is breached. For TP REIT Propco 2 Limited, the interest cover ratio would need rental income collection to fall to 59% before the covenant is breached.
The Board believes that there are currently no material uncertainties in relation to the Group's and Company's ability to continue for a period of at least 12 months from the date of the approval of the Group and Parent Company's financial statements and, therefore, has adopted the going concern basis in the preparation of the financial statements, please see Note 2 of the financial statements for more information.
Viability Statement
In accordance with Principle 21 of the AIC Code, the Board has assessed the prospects of the Group over a period longer than 12 months required by the relevant 'Going Concern' provisions. The Board has considered the nature of the Group's assets and liabilities, and associated cash flows, and has determined that five years, up to 31 December 2026, is the maximum timescale over which the performance of the Group can be forecast with a material degree of accuracy and therefore is the appropriate period over which to consider the viability.
In determining this timescale the Board has considered the following:
· That the business model of the Group assumes the future growth in its investment portfolio through the acquisition of Supported Housing assets which are intended to be held for the duration of the viability period.
• The length of the service level agreements between Approved Providers and care providers.
• The future growth of its investment portfolio of properties is achieved through long-term, inflation linked, fully repairing and insuring leases.
• The Group's property portfolio has a WAULT of 26.2 years to expiry, representing a secure income stream for the period under consideration.
• The Group's Loan Notes have a weighted average term of 12 to 13 years.
In assessing the Company's viability, the Board has carried out a robust assessment of the emerging risks and principal risks facing the Group, including those that would threaten its business model, future performance, solvency, liquidity and dividend cover for a five year period.
The Directors' assessment has been made with reference to the principal risks and uncertainties and emerging risks and how they could impact the prospects of the Group and Company both individually and in aggregate. The following risks in particular have been addressed in the assessment:
1. Default of one or more Approved Provider lessees
2. Risk of changes to the social housing regulatory regime
3. Non-payment of voids cover by care providers
The business model was subject to a sensitivity analysis, which involved flexing a number of key assumptions underlying the forecasts. The sensitivities performed were designed to provide the Directors with an understanding of the Group's performance in the event of a severe but plausible downturn scenario, taking full account of mitigating actions that could be taken to avoid or reduce the impact or occurrence of the underlying risks outlined below:
• Rental income: 8% decrease in rent received. This assumes that some care providers do not cover voids and this causes Approved Providers to default under 8% of SOHO's leases.
• Property valuations: It is assumed that the 8% of leases that Approved Providers default under will be valued at 20% below their vacant possession value. This leads to a 15.4% drop in value of the Company's portfolio. We believe that this is a severe downside case given that the valuation yields have not been affected by Covid-19 and we have collected 99.8% of rent due throughout the pandemic.
• Inflation: No inflation uplift on rental income but costs and dividends increase in line with inflation. We believe this is a severe downside assumption as we have been successful in collecting inflation linked uplifts on all leases to date.
The outcome in the downturn scenario on the Group's covenant testing is that there are no breaches and the Group can maintain a covenant headroom on existing facilities.
In the downturn scenario mitigating actions to reduce variable costs such as marketing, PR and any other non-critical spend would be required to enable the Group to meet its future liabilities.
The remaining principal risks and uncertainties, whilst having an impact on the Group's business, are not considered by the Directors to have a reasonable likelihood of impacting the Group's viability over the five year period.
Based on the results of this analysis, the Directors have a reasonable expectation that the Group and Company will be able to continue in operation and meet its liabilities as they fall due for the next five years.
BOARD APPROVAL OF THE STRATEGIC REPORT
The Strategic Report was approved by the Board and signed on its behalf by:
Chris Phillips
Chair
24 March 2022
GROUP FINANCIAL STATEMENTS
GROUP STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2021
| | | Year ended 31 December 2021 | | Year ended 31 December 2020 |
| | | | ||
| | Note | £'000 | | £'000 |
| | | | | |
| Income | | | | |
| Rental income | 5 | 33,117 | | 28,393 |
| Other Income | | | | 535 |
| Total income | | 33,117 | | 28,928 |
| | | | | |
| Expenses | | | | |
| Directors' remuneration | 6 | (307) | | (307) |
| General and administrative expenses | 9 | (2,067) | | (2,200) |
| Management fees | 8 | (4,552) | | (4,100) |
| Total expenses | | (6,926) | | (6,607) |
| | | | | |
| Gain from fair value adjustment on investment property | 14 |
8,998 | |
7,894 |
| | | | | |
| Operating profit | | 35,189 | | 30,215 |
| | | | | |
| | | | | |
| Finance income | 11 | 44 | | 102 |
| Finance costs | 12 | (6,823) | | (5,723) |
| Profit for the year before tax | | 28,410 | | 24,594 |
| | | | | |
| Taxation | 13 | - | | - |
| | | | | |
| Profit and total comprehensive income for the year | | 28,410 | | 24,594 |
| | | | | |
| IFRS Earnings per share - basic and diluted | 35 | 7.05p | | 6.82p |
The accompanying notes form an integral part of these Group Financial Statements.
GROUP STATEMENT OF FINANCIAL POSITION
As at 31 December 2021
| | | | 31 December 2021 | | 31 December 2020 |
| | | Note | £'000 | | £'000 |
| Assets | | | | | |
| Non-current assets | | | | | |
| Investment properties | | 14 | 641,293 | | 572,101 |
| Trade and other receivables | 15 | 2,311 | | | |
| Total non-current assets | | | 643,604 | | 572,101 |
| | | | | | |
| Current assets | | | | | |
| Assets held for sale | | 480 | | 110 | |
| Trade and other receivables | 16 | 3,435 | | 4,152 | |
| Cash, cash equivalents and restricted cash | | 17 | 52,470 | | 53,701 |
| Total current assets | | 56,385 | | 57,963 | |
| | | | | | |
| Total assets | | 699,989 | | 630,064 | |
| | | | | | |
| Liabilities Current liabilities | | | | | |
| Trade and other payables | 18 | 3,651 | | 4,969 | |
| Total current liabilities | | 3,651 | | 4,969 | |
| | | | | | |
| Non-current liabilities | | | | | |
| Other payables | | 19 | 1,523 | | 1,517 |
| Bank and other Borrowings | | 20 | 258,702 | | 194,927 |
| Total non-current liabilities | | 260,225 | | 196,444 | |
| Total liabilities | | | 263,876 | | 201,413 |
| | | | | | |
| Total net assets | | 436,113 | | 428,651 | |
| | | | | | |
| Equity | | | | | |
| Share capital | | 22 | 4,033 | | 4,033 |
| Share premium reserve | | 23 | 203,753 | | 203,776 |
| Treasury shares reserve | | 24 | (378) | | (378) |
| Capital reduction reserve | | 25 | 160,394 | | 166,154 |
| Retained earnings | 26 | 38,311 | | 55,066 | |
| Total Equity | | 436,113 | | 428,651 | |
| | | | | | |
| IFRS Net asset value per share - basic and diluted | 37 | 108.27p | | 106.42p | |
The Group Financial Statements were approved and authorised for issue by the Board on 24 March 2022 and signed on its behalf by:
Chris Phillips
Chair
24 March 2022
The accompanying notes form an integral part of these Group Financial Statements.
GROUP STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2021
| | | Share capital | Share premium reserve |
| Capital reduction reserve | Retained earnings | Total equity |
| Year ended 31 December 2021 | Note | £'000 | £'000 |
| £'000 | £'000 | £'000 |
| | | | | | | | |
| Balance at 1 January 2021 | | 4,033 | 203,776 | (378) | 166,154 | 55,066 | 428,651 |
| | | | | | | | |
| Profit and total comprehensive income for the year | | - | - | - | - | 28,410 | 28,410 |
| | | | | | | | |
| Transactions with owners | | | | | | | |
| Dividends paid | 27 | - | - | - | (5,760) | (15,165) | (20,926) |
| Share issue costs capitalised | 23 | - | (23) | - | - | - | (23) |
| | | | | | | | |
| Balance at 31 December 2021 | | 4,033 | 203,753 | (378) | 160,394 | 68,311 | 436,113 |
| | | | | | | | |
| | | Share capital | Share premium reserve |
| Capital reduction reserve | Retained earnings | Total equity |
| Year ended 31 December 2020 | Note | £'000 | £'000 |
| £'000 | £'000 | £'000 |
| | | | | | | | |
| Balance at 1 January 2020 | | 3,514 | 151,157 | (378) | 166,154 | 49,286 | 369,733 |
| | | | | | | | |
| Profit and total comprehensive income for the year | |
- |
- |
- |
- |
24,594 |
|
| | | | | | | | |
| Transactions with owners | | | | | | | |
| Ordinary Shares issued in the year at a premium | 22, 23 | 519 | 54,481 | - | - | - | 55,000 |
| Share issue costs capitalised | 23 | - | (1,862) | - | - | - | (1,862) |
| Dividends paid | 27 | - | - | - | - | (18,814) | (18,814) |
| | | | | | | | |
| Balance at 31 December 2020 | | 4,033 | 203,776 | (378) | 166,154 | 55,066 | 428,651 |
| | | | | | | | |
The accompanying notes form an integral part of these Group Financial Statements.
GROUP STATEMENT OF CASH FLOWS
For the year ended 31 December 2021
| | |
31 December 2021 | | Year ended 31 December 2020 |
| | | | ||
| | Note | £'000 | | £'000 |
| | | | | |
| Cash flows from operating activities | | | | |
| | | | | |
| Profit before income tax | | 28,410 | | 24,594 |
| Adjustments for: | | | | |
| | | | | |
| Gain from fair value adjustment on investment property | | (8,998) | | (7,894) |
| Finance income | | (44) | | (102) |
| Finance costs | | 6,823 | | 5,723 |
| | | | | |
| Operating results before working capital changes | | 26,191 | | 22,322 |
| | | | | |
| (Increase)/Decrease in trade and other receivables | | (1,237) | | 640 |
| (Decrease)Increase in trade and other payables | | (242) | | 1,545 |
| Net cash flow generated from operating activities | | 24,712 | | 24,507 |
| | | | | |
| Cash flows from investing activities | | | | |
| | | | | |
| Purchase of investment properties | | (61,350) | | (95,609) |
| Prepaid acquisition costs (paid) | | (18) | | (3) |
| Disposal proceeds from sale of assets | | 125 | | - |
| Restricted cash - paid | | (410) | | (2,862) |
| Restricted cash - released | | 279 | | 4,042 |
| Interest received | | - | | 59 |
| Net cash flow used in investing activities | | (61,374) | | (94,373) |
| | | | | |
| Cash flows from financing activities | | | | |
| | | | | |
| Proceeds from issue of Ordinary Shares at a premium | | - | | 55,000 |
| Ordinary Share issue costs capitalised | | (23) | | (1,862) |
| Interest paid | | (5,615) | | (4,645) |
| Bank borrowings drawn | 20 | 195,000 | | 29,408 |
| Restricted bank borrowings | 20 | (130,000) | | - |
| Loan arrangement fees paid | 21 | (2,728) | | (1,101) |
| Dividends paid | 27 | (20,925) | | (18,814) |
| Net cash flow generated from financing activities | | 35,709 | | 57,986 |
| | | | | |
| Net decrease in Cash, cash equivalents and restricted cash | | (953) | | (11,880) |
| | | | | |
| Cash and cash equivalents at the beginning of the year | | 52,852 | | 64,732 |
| | | | | |
| Cash and cash equivalents at the end of the year | 17 | 51,899 | | 52,852 |
The accompanying notes form an integral part of these Group Financial Statements.
NOTES TO THE GROUP FINANCIAL STATEMENTS
For the ended 31 December 2021
1. CORPORATE INFORMATION
Triple Point Social Housing REIT PLC (the "Company") is a Real Estate Investment Trust ("REIT") incorporated in England and Wales under the Companies Act 2006 as a public company limited by shares on 12 June 2017. The address of the registered office is 1 King William Street, United Kingdom, EC4N 7AF. The Company is registered as an investment company under section 833 of the Companies Act 2006 and is domiciled in the United Kingdom.
The principal activity of the Company is to act as the ultimate parent company of Triple Point Social Housing REIT PLC and its subsidiaries (the "Group") and to provide shareholders with an attractive level of income, together with the potential for capital growth from investing in a portfolio of social homes.
2. BASIS OF PREPARATION
The financial information contained in this results announcement has been prepared on the basis of the accounting policies set out in the statutory financial statements for the year ended 31 December 2021 which are consistent with policies those adopted in the year ended 31 December 2020. Whilst the financial information included in this announcement has been computed in accordance with UK adopted international accounting standards, this announcement does not itself contain sufficient disclosures to comply with IFRS. The financial information does not constitute the Group's statutory financial statements for the years ended 31 December 2021 or 31 December 2020, but is derived from those financial statements. Financial statements for the year ended 31 December 2020 have been delivered to the Registrar of Companies and those for the year ended 31 December 2021 will be delivered following the Company's Annual General Meeting. The auditors' reports on both the 31 December 2021 and 31 December 2020 financial statements were unqualified; did not draw attention to any matters by way of emphasis; and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.
The financial statements of the Group have been prepared in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006 as applicable to companies reporting under those standards. All accounting policies have been applied consistently.
The Group's Financial Statements have been prepared on a historical cost basis, as modified for the Group's investment properties, which have been measured at fair value. Gains or losses arising from changes in fair values are included in profit or loss.
On 31 December 2020, IFRS as adopted by the European Union at that date was brought into UK law and became UK-adopted international accounting standards, with future changes being subject to endorsement by the UK Endorsement Board. The Company transitioned to UK-adopted international accounting standards in its consolidated financial statements on 1 January 2021. There was no impact or changes in accounting policies from the transition. The Group has applied the same accounting policies in these Financial Statements as in its 2020 annual financial statements, except for those that relate to new standards and interpretations effective for the first time for periods beginning on or after 1 January 2021. The new standards and amendments impacting the Group are:
· Interest Rate Benchmark Reform - Phase 2 (Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16); and
· Covid-19-Related Rent Concessions beyond 30 June 2021 (Amendment to IFRS 16)
· The Directors have given due consideration to the impact on the financial statements of the amendments as follows:
Interest Rate Benchmark Reform - Phase 2
The above is effective from 1 January 2021. The amendments state that if a financial contract results in a substantial modification as a direct result of IBOR reform, a practical expedient can be applied and the changes will be accounted for by updating the effective interest rate. The amendments also allow a series of exemptions from the regular hedge accounting. During the year the Group renegotiated the Revolving Credit Facility, setting pre agreed terms for the transition of LIBOR to SONIA. Given that the original facility was repaid in August 2021, and the new facility remains undrawn at 31 December 2021, there has been no material impact on the Group's financial statements from the amendments.
Covid-19-Related Rent Concessions beyond 30 June 2021
As a result of Covid-19 there was an amendment to IFRS 16, Leases, for Covid-19-related rent concessions. The amendment to the standard has been considered, however at the reporting date had not been required to be applied. No material impact as a result of new standards is expected, as the Group is the lessor.
Amendments to IAS 1 on Classification of liabilities as Current or Non-Current are effective for the financial years commencing on or after 1 January 2023 and are to be applied retrospectively. It is not expected that the amendments may have an impact on the presentation and classification of liabilities in the Group Statement of Financial Position based on rights that are in existence at the end of the reporting period.
There are other new standards and amendments to standards and interpretations which have been issued that are effective in future accounting periods, and which the Group has decided not to adopt early. None of these are expected to have a material impact on the condensed consolidated financial statements of the Group.
2.1. Going concern
The Group benefits from a secure income stream from long leases which are not overly reliant on any one tenant and present a well-diversified risk. The Directors have reviewed the Group's forecast which shows the expected annualised rental income exceeds the expected operating costs of the Group. 99.82% of rental income due and payable for the period ended 31 December 2021 has been collected. 97.16% of all rent due and payable at 28 February 2022 has been collected.
To date, Covid-19 has not impacted the Group's ability to continue as a going concern for reasons discussed below. As a result, the Directors believe that the Group is still well placed to manage its financing and other business risks and that the Group will remain viable, continuing to operate and meet its liabilities as they fall due. During the year, Fitch Ratings Limited assigned the Company an Investment Grade Long-Term Issuer Default Rating of 'A-' with a stable outlook, and a senior secured rating of 'A'.
The Directors have performed an assessment of the ability of the Group to continue as a going concern, which includes the impact of Covid-19, for a period of at least 12 months from the date of signing these financial statements. The Directors have considered the expected obligations of the Group for the next 12 months and are confident that all will be met.
In considering the ability of the Group to continue as a going concern, the Directors also considered the impact of Covid-19 on their tenants. Tenants of the Group are Registered Providers who receive their housing benefit from Local Authorities, before it is passed to subsidiaries in the form of rental income. To date, Covid-19 has not had any impact on, and the Directors do not foresee any issues in, rent collection, however in the event of a downturn in revenue, variable costs would be reduced to enable the Group to meet its future liabilities.
The Directors have also considered the financing provided to the Group. Norland Estates Limited and TP REIT Propco 2 Limited have bank facilities with MetLife Investment Management and Barings respectively. TP REIT Propco 5 Ltd has a RCF with Lloyds and NatWest however this was undrawn at the year end and remains so at date of signing. The loan secured by Norland Estates Limited is subject to an asset cover ratio covenant of x2.00 (amended from previous covenant of x2.25 in August 2021 to bring more in line with the ACR covenant in the new Note Purchase Agreement with MetLife Investment Management and Barings). The latest external valuation was carried out at 31 December 2021 and at that point the asset cover ratio was x2.75. The loan is also subject to an interest cover ratio. The covenant ratio is not less than x1.75 and at 31 December 2021 the interest cover ratio was x4.90. The loan secured by TP REIT Propco 2 Limited with MetLife Investment Management and Barings is subject to an asset cover ratio covenant of x1.67. As at 31 December 2021, the asset cover ratio was x2.01. The loan is also subject to an interest cover ratio. The covenant ratio is not less than x1.75 and at 31 December 2021 the interest cover ratio was x4.33.
The Directors have also considered reverse stress testing and the circumstances that would lead to a covenant breach. For Norland Estates Limited, the property portfolio valuation at 31 December 2021 is based on a blended net initial yield of 5.21%, and 5.34% for TP REIT Propco 2 Limited. Yields would have to move by 179bps for Norland Estates Limited and 101bps for TP REIT Propco 2 Limited before valuations fell to a level at which the asset cover ratio covenant was breached. The interest cover ratio would need rental income collection to fall to 36% before the covenant is breached. And for TP REIT Propco 2 Limited, the interest cover ratio would need rental income collection to fall to 40% before the covenant is breached. Given the level of headroom, the Directors are of the view that the risk of scenarios materialising that would lead to a breach of the covenants are remote.
Under the downside model the forecasts have been stressed to show the effect of Care Providers ceasing to pay their voids liability, and as a result lessees being unable to pay rent on void units. It assumes that the Registered Provider (the tenant) will not be able to pay the voids. Under the downside model the Company and its subsidiaries will be able to settle its liabilities for a period of at least 12 months from the date of signing these financial statements. As a result of the above, the Directors are of the opinion that the going concern basis adopted in the preparation of the financial statements is appropriate.
The Group has no short or medium-term refinancing risk given the 11.6 year average maturity of its long-term debt facilities with MetLife Investment Management and Barings, the first of which expires in June 2028, and which are fully fixed at an all-in weighted average rate of 2.74%.
Based on the forecasts prepared and the intentions of the parent company, the Directors consider that the Company and its subsidiaries will be able to settle its liabilities for a period of at least 12 months from the date of signing these financial statements and therefore has prepared these financial statements on the going concern basis.
2.2. Currency
The Group financial information is presented in Sterling which is also the Company's functional currency.
3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
In the application of the Group's accounting policies, which are described in note 4, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are outlined below:
Estimates:
3.1. Investment properties (note 14)
The Group uses the valuation carried out by its independent valuers as the fair value of its property portfolio. The valuation is based upon assumptions including future rental income and the appropriate discount rate. The valuers also make reference to market evidence of transaction prices for similar properties. Further information is provided in note 14.
The Group's properties have been independently valued by Jones Lang LaSalle Limited ("JLL" or the "Valuer") in accordance with the definitions published by the Royal Institute of Chartered Surveyors' ("RICS") Valuation - Professional Standards, July 2020, Global and UK Editions (commonly known as the "Red Book"). JLL is one of the most recognised professional firms within social housing valuation and has sufficient current local and national knowledge of both social housing generally and specialist supported housing ("SSH") and has the skills and understanding to undertake the valuations competently.
With respect to the Group's Financial Statements, investment properties are valued at their fair value at each Statement of Financial Position date in accordance with IFRS 13 which recognises a variety of fair value inputs depending upon the nature of the investment. Specifically:
Level 1 - Unadjusted, quoted prices for identical assets and liabilities in active (typically quoted) markets;
Level 2 - Quoted prices for similar assets and liabilities in active markets; and
Level 3 - External inputs are "unobservable". Value is the Director's best estimate, based on advice from relevant knowledgeable experts, use of recognised valuation techniques and a determination of which assumptions should be applied in valuing such assets and with particular focus on the specific attributes of the investments themselves.
Given the bespoke nature of each of the Group's investments, all of the Group's investment properties are included in Level 3.
Judgements:
3.2. Asset acquisitions
The Group acquires subsidiaries that own investment properties. At the time of acquisition, the Group considers whether each acquisition represents the acquisition of a business or the acquisition of an asset. The Directors consider whether a set of activities and assets which include an input and a substantive process that together significantly contribute to the ability to create outputs has been acquired in determining whether the acquisition represents the acquisition of a business. An optional concentration test is also performed which assesses whether substantially all of the fair value of the gross assets acquired is concentrated in a single asset or group of similar assets. If such a concentration exists, the transaction is not viewed as an acquisition of a business and no further assessment of the business combination guidance is required. The Group has not purchased, and does not intend to purchase, any subsidiaries which incorporate any assets other than investment property.
Where such acquisitions are not judged to be the acquisition of a business, they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based upon their relative fair values at the acquisition date. Accordingly, no goodwill or deferred tax arises.
All corporate acquisitions during the period have been treated as asset purchases rather than business combinations because the optional concentration test has been performed which has determined that the fair value of the gross asset acquired is concentrated into a single asset, investment property and therefore is not a business combination.
3.3. The Group as lessor (note 28)
The Group has determined, based on an evaluation of the terms and conditions of the arrangements, that it retains all the significant risks and rewards of ownership of its properties and so accounts for the leases as operating leases. This evaluation involves judgement and the key factors considered include comparing the duration of the lease terms compared to the economic life of the underlying property asset, or in the case of sub-leased properties, the remaining life of the right-of-use asset arising from the headlease, and the present value of minimum lease payments compared to the fair value of the asset at acquisition.
3.4. Lease term (note 5)
Rental income is recognised on a straight line basis over the expected lease term. A judgement has to be made by the Directors as to the expected term of each lease. The judgement involves determining whether put and call options on certain leases will be exercised. This judgement impacts the length of time over which lease incentives are recognised. The key element of this judgement is whether the Directors can be "reasonably certain" that any options or breaks in place to extend the lease term will be exercised at the expiry of the current lease, which is typically some 20 years in the future. In particular, consideration was given to the future regulatory environment, government policy on social housing and future alternative uses for the property. The Directors concluded that it was impossible to say with reasonable certainty that an option will be exercised. The Directors concluded that lease terms should be restricted to the initial term of the lease, or to the break date, except where reversionary leases have already been executed or where options to extend have already been exercised.
The principal accounting policies applied in the preparation of the financial statements are set out below.
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
4.1. Basis of consolidation
The financial statements comprise the financial information of the Group as at the year end date.
Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. The financial information of the subsidiaries are included in the financial statements from the date that control commences until the date that control ceases.
If an equity interest in a subsidiary is transferred but a controlling interest continues to be held after the transfer then the change in ownership interest is accounted for as an equity transaction.
Accounting policies of the subsidiaries are consistent with the policies adopted by the Company.
4.2. Investment property
Investment property, which is property held to earn rentals and/or for capital appreciation, is initially measured at cost, being the fair value of the consideration given, including expenditure that is directly attributable to the acquisition of the investment property. The Group recognises asset acquisitions on completion. After initial recognition, investment property is stated at its fair value at the Statement of Financial Position date. Gains and losses arising from changes in the fair value of investment property are included in profit or loss for the period in which they arise in the Statement of Comprehensive Income. Subsequent expenditure is capitalised only when it is probable that future economic benefits are associated with the expenditure.
An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected to be obtained from the disposal. Any gain or loss arising on de-recognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recorded in profit or loss in the period in which the property is derecognised.
Investment properties under construction are financed by the Group where the Group enters into contracts for the development of a pre-let property under a forward funding agreement. The Group does not expose itself to any speculative development risk as the proposed property is pre-let to a tenant under an agreement for lease and the Group enters into a fixed price development agreement with the Developer. Investment properties under construction are initially recognised in line with stage payments made to the developer. The properties are revalued at fair value at each reporting date in the form of a work-in-progress value. The work-in-progress value of investment properties under construction is estimated as fair value of the completed asset less any costs still payable in order to complete, which includes the Developer's margin.
During the period between initial investment and the lease commencement date (practical completion of the works) a coupon interest due on the funds paid in the range of 6-6.75% per annum is payable by the Developer. The accrued coupon interest is considered as a discount on the fixed contract price. It does not result in any cash flows during the development but reduces the outstanding balance payable to the developer on practical completion. When practical completion is reached, the completed investment property is transferred to operational assets at the fair value on the date of completion.
Significant accounting judgements, estimates and assumptions made for the valuation of investment properties are discussed in note 3.
4.3. Leases
Lessor
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
The Group has determined that it retains all the significant risks and rewards of ownership of the properties it has acquired to date and accounts for the contracts as operating leases as discussed in note 3.
Properties leased out under operating leases are included in investment property in the Statement of Financial Position. Rental income from operating leases is recognised on a straight-line basis over the term of the relevant leases.
Lessee
As a lessee the Group recognises a right-of-use asset within investment properties and a lease liability for all leases, which is included within other payables (note 18). The lease liabilities are measured at the present value of the remaining lease payments, discounted using an appropriate discount rate. The discount rate applied by the Group is the incremental borrowing rate at which a similar borrowing could be obtained from an independent creditor under comparable terms and conditions. Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding and are reduced for lease payments made.
As leasehold properties meet the definition of investment property, the right-of-use assets are presented within investment property (note 14), and after initial recognition are subsequently measured at fair value.
Sub-leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership of the underlying property asset to the lessee. Sub-leases of leasehold properties are classified with reference to the right-of-use asset arising from the head lease. All other leases are classified as operating leases.
4.4. Rent and other receivables
Rent and other receivables are amounts due in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets.
Rent receivables are initially recognised at fair value plus transaction costs and are subsequently carried at amortised cost, less provision for impairment.
Impairment provisions for current and non-current rent receivables are recognised based on the simplified approach within IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses. During this process the probability of the non-payment of the rent receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the rent receivables. For rent receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised in the consolidated statement of comprehensive income. On confirmation that
the rent receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.
Impairment provisions for all other receivables are recognised based on a forward-looking expected credit loss model using the general approach. The methodology used to determine the amount of the provision is based on whether there has been a significant increase in credit risk since initial recognition of the financial asset. For those where the credit risk has not increased significantly since initial recognition of the financial asset, twelve month expected credit losses along with gross interest income are recognised. For those for which credit risk has increased significantly, lifetime expected credit losses along with the gross interest income are recognised. For those that are determined to be credit impaired, lifetime expected credit losses along with interest income on a net basis are recognised.
4.5. Cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash include cash in hand, cash held by lawyers and liquidity funds with a term of no more than three months that are readily convertible to a known amount of cash, and which are subject to an insignificant risk of changes in value.
Cash held by lawyers is money held in escrow for expenses expected to be incurred in relation to investment properties pending completion. These funds are available immediately on demand.
Restricted Cash represents cash held in relation to retentions for repairs, maintenance and improvement works by the vendors that is committed on the acquisition of the properties; and restricted bank borrowings.
4.6. Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the expenditure required to settle the present obligation at the Statement of Financial Position date, taking into account the risks and uncertainties surrounding the obligation.
4.7. Trade and other payables
Trade and other payables are classified as current liabilities if payment is due within one year or less from the end of the current accounting period. If not, they are presented as non-current liabilities. Trade and other payables are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method until settled.
4.8. Bank and other borrowings
Bank borrowings and the Group's loan notes are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensure that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the Group Statement of Financial Position. For the purposes of each financial liability, interest expense includes initial transaction costs and any premium payable on redemption, as well as any interest or coupon payment while the liability is outstanding.
Modifications to borrowing terms are assessed when agreed with the lender to determine if they represent a substantial or non-substantial modification under IFRS 9. This involves the '10% test' comparing the discounted present value of the revised cash flows against the carrying value of the loan, as well as a review of any other qualitative changes to the terms. If the modifications are deemed substantial, the existing liability is extinguished and a new liability is recognised, with the difference between the carrying amount of the existing financial liability and the fair value of the modified financial liability at modification date being recognised in the Statement of Comprehensive Income. If the modification is deemed non-substantial, costs or fees incurred are adjusted against the liability and are amortised over the remaining term.
4.9. Taxation
Taxation on the element of the profit or loss for the period that is not exempt under UK REIT regulations would be comprised of current and deferred tax. Tax is recognised in the Statement of Comprehensive Income except to the extent that it relates to items recognised as direct movement in equity, in which case it is recognised as a direct movement in equity. Current tax is the expected tax payable on any non REIT taxable income for the period, using tax rates enacted or substantively enacted at the Statement of Financial Position date, and any adjustment to tax payable in respect of previous periods.
4.10 Dividends payable to shareholders
Dividends to the Company's shareholders are recognised as a liability in the Group's Financial Statements in the period in which the dividends are approved. In the UK, interim dividends are recognised when paid.
4.11 Rental income
Rental income from investment property is recognised on a straight-line basis over the term of ongoing leases and is shown gross of any UK income tax. A rental adjustment is recognised from the rent review date in relation to unsettled rent reviews, where the Directors are reasonably certain that the rental uplift will be agreed.
Tenant lease incentives are recognised as a reduction of rental revenue on a straight-line basis over the term of the lease. These are recognised within trade and other receivables on the Statement of Financial Position.
When the Group enters into a forward funded transaction, the future tenant signs an agreement for lease. No rental income is recognised under the agreement for lease, but once the practical completion has taken place the formal lease is signed at which point rental income commences to be recognised in the Statement of Comprehensive Income.
4.12 Finance income and finance costs
Finance income is recognised as interest accrues on cash balances held by the Group. Finance costs consist of interest and other costs that the Group incurs in connection with bank and other borrowings. These costs are expensed in the period in which they occur. Borrowing costs that are separately identifiable and directly attributable to the acquisition or construction of forward funded assets that take a substantial period of time to complete are capitalised as part of the development cost in investment property (note 14).
4.13 Expenses
All expenses are recognised in the Statement of Comprehensive Income on an accruals basis.
4.14 Investment management fees
Investment advisory fees are recognised in the Statement of Comprehensive Income on an accruals basis.
4.15 Share issue costs
The costs of issuing or reacquiring equity instruments (other than in a business combination) are accounted for as a deduction from equity.
4.16 Treasury shares
Consideration paid or received for the purchase or sale of treasury shares is recognised directly in equity. The cost of treasury shares held is presented as a separate reserve ("the treasury share reserve"). Any excess of the consideration received on the sale of treasury shares over the weighted average cost of the shares sold is credited to retained earnings.
5. RENTAL INCOME
| | Year ended | | Year ended |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Rental income - freehold assets | 31,071 | | 26,406 |
| Rental income - leasehold assets | 2,046 | | 1,987 |
| | 33,117 | | 28,393 |
The lease agreements between the Group and the Registered Providers are fully repairing and insuring leases. The Registered Providers are responsible for the settlement of all present and future rates, taxes, costs and other impositions payable in respect of the property. As a result, no direct property expenses were incurred.
All rental income arose within United Kingdom.
6. DIRECTORS' REMUNERATION
| | Year ended | | Year ended |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Directors' fees | 275 | | 275 |
| Employer's National Insurance Contributions | 32 | | 32 |
| | 307 | | 307 |
| Additional fees paid - capitalised as share issue costs | - | | 7 |
| | 307 | | 314 |
The Directors are remunerated for their services at such rate as the Directors shall from time to time determine. The Chair receives a Director's fee of £75,000 per annum (2020: £75,000), and the other Directors of the Board receive a fee of £50,000 per annum (2020: £50,000). The Directors are also entitled to an additional fee of £7,500 in connection with the production of every prospectus by the Company (including the initial Issue). Each Director received this additional fee in 2020 following the publication of the prospectus, but no additional fees were received during 2021. (The additional fees are treated as a cost of issue not included as an expense through the Statement of Comprehensive Income).
A summary of the Directors' emoluments, including the disclosures required by the Companies Act 2006, is set out in the Directors' Remuneration Report within the Corporate Governance Report. None of the Directors received any advances or credits from any group entity during the year.
7. PARTICULARS OF EMPLOYEES
The Group had no employees during the year other than the directors (2020: none).
8. MANAGEMENT FEES
| | Year ended | | Year ended |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Management fees | 4,552 | | 4,100 |
| | 4,552 | | 4,100 |
On 20 July 2017 Triple Point Investment Management LLP 'TPIM' was appointed as the delegated investment manager of the Company by entering into the property management services and delegated portfolio management agreement. Under this agreement the delegated investment manager will advise the Company and provide certain management services in respect of the property portfolio. A Deed of Variation was signed on 23 August 2018. This defined cash balances in the Net Asset Value calculation in respect of the management fee as "positive uncommitted cash balances after deducting any borrowings". The management fee is an annual management fee which is calculated quarterly in arrears based upon a percentage of the last published Net Asset Value of the Group (not taking into account uncommitted cash balances after deducting borrowings as described above) as at 31 March, 30 June, 30 September and 31 December in each year on the following basis with effect from Admission:
· on that part of the Net Asset Value up to and including £250 million, an amount equal to 1% of such part of the Net Asset Value;
· on that part of the Net Asset Value over £250 million and up to and including £500 million, an amount equal to 0.9% of such part of the Net Asset Value;
· on that part of the Net Asset Value over £500 million and up to and including £1 billion, an amount equal to 0.8% of such part of the Net Asset Value;
· on that part of the Net Asset Value over £1 billion, an amount equal to 0.7% of such part of the Net Asset Value.
Management fees of £4,552,000 (2020: £4,100,000) were chargeable by TPIM during the year. At the year end £1,146,000 (2020: £1,132,000) was due to TPIM.
By two agreements dated 30 June 2020, the Company appointed TPIM as its Alternative Investment Fund Manager by entering into an Alternative Investment Fund Management Agreement and (separately) documented TPIM's continued appointment as the provider of portfolio and property management services by entering into an Investment Management Agreement.
9. GENERAL AND ADMINISTRATIVE EXPENSES
| | Year ended | | Year ended |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| Legal and professional fees | 673 | | 666 |
| Audit fees | 256 | | 227 |
| Administration fees | 336 | | 327 |
| Lease transfer costs | 40 | | 343 |
| Other administrative expenses | 762 | | 637 |
| | 2,067 | | 2,200 |
On 1 October 2019 Hanway Advisory Limited, who are associated with Triple Point Investment Management LLP, the investment manager, were appointed to provide Administration and Company Secretarial Services to the Group.
Within Administration Fees is an amount of £326,000 (2020: £315,000) for Company Secretarial Services chargeable by Hanway Advisory Limited.
The audit fees in the table above are inclusive of VAT, and therefore differ to the fees in note 10 which are reported net of VAT.
On 30 June 2020 Triple Point Investment Management LLP was appointed as the fund's Alternative Investment Fund Manager (AIFM) to perform certain functions for the Group. During the year AIFM services of £175,000 (2020: £76,000) were chargeable by TPIM. At the year end £44,000 (2020: £38,000) was due to TPIM.
Lease transfer costs represent legal and administrative costs incurred in relation to the transfer of 12 leases from Westmoreland and amortisation costs in relation to the original transfer costs.
10. AUDIT FEES
| | Year ended | | Year ended |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Group audit fees - current year | 189 | | 155 |
| Group audit fees - prior year | - | | 15 |
| Subsidiary audit fees | 24 | | 19 |
| | 213 | | 189 |
Non audit fees paid to BDO LLP included £29,000 (2020: £27,000) in relation to the half year interim review and nil (2020: £22,000) in relation to eNAV work.
The audit fee for the following subsidiaries has been borne by the Company:
| · TP REIT Super Holdco Limited · | · Norland Estates Limited · |
| · TP REIT Holdco 1 Limited · | · TP REIT Propco 2 Limited · |
| · TP REIT Holdco 2 Limited · | · TP REIT Propco 3 Limited · |
| · TP REIT Holdco 3 Limited | · TP REIT Propco 4 Limited |
| · TP REIT Holdco 4 Limited | · TP REIT Propco 5 Limited |
| · TP REIT Holdco 5 Limited | |
11. FINANCE INCOME
| | Year ended | | Year ended |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Other interest income | 44 | | 43 |
| Interest on liquidity funds | - | | 59 |
| | 44 | | 102 |
12. FINANCE COSTS
| | Year ended | | Year ended |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Interest payable on bank borrowings | 5,492 | | 4,627 |
| Borrowing costs capitalised (note 14) | - | | (128) |
| Amortisation of loan arrangement fees | 1,279 | | 1,163 |
| Head lease interest expense | 44 | | 43 |
| Bank charges | 8 | | 18 |
| | 6,823 | | 5,723 |
| Total finance cost for financial liabilities not at fair value through profit or loss | 6,815 | | 5,705 |
13. TAXATION
As a UK REIT, the Group is exempt from corporation tax on the profits and gains from its property investment business, provided it meets certain conditions as set out in the UK REIT regulations. For the current period, the Group did not have any non-qualifying profits and accordingly there is no tax charge in the period. If there were any non-qualifying profits and gains, these would be subject to corporation tax. It is assumed that the Group will continue to be a group UK REIT for the foreseeable future, such that deferred tax has not been recognised on temporary differences relating to the property rental business.
| | Year ended | | Year ended |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| Current tax | | | |
| Corporation tax charge for the year | - | | - |
| | | | |
| Total current income tax charge in the profit or loss | - | | - |
The tax charge for the period is less than the standard rate of corporation tax in the UK of 19% (2020:19%). The differences are explained below.
| | Year ended | | Year ended |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Profit for the year before tax | 28,410 | | 24,594 |
| | | | |
| Tax at UK corporation tax standard rate of 19% | 5,398 | | 4,673 |
| Change in value of investment properties | (1,710) | | (1,500) |
| Exempt REIT income | (4,202) | | (3,539) |
| Amounts not deductible for tax purposes | 22 | | 21 |
| Unutilised residual current period tax losses | 492 | | 345 |
| | - | | - |
UK REIT exempt income includes property rental income that is exempt from UK Corporation Tax in accordance with Part 12 of CTA 2010.
14. INVESTMENT PROPERTY
| | | | | Operational assets £'000 | | Properties under development £'000 | | Total £'000 |
| As at 1 January 2021 | | | | 565,533 | | 6,568 | | 572,101 |
| | | | | | | | | |
| Acquisitions and additions | | | | 59,114 | | 1,568 | | 60,682 |
| Fair value adjustment* | | | | 9,513 | | - | | 9,513 |
| Movement in head lease ground rent liability | | | | 5 | | - | | 5 |
| Transfer of completed properties | | | | 8,136 | | (8,136) | | - |
| Reclassified to assets held for sale | | | | (1,008) | | - | | (1,008) |
| As at 31 December 2021 | | | | 641,293 | | - | | 641,293 |
| | | | | | | | | |
| As at 1 January 2020 | | | | 454,400 | | 17,949 | | 472,349 |
| | | | | | | | | |
| Acquisitions and additions | | | | 77,126 | | 14,711 | | 91,837 |
| Fair value adjustment* | | | | 7,049 | | 908 | | 7,957 |
| Changes to head lease right-of-use assets | | | | 3 | | - | | 3 |
| Borrowing costs capitalised (note 12) | | | | - | | 128 | | 128 |
| Transfer of completed properties | | | | 27,128 | | (27,128) | | - |
| Reclassified to assets held for sale | | | | (173) | | - | | (173) |
| As at 31 December 2020 | | | | 565,533 | | 6,568 | | 572,101 |
| | | | | | | | | |
*Gain from fair value adjustment on investment property in the Statement of Comprehensive Income includes loss from fair value adjustments on assets held for sale.
| Reconciliation to independent valuation:
| | 31 December 2021 | | 31 December 2020 |
| | | £'000 | | £'000 |
| | | | | |
| Investment property valuation | | 642,018 | | 571,463 |
| Fair value adjustment - headlease ground rent | | 1,462 | | 1,457 |
| Fair value adjustment - lease incentive debtor | | (2,187) | | (819) |
| | | 641,293 | | 572,101 |
Properties under development represent contracts for the development of a pre-let property under a forward
funding agreement. Where the development period is expected to be a substantial period, the borrowing costs that can be directly attributed to getting the asset ready for use are capitalised as part of the investment property value. All properties under development were completed in the year. There are no properties under development as at 31 December 2021.
The carrying value of leasehold properties at 31 December 2021 was £39.36 million (2020: £36.5 million).
In accordance with "IAS 40: Investment Property", the Group's investment properties have been independently valued at fair value by Jones Lang LaSalle Limited ("JLL"), an accredited external valuer with recognised and relevant
professional qualifications. The independent valuers provide their fair value of the Group's investment property portfolio every three months.
JLL were appointed as external valuers by the Board on 11 December 2017. JLL has provided valuations services to the Group. The proportion of the total fees payable by the Company to JLL's total fee income is minimal. Additionally, JLL has a rotation policy in place whereby the signatories on the valuations rotate after seven years.
% Key Statistic
The metrics below are in relation to the total investment property portfolio held as at 31 December 2021.
| Portfolio metrics | | 31 December 2021 | 31 December 2020 |
| Capital Deployed (£'000) * | | 569,991 | 512,296 |
| Number of Properties | | 488 | 445 |
| Number of Tenancies*** | | 382 | 341 |
| Number of Approved Providers*** | | 24 | 20 |
| Number of Local Authorities*** | | 156 | 155 |
| Number of Care Providers*** | | 114 | 98 |
| Valuation Net Initial Yield** | | 5.25% | 5.27% |
*calculated excluding acquisition costs
**calculated using IAS 40 valuations (excluding forward funding acquisitions)
*** calculated excluding forward funding acquisitions
| | 31 December 2021 | 31 December 2020 | ||
| Region | *Cost £'000 | % of funds invested | *Cost £'000 | % of funds invested |
| North West | 122,622 | 21.5 | 115,025 | 22.5 |
| West Midlands | 92,794 | 16.3 | 88,397 | 17.3 |
| East Midlands | 64,595 | 11.3 | 65,559 | 12.8 |
| London | 49,526 | 8.7 | 49,213 | 9.6 |
| North East | 47,061 | 8.3 | 47,088 | 9.2 |
| Yorkshire | 81,034 | 14.2 | 46,013 | 9.0 |
| South East | 52,196 | 9.2 | 45,682 | 8.9 |
| South West | 27,900 | 4.9 | 27,900 | 5.4 |
| East | 23,703 | 4.2 | 20,229 | 3.9 |
| Scotland | 5,900 | 1.0 | 4,530 | 0.9 |
| Wales | 2,660 | 0.4 | 2,660 | 0.5 |
| Total | 569,991 | 100 | 512,296 | 100 |
*excluding acquisition costs
Fair value hierarchy
| | Date of valuation | Total | Quoted prices in active markets (Level 1) | Significant observable inputs (Level 2) | Significant unobservable inputs (Level 3) |
| | | | | | |
| | | £'000 | £'000 | £'000 | £'000 |
| Assets measured at fair value: Investment properties | 31 December 2021 | 641,293 | - | - | 641,293 |
| Investment properties | 31 December 2020 | 572,101 | - | - | 572,101 |
There have been no transfers between Level 1 and Level 2 during the year, nor have there been any transfers between Level 2 and Level 3 during the year.
The valuations have been prepared in accordance with the RICS Valuation - Professional Standards (incorporating the International Valuation Standards) by JLL, one of the leading professional firms engaged in the social housing sector.
As noted previously, all of the Group's investment properties are reported as Level 3 in accordance with IFRS 13 where external inputs are "unobservable" and value is the Directors' best estimate, based upon advice from relevant knowledgeable experts.
In this instance, the determination of the fair value of investment property requires an examination of the specific merits of each property that are in turn considered pertinent to the valuation.
These include i) the regulated social housing sector and demand for the facilities offered by each Specialised Supported Housing ("SSH") property owned by the Group; ii) the particular structure of the Group's transactions where vendors, at their own expense, meet the majority of the refurbishment costs of each property and certain purchase costs; iii) detailed financial analysis with discount rates supporting the carrying value of each property; iv) underlying rents for each property being subject to independent benchmarking and adjustment where the Group considers them too high (resulting in a price reduction for the purchase or withdrawal from the transaction); and v) a full repairing and insuring lease with annual indexation based on CPI or CPI+1% and effectively 25 years outstanding, in most cases with a Housing Association itself regulated by the Regulator of Social Housing.
The valuer treats the fair value for forward funded assets as work-in-progress value whereby the Group forward funds a development by committing a total sum, the Gross Development Value ("GDV") over the development period in order to receive the completed development at practical completion. The work-in-progress value of the asset increases during the construction period accordingly as payments are made by the Group which leads, in turn, to a pro-rata increase in the valuation in each quarter valuation assuming there are no material events affecting the GDV adversely. Interest accrued during construction as well as an estimation of future interest accrual prior to lease commencement will be deducted from the balancing payment which is the final payment to be drawn by the developer prior to the Group receiving the completed building. All properties under development were completed in the year. There were no forward funded assets in the portfolio as at 31 December 2021.
Descriptions and definitions relating to valuation techniques and key unobservable inputs made in determining fair values are as follows:
Valuation techniques: Discounted cash flows
The discounted cash flows model considers the present value of net cash flows to be generated from the property, taking into account the expected rental growth rate and lease incentive costs such as rent-free periods. The expected net cash flows are then discounted using risk-adjusted discount rates.
There are two main unobservable inputs that determine the fair value of the Group's investment property:
1. the rate of inflation as measured by CPI; it should be noted that all leases benefit from either CPI or RPI indexation; and
2. the discount rate applied to the rental flows.
Key factors in determining the discount rates to assess the level of uncertainty applied include: the performance of the regulated social housing sector and demand for each specialist supported housing property owned by the Group; costs of acquisition and refurbishment of each property; the anticipated future underlying cash flows for each property; benchmarking of each underlying rent for each property (passing rent); and the fact that all of the Group's properties have the benefit of full repairing and insuring leases entered into by a Housing Association.
All of the properties within the Group's portfolio benefit from leases with annual indexation based upon CPI or RPI. The fair value measurement is based on the above items highest and best use, which does not differ from their actual use.
Sensitivities of measurement of significant unobservable inputs
As set out within the significant accounting estimates and judgements in note 3, the Group's property portfolio valuation is open to judgements and is inherently subjective by nature.
As a result, the following sensitivity analysis has been prepared:
Average discount rate and range:
The average discount rate used in the Group's property portfolio valuation is 6.63% (2020: 6.62%).
The range of discount rates used in the Group's property portfolio valuation is from 6.21% to 8% (2020: 6.3% to 7.4%).
| | -0.5% change in | +0.5% change in | +0.25% change in | -0.25% change in |
| | Discount Rate | Discount Rate | CPI | CPI |
| | £'000 | £'000 | £'000 | £'000 |
| Changes in the IFRS fair value of investment properties as at 31 December 2021 | 26,922 | (24,663) | 21,190 | (20,238) |
| Changes as at 31 December 2020 | 35,919 | (32,643) | 18,635 | (17,811) |
15. TRADE AND OTHER RECEIVABLES (non-current)
| | | | |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Other receivables | 183 | | - |
| Lease incentive debtor | 2,128 | | - |
| | 2,311 | | - |
The Directors consider that the carrying value of trade and other receivables approximate their fair value. All amounts are due to be received within one year from the reporting date.
16. TRADE AND OTHER RECEIVABLES (current)
| | | | |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Rent receivable | 1,971 | | 2,112 |
| Prepayments | 796 | | 608 |
| Other receivables | 608 | | 613 |
| Lease incentive debtor | 60 | | 819 |
| | 3,435 | | 4,152 |
Included in Prepayments are prepaid acquisition costs which include the cost of acquiring assets not completed at the year end. The Directors consider that the carrying value of trade and other receivables approximate their fair value. All amounts are due to be received within one year from the reporting date. The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for rent receivables. To measure expected credit losses on a collective basis, rent receivables are grouped based on similar credit risk and ageing. The expected loss rates are based on the Group's historical credit losses experienced since incorporation in 2017. The historical loss rates are then adjusted for the current and forward-looking information on macroeconomic factors affecting the Group's tenants. The Group does not hold any collateral as security. The Group applies the general approach to providing for expected credit losses under IFRS 9 for other receivables. Both the expected credit loss and the incurred loss provision in the current and prior year are immaterial.
17. CASH, CASH EQUIVALENTS AND RESTRICTED CASH
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Cash held by lawyers | 8,459 | | 3,938 |
| Restricted cash | 571 | | 849 |
| Ring-fenced cash | 4,451 | | - |
| Cash at bank | 38,989 | | 48,914 |
| | 52,470 | | 53,701 |
Cash held by lawyers is money held in escrow for expenses expected to be incurred in relation to investment properties pending completion. These funds are available immediately on demand.
Restricted cash represents retention money (held by lawyers only) in relation to repair, maintenance and improvement works by the vendors to bring the properties up to satisfactory standards for the Group and the tenants. The cash is committed on the acquisition of the properties. It also includes funds held in an escrow account in relation to the transfer of leases during 2020.
Ring-fenced cash includes retention monies held by Coutts in a "charged" account which requires lender's permission to release, and funds held in a separate bank account for upcoming commitment fees on the Lloyds RCF.
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Total Cash, cash equivalents and restricted cash | 52,470 | | 53,701 |
| Restricted cash | (571) | | (849) |
| Cash reported on Statement of Cash Flows | 51,899 | | 52,852 |
18. TRADE AND OTHER PAYABLES
Current liabilities
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Accruals | 2,373 | | 2,929 |
| Trade payables | 48 | | 79 |
| Head lease ground rent (note 27) | 39 | | 39 |
| Other creditors | 1,191 | | 1,922 |
| | 3,651 | | 4,969 |
The Other Creditors balance consists of retentions due on completion of outstanding works. The Directors consider that the carrying value of trade and other payables approximate their fair value. All amounts are due for payment within one year from the reporting date.
19. OTHER PAYABLES
Non-current liabilities
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Head lease ground rent (note 28) | 1,423 | | 1,417 |
| Rent deposit | 100 | | 100 |
|
| 1,523 | | 1,517 |
20. BANK AND OTHER BORROWINGS
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Bank and other borrowings drawn at year end | 263,500 | | 198,500 |
| Less: loan issue costs incurred | (6,077) | | (4,736) |
| Add: loan issue costs amortised | 1,279 | | 1,163 |
| Unamortised costs at end of the year | (4,798) | | (3,573) |
| Balance at year end | 258,702 | | 194,927 |
As at 31 December 2021, the Group's borrowings comprised two debt facilities;
· a long dated, fixed rate, interest only financing arrangement in the form of a private placement of loan notes in an amount of £68.5 million with MetLife Investment Management (and affiliated funds)
· £195 million long dated, fixed rate, interest only sustainability-linked loan notes through a private placement with MetLife Investment Management clients and Barings
The Group also have access to £160 million Revolving Credit Facility (RCF) with Lloyds and NatWest which was undrawn at the reporting date.
Loan Notes
The Loan Notes of £68.5 million are secured against a portfolio of specialist supported living assets throughout the UK, worth approximately £188 million (31 December 2020: £184 million). The Loan Notes represent a loan-to-value of 40% of the value of the secured pool of assets and are split into two tranches: Tranche-A, is an amount of £41.5 million, has a term of 10 years from utilisation and is priced at an all-in coupon of 2.924% p.a.; and Tranche-B, is an amount of £27.0 million, has a term of 15 years from utilisation and is priced at an all-in coupon of 3.215% p.a. On a blended basis, the weighted average term is 12 years carrying a weighted average fixed rate coupon of 3.04% p.a. At 31 December 2021, the Loan Notes have been independently valued at £71.0 million which has been used to calculate the Group's EPRA Net Disposal Value in note 4 of the Unaudited Performance Measures. The fair value is determined by comparing the discounted future cash flows using the contracted yields with the reference gilts plus the margin implied. The reference gilts used were the Treasury 0.804 % 2028 Gilt (Tranche A) and Treasury 0.991% 2033 Gilt (Tranche B), with an implied margin that is unchanged since the date of fixing.
In August this year, the Group put in place Loan Notes of £195 million which enabled the Group to refinance the full £130 million previously drawn under its £160 million RCF with Lloyds and NatWest. The Loan Notes are secured against a portfolio of specialist supported living assets throughout the UK, worth approximately £391 million. The Loan Notes represent a loan-to-value of 40% of the value of the secured pool of assets and are split into two tranches: Tranche-A, is an amount of £77.5 million, has a term of 10 years from utilisation and is priced at an all-in coupon of 2.403% pa; and Tranche-B, is an amount of £117.5 million, has a term of 15 years from utilisation and is priced at an all-in coupon of 2.786% p.a. On a blended basis, the weighted average term is 13 years carrying a weighted average fixed rate coupon of 2.634% p.a. At 31 December 2021, the Loan Notes have been independently valued at £189.7 million which has been used to calculate the Group's EPRA Net Disposal Value in note 4 of the Unaudited Performance Measures. The fair value is determined by comparing the discounted future cash flows using the contracted yields with the reference gilts plus the margin implied. The reference gilts used were the Treasury 0.899% 2028 Gilt (Tranche A) and Treasury 1.141% 2033 Gilt (Tranche B), with an implied margin that is unchanged since the date of fixing.
The loans are considered to be a Level 2 fair value measurement.
RCF
The RCF was fully refinanced on the 26 August 2021 and as a result, was novated from TP REIT Propco 2 Limited to TP REIT Propco 5 Limited. This was not considered to be a substantial modification under IFRS 9 in the Group accounts, as there is no change to the borrower at Group level. Otherwise, the terms remain unchanged and at 31 December 2021 the facility remained undrawn. The originally agreed four-year term was previously extended in 2020 by one further year expiring on 20 December 2023. This may be extended by a further year, to 20 December 2024 (subject to the consent of the lenders). Originally, the interest rate for drawn amounts was 1.85% per annum over three-month LIBOR. Under the amended and restated facility agreement in place pre the refinance, the Group negotiated and agreed provisions setting pre-agreed terms for the transition of LIBOR to the new benchmark rate SONIA from the 1 July 2021. For undrawn loan amounts the Company pays a commitment fee in the amount of 40% of the margin. When fully drawn, the RCF will represent a loan-to-value of 40% secured against a defined portfolio of the Group's specialist supported housing assets located throughout the UK and held in a wholly-owned Group subsidiary. For the RCF there is considered no other difference between fair value and carrying value.
The Group has met all compliance with its financial covenants on the above loans throughout the year.
Undrawn committed bank facilities - maturity profile
| 31 December 2021 | Total | | < 1 year | | 1 to 2 years | | 3 to 5 years | | > 5 years |
| | £'000 | | £'000 | | £'000 | | £'000 | | £'000 |
| | | | | | | | | | |
| At 31 December 2021 | 160,000 | | - | | 160,000 | | - | | - |
| At 31 December 2020 | 30,000 | | - | | - | | 30,000 | | - |
21. NOTES SUPPORTING STATEMENT OF CASH FLOWS
Reconciliation of liabilities to cash flows from financing activities:
| | | Bank borrowings | | Head lease | | Total |
| | | £'000 | | £'000 | | £'000 |
| | | (note 20) | | (note 18,19) | | |
| At 1 January 2021 | | 194,927 | | 1,456 | | 196,383 |
| Cashflows: | | | | | | |
| Bank borrowings drawn | | 195,000 | | - | | 195,000 |
| Bank borrowings repaid | | (130,000) | | - | | (130,000) |
| Repayment of principal on head lease liabilities | | - | | (39) | | (39) |
| Loan arrangement fees paid | | (2,728) | | - | | (2,728) |
| Non-cash flows: | | | | | | |
| -Amortisation of loan arrangement fees | | 1,278 | | - | | 1,278 |
| -Loan arrangement fees paid in advance recognised in prepayments | | 225 | | - | | 225 |
| -Head lease additions | | - | | 2 | | 2 |
| -Accrued interest on head lease liabilities | | - | | 44 | | 44 |
| At 31 December 2021 | | 258,702 | | 1,463 | | 260,165 |
| | | Bank borrowings | | Head lease | | Total |
| | | £'000 | | £'000 | | £'000 |
| | | (note 20) | | (note 18,19) | | |
| At 1 January 2020 | | 164,955 | | 1,453 | | 166,408 |
| Cashflows: | | | | | | |
| Bank borrowings drawn | | 29,408 | | - | | 29,408 |
| Repayment of principal on head lease liabilities | | - | | (39) | | (39) |
| Loan arrangement fees paid | | (1,101) | | - | | (1,101) |
| Non-cash flows: | | | | | | |
| -Amortisation of loan arrangement fees | | 1,163 | | - | | 1,163 |
| -Loan arrangement fees paid in advance recognised in prepayments | | 502 | | - | | 502 |
| -Head lease additions | | - | | - | | - |
| -Accrued interest on head lease liabilities | | - | | 42 | | 42 |
| At 31 December 2020 | | 194,927 | | 1,456 | | 196,383 |
22. SHARE CAPITAL
| | | Issued and fully paid | | Issued and fully paid |
| | | Number | | £'000 |
| | | | | |
| At 1 January 2021 | | | | |
| | | 403,239,002 | | 4,033 |
| At 31 December 2021 | | 403,239,002 | | 4,033 |
| | | | | |
| | | Number | | £'000 |
| | | | | |
| At 1 January 2020 | | 351,352,210 | | 3,514 |
| Issued on public offer on 21 October 2020 | | 51,886,792 | | 519 |
| At 31 December 2020 | | 403,239,002 | | 4,033 |
The Company achieved admission to the specialist fund segment of the main market of the London Stock Exchange on 8 August 2017, raising £200 million. As a result of the IPO, at 8 August 2017, 200,000,000 shares at one pence each were issued and fully paid. The Company was admitted to the premium segment of the Official List of the Financial Conduct Authority and migrated to trading on the premium segment of the Main Market on 27 March 2018.
Following a fourth public offer on 21 October 2020, a further 51,886,792 Ordinary Shares of one pence each were issued and fully paid.
Rights, preferences and restrictions on shares: All Ordinary Shares carry equal rights, and no privileges are attached to any shares in the Company. All the shares are freely transferable, except as otherwise provided by law. The holders of Ordinary Shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company's residual assets.
The table above includes 450,000 treasury shares (note 24). Treasury shares do not hold any voting rights.
23. SHARE PREMIUM RESERVE
The share premium relates to amounts subscribed for share capital in excess of nominal value.
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Balance at beginning of year | 203,776 | | 151,157 |
| Share premium arising on Ordinary Shares issue | - | | 54,481 |
| Share issue costs capitalised | (23) | | (1,862) |
| Balance at end of year | 203,753 | | 203,776 |
24. TREASURY SHARES RESERVE
|
| | | |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| Balance at beginning of year | (378) | | (378) |
| Own shares repurchased | - | | - |
| Balance at end of year | (378) | | (378) |
The treasury shares reserve relates to the value of shares purchased by the Company in excess of nominal value. No treasury shares were purchased during the current year. During the year ended 31 December 2019, the Company purchased 450,000 of its own 1p Ordinary Shares at a total gross cost of £377,706 (£374,668 cost of shares and £3,038 associated costs). As at 31 December 2021 and 31 December 2020, 450,000 1p Ordinary Shares were held by the Company.
25. CAPITAL REDUCTION RESERVE
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| Balance at beginning of year | 166,154 | | 166,154 |
| Dividends paid | (5,760) | | - |
| Balance at end of year | 160,394 | | 166,154 |
The capital reduction reserve relates to the distributable reserve established on cancellation of the share premium reserve. Dividends have been distributed out of Retained Earnings rather than the Capital Reduction Reserve in the year ended 31 December 2021.
26. RETAINED EARNINGS
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Balance at beginning of year | 55,066 | | 49,286 |
| Total comprehensive income for the year | 28,410 | | 24,594 |
| Dividends paid | (15,165) | | (18,814) |
| Balance at end of year | 68,311 | | 55,066 |
27. DIVIDENDS
| | | | |
| | Year ended 31 December 2021 | | Year ended 31 December 2020 |
| | £'000 | | £'000 |
| 1.285p for the 3 months to 31 December 2019 paid on 27 March 2020 | - | | 4,509 |
| 1.295p for the 3 months to 31 March 2020 paid on 26 June 2020 | - | | 4,544 |
| 1.295p for the 3 months to 30 June 2020 paid on 25 September 2020 | - | | 4,544 |
| 1.295p for the 3 months to 30 September 2020 paid on 18 December 2020 | - | | 5,217 |
| 1.295p for the 3 months to 31 December 2020 paid on 26 March 2021 | 5,217 | | - |
| 1.3p for the 3 months to 31 March 2021 paid on 25 June 2021 | 5,236 | | - |
| 1.3p for the 3 months to 30 June 2021 paid on 30 September 2021 | 5,236 | | - |
| 1.3p for the 3 months to 30 September 2021 paid on 17 December 2021 | 5,236 | | - |
| | 20,925 | | 18,814 |
On 3 March 2021, the Company declared an interim dividend of 1.30 pence per Ordinary Share for the period 1 October 2021 to 31 December 2021. The total dividend of £5.2 million will be paid on 25 March 2022 to Ordinary shareholders on the register on 11 March 2022.
The Company intends to pay dividends to shareholders on a quarterly basis and in accordance with the REIT regime.
Dividends are not payable in respect of its Treasury shares held.
28. LEASES
A. Leases as lessee
The following table sets out a maturity analysis of lease payments, showing the undiscounted lease payments to be paid after the reporting date:
| | | < 1 year | | 2-5 years | | > 5 years | | Total |
| | | £'000 | | £'000 | | £'000 | | £'000 |
| | | | | | | | | |
| Lease payables | | | | | | | | |
| 31 December 2021 | | 40 | | 159 | | 13,126 | | 13,325 |
| 31 December 2020 | | 40 | | 159 | | 14,366 | | 14,565 |
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| Current liabilities (note 18) | 40 | | 39 |
| Non-current liabilities (note 19) | 1,423 | | 1,417 |
| Balance at end of year | 1,463 | | 1,456 |
The above is in respect of properties held by the Group under leasehold. There are 21 properties (2020: 21) held under leasehold with lease ranges from 125 years to 999 years.
The Group's leasing arrangements with lessors are headlease arrangements on land and buildings that have been sub-let under the Group's normal leasing arrangements (see above) to tenants. The Group carries its interest in these headlease arrangements as long leasehold investment property (note 14).
B. Leases as lessor
The Group leases out its investment properties (see note 14).
The future minimum lease payments receivable by the Group under non-cancellable operating leases are as follows:
| | | < 1 year | | 2-5 years | | > 5 years | | Total |
| | | £'000 | | £'000 | | £'000 | | £'000 |
| Lease receivables | | | | | | | | |
| 31 December 2021 | | 35,771 | | 143,199 | | 461,561 | | 640,531 |
| 31 December 2020 | | 31,585 | | 126,471 | | 419,850 | | 577,906 |
Prior year restatement
In the prior year the Group incorrectly calculated the future minimum lease receipts on the assumption that any put and call options have been extended rather than the "expected lease" term (see note 3.4) being the period to the first break clause, or to the point where the put or call options become exercisable. The prior year disclosure has therefore been restated to reflect the future minimum lease payments receivable by the Group under non-cancellable operating leases using the correct lease term. The restatement has reduced the total amount receivable by £246m. This has affected this disclosure only and does not change any of the figures reported in the primary statements.
Leases are direct-let agreements with Registered Providers for a term of at least 15 years and usually between 20 to 25 years with rent linked to CPI or RPI. All leases are full repairing and insuring (FRI) leases, the tenants are therefore obliged to repair, maintain and renew the properties back to the original conditions.
The following table gives details of the percentage of annual rental income per Registered Provider with more than a 10% share:
| | 31 December 2021 | | 31 December 2020 |
| Registered Provider | % of total annual rent | | % of total annual rent |
| Inclusion Housing CIC | 30 | | 31 |
| Falcon Housing Association CIC | 10 | | 11 |
| Parasol Homes (previously 28A Supported Living) | 10 | | 11 |
Annual rental income for My Space and Hilldale amounted to less than 10% of the total annual rental income as at 31 December 2020.
Other disclosures about leases are provided in notes 5, 14, 17, 20 and 32.
29. CONTROLLING PARTIES
As at 31 December 2021 there is no ultimate controlling party of the Company.
30. SEGMENTAL INFORMATION
IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the Chief Operating Decision Maker (which in the Group's case is delegated to the Delegated Investment Adviser TPIM).
The internal financial reports received by TPIM contain financial information at a Group level as a whole and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements.
The Group's property portfolio comprised 488 (2020: 445) Social Housing properties as at 31 December 2021 in England, Wales and Scotland. The Directors consider that these properties represent a coherent and diversified portfolio with similar economic characteristics and, as a result, these individual properties have been aggregated into a single operating segment. In the view of the Directors there is accordingly one reportable segment under the provisions of IFRS 8. All of the Group's properties are engaged in a single segment business with all revenue, assets and liabilities arising in the UK, therefore, no geographical segmental analysis is required by IFRS 8.
31. RELATED PARTY DISCLOSURE
Directors are remunerated for their services at such rate as the Directors shall from time to time determine. The Chair receives a Director's fee of £75,000 per annum (2020: £75,000), and the other directors of the Board receive a fee of £50,000 per annum (2020: £50,000). The Directors are also entitled to an additional fee of £7,500 in connection with the production of every prospectus by the Company (including the Issue). This was received by the Directors in 2020 but not in the current year as no prospectus was produced.
Dividends of the following amounts were paid to the Directors during the year:
Chris Phillips: £2,850 (2020: £2,836)
Peter Coward: £4,031 (2019: £3,938)
Paul Oliver: £4,050 (2019: £4,031)
Tracey Fletcher-Ray: £1,960 (2020: £489l)
No shares were held by Ian Reeves as at 31 December 2021 (31 December 2020: nil).
32. CONSOLIDATED ENTITIES
The Group consists of a parent Company, Triple Point Social Housing REIT PLC, incorporated in the UK and a number of subsidiaries held directly by the Company, which operate and are incorporated in the UK and Guernsey. The principal place of business of each subsidiary is the same as their place of incorporation.
The Group owns 100% of the equity shares of all subsidiaries listed below and has the power to appoint and remove the majority of the Board of those subsidiaries. The relevant activities of the below subsidiaries are determined by the Board based on simple majority votes. Therefore, the Directors of the Company concluded that the Company has control over all these entities and all these entities have been consolidated within the financial statements. The principal activity of all the subsidiaries relates to property investment.
The subsidiaries listed below were held as at 31 December 2021:
| Name of Entity | Registered Office | Country of Incorporation | Ownership % |
| TP REIT Super HoldCo Limited* | 1 King William Street, London, EC4N 7AF | UK | 100% |
| TP REIT HoldCo 1 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| TP REIT HoldCo 2 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| TP REIT HoldCo 3 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| TP REIT HoldCo 4 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| TP REIT HoldCo 5 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| TP REIT PropCo 2 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| TP REIT PropCo 3 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| TP REIT PropCo 4 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| TP REIT PropCo 5 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Norland Estates Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Grolar Developments SPV 6 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Parklands 1 Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Kirkdale House 1 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Connaught1 Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Earlsway (Macclesfield) Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Creed Housing SPV 5 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Grolar Developments SPV 10 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Applewood 1 Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% |
| SL Stoke Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Rowen 1 Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% |
| Challenger Homes (Crewe) Limited | 1 King William Street, London, EC4N 7AF | UK | 100% |
| MSL (114) Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% |
| | | | |
| * indicates entity is a direct subsidiary of Triple Point Social Housing REIT plc. | | | |
| The subsidiaries listed below were acquired in the year to 31 December 2021: | ||||
| Name of Entity | Registered Office | Country of Incorporation | Ownership % | |
| Grolar Developments SPV 6 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Kirkdale House 1 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Creed Housing SPV 5 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Parklands 1 Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Earlsway (Macclesfield) Limited | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Grolar Developments SPV 10 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Connaught Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Applewood 1 Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| SL Stoke Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Challenger Homes (Crewe) Limited | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Rowen 1 Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| MSL (114) Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% | |
|
The subsidiaries listed below have been struck off since 31 December 2021: | ||||
| | ||||
| | | | | |
| Creed Housing SPV 5 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Kirkdale House 1 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Applewood 1 Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Parklands 1 Ltd | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Grolar Developments SPV 10 Limited | 1 King William Street, London, EC4N 7AF | UK | 100% | |
| Grolar Developments 6 Limited
| 1 King William Street, London, EC4N 7AF | UK | 100% | |
33. FINANCIAL RISK MANAGEMENT
The Group is exposed to market risk, interest rate risk, credit risk and liquidity risk in the current and future periods. The Board oversees the management of these risks. The Board's policies for managing each of these risks are summarised below.
33.1 Market risk
The Group's activities will expose it primarily to the market risks associated with changes in property values.
Risk relating to investment in property
Investment in property is subject to varying degrees of risk. Some factors that affect the value of the investment in property include:
· changes in the general economic climate;
· competition for available properties;
· obsolescence; and
· Government regulations, including planning, environmental and tax laws.
Variations in the above factors can affect the valuation of assets held by the Group and as a result can influence the financial performance of the Group.
The factors mentioned above have not had a material impact on the valuations of the investment properties as at 31 December 2021, and are not expected to in the immediate future, but will continue to be monitored closely.
Please refer to the Sustainability Report for further information on Environmental Policy which may effect the investment property valuations going forward. There was no impact on the valuations in the year ended 31 December 2021 from climate change factors, given that there is little measurable impact on inputs at present.
33.2. Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
The Revolving Credit Facility with Lloyds Bank was undrawn at 31 December 2021. It has been secured on a floating rate basis whereby the Group pays a margin of 1.85% per annum above 3-month LIBOR for drawn loan amounts throughout the loan term. In the light of the ceasing of LIBOR as a benchmark rate, the Group has negotiated and agreed provisions within the terms of the increase and extension of the RCF setting pre-agreed terms for the transition of LIBOR to the new benchmark rate SONIA. The date for the transition from LIBOR to SONIA was 1 July 2021.
The director's decision was not to put hedging arrangements in place from the date of signing the initial agreement, as up until the most recent Amended and Restated Agreement signed on 14 December 2020 under the terms of the Revolving Credit Facility, the Group has had full flexibility, and at its sole discretion, to put hedging arrangements in place at any time during the loan term.
In the Amended and Restated Agreement signed on 26 August 2021, a Hedging Trigger Event remains in place which means a hedging agreement will be required to be entered into if the Projected Interest Cover falls below 400% on any date after the first utilisation date.
Throughout the loan term the Group has closely monitored changes in interest rates to determine if it is necessary to implement hedging. The liquidity table in 33.4 below outlines the bank borrowings and interest payable on bank borrowings with a floating interest rate.
All debt drawn at 31 December 2021 does not have any exposure to interest rate risk.
33.3 Credit risk
Credit risk related to financial instruments and cash deposits
One of the principal credit risks facing the Group arises with the funds it holds with banks and other institutions. The Board believes that the credit risk on short-term deposits and current account cash balances is limited because the counterparties are banks and institutions with high credit ratings.
In August this year, Fitch has assigned the Company an Investment Grade Long-Term Issuer Default Rating of 'A-' with a stable outlook, and a senior secured rating of 'A' for the Group's new Loan Notes.
Credit risk related to leasing activities
In respect of property investments, in the event of a default by a tenant, the Group will suffer a rental shortfall and additional costs concerning re-letting the property to another Social Housing Registered Provider. Credit risk is primarily managed by testing the strength of covenant of a tenant prior to acquisition and on an ongoing basis. The Investment Manager also monitors the rent collection in order to anticipate and minimise the impact of defaults by occupational tenants. Outstanding rent receivables are regularly monitored. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial asset.
The Group has leases in place with five Registered Providers that have been deemed non-compliant by the Regulator of Social Housing (RSH). We continue to conduct ongoing due diligence on all Registered Providers and all rents
payable under these leases have been paid. The Group's valuer has confirmed that there is no impact on the value of the Group's assets as a result of the non-compliant rating. We continue to monitor and maintain a dialogue with the Registered Providers as they work with advisers and the Regulator to implement a financial and governance improvement action plan in order to address the Regulator's concerns and obtain a compliant rating. The Board believes that the credit risk associated with the non-compliant rating is limited and all rents are received by the Registered Provider from local and central government.
The effects of Covid-19 on credit risk have been and continue to be assessed but substantially all (99.82%) rents due at 31 December 2021 have been collected, and no material expected credit losses have been identified.
33.4 Liquidity risk
The Group manages its liquidity and funding risks by considering cash flow forecasts and ensuring sufficient cash balances are held within the Group to meet future needs. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of financing through appropriate and adequate credit lines, and the ability of customers to settle obligations within normal terms of credit. The Group ensures, through forecasting of capital requirements, that adequate cash is available to fund the Group's operating activities.
The following table details the Group's liquidity analysis:
| 31 December 2021 | | | < 3 months | | 3-12 months | | 1-5 Years | | > 5 years |
| | £'000 | | £'000 | | £'000 | | £'000 | | £'000 |
| | | | | | | | | | |
| Headleases (note 28) |
| |
| |
| |
| | |
| Trade and other payables | | | | | | | - | | - |
| Bank and other borrowings (note 20): | | | | | | | | | |
| - Fixed interest rate | 263,500 | | - | | - | | - | | 263,500 |
| - Variable interest rate | - | | - | | - | | - | | - |
|
Interest payable on bank and other borrowings: | | | | | | | | | |
| - Fixed interest rate | 83,827 | | 1,804 | | 5,413 | | 28,869 | | 47,741 |
| - Variable interest rate | - | | - | | - | | - | | - |
| | 360,652 | | 1,814 | | 5,443 | | 29,028 | | 324,367 |
| 31 December 2020 | | | < 3 months | | 3-12 months | | 1-5 Years | | > 5 years |
| | £'000 | | £'000 | | £'000 | | £'000 | | £'000 |
| | | | | | | | | | |
| Headleases (note 28) | 14,565 | | 10 | | 30 | | 159 | | 14,366 |
| Trade and other payables | 4,908 | | 4,717 | | 191 | | - | | - |
| Bank and other borrowings (note 20): | | | | | | | | | |
| - Fixed interest rate | 68,500 | | - | | - | | - | | 68,500 |
| - Variable interest rate | 130,000 | | - | | - | | 130,000 | | - |
|
Interest payable on bank and other borrowings: | | | | | | | | | |
| - Fixed interest rate | 19,951 | | 520 | | 1,561 | | 8,326 | | 9,544 |
| - Variable interest rate | 9,863 | | 720 | | 1,829 | | 7,314 | | - |
| | 247,287 | | 5,967 | | 3,611 | | 145,799 | | 92,410 |
33.5 Financial instruments
The Group's principal financial assets and liabilities, which are all held at amortised cost, are those that arise directly from its operation: trade and other receivables, trade and other payables, headleases, borrowings and cash held at bank.
Set out below is a comparison by class of the carrying amounts and fair value of the Group's financial instruments that are included in the financial statements:
| | Book value 31 December 2021 | | Fair value 31 December 2021 | | Book value 31 December 2020 | Fair value 31 December 2020 |
| | £'000 | | £'000 | | £'000 | £'000 |
| Financial assets: | | | | | | |
|
| 4,739 | | 4,739 | | 3,368 | 3,368 |
| Cash held at bank | 52,470 | | 52,470 | | 53,701 | 53,701 |
| | | | | | | |
| Financial liabilities: | | | | | | |
| Trade and other payables | 3,606 | | 3,606 | | 4,930 | 4,930 |
| Borrowings | 258,702 | | 260,761 | | 194,927 | 205,272 |
34. POST BALANCE SHEET EVENTS
Property acquisitions
Since 31 December 2021, the Group has acquired portfolios of eight properties deploying £10 million (including acquisition costs).
Borrowings
On 21 February 2022, the £160 million RCF with Lloyds was reduced to £50 million, and remains undrawn at the date of signing.
35. CAPITAL COMMITMENTS
The Group had capital commitments of £4.2 million (2020: £2.8 million) in relation to the cost to complete its forward funded pre-let development assets at 31 December 2021.
36. EARNINGS PER SHARE
Earnings per share ("EPS") amounts are calculated by dividing profit for the period attributable to ordinary equity holders of the Company by the weighted average number of Ordinary Shares in issue during the period. As there are no dilutive instruments outstanding, both basic and diluted earnings per share are the same.
The calculation of basic and diluted earnings per share is based on the following:
| | Year ended | | Year ended |
| | 31 December 2021 | | 31 December 2020 |
| | | | |
| | | | |
| | | | |
| Calculation of Basic Earnings per share | | | |
| | | | |
| Net profit attributable to Ordinary Shareholders (£'000) | 28,410 | | 24,594 |
| | | | |
| Weighted average number of Ordinary Shares (excluding treasury shares) | 402,789,002 | | 360,853,102 |
| | | | |
| IFRS Earnings per share - basic and diluted | 7.05p | | 6.82p |
| | | | |
| Calculation of EPRA Earnings per share | | | |
| Net profit attributable to Ordinary Shareholders (£'000) | 28,410 | | 24,594 |
| Changes in value of fair value of investment property (£'000) | (8,998) | | (7,957) |
| EPRA earnings (£'000) | 19,412 | 16,637 | |
| Non cash adjustments to include: | | | |
| Interest capitalised on forward funded developments | - | | (128) |
| Amortisation of loan arrangement fees | 1,279 | | 1,163 |
| Adjusted earnings (£'000) | 20,691 | | 17,672 |
| | | | |
| Weighted average number of Ordinary Shares (excluding treasury shares) | 402,789,002 | | 360,853,102 |
| EPRA earnings per share - basic and diluted | 4.82p | | 4.61p |
| Adjusted earnings per share - basic and diluted | 5.14p | | 4.90p |
Adjusted earnings is a performance measure used by the Board to assess the Group's dividend payments. The metric adjusts EPRA earnings for interest paid to service debt that was capitalised, and the amortisation of loan arrangement fees. The Board sees these adjustments as a reflection of actual cashflows which are supportive of dividend payments. The Board compares the Adjusted earnings to the available distributable reserves when considering the level of dividend to pay.
37. NET ASSET VALUE PER SHARE
Basic Net Asset Value ("NAV") per share is calculated by dividing net assets in the Group Statement of Financial Position attributable to Ordinary Shareholders of the parent by the number of Ordinary Shares outstanding at the end of the period. Although there are no dilutive instruments outstanding, both basic and diluted NAV per share are disclosed below.
Net asset values have been calculated as follows:
| | 31 December 2021 | | 31 December 2020 |
| | £'000 | | £'000 |
| | | | |
| Net assets at end of the year | 436,113 | | 428,651 |
| | | | |
| Shares in issue at end of the year (excluding treasury shares) | 402,789,002 | | 402,789,002 |
| Dilutive shares in issue | - | | - |
| | | | |
| IFRS NAV per share - basic and dilutive | 108.27p | | 106.42p |
38. CAPITAL MANAGEMENT
The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and to maintain an optimal capital structure to minimise the cost of capital.
The Group considers proceeds from share issuance, bank and other borrowings and retained earnings as capital.
Until the Group is fully invested and pending re-investment or distribution of cash receipts, the Group will invest in cash equivalents, near cash instruments and money market instruments.
The level of borrowing will be on a prudent basis for the asset class and will seek to achieve a low cost of funds, whilst maintaining the flexibility in the underlying security requirements and the structure of both the investment property portfolio and the Group.
The Directors currently intend that the Group should target a level of aggregate borrowings over the medium term equal to approximately 40% of the Group's Gross Asset Value. The aggregate borrowings will always be subject to an absolute maximum, calculated at the time of drawdown, of 50% of the Gross Asset Value.
The fixed rate facility with MetLife Investment Management requires an asset cover ratio of x2.00 (amended from previous covenant of x2.25 in August 2021 to bring more in line with the ACR covenant in the new Note Purchase Agreement with Metlife Investment Management and Barings) and an interest cover ratio of x1.75. At 31 December 2020, the Group was fully compliant with both covenants with an asset cover ratio of x2.75 (2020: x2.69) and an interest cover ratio of x4.90 (2020: x4.89). The subsequent facility with Metlife Investment Management and Barings requires an asset cover ratio of x1.67 and an interest cover ratio of x1.75. At 31 December 2021, the Group was fully compliant with both covenants with an asset cover ratio of x2.01 and an interest cover ratio of x4.39.
The RCF requires the Group to maintain a loan-to-value of less than 50%, and an interest cover ratio in excess of x2.75. At 31 December 2020, the RCF was undrawn.
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