Fitch Ratings has affirmed
The ratings reflect Triple Point's property portfolio of specialised supported housing (SSH) for special-needs tenants. Its assets are supported by long-term contractual terms directly with registered providers (RPs) that lease the properties from Triple Point, and by rents indirectly paid by the government in the form of housing benefit.
With equity funding raised historically and a policy of maximum gross loan-to-value (LTV) at 40%, Fitch expects Triple Point's net debt/EBITDA to remain under 9.0x with interest cover of 3.5x-4.5x under Fitch's rating case of rising interest rates.
Key Rating Drivers
Long-Term SSH Demand: Triple Point provides SSH for special-needs tenants whose local authorities have a legal duty to house and care for them. Third-party studies have shown that this type of SSH, provided in the community, is better and more economical than remote institutional alternatives or inpatient
State-Sourced Rental Income: Triple Point, as the property owner and not the care provider, does not receive any public funds for the provision of care. But it indirectly receives its portion of the state-funded housing benefit routed through the RP. On behalf of the SSH tenants, state entities pay housing benefit (representing RP lease rent, service charges and maintenance costs) and separately other costs for care services including the care provider's fees and void costs.
Stability from Lease Structure: At
Limited Impact from Lease Changes: Recent amendments to Triple Point's investment policy allow the REIT to enter into new shorter-term leases, assume some maintenance costs, and to index rents to inflation or housing benefit changes. Fitch does not expect these changes would materially alter Triple Point's business profile or financial obligations.
Counterparty Exposures to RPs: Triple Point has 24 RPs in its portfolio, with some concentration in the largest RP at 29.9% of 2021 income. Regulatory judgments from the Regulator of
In early 2018 when the RP Westmoreland was in financial distress, Triple Point pro-actively transferred the entity's leases to another RP, Inclusion Housing CIC, with no reduction in these leases' rent.
RSH's Regulatory Judgements: RSH's judgements, some in place since 2019, showed that some RPs' boards would benefit from greater professional expertise and better systems to quantify and manage assumed risks. Many entities have since changed their boards, their reporting, and improved their profitability.
Furthermore, unlike other RPs that own their housing stock, SSH RPs operate under lease-based models that have tighter margins between rents and costs such as maintenance and voids, and CPI risk over long-term leases. Reflecting the regulator's concern in its judgements, most of Triple Point's leases have lease negotiation mechanisms in place should there be a change in government policy to housing benefit's exempt rent, even though such a change is not expected.
Equity-Funded Structure: Triple Point typically acquires completed buildings with nominated tenants with care services in place, or provides forward funding when the property is pre-let. It funds its acquisitions with a mix of equity and debt, and has a policy of a maximum LTV of up to 40%. At 40% LTV (gross debt basis), the equivalent net debt/EBITDA is about 8.5x. Triple Point has raised equity of
Derivation Summary
Triple Point, like
Like Civitas,
If the immediate lessee of
For the
The 'A' rating category is appropriate for
Unlike
The Standalone Credit Profile (SCP) of a traditional asset-backed
Triple Point has a lower non-state-supported credit profile than housing associations as it does not have access to capital grants from Homes England (which although diminishing in usage, currently average around
RPs and Triple Point benefit from stable CPI- or RPI-linked rents from necessity-based housing assets, with Triple Point having a higher percentage of housing benefit receipts. RPs assume void risk. LTV ratios are difficult to compare as RPs do not revalue their housing stock. To continue to expand its portfolio and retain its equity-weighted capital structure, Triple Point relies on periodic equity issuance, whereas to some extent, RPs churn their portfolios.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Inflation-indexed rents to rise by 3% per year to 2025 despite 2022's higher rent rise
Investment management agreement fee continues at around 1% of balance sheet net asset value such that EBITDA/investment property improves to 4.4% by 2025 from 4% in 2020/2021
Property acquisition spend of
Periodic equity raises consistent with the REIT's policy of maximum 40% LTV
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Fitch believes that the current rating is capped by Triple Point's overall risk profile, including target LTV and the sector ecosystem
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Net debt/EBITDA above 9.0x on a sustained basis
Significant financial losses resulting from poorly managed SSH RPs
EBITDA net interest cover below 2.0x
Consolidated LTV above management's target 40%
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Comfortable Liquidity: Triple Point had readily available cash (excluding reserved cash for six-months debt service for its first segregated secured financing and other small restricted cash) of about
Secured Rating: Triple Point's secured rating is one notch above the IDR. All of Triple Point's debt is secured and are in three segregated secured financings, each with their own asset pools broadly representative of the group's profile. Each segregated financing receives its rents, and after paying its periodic interest expenses and retaining cash for six months of debt service, the remaining cash is up-streamed to the debt-free parent whose main obligation is the dividend. This cash can be down-streamed to a special-purpose vehicle for its liquidity or any LTV covenant cure, if needed.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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