Civitas Social Housing — Further growth in Q320

Civitas Social Housing (LSE: CSH)

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Research: Real Estate

Civitas Social Housing — Further growth in Q320

A business update for the quarter ended 31 December 2019 (Q320) shows an increase in IFRS NAV per share to 107.55p. Including dividends paid the accounting total return was 1.53% (6.3% annualised). Rent indexation and portfolio acquisitions increased annualised rent roll and the run-rate of dividend cover increased further to 97%. We make no change to our forecast set out in our detailed post-interim results note.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Civitas Social Housing

Further growth in Q320

Q320 NAV update

Real estate

31 January 2020

Price

98.9p

Market cap

£615m

Net debt (£m) at 30 September 2019

181.0

Net LTV at 30 September 2019

21.5%

Shares in issue

622.5m

Free float

99%

Code

CSH

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.3

16.2

(4.9)

Rel (local)

11.3

14.2

(11.6)

52-week high/low

104p

77p

Business description

Civitas Social Housing is the leading listed UK social housing REIT. Its investment objective is to provide an attractive level of income, with the potential for capital growth, from investing in a diversified portfolio of fully developed social homes, particularly specialist supported housing for vulnerable adults.

Next events

Q320 DPS payment

Expected 28 February 2020

Analyst

Martyn King

+44 (0)20 3077 5745

Civitas Social Housing is a research client of Edison Investment Research Limited

A business update for the quarter ended 31 December 2019 (Q320) shows an increase in IFRS NAV per share to 107.55p. Including dividends paid the accounting total return was 1.53% (6.3% annualised). Rent indexation and portfolio acquisitions increased annualised rent roll and the run-rate of dividend cover increased further to 97%. We make no change to our forecast set out in our detailed post-interim results note.

Year end

Net rental income (£m)

Adjusted earnings* (£m)

EPRA EPS*
(p)

EPRA NAV/ share* (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

03/18

18.6

9.1

1.44

105.5

4.25

0.94

4.3

03/19

35.7

22.6

3.63

107.1

5.00

0.92

5.1

03/20e

46.7

29.8

4.80

108.0

5.30

0.92

5.4

03/21e

52.2

33.6

5.41

109.9

5.40

0.90

5.5

Note: *EPRA earnings and NAV are fully diluted.

Portfolio growth and rent indexation driving returns

Civitas added nine properties in Q320 for an aggregate consideration of £7.1m. The pipeline of further opportunities remains robust, comprising new and existing schemes. As Civitas gears its existing equity base towards its target 35%, the additional £60m of debt facilities arranged in H120, partly drawn, provides immediate funding and an additional £80m is under negotiation. Including the Q320 investment we forecast £123m of acquisitions by end-FY21. The growing portfolio and indexation of rents to CPI continues to lift annualised rent roll, £47.2m at end-Q320 versus £46.5m at end-H120, contributing to increasing dividend cover. The company says that run-rate cover is now 97% compared with 96% at the half-year although achieved cover in the first nine months was 87%, similar to H120.

Supporting sector growth and development

The chronic shortage of specialist supported housing (SSH) homes is forecast to increase, yet compared with the alternatives of residential care or hospitals it is widely recognised to improve lives in a cost-effective manner. SSH funding comes 100% from central government via local authorities, with cross-party support. Civitas continues to work closely with its housing association partner providers to help them develop and mature and is actively engaged with the regulator, which has raised sector-wide concerns over corporate governance and/or financial viability. It has recently supported the establishment of a sector community interest company (CIC) to bring together housing associations and pool industry skills, expertise and best practice. Most of Civitas’s housing association partners are profitable and it continues to operate as normal with those that are subject to regulatory notices and judgements, actively engaging with them to help effect any changes that may be necessary to allay the regulator’s concerns.

Valuation: Attractive yield and NAV discount

Despite recent share price strength, compared with a peer group of long income investors in social housing and healthcare property, Civitas shares provide an above-average prospective yield and trade at a larger discount to EPRA NAV.

Further detail on the update

As noted above, we have made no change to our forecast set out in detail in our detailed post-interim results note.

6.3% annualised accounting return in Q320

On an IFRS basis the end-Q320 NAV was £668.6m or 107.55p per share (end-H120: £667.4m or 107.23p per share). Including the DPS of 1.325p paid during the period the total accounting return was 1.53% (an annualised return of 6.3%). EPRA NAV per share includes an add-back for negative mark-to-market valuation effects on interest rate derivatives. The H120 add-back of £180k resulted in an EPRA NAV per share of 106.26p. No EPRA NAV per share is available for Q320 but we do not believe that it differs materially from the IFRS NAV per share.

Rent roll and run-rate DPS cover increased further in Q3

The annualised rent roll has increased to £47.2m, up from £46.5m at end-H120. The quarterly increase of £0.7m reflects continued investment in the portfolio as well as rent indexation to consumer price inflation (CPI), with the company noting that all of its indexation targets in the period were met. CPI has moderated in recent months to a 12-month rate of 1.3% in December 2019 compared with 1.5% in November.

With growing income, the end-Q3 run rate of DPS cover, factoring in the period-end contracted rents as well as normalised expenses, increased to 97% compared with 96% at the half-year stage. The achieved DPS cover in the first nine months of FY20 was 87%, similar to the H120 level. The company says that it remains committed to achieving full dividend cover as soon as is practicable. We forecast that DPS will be covered on a run-rate basis during the next 12 months and on an annual basis for FY22.

Continuing to invest with a robust pipeline

During Q320 the company acquired nine properties for an aggregate consideration of £7.1m. Total invested capital since IPO has now reached £771m, comprising 608 properties, fully let to 15 housing associations working with 115 care providers to provide homes on behalf of 161 local authorities to more than 4,000 individual tenants. The net initial yield of the portfolio was 5.29% at end-Q319, very slightly up on end-H120 (5.28%) reflecting a reduced expectation for CPI growth. We estimate a value of c £850m.

The company says that its investment pipeline remains robust, comprising new and existing schemes. The company is in the process of honouring existing commitments to counterparties, including a mix of investment in new properties to be acquired as well as existing properties that are being extended to meet demand. Additionally, the company intends to focus on the generation of bespoke, high acuity schemes where it is instrumental in selecting the properties, determining the adaptions, and then on-boarding the care providers and/or housing associations. Commissioning works are continuing on the new properties in Wales that will provide state of the art quality care provision to residents with acute learning disability, mental health, brain injury and degenerative illness needs. These will be acquired by Civitas upon completion and following the entering into of all arrangements including leases. Including these properties and the £7.1m of investment in Q320 our forecasts assume £123m of investment by end-FY21.

Civitas increased its debt facilities by £60m in H120 to £272.5m, of which £228.4m was drawn at the period end. The new £60m facility with National Westminster Bank has been partially drawn and an additional £80m debt facility that is under negotiation will contribute towards moving gearing on a portfolio basis towards the 35% level targeted by the company (H120: 24%), defined as gross borrowings as a percentage of gross assets on a portfolio basis. To ease comparison across the sector, our calculation of net LTV represents net debt as a percentage of investment property assets measured on an IFRS basis. At H120 this was 21.5% or 27.1% on a gross basis (ie before adjusting gross debt for cash balances).

In addition to investing in portfolio growth Civitas commenced share repurchases in early October 2019 and to date has acquired 815k shares, held in treasury, at a cost of c £694k or an average 85.2p per share. Although relatively modest in scale, the repurchases are accretive and underline the board’s confidence in the published NAV.

Further optimisation of tenant profile

As part of its asset management activities, the company continues to re-assign (on their existing terms) certain leases. As a result, the proportion of the portfolio leased to Westmoreland Supported Housing has continued to reduce, from c 20% at the start of the year and c 11% at H120, to 6.4%, with the leases re-assigned to several other existing housing association partners. This change is related to Westmoreland’s ongoing actions to improve its financial performance and corporate governance.

Exhibit 1: Financial summary

Year end 31 March

£'000s

2018

2019

2020e

2021e

2022e

INCOME STATEMENT

Revenue

18,606

35,738

46,716

52,221

55,568

Directors' remuneration

(205)

(163)

(168)

(168)

(168)

Investment advisory fees

(5,773)

(6,457)

(6,169)

(6,184)

(6,321)

General & administrative expenses

(2,915)

(3,022)

(3,110)

(2,834)

(2,890)

Total expenses

(8,893)

(9,642)

(9,447)

(9,185)

(9,379)

Total recurring expense ratio (TER)

1.36%

1.36%

1.35%

1.35%

EBITDA

9,713

26,096

37,269

43,035

46,189

Change in fair value of investment properties

30,633

3,652

8,264

11,843

17,684

Operating Profit (before amort. and except.)

40,346

29,748

45,533

54,878

63,873

Net finance expense

(628)

(3,484)

(7,437)

(9,424)

(10,484)

C share amortisation

(2,792)

(6,400)

0

0

0

Profit Before Tax (norm)

36,926

19,864

38,096

45,455

53,389

Tax

0

0

0

0

0

Net profit

36,926

19,864

38,096

45,455

53,389

Adjusted for:

Change in fair value of investment properties

(30,633)

(3,652)

(8,264)

(11,843)

(17,684)

C share amortisation

2,792

6,400

0

0

0

EPRA earnings

9,085

22,612

29,832

33,612

35,705

Average number of shares (m)

350.0

425.4

622.1

621.6

621.6

Average diluted shares (m)

633.1

622.5

622.1

621.6

621.6

Basic IFRS EPS (p)

10.55

4.67

6.12

7.31

8.59

Diluted EPRA EPS (p)

1.44

3.63

4.80

5.41

5.74

DPS declared (p)

4.25

5.00

5.30

5.40

5.50

EPRA EPS/DPS

0.34

0.73

0.90

1.00

1.05

BALANCE SHEET

Investment properties

516,222

820,094

884,085

980,568

998,252

Other receivables

0

6,824

8,079

8,193

8,307

Total non-current assets

516,222

826,918

892,164

988,761

1,006,559

Trade & other receivables

3,315

5,723

7,196

7,996

8,378

Cash & equivalents

249,608

54,347

46,600

43,355

46,103

Total current assets

252,923

60,070

53,796

51,351

54,481

Trade & other payables

(10,176)

(15,324)

(9,595)

(10,661)

(11,170)

C shares

(298,752)

0

0

0

0

Total current liabilities

(308,928)

(15,324)

(9,595)

(10,661)

(11,170)

Bank loan & borrowings

(90,822)

(205,156)

(265,245)

(346,445)

(347,645)

Total non-current liabilities

(90,822)

(205,156)

(265,245)

(346,445)

(347,645)

Net assets

369,395

666,508

671,120

683,006

702,224

Basic EPRA NAV

369,395

666,508

671,120

683,006

702,224

C shares

298,752

0

0

0

0

Fair value of interest rate derivatives

0

0

180

180

180

Diluted EPRA NAV

668,147

666,508

671,300

683,186

702,404

Period-end basic number of shares (m)

350.0

622.5

621.6

621.6

621.6

Period end diluted number of shares (m)

633.1

622.5

621.6

621.6

621.6

Basic IFRS NAV per share (p)

105.5

107.1

107.9

109.8

112.9

Diluted EPRA NAV per share (p)

105.5

107.1

108.0

109.9

113.0

CASH FLOW

Net cash flow from operating activity

8,057

23,335

36,479

43,188

46,203

Cash flow from investing activity

(483,898)

(302,577)

(61,877)

(84,640)

0

Net proceeds from equity issuance

343,000

(56)

0

0

0

Net proceeds from C share issuance

295,960

0

0

0

0

Loan interest paid

(417)

(2,958)

(6,031)

(8,224)

(9,284)

Bank borrowings drawn/(repaid)

92,457

115,990

60,000

80,000

0

Share repurchase

(694)

0

0

Dividends paid to ordinary shareholders

(10,073)

(17,591)

(32,883)

(33,569)

(34,171)

Dividends paid to C shareholders

0

(9,966)

0

0

0

Other cash flow from financing activity

(1,761)

(2,374)

(1,111)

0

0

Cash flow from financing activity

719,166

83,045

19,282

38,207

(43,455)

Change in cash

243,325

(196,197)

(6,117)

(3,245)

2,748

Opening cash

0

243,325

47,128

41,011

37,766

Closing cash (excluding restricted cash)

243,325

47,128

41,011

37,766

40,514

Restricted cash

6,283

7,219

5,589

5,589

5,589

Cash as per balance sheet

249,608

54,347

46,600

43,355

46,103

Debt as per balance sheet

(90,822)

(205,156)

(265,245)

(346,445)

(347,645)

Unamortised loan arrangement costs

(1,635)

(3,291)

(3,202)

(2,002)

(802)

Total debt

(92,457)

(208,447)

(268,447)

(348,447)

(348,447)

Net (debt)/cash excluding restricted cash

150,868

(161,319)

(227,436)

(310,681)

(307,933)

Net LTV (IFRS valuation basis)

n.m.

19.5%

25.5%

31.4%

30.6%

Source: Civitas Social Housing data, Edison Investment Research forecasts


General disclaimer and copyright

This report has been commissioned by Civitas Social Housing and prepared and issued by Edison, in consideration of a fee payable by Civitas Social Housing. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

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London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Civitas Social Housing and prepared and issued by Edison, in consideration of a fee payable by Civitas Social Housing. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

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BCI Minerals — Resilient iron ore price buoys Q220

In its December quarterly report, BCI Minerals confirmed that the strong performance exhibited by its Iron Valley royalty asset in Q120 continued into Q220. Iron Valley shipped 1.5Mt of iron ore in Q220 (cf 2.0Mt in Q120), comprising 60% fines (cf 65%), resulting in a quarterly EBITDA of A$3.2m, including a negative prior quarterly adjustment of A$1.6m (cf a near record quarterly EBITDA of A$7.7m in Q120). Notwithstanding the adjustment, BCI’s Q220 EBITDA of A$3.2m was nevertheless higher than any other quarter since Q317 except Q419 and Q120.

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