Civitas: Building a sustainable portfolio
The Civitas portfolio has grown strongly and steadily since IPO, with £758m (before acquisition costs) having been committed as at 31 March 2019. The properties have been acquired from HAs, CPs, developers or private owners at yields ranging from 5.5–6.5%. Civitas only invests in completed properties and does not engage in development or the forward funding of developments. Civitas says that developers are often encouraged to approach it with completed properties by local authorities that are keen to have evergreen social impact funds invested in them. It also notes that CPs welcome the certainty that a well-resourced investor brings to the process. Civitas has established strategic relationships with some of the largest CPs, which often have a strong influence over where tenants are placed, given that the care element of SSH costs represents c 85% of the total (ie rent and service costs a more modest c 15%).
Assets are selected through a rigorous process aimed at building a portfolio that will sustainably deliver on its investment objectives over the long term, and it is worth noting that the company has reviewed and rejected potential acquisitions with a value of more than £400m since IPO. The most common reasons for a property being rejected is that the level of rents (relative to the care provided) is above the median level that Civitas targets, because of the condition of the property or because the property does not meet the company’s social impact hurdles.
Exhibit 3: Strong and steady growth since IPO
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Source: Civitas Social Housing
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Reflecting increases in asset values since acquisition, the balance sheet portfolio value at end March 2019 was £820m, with a contracted annualised rent roll of £45.7m and a long weighted average unexpired lease length of more than 24 years. The portfolio comprised 591 individual properties, fully let to 15 different registered providers that manage SSH homes for more than 4,000 tenants on behalf of 157 different local authorities, around half of the total in England and Wales. The UK market for SSH is very fragmented and although Civitas is the leader in terms of portfolio size, management estimates that its 4,000 plus tenants still only represent around 2.4% of the market total. This provides Civitas with ample scope to increase market penetration, as well as growing with the market. The average age of a tenant in a Civitas-owned property is 32, which suggests they may be living in those properties for many decades to come.
Exhibit 4: Summary of portfolio as at 31 March 2019
Capital deployed (before acquisition costs) |
£755m |
Balance sheet valuation |
£820m |
Weighted average unexpired lease term (WAULT) |
24.4 years |
Contracted annualised rent roll |
£45.7m |
Net initial yield |
5.27% |
Number of properties |
591 |
Number of tenancies |
4,072 |
Number of local authorities |
157 |
Number of registered providers |
15 |
Number of care providers |
113 |
Average care hours per week |
40–50 |
Source: Civitas Social Housing
The portfolio is geographically diversified around major conurbations, with around one-third of the properties being purpose built or repurposed and two-thirds being well located community properties which have been adapted on a bespoke basis for long-term use by residents. The list of HAs with which Civitas has chosen to work has steadily increased, providing further diversification. The aim has been to establish a registered management counterparty in each area and to have several others in reserve to provide for contingencies.
Exhibit 5: Portfolio market value by region
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Exhibit 6: Rental income by registered provider
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Source: Civitas Social Housing. Note: As at 31 March 2019.
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Source: Civitas Social Housing. Note: Others comprises New Walk (3.0%), Harbour Light (2.4%), My Space (1.2%), IKE (1.2%), Hilldale (1.0%) and Blue Square (0.1%). As at 31 March 2019.
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Exhibit 5: Portfolio market value by region
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Source: Civitas Social Housing. Note: As at 31 March 2019.
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Exhibit 6: Rental income by registered provider
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Source: Civitas Social Housing. Note: Others comprises New Walk (3.0%), Harbour Light (2.4%), My Space (1.2%), IKE (1.2%), Hilldale (1.0%) and Blue Square (0.1%). As at 31 March 2019.
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The five main areas within social housing targeted by Civitas are:
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SSH for those living with learning difficulties, autism and acquired brain injury.
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Mental health care facilities where residents require monitoring and supervision in carrying out daily tasks.
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Accommodation for those able to step down from NHS hospital care and transition to more independent living.
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Accommodation for those with addictions.
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Accommodation for those who are homeless or at risk of homelessness.
In practice, many residents have been diagnosed with more than one care need, reflected in the size of the multi-diagnosis category in Exhibit 7.
Exhibit 7: Percentage of Civitas residents by type of care need
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Source: Civitas – Half Year Impact Report, November 2018. Note: *Multi-diagnosis includes residents who have been diagnosed with more than one care need, requiring a higher level of support.
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Key factors in sustainability
In building a sustainable portfolio, Civitas highlights three core features:
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The level of care being provided. As noted above, for SSH accommodation to fall within the exempt rent legislation, the services provided must include meaningful levels of care, support or supervision and understanding. The level of care provision in each property is important in establishing that rent levels are fair and reasonable. Civitas discusses acuity levels with each CP before investing, providing it with a clear picture of care levels, and management estimates that an average tenant in a Civitas property receives a relatively high 40–50 hours of care per week. Using its own extensive database, Civitas also benchmarks its rents against those for similar properties and care needs in the same locality, aiming to be below the median. This aim appears consistent with average weekly rents received by Civitas across the portfolio as a whole, which positions it within the ranges identified by the government analysis and Mencap research noted above. For standard (mainly learning disability and autism) SSH, Civitas receives average weekly rents of £178 and, including very high acuity/niche SSH such as addiction and women’s refuge, the average is £211.
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Ensuring that properties are suitably adapted. SSH accommodation must have been specially designed or structurally altered for residents, but ensuring that these have been suitably tailored to each resident is important to maximise their welfare and ensure that they remain in the home for many years, if not for life. Civitas ensures that refurbishments are paid for by the vendors and that the housing association takes on a property that is fit for purpose.
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For SSH, unlike general needs housing, the HA needs to be able to demonstrate the delivery of enhanced housing management services to establish the exempt accommodation status that is necessary for it to secure exempt rent and service charge payments. Civitas provides considerable support to its HA partners and also regularly monitors their performance. It holds quarterly seminars, open to all its partners, aimed at fostering best practice. There have been six seminars to date, covering areas such as compliance with health and safety requirements, working effectively with the care providers, and staff recruitment.
Sector regulation has historically provided stability
The Regulator of Social Housing (RSH) regulates registered providers of social housing (RPs) to promote a viable, efficient and well-governed social housing sector able to deliver homes that meet a range of needs. Civitas’s housing association tenants are regulated by the RSH but Civitas is not, although it interacts with the RSH on a regular basis. Regulation has played an important role in providing long-term stability to the social housing sector, and while individual registered providers have from time to time faced financial difficulties, there have been no material losses suffered by funders as a result of a registered provider default.
Although exempt social housing has been around for 25 years, over the last few years private capital has played an increasingly important role in supporting the much-needed growth and sustainable development of the SSH sector, filling the gap created by the limited availability for all forms of social housing. The capital has been provided by a range of funds and other investors in SSH assets, which are then made available to housing associations on long leases, typically indexed to CPI. Given its greater complexity and granularity, and the continuing strong demand for general needs social housing, SSH has not generally been the focus of the longer established HAs and sector growth has been led by 40–50 more specialist HAs that have been established in the past 10 years or so. These have typically utilised lease-based structures to provide the capital for growth and, in many cases being newer and smaller associations, inevitably have relatively thin capital bases and less sophisticated management and governance structures.
In early 2018, one of these newer entities and a significant lessee of Civitas properties, First Priority Housing Association, became financially distressed. Its leases, including those with Civitas, were reassigned on similar terms to other providers within a few weeks, with no material loss incurred by capital providers (see comments in financial section). However, in the aftermath the regulator has been engaging with other specialist SSH HAs with similar lease-based business models to establish whether the issues at First Priority are replicated elsewhere. As a result of this work, the regulator has raised a number of concerns and has published regulatory judgements and notices in some specific cases, primarily in relation to corporate governance and/or financial viability (see Appendix for description of the regulatory process).
Exhibit 8 provides a summary of the five regulatory judgements and notices to date in respect of Civitas lessees. In aggregate these account for 40-50% of the Civitas portfolio.
Exhibit 8: Regulatory judgements in respect of Civitas lessees
Housing association partner |
Type of publication |
Most recent RSH publication |
% portfolio NAV (by value)* |
% portfolio GAV |
Trinity |
Regulatory judgement |
Nov-18 |
5.7% |
4.7% |
Westmoreland |
Regulatory notice |
Nov-18 |
19.6% |
16.3% |
Inclusion |
Regulatory judgement |
Feb-19 |
8.3% |
6.9% |
Encircle |
Regulatory notice |
Apr-19 |
5.9% |
4.9% |
BeST |
Regulatory notice |
May-19 |
11.5% |
9.5% |
Source: Civitas, RSH. Note: *For explanation of portfolio NAV, see page 15. At 31 March 2019, the portfolio NAV was £741.2m compared with the IFRS NAV of £666.5m.
More specifically, the four key concerns raised by the regulator are:
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Margins are low and capital bases are thin for lease-based housing associations, leaving them more vulnerable to shocks. Civitas notes that some are starting to acquire assets and reserves as they grow and that its analysis shows that margins and return on capital employed across the range of HAs with which it is working are on average very good. Nevertheless, it expects the number of specialist SSH HAs to reduce, with the stronger organisations absorbing the weaker.
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Poor risk management and contingency planning. The regulator expects all HAs to produce detailed 30-year business plans as well as identifying corrective actions should the business model come under threat. The specialist SSH HAs have typically not had the expertise or resources to apply this level of business planning and have not always set out their plans for corrective action in the way that the regulator seeks, reflecting their belief and experience that SSH is under no threat, being under-supplied, with growing demand, and positive social and financial outcomes. Civitas and others are working with the specialist SSH HAs on improving their planning frameworks so as to ease regulatory concerns.
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Inappropriate governance in some housing associations. Civitas notes from its own experience of the social housing sector that it has historically been the case that pretty much all HAs start small, with boards that reflect the individuals involved in their creation, and then professionalise as they grow and mature. This appears to be the path that the specialist SSH HAs are on, and Civitas works with them to expand and deepen their boards. The fact that some have been set up by developers or have developers and/or care providers on their boards is not by itself an issue providing that the correct checks and balances operate within the housing association, and they manage any potential conflicts of interest in an open and transparent way. In such situations, Civitas expects the housing association to have received independent legal advice before it will proceed with a transaction.
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Lack of assurance about appropriate rents. As we have noted above, it is critical that the rents charged on SSH sit within the exempt rent legislation, and the due diligence and measures that Civitas undertakes to ensure appropriate rents are charged on its assets.
We believe that current regulatory interventions in the fast developing SSH segment are primarily aimed at identifying, assessing and making clear the risks so that these may be adequately managed as a means to safeguarding this financial resilience and maintaining the operational standards of the sector. Significantly, in a recent seminar hosted by Civitas, the regulator recognised the important role played by private capital in supporting the much-needed growth and sustainable development, and commented that he saw no inherent issues with the lease-based model. It is important to note that Civitas continues to operate as normal with its HA partners that are subject to regulatory notices and judgements, and that there have been no material impacts on its ability to collect rents due, but is engaging with them to help effect any changes that may be necessary to allay the regulator’s concerns.
Active engagement with the housing associations and regulator
Civitas is highly experienced in the social housing sector and fully understands the challenges that its specialist SSH HA partners face as they seek to grow and respond to the SSH shortage. It engages frequently with them, helping them to develop and mature, in support of both its financial and social impact goals. Civitas also has regular engagement with the RSH and is sponsoring industry-wide initiatives to support continued growth while managing risks. Alongside the voluntary seminars for the housing association partners, the more formal hands-on monitoring of the portfolio involves quarterly meetings with each partner. These are led by senior members of the Civitas team, who visit the HA on the ground, meeting the managers, board and also the care providers, inspecting properties and reviewing performance against KPIs. As a result of this active engagement, Civitas has provided support in areas such as recruiting new board members to strengthen corporate governance, compliance with health and safety requirements, and asset management. Attracting new independent members to strengthen and broaden the boards of smaller housing associations is no easy task, but one where Civitas can make a real difference to addressing regulatory corporate governance concerns. At a general level, Civitas is looking at ways that the lease structure may evolve to provide more tangible evidence of the sustainability of the SSH model. This includes:
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The possible introduction of a ‘force majeure’ clause in leases, similar to that used in the infrastructure sector. This would give the HAs recourse to discuss with property owners about future letting options (ie other uses) in the extremely unlikely event that SSH demand fell away or was removed through a change in government policy.
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The possible introduction of rent indexation collars and caps into lease agreements. Indexation is currently at CPI, although in its last large transaction Civitas included a collar of 1% and cap of 4%.
Civitas has recently sponsored the formation of a new community interest company as the first unitary overarching body that can represent SSH, bringing together its multiple facets spanning health, social policy, housing policy and welfare. It is also working with Learning Disability England to establish a new trade body that will promote the benefits of SSH including the cost savings to the public sector and social benefits that it delivers, and will seek to build on these through the sharing of skills and knowledge and the spread of best practice across the sector.
In this section we first discuss the progress reflected in the FY19 results, before outlining our forward-looking financial forecasts in detail.
FY19 results reflect strong portfolio expansion
The FY19 results reflect the continuing growth in the company’s asset and income base. During the year, £286m (before acquisition costs) was committed to acquisitions, including investment of the C share proceeds, with conversion taking place at the end of November 2018 and leading to the creation of 272.5m new ordinary shares.
Exhibit 9: Summary of financial results for year to 31 March 2019 (FY19)
£m |
2019 |
2018 |
2019/2018 |
Revenue |
35.7 |
18.6 |
92% |
Total expenses |
(9.6) |
(8.9) |
8% |
Operating profit/(loss) before revaluation of properties |
26.1 |
9.7 |
169% |
Change in fair value of investment properties |
3.7 |
30.6 |
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Operating profit/(loss) |
29.7 |
40.3 |
-26% |
Net finance expense |
(3.5) |
(0.6) |
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C share amortisation |
(6.4) |
(2.8) |
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PBT |
19.9 |
36.9 |
-46% |
Tax |
0.0 |
0.0 |
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IFRS net earnings |
19.9 |
36.9 |
-46% |
Adjust for: |
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Change in fair value of investment properties |
(3.7) |
(30.6) |
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EPRA earnings |
16.2 |
6.3 |
158% |
C share amortisation |
6.4 |
2.8 |
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Civitas adjusted earnings |
22.6 |
9.1 |
149% |
Basic IFRS EPS (p) |
4.67 |
10.55 |
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Diluted EPRA EPS (p) |
3.63 |
1.44 |
153% |
Company adjusted EPS (p) |
3.63 |
2.60 |
40% |
DPS declared (p) |
5.00 |
4.25 |
67% |
Investment portfolio |
820.1 |
516.2 |
59% |
Diluted EPRA NAV per share (p) |
107.1 |
105.5 |
1% |
Net cash/(debt) |
(161.3) |
150.9 |
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Net LTV |
20% |
N/M |
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The key financial highlights were:
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Revenues almost doubled in the year, primarily reflecting portfolio growth, and supported by CPI-linked, like-for-like rental growth. Contracted rent roll increased to £45.7m from £28.4m at the end of FY18 and further revenue growth is built in as the FY19 acquisitions make a full year contribution in FY20.
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Cost growth significantly trailed revenue growth, with management fees, linked to NAV, ahead by c 12% and other costs broadly flat. With income growing strongly, the total expense ratio (TER) improved to 1.45% and would have been c 0.6% lower without c £400k of non-recurring bad debt costs (see below).
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Recurring net finance expense increased to £3.5m, with acquisitions funded by additional debt (increased by £116m to £205.2m) and a drawdown of cash resources as the C share proceeds were deployed. The C share amortisation of £6.4m, included within finance costs, reflects the net earnings attributable to the C share pool, up until conversion.
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The portfolio value increased by £303.9m, or 59%, to £820.1m. In addition to new investment, gross property revaluation added £10.1m, reflecting the positive impacts of rental growth partly offset by acquisition costs. The negative drag from acquisition costs was greater in H219 reflecting the level and complexity of transactions. The FY19 revaluation gains were significantly lower than in FY18 when a maturing of the market and increasing investor familiarity with the asset class saw valuations improve markedly. The end-FY19 net initial yield of 5.27% was at a similar level to end-FY18.
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Adjusting for valuation movements, EPRA earnings and diluted EPRA EPS more than doubled to £16.2m and 3.63p per share respectively.
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Quarterly dividends amounting to 5.0p were paid during the year, meeting the target for the first full year of operation that was set at the time of the IPO. For the three months ending 31 March 2019, a quarterly DPS of 1.325p was declared, a 6% increase on the previous quarter, for payment on 7 June. For the year to 31 March 2020 (FY20), barring unforeseen circumstances, the company targets aggregate DPS payments of 5.3p, a 4.3% increase over FY19. For future years the company intends to increase dividends to reflect the growth of rental income.
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EPRA NAV per share increased by 1% during the year to 107.1p and, including DPS paid, the EPRA NAV total return was 6.2%. We estimate that the acquisition costs incurred in growing the portfolio amounted to 1.8p per share and that, adjusted for these, EPRA NAV total return would have been 7.9%.
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Following the emergence of financial difficulties at First Priority in May 2018, Civitas assigned all of its leases to Falcon Housing Association on similar terms. At the time, Civitas was owed c £0.5m by First Priority, which it hoped to collect in full but given the slow collection progress to date it has provided in full for the outstanding balance of £421k. When assigning the leases to Falcon, Civitas was also granted an option to extend the lease term to 40 years which, when exercised in the first half of the year triggered lease incentive payments of c £4.0m. We believe the impact of the lease extension on valuation, net of the lease incentive payment, was positively assessed by the external valuer. Lease incentives of c £2m granted in H219 relate to other assets and lessees.
Civitas has existing debt facilities of £212.5m, of which £208.4m was drawn at end-FY19. The facilities comprise a £52.5m 10-year fixed rate facility and two floating rate revolving credit facilities of a shorter-term nature. Based on a three-month Libor rate of 0.84% at 31 March 2019, we estimate the average cost of the facilities at 2.5% with a weighted average unexpired term of a little over five years. All covenants on the facilities were comfortably met during the year.
Exhibit 10: Existing debt facilities
Lender |
Scottish Widows |
Lloyds |
HSBC |
Facility |
Loan notes |
RCF* |
RCF* |
Facility size |
£52.5m |
£60m |
£100m |
Drawn at end-FY19 |
£52.5m |
£56m |
£100m |
Term |
10 years |
3 years +1** |
3 years +1 +1*** |
Maturity |
November 2027 |
November 2020 |
November 2021 |
Cost |
2.99% fixed |
1.50% margin over LIBOR |
"Similar to Lloyds" |
Source: Civitas. Note: *RCF is revolving credit facility. **Facility may be extended for one year at the option of Civitas. ***Facility may be extended by one year and then a further year at the option of Civitas.
In order to grow the portfolio further and achieve its target rate of gearing, Civitas is currently negotiating additional borrowing facilities amounting to £170m and expects this to also increase the overall term of its debt. We have allowed for this in our forecasts, assuming it is fully drawn by the end of FY20 and that it carries interest at 2.6%.
Based on targeted quarterly DPS payments amounting to 5.34p for the current year, Civitas offers a yield of almost 7.0% while trading at 0.74x the end-FY19 EPRA NAV per share of 107.1p.
We calculate an EPRA NAV total return since the 18 November 2017 IPO to 31 March 2019 of 17.4%, or an average annualised 7% pa. As we expect the company to hold its investment properties for the long term, we believe it more relevant to focus on the IFRS data for this purpose. Our forecasts for FY20 and FY21 imply an average annualised return of 6.8% pa over the period, with FY20 held back slightly by assumed property acquisition costs on the £170m of assumed investment in the year, before increasing to 8.1% in FY21, with a forecast CPI rental income uplift of 1.8% feeding through to capital values on the assumption of an unchanged property yield.
Exhibit 11: EPRA NAV total return
|
FY18* |
FY19 |
FY20e |
FY21e |
Since IPO |
FY20/FY21 |
Opening EPRA NAV per share (p) |
98.0 |
105.5 |
107.1 |
108.1 |
98.0 |
107.1 |
Closing EPRA NAV per share (p) |
105.5 |
107.1 |
108.1 |
111.4 |
107.1 |
111.4 |
Dividends paid (p) |
3.0 |
5.0 |
5.2 |
5.5 |
8.0 |
10.7 |
EPRA NAV total return |
10.8% |
6.2% |
5.8% |
8.1% |
17.4% |
14.0% |
Average annual return |
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|
|
|
7.0% |
6.8% |
Source: Civitas, Edison Investment Research. Note:* 18 November 2016 to 31 March 2018.
In Exhibit 12 we show a share price performance and valuation comparison with a group of companies that we would consider to be the closest peers to Civitas. The group includes Triple Point Social Housing and Residential Secure Income, which invests in affordable shared ownership, retirement and local authority housing (but not specialist supported housing), primary healthcare investors, PHP and Assura, and care home investors, Target Healthcare and Impact Healthcare. The peers are all focused on stable, growing, income returns, with the potential for capital appreciation, from investment in properties let on long leases to tenants whose income is provided, to differing degrees, by government funding. However, the peer group remains quite differentiated in terms of lease terms, which will naturally influence valuation levels. UK primary healthcare leases benefit from the security of being directly or indirectly backed by government, although the majority of rents are subject to open market rent reviews rather than being indexed to inflation. For the care home investors, the lease counterparties are the care home operators, and rents are generally linked to RPI.
The regulatory intervention in the SSH market has clearly affected the Civitas share price performance and hence the valuation of the company. The prospective yield of 6.8%, with DPS well covered as capital resources are fully deployed, is the highest in the group, and P/NAV is the lowest. If investors become more confident about the robustness of the Civitas income stream, the potential for a re-rating is significant.
Exhibit 12: Peer comparison
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Price (p) |
Market cap (£m) |
P/NAV* (x) |
Yield** (%) |
Share price performance |
One month |
Three months |
12 months |
From 12-month high |
Assura |
64 |
1542 |
1.20 |
4.3 |
2% |
12% |
11% |
-2% |
Impact Healthcare |
113 |
324 |
1.08 |
5.5 |
7% |
7% |
10% |
-2% |
PHP |
135 |
1529 |
1.29 |
4.2 |
0% |
3% |
18% |
-3% |
Residential Secure Income |
94 |
161 |
0.87 |
5.3 |
-2% |
4% |
0% |
-4% |
Triple Point Social Housing REIT |
83 |
292 |
0.80 |
6.1 |
-10% |
-18% |
-21% |
-24% |
Target Healthcare |
118 |
455 |
1.10 |
5.6 |
3% |
1% |
5% |
0% |
Average |
|
|
1.06 |
5.1 |
0% |
1% |
4% |
-6% |
Civitas Social Housing REIT |
78 |
488 |
0.73 |
6.8 |
-7% |
-18% |
-24% |
-31% |
UK property index |
1,662 |
|
|
4.1 |
-3% |
-4% |
-9% |
-10% |
FTSE All-Share Index |
4,055 |
|
|
4.5 |
1% |
1% |
-3% |
-5% |
Source: Company data. Refinitiv. Note: Prices at 21 June 2019. *Last published EPRA NAV. **Last declared DPS annualised.
We believe the issues raised by the regulator in the light of the First Priority failure have had a significant impact on the performance of Civitas shares, and the other investors in the social housing sector. Given the importance of long-term income visibility, this is understandable. The complex nature of the SSH contractual structure is also a factor contributing to investor uncertainty. We believe that it is the quality and location of the assets, their suitable adaption to the long-term needs of the tenants, rents being at an appropriate level and the growing demand for SSH that provide the effective security to Civitas’s long-term income.