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FY22 DPS targeted to increase by 2.8%

Civitas Social Housing 19 May 2021 Update
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Civitas Social Housing

FY22 DPS targeted to increase by 2.8%

Q421 trading update

Real estate

19 May 2021

Price

118p

Market cap

£735m

Net debt (£m) at 30 September 2020

272.5

Gross LTV at 30 Sept 2020 (gross debt as % gross assets on portfolio basis)

26.%

Shares in issue

622.5m

Free float

99%

Code

CSH

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.0

9.7

15.7

Rel (local)

5.0

3.0

(4.2)

52-week high/low

118p

102p

Business description

Civitas Social Housing is the leading listed UK social housing REIT. It targets 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, but also targeting broader needs such as homelessness, NHS ‘step-down’ accommodation and general needs housing.

Next events

Q421 DPS paid

11 June 2021

FY21 results

29 June 2021

Analyst

Martyn King

+44 (0)20 3077 5745

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

The Q421 trading update for the three months ended 31 March 2021 shows that Civitas Social Housing (CSH) is continuing to perform in line with expectations and is consistently delivering positive returns. With no COVID-19 impact on rent collections or property valuations and gearing in place to fund accretive portfolio growth, the company is targeting FY22 DPS growth of 2.8%, ahead of recent CPI inflation, to 5.55p.

Year end

Net rental income (£m)

EPRA earnings* (£m)

EPRA EPS* (p)

EPRA NAV**/ share* (p)

DPS
(p)

P/NAV
(x)

Yield
(%)

03/19

35.7

22.6

3.6

107.1

5.08

1.10

4.3

03/20

46.2

28.8

4.6

107.9

5.30

1.09

4.5

03/21e

48.5

30.7

4.9

108.6

5.40

1.09

4.6

03/22e

54.2

34.8

5.6

111.3

5.55

1.06

4.7

Note: *EPRA earnings and NAV are fully diluted. **Excludes derivative fair value adjustment.

Consistently meeting expectations

A Q421 DPS of 1.35p takes the total declared for the year to 5.4p, in line with the target, and fully covered on an annualised run-rate basis by EPRA earnings. IFRS NAV/share increased through the year to reach 108.3p (end-FY20: 107.9p) and including DPS paid, the quarterly IFRS NAV total return was consistently positive throughout the year, amounting to 5.4%. The consistency of returns reflects the role of portfolio properties in the provision of an essential service, secured by long-term lease and care arrangements, providing good visibility of income with little direct correlation to the wider property market or economy, capable of delivering stable inflation-indexed dividend growth. Our FY22 DPS and NAV forecasts are increased, but, with the arrangement of the recent c £85m increase in debt capital and hence deployment of the proceeds slower than we had assumed, our EPRA earnings for FY21 and FY22 are slightly reduced but with full FY22 DPS cover maintained.

Funding in place for growth

During the pandemic, the healthcare and housing sectors in which Civitas operates have proved to be operationally resilient and demand has remained strong. Including its recently widened investment remit, enabling Civitas to diversify into working with a broader range of counterparties and new client groups, in addition to specialist supported housing, the company has a strong pipeline of potential investment opportunities (amounting to c £180m at November 2020). With the full year results, Civitas will provide further details on its plans for addressing the substantial demand for suitable housing for the homeless, in combination with additional support aimed at preventing them from returning to homelessness. Our assumed acquisitions (£100m in FY22) represent only a part of this opportunity and additional equity would provide scope for further investment while offering scale and diversification benefits.

Valuation: Stable income and attractive yield

The shares offer an attractive c 4.7% FY22 prospective yield and trade at a around EPRA NAV. Dividends are backed by stable income, uncorrelated with the wider economy, with good inflation-linked growth prospects.

Further details

Portfolio performing as expected

The sector has proved operationally and financially resilient over the past year, with no impact on rental payments to Civitas and no interruption of quarterly DPS and no impact on portfolio valuations. NAV per share showed a small but steady increase to 108.3p1 at end-FY21 (end-FY20 107.9p) and NAV total return (adjusted for DPS paid but without assuming reinvestment) was consistently positive on a quarterly basis, amounting to c 5.4% for the year. The consistency of returns reflects the role of portfolio properties in the provision of an essential service, secured by long-term lease2 and care arrangements, providing good visibility of income with little direct correlation to the wider property market or economy, capable of delivering stable inflation-indexed dividend growth.

  EPRA NAV per share (108.2p at H221 versus 108.0p on an IFRS basis) includes an adjustment for the change in fair value of interest rate derivatives.

  The H121 weighted average unexpired lease term (WAULT) was 22.9 years.

Exhibit 1: Consistently positive quarterly returns

Q121

Q221

Q321

Q421

FY21

Opening NAV per share (p)

107.9

107.9

108.1

108.2

107.9

Closing NAV per share (p)

107.9

108.1

108.2

108.3

108.3

Dividends paid (p)

1.325

1.350

1.350

1.350

5.375

Annualised NAV total return

1.27%

1.42%

1.31%

1.37%

5.38%

Source: Civitas Social Housing data, Edison Investment Research

Annualised rent roll was £50.4m at end-FY21, up from £48.4m during the year, with the increase reflecting CPI-linked rental uplifts and relatively modest acquisition growth during the year. On an IFRS basis and on a portfolio basis, the net initial yields (NIY) reflected in the portfolio valuation were little changed, closing the year at 5.24% and 5.07% respectively. The portfolio is well diversified by property (619), approved provider lessees (16), local authorities (164) and care providers (118), as well as being widely spread by geography. It provides homes to almost 4,300 vulnerable, mostly young, adults.

Exhibit 2: Quarterly portfolio valuation and NAV data

Q121

Q221

Q321

Q421

IFRS NAV (£m)

671

671

672

673

NAV per share (p)

107.9

108.1

108.2

108.3

NIY

5.26%

5.26%

5.26%

5.24%

Portfolio NAV (£m)

736

736

736

737

Portfolio NAV per share (p)

118.4

118.4

118.5

118.5

Portfolio NIY

5.07%

5.08%

5.09%

5.07%

Source: Civitas Social Housing data

We expect portfolio growth to accelerate as debt proceeds are deployed

Despite the pandemic, the demand for specially adapted, high-quality accommodation has remained strong as local authorities strive to meet their statutory requirements and relieve pressures on other care services, adding to an existing shortage of homes relative to supply. Portfolio acquisitions were nonetheless unusually modest during the year, primarily reflecting the time taken in arranging additional debt financing, to gear the existing equity base towards its 35% gross gearing target (gross debt to gross assets on a portfolio basis) from 26.8% at H121. Including full drawing of the new facility we expect a little over 32% at end-FY21. Civitas had indicated a disciplined approach to the arrangement of new debt facilities, seeking suitable terms (duration and cost) with a good-quality lender. The pandemic slowed the process as lenders put increased focus on existing loan positions, but the company’s patience was rewarded in February 2021 when it agreed a new £84.5m, seven-year, interest-only secured facility with M&G priced at 2.75% above a fixed rate set by reference to the Libor swap rate of the loan term. The facility is now fully drawn down to support investment plans, reflected in our forecasts.

Exhibit 3: Slowdown in acquisition-led portfolio growth ahead of debt financing

Source: Civitas Social Housing data

With the H121 results in November 2020, Civitas spoke of a c £180m pipeline of investment opportunities. In addition to further investment in meeting the demand for specialised supported housing providing long-term homes for those with learning disabilities, mental health conditions and autism, this includes the broadening of Civitas’s investment remit approved by shareholders in May 2020. This allows Civitas to diversify into working with a broader range of counterparties and with new client groups, expanding from the current focus on local authorities and housing associations to include the NHS, major charities and community interest companies. Over the coming one to two years, Civitas aims to position itself as a strategic partner with these to provide a wide range of community-based social assets with similar dynamics to specialist supported housing,3 to meet an expanding range of needs. The near-term focus is on meeting the substantial demand for suitable housing for those who have suffered homelessness, combined with additional support aimed at preventing them from returning to homelessness. Civitas will provide further details of its plans with the full-year results.

  High long-term structural demand, extensive care requirements and positive social outcomes.

Increasing focus on ESG within the portfolio

Civitas has been increasing its focus on the environmental aspects of ESG (environment, social, and governance) principles with the goal of being carbon neutral across its portfolio by 2030. Several pilot projects have been undertaken, including the installation of solar panels and air source heat pumps, with the aim of improving energy efficiency and reducing carbon emissions across the portfolio. Civitas is now seeking to build on these projects, potentially involving ‘turnkey’ partners, to deliver permanent portfolio-wide energy efficiency enhancements.

Regulatory measures stepped up after pandemic pause

Following a pause during the height of the pandemic, the Regulator of Social Housing (RSH) has continued to publish notices across the sector where it considers that a housing association needs to demonstrate improvements. We continue to believe that this continuing regulatory scrutiny is aimed at improving corporate governance and/or financial viability of several lease-based specialist supported housing providers and should reinforce the sector’s ability to meet the growing needs of local authorities for additional accommodation. With all housing association lease counterparties, Civitas, through its investment adviser, seeks to be a catalyst for continuing improvements in governance and operational and financial management, engaging with them and the RSH and sponsoring the sharing of best practices, including through quarterly seminars. Civitas has suffered no loss of rental income as a result of the regulatory process and property valuations have been unaffected; it remains confident that all its properties meet the rent standard (the relevant criteria for exempt rent claims in specialist supported housing) due to its rigorous due diligence procedures and the level of care provided in all its properties.4

  Recent regulatory judgements have included Civitas tenants Pivotal, Hilldale, and MySpace with the Auckland grading under review.

Changes to forecasts

The target DPS for FY22 of 5.55p is slightly ahead of the 5.50p that we had previously forecast, and now adjusted. Otherwise, while the NAV total return of 5.4% is very slightly ahead of the 5.3% reflected in our last published forecasts, our analysis of the quarterly portfolio yield data suggests that the mix of the FY21 return is tilted slightly more towards capital growth than we had previously forecast. This reflects the strong investment market for specialist social housing properties, supporting capital values and NAV growth, while the deferment, until FY22, of some of the acquisition activity that we had expected in H221 acts as a drag on forecast rental income in both FY21 and FY22.

Our revised estimates are shown in Exhibit 4, with DPS and EPRA NAV per share both increased and net rental income and EPRA EPS both slightly reduced. Importantly, we continue to expect the FY22 DPS to be fully covered by EPRA earnings even at the increased rate.

Exhibit 4: Forecast changes

Net rental income (£m)

EPRA earnings (£m)

EPRA EPS (p)

EPRA NAV/share (p)

DPS (p)

New

Old

% chg

New

Old

% chg

New

Old

% chg

New

Old

% chg

New

Old

% chg

03/21e

48.5

49.0

(1.0)

30.7

31.8

(3.3)

4.9

5.1

(3.3)

108.6

108.3

0.2

5.40

5.40

0.0

03/22e

54.2

55.2

(1.8)

34.8

36.2

(3.8)

5.6

5.8

(3.9)

111.3

110.3

0.9

5.55

5.50

1.0

Source: Edison Investment Research

Our forecasts include c £100m (before costs) of acquisitions during FY22, including the £10.9m (before costs) acquisition of 15 supported care and living facilities in South Wales announced in April 2021. The size of this assumed commitment is based on our assessment of the full deployment of existing equity capital and an amount of debt capital consistent with the company’s 35% gross gearing target and is more than the c £85m of the recently increased borrowing facilities. This implies either a lower cash float than the c £30m that the company targets or additional borrowing; in this respect we note the company’s intention to work with lenders to utilise the strong investment-grade credit rating that it received in March 20215 to further develop its debt financing strategy to encompass the sterling bond market as a means of securing a reduction in the overall cost of finance, while increasing flexibility and securing an increase in tenure.

  In March 2021, Civitas announced that Fitch Ratings had awarded the company an investment grade high credit quality rating of A (senior secured) and a long-term issuer default rating of A- with a stable outlook.

Consistent performance supports valuation

Total return in FY21 continues the trend since launch in November 2016 (Exhibit 5). Over this period Civitas has generated an aggregate total return (adding back, but not reinvesting dividends paid) of 29.6% or an annual average 6.1%, with income returns representing two-thirds of the total. The slight slowdown in FY21 return (5.4%) primarily reflects the relative pause in portfolio growth and we expect this to increase as the proceeds of the additional borrowing are further deployed.

Exhibit 5: NAV total return

FY18

FY19

FY20

FY21

From IPO to end-FY20

Opening NAV per share (p)

98.0

105.5

107.1

107.9

98.0

Closing NAV per share (p)

105.5

107.1

107.9

108.3

108.3

Dividends paid (p)

3.0

5.0

5.3

5.4

18.7

NAV total return

7.9%

6.2%

5.7%

5.4%

29.6%

Annualised total return

6.1%

Source: Civitas Social Housing data, Edison Investment Research

Based on the targeted 5.55p aggregate FY22 DPS, the prospective yield is 4.7%, supporting the c 9% premium to end-FY21 IFRS NAV per share.

Exhibit 6: Price to NAV history since IPO

Source: Company NAV data, Refinitiv prices

In Exhibit 6 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, investing in housing and healthcare properties. For comparative purposes, the table is based on trailing DPS and NAV data and on this basis Civitas is trading close to the peer average, with a slightly lower yield and slightly lower P/NAV. With performance during the pandemic demonstrating the resilience of the sector and the business model, we consider that Civitas offers an attractive yield while also delivering a material social benefit.

Exhibit 7: Peer valuation and performance comparison

Price
(p)

Market
cap (£m)

P/NAV*
(x)

Yield**
(%)

Share price performance

1 month

3 months

12 months

From 12M high

Assura

73

1,764

1.30

3.8

-1%

0%

-5%

-15%

Impact Healthcare

112

357

1.02

5.6

-2%

2%

16%

-4%

Primary Health Properties

153

2,157

1.35

3.9

2%

2%

-4%

-8%

Residential secure Income

97

166

0.92

5.2

3%

9%

11%

-1%

Triple Point Social Housing

105

423

0.99

4.9

1%

-4%

9%

-8%

Target Healthcare

114

522

1.06

5.9

-2%

1%

21%

-5%

Average

1.11

4.9

0%

2%

8%

-7%

Civitas Social Housing

118

735

1.09

4.6

5%

10%

16%

0%

UK property sector index

1,721

0%

9%

27%

-4%

UK equity market index

4,003

0%

6%

21%

-2%

Source: Company data, Refinitiv prices as at 18 May 2021. Note: *Based on last reported EPRA NAV. **Based on trailing 12-month DPS declared.

Exhibit 8: Financial summary

Period ending 31 March (£'000s)

2018

2019

2020

2021e

2022e

INCOME STATEMENT

Revenue

18,606

35,738

45,906

48,472

54,187

Directors' remuneration

(205)

(163)

(176)

(195)

(200)

Investment advisory fees

(5,773)

(6,457)

(6,183)

(6,138)

(6,192)

General & administrative expenses

(2,915)

(3,022)

(3,501)

(3,468)

(3,162)

Total expenses

(8,893)

(9,642)

(9,860)

(9,801)

(9,554)

Total recurring expense ratio (TER)

1.36%

2.84%

1.45%

1.40%

Operating profit/(loss) before revaluation of properties

9,713

26,096

36,046

38,671

44,633

Change in fair value of investment properties

30,633

3,652

9,389

6,502

16,634

Operating profit/(loss)

40,346

29,748

45,435

45,173

61,267

Net finance expense

(628)

(3,484)

(7,710)

(8,850)

(9,853)

C share amortisation

(2,792)

(6,400)

0

0

0

PBT

36,926

19,864

37,725

36,323

51,414

Tax

0

0

0

0

0

Net profit

36,926

19,864

37,725

36,323

51,414

Adjusted for:

Change in fair value of investment properties

(30,633)

(3,652)

(9,389)

(6,502)

(16,634)

Fair value change in interest rate derivatives

0

0

478

908

0

C share amortisation

2,792

6,400

0

0

0

EPRA earnings

9,085

22,612

28,814

30,729

34,781

Average number of shares (m)

350.0

425.4

622.1

621.6

622.3

Average diluted shares (m)

633.1

622.5

622.1

621.6

622.3

Basic IFRS EPS (p)

10.6

4.7

6.1

5.8

8.3

Diluted EPRA EPS (p)

1.4

3.6

4.6

4.9

5.6

DPS declared (p)

4.25

5.08

5.30

5.40

5.55

DPS paid (p)

3.00

5.00

5.30

5.38

5.50

Dividend cover (x)

0.87

0.91

0.87

0.92

1.02

BALANCE SHEET

Investment properties

516,222

820,094

867,988

906,018

1,029,452

Other receivables

0

6,824

10,755

11,450

11,368

Total non-current assets

516,222

826,918

878,743

917,468

1,040,820

Trade & other receivables

3,315

5,723

10,838

7,322

8,450

Cash & equivalents

249,608

54,347

58,374

115,111

11,489

Total current assets

252,923

60,070

69,212

122,434

19,939

Trade & other payables

(10,176)

(15,324)

(7,743)

(9,763)

(11,267)

Bank loan & borrowings

0

0

(59,730)

0

0

C shares

(298,752)

0

0

0

0

Total current liabilities

(308,928)

(15,324)

(67,473)

(9,763)

(11,267)

Bank loan & borrowings

(90,822)

(205,156)

(209,440)

(355,004)

(356,460)

Total non-current liabilities

(90,822)

(205,156)

(209,440)

(355,004)

(356,460)

Net assets

369,395

666,508

671,042

675,134

693,032

Adjust for:

C shares

298,752

0

0

0

0

Fair value of interest rate derivatives

0

0

478

1,386

1,386

Diluted EPRA NAV

668,147

666,508

671,520

676,520

694,418

Period-end basic number of shares (m)

350.0

622.5

621.6

621.9

622.5

Period end diluted number of shares (m)

633.1

622.5

621.6

621.9

622.5

Basic IFRS NAV per share (p)

105.5

107.1

107.9

108.3

111.1

Diluted EPRA NAV per share (p)

105.5

107.1

107.9

108.6

111.3

CASH FLOW

Net cash flow from operating activity

8,057

23,335

32,905

44,366

45,091

Cash flow from investing activity

(483,898)

(302,577)

(61,901)

(18,634)

(106,800)

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)

(5,804)

(6,321)

(8,397)

Bank borrowings drawn/(repaid)

92,457

115,990

64,053

84,500

0

Share repurchase

(699)

275

654

Dividends paid to ordinary shareholders

(10,073)

(17,591)

(32,889)

(33,381)

(34,171)

Dividends paid to C shareholders

0

(9,966)

0

0

0

Other cash flow from financing activity

(1,761)

(2,374)

(1,364)

(122)

0

Cash flow from financing activity

719,166

83,045

23,297

44,950

(41,914)

Change in cash

243,325

(196,197)

(5,699)

70,682

(103,623)

Opening cash

0

243,325

47,128

41,429

112,111

Closing cash (excluding restricted cash)

243,325

47,128

41,429

112,111

8,489

Restricted cash

6,283

7,219

16,945

3,000

3,000

Cash as per balance sheet

249,608

54,347

58,374

115,111

11,489

Debt as per balance sheet

(90,822)

(205,156)

(269,170)

(355,004)

(356,460)

Unamortised loan arrangement costs

(1,635)

(3,291)

(3,330)

(1,996)

(540)

Total debt

(92,457)

(208,447)

(272,500)

(357,000)

(357,000)

Net (debt)/cash excluding restricted cash

150,868

(161,319)

(231,071)

(244,889)

(348,511)

Net LTV (IFRS valuation basis)

n.m.

19.5%

26.3%

26.7%

33.5%

Source: Civitas Social Housing historical data, Edison Investment Research forecasts

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Germany

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United Kingdom

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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

1185 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

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New Zealand

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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

1185 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

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 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

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