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No COVID-19 impact and increased DPS target

Civitas Social Housing 20 May 2020 Update
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Civitas Social Housing

No COVID-19 impact and increased DPS target

Q420 NAV update

Real estate

20 May 2020

Price

104p

Market cap

£647m

Gross debt (£m) at 31 March 2020

272.5

Gross LTV at 31 March 2020 (gross debt as % gross assets on portfolio basis)

26.9%

Shares in issue

621.6m

Free float

99%

Code

CSH

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.8

4.4

21.4

Rel (local)

3.1

31.5

47.9

52-week high/low

103p

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

FY20 results

Expected June 2020

Analyst

Martyn King

+44 (0)20 3077 5745

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

The COVID-19 pandemic has thus far had no impact on Civitas Social Housing’s rent collection or financial performance and the portfolio continues to grow and perform as expected. In the three months ended 31 March 2020 (Q420), IFRS NAV per share increased marginally and quarterly dividends continued. As a result of continuing acquisitions and CPI-linked rental growth, the run rate of dividend cover has reached 100% and the target DPS for the current year has been increased by 1.9% to 5.4p/share.

Year end

Net rental income (£m)

EPRA 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

0.99

4.1

03/19

35.7

22.6

3.63

107.1

5.00

0.97

4.8

03/20e

46.3

29.2

4.69

107.8

5.30

0.96

5.1

03/21e

52.2

34.2

5.50

109.7

5.40

0.95

5.2

Note: *EPRA earnings and NAV are fully diluted.

Rent collection as expected

Of the rents due to be paid during Q420, more than 99% have been received and Q121 rents continue to be collected as expected. Five properties were added in the quarter for an aggregate consideration of £17.8m taking total invested capital since IPO to £789m and including CPI-linked rent increases the annualised rent roll increased to £48.4m. Dividends are now 100% covered on a run rate basis and we expect full cover of the increased DPS on a reported basis in FY21 as past acquisitions make a full year contribution and as portfolio growth continues. IFRS NAV per share was 107.87p (Q320: 107.55p) and including DPS paid the quarterly total return was 1.5%.

Demand uncorrelated with the economy

Civitas invests in specialist supported social housing (SSH) properties, providing much needed homes for vulnerable young adults. The properties are fully let on long inflation-adjusted leases and we expect the sector’s historically low correlation to the general economy, or the broader residential and commercial property sectors, to continue. In the near term, the impact of COVID-19 is mitigated by a relatively low average age of residents, less likely to suffer from the types of underlying health conditions categorised as ‘high risk’ by the NHS, and the configuration of much of the modern housing stock, around self-contained apartments and small housing clusters, which supports infection control and management. In the longer term, the chronic shortage of SSH homes is forecast to increase and 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.

Valuation: Stable income and attractive yield

The shares have performed strongly over the past year reflecting the stable income profile, uncorrelated with the wider economy, and improved confidence over tenant quality. Despite this the shares continue to offer an attractive yield, with a growing dividend that we expect to be fully covered, and trade at a small discount to NAV.

Further details on the update

COVID-19 resilience

Civitas properties provide homes for more than 4,200 vulnerable residents, typically working age adults with learning disabilities, autism, and mental health and other significant care needs. With an average age of 32 years they are far less likely to suffer from the types of underlying health conditions categorised as ‘high risk’ by the NHS in respect of COVID-19. Civitas’s housing association and care provider partners remain fully operational, having made various adjustments to working practices, the implementation of which is significantly assisted by the configuration of many of the portfolio properties in the form of self-contained apartments and small housing clusters.

Positive total return in Q420 and +5.7% for the year

On an IFRS basis the unaudited end-Q420 NAV was £670.6m or 107.87p per share (end-Q320: £668.6m or 107.55p 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%). For the FY20 year, based on the unaudited NAV, the IFRS basis NAV total return was 5.7% with positive returns in each quarter. Q420 NAV per share on an EPRA basis will be available with the full year results but at H120 included a relatively small add-back for negative mark-to-market valuation effects in respect of derivative instruments used to hedge interest cost. Given the subsequent decline in market interest rates it is possible that the full-year negative mark to market will have increased and so too the EPRA add-back to IFRS NAV per share, but we do not expect this to be material.

The run-rate of dividend cover has reached 100%

The annualised rent roll has continued to increase, to £48.4m at end-Q420 and up from £47.2m at end-Q320, driven by acquisitions as well as rent indexation to consumer price inflation (CPI). The annual rate of CPI was 1.5% in March 2020 and has shown signs of moderating over the past year, from c 2.0%.

With growing income, the end-Q420 run rate of DPS cover, factoring in the period-end contracted rents as well as normalised expenses, had reached 100% compared with 97% at the end of Q320 and 96% at the half-year stage. On an achieved/reported basis, DPS cover in the first nine months of FY20 was 87% and we expect a slight increase for FY20 as a whole. With continuing rental growth and as recent acquisitions fully contribute, the company is on track to report full dividend cover in FY21, barring unforeseen costs and without factoring in additional acquisitions.

Continuing to invest with a robust pipeline

During Q420 the company acquired a further five properties, for an aggregate consideration of £17.8m (excluding acquisition costs), situated across five local authority areas, focused on the delivery of mid-to-higher acuity care, and let to existing housing association partners. For the year as a whole, Civitas acquired 22 properties for a total consideration of £31m. Total invested capital since IPO has now reached £789m, comprising 613 properties, fully let to 15 housing associations working with 117 care providers to provide homes on behalf of 164 local authorities to more than 4,200 individual tenants. The external property valuation is subject to what has become the industry standard ‘material uncertainty’ clause implemented by the valuers at a time of economic uncertainty and a significant reduction in market transactions to provide a benchmark. On this basis, the IFRS net initial yield of the portfolio was 5.26% at end-Q420, very slightly down on the 5.29% reported for end-Q320.

Looking ahead, Civitas expects to soon take delivery of the high acuity specialist facilities in Wales, an example of the company’s proactive role in the design and delivery of new purpose-built facilities. (we had previously assumed late in FY20 in our modelling and have pushed this out to early FY21). Additionally, the company says that it is in active discussions over the potential acquisition of a range of high-quality existing and new build properties for acquisition at completion.

Strong, liquid balance sheet

With gross borrowings of £272.5m at end-Q420 Civitas has now fully deployed its existing debt facilities, increased by £60m in H120. The average cost of debt at end-Q420 was 2.46% with interest cover at 4.5x and a weighted average term to maturity of 3.4 years. Gross gearing (which the company measures as gross debt divided by gross assets including the investment properties on a portfolio valuation basis) was 26.9%, some way off the target 35%. The company has previously indicated an intention to increase debt facilities by an additional £80m to fund further accretive portfolio growth and we assume this in FY21 in our modelling. At end-Q420 properties with a value of £212m remained unencumbered and available as security for additional borrowing. The balance sheet remains liquid with cash balances of £49.3m (net of operating and financing amounts due) of which £24m is legally committed to transactions (primarily the Welsh facility) and the balance being held as a contingency buffer.

Financials and valuation

We have made only modest changes to our estimates. We had previously allowed for the completion of the acquisition of the Welsh facilities during FY20 and we have now deferred this into FY21. Our FY21 and FY22 estimates benefit positively from the recent decline in market interest rates. In our forecasts we continue to assume that Civitas will further gear its existing equity towards the target 35% LTV by increasing borrowing facilities by an additional £80m during the current year and investing the proceeds.

Exhibit 1: Forecast revisions

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

03/20e

46.3

46.7

(0.9)

29.2

29.8

(2.2)

4.69

4.80

(2.2)

107.8

108.0

(0.1)

5.30

5.30

0.0

03/21e

52.2

52.2

(0.1)

34.2

33.6

1.8

5.50

5.41

1.8

109.7

109.9

(0.2)

5.40

5.40

0.0

03/22e

55.6

55.6

(0.0)

36.4

35.7

2.0

5.86

5.74

2.0

112.9

113.0

(0.1)

5.50

5.50

0.0

Source: Edison Investment Research

In Exhibit 2 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. Civitas shares have outperformed the peer group average, UK property sector and FTSE All-Share Index over one, three and 12 months which we believe reflects the stable and growing income stream and a recovery from earlier investor concerns regarding regulatory intervention in the housing association sector aimed at improving corporate governance and/or financial viability of several specialist supported housing providers. Despite this strong share price performance, the shares continue to offer an attractive yield, with a growing dividend that we expect to be fully covered, while continuing to trade at a discount to NAV.

Exhibit 2: Peer group valuation and performance

Price (p)

Market cap. (£m)

P/NAV* (x)

Yield** (%)

Share price performance

1 month

3 months

12 months

From 12M high

Assura

76

2016

1.42

3.6

-2%

-7%

25%

-14%

Impact Healthcare

101

321

0.94

6.1

13%

-7%

-6%

-13%

Primary Health Properties

156

1894

1.44

3.6

-1%

-3%

17%

-7%

Residential Secure Income

85

146

0.80

5.9

-7%

-14%

-12%

-15%

Triple Point Social Housing

95

333

0.90

5.4

0%

-2%

1%

-11%

Target Healthcare

94

430

0.87

7.0

-11%

-24%

-18%

-25%

Average

1.06

5.3

-2%

-10%

1%

-14%

Civitas Social Housing

104

647

0.96

5.1

5%

4%

23%

-2%

UK property index

1,352

4.3

-6%

-30%

-21%

-31%

FTSE All-Share Index

3,311

4.6

3%

-20%

-17%

-22%

Source: Civitas Social Housing data, Refinitiv. Note: Prices at 20 May 2020. *Based on last reported EPRA NAV. **Based on trailing 12-month DPS declared.

Exhibit 3: Financial summary

Period ending 31 March (£'000s)

2018

2019

2020e

2021e

2022e

INCOME STATEMENT

Revenue

18,606

35,738

46,311

52,180

55,559

Directors' remuneration

(205)

(163)

(168)

(168)

(168)

Investment advisory fees

(5,773)

(6,457)

(6,164)

(6,163)

(6,291)

General & administrative expenses

(2,915)

(3,022)

(3,310)

(2,900)

(2,958)

Total expenses

(8,893)

(9,642)

(9,642)

(9,231)

(9,417)

Total recurring expense ratio (TER)

1.36%

1.39%

1.36%

1.36%

Operating profit/(loss) before revaluation of properties

9,713

26,096

36,669

42,950

46,142

Change in fair value of investment properties

30,633

3,652

8,361

10,700

17,664

Operating profit/(loss)

40,346

29,748

45,030

53,649

63,806

Net finance expense

(628)

(3,484)

(7,485)

(8,749)

(9,709)

C share amortisation

(2,792)

(6,400)

0

0

0

PBT

36,926

19,864

37,545

44,900

54,097

Tax

0

0

0

0

0

Net profit

36,926

19,864

37,545

44,900

54,097

Adjusted for:

Change in fair value of investment properties

(30,633)

(3,652)

(8,361)

(10,700)

(17,664)

C share amortisation

2,792

6,400

0

0

0

EPRA earnings

9,085

22,612

29,184

34,201

36,433

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

6.04

7.22

8.70

Diluted EPRA EPS (p)

1.44

3.63

4.69

5.50

5.86

DPS declared (p)

4.25

5.00

5.30

5.40

5.50

EPRA EPS/DPS

0.34

0.73

0.89

1.02

1.07

BALANCE SHEET

Investment properties

516,222

820,094

865,100

979,484

997,148

Other receivables

0

6,824

8,079

8,193

8,307

Total non-current assets

516,222

826,918

873,179

987,677

1,005,455

Trade & other receivables

3,315

5,723

7,074

7,994

8,376

Cash & equivalents

249,608

54,347

68,994

47,334

50,809

Total current assets

252,923

60,070

76,068

55,329

59,186

Trade & other payables

(10,176)

(15,324)

(9,433)

(10,659)

(11,168)

C shares

(298,752)

0

0

0

0

Total current liabilities

(308,928)

(15,324)

(9,433)

(10,659)

(11,168)

Bank loan & borrowings

(90,822)

(205,156)

(269,245)

(350,445)

(351,645)

Total non-current liabilities

(90,822)

(205,156)

(269,245)

(350,445)

(351,645)

Net assets

369,395

666,508

670,570

681,902

701,828

Adjust for:

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

670,750

682,082

702,008

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

107.8

109.7

112.9

Diluted EPRA NAV per share (p)

105.5

107.1

107.8

109.7

112.9

CASH FLOW

Net cash flow from operating activity

8,057

23,335

35,838

43,142

46,155

Cash flow from investing activity

(483,898)

(302,577)

(42,795)

(103,684)

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)

(6,079)

(7,549)

(8,509)

Bank borrowings drawn/(repaid)

92,457

115,990

64,000

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

23,234

38,882

(42,680)

Change in cash

243,325

(196,197)

16,277

(21,659)

3,475

Opening cash

0

243,325

47,128

63,405

41,745

Closing cash (excluding restricted cash)

243,325

47,128

63,405

41,745

45,220

Restricted cash

6,283

7,219

5,589

5,589

5,589

Cash as per balance sheet

249,608

54,347

68,994

47,334

50,809

Debt as per balance sheet

(90,822)

(205,156)

(269,245)

(350,445)

(351,645)

Unamortised loan arrangement costs

(1,635)

(3,291)

(3,202)

(2,002)

(802)

Total debt

(92,457)

(208,447)

(272,447)

(352,447)

(352,447)

Net (debt)/cash excluding restricted cash

150,868

(161,319)

(209,042)

(310,702)

(307,227)

Net LTV (IFRS valuation basis)

n.m.

19.5%

23.9%

31.5%

30.6%

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


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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.

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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

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United Kingdom

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United States

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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

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

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