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Research: Real Estate
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.
Civitas Social Housing |
Further growth in Q320 |
Q320 NAV update |
Real estate |
31 January 2020 |
Share price performance
Business description
Next events
Analyst
Civitas Social Housing is a research client of Edison Investment Research Limited |
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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* |
EPRA NAV/ share* (p) |
DPS |
P/NAV |
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
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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.