Civitas Social Housing — FY22 DPS targeted to increase by 2.8%

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.