Civitas Social Housing — Performing well and looking to further growth

Civitas Social Housing (LSE: CSH)

Last close As at 28/03/2024

79.80

0.00 (0.00%)

Market capitalisation

497m

More on this equity

Research: Real Estate

Civitas Social Housing — Performing well and looking to further growth

The Q221 trading update for the three months ended 30 September 2020 shows Civitas Social Housing continuing to perform in line with expectations, with no COVID-19 impact on rent collections or property valuations. Quarterly DPS has continued uninterrupted, while continuing moderate growth in the portfolio and rent roll delivers 100% cover by EPRA earnings on a run-rate basis.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Civitas Social Housing

Performing well and looking to further growth

Q221 update

Real estate

13 November 2020

Price

109p

Market cap

£679m

Gross debt (£m) at 30 September 2020

272.5

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

26.8%

Shares in issue

622.5m

Free float

99%

Code

CSH

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.2

(1.1)

24.7

Rel (local)

(1.0)

(5.4)

40.5

52-week high/low

114p

79p

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

H121 results

Early December 2020

Q3 DPS paid

4 December 2020

Analyst

Martyn King

+44 (0)20 3077 5745

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

The Q221 trading update for the three months ended 30 September 2020 shows Civitas Social Housing continuing to perform in line with expectations, with no COVID-19 impact on rent collections or property valuations. Quarterly DPS has continued uninterrupted, while continuing moderate growth in the portfolio and rent roll delivers 100% cover by EPRA earnings on a run-rate basis.

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

3.63

107.1

5.08

1.02

4.7

03/20

46.2

28.8

4.63

107.9

5.30

1.01

4.9

03/21e

49.0

31.8

5.11

108.3

5.40

1.01

5.0

03/22e

55.2

36.2

5.82

110.3

5.50

0.99

5.0

Note: *EPRA earnings and NAV are fully diluted

Performing as expected

The specialised supported housing sector provides an essential public service, 100% funded by central government (paid directly to the housing associations that lease the properties). As a result, rental income has continued to be received as normal with no COVID-19 impact. By 5 November 2020, 98% of rents due to Civitas for Q221 had been received, with the balance expected shortly. A Q221 quarterly DPS of 1.35p has been declared for payment in early December, leaving the company on track to meet its annual targeted 5.4p (+1.9%). Previously committed investments with an aggregate value of c £14m (before costs) have completed and including inflation-indexed rent uplifts the annualised rent roll has increased to £50.0m (end-FY19: £48.4m). Property valuations have increased and quarterly IFRS NAV per share increased slightly to 108.01p (Q121: 107.92p) after acquisition costs. Including DPS paid, IFRS NAV total return in Q221 was 1.42% (H121: 2.72%). COVID-19 has slightly delayed negotiations to raise £80–120m of additional debt, moving gross gearing closer to the 35% target. As a result, we have deferred forecast investment, reducing FY21 estimates but with no material impact on FY22.

Attention turns to growth opportunities

During the COVID-19 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 permitting long-term leases with a broader range of counterparties such as the NHS, the company has a growing pipeline of potential investment opportunities amounting to c £200m, with several large, early stage opportunities on top. With existing free cash resources committed at end-FY20 and deployed in H121, converting this pipeline is dependent on finalising additional debt facilities. Additional equity would provide scope for additional investment while offering scale and diversification benefits.

Valuation: Stable income and attractive yield

The shares offer an attractive c 5% 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.

Performing well and looking to further growth

Since IPO, Civitas has built a c £900m portfolio of primarily 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.

During the COVID-19 pandemic, the sector proved to be operationally resilient and the fundamental demand for specially adapted, high-quality accommodation has remained strong and even increased as local authorities look to relieve pressure on other care services. 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 life outcomes in a cost-effective manner.

In addition to the continuing strong demand from local authorities for specialised supported housing, the broadening of Civitas’s investment remit approved by shareholders in May has further increased the range and scale of the potential investment opportunities available. The revised investment policy allows the company to enter into long-term lease opportunities with a broader range of counterparties, 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 to meet an expanding range of needs.

Exhibit 1: New opportunities and additional counterparties

Source: Civitas Social Housing FY20 annual results presentation

With the FY20 annual results at the end of June 2020, Civitas disclosed a pipeline of investment opportunities of c £200m including specialised supported housing investments as well as investments from across its expanded counterparty base. Not included in the c £200m were several large transactions that it had begun to discuss. With the Q221 trading update, Civitas confirmed that active discussions are continuing over the potential acquisition of a range of high-quality existing and new build properties to be acquired at completion without the need for forward financing of the development.

Existing investment commitments completed during H121

During the first two quarters of the current financial year to 31 March 2021 (FY21), Civitas has completed the acquisition of five properties for an aggregate investment of c £14m (before acquisition costs). The properties had all been contracted for at year end and most significantly include the high acuity, newbuild, state-of-the-art supported housing and healthcare facilities in Wales (£12.1m) as well as smaller properties in Telford and Sunderland. The company has set aside an additional £10m in respect of the Welsh facilities, payment of which is contingent upon certain financial conditions being met. Including the completed acquisitions and annual rent indexation, by the end of Q221 the run-rate of contracted rent roll had reached £50.0m, compared with £48.4m at the end of FY20.

Exhibit 2: Key portfolio statistics

FY17

FY18

FY19

FY20

Q121

Q221

31-Mar-17

31-Mar-18

31-Mar-09

31-Mar-20

30-Jun-20

30-Sep-20

Investment (£m)

106

472

758

789

793

803

Properties

82

414

591

613

616

618

Tenancies

487

2,621

4,072

4,216

4,241

4,292

Local Authorities

32

109

157

164

164

164

Housing Associations

5

11

15

15

15

15

Care Providers

25

64

113

117

118

118

WAULT (years)

24.3

24.1

24.1

23.7

23.2

22.9

Source: Civitas Social Housing

Funding the investment pipeline

As previously disclosed, the company continues to target £80–120m of additional debt, the upper range of which is consistent with its target gross gearing of c 35% (and a maximum 40%). Gross gearing is defined as gross debt divided by gross assets including the investment properties on a portfolio valuation basis, and it was 26.9% at end-FY20. Current borrowing facilities of £272.5m are fully drawn and free cash resources fully committed. The end-FY20 cash balance of £58.4m roughly breaks down into the c £30m liquidity reserve that Civitas prudently targets and the committed investments (including the contingent payment) that have since completed or are expected to do so before year-end.

The general economic uncertainty created by COVID-19 has slowed discussions with potential lenders regarding the additional debt facilities, with many lenders focused on managing existing exposures to borrowers that were negatively affected, but Civitas says that lending activity is beginning to move forward and that it expects to provide an update in due course.

Clearly, the scale of the investment pipeline, including the large transactions in early stage discussion, would exceed even £120m of additional borrowing, but to be consistent with meeting the gearing targets, acquisitions above this level would require additional equity funding. Given the stable, inflation-indexed nature of the existing portfolio, the benefits of scale and increased diversification (by counterparty, care need, and regulatory regime) that further growth offers, we would expect a good level of investor interest in any equity raising.

Financials and valuation

As a result of the slight delay in financing we have pushed back some our investment assumptions, deferring rental income, although given the scale of the investment pipeline we have increased our aggregate investment assumption from c £98m (all during FY21) to £115m spread over FY21 and the first half of FY22. Given the company’s comments about the large scale of certain investment opportunities, we would expect additional debt capital to be deployed fairly quickly and we assume £55m (before costs) of investment in H221 (all in Q4 and none in Q321) followed by £60m (before costs) in H221, all at an assumed net initial yield of 5.5% with costs assumed at 6.8%.

To fund the acquisitions we have assumed £100m (within the range of £80–120m the company is targeting) of borrowing from 31 December 2020 (end-Q320) at an assumed cost of c 3%, above the current weighted average cost of debt (2.47% at end-FY20 and we estimate c 2.15% recently based on the three-month Libor rate of c 0.05%) but similar to the current cost of Civitas’s fixed rate debt (c 41% of the total).

Our FY21 forecasts are reduced a little by the delayed borrowing and deployment, but there is very little change to FY22 even though the H122 acquisitions will not contribute for a full year in FY22.

Our FY21 forecasts indicate DPS substantially (c 95%) covered by EPRA earnings. On a run rate basis, the dividend has been fully covered since the beginning of FY21, but this includes the properties on which contracts had been exchanged or where investment had been legally committed; these only contribute partially to FY21. Our FY22 forecast assumed continuing DPS growth (+1.9%) and increasing cover (to 1.06x).

On the company’s basis of measuring gross gearing, we expect c 32% at end-FY22, closer to its medium-term target of c 35%, and our estimate of net loan to value (debt adjusted for cash as percentage of the IFRS balance sheet portfolio value) is c 33%.

Exhibit 3: 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

03/21e

49.0

52.2

(6.2)

31.8

34.2

(7.1)

5.11

5.50

(7.1)

108.3

109.7

(1.2)

5.40

5.40

0.0

03/22e

55.2

55.6

(0.6)

36.2

36.4

(0.8)

5.82

5.86

(0.8)

110.3

112.9

(2.3)

5.50

5.50

0.0

Source: Edison Investment Research. Note: *Fully diluted

Civitas shares offer an attractive 5.0% dividend yield with good visibility of inflation-indexed dividend growth and trade at around NAV. Since IPO in November 2016 the average discount to NAV has been around 3% (Exhibit 4) with a peak premium of c 10%, but the average is reduced by two distinct periods of temporary weakness. The first of these occurred from late-2018 to mid-2019 reflecting initial investor caution in response to increased regulatory intervention in the sector. As the issues became better understood, the share price began to move higher, only for the improvement to be punctuated by COVID-19 fears at the beginning of the lockdown. An appreciation of the critical role that the sector performs, the factors that mitigate the operational risks of COVID-19 and the robustness of rent payments have resulted in the shares recovering.

Exhibit 4: Price to NAV history since IPO

Source: Refinitiv

In Exhibit 5 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. Civitas shares have outperformed the peer group average, UK property sector and FTSE All-Share Index over the past year, which we believe reflects the stable and growing income stream and a recovery from earlier investor concerns regarding regulatory intervention in the specialised housing association sector. 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. 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 small discount to NAV. Performance during the pandemic has demonstrated the resilience of the sector and the business model.

Exhibit 5: Peer group comparison

Price
(p)

Market cap
(£m)

P/NAV*
(x)

Yield**
(%)

Share price performance

One month

Three months

12 months

From 12M high

Assura

75

1996

1.39

3.7

-3%

-7%

5%

-15%

Impact Healthcare

104

332

0.95

6.0

4%

0%

-4%

-6%

Primary Health Properties

150

1967

1.37

3.9

1%

-1%

6%

-11%

Residential Secure Income

90

154

0.01

5.6

-1%

1%

0%

-11%

Triple Point Social Housing

111

445

1.05

4.7

4%

6%

27%

-3%

Target Healthcare

114

520

1.05

5.9

8%

2%

-1%

-9%

Average

0.97

5.0

2%

0%

6%

-9%

Civitas Social Housing

109

678

1.01

4.9

5%

-1%

24%

-6%

UK property index

1,583

9%

5%

-12%

-20%

FTSE All-Share Index

3,547

6%

3%

-12%

-17%

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

Exhibit 6: Financial summary

Period ending 31 March (£'000s)

2018

2019

2020

2021e

2022e

INCOME STATEMENT

Net rental income

18,606

35,738

46,165

48,967

55,205

Directors' remuneration

(205)

(163)

(176)

(184)

(184)

Investment advisory fees

(5,773)

(6,457)

(6,131)

(6,141)

(6,202)

General & administrative expenses

(2,915)

(3,022)

(3,501)

(3,100)

(3,162)

Total expenses

(8,893)

(9,642)

(9,808)

(9,425)

(9,548)

Total recurring expense ratio (TER)

1.36%

2.84%

1.40%

1.40%

Operating profit/(loss) before revaluation of properties

9,713

26,096

36,357

39,541

45,657

Change in fair value of investment properties

30,633

3,652

9,389

4,014

10,606

Operating profit/(loss)

40,346

29,748

45,746

43,555

56,262

Net finance expense

(628)

(3,484)

(7,710)

(7,776)

(9,501)

C share amortisation

(2,792)

(6,400)

0

0

0

PBT

36,926

19,864

38,036

35,779

46,761

Tax

0

0

0

0

0

Net profit

36,926

19,864

38,036

35,779

46,761

Adjusted for:

Change in fair value of investment properties

(30,633)

(3,652)

(9,389)

(4,014)

(10,606)

C share amortisation

2,792

6,400

0

0

0

EPRA earnings

9,085

22,612

28,647

31,765

36,155

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

6.06

5.76

7.52

Diluted EPRA EPS (p)

1.44

3.63

4.63

5.11

5.82

DPS declared (p)

4.25

5.08

5.30

5.40

5.50

DPS paid (p)

3.00

5.00

5.30

5.40

5.50

EPRA EPS/DPS

0.34

0.72

0.87

0.95

1.06

BALANCE SHEET

Investment properties

516,222

820,094

867,988

945,587

1,020,273

Other receivables

0

6,824

10,755

10,815

10,875

Total non-current assets

516,222

826,918

878,743

956,402

1,031,148

Trade & other receivables

3,315

5,723

10,838

7,420

8,497

Cash & equivalents

249,608

54,347

58,374

34,693

29,096

Total current assets

252,923

60,070

69,212

42,114

37,594

Trade & other payables

(10,176)

(15,324)

(7,743)

(9,894)

(11,330)

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)

(9,894)

(11,330)

Bank loan & borrowings

(90,822)

(205,156)

(209,440)

(315,370)

(371,570)

Total non-current liabilities

(90,822)

(205,156)

(209,440)

(315,370)

(371,570)

Net assets

369,395

666,508

671,042

673,252

685,842

Adjust for:

C shares

298,752

0

0

0

0

Fair value of interest rate derivatives

0

0

478

478

478

Diluted EPRA NAV

668,147

666,508

671,520

673,730

686,320

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

107.87

108.22

110.25

Diluted EPRA NAV per share (p)

105.5

107.1

107.95

108.30

110.33

CASH FLOW

Net cash flow from operating activity

8,057

23,335

32,905

45,050

45,956

Cash flow from investing activity

(483,898)

(302,577)

(61,901)

(66,640)

(57,580)

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)

(6,576)

(8,301)

Bank borrowings drawn/(repaid)

92,457

115,990

64,053

45,000

55,000

Share repurchase

(699)

0

0

Dividends paid to ordinary shareholders

(10,073)

(17,591)

(32,889)

(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)

(1,364)

0

0

Cash flow from financing activity

719,166

83,045

23,297

4,855

12,528

Change in cash

243,325

(196,197)

(5,699)

(16,736)

903

Opening cash

0

243,325

47,128

41,429

24,693

Closing cash (excluding restricted cash)

243,325

47,128

41,429

24,693

25,596

Restricted cash

6,283

7,219

16,945

10,000

3,500

Cash as per balance sheet

249,608

54,347

58,374

34,693

29,096

Debt as per balance sheet

(90,822)

(205,156)

(269,170)

(315,370)

(371,570)

Unamortised loan arrangement costs

(1,635)

(3,291)

(3,330)

(2,130)

(930)

Total debt

(92,457)

(208,447)

(272,500)

(317,500)

(372,500)

Net (debt)/cash excluding restricted cash

150,868

(161,319)

(231,071)

(292,807)

(346,904)

Net LTV (IFRS valuation basis)

n.m.

19.5%

26.3%

30.6%

33.6%

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

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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

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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