Civitas Social Housing PLC (LON:CSH) is the topic of conversation when Hardman and Co’s Research Analyst Mike Foster caught up with DirectorsTalk for an exclusive interview.
Q1: Mike, I want to talk about Civitas, can you tell us what a Civitas REIT is?
A1: Civitas Social Housing REIT is a real estate investment trust which has raised £650 million to invest in the UK’s social housing stock. Its dominant focus is in specialist supported housing, occupied on a long- term basis by tenants on housing benefit who have specific requirements. They may have physical or mental health issues and this specifically configured housing stock enables the tenants to move from either their elderly parents’ homes or an institutional facility. A typical tenant would start renting in their 30s, with the occupancy therefore lasting several decades.
Civitas enters into long-term leases only with Housing Associations and Local Authorities, these properties may be newly developed or specially and fundamentally converted. In the past it would be the Housing Associations owning, or indeed care providers on occasion, and the Civitas capital deployment releases more funding to the Housing Associations for more social homes.
Q2: So, what’s its market?
A2: There is push from the authorities to accommodate vulnerable people and Civitas supports this need. In 2016, the Department for Health published the National Transforming Care Programme to enable more people requiring care to live within communities. Local authorities have a legal responsibility, through the Care Act 2014 and the Homelessness Reduction Act 2017, to provide vulnerable adults with long-term, safe accommodation.
In 2015, there were about 155,000 adults with severe or critical learning disabilities housed and/or cared for in accommodation funded by local authorities or central government but mostly in larger institutions outside the local community. This number is estimated to grow to around 180,000 by 2025. Just achieving 10% of this potential 180,000, equates to a £2.7 billion opportunity. To date, Civitas invested £550 million in specially configured supported social housing for adults.
Q3: You mention Civitas’ capital deployed, at what stage of its development is Civitas at?
A3: Civitas has indeed invested £550 million which is a strong achievement, that’s 20 months from its IPO which is a good speed of deployment. Their reach enables it to assess a large range of potential investments, it’s invested now in 123 local authorities. They have de-risked its investment of the £650 million equity capital raised which was £350 million at IPO, £300 million at an over-subscribed second round) so investors can see the money is in the long-lease properties that they anticipated and that the purchase prices have average a net initial yield on the assets at around 5.9%.
Q4: What are risks and rewards Civitas’ investors are exposing themselves to?
A4: Civitas REIT invests in assets with 20 year plus income streams, upwards only rent. With characteristics of very long leases, on upward only rents, the sector is more akin to the primary medical sector where three large REIT’s are all growing and all trading at a premium to NAV, Civitas trades at a small discount to NAV.
No real estate sector is without risks, we see two and we conclude that the risks are well covered. The lease counterparts are predominantly specialist Housing Associations focused on the specific challenges of the tenants’ health-related requirements, they’re thus usually small organisations, hence the covenant is with a small organisation. Secondly, the rents per room are higher than ‘standard’ social housing.
Q5: So, they have a good-sized market to grow into, but you did say its shares trade at a small NAV discount. Why might that be?
A5: In February, its former second-largest lessee, First Priority Housing Association, fell into financial difficulties, however, this was quickly resolved for Civitas, with the leases transferred on the same terms to another housing association within a few weeks in. This indicates to us that the properties were seen as attractive to the fresh housing association agreeing the new leases, remember these were on the same terms.
If the stock market takes this as a negative, we’re reassured that it means investors can benefit from attractive Civitas share valuations. Attractive certainly does not mean without risks for any stock market vehicle, but the rating to NAV is below its peer group of the primary health REITs and the other social housing REIT, Triple Point Social Housing.
Q6: Now, you mentioned that the rents per room are higher than standard social housing, is that good or is it bad?
A6: We would say that this is not a problem, it shows how customised the rooms have to be, inevitably the occupants require high levels of care within the properties. The rent is a modest portion of the whole cost and 100% paid for by the state. The properties enable care to be given in the best way, efficiently and with personalised outcomes for personalised requirements. This has been quantified as reducing total costs versus other more institutional settings. These are highly customised rooms, bespoke to each occupier in highly customised properties.
Q7: Is the way things have played out so far for Civitas Social Housing, is it going well?
A7: Yes, NAV has risen to 106p a share, from 98p post the IPO 2 years ago, dividends are being paid and projected as targeted at IPO. 100% dividend cover is anticipated this year, an excellent outcome 2 years from IPO, it only works if the assets are carefully selected. The senior team is very experienced, and we see the events to date as fully justifying a conclusion that these are at the same time good assets as well as good lease structures. Very importantly, these assets have a low correlation to commercial property and certainly to the broader residential market. They yield enough to pay a 5% dividend yield next year, which makes Civitas’ income competitive versus competitor REITs.