Civitas Social Housing PLC Quarterly Portfolio Update (0188L)

TIDMCSH

RNS Number : 0188L

Civitas Social Housing PLC

11 May 2022

11 May 2022

CIVITAS SOCIAL HOUSING PLC

("Civitas" or the "Company")

Quarterly Portfolio Update

New Lease De-Risking Initiatives and Expansion of Investment Adviser Team

Civitas Social Housing PLC ("Civitas" or the "Company"), the UK's leading care-based and healthcare REIT, is pleased to announce its quarterly net asset value ("NAV") update as at 31 March 2022, with performance continuing to be robust and dividend declared in line with full year target.

Highlights:

-- Consistently robust financial and operational performance, in line with the Board's expectations

   --    Unaudited IFRS NAV per share continues to be resilient at 110.30p (31 March 2021: 108.30p) 

-- Fourth 1.3875p quarterly dividend declared in line with full year target of 5.55p (2021: 5.40p)

-- New dividend target of at least 5.70p [1] for financial year ending 31 March 2023 (2.7% increase)

   --    Initiatives launched to promote greater regulatory alignment and address perceived lease risk 
   --    Investment Adviser team strengthening to support enhanced portfolio delivery 
   --    Acquisition of 47 properties in the quarter for c.GBP8.1m to deliver asylum accommodation 

Introduction

The Company is pleased to announce an increased unaudited NAV of 110.30 pence per share (1.85% annual increase) and a fourth quarterly dividend of 1.3875 pence per share as targeted, consistent with the Board's stated target of paying a total dividend of 5.55 pence per share for the year ended 31 March 2022.

The Civitas portfolio continues to benefit from inflation adjusted long-term leases or occupancy agreements with Approved Providers (housing associations and other not-for-profit organisations) and the Company aims to deliver returns broadly in line with inflation over the long-term.

Over the past year the Company and its investment adviser, Civitas Investment Management Limited (the "Investment Adviser" or "CIM") have worked closely with several leading housing associations and sector counterparties to develop a consensus on a universal approach that seeks to enhance sector regulatory compliance. This has most recently included meeting with the Regulator of Social Housing ("RSH").

Further details regarding the impact of inflation and the Company's sector initiatives are set out below.

Completed Transactions

During the quarter to 31 March 2022, the Company completed the acquisition of 47 four-bed properties in Yorkshire and Humberside for a total consideration of c.GBP8.1 million (excluding purchase costs).

The properties are subject to indexed leases with Qualitas Housing (an existing counterparty) and benefit from an underlease with a leading national housing provider holding a long-term Government contract to deliver asylum accommodation. The properties are immediately income generating with a net initial yield in line with the Company's present expectations.

Properties providing homeless/asylum seeker accommodation represent 3.7% of the Company's portfolio in terms of the IFRS valuation at 31 March 2022.

Net Asset Values ("NAV"):

IFRS NAV

The unaudited IFRS NAV, disclosed below, reflects an independent RICS "Red Book" valuation prepared on an individual asset basis by Jones Lang LaSalle ("JLL").

 
                                    31       31 
                                    Mar      Dec 
 IFRS NAV                           2022     2021 
 Ordinary NAV (GBP'000)           675,547  669,650 
                                  -------  ------- 
 Ordinary NAV per share (pence)   110.30   108.78 
                                  -------  ------- 
 

The portfolio, based on individual asset valuations, has been valued overall at 31 March 2022, at an average Net Initial Yield of 5.28% (31 December 2021: 5.29%), after taking into account the initial costs of property acquisitions incurred by the Company and the assumed costs of a subsequent theoretical sale. The individual valuations are determined by JLL and are based on a range of underlying metrics including applicable discount rates and expected long-term inflation.

The IFRS NAV reflects the contribution from the indexation of leases in the period, less the cost of discretionary capital expenditure that has been incurred to enhance further the quality of the Company's properties to reflect the individual needs of tenants for the long-term.

During the financial year to 31 March 2022, the Company also purchased 10,025,000 shares into Treasury at an average price of 92.36p, being a discount to the Company's prevailing NAV per share. The impact of the share repurchases at 31 March 2022 has been to enhance IFRS NAV per share by 0.26p. The Company also released 565,000 shares from Treasury during the year reflecting a positive 0.03p impact to IFRS NAV per share since 31 March 2021.

A dividend of 1.3875p per Ordinary Share was declared, as targeted, on 9 February 2022 in respect of the quarter ended 31 December 2021 and paid on 11 March 2022, amounting to GBP8.5 million.

Portfolio NAV

The unaudited Portfolio NAV, disclosed below, reflects an independent RICS "Red Book" valuation prepared on a portfolio basis by JLL.

 
                                     31        31 
                                   Mar 2022    Dec 
 PORTFOLIO NAV                                 2021 
 Ordinary NAV (GBP'000)            752,331   741,346 
                                  ---------  ------- 
 Ordinary NAV per share (pence)    122.84    120.43 
                                  ---------  ------- 
 

The portfolio, as a single entity, has been valued at 31 March 2022 at 5.06% Net Initial Yield (31 December 2021: 5.06%), reflecting the enhanced value from the aggregation of individual properties into a single portfolio company and the positive effects of the stamp duty adjustment noted below.

The JLL portfolio valuation incorporates two additional assumptions when considering Red Book valuation. Firstly, that the assumed theoretical sale costs (from Civitas to a subsequent buyer) are reduced as the portfolio is assumed to be sold (with all properties within SPVs) with stamp duty being charged at 0.5% on the sale of shares in SPVs, as opposed to 5.0% for the sale of each underlying property. Secondly, that the portfolio is sold in its entirety rather than as individual properties (making it better suited to a wider group of institutional buyers) and so attracting more competitive pricing. This assumption is supported by transactional evidence that JLL has observed in the market.

Dividend Declaration

The Board has today declared a fourth quarterly dividend for the period from 1 January 2022 to 31 March 2022 of 1.3875p per Ordinary Share as part of the previously stated dividend target of 5.55p per Ordinary Share for the year ended 31 March 2022.

The dividend will be paid on or around 28 June 2022, to holders on the register as at 20 May 2022 (the "record date"), with the corresponding ex-dividend date being 19 May 2022. The dividend will be paid as a REIT property income distribution. The Company operates a Dividend Reinvestment Plan ("DRIP"), which is managed by its registrar, Link Group. For shareholders who wish to receive their dividend in the form of shares, the deadline to elect for the DRIP is 7 June 2022.

The Board intends to target a dividend of at least 5.70 pence per Ordinary Share for the financial year ending 31 March 2023 [2] , an increase of 2.7%.

Notwithstanding the significant recent jump in inflation, the average increase in CPI since March 2019 (when the Company completed payment of the first full dividend of 5 pence per share) to end March 2022 was 2.6% p.a. and compares to an average increase in the Company's dividend of 3.3% p.a. over the same period.

Investment Performance and Inflation

As the Company approaches its sixth year of operations the Board is pleased to note that the Company continues to deliver a positive financial and operational performance in line with expectations. The Company, in the Board's view, is successfully implementing its strategy of delivering investor returns whilst doing social good by providing homes for the most vulnerable in society.

Rental income has continued to be generated as planned, with CPI based indexation being achieved in the usual manner on the anniversary of the inception of each lease (the CPI rate is usually backdated two months to ensure availability of data).

Across the Company's portfolio 27% of rents benefit from indexation at CPI+1, with the balance of 73% at CPI. Additionally, 31% of rents are subject to a collar/cap at 0%-4%.

For many years, inflation as reported by the Office for National Statistics, has remained subdued. In the Company's financial year to 31 March 2022 monthly CPI rates reflected this with reported inflation in many months close to, or at, or below zero but with a well reported uplift toward the end of this period.

Today, inflation, as measured by CPI, is increasing at an even faster rate with the Bank of England forecasting further increases during 2022 before an anticipated decline later in 2023. The Office for Budget Responsibility retains a medium-term forecast of 2% for CPI based inflation, a level that is often adopted for longer-term financial and business planning.

Within the Specialist Supported Housing ("SSH") sector, housing associations, charities and specialist care providers typically agree annual settlements with local authorities adjusted for inflation. This has been the norm for many years and is expected to continue in the future.

As part of its monitoring activities, the Investment Adviser has engaged with a range of housing association partners who have confirmed that, after making appropriate submissions, they have in recent months continued to achieve positive settlements with local authorities that reflect both the current higher levels of inflation and the requirement to provide value for money for the public purse.

The investment Adviser intends to continue its active engagement and to monitor the level of settlements that are being achieved. This activity is led by experienced staff within the Investment Adviser who have previously held senior roles within local authorities, housing associations and specialist care providers and so are particularly well placed to undertake this analysis.

Rent Levels

The Company's lease rents are tested for reasonableness (against the Investment Adviser's detailed database and further with independent consultants as required) and agreed with housing associations and other leaseholders. The housing associations and other leaseholders in turn seek sign-off from the relevant housing benefit officers within each local authority in which they operate. The objective is to confirm both the specific rent level and exempt rent status for the delivery of each specialist supported housing property.

To assist this process, the Investment Adviser employs, at its own cost, full-time specialist staff in this sector including most recently the former head of housing benefit for a leading London local authority and other specialists with a track record within local government, housing associations and the care industry.

Rent levels vary significantly in both general needs and SSH social housing due to a number of factors, particularly location in the UK (reflecting the cost of delivering the accommodation) and the use of the properties. Properties that require little adaptation and are entirely conventional are much cheaper to deliver than those that require bespoke adaptation to make them suitable for high acuity care.

The Company has sought to construct a portfolio that is focussed on the delivery of high acuity care in the belief that this most effectively meets the needs of individuals with critical requirements and achieves a comparative cost saving for the public purse against the alternatives of institutional or hospital care. This is reflected in the most recently reported average delivered care hours across the Company's portfolio of 43 hours per person per week.

The Company has previously indicated that the average weekly rent for a mid-acuity SSH property is GBP194 (which is in-line with rents quoted by Mencap (GBP185.60 - GBP194.43) in the "Funding Supported Housing for All" in April 2018) and GBP311 a week for very high acuity residential care accommodation. In both cases, this represents a significantly lower cost than other forms of accommodation such as institutional or hospital care. The accommodation cost also usually forms a small part (c. 10% - 15%) of the overall cost of the delivery of high acuity care provision.

Average Weekly Rent by Region across the Civitas Portfolio (SSH and Residential Care)

 
     Region        Average weekly 
                        rent 
    Midlands           GBP203 
                  --------------- 
 East of England       GBP244 
                  --------------- 
     London            GBP394 
                  --------------- 
   North East          GBP135 
                  --------------- 
   North West          GBP152 
                  --------------- 
   South East          GBP266 
                  --------------- 
   South West          GBP215 
                  --------------- 
      Wales            GBP217 
                  --------------- 
 Yorkshire & the       GBP116 
      Humber 
                  --------------- 
 

Within the portfolio, and as noted above, the Company has, by way of diversification, invested in a small number of properties that provide accommodation for services such as homelessness or those individuals with refugee status, usually in support of established and long-term Government programmes. In these instances, the level of adaptation needed to deliver the care required is much lower than equivalent care-based accommodation and this is reflected in the weekly rent levels that commence at around GBP107 a week with an average of GBP124 a week, depending on location in the UK.

Maintaining detailed information in respect of rents enables the Company to ensure that rents are set at a reasonable level in relation to the facilities provided and this in turn ensures that they are correctly based when annual indexation is applied. This is important to demonstrate value for money at a time of rising inflation.

Investment Policy

The Company's existing Investment Policy already provides significant flexibility both in terms of the length and the nature of lease and occupancy agreements that can be entered into with counterparties.

The Investment Policy states that:

"The Directors intend that the Group will meet the Company's investment objective by acquiring portfolios of Social Homes and entering into long-term inflation adjusted leases or occupancy agreements for terms primarily ranging from 10 years to 40 years with Registered Providers."

The Investment Policy was, with shareholder approval, updated in May 2020 to broaden the range of potential lease counterparties beyond Registered Providers (housing associations and local authorities) to include not-for-profit entities such as charities and the NHS together with private care providers on the basis that their principal source of income is from public funds.

As with all sectors, the delivery of specialist supported housing has continued to evolve but with a consistent theme of high levels of underlying demand for properties capable of supporting the delivery of high-quality community care for working age adults with long-term care needs.

The demand for such accommodation is predicted to continue to grow in the future with individuals often being in residence for several decades. The average age of a resident within the Company's portfolio is a little over 30 years and this supports the need to provide stable accommodation over the long-term.

As the leading provider of SSH accommodation in the UK, the Company will continue to monitor the sector closely and where appropriate make proposals (such as those noted below) that are believed to be consistent with delivering improvements to the sector and that support the core investment themes that were established by the Company at the time of IPO.

New Initiatives - Supporting Additional Regulatory Compliance and Addressing Perceptions of Risk

During 2021 and 2022, the Company's Investment Adviser has engaged with relevant counterparties, including several shareholders, lending banks, valuers and the RSH and undertaken detailed negotiations with several housing association partners, to explore how the Company can assist those organisations to be better positioned to achieve regulatory compliance under the RSH's Governance and Financial Viability Standard (the "Standard").

The consensus result of these discussions and negotiations is the development of an approach with a new draft lease clause whose principal objectives are to enable housing associations to:

   --    achieve greater alignment between income receipts and lease liabilities 
   --    set achievable capital solvency requirements against lease obligations 
   --    demonstrate a further degree of risk sharing 

Each with the objective of seeking to demonstrate compliance with the Standard (expressed as gradings V1 - V4 and G1 - G4).

Meanwhile, the draft lease clause will provide the Company with:

   --    counterparties better able to achieve regulatory compliance 

-- enhanced information and step in rights (having regard to tenant welfare) in addition to existing lease transfer and assignment rights

   --    unchanged lease and property values supported by strong underlying demand 

The draft clause once enacted will operate on a property-by-property basis to provide for a temporary pass through of lease rent in certain limited circumstances when the housing association is not in receipt of full payment whilst at the same time ensuring that the Company does not become responsible for obligations that are rightly owed by others such as void cover by care providers. Furthermore, this applies only after an initial period of time during which all rents remain the responsibility of the vendor/housing association and then only if paying the rent in full would cause the housing association to fail to meet the Regulator's standards.

The draft clause also contains provision for the reimbursement of rental income if that is subsequently recovered by the housing association.

Implementation of the clause will codify much of the general asset management work and the Company's approach to sector collaboration that already takes place on a day-to-day basis and is reflected in the Company's existing rent roll but which has to date not been included within the terms of the Company's leases and so have not received formal recognition. It is anticipated that the clause will only be relevant to a small number of properties at any time and will not have any material impact on the Company's rent roll.

The Company has sought and obtained formal written confirmation from valuers that the inclusion of the clause within the Company's new and existing leases will not of itself cause a diminution in the value of those leases or in the underlying assets. Indeed, the Company considers that enhanced regulatory alignment would be consistent with asset appreciation over the medium term.

At the present time the clause is in draft form and is subject to further discussion and refinement with several housing association boards assisted by leading sector lawyers together with other relevant approvals.

It is intended that the clause will be incorporated initially into a limited number of existing leases on a retrospective basis commencing with properties that are unencumbered.

On the assumption that it is well received by relevant parties within the sector and has the potential to achieve the objectives set out above it will be further rolled out in a controlled manner over time to Approved Providers and in respect of new and existing leases on a retrospective basis. The Company will provide further updates in due course once the final form of the clause has been settled.

The Investment Adviser - Investing in Sector Specialists and Investment Professionals

CIM has continued to invest heavily in the recruitment of experienced professionals who bring further in-depth operational knowledge of the social housing sector together with additional senior fund investment and real estate expertise. This team of diverse people is available to support the activities of the Company. CIM now comprises 35 professionals including the founding directors and board members.

The team includes:

TOM FALCONER - Head of Asset Management - Previously Group Property Manager at Lifeways (leading UK specialist care provider)

Tom is a former local authority commissioner with over 12 years of experience in asset management, specialist housing delivery together with health and social care integration across the UK. At CIM, Tom leads the asset management team, working closely with local authorities and housing associations supporting them in their requirement to meet the demand for SSH and residential care accommodation.

CHARLES REID - Senior Partnership Officer - Previously Housing Benefit Appeals Officer at London Borough of Southwark Council

Charles is a housing benefit specialist with a 30-year track record in assessing housing benefit claims and appeals across many of the largest London local authorities. At CIM he works within the asset management team to assist property due diligence and to support the work of Approved Provider partners in determining housing benefit claims and setting appropriate rent levels.

SEAN CORNEY - Director, Asset Management - Previously an executive within Savills' Asset Management Team

Sean is a specialist in the delivery of asset management within a residential environment. He is an Associate of the Royal Institute of Chartered Surveyors (RICS) and a member of the Institution of Residential Property Management (IRPM). At CIM as part of the asset management team he is responsible for the oversight of capital works that supports the enhancement of the Company's portfolio.

CONNELL GROGAN - Senior Portfolio Manager - Previously Senior Portfolio Manager at Resonance Ltd (leading specialist impact investor)

Connell is a Chartered Surveyor and experienced senior portfolio manager with over 20 years in real estate. He has worked previously with a leading impact fund manager with a focus on homelessness and specialist supported housing. At CIM Connell works within the asset management team focusing on delivering enhancements to the property portfolios.

DARYL QUARRY - Senior Portfolio Manager - Previously Head of Change & Transformation at Falcon Housing Association C.I.C.

Daryl has worked within the social housing sector for over 16 years in business development and change management. Daryl works collaboratively with the asset management team to support Approved Providers in implementing software and developing internal processes to contribute to the organisation achieving optimal performance as part of increased independence.

MATTHEW FILKIN - Fund Director - Previously COO at Almacantar (Property investment and development company)

Matthew has over 20 years of real estate experience covering investment, development, finance and corporate matters. At CIM he has an active day-to-day involvement in the operations of the existing investment strategies working closely with the asset management team to provide a broad real estate overview. He is also engaged with a number of specific asset management projects.

DIPESH DEVCHAND - Group CFO - Previously Managing Director, Head of Fund Finance & Operations for Intermediate Capital Group plc (FTSE 100 listed alternative asset manager)

Dipesh has over 20 years' experience in finance at a senior strategic level within a financial services and investment management environment. At CIM Dipesh leads the finance function, working closely with CIM's founders and shareholder partners to deliver the strategic mission of the group. He brings a wealth of experience covering financing, regulatory reporting, taxation and operational matters.

NAZLIN NAZRI - Associate Director, Finance - Previously Head of Financing Reporting at Tritax Group

Nazlin has over fifteen years of experience in real estate finance, including financial reporting under various GAAPs, financial management, group consolidation and fund accounting. At CIM she works within the finance team as an associate director with accounting responsibility for Civitas Social Housing PLC.

Ongoing Engagement with Approved Providers

Civitas continues to take a proactive and collaborative approach towards the Approved Providers holding Civitas leases in support of their objective to enhance their financial and operational performance and, where relevant for certain housing associations, to respond to comments made by RSH. Approved Providers have continued in the quarter to report high levels of health and safety compliance.

Quarterly Factsheet

The Company has today published its Factsheet for the quarter to 31 March 2022 and this is available to view on

the   Company's website . 

ENDS

For further information, please contact:

 
 Civitas Investment Management 
  Limited 
 Andrew Dawber                    Tel: [phone] 
 Paul Bridge                      Tel: [phone] 
 
 Panmure Gordon 
 Sapna Shah                       Tel: [phone] 
 Tom Scrivens                     Tel: [phone] 
 
 Liberum Capital Limited 
 Chris Clarke / Darren Vickers    Tel: [phone] 
  / Owen Matthews 
 
 Buchanan 
 Helen Tarbet / Henry Wilson      Tel: [phone] 
 Hannah Ratcliff / George Beale   [e-mail] 
 

Notes:

Civitas Social Housing PLC (CSH) was created in 2016 by Civitas Investment Management Limited as the first dedicated London listed REIT to raise long-term, sustainable, institutional capital to invest in care-based social homes and healthcare facilities across the UK. So far, Civitas has completed more than 120 individual transactions to build the largest portfolio of its kind that has been independently valued at GBP946.3million (30 September 2021). CSH now provides homes for 4,592 working age adults with long-term care needs, in 696 bespoke properties that are supported by 130 specialist care providers, 18 approved providers and working with over 178 individual local authorities.

[1] This is a target and not a formal dividend forecast or a profit forecast

[2] This is a target and not a formal dividend forecast or a profit forecast

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May 11, 2022 02:02 ET (06:02 GMT)