Civitas Social Housing (CSH) has invested £761m to amass a portfolio of diversified supported social housing assets since it launched on 18 November 2016. It raised £350m at its initial public offering (IPO) and expanded in November 2017, raising an additional £302m through a C share issue whereby C share investors own a separate class of shares which has its own portfolio. These two pools were merged together in December 2018.
CSH aims to provide an attractive dividend yield, with stable income growing in line with inflation and the potential for capital growth. Its diversified portfolio is let to housing associations and local authorities, referred to as registered providers, on long-term lease agreements that are typically 25 years. CSH buys only completed homes, which includes acquiring new developments on completion, but it does not get involved with forward funding deals, such as putting up money to finance the construction of new social homes, or the management of social homes directly.
CSH’s portfolio has a low correlation to the general residential and commercial real estate sectors, as the supply and demand demographics driving the social home sector do not move in line with that of the wider real estate market. It is a real estate investment trust (REIT), giving it certain tax advantages. As a REIT, it must distribute at least 90% of its income profits for each accounting period. CSH is advised by Civitas Housing Advisors, a business established in 2016. Many of the 16-strong team have long experience of working in the sector and in specialist healthcare, and collectively, they have been involved in the acquisition, sale and management of more than 80,000 social homes in the UK.
CSH’s property portfolio is valued by property consultancy firm, JLL, on a quarterly basis, using a standard Royal Institute of Chartered Surveyors method which is based on discounted cashflows. It published an International Financial Reporting Standards (IFRS) NAV, which adds up the valuations of individual assets and reflects the value of the portfolio if it was sold off on a piecemeal basis.
CSH also publishes a portfolio NAV based on value if it were to be sold as a single portfolio. This reflects the fact that the properties are held in special purpose vehicles and attract a lower tax charge when they are sold on than selling properties individually.
At 30 June 2019 the IFRS NAV was £667.5m or 107.24p per share. On a portfolio basis, the NAV was £739.4m or 118.79p per share CSH sits within a small group of listed peers comprised of Triple Point Social Housing REIT (SOHO) and Residential Secure Income REIT (RESI). CSH is by far the largest fund in this peer group. RESI’s focus is more on retirement properties and shared ownership housing without leases, and therefore SOHO may provide a better comparison. CSH’s higher yield, larger size, better dividend cover, longer track record and similar NAV performance over one year suggest that it should attract a higher rating than SOHO.
At the end of March 2019, CSH’s portfolio was valued at £826.9m and its annualised rent roll stood at £45.7m, equivalent to an implied net initial yield of 5.53%. The model assumes CSH will invest £150m of the £170m of new borrowings. It assumes a net initial yield of 5.5% on new purchases.
Civitas Social Housing Price 84.90p
As at 10 September 2019
Investment strategy – a cautious approach underpinned by careful acquisition policy
The CSH portfolio has grown steadily since IPO, with £761m before acquisition costs committed as at 30 June 2019. The bulk of the properties have been acquired from housing associations, care providers, developers and private owners, at yields of between 5.5% and 6.5%; the majority of the time on an off-market basis. As the first and largest fund in the sector, CSH has established extensive relationships with developers, care providers and registered providers, which it uses to put in place acquisition agreements. All of the properties that it acquires already have a lease agreement with a registered provider in place, and so are income-producing from day one. CSH says that it may, from time to time, require the seller to review and upgrade the contracts that it has with various parties before acquisition.
CSH says it makes a detailed assessment of each property to ensure it is fit for purpose before acquisition. It only invests in completed buildings and does not engage in development or forward funding risk. CSH operates within the following investment restrictions:
• It may only invest in social homes where the counterparty to the lease is a housing association or a local authority;
• The minimum unexpired term for a lease or occupancy agreement at the time of acquisition will be 10 years, although leases with shorter lengths can be included in an acquisition of a portfolio that has a weighted average unexpired lease term of more than 15 years;
• The maximum exposure to a local authority or housing association is 25% of gross asset value once the capital of the group is fully invested;
• The maximum exposure to a group of houses/apartment blocks in a single geographic location is 20% of gross asset value once the capital of the group is fully invested;
• Only completed social homes will be acquired – forward finance of social homes under construction is not permitted;
• No investment in other investment companies or alternate finance funds; and
• No short selling.
The manager’s view – deals in the pipeline
Demand for supported housing is expected to increase, driven by government policy to offer supported living to more people in need and general growth in that demographic. An April 2018 report, based on research carried out by the Housing Learning and Improvement Network and published by Mencap, found that there were between 22,000 and 35,000 supported living homes (each with several dwellings), while it was estimated that between 29,000 and 37,000 supported living homes would be needed to meet demand by 2027/28. There is substantial unmet demand for suitable properties with the demand/supply gap forecast to grow
The bulk of CSH’s portfolio is comprised of specialised supported housing properties. These are homes for people requiring some form of care, mainly people with learning disabilities, autism, mental health issues and physical disabilities. CSH, whose portfolio covers half of the local authority jurisdiction in England and Wales, has indicated that demand for supported housing is growing and expanding to cover a wide range of underlying needs faced by people who are battling homelessness, addiction or who are stepping down from the NHS into a more appropriate supportive care environment.
Civitas Housing Advisors (CHA) has identified a pipeline of property that it wants to buy, worth more than £200m, for CSH’s portfolio. CHA said that the majority will be similar to the properties that CSH has in its portfolio at the moment. CHA is seeing continued opportunities to buy from local authorities and care providers, looking to release capital in order to invest back into quality care. However, going forward, the company is also evaluating plans to broaden its portfolio exposure in the supported living sector to include other areas of government-backed housing, such as facilities for homeless people and accommodation for people stepping down from the NHS. Much like the properties in its current portfolio, which predominantly caters for individuals with learning difficulties and mental health issues, the cost savings for local authorities in placing people in supported living accommodation is potentially large. CHA believes that the move will help CSH achieve greater diversification and make the company ever more relevant to the needs of local authorities.
The move comes after the passing of the Homelessness Reduction Act 2017, which states that local authorities have an increased responsibility for ensuring that those at risk of homelessness are helped. Homeless charity Shelter estimates that there are 35,000 people regularly sleeping rough and over 100,000 families in temporary accommodation, which is often expensive and of poor quality. CSH, in some cases in partnership with Crisis, is in discussion with a number of local authorities to provide social housing for the homeless where the properties will be let directly to the local authority. CSH has had a number of conversations with NHS trusts and other providers to develop a pipeline of NHS step-down facilities. These are long-term step-down homes and facilities for those with care needs who are currently housed in hospitals.
Shareholder approval has also been received to open up its investment criteria to include the rest of the UK. Up until now, the company has been restricted to acquiring social homes located in England and Wales. It believes it can capture good returns in Scotland and Northern Ireland and has been actively looking at investment opportunities.
CHA has met with Scottish and Northern Ireland governments and housing associations based in these areas, and it believes that the rationale for investing there is strong. CHA believes house prices are cheaper than in many parts of England and Wales and that demand for this kind of accommodation is high.
Further reading: Investment trusts: a beginner’s guide