Civitas Social Hsng. - Quarterly Portfolio Update
11/05/2022 07:00
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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 (#_ftn1) 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.£8.1m 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.£8.1 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").
IFRS NAV 31 31
Mar Dec
2022 2021
Ordinary NAV (£'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 £8.5 million.
Portfolio NAV
The unaudited Portfolio NAV, disclosed below, reflects an independent RICS
"Red Book" valuation prepared on a portfolio basis by JLL.
PORTFOLIO NAV 31 31
Mar 2022 Dec
2021
Ordinary NAV (£'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 (#_ftn2) , 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 £194 (which is in-line with rents quoted by Mencap
(£185.60 - £194.43) in the "Funding Supported Housing for All" in April
2018) and £311 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 £203
East of England £244
London £394
North East £135
North West £152
South East £266
South West £215
Wales £217
Yorkshire & the Humber £116
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 £107 a week
with an average of £124 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
(https://www.civitassocialhousing.com/investors/results-reports-and-presentations/#currentPage=1)
.
ENDS
For further information, please contact:
Civitas Investment Management Limited
Andrew Dawber Tel: +44 (0)20 3058 4846
Paul Bridge Tel: +44 (0)20 3058 4844
Panmure Gordon
Sapna Shah Tel: +44 (0)20 7886 2783
Tom Scrivens Tel: +44 (0) 20 7886 2648
Liberum Capital Limited
Chris Clarke / Darren Vickers / Owen Matthews Tel: +44 (0) 20 3100 2000
Buchanan
Helen Tarbet / Henry Wilson Tel: +44 (0) 20 7466 5000
Hannah Ratcliff / George Beale civitas@buchanan.uk.com
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 £946.3million (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 (#_ftnref1) This is a target and not a formal dividend forecast or a
profit forecast
2 (#_ftnref2) This is a target and not a formal dividend forecast or a
profit forecast
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