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Civitas re-rates as investors applaud Covid resilience

1 July 2020

Civitas Social Housing has completed a dramatic share price re-rating during the coronavirus pandemic on the back of an NHS deal, strong rent collection and improved dividend cover.

Civitas Social Housing (CSH ), a provider of homes for over 4,000 tenants with learning and mental disabilities, has completed a dramatic share price re-rating during the turbulent stock markets caused by the coronavirus pandemic.

At a time when the UK stock market has fallen 19% this year and many investment trusts remain well below their January starting point, despite a rapid rebound from mid-March lows, Civitas has notched up a 19% gain, with the share price moving from 91.4p back through its 100p launch price at the end of 2016 to stand at 109p today.

Even more impressive, shares in the £669m specialist real estate investment trust stand at a 1.6% premium over their 31 March net asset value (NAV), having begun the year on a 13% discount.

This is a huge turnaround from last summer when we highlighted Civitas as one of a handful of bargain income trusts in our quarterly ezine. At the time the shares languished on a 26% discount below NAV after investors took fright at the Regulator for Social Housing’s tough stance against some of the housing associations to which Civitas and its two main rivals leased their properties.

It’s been a double dip for investors on the Civitas roller coaster. Having partly re-rated by the end of last year in response to efforts by the company to engage with the regulator and help housing associations meet its standards, shares in the Reit plunged in the coronavirus crash to trail at 78.8p or 25% below their then NAV in mid March.

Since that low they have rallied 38% as Civitas has proved to be one of the few winners in the Covid-19 crisis. In contrast to property peers slashing dividends as commercial tenants struggled to pay rents, Civitas collected more than 99% of its first quarter rent. As a result income is now covering its dividends and 5% yield on an ongoing or ‘run rate’ basis. 

Meanwhile, having gained permission from investors, the company has forged a partnership with the NHS which should see it develop a range of healthcare facilities. These and other new investments should ensure that dividends are covered in this financial year.

There has been further good news recently with Civitas’ independent valuer removing the ‘material uncertainty’ clause inserted into most property fund valuations since the imposition of lockdown restrictions.

‘We believe investors will continue to be wary of potential for further negative regulatory decisions in what remains a relatively young sector of the market,’ said analysts at Numis Securities. 

‘However, the favourable rent collection and improved dividend cover could see some tempted to own the shares. The removal of the material uncertainty clause by the valuer since the period end may also be well received,’ it added.

Liberum analysts were more positive. ‘The shares have performed strongly through the Covid-19 crisis. The sector provides vital accommodation for vulnerable people and benefits from cross-party political support. The board’s confidence in the income stream was demonstrated by the 1.9% increase in the dividend target for FY 2021. 

‘Considering the premium placed on government-backed income streams in other asset classes, we believe there is considerable scope for continued improvement in the share rating,’ they said.

Loan talks

Civitas group director Andrew Dawber  (pictured) spoke to Investment Trust Insider after yesterday’s annual results confirmed a 5.7% total return including dividends on net assets in the year to 31 March.  

With the company fully drawn on its £272.5m debt facilities, leaving it with gearing of 26.9% and £49.3m of cash, Dawber’s priority is to obtain an additional £80-£120m of borrowing against the £212m of properties on which no mortgage is secured with which to expand the 613-strong property portfolio.

Dawber said he was likely to turn to a private lender such as an insurance company as banks had restricted their lending in response to the economic crisis.

‘Before we went into lockdown we had got fairly advanced with new bank debt facilities, and these conversations are still ongoing...but in the next months we will not see much lending,’ he said. 

Dawber said they had looked at UK and European institutions but the ‘main market is in the US’ where there is a ‘deep private placement market’.

He admitted that private loans were ‘probably a bit more expensive’ than trusts’ more standard way of borrowing through a ‘revolving credit facility’ from a bank, which allows the borrower to withdraw cash, repay it and withdraw again.

However, Dawber said it was not much more than a long-term bank loan, with ‘standard bank facilities’ costing between 300-330 basis points, and a private loan being ‘a similar level’, although the pricing has not yet been confirmed.  

‘We are still buying at the 550-580 basis points range and so there is a big spread between the cost of debt and the yield we are getting,’ he said. 

Dawber said there were ‘plenty of opportunities’ to use any cash borrowed especially as the trust starts to work with the NHS and other care providers rather than solely providing accommodation for housing associations. 

‘We have changed the business in the last year as people realised we can be major strategic partners,’ he said. 

‘Local authorities want to talk about plans to tackle homelessness and move people out of HMOs (houses of multiple occupation) and we can assist with that...That gives us more additions to the pipeline.’ 

He also said the trust would be an indirect beneficiary of prime minister Boris Johnson’s (pictured) large-scale spending plan, which includes throwing more cash at the struggling NHS. 

Civitas is in talks with NHS trusts that want to extend their hospital facilities and offer accommodation for those who need care but do not need to stay in an expensive ward bed, as well as provide accommodation for nurses and doctors. 

Dawber said although hospitals may receive more funding under Johnson’s plans, they are unlikely to have enough money to pay for the accommodation outright. 

‘If they partner with us, we can bring the capital side and they bring the revenue side, and that funding [they receive] can go a lot further,’ he said. 





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