Civitas slides as short-selling attack casts shadow over deals

ShadowFall has published a highly critical report accusing Civitas of failing to fully disclose property deals that it says put investors at a disadvantage.

Shares in Civitas Social Housing (CSH ) have dropped nearly 5% after the real estate investment trust (Reit) came under attack from short-seller ShadowFall, which has accused it of hiding a transaction that put investors at a disadvantage.

The social housing giant, whose £622m portfolio makes it the largest player in a growing sector, slid 4.9% to 95p after ShadowFall published a highly critical report. Peer Triple Point Social House (SOHO ) ticked down 1.4% to 102.6p.

ShadowFall is a short seller, meaning it bets against the shares of companies it believes are overvalued and publishes negative research on them in the hope the shares will tumble, allowing it to buy them back at a cheaper price – a tactic it employed successfully with online retailer Boohoo (BOO) last year. It is estimated to have a short position equivalent to 1% in Civitas.

The short seller’s latest report centres around what it believes is a conflict of interest in a property deal done by the Reit. In 2018, Civitas bought a care home operator, retained the property assets but sold the operating business to a third-party care provider, Envivo, registered on the Isle of Man. However, Civitas Investment Management directors Tom Pridmore and Andrew Dawber each have a 10% stake in Envivo.

The deal involved a company called TLC Care Homes, which cared for residents in nine homes it owned in Essex, which Civitas bought for £25.5m. It then split TLC into two companies: one that ran the homes and cared for the residents, and the other owned the properties. The operating company, which cared for residents, was then sold to Envivo, which would in turn rent the homes from the property company.

Such deals are known as operating company/property company (opco/propco) splits and typically see operating companies selling properties and then leasing them back from a new owner. They are not uncommon in the property circles but ShadowFall said the sale was arranged ‘on the cheap’ for £4.3m and the involvement of Pridmore and Dawber in Envivo was not fully disclosed to shareholders. The valuation appears low given the operating company made £3.2m of underlying profit in 2018, according to The Times, which first reported the story. 

However, Civitas has disputed the figures, stating that they do not take into account rent, which bumps up the purchase price to £5.4m, and that it has complied with disclosure requirements.

A source at Civitas said ShadowFall’s report was ‘false, damaging and misleading’ and Civitas investors were not disadvantaged by the opco/propco deals. They added that the deal was ‘presented to the UK Listing Authority by the company’s advisers, and it was formally recorded in board papers and signed by the auditors’.

Numis analyst Andrew Rees said although he had not seen a copy of ShadowFall’s report, news of the stakes in Envivo will raise ‘concerns for shareholders’.

‘Civitas’s management has stated that the structuring of these transactions was disclosed to the company’s board and broker, who were satisfied and agreed there was no requirement to disclose the transaction,’ he said.

‘In addition, the manager highlighted that the structure of the transaction was not widely used by competitors and therefore considered appropriate not to disclose proprietary information in the way the company sources its assets.’

Rees said the board was likely to come under increased pressure over disclosure and that he expects ‘there to be ongoing focus on the evolving nature of the social housing market and the risk-return profile investors are facing’.

The high-yielding sector has been growing rapidly and Civitas boasts that it has saved the government £76m a year while paying £103m of dividends over the past five years, but it has not been without its issues. In 2019, the Regulator of Social Housing published a highly critical report questioning the sector’s financial model. Since then, Reits have been working with the watchdog to iron out the issues.

While the government pays the rent for tenants living in the Reits’ properties as they house vulnerable members of society – in Civitas’s case, the portfolio of 600 homes accommodates more than 4,000 people with learning, physical, or mental health issues – the housing associations that are the trusts’ underlying tenants still have to pay rent when the homes are empty.

A number of housing associations have been highlighted by the regulator for poor financial practices, including Trinity, Westmoreland, Inclusion, Encircle and, most recently, Auckland Home Solutions, which is under review.

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