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Civitas victim of ‘mis-information’, says Hawksmoor

24 April 2018

Trust watchers at Hawksmoor Investment Management have bought more shares in Civitas Social Housing for recovery, believing the high-yielding real estate investment trust has been unfairly punished over problems at one of its housing associations.

Trust watchers at Hawksmoor Investment Management are backing Civitas Social Housing (CSH) for recovery, believing the high-yielding real estate investment trust (Reit) has been unfairly punished over financial problems at one of its housing associations.

Civitas, which supplies rental accommodation to hard-pressed local authorities, saw its shares plunge 15% in the first quarter after First Priority in Kent, one of 11 housing associations it uses, was censured by the Regulator of Social Housing for governance and financial failings.

A rapid de-rating ensued with shares in the 5% yielding fund dropping from a 10% premium above net asset value (NAV) at the start of the year to stand 14% below NAV by the end of March. They have rallied 7% this month and trade at a discount of 10%.

Ben Conway, senior fund manager at Hawksmoor in Exeter, which holds investment trusts in its Vanbrugh and Distribution funds, said: ‘The ‘problem’ at First Priority has largely been poorly reported on by the investment community,’ adding that the ‘misinformation reflects vested interests in some parts of the broking community’ he believed felt threatened by the investment trust’s success.

Civitas was the first social housing Reit to launch at the end of 2016, romping to market with a £350 million flotation followed by a £300 million C-share issue a year later. It opened the way for Residential Secure Income (RESI) and Triple Point Social Housing (SOHO) which launched last year, with Fundamentum Social Housing looking to raise £150 million in an initial public offer closing this week.

Conway said it was ‘lazy’ and too easy to say ‘Civitas raised money too quickly and has relationship with a poor quality housing association which allegedly won’t pay as much rent’.

He said Civitas management were very experienced and that the company had been a ‘victim’ of First Priority’s excessive optimism about the ability of its care provider to deliver more tenants and on time.

In February Civitas said it expected the difficulties at First Priority, to which it has leased 45 properties, would have no impact on its dividend targets. It said it was working with the housing association to ensure there was no disruption to the tenants. Last month it said this work continued and that it had taken steps to promote best practice and due diligence within housing associations.

At the end of last September, First Priority accounted for 14% of Civitas’ rent roll, according to Numis Securities, with figures from the company showing that by the end of February it represented 5% of gross asset value of around £900 million (including uninvested cash from the C-share issue and 30% gearing). This made it the third biggest housing association in the portfolio behind Falcon Housing Association in Country Durham and Harbour Light Assisted Living in Liverpool.

‘I feel pretty confident about Civitas as a core holding in this sector,’ Conway told investors in a conference call last week, adding he had added to the holding when the shares fell.

Another of investors’ concerns over Civitas has been confusion over the valuation of its portfolio. The company introduced a ‘portfolio premium’ to boost its quarterly net asset values by 6%, arguing that conventional ‘sum-of-the-parts valuation would not fully reflect the price it would receive in a sale. However, it also publishes a standard IFRS valuation twice a year that strips this out.

‘Even when you take out the portfolio premium it is still on a discount,’ said Conway, who likes the indirect government backing and inflation linked dividend that supports the 5% yield.

Hawksmoor uses investment trusts to access specialist markets for its two fund of funds. Since last June it has lifted UK property exposure from 5.7% to 7.6% in its Vanbrugh fund, while doubling it in the Distribution fund to 15%. To do this it has preferred specialist Reits over mainstream, generalist commercial property trusts.

It is also a fan of the Warehouse (WHR) and Pacific Industrial & Logistics (PILR) where yields of around 6% and rental growth of 5% imply total annual returns of over 10%, Conway said.

Citing data from Pacific Industrial, which is proposing to change its name to Urban Logistics Reit, Hawksmoor said demand for warehouses was being fuelled by the structural increase in online shopping: ‘For every £1 billion of new online retail sales an additional 1.125 million of square feet of new distribution space is required.’

The managers were busy in the first quarter topping up holdings in ‘alternative income’ trusts such as GCP Infrastructure (GCP), ICG Longbow Senior Secured Property Debt (LBOW), LXi Reit (LXI), Pacific Industrial and RM Secured Direct Lending (RMDL).

Conway said they had also sold out of Rights & Issues (RII) after the discount on the top-performing UK smaller companies trust narrowed; Taliesin Property, which was bought by Blackstone last year and de-listed in the first quarter; India Capital Growth (IGC) where Hawksmoor took profits after strong returns last year left Indian equities looking expensive; and Pantheon International (PIN) where they said there seemed to be no catalyst for the private equity fund of funds to re-rate higher, despite the ambition of its manager to eradicate the discount on the shares.

The first three months of the year were tough for both Hawksmoor funds: the £130 million MI Hawksmoor Vanbrugh fund dropped 3.5% ahead of the 4.5% average decline of fund in its IA Mixed Investment 20-60% Shares sector, while the £111 million MI Hawksmoor Distribution fund shed 4.6% although again this was better than the 6% decline in the IA Mixed investment 40-85% shares Sector.

According to Hawksmoor both multi-asset funds have outperformed their sector since launch with Vanbrugh generating an annual 6.9% return since 2009 and Distribution returning 7.5% a year since 2012.

Investment company news brought to you by Citywire Financial Publishers Limited.

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