High-yielding Civitas hopes lease amendment will get regulator off its back

Civitas Social Housing is consulting on a new lease clause it hopes will clarify the position of its housing association tenants and lift the long-standing regulatory uncertainty over the real estate investment trust's shares.

Civitas Social Housing (CSH ) is consulting on a new lease clause it hopes will clarify the position of its housing association tenants and lift the long-standing cloud of regulatory uncertainty over its shares.

The high-yielding real estate investment trust, whose shares are still recovering from a short-attack last year, has been dogged in its six-year life by repeated concerns of the Regulator of Social Housing (RSH) about the financial weakness of housing associations signing up to its 25-year leases when their income stems from much shorter local authority contracts.

In response, Civitas has developed a clause allowing a housing association to temporarily stop paying rent when it has not received full payment from a council and when the payment would put it in breach of the regulator’s viability standards.

It said the clause would operate on a property-by-property basis, rather than apply to all of an association’s homes, and would be implemented in limited circumstances with Civitas able to reclaim rent arrears if the association receives its money. The impact on Civitas’ rent roll would be immaterial, it said, and could add to the portfolio’s value in time if the clause is rolled out and seen to be reducing the risk of an intervention by the regulator.

‘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.’

‘The key focus will now be on the likely response from the regulator and whether the clause creates a pathway for regulatory compliance,’ said Conor Finn, analyst at Liberum, corporate broker to Civitas. 

The quarter also saw Civitas continue to diversify its government-backed business model with the £8.1m acquisition of 47 four-bed properties in Yorkshire and Humberside which will be leased to Qualitas Housing and provide shelter to asylum seekers. Properties for asylum seekers and the homeless now account for 3.7% of the property portfolio, which is predominantly focused on supporting vulnerable adults with learning difficulties, mental illness or drug dependency.

The company declared a fourth quarter dividend of 1.3875p per share hitting its target of 5.55p for the year. It is targeting a 2.7% increase for 2022/23 to 5.7p per share, which Liberum said put it on a forward yield of 6.8%.

The high yield reflects the inflation-linked rents from three quarters of the portfolio but also the depressed level of Civitas shares, which have fallen 24% in the past year to 84p, a steep decline that also puts them on a 24% discount to their NAV, according to Liberum.

The best hope for re-rating the shares is getting regulatory approval for the lease amendment, Finn said.

‘Predicting the RSH’s response is challenging, but we are cautiously optimistic that it will be viewed favourably. We are updating our target price to 105p from 123p to reflect a c.5% discount to NAV, a level we believe is more realistic given the current environment,’ the analyst said.


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