Large shareholders have pushed through the knockdown sale of real estate investment trust Civitas Social Housing (CSH) to a Hong Kong asset management group, which effectively robs investors of up to £175m of value.

In May, the board agreed and recommended an 80p-per-share offer from CKA Group, a direct investor in Civitas Investment Management, after it swooped in with a £485m cash bid.

In annual results published yesterday, CSH revealed the offer had become unconditional on 23 June after the proposed purchaser either held or had received valid acceptances in respect of around 64% of the issued share capital of the fund a day earlier.

James Carthew, head of investment company research at QuotedData and a shareholder in the CSH, said it was an ‘extremely disappointing’ development.

‘Effectively, they [the large shareholders] handed the bidder up to £175m of value, assuming it can buy the remainder at the same price, without putting up a fight. I’m not sure how they can justify that to their underlying customers,’ he said.

Minorities holding 25% of the register can block a delisting or a liquidation of a company, while holders of 10% can block the majority shareholder from forcing them to sell their shares. However, Carthew conceded that ‘in this case, I see little point in persevering with Civitas and have since accepted the offer’.

Manager Pietro Nicholls agrees that the offer ‘undervalues the company a little too much’. At the time of the bid, he had 3% exposure to Civitas in his £211m VT RM Alternative Income fund, but he told Citywire he has since exited the position.

Shares in CSH soared 43% on news of the offer and have since bumped along around the offer price of 80p, but that nevertheless undervalues the assets by 26.7%.

‘Now that one unloved investment company has been bought out at a 27% discount, how many others might follow?’ asked Carthew, a columnist for this website.

‘Triple Point Social Housing [SOHO], which is a very similar fund, still trades on a 61% discount and offers a yield of 11%. It seems like an obvious place to reinvest some or all of my money.’

UK wealth managers have also been big backers of Civitas. Evelyn Partners owned 4.8% of the shares as of May last year, while Barclays Wealth owns 1.7% and Walker Crips holds 1.3%, according to the latest stock exchange filings this year. 

 Performance since launch

Source: Morningstar

Mixed picture

After the offer became unconditional, CSH appointed six new non-executive directors to the board on 29 June. The previous five directors stepped down on the same day.

The move came as the fund released annual results that showed a mixed performance picture. Net asset value (NAV) per share declined 1% in the year to the end of March but gained 4.6% once dividends were accounted for.

Dividends of 5.7p per share were in line with the minimum stated intention but only 0.78 times covered by earnings as increased interest costs on debt took their toll. The weighted average interest cost of debt increased by 90 basis points to 3.4%.

CSH’s share price slid 34%, weighed down by regulatory pressures on the housing associations that lease its properties and the wider commercial property selloff sparked by rising interest rates.

A net fair value gain on investment properties of £2.6m was recorded during the year and the portfolio was valued with an average net initial yield of 5.55% at the period-end, up from 5.28% a year earlier.

Rental income was also up, rising by 5% on 2022, driven by the indexation of leases as no acquisitions were made in the period.

Buybacks of 6.1 million shares during the period at an average price of 76.89p added 0.3% to NAV.