Civitas Social Housing’s FY19 results reflect the continuing strong growth in the company’s asset and income base. EPRA earnings more than doubled, and dividend growth is continuing with the company targeting a 6% increase in DPS to 5.3p for the current year. Acquisitions of £286m in in the year are yet to fully contribute, locking in further income growth, and we forecast an additional c £170m of acquisitions in the current year as the company gears its equity base towards its 35% target.
Civitas invests in specialist supported social housing (SSH) assets, fully let on long inflation-adjusted leases (more than 24 years) and this provides strong visibility of contractual income with a low historical correlation to the general economy, or residential or commercial property. It also delivers a strong positive social return, providing much needed private investment capital to housing associations/ registered providers (RPs) so that they may provide and manage additional, carebased quality accommodation to some of the most vulnerable in society. The endFY19 portfolio value was £820m, reflecting a net initial yield of 5.27%, and we expect this to grow to more than £1bn as Civitas gears the existing equity base.
The chronic shortage of SSH homes is forecast to increase, yet compared with the alternatives of residential care or hospitals it is widely recognised to improve lives in a cost-effective manner. SSH funding comes 100% from central government, via local authorities, with cross-party support. The growing demand for SSH has mostly been addressed by newer, specialised RPs, dependent on capital-light, leasebased models in the absence of capital grant funding. Civitas is working closely with its 15 RP partners to help them develop and mature, and is actively engaged with the regulator, which has raised sector-wide concerns in relation to corporate governance and/or financial viability. In this note we explore these and other issues in detail. The SSH contractual structure is complex, and we conclude that it is the quality and location of the assets, their suitable adaption to the long-term needs of the tenants, rents being at an appropriate level, and the growing demand for SSH that provides the effective security to Civitas’s long-term income.
The shares provide a prospective yield that is approaching 7%, well covered by adjusted earnings on a fully invested basis, and trade at a more than 20% discount to EPRA NAV. This a standout valuation among a peer group of long income investors in social housing and healthcare property
