On Thursday 9th July 2020, Hardman & Co held our first virtual Investor Forum as an online webinar for investors.
The event, normally taking place as a physical evening presentation in central London, has adapted with the changing times to great effect. Benefiting from both a wider geographical reach and logistical ease for attendees, our highly engaged audience more than doubled in size from previous forums.
Civitas Social Housing was one of four companies presenting over the webinar, with a management presentation followed by a lively Q&A session featuring questions from both investors and Hardman analysts.
Here, we transcribe that Q&A (edited for concision) and below that, we offer some further insight following the Forum session.
Analyst Mike Foster dissects the investment story in his research report published ahead of the event, please click here to read.
For more information about the event and to watch the recordings, please click here.
I’m going to try to group these questions into three parts. The first set of questions are around the regulatory environment and issues with other parts of the market and how that impacts your opportunity. I’d then like to go on and talk about the size of the market, your market share and how you scale your balance sheet – not in the next two or three years but over the longer term. And then I have a question about the value of your shares.
The question basically is: as the share price is more than the net asset value, how do you create value for shareholders? How much are you planning to raise the dividend going forward, and in what other ways are you looking to increase shareholder value? So, you might want to start with that one and then go back into the other two aspects which are more structural.
Obviously, some of this will be estimated – as you saw in the presentation, the projected dividend for the coming year is 5.4p. In terms of additional value, where that potentially comes is in the aggregation value of this portfolio, because with 125 transactions, the smallest being 300,000, and the largest being 80 million, JLL do attribute additional value through portfolio and we do tend to show IFRS now (at the request of shareholders).
The key purpose of this fund is to deliver long-term, consistent income on a very safe basis with low levels of debt […] We call ourselves an evergreen fund, that’s really important for the counterparties that we work with, because the need for this housing is lifelong and likely to be multi-decade, so what we’re aiming for is providing consistent dividend – and hopefully growth – but certainly consistent dividend payments throughout the life of the fund.
Would you like to address the regulatory environment – what was happening last year – and talk about the difficulty of trying to navigate your way through the regulatory environment going forward?
Clearly all these housing associations are regulated by the Regulator of Social Housing. They have one duty, and obviously I can’t speak on behalf of the regulator, but their one duty is to oversee standards in that sector. They don’t have a locus for investment, and they don’t have a locus for anything else in respect of the duties of those housing associations. Actually, some years ago, the regulator would have had a joint role: firstly, to inspect standards, but secondly, to promote investment. Those responsibilities are now split between Homes England, which is essentially the government’s investor, and the Regulator of Social Housing, which is essentially around standards.
Now, the Regulator of Social Housing has been quite clear that it absolutely sees this enormous demand for this type of property. They’ve spoken to local authorities themselves, they’ve spoken to the CQC, and it’s absolutely clear that demand is very, very high. It’s estimated that for every bed space we have, there are eight more people waiting for it.
You can see in the wider material that we’ve provided that there have been a number of government statements and reaffirmations, from all political parties, of the need for specially supported living and this is not unique to the UK. It’s a Western European phenomenon and people have all agreed this needs to happen.
What is quite clear is where the regulator is engaging with smaller housing associations. The average size of a housing association managing specially supported living is under 1,000 homes. There’s a simple reason for that: they’ve never received any government grants. Specially supported living has only been provided for the last 25 years so they’re all less than that, so when they become over 1,000 homes the regulator will carry out an in-depth assessment, and will make recommendations and will publish those recommendations for improvements to be made. Sometimes those recommendations that are made have already been implemented, and normally they’re around operational and governance issues.
To be absolutely candid, there’s a wider point the regulator has around the dependency of each housing association on state-backed income. You could argue that that is similar for other big, general-needs housing associations, except that they have the additional risks of development and of creating housing for sale to subsidize social housing.
We personally have an excellent relationship with the regulator. We talk to them regularly, the Social Housing Family CIC that we set up talks to them regularly. We’re not regulated by them and we will diversify who we’re working with (that was part of the purpose of the extension of the investor mandates by shareholders) so we will work with unregistered housing associations and other charities and other bodies to diversify some of the risk around that.
Could you expand on the practical benefits of having bespoke facilities?
As you’ll see from a lot of the pictures, in terms of the buildings that are in the community, they look like a building that any one of us might live in. It’s inside the building where the bespoke nature takes place, in terms of particular facilities. You might have heat sensors, automatic lighting, lighting that’s appropriate for people with autism, sensory rooms… A whole series of things.
The reason those things are important is because when the local authority is specifying that they want Paul, say, to live in a particular property, with a particular condition, those bespoke facilities need to be provided for Paul. Because Paul is likely to be 25 years old and live there for 50 years, it’s absolutely critical that he gets the facilities that he needs.
Is your model applicable internationally? I’m sure you’ve got enough to do in the UK, but it was just a question that’s just come in.
I think it is. We’ve travelled a little bit in Europe, talking to people about what they’re doing. There is this type of housing in Germany and Scandinavia and various other European countries, so yes, absolutely I think it is possible. We’ve had discussions with care providers in Sweden who wanted to come into the UK.
It’s interesting because (and I hate to quote numbers like this because they may be inaccurate) but the care industry itself in this sense is remarkably disaggregated so it’s estimated that there’s 22,000 companies providing care. Some of that is obviously companies under different names, but there’s a lot of aggregation to come. A lot of the bigger providers are starting to aggregate companies together and there’s a lot of interest internationally in that as well.
I’ve got a slightly technical question. What was the significance of emerging from the COVID-19 blanket material uncertainty clause that was mandated by RICS [and has been lifted now]? What does it actually mean for investors? What does it mean in terms of the implications for you?
At the time of the pandemic there was no… with our independent valuers JLL there was no sense that there was going to be any effect on the valuation at all.
Of course, as you know and as we’ve demonstrated, there’s been no operational interruption and there’s been no loss of rental income, and in some cases that has actually got quicker because the state wants to make sure that it is paying its bills to keep people in the properties.
Can you help me understand what the care provider gets out of the involvement in the equation between yourself, the housing association? Are they able to make money, are they solidly based?
It’s a very good question. Where this started, 25 years ago, was that local authorities and the regulator at the time felt that having a care provider owning the building, plus managing it, created risks for people living there. The risks that people felt it created was that, if the care started to fail, then even if the local authority and regulator intervene, the care provider could say “we own this property and we’re going to take our keys with us” (in the most extreme example).
Secondly, the fees we’re talking about here are several thousand pounds a week. They can go up to £5,000 a week, and even though that sounds very high, it’s about 50 percent less than the cost of providing equivalent care in a large institution, and even if it wasn’t significantly less, the outcomes for residents are much better. We see a lot of media at the moment about young people still stuck in institutions, in hospitals, and they need high quality facilities like this.
Many care providers only own properties. Some of them are charitable, some of them are private entities. National Care Group (that I mentioned earlier and that we work with a lot) are one of the largest privately owned care operators in the UK of specialist supported housing. In many cases the newer care providers don’t want to tie up capital in acquiring assets.
Where they do hold assets, they sometimes want to release that capital so they can expand their services, or to deal with the aggregation points so that they can acquire other companies – if you look at Lifeways (Britain’s biggest care provider), that’s an amalgam of probably 40 companies that were bought over the last 20 years, and they were able to achieve that by deleveraging and selling property and leasing it back, so the fees are very robust.
Interestingly, if you take the building in front of you [on slide 30 of the presentation], the rents payable to us might be £200 a week per person (indexed), but the care fees, as I say, will start at £2,000 a week, so you can see there’s a significant margin for the care provider.
I’ve got one final question for you. Is Civitas planning to increase its scope to start investing in supported housing for individuals with lower support needs, victims of domestic violence, substance abuse, misuse etc?
Some of the portfolio already provides accommodation for ex-offenders and for people who have had addictions, for people who require weather support and we do have a couple of buildings where people have been fleeing domestic violence [can be accommodated]. So, there’s a range of different types of support that can be provided – obviously that needs to be provided by a professional care provider. I’m not going to say the accommodation is easy, because it’s really difficult, but even more important than the accommodation, and getting that right, is making sure that the long-term support for people moving in is there. Because if the support isn’t there then they’re unlikely to thrive in the community homes that we’re providing.
Paul, thank you very much indeed