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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.

The most important point to note from the presentation on 9 July 2020 is that Civitas has a scalable model and has successfully deployed all equity, through 125 transactions achieving an average 5.9% acquisition yield pre costs.

Aggregation value

As to investors, the time-consuming and incremental manner of acquiring a portfolio in this fragmented and generally small lot-size real estate sector is a value-adding characteristic. Therefore, the portfolio does have an aggregation value. In this regard there are similarities to the generally small lot-size primary health REITs, which, we note, trade at notable premiums to NAV – albeit they do have longer track records.

Growing remit

Civitas is widening its remit following discussions with NHS Local Authorities Charities and other companies to provide housing through their management. This is the same strategy of ultra-long leases, indexed, through care providers. The specialist supported housing market has several provider-sectors, so Civitas has evidenced its expertise in a plurality of settings. The shareholder mandate has been updated and Civitas can directly access this plurality. It does mean more regulation, but regulation is an important oversight to all providers and should reassure investors.

Long-term assurance

100% of assets are on long-term leases, the average being 23.7 years. Not only does this provide dividend visibility through to long-term projections, but low levels of debt also underpin the safe progression. The long leases are beneficial not only to the REIT, but, in an “evergreen” fund with a lifelong multi-decade requirement by occupiers and tenants, all parties are looking for the long-term assurance.

As to levels of rent, the supported social housing (SSH) Rent Standard 2020 re-confirmed in April this year that rents were exempt from normal social housing rent standard.

Low regulator involvement

The average size of housing associations operating specifically in the SSH arena is under 1,000 homes; they have never got a government grant and are under 25 years old. When a housing association reaches over 1,000 homes, an in-depth assessment and report is published by the regulator. Civitas pointed out that the regulator has a wider point on the state-backed income dependency of the housing associations providing the care setting, but that is because they have no private market development income or risk.

This does not impact on Civitas, other than to highlight that while their tenants are smaller organisations, these organisations are focused and intrinsically of low financial complexity and risk. Two-thirds are community properties, the rest (a growing proportion) being specialist higher acuity care settings.

Government support

The regulator oversees standards but has no role in investment. Homes England is responsible for investment and this is an underinvested sector: the waiting list is eight times the Civitas bed space. A number of re-affirmations from the government show ongoing support for funding to expand supply. Indeed, this is a western European phenomenon.

Simple proposition

A significant element of understanding Civitas’ investment proposition is understanding the requirements of the occupiers, their carers and the regulator. This is because the financial proposition is simple: long, upwards-only leases with no development and modest financial gearing, allied to strong income streams, all from the government.

Civitas now works for a wider group of counterparts and risks. All require long-term bespoke real estate availability within a context of high demand and lack of supply. Investors have to be encouraged to provide new assets over the long term. For occupiers, if the long-term support isn’t there, the homes will not function at their best to provide the context for care.

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