Investor Forum July 2020: Index-linked, government-derived income

Civitas derives income ultimately from government payments – predominantly housing benefits. Its portfolio accommodates younger adults with multiple health vulnerabilities. The impact of COVID-19 has been nil, to date, as the income underpins the long-lease rental contracts into which the lessees enter. These are all CPI-linked and typically are of 20 years’ term or longer. In a third of cases, the care provider also underwrites the rent payments, in addition to the social housing provider lessee. Civitas is not a passive investor, but takes no development or care risk and, once the lease is signed, it takes no occupancy risk.

• Strategy and dividends: Civitas’s property provides a cost-effective and clinically superior alternative to institutional care, in a model with cross-party political support. It generated EPRA EPS of 96% the level of dividend payout in 1H’20, rising to 97% in 3Q’20. The current run rate now achieves 100% cover.
• Capital deployment: Civitas’s investment into the long-dated, index-linked assets is moving towards its stated 35% LTV target. Current acquisitions, and the move to 35% LTV, will principally be newly bespoke higher acuity facilities from third-party specialist developers or care providers, we believe.
• Valuation and business model: The stable, rising, long-lease income is inflation- linked. The balance sheet is strong, and covenants have strengthened significantly in the past year. This sector is the first to emerge from the COVID-19 blanket “Material Uncertainty Clause”, which the RICS, the valuers’ body, mandated.
• Risks: Demand is uncorrelated to the economy, but, as with all real estate, the counterpart is crucial. In 2019, some assets were novated to new housing association lessees. The Regulator published a report on this new sector. We see the higher-acuity expansion as an important and focused deepening.
• Investment summary: Evolution of the business model is important to note. Assets drive the model – this is a real estate investing company – but Civitas works very closely with the care providers – each house having its own bespoke occupier needs. It is building on this expertise, expanding to higher-acuity assets, with strong partners. A significant positive social impact is generated.