Housing security

We initiate coverage on Civitas Social Housing. Floated in November 2016, with a 5% dividend target, this was the first LSE-listed REIT dedicated to investing in regulated social housing, principally care-based supported living (100% here, to date). Civitas has provided an update to end-June: IFRS NAV (Ordinary) was 105.8p, with a £31.1m rent roll. 2016 IPO proceeds are fully invested. To date, Civitas has invested £550m in specially configured supported social housing for adults. Current equity resources enable at least £1bn investment. Civitas has identified a pipeline (off-market transactions), part of which, £100m, is described as available in the near term.

• Strategy: Civitas addresses the acute housing provision shortfall in quality, community-based healthcare. Housing gives both tenants and investors security (long, secure CPI-linked income for the latter). Tenant rents and other costs are met by central government, and received by the property’s relevant housing association, which has entered into long leases with Civitas.
• Deployment of capital well on target: £350m gross was raised in the November 2016 IPO – fully invested with some financial gearing. The £302m November 2017 C class share issue is £150m invested (£108.5m end-June). We model C shares to be fully invested by November this year, when conversion to Ordinary is due.
• Valuation: Acquisition net initial yields (NIY) of 5.9% have been achieved, a level commensurate with the assets being in an emerging real estate class, leaving potential for future positive revaluation. The shares trade at a small discount to NAV and on a 4.8% current-year dividend yield. 4.25p DPS has been paid to date.
• Risks: Civitas’s income derives entirely from 20+year commercial leases. We are encouraged that, when one lessee, First Priority Housing Association (FP), encountered difficulties, all leases were reallocated on the same terms in a short number of weeks. This shows Civitas’s due diligence on the sustainability of the rent income supporting the leases. Civitas’s selection is rigorous, turning down £300m of properties assessed during its due diligence investment process.
• Investment summary: IPO dividend projections (5.0p DPS this year) are well on-track, and should grow ca.4% p.a. A strong, experienced team is proving its worth. Re-assignment of certain leases on unchanged terms strongly validates Civitas’s due diligence on long-term income sustainability, 100% CPI. linked.