CIVITAS SOCIAL HOUSING PLC
(“Civitas” or the “Company”)
Update on Westmoreland Supported Housing Association (“Westmoreland”) and additional information on the Company’s Portfolio
Following the publication of the recent Investment Adviser’s update commentary on 30 November 2018, the Company is now providing shareholders with a further update with respect to Westmoreland. In addition, the Company is also providing detailed segmental information on the portfolio.
As at today’s date Westmoreland represents 22.6% of the net asset value of the portfolio and it is anticipated this will drop to c. 15.7% of the target gross asset value (based on c. 35% leverage) (see table below for further details).
Prior to the publication of the update commentary on 30 November 2018 and subsequently the Investment Adviser has held discussions with JLL, it remains the view of the Investment Adviser that there is unlikely to be any detrimental effect to the Company’s NAV as a result of the recent Westmoreland summary regulatory judgement.
The Investment Adviser notes the peer group commentary in relation to a potential reduction in their net asset value whilst also noting that there was no certainty that such reduction would ultimately be made. The Investment Adviser was also consulted in advance of the publication of the research note that speculated on the potential for reductions of up to 4% in the Civitas net asset value and made clear that their assumptions were purely subjective, and this was not something that the Investment Adviser was directing them towards.
Whilst it is the understanding of the Company that it is correct to state that any “Red Book” valuation will take into account covenant strength Civitas is not of the view that this has changed in any substantive manner as a result of the publication of the regulatory judgement. Civitas has indicated that the Westmoreland rents remain in payment and there is no suggestion that this will not continue to be the case. As noted below underpinning the leases with Westmoreland is income due from a wide range of local authorities that provide significant income diversity as well as support from a wide range of care providers. This remains unchanged as a result of the regulatory judgement as does the fact that tenants who reside in Civitas properties are likely to do so for many years or in some cases for decades to come.
Given the scale of the Civitas portfolio the levels of underlying income diversity are amongst the greatest in the specialist sector and support the covenant strength of the Civitas portfolio with Westmoreland and in a similar manner with other housing association partners.
There are Civitas leases with Westmoreland in respect of 109 properties with 624 tenancies and this is supported by rent and service charge payments to Westmoreland due from 53 separate local authorities, each of whom is responsible for nominating the tenants, and 27 individual care providers that provide the care packages for the tenants and who agree void/rent support with Westmoreland. In addition, Westmoreland also has the ability to benefit from the exitance of certain deposits and security that Civitas has negotiated with certain vendors to provide additional rent support and void protection should that be required.
The Civitas Specialist Supported Housing Portfolio
The Civitas portfolio is now the largest and most diversified portfolio of Specialist Supported Housing in England and Wales.
The Civitas portfolio is underpinned from rental income being received from 142 local authorities and supported by 94 care providers. The diversity of the sources of income within the portfolio demonstrate a robustness and an underpinning that Civitas has sought to build from 94 individual transactions and the rejection of more than £400 million of properties deemed unsuitable.
Underlying its leases with housing associations, Civitas provides housing for 3,619 tenants which have been specifically placed by local authorities in the properties with rental and care packages, which have been individually agreed with the intention of long-term provision.
In reflection of the clinical needs of the tenants it often takes a number of months to manage the placement of an individual with learning disabilities or mental health issues into a property and it is the recognised intention of local authorities and families that this housing will be of a long-term or permanent nature for the tenants.
When considering credit quality and covenant strength the diversity of income and intended long length of stay are fundamental components and ones that have grown in strength as the size of the portfolio and the number sources of income have increased. Civitas considers that a larger portfolio should deliver greater diversity and therefore greater credit quality and covenant strength than a much smaller portfolio in the same sector.
This was recently demonstrated with the securing of the new HSBC £100 million revolving credit facility priced at a highly competitive rate.
When considering the portfolio and reflecting on the housing association partners the Company believes it is important to consider the diversity of income, together with the substantial demand for Specialist Supported Housing, the backing of legislation promoting care in the community and the fact that many of the tenants in Civitas properties may be in residence for many years or decades. At the present time the average age of a Civitas tenant is 36 years.
The portfolio is made up as follows:
|3,619 Tenants||535 Properties|
|142 Local Authorities||94 Care Providers|
|15 Housing Associations||Run-Rate Rent Roll £38.8m*|
*As at 2 December 2018
Assembling the Portfolio
In assembling the portfolio, Civitas has undertaken a determined series of diligence and confirmatory steps that have been consolidated into the Best Practice Protocols.
This is reflected in the track record in securing and building the rent roll over the past two years.
For properties purchased the following steps are planned into the acquisition process:
- Determination of local demand and consideration of existing supply to ensure long-term need;
- Independent assessment of individual rents and service charges plus confirmation of each rent and service charge with each relevant local authority;
- Confirmation of suitability of properties with each care provider responsible for care delivery;
- Examination of property adaptations to ensure they are appropriate for each individual tenant;
- Full external and internal independent building surveys of each property;
- Confirmation that each property meets required health, safety and fire standards and energy efficiency;
- Detailed schedules of enhancement works and further independent monitoring to ensure works are completed to required standards;
- Full legal review of each property including associated land; and
- Determination of appropriate levels of void/ rent support to be provided by vendors for the benefit of the housing association.
As a result of this detailed work the Company has been able to build an extensive data set in respect of each property that underpins their suitability and quality and also facilitates future asset management activities and further supports credit and covenant strength.
Deposits and Additional Security
Civitas has negotiated with various vendors to make available deposit monies and additional security that, with the agreement and support of Civitas can be accessed by housing associations should the need arise in accordance with their lease obligations.
As noted previously, it is now an objective, where feasible, for deposits to be subject to various forms of ring-fencing in order to ensure they are available for their intended purpose.
Set out below is the detailed segmental analysis of the overall portfolio that identifies in respect of each of the 15 housing association partners:
- The proportion that each housing association represents of the portfolio based on NAV and GAV (assuming 35% leverage);
- The number of Civitas properties being managed by each housing association;
- The number of tenants in those properties;
- The number of local authorities that pay rent and service charges to the housing association in respect of the Civitas properties; and
- The number of care providers that deliver care packages to the tenants residing in the Civitas properties and which have entered into care agreements with the housing association (including various arrangements for void/rent support).
|Housing Association (RP)||% NAV1||% GAV2||Properties||Tenancies||Local Authorities||Care Providers|
|Auckland Home Solutions C.I.C.||9.8%||6.8%||8||188||6||2|
|Bespoke Supportive Tenancies Limited||4.4%||3.1%||60||298||28||24|
|Blue Square Residential Limited||0.1%||0.1%||1||4||1||3|
|Chrysalis Supported Association Limited||3.5%||2.4%||15||117||8||5|
|Encircle Housing Limited||5.8%||4.0%||9||164||8||6|
|Falcon Housing Association C.I.C.||24.6%||17.1%||114||842||52||34|
|Harbour Light Assisted Living C.I.C||2.8%||1.9%||26||182||5||5|
|Hilldale Housing Association Limited||1.0%||0.7%||15||34||3||7|
|IKE Supported Housing Limited||1.4%||1.0%||10||68||2||2|
|Inclusion Housing C.I.C.||7.8%||5.4%||49||353||24||4|
|New Walk Property Management C.I.C.||3.5%||2.4%||41||194||5||1|
|Pivotal Housing Association||4.7%||3.3%||27||238||4||2|
|Trinity Housing Association Limited||6.6%||4.6%||43||242||20||10|
|Westmoreland Supported Housing Association||22.6%||15.7%||109||624||53||27|
|Remaining debt to be applied3||26.9%|
|Remaining capital to be invested||3.7%|
1As at 2 December 2018
2At 35% leverage
3Including £100m HSBC facility
As noted the covenant strength of the portfolio is achieved as a result of the overall layers of protection that are built into the system of Specialist Supported Housing which includes the regulatory system, the value for money offered by Specialist Supported Housing, the good track record of rent payment by housing associations, the long-term nature of stay and the underlying agreements entered with local authorities and care providers in respect of every tenant.
In addition to this there is legislation (most recently driven by the Care Act 2014) and government policy that places an obligation on relevant parties including local authorities to provide community-based housing for people with care needs.
Considering these core elements in more detail the overall covenant chain will be more visible.
The Local Authority
As the summary of the portfolio demonstrates Civitas engages with142 local authorities in England and Wales out of a total of 326 “billing authorities” that raise and collect council tax representing 44% of the total.
With respect to each of the housing association partners the number of local authorities that pay rent and service charge for Civitas tenants ranges from the smallest with 1 to 53 with an average of 15 local authorities per housing association.
By way of example in respect of Westmoreland there are 53 local authorities that make payments to Westmoreland in respect of tenants residing in Civitas properties. In each case each local authority will have reached an agreement on a bespoke basis for each tenant in respect of the amount of rent and service charge to be paid for that tenant and this will be a reflection of that tenant’s individual needs.
Whilst these arrangements, as is the case for much of the UK healthcare system, will typically be on a rolling 12-month basis, this does not detract from the objective of providing long-term stable placements. Given the detailed process that is undertaken to place tenants, enabling those individuals to stay in situ in the long-term is normally a key objective for local authority commissioners.
In addition, each local authority, as the commissioning party being responsible for individuals’ care and accommodation needs within the community will typically agree with care providers appropriate arrangements to cover many aspects of void/rent support that will in turn form part of the support offered to the housing associations. This should cover, for example when properties enter the sector for the first time and need to be reconfigured and where time is needed from a clinical perspective to bring new tenants into properties to ensure their well-being.
Overall this creates an important underpinning as rent, service charge and void/rent support cover are secured from multiple sources for each housing association and in each case on the basis of bespoke arrangements ultimately backed by legislation. As the number of these sources of income increases so does the diversification and the credit quality and covenant strength.
The Care Provider
As the summary of the portfolio demonstrates Civitas engages with 94 care providers in England and Wales that represent a material distribution of those larger care providers who are active within Specialist Supported Housing.
With respect to each of the housing association partners the number of care providers that provide care packages and provide void/rent support for the housing associations ranges from the smallest with 1 to 34 with an average of nine care providers per housing association.
By way of example in respect of Westmoreland there are 27 care providers that provide care packages to tenants residing in Civitas properties and under agreements between Westmoreland and the care providers offer various forms of void/rent support in respect of those tenants.
This creates a further important underpinning as multiple care providers provide various forms of void/rent support to the housing association and this is part of an overall package of care that in the same manner as the rent and service charge is determined on a bespoke individual basis. As the number of these sources of support increase so does the diversification and the credit quality and covenant strength.
The Housing Associations
Housing associations in England and Wales have an excellent track record in meeting their commercial obligations including within the Specialist Supporting Housing sector.
The 15 housing association partners that work with Civitas share that excellent track record in meeting their obligations under the leases to Civitas, paying rent and managing the properties. In saying this Civitas notes the issues surrounding First Priority in February this year and the understandable uncertainty and concern that caused. The Company also notes the various grading under review notices and regulatory judgments being issued by the Regulator of Social Housing.
It is however important to note, by way of balance that, as a result of all the diligence and process steps noted above that Civitas undertakes, the Company was able to assign the First Priority leases to another relevant housing association on the same terms (plus securing a 15-year lease extension that enhanced capital values). In respect of housing associations with grading under review there is no indication that these organizations will not meet their obligations under their leases.
Civitas devotes a considerable amount of time and management effort to working with their housing association partners to assist them as they grow and improve their business processes and gradings and will continue to do so in the future.
The Company’s first objective, reflecting the commercial requirements of the leases, is to ensure that it receives the correct payments under the leases and to ensure that the properties are safe for the tenants and properly managed and the Company has been successful with this to date. These are the core lease obligations and are similar to obligations in most institutional property leases.
Beyond this Civitas offer hands-on support to the housing association partners drawing on the team’s many years of sector expertise in being involved in some of the largest regulated housing businesses in the country. The Company wants to see the quality of the sector continue to improve as this will assist the Company as it continues to grow.
Specialist Supported Housing is a vital and important element of the care system in the UK and will continue to be so in the future as it grows.
The manner in which the sector is structured offers multiple levels of income protection for the Civitas portfolio, particularly given its size and diversity of sources of income.
There is no doubt that the sector is evolving and maturing as its scale increases and Civitas as the market leader will continue to pay a pro-active role in helping to drive improvements. Civitas welcomes the involvement of the Regulator of Social Housing (RSH) and its contribution to improving the governance of specialist housing associations generally within the sector, working in partnership with Civitas and other stakeholders.
For further information, please contact:
Civitas Housing Advisors Limited
Paul Bridge Tel: +44 (0)20 3058 4844
Andrew Dawber Tel: +44 (0)20 3058 4846
Cenkos Securities PLC
Sapna Shah Tel: +44 (0)20 7397 1922
Tom Scrivens Tel: +44 (0)20 7397 1915
Philip Dennis Tel: +44 (0)7947 868206
David Leslie Tel: +44 (0)7584 070274
Civitas Social Housing PLC is the first Real Estate Investment Trust offering pure play exposure to social housing in England and Wales. The Company is advised by Civitas Housing Advisors Limited. The Company is listed on the premium listing segment of the Official List of the Financial Conduct Authority and was admitted to trading on the main market for listed securities of the London Stock Exchange in November 2016. The company is a constituent of the FTSE 250 index