Civitas slides as social housing concerns return

Real estate investors are fretting about the listed social care sector again. In recent weeks, shares in Civitas Social Housing (CSH) have sold off as markets have digested a darkening in the regulatory backdrop and a short attack. The market value of peer Triple Point (SOHO) has also dipped, albeit to a lesser extent. 

While the companies were viewed as reliable rental income generators and dividend payers during much of the pandemic, the latest price moves have revived long-running concerns about market structure and tenants’ ability to meet the long-term lease agreements they have signed up to.

This came to a head last month when the Regulator of Social Housing (RSH) concluded a review into Auckland Home Solutions, a major Civitas tenant. It accused the supported housing accommodation provider of serious lapses of governance and failure to “manage their resources effectively to ensure their viability can be maintained”.

The non-profit’s property arrangements, which include long-term index-linked leases and full repair and insurance terms and no break clauses, came in for particular criticism. At the same time, the watchdog said Auckland’s own variable streams of rental income – ultimately paid for by local authorities – represented a “concentration risk”, further hampered by weak capital levels.

Auckland is one of 16 so-called approved providers that work with Civitas, nine of which have now been deemed non-compliant by the regulator. The non-profit represents 17 per cent of Civitas’ rent roll, down from just under 24 per cent as recently as March, and according to the landlord is “fully up to date will all lease payments due”.

While Civitas says it expects this to remain the case, the regulator’s next steps are unpredictable.

Analysts at Jefferies note that the RSH can appoint directors to non-compliant social housing providers and reduce the rents paid by local authorities. In theory, this could threaten landlord income, lease security and even property values.

“If this becomes widespread it could make many [providers] insolvent and their long leases would be worthless,” the brokerage wrote in a note to clients last week. “How big an ‘if’? We can’t tell but, if it came to pass, it wouldn’t exactly be great news for the NAVs of landlords like CSH and SOHO.”

Worries that the watchdog could soon step in have caused Civitas shares to fall by as much as a fifth in recent weeks. The stock now trades at 97p, a discount to the latest reported net asset value (NAV) of 108.4p a share. Shares in Triple Point have fallen 8 per cent in the past month.

This isn’t the first time the market has faced concerns about income and tenant security. In 2019, a report by RSH raised concerns about the financial stability of some registered providers and governance shortcomings, sparking a sell-off in sector shares.

Industry sources said the regulator has been opposed to the growth of the private landlord sector in recent years, given the financial fragility of some housing associations. Last year the RSH found two more Civitas tenants, Westmoreland and Trinity, to be non-compliant with fair rent rules.

Compounding the bearishness has been a short report from research group Shadowfall, which according to The Sunday Times accuses Civitas directors of failing to disclose a related-party transaction connected to the 2020 acquisition of TLC Care Homes. Following the purchase, Civitas retained the property but sold off TLC’s operating business to a company part-owned by directors Tom Pridmore and Andrew Dawber.

Although the sale was not disclosed to shareholders, both the Civitas board and the UK Listing Authority were informed of the deal and a formal public announcement was deemed unnecessary.

ShadowFall has not made public its report on Civitas, making the details hard to verify. But the group continues to short the stock – meaning it benefits from share price declines – and says it could soon release an open letter to the real estate investment trust’s directors. Its short position bounced back to 0.78 per cent of Civitas stock last week from 0.64 per cent.

Last month FTSE Russell said Civitas was likely to drop out of the FTSE 250 Index, which may have exacerbated the recent selling pressure. On 14 September, passive giant BlackRock disclosed a 0.53 per cent short position in the stock, pushing the total short volume to at least 1.8 per cent.

Looking beyond the bear attack and Auckland report, a bigger question is RSH’s evolving response to what it views as insufficient financial controls in the supported housing sector. Two industry sources, speaking on the condition of anonymity, questioned the capacity of some housing association tenants to understand the financial implications of long-term index-linked leases.

While this is arguably true of some commercial tenants, this is an altogether more regulated and political sector. There is little value in a regulator sending housing associations to the wall, given what this would mean for the high acuity care needs of its service users. But the direction of travel seems more onerous, and rising uncertainty justifies Civitas’ discount to book value. Hold.

Last IC View: Buy, 116p, 1 Jul 2021