Civitas offers ESG income edge

This niche part of the market is significantly undersupplied. Civitas focuses on buying pre-built properties as opposed to developing them. It lets its properties to housing associations on leases with an average length of almost 25 years and with annual inflation-linked uplifts based on the consumer price index (CPI), capped at 4 per cent. While there is a convoluted funding chain, the money for rent ultimately comes from central government's welfare budget. Dividend security is also forecast to improve, with annual payments expected to be fully covered by earnings this year.

Since listing on the main market in 2016, Civitas has been steadily growing its £842m portfolio, with properties located across half the local authorities in England and Wales and leased to 15 housing associations. Properties cater to tenants with learning disabilities, autism, mental health disorders and also for women's refuge. Civitas is also acquiring more high-acuity properties, which are designed for tenants that need a higher level of care, as well as diversifying geographically by expanding into Scotland and Northern Ireland.

Acquisitions added £8.3m to the annual rent roll during the first half of the financial year, with a further £1m from annual rent reviews. Together that boosted net rental income by almost half to £22.7m. Meanwhile, the valuation of the portfolio remained steady on a net initial yield of 5.28 per cent. 

Across the group’s portfolio, it has 3 per cent of voids, which are paid for by housing associations. Long void periods are common given the length of time it takes to agree care plans for new tenants and prepare properties. Although Civitas is not liable for any voids legally, they do represent a noteworthy risk should a housing association fail or if lease terms are not met. Indeed, Civitas's share price tumbled last year when events exposed these risks, which are connected to the funding chain for supported-living rents.

Central government funding for supported living first goes to local authorities. Local authorities then appoint a care provider. The care provider then seeks out a housing association that can service the care plan it has put in place for its tenant. Finally, the housing association goes to a specialist landlord, such as Civitas, to satisfy the plan's property requirement. The landlord's income is in jeopardy should the housing association it leases property to fail, or if rent is withheld because terms of a care plan are not met. In the case of housing association failure, leases can be reassigned, but voids can be particularly costly for landlords during this process. 

This risk was brought home to Civitas's shareholders in April last year. The Regulator of Social Housing issued a report into the lease-based providers of specialised supported housing after the failure of one of Civitas's housing association customers, First Priority. It highlighted governance and financial viability challenges among some providers. Civitas incurred just £400,000 in lost income after reassigning First Priority leases to a number of different operators, but the risk of housing association failure was clearly illustrated. 

Out of 15 housing associations that Civitas had agreements with at the end of September, two were lossmaking – Westmoreland accounting for 11 per cent of rental income and Trinity at 6 per cent.  Meanwhile its two biggest customers each account for about 20 per cent of rents.