Investors lose out as REIT bought out on large discount

The struggling social housing sector has attracted M&A activity as big investors look for bargains, writes Sam Benstead. 

An outside investor has purchased struggling real estate investment trust (REIT) Civitas Social Housing Ord (LSE:CSH) at a large discount, stripping investors of about 25% of the value of the business.

The CSH board accepted Hong Kong-based CKA Group’s 80p a share, £485 million cash offer, which values it at 27% below the latest net asset value (NAV) estimate of 111p. The offer was made in May but accepted this week due to backing by other shareholders.

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CKA Group, via its subsidiary CK Bidco, now has more than 75% of the voting rights of CSH, according to a stock market filing this week. It said that it will now apply to the Financial Conduct Authority (FCA) and London Stock Exchange to cancel the listing of Civitas shares. It expects the shares to delist on 4 August 2023.

CKA owns 17% of the shares but support from the board for the deal and other large investors meant that it has the backing of 89% of the share count for the takeover deal.

Shares in the trust soared 50% on the news to trade at around the 80p deal price, but that does not mean shareholders will be happy.

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James Carthew, head of investment company research and an investor in the trust, told media group Citywire that it was an “extremely disappointing” development.

“Effectively, they [the large shareholders] handed the bidder up to £175 million of value, assuming it can buy the remainder at the same price, without putting up a fight. I’m not sure how they can justify that to their underlying customers,” he said.

Civitas may maintain REIT status via a listing on the International Stock Exchange in Jersey. CK Bidco said it is “currently in the process of making an application to list the Civitas shares” there, but added that there was no guarantee it would happen.

It said: “There can be no certainty that such a listing will be achieved or will be maintained. In addition, given the nature and complexities of the REIT rules, some of which relate to matters outside the control of CKA and CK Bidco, there can be no certainty that Civitas will remain a REIT following completion of the offer.”

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Civitas Social Housing owns residential property that local government housing associations lease to provide “supported housing” for the community. This is generally used by those with learning disabilities, autism, mental health issues and physical disabilities.

The investment pitch is that it benefits from guaranteed rent payments by the government and inflation-linked leases.

However, the social housing sector has been under pressure, leading to wide discounts to NAV. Rival trust Home REIT suspended its shares in January following its failure to publish its annual reports on time after an investor report highlighted valuation issues and difficulties of its tenants paying rent.