Civitas Social Housing REIT (CSH) - Takeover Bid

June 2023

Overview

The fund has recently become subject to a takeover bid by a foreign private equity investor, CK Bidco.

They have offered existing shareholders £0.80p per share in a bid to purchase the entire issued share capital of the fund and take it private i.e. delist from the London Stock Exchange and exist as a privately owned and operated business. This offer represents a +43% premium to the prevailing share price prior to the offer being made.

Having considered the offer in detail, including the possibility that voting against the takeover could result in clients retaining shares in an unlisted business which would be difficult to trade, monitored trading activity in the shares since the takeover offer was announced and taking into account other investment opportunities available in the market, we are recommending clients accept the offer of £0.80p per share.

The deadline for submitting acceptances was originally set for 21st July 2023, however on 9th June 2023 it was announced the deadline would be brought forward to 23rd June 2023. Whilst this represents a shorter time frame between this communication and the deadline than originally envisaged, this timetable is out of our control.

We intend to vote on your behalf to accept the cash offer of £0.80p per share, unless you contact us by phone, email, or in writing to confirm otherwise.

We are planning to begin submitting votes on Wednesday 21st June 2023, so please contact us by 5pm on Tuesday 20th June 2023 if you wish to reject the offer.

If you are happy to take our advice on this matter and agree to accept the offer of £0.80p per share, then you don’t need to contact us or take any further action, as we will deal with it on your behalf.

If you have any questions, or wish to contact us to confirm your rejection of the offer, please contact John Genovese at our office who has been dealing with this matter. His email address is john.genovese@chestertonhouse.co.uk, alternatively he can be reached by calling the main office telephone number and asking to be put through to his extension.

NB: Please note that we are aware that some clients have been contacted about their shareholding in Civitas Social Housing REIT by what we suspect to be scammers. Please do not engage with any such third parties and do not give out any of your personal information.

Expected Timetable

The outcome of the takeover bid should be announced on or around 23rd June 2023.

If the bid is successful, we would expect your shares in Civitas Social Housing REIT to be exchanged for cash at £0.80p per share around 1-2 months later.

We would then recommend how this cash is to be reinvested at your next regular Progress Meeting. In the meantime, cash held on Transact is currently accruing interest at 4.00% p.a. and the rate has been rising month-on-month as base rates have been increasing.

If the takeover bid is not successful, you will retain your shareholding in Civitas Social Housing REIT.

The following represents a more detailed overview of the rationale behind our recommendation to accept the offer of £0.80p per share:

There are a number of funds in the market structured as investment trusts which have seen their share prices move to a substantial discount to net asset value (NAV). In general, these movements in shares price have been caused by a combination of negative sentiment in the market and negative fund flows.

In recent months, we have seen a trend of private equity and other institutional investors taking advantage of discounted valuations by bidding to takeover investment trusts. Recent examples of this include Blackstone’s bid for Industrials REIT, LondonMetric’s bid for CT Property Trust REIT and now CKBidco’s bid for Civitas Social Housing REIT.

The bid for Civitas Social Housing REIT is positive for our clients invested in it, as the offer was 43% above the prevailing share price and the share price rose by 43% on the day of the offer to £0.80p, where it remains at the time of writing. That said, in our opinion, the offer doesn’t truly reflect the value of the assets held in the fund given the last stated net asset value (NAV) was £1.09 as at 31st March 2023.

However, the bidder, CK Bidco, now owns around 17% of the shares and we are aware of a number of index tracking funds which have retained and increased their shareholdings as a result of the fund becoming a larger weighting in the relevant index. We can assume that these index tracking funds will elect to accept the terms of the takeover offer, as typically they vote in line with Board recommendations.

Furthermore, we have observed, through monitoring Form 8.3 notifications on the London Stock Exchange, that most of the longer term institutional investors holding meaningful positions in the fund have effectively accepted the offer by virtue of selling their shares while they continue to trade at the offer price of £0.80p.

Based on this, we feel it is reasonable to assume that the bidder will secure sufficient acceptances to meet the required threshold to complete the takeover, even if our clients elected to reject the offer.

An important factor when considering the possibility of rejecting the offer is that if the bidder reaches the required threshold, but secures less than 90% of total elections, those who voted to reject the offer could be left with shares in an unlisted private company which would be difficult to trade. It is also the case that if the fund becomes privately owned and is delisted, it may lose its status as a REIT, which could have tax implications for the fund and its shareholders e.g. more tax to pay on rental income.

Although we would prefer not to dispose of Civitas Social Housing REIT below its fair value, it is worth noting that the current market offers a wide range of highly appealing investment opportunities. Many of these opportunities involve undervalued assets, making them particularly attractive.

It is also the case that when considered in aggregate, based on a selling price of £0.80p, our clients will have made a profit on their investment into Civitas Social Housing REIT, taking into account rebalancing over time and dividends paid over the time of ownership.

This is in contrast to the broader index of UK listed property companies, which including dividends is down -13% since we introduced Civitas into portfolios in June 2017 and has fallen -31% in the last 17 months alone.

In conclusion, in order to mitigate the risk of holding unlisted shares which would be difficult to trade, and to facilitate the redeployment of capital into new attractive investment opportunities, we are recommending clients accept the cash offer of £0.80p per share.