Civitas Social Housing has been the subject of negative press over the weekend.
The Sunday Times reported that ShadowFall – an investor that sells stock in companies it doesn’t own and then publishes negative research on them with the aim of buying back the shares at a cheaper price – has a short position in Civitas (which we believe to be equivalent to about 0.8% of Civitas). It is preparing a report on the company making a series of allegations including not disclosing conflicts of interest in property deals.
The allegation centres around a deal in 2018 in which Civitas bought a care home operator, kept the property assets and sold the operating business to a care provider called Envivo, in which Civitas Investment Management directors Tom Pridmore and Andrew Dawber each have a 10% interest.
ShadowFall alleges this sale was done “on the cheap” for £4.3m, and stated that in 2018 it made £3.2m of underlying profit. Civitas strongly denies this and said the ShadowFall profit figure did not include rent. With rent included, Civitas said the EBITDA was £1.8m and with costs, the purchase price was £5.4m.
Deals of this nature are not uncommon and are known as opco-propco splits, whereby the operating company sells its properties and leases them back from the new owner.
In total the REIT had conducted five deals in this way, with the properties worth £134m. The March 2021 valuation of the properties was £141m, Civitas said.
Civitas said it was “false, misleading and very damaging” to suggest this transaction disadvantaged shareholders. In fact, it says, the setup allows it to purchase quality properties that it would not normally have the chance to buy – giving it a competitive advantage.
The deals with Envivo (and Tom Pridmore and Andrew Dawber’s shareholdings) were presented to the UK Listing Authority (UKLA) by the company’s advisers, formally recorded in board papers and signed off by auditors. Civitas said the Envivo deals were not deemed related party transactions and therefore there was no requirement to make disclosures.
It added that disclosing the deals would have alerted competitors to the investment opportunity.
Civitas’ share price has fallen 2.6% today (at 10.30am), and since 5 August it has fallen 19.3%. Apart from the short-selling by ShadowFall, the reason for this, it would appear, is that Civitas is set to drop out of the FTSE 250 and the associated selling by tracker funds has pushed the share price down.
[QD comment: The additional kicker that Shadowfall will get from CSH dropping out of the FTSE 250 may be a key reason why it targeted the company in the first place. Given that CSH appears to have added value with these deals and its auditors, board and the UKLA were made aware of the transactions, we don’t think there is much new information here. It’ll be interesting to see whether this story persists once CSH has dropped out of the FTSE 250 and Shadowfall has closed its short position. Watch this space.]
CSH : Social housing provider Civitas targeted by short-seller