Civitas Social Housing comments on First Priority Housing Association

Civitas Social Housing comments on First Priority Housing Association – Civitas Social Housing leases 45 properties to First Priority Housing Association.

Regulator’s report

The Regulator of Social Housing released a report last week that said:

First Priority Housing Association Limited (4702) is a small Registered Provider of homes for a vulnerable client group, primarily adults with learning disabilities and mental health problems. It was incorporated in 2011 but has grown substantially in the last 18 months and now has leased properties with 26 landlord counterparties in total. The provider has 227 individual properties in 50 local authority areas that number 1,0751 bed spaces with 759 tenancies currently in place.

In autumn 2017 First Priority Housing Association Limited (FPHA) advised the regulator that it had terminated its contract with its managing agents and had appointed a new Chief Executive. Production of the Annual Accounts had been delayed and they have still not been submitted.

The regulator has concluded that

  1. based on the evidence submitted directly by FPHA, including communications from the board of directors and the Chief Executive Officer in January 2018, FPHA is not compliant with the Governance and Financial Viability Standard.
  2. the board has failed to ensure that it operates an appropriate strategic planning and control framework that identifies and manages risks to the delivery of its objectives and their planning has not sufficiently considered the financial implications of risks to the delivery of plans.

Subsequent enquiries and investigations undertaken by the regulator suggest that FPHA does not have sufficient working capital or the financial capacity to meet its debts as they fall due. The regulator has concluded that FPHA has failed to secure access to sufficient liquidity because it continues to trade on the goodwill of its creditors. FPHA is working with its creditors and lender to find a solution to its current financial difficulties.

The regulator also has concerns about the governance arrangements within the organisation, particularly the adequacy of resources and the skill and capability of the board to maintain effective control of the organisation. The fact the board is dependent on the goodwill of its lease counterparties in relation to rent payments indicates a fundamental failure of governance.

The board of directors and the Chief Executive recognise the seriousness of FPHA’s situation and are working positively with the regulator. The regulator has taken steps to strengthen FPHA’s board by appointing new board members with a range of relevant skills and expertise. These additions to the board will support FPHA as it works through the complex matrix of difficulties it faces.

Based on the most recent SDR return FPHA had fewer than 1,000 units and is classed as a small provider. The regulator does not publish regulatory judgements for providers who fall into this category. Instead, in the interests of transparency, the regulator publishes a Regulatory Notice where it has evidence that a small registered provider is not meeting the regulatory standards. This notice is published under those arrangements.

Inside Housing article

Inside Housing, a trade publication for the social housing sector, said in an article published on 21 February 2018 that: “First Priority also leases around £40m worth of property from the real estate investment trust Civitas and a similar amount from the trust GCP Infrastructure Investments. It is obliged to pay £984,556 in annual rent to Civitas, which confirmed that all rents were received in full as of January 2018.”

Civitas response

Civitas has responded with an announcement released at 17:43 on 21 February 2018 that said “Any inability of First Priority to meet the lease obligations, is currently not expected to impact the company’s dividend targets. Civitas is actively working with First Priority to ensure there is no disruption to the underlying tenants. Until the current situation is resolved, the company will not be entering into any new leases with First Priority.”

Civitas’ shares have fallen from 109.5p to 103p on the news.

Update 22 February

GCP Infrastructure has commented on First Priority, saying: “As at 29 December 2017, the company was exposed to a portfolio of partially in ation protected investments comprising 43 loan assets with an unaudited valuation of GBP911.0 million, of which approximately 17% was exposed to social housing investments. At that date c.3.8% of the company’s portfolio (valued at c.GBP37.4 million) was comprised of a loan advanced to Supported Living Infrastructure Ltd (“SLIL”) to finance supported living units for occupation by adults with learning or physical difficulties (the “Loan Note”). The Loan Note is secured on a senior basis against a portfolio of 24 underlying properties in England and Wales let to c.200 tenants. The properties are subject to fully repairing and insuring 35-year leases with FPHA. 

Interest payments due to the company in connection with the Loan Note are up to date and there are no outstanding payments due. The properties securing the Loan Note, over which the company benefits from a first ranking charge, are understood to be fully occupied, and are subject to a service agreement with a major care provider which takes responsibility for any voids in the portfolio. Substantially all of the rents arising from these properties are underpinned by payments of housing benefit from local authorities. Moreover, the company benefits from a first ranking charge over a number of further properties owned by SLIL which further secure the Loan Note. Accordingly, the Directors do not anticipate that the company is likely to experience any impairment of value on the Loan Note. 

The company and its investment adviser, Gravis Capital Management Ltd (“Gravis”), will continue to monitor events in relation to FPHA. Homes England is working with FPHA and its various landlords to implement a satisfactory resolution in the immediate future.”

GCP’s shares haven’t moved.

CSH / GCP : Civitas Social Housing comments on First Priority Housing Association

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