TIDMHOME
RNS Number : 0510I
Home REIT PLC
30 November 2022
30 November 2022
Home REIT plc
("Home REIT" or the "Company")
FULL RESPONSE TO SHORT SELLING REPORT
Further to the Company's announcement released on 23 November
2022, Home REIT today provides a response to the short selling
report (the "Report") published by Viceroy Research LLC
("Viceroy").
This announcement has been prepared to the standard required
under the UK Disclosure and Transparency Rules and UK Listing
Rules, including Listing Rule 1.3.3 "Misleading information not to
be published", with the content of this announcement verified under
the supervision of the Company's lawyers, Stephenson Harwood LLP.
The Company notes with disappointment that these obligations do not
appear to apply to Viceroy's Report.
The Company has provided detailed information below to address
the issues raised by Viceroy. The Company would invite them to
consider our responses, engage with the Company and discontinue
their campaign in the media. Home REIT is completely confident in
the integrity of the business it is operating, its financial
soundness and the beneficial impact the Company is having in
reducing homelessness in the UK.
The Company invites investors to join one of the webcasts it is
hosting to discuss this announcement and the Report. The webcasts
are at 11:30 on 30 November 2022 and 15:00 on 1 December 2022.
Please contact HomeREIT@fticonsulting.com to register your interest
in attending.
Lynne Fennah, Chair of Home REIT, commented:
"This is a business whose sole focus is on providing safe and
secure accommodation to some of the most vulnerable in society,
whilst generating shareholder value. It is with deep frustration
that the Board is having to spend time and resources responding to
these baseless and misleading allegations."
Summary Rebuttal
-- ALLEGATION 1 - The Company's Tenants "do not appear to be
paying rent", "Substantial quantities of Home REIT's rent will
never be collected," and therefore "[this] is likely...to [result
in] substantial downwards revaluations of its investment
properties"
RESPONSE - Home REIT's rent is ultimately supported by central
government funding and Local Authorities' statutory duty to house
homeless people. There are no overdue arrears in relation to
amounts billed to 31 August 2022, supporting the independent
valuations of the Company's portfolio carried out by Knight Frank
LLP ("Knight Frank").
-- ALLEGATION 2 - Viceroy queries the Company's financials and
questions the use of straight-line rent revenue.
RESPONSE - The Company is obliged under IFRS accounting
standards to straight-line its rental income. The half year report
presents an adjusted cash earnings figure to provide complete
transparency over the impact of the straight-lining adjustment. As
a result, the suggestions that the Company has poor cash conversion
are incorrect.
-- ALLEGATION 3 - The "financial data of Home REIT's tenants
show that many cannot afford rent, have not been paying rent, are
in administration, are run by bad actors, or simply do not provide
social housing services."
RESPONSE - All of the Company's Tenants provide social housing
services. The Company has addressed each of Viceroy's accusations
on a Tenant-by-Tenant basis. The Company reiterates that there are
no overdue arrears in relation to amounts billed to 31 August 2022.
The Investment Adviser's due diligence exercises are adapted to
each Tenant but include confirming the Tenant's legal qualification
to receive exempt housing benefit, in addition to reviewing
financial statements, operational capabilities (e.g. staffing
levels) and their business plan/forecasts, such that the Tenants
can meet their rent payment obligations as they fall due. The
Company takes any accusation against the conduct of
directors/trustees of its Tenants seriously and would investigate
any suspected wrongdoing, if required.
-- ALLEGATION 4 - Alvarium Home REIT Advisors Limited's (the
"Investment Adviser") fee structure is poorly aligned with
shareholder interests and perfectly aligned to commit fraud.
RESPONSE - External management is a common feature of the UK
listed investment trust and REIT market. Home REIT has one of the
lowest external management fees in the UK REIT space with an
effective rate of 0.79% on NAV as at 31 August 2022 and no
performance fee, which has incentivised the on-target delivery of
all its KPIs. Home REIT's NAV is calculated by the Company's
administrator, Apex Fund and Corporate Services (UK) Limited
("Apex"), using the latest available independent valuations
provided by Knight Frank. Each of Apex, Knight Frank and BDO LLP
("BDO") are independent of the Investment Adviser. There is
therefore no "alignment" whatsoever for fraud in the Investment
Adviser's fee structure; on the contrary - it is designed to
prevent fraud.
-- ALLEGATION 5 - "Alvarium have systematically inflated the
prices of properties on the balance sheet."
RESPONSE - The total revaluation gain for properties purchased
by the Company between IPO and 28 February 2022 is GBP43.2 million,
which equates to an average of 6.4% per property. This revaluation
gain was established by the external valuation process undertaken
by Knight Frank as per the RICS Valuation. As the Company explains
in detail below, the statements made by Viceroy misunderstand the
process by which the Company acquires its assets, misinterprets
figures derived from underlying SPVs and relies on misleading HM
Land Registry data.
Home REIT: A Summary
In this section, the Company provides a re-cap of essential
information on its structure and processes that informs its
responses to allegations raised in the Report.
The Company targets inflation-protected income and capital
returns by investing in a diversified portfolio of homeless
accommodation assets, let or pre-let to registered charities,
community interest companies and other regulated organisations (the
"Tenants") that receive housing benefit or comparable funding from
local or central government, on very long-term and index-linked
leases. Pursuant to the Homelessness Reduction Act 2017, Local
Authorities have a statutory duty to house people who are
unintentionally homeless and in priority need.
The funding structure for Home REIT is illustrated in a diagram
that can be accessed at the following location:
https://www.homereituk.com/wp-content/uploads/2022/11/Funding-Diagram.pdf
What the Company looks for in its properties
The Company's properties:
-- provide high-quality accommodation to homeless and vulnerable individuals in need of housing;
-- benefit from residual value and alternative use characteristics;
-- are let on very long unexpired lease terms (typically 20 to
30 years to expiry or first break);
-- have triple net, full repairing and insuring leases; and
-- have rent reviews that are inflation-linked (typically capped
at 4% and collared at 1%) or contain fixed uplifts.
The Company's properties are in areas of the UK with the
greatest need for homeless accommodation, spread across 135 Local
Authorities in England and Wales. Home REIT believes that each
Tenant is best placed to assess the specific requirements of
homeless people in their area (e.g. domestic violence survivors,
prison leavers, ex-servicepeople) and sources properties based on
these criteria.
Home REIT's properties provide new social housing capacity to
help alleviate homelessness, at a much more competitive cost versus
more expensive, unsuitable alternatives e.g. B&Bs, which Home
REIT does not provide. On average, Home REIT's properties provide
Local Authorities with a rental saving of approximately 70% versus
the alternatives.
How the Company acquires its properties
The Company generally acquires properties in off-market bulk
purchases from developers ("Vendors"), which means that properties
can be refurbished and upgraded prior to occupation by the Tenant's
residents. Vendors typically provide the Company's Tenants with
additional funding, usually representing twelve months of rent, to
assist Tenants at any stage of the lease where the residential
property may not have full occupancy, including in the important
ramp up stage of a lease where properties may not be fully
occupied. Properties are generally purchased in corporate
portfolios, which often provide additional costs savings for the
Company e.g. in Stamp Duty and due diligence efficiencies.
Wider market backdrop
The Board believes that the investment case for Home REIT is
underpinned by the following fundamental macro and micro property
investment drivers:
1. The supply/demand imbalance between the unmet demand for
low-cost affordable housing in the UK and the limited supply of
quality, cost-effective housing stock.
2. A material and growing spread between the high cost of
private rentals and the level of Universal Credit funding for
housing benefit.
3. The statutory obligations imposed on Local Authorities under
the Homelessness Reduction Act 2017 to house homeless people.
4. Home REIT's ability to charge a low rent in line with Local
Housing Allowance ("LHA") rates (current average of only GBP96 per
person per week) but still deliver a sustainable net initial yield
on cost of 5.9% per annum for investors and quality, fully
refurbished accommodation for residents.
5. The long-term supply demand imbalance for all forms of
residential accommodation in the UK, which has historically
supported consistent capital appreciation for UK housing stock.
6. The non-specialist and fully refurbished nature of the
Company's property portfolio, coupled with the low current rent and
attractive yield on cost, provides multiple avenues for downside
protection, including (1) re-letting to general needs social
housing tenants, students, or other private renters and (2) sale to
owner-occupiers or buy to let portfolio owners.
Detailed Rebuttal
The Report raises five key issues, which the Company entirely
rebuts, highlighting the inaccuracies and misinterpretations:
Allegation 1 - Tenants
-- The Company is disappointed by the public disclosure of the
addresses of certain of the Company's properties. The Company has
always committed to increasing its disclosures to investors but has
taken the utmost care to protect the privacy and safety of the
residents, who are among the most vulnerable in society.
-- The Company's top Tenants are shown below, alongside key operating and financial metrics:
Tenant Area Focus Beds Exposure Invoiced Cash Rent Arrears Average
(by rent) rent received free Tenant
rent
(pw)
Lotus
Sanctuary Midlands 2 939 12.2% GBP3.7m GBP3.7m Nil Nil GBP136
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Supportive
Homes CIC NW 1 1,020 10.4% GBP3.0m GBP3.0m Nil Nil GBP106
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Redemption
Project
CIC Midlands 1+2 890 9.1% GBP2.7m GBP2.7m Nil Nil GBP106
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Big Help
Project NW 1+3 1,253 9.1% GBP3.9m GBP3.9m Nil Nil GBP75
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
One CIC NW 1+3+4 808 8.3%(1) GBP3.0m GBP3.0m Nil Nil GBP106
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Gen Liv
UK CIC NW 1+2 571 6.3% GBP3.0m GBP3.0m Nil Nil GBP114
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Bloom Social
Housing
CIC SW 1 637 5.3% GBP2.0m GBP2.0m Nil Nil GBP86
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
CG Community
Council SE 1+3 386 5.0% GBP2.4m GBP2.4m Nil Nil GBP134
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Dovecot
& Princess
Drive
Community
Association NW 1+3+5 396 4.5% GBP2.0m GBP2.0m Nil Nil GBP117
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Noble Tree London 1 527 4.5% GBP1.6m GBP1.6m Nil Nil GBP88
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
LTG Vision
CIC NW 1 646 4.0% GBP1.1m GBP1.1m Nil Nil GBP65
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Dawson
Housing
Limited SW 1 397 3.4% GBP1.8m GBP1.8m Nil Nil GBP88
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Circle
Housing
and Support
CIC EE 1 451 2.6% GBP1.4m GBP1.4m Nil Nil GBP61
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Ashwood
Housing
Solutions
CIC EE 1 415 2.6% GBP0.4m GBP0.4m Nil Nil GBP65
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Complete
Homes NW
CIC NW 1+2 214 2.2% GBP0.3m GBP0.3m Nil Nil GBP105
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Eden Safe
Homes CIC WM 1+2 280 2.2% GBP0.5m GBP0.5m Nil Nil GBP80
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Mansit
Housing
CIC London 1 234 1.4% GBP0.5m GBP0.5m Nil Nil GBP80
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Serenity
Support
CIC London 1+2 96 1.2% GBP0.7m GBP0.7m Nil Nil GBP133
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Lifeline
(NW) CIC NW 1+3 131 1.2% GBP0.4m GBP0.4m Nil Nil GBP95
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
N-Trust
Homes CIC NW 1 113 1.1% GBP0.6m GBP0.3m GBP0.3m Nil GBP97
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Marigold
Housing EM 1 72 0.7% GBP0.2m GBP0.2m Nil Nil GBP96
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Midland
Living
CIC WM 1 55 0.6% GBP0.3m GBP0.3m Nil Nil GBP119
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
ICDE Homes
CIC WM 1 85 0.6% GBP0.3m GBP0.1m GBP0.2m Nil GBP71
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Select
Social
Housing
CIC NW 1 73 0.5% GBP0.3m GBP0.2m GBP0.1m Nil GBP71
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Elemel
CIC SW 1 33 0.4% GBP0.1m GBP0.1m Nil Nil GBP125
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Care and
Community
Foundation
CIC NW 1 36 0.3% GBP0.2m GBP0.2m Nil Nil GBP95
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
New
Beginnings
CIC NW 1 44 0.3% GBP0.1m GBP0.1m Nil Nil GBP70
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Ready 4
Home CIC NW 3 15 0.1% GBP0.1m GBP0.1m Nil Nil GBP80
--------------------- ----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Total 10,817 100% GBP36.6m GBP36.0m GBP0.6m Nil
----------------- ------------------ --------------------- -------------------- -------------------- ------------------- ------------------- -------------------
Note: All figures as at 1 November 2022, reflecting FY periods
to 31 August 2022.
Note 1: Following the reassignment of Circle's leases to One CIC
as outlined below, rents paid by One CIC represented c. 10.9% of
the Company's total.
Note 2: Invoiced rent does not include adjustments for
straight-lining of rent, accrued and deferred income
Note 3: All rent free figures reflect the six-month period from
1 March to 31 August 2022
Note 4: The Company has disregarded aggregate arrears of less
than GBP10,000 across all Tenants (being less than 0.027% of the
Company's invoiced rent in the year to 31 August 2022) over the
financial period for the purposes of this announcement
Focus: 1= General Homeless, 2= Vulnerable Women, 3= Prison
Leavers, 4= Domestic Abuse, 5= Ex-Service-people.
-- All of the Company's Tenants were set up at different times
and each manages accommodation for homeless people, overseen by
industry experts with established track records in the social
sector. Home REIT undertakes financial and operational due
diligence on its Tenants at the outset of any relationship,
including a review of current operational capabilities and forecast
business plan. The Company is committed to strengthening its
ongoing due diligence of Tenants and is in the process of creating
quarterly reporting obligations for its Tenants covering underlying
occupancy, status of exempt housing benefit applications, progress
of refurbishments, the presence of any assured shorthold tenancies
("AST") already in the property, changes to composition of the
board of trustees, and provision of management accounts. Home REIT
has a constructive relationship with all its Tenants and is not the
subject of current, nor has ever been the subject of historical,
legal action with any counterparty (as Viceroy has alleged on
social media) nor have any Tenants raised issues on the "financial
viability of Home REIT's portfolio, and also about the
appropriateness of this venture" with the Company. Home REIT is not
concerned that some Tenants do not have an online presence given
the comprehensive financial and operational due diligence
undertaken. There are no overdue arrears in relation to amounts
billed to 31 August 2022.
-- The Company's Tenants receive exempt housing benefit directly
from the Local Authority, which is directly funded by central
government, to pay rent and associated expenses for their
residents. Local Authorities have a statutory duty to house people
who are unintentionally homeless and in priority need, pursuant to
the Homelessness Reduction Act 2017. All the Company's Tenants are
regulated either by the Charity Commission, the Office of the
Regulator of Community Interest Companies or the Regulator of
Social Housing, and there is strong oversight to ensure that exempt
housing benefit is distributed fairly and high standards are
maintained at the Tenant level. As stated to investors, the Company
is committed to increasing its detailed ongoing assessment of the
service levels of Tenants to their residents at the Company's
properties.
-- Prior to entering into a lease with the Company, Tenants
typically engage informally with the relevant Local Authority to
understand the demand for homelessness accommodation, the number of
referrals on their books and the type of property the Local
Authority is lacking for this provision of accommodation. Once the
lease has been signed, the Tenant starts the process of exempt
housing benefit application to the Local Authority either on a per
bed basis or on a block basis (such as Wellesley House referenced
later in this section). Evidence for each line of a claim must be
provided e.g. a lease in reference to the rent claim, the costs of
management and maintenance such as property insurance, gas safety
certificates, allowance for out of hours repairs and management
calls, and eligible service charge costs such as fuel/energy costs
on communal areas, provision of furniture and white goods. Claims
can be made for a share of management and administration costs and
an allowance on service charge costs for void periods as well. The
Local Authority will review the claim and the evidence provided
and, assuming the application is approved, will backdate the
payment to the date of occupation by the resident or date of block
contract (as applicable). The Local Authority will also undertake
regular reviews that the levels of service previously stated are
provided (e.g. through logs of visits by housing officers) and that
the property is in the correct condition. Home REIT charges a low
rent in line with LHA rates and delivers appropriate accommodation
for residents.
-- The following points are made in direct response to allegations raised in the Report:
o Big Help Project: Regarding Peter Mitchell and the allegations
previously raised, Home REIT understands that he rejects all
allegations and remains a serving councillor on Liverpool City
Council. Mr Mitchell has extensive social housing experience,
having been chairman of the registered provider Cobalt Homes for 10
years and on the board of Symphony Homes. Colette Goulding has
extensive social housing experience and was a finalist for the
Merseyside Women of the Year Awards 2022. Home REIT has discussed
Big Help Project's draft management accounts to FY 2022 with senior
Big Help management and expects these to show a relative decrease
in debtors and an increase in rental income, along with a decrease
in the level of donations (as this may contain the rent cover
provided by the Vendor to the Tenant). Further information on
shared trustees for this and other Tenants is provided later in
this section. Full due diligence was undertaken on the Tenant on a
financial and operational basis, including a review of the
allegations made against Peter Mitchell. Home REIT has been paid
all rent due in full (GBP3.9 million for FY 2022).
o CG Community Council: The Report cites financial statements
for the year ended 31 March 2021. However, Home REIT entered into
its first lease with this Tenant in June 2021 and therefore any
expenditure in the prior financial year does not impact on the
Company's investment. For FY 2022, the Company received GBP 2.4
million in rent from CG Community Council for the provision of
accommodation to homeless residents. Please see the Big Help
Project (above) for comments around trustees. The Company has also
requested that the Tenant updates its 'Charity Overview' section on
the Charity Commission website to reflect the services it provides
through the properties leased from the Company. The Company has
discussed the draft financial statements for the year ended 31
March 2022 and expects these to demonstrate a significantly
improved balance sheet and income statement. These are due to be
published on the Charity Commission's website in January 2023.
o Dovecot and Princess Drive Community Association : The Report
variously claims that this Tenant was established in May 1974 or in
1997: the Tenant was established on 9 July 1997. The Report also
cites financial statements for the year ended 30 September 2020
(prior to Home REIT's launch had formally closed) and 31 March
2022, showing low or no rental expense. Home REIT has been paid all
rent due in full (c. GBP2.0 million for FY 2022) for the provision
of accommodation to homeless residents and has been advised that
the Tenant's accounts have been administered incorrectly, which
will be rectified at the next public filing. Please see the Big
Help Project (above) for comments around trustees. The Company
understands that the Tenant does not publicly promote its provision
of accommodation for homeless people, as it relies predominantly on
relationships with Local Authorities who provide homeless referrals
that are used to occupy the accommodation that the Tenants leases.
The Company has also requested that the Tenant updates its "Charity
Overview" section on the Charity Commission website to reflect the
services it provides through the properties leased from the
Company.
o Redemption Project : The Investment Adviser has reviewed draft
management accounts to 30 September 2022 and expects Redemption
Project to deliver both an operating profit and balance sheet
improvement at its next set of publicly available accounts. The
fact that the Tenant's registered office was previously used by
other businesses is irrelevant: Home REIT has been paid all rent
due in full (GBP2.7 million for FY 2022).
o Lotus Sanctuary: Home REIT encourages all counterparties to
provide the highest calibre of care to promote positive outcomes
for its residents, who remain anonymous to the Company. Regarding
the statement around a property in an "unsafe area", Lotus
Sanctuary formally rebutted the claim by Women's Aid, explaining
that the property comprised 28 self-contained refurbished flats
that had been approved by the Local Authority for exempt
accommodation. Regarding the resident complaint around the standard
of care provided in a property run by Lotus Sanctuary, Home REIT
was in dialogue with the Tenant, who determined that the issues
pertained to a limited number of residents where underlying factors
such as eligibility for housing, non-declaration of income, and
anti-social behaviour were contributing factors. No concerns have
been raised to Home REIT regarding any other aspect of the
properties under this Tenant's control regarding staff, property
conditions, or otherwise. Indeed, the Tenant invited Women's Aid to
visit the relevant property; the invitation was not responded to .
Home REIT has been paid all rent due in full (GBP3.7 million for FY
2022 ).
o Supportive Homes CIC : The Tenant has the benefit of
significant operational experience in the social housing space,
with Morag Williams having over eight years of industry experience,
and the Tenant having access to a total of 22 staff. The Company
believes that this expertise supplements other directors who are
newer to the social housing sector. As the Tenant legal entity was
established in March 2021, it has yet to file any formal accounts
with Companies House. Home REIT has been paid all rent due in full
(GBP3.0 million for FY 2022).
o One (Housing and Support) CIC : The Report comments that
current debts were rising quickly in the Tenant's FY 2022 accounts.
It is correct that creditors had risen to GBP2.31 million compared
to GBP1.92 million in FY 2021, but this fails to consider the
increase in debtors from c. GBP88,000 to c. GBP320,000 and increase
in stock. This typically reflects delays with some Local
Authorities in their processing of exempt housing benefit claims,
which are subsequently backdated to the date of the claim upon
payment. Home REIT has been paid all rent due in full (c. GBP3.0
million for FY 2022).
o Bloom Social Housing: The Report comments on Wellesley House,
which is an example of the proper functioning of the exempt
accommodation sector. It is currently under a block contract due to
the high levels of demand for homeless accommodation in the Local
Authority area. These contracts, covering a block of 20
self-contained studios, are typically for twelve months, but given
the elevated need for homeless accommodation in the area, the
Tenant fully expects to have the contract extended in due course.
Should the block contract not be extended, Bloom Social Housing is
able to fill the properties on an individual basis. The Penta House
Veterans project referenced by Viceroy is currently being used for
general needs housing. Penta House was not granted exempt
accommodation status as originally sought by the Tenant due to the
number of people to be housed in the building. Whilst the Tenant
was disappointed with the decision, they have acted swiftly to
ensure the property is income producing and providing a much-needed
social impact. The Tenant was founded in April 2020, prior to the
IPO of the Company in October 2020. The Tenant directors have
significant expertise, with Sarah Furber in particular having
worked in the housing and social housing sectors for over 30 years.
Home REIT has been paid all rent due in full (c. GBP2.0 million for
FY 2022) .
o Circle Housing and Support ("Circle"): Circle is currently in
solvent administration. The circumstances surrounding Circle's
solvent administration were driven by a change of strategic
direction by Circle's management. Circle's properties are largely
sub-let to Mears Group Ltd ("Mears") on ten-year sub-leases. Mears
manages over 17,000 homes for local and central government. The
Vendor provided a contribution to Circle referred to in the Report
to cover the difference over the course of the lease between the
cost of the head lease to Home REIT and the cost of the sub-lease
to Mears. The Company announced the solvent administration on 1
November 2022, further noting that rent due continues to be paid on
time and in full, with no impact to residents. Circle's existing
leases were reassigned on the same rental terms and the remaining
Vendor's contribution referenced above was transferred to One CIC
on 25 November 2022, demonstrating the resilience of Home REIT's
business model and its ability to continue to provide critical
housing to its vulnerable occupants due to the protective statutory
framework that the Homelessness Reduction Act 2017 created.
o Gen Liv UK CIC ("Gen Liv"): The Investment Adviser has
previously reviewed draft financial statements to December 2021
which provide appropriate comfort that Gen Liv can afford its lease
obligations. Home REIT has been paid all rent due in full (GBP3.0
million for FY 2022). Gen Liv has a staff of seven with requisite
experience to provide homeless accommodation services. Gen Liv has
noted the photographical error on its website and intends to update
this in due course.
o Dawson Housing: The Report summarises a clerical error
regarding the inadvertent deregistration by the regulator of Dawson
Housing in April 2021. Dawson Housing was reinstated by the
regulator in November 2021 following an appeal. Dawson Housing has
a staff of 14 with requisite experience to provide homeless
accommodation services. Home REIT has been paid all rent due in
full (c. GBP1.8 million for FY 2022). CEO Alex Bass's background
has been predominantly in real estate and his experience is
supplemented by an additional five directors, the majority of whom
have specialist experience in social housing, including Amanda
Trent who has over ten years in the sector and is a Chartered
Member of the Chartered Institute of Housing.
o Noble Tree: The Report notes sub-leases from Noble Tree to
Mears. Home REIT is aware of and is comfortable with this
situation; having sub-lease holders provides further protections
around the ongoing collection of rent, especially when such
sub-lease holders are large publicly listed entities. This has
enabled Noble Tree to expand its portfolio at a sustainable rate.
The Tenant has used the COVID-19 extension to extend the reporting
as the Tenant is implementing updated management systems. The
Company expects the Tenant to show a healthy balance sheet for the
year ending December 2021 when filed and again in the year to 2022
when these are filed. Jakob Kinde has stated that the allegations
raised are historical and unfounded. Home REIT has been paid all
rent due in full (GBP1.6 million for FY 2022).
-- Tenants typically seek to run a minor surplus on their
financial accounts. As previously disclosed, the rent paid to Home
REIT represents on average c. 45% of the exempt housing benefit
that they can claim, with the remainder of the funds allocated to
maintenance costs, the provision of additional support services and
a share of central costs.
-- Viceroy notes that many of the Tenants are administered by
the same parties. There is nothing unusual in these arrangements.
The Company believes that charitable focus on homelessness is an
undersupplied and underfunded area in the UK. For smaller
charities, it is common practice to share senior level expertise,
administrative support functions and office space, which drives a
reduction in operating costs, allowing them to focus resources on
the vulnerable people they support. Indeed, Home REIT believes that
this organisational approach is currently conducive to helping the
greatest number of vulnerable people.
(1) Lotus Sanctuary CIC and Redemption Project and (2) The Big
Help Project, CG Community Council and Dovecot and Princess Drive
Community Association share senior expertise. As outlined above,
this is common practice and the Company refutes strongly that it
represents a manipulation of its investment restrictions around
Tenant concentration. This is an example of Tenants sharing best
practice ideas and resources with industry experts to apply their
experience across multiple charitable projects, delivering a
superior outcome for residents.
o In connection with the above, Viceroy notes that Home REIT's
Tenant exposure restriction (being <= 15% of GAV) "seems to only
be valid on a technicality". The fact that the Tenants are
different legal entities is not a "technicality". The investment
restriction that the Company has no Tenant exposure in excess of
15% of its GAV is designed to protect the Company from the risk of
having a large exposure to a single Tenant in a default/
insolvency. As each of these Tenants is a distinct legal entity,
the Company's exposure to the default/insolvency risk is against
each Tenant entity individually, not collectively, thereby
mitigating the risk and complying with the investment restriction
as intended.
-- Many of Viceroy's complaints centre on the financial health
of the Tenants and an accompanying lack of public profile being
demonstrated by them. The Investment Adviser undertakes extensive
due diligence exercises ahead of contracting with any counterparty,
including the Company's Tenants. These exercises are adapted to
each Tenant but generally include confirming the Tenant's legal
qualification to receive exempt housing benefit, in addition to
reviewing financial statements, operational capabilities (e.g.
staffing levels) and their business plan/forecasts, such that the
Tenants can meet their rent payment obligations as they fall due.
The Tenants are private entities and are subject to different
timelines regarding the preparation and publication of their
financial statements compared to publicly listed entities.
-- Viceroy states that several Tenant directors/trustees (e.g.
at Big Help Project and CG Community Council) also own property
development companies. As described in Allegation 5 below, Home
REIT has rigorous controls and processes in place to ensure that
the assets it acquires represent fair value for all stakeholders. A
core foundation of the Company's existence is that there is a role
for private capital to help alleviate homelessness in the UK; by
making an appropriate return on their investment in residential
property, Vendors can deliver additional high-quality accommodation
for homeless people at an attractive cost to taxpayers. Without the
Company's participation in providing such accommodation, Local
Authorities would be forced to use unsuitable, more expensive
options (e.g. overnight shelters, B&Bs, hostels) that are on
average approximately 70% more expensive than the accommodation
that Home REIT provides. It should also be noted that the Company
does not acquire "B&B accommodation assets" as alleged in the
Report; it acquires newly refurbished residential property.
-- Home REIT's Tenants are charities, community interest
companies and other regulated organisations. Certain of these
Tenants may have trustees that also act on the boards of for-profit
companies; however, these are separate entities and each trustee
owes a fiduciary duty to the relevant charity, community interest
company, or other regulated organisation as a trustee. 100% of the
support services provided by the Tenants that are contained within
a gross exemption housing benefit claim are agreed with the Local
Authority, which undertakes full checks on compliance at the
beginning and on an ongoing basis.
-- The Company has prioritised providing high quality housing in
the two years of its life since IPO. As the Company continues to
grow, it is committed to increasing its public disclosure. Enhanced
future disclosures around Tenants will include:
o Improving the evaluation process of the Company's Tenants and
standardising the methods of tracking performance; and
o Helping Tenants to formalise the routine monitoring that
enables the Company to evaluate the services delivered to
residents.
Allegation 2 - Financial Analysis
Viceroy's report suggests the Company has poor cash conversion
due to its receivables being overdue and also criticises the
Company's rental revenue recognition approach. This is a
misrepresentation of the Company's financial position based on
incorrect conclusions from the HY 2022 financial results. The
Company highlights the following points:
-- There are no overdue arrears in relation to amounts billed to 31 August 2022.
-- The Company structures its leases such that the first twelve
weeks of rent are invoiced in a single invoice after three months.
This (1) enables the Tenant to focus on its core charitable aim to
house homeless people, in the most efficient way possible and (2)
accounts for any delays in the Tenant receiving the first payment
of exempt housing benefit from the Local Authority. This structure
can have the appearance (when viewed out of context or in
isolation) of a relatively high rental debtor balance at a point in
time (e.g. at the Company's half year end). T his timing issue has
never materialised into non-recovery of debts. The Company is aware
that this method impacts its accounts receivable days, particularly
when acquisition activity has been elevated, but feels that any
crude calculation of receivable days based on a point in time
debtor position that doesn't adjust for this is likely to be
unreliable. The Company has been highly acquisitive since IPO and,
therefore, this structure has materially impacted the Company's
accounts receivable days; the Company expects this situation to
normalise as it matures.
Revenue recognition of rent
-- The Company reports its financial statements under
International Financial Reporting Standards ("IFRS"), as is
required for the consolidated financial statements of UK listed
companies.
-- IFRS 16 requires lessors, where the relevant lease has a
minimum uplift, to straight line such an increase in the rent
arising over the expected term of the lease. The straight lining of
rents recorded in the Company's financial statements reflects that
the leases have a minimum uplift of 1% per annum and hence the
Company is required to smooth this minimum uplift over the 25-year
term of a typical lease.
-- This is an explicit IFRS requirement and not a choice of
accounting policy. The Board notes that this treatment must be
adopted by every other UK publicly listed company that has minimum
uplifts in the terms of their leases. To state otherwise is
factually incorrect.
-- The Company has consistently disclosed the effect of rental
smoothing in its independently audited financial accounts, allowing
shareholders and other stakeholders to adjust for the rental
smoothing effect required under IFRS.
-- The Company's independent valuer is Knight Frank, which is
appropriately qualified and objective.
-- From an accounting perspective, any additional rent that is
credited to revenue by straight lining rent is offset against the
change in fair value in the profit and loss account, meaning that
no asset is held at an amount above its independent valuation at
the reporting date.
-- Revenue recognition is a concept purely reserved for
accounting treatment and has no place in a rental agreement.
Therefore, it is unsurprising that Viceroy cannot find a reference
to it in the agreements they have found.
-- The Report refers to "rapidly increasing administrative
expenses" when comparing operating expenses for the twelve months
to August 2021 and the six-month period to February 2022. The
comparison fails to consider the growth of the Company during the
period, notably the GBP358 million of acquisitions completed during
the latter six-month period. Operating expenses as a percentage of
rental income fell from 47% (in the period to February 2021) to 19%
(in the period to February 2022). The Company is transparent in the
breakdown of administrative expenses in the notes to its financial
statements, which are fully compliant with the disclosure
requirements of International Financial Reporting Standards.
Allegation 3 - Valuation and Alleged Conflict
-- The Report alleges that Home REIT values its own properties.
This is incorrect: the Company's valuation advisers are Knight
Frank, who are retained by the Company to value the properties on a
bi-annual basis for financial reporting under IFRS, as well as to
provide ad hoc valuations as required. Knight Frank provides
independent valuation services and confirms in its reports that,
other than the valuation services it provides, it has no material
involvement with the Company's portfolio nor any potential conflict
of interest.
-- As with all UK listed REITs, Knight Frank values the
Company's assets per the RICS Valuation - Global Standards, which
incorporate the International Valuation Standards, and the RICS UK
National Supplement (the "Red Book"). The portfolio has been valued
based on "Fair Value" as defined in VPS4 of the Red Book. As stated
in Knight Frank's report, the adoption of the required Fair Value
basis does not result in any material difference in the value
reported from that derived under the definition of Market Value
which is set out in VPS4 (1.2) of the Red Book and is defined as:
"The estimated amount for which an asset or liability should
exchange on the valuation date between a willing buyer and a
willing seller in an arm's length transaction after proper
marketing and where the parties had each acted knowledgeably,
prudently and without compulsion."
-- It is correct that the valuer's opinion of Fair Value is
primarily derived using recent comparable market transactions on
arm's length terms and appropriate valuation techniques (in this
case, the Investment Method). Knight Frank has provided Home REIT
with details of comparable market transactions when presenting its
valuations. Knight Frank also considers the long-term sustainable
rental levels and asset cash flows, current and predicted
operational performance for the assets and the strength of the
financial covenants of the Tenants in determining the net initial
yield ("NIY") applied to the current rental income of the
properties. Given the robust position regarding rental income, no
valuation impairments are expected due to non-payment of rent.
-- Knight Frank inspects the properties externally for the
valuation following the purchase of those properties by Home REIT.
It is not standard market practice for a residential property
portfolio of this scale for every property to be inspected
internally at each bi-annual valuation especially where access to
the building can be difficult and the Valuer can obtain sufficient
information about the internal layout and state of repair of the
residential property from other sources. However, to provide
further assurance in this area, Knight Frank intends to start
internal inspections on a random sample basis going forward.
-- Before acquisition, the Company commissions professional
surveyors to conduct building surveys. The Company uses high
quality and reputable law firms to advise on the purchase of its
properties, including a full title review of each asset before
acquisition with formal reliance reports provided, and is therefore
confident that it has appropriate and proper title on all the
assets it has acquired. Given the procedures in place over
inspections of leases, title and physical property, the Company
does not believe that Knight Frank's procedures should be seen as a
"major red flag" and notes that Knight Frank are following their
standard procedures. Reviewing three recent public valuation
reports published in prospectuses by UK REITs over the last two
years and conducted by three different valuation firms (CBRE,
Cushman & Wakefield and Colliers) illustrates this point well -
none included a review over lease documents or title deeds.
-- Lease information provided to Knight Frank by Home REIT is
subject to a comprehensive reconciliation process between Home
REIT, Apex, and Knight Frank to ensure the robustness of the lease
data used in the valuation. As part of the statutory audit of the
2021 annual report, BDO concluded, as disclosed in its audit
report, that based on its work it did not note any material
instance which may have indicated that the assumptions adopted by
the directors in the valuation of investment property were not
reasonable or that the methodology applied was inappropriate.
-- The Company has GBP250 million of long-term fixed rate debt.
This debt requires in-depth lender engagement, which includes
reviewing property titles, building surveys, valuations, rental
credit quality and other technical due diligence. At no point have
the Company's lenders raised any material issues with either their
own valuations or due diligence or the Company's valuations in any
discussion with the Company.
-- Home REIT's valuation approach relies upon a tried and tested
international methodology and set of valuation standards that have
consistently worked well. In trying to claim that Home REIT's
valuation methodology is fundamentally different and flawed, the
Company believes that Viceroy demonstrates a lack of understanding
of the UK real estate market as a whole.
Allegation 4 - Outsourcing
-- Home REIT is a premium listed investment company that, under
the FCA's Listing Rules, is required to have a non-executive board
of directors that is independent of its management company.
Accordingly, none of the board has any connection with the
Investment Adviser's group or its affiliates.
-- Along with hundreds of other REITs, investment trusts and
other investment companies that are established by asset managers
and listed on the premium segment of the London Stock Exchange's
Main Market, Home REIT has an external management structure whereby
the wholly independent, non-executive board delegates parts of its
day-to-day responsibilities for running the Company to an external
alternative investment fund manager ("AIFM"). The AIFM, in turn, is
advised by an investment adviser, a situation which is compliant
with the Alternative Investment Fund Managers Directive ("UK
AIFMD").
-- As payment for their respective services, the AIFM receives a
small management fee and the Investment Adviser receives an annual
investment advisory fee, paid monthly, based on a percentage of the
Company's NAV. There is no performance fee charged, as incorrectly
stated by Viceroy.
-- The Company has appointed Alvarium Securities Limited
("Alvarium Securities") and Jefferies International ("Jefferies")
to provide corporate broking services to the Company. Alvarium
Securities and Jefferies are each paid an identical annual retainer
fee and may receive additional fees, at market rates, from time to
time in relation to other services, including with respect to
equity issuances conducted by the Company. As has been consistently
disclosed in the Company's prospectuses and in its annual and half
year reports, Alvarium Securities is a subsidiary of Alvarium
Investments Limited ("Alvarium Investments"), the ultimate parent
company of the AIFM and the Investment Adviser. Engagements between
the Company, Alvarium Securities, the AIFM, and the Investment
Adviser (among others), including any sponsor and placing
agreements, have always been entered into between the relevant
parties on standard market terms and on an arm's- length basis
between the related parties. In the interests of transparency, the
Company discloses all fees paid to entities within the Alvarium
Investments group in its annual report. As required by the FCA's
Listing Rules, the Board monitors and manages the performance of
its key service providers, including Alvarium Securities, on an
ongoing basis and at least annually. The Board is satisfied with
the performance of Alvarium Securities to date and is further
satisfied that Alvarium Securities, which is authorised and
regulated by the FCA, operates independently from the AIFM and the
Investment Adviser such that any potential conflicts between them
are managed.
-- The Company's NAV is calculated by the Company's
administrator, Apex, at each year end reporting date and is
independently audited by BDO as part of its statutory audit of the
Company's annual report and accounts. The valuation of the property
portfolio, a key constituent of the NAV, is conducted by the
Company's independent valuer, Knight Frank.
-- The NAV is a key metric of performance for a UK REIT ensuring
a strong alignment between the Investment Adviser and the Company's
shareholders.
-- The Investment Adviser does not earn performance fees,
acquisition fees or other fees from its investment advisory
services contract. The Investment Adviser is not generally
incentivised to take on additional leverage, as its fee is paid on
NAV (set out below), but the Company accepts that the effects of
purchasing a property with leverage will accrete the Company's NAV
per share; the Company is limited to taking on leverage up to 35%
of its gross asset value.
-- This simple fee structure is a key differentiator for Home
REIT whilst the quantum of fees (effective 0.79% of NAV, based on
the following tiers: 0.85% of NAV <GBP500 million, 0.75% of NAV
GBP500-750 million, 0.65% of NAV > GBP750 million) represents
one of the lowest in the externally managed UK Real Estate
sector.
-- The Board oversees and regularly reviews the performance of
the Investment Adviser, Apex, BDO and Knight Frank. Additionally,
The Good Economy produces an independent verification of the
Company's strategy and the social impact it has on the homeless
people who are accommodated in the Company's properties.
-- As set out in the Company's annual report for the year to 31
August 2021, several Key Performance Indicators ("KPIs") are used
to track the Company's financial and social performance, including
performance of its asset base. Given the delegation of the
Company's day-to-day running to the Investment Adviser, these KPIs
effectively act as a scorecard of the Investment Adviser's
performance. The Company's KPIs are listed below, all of which have
been consistently met or exceeded since the Company's launch:
-- Total NAV return
-- Dividend per share
-- EPRA earnings per share
-- Total expense ratio
-- EPRA net total assets
-- Pro forma net LTV / EPRA LTV
-- Weighted average unexpired lease term
-- Percentage of contracted rents index-linked or fixed
-- Homelessness beds created
-- The Management Engagement Committee of the Company reviews
the performance of the Investment Adviser on at least an annual
basis to ensure that their continuing engagement is in the best
interest of the Company and its shareholders. Following the latest
review process the Board agreed that the performance and fees of
the Investment Adviser were satisfactory and that it was in the
Company's best interest that the engagement of the Investment
Adviser continues.
-- The Report states that the Company has had three CFOs in
2022, which is false. As is standard for an externally managed
listed investment company, the Company itself has no CFO and indeed
no employees. The CFO function is outsourced to the Investment
Adviser and Gareth Jones acted in this role from launch until the
Company announced on 1 November 2022 that he was taking a period of
leave for health reasons. Prior to Gareth's leave, James Snape had
been hired to take on the role as CFO of the Investment Adviser,
such that Gareth could focus on his fund management duties. Gareth
remains an employee of the Investment Adviser and the Company
wishes him a speedy recovery. The audit committee of the Board
retains oversight of the Company's finances.
-- As the Company's arrangements with its Investment Adviser are
market standard, regularly reviewed, and embed low fees based on
independent valuations performed by third party experts under their
own professional codes of conduct, the Company strongly refutes the
baseless allegation that this structure creates a heightened risk
of fraud. On the contrary, the management fee structure is designed
such that the risk of fraud is reduced by the separation of
responsibilities amongst different parties and the independent
valuation, audit and oversight structure outlined in this
section.
Allegation 5 - Alleged NAV Inflation
As noted above, property valuations from which the NAV is
derived have been produced independently by an independent valuer,
Knight Frank. The year-end valuations have been subject to audit
procedures carried out by the Company's independent auditor, BDO,
as part of their audit of the annual report as well as challenge
and review from the Company's independent Board of Directors as
well as other advisers. In addition, the assets secured to the
Company's lender (constituting the majority of the portfolio) have
been subject to an independent valuation carried out by leading
valuers appointed by the lender, that support the valuation levels
given by Knight Frank.
As part of any property acquisition, the following criteria must
be met for the deal to progress:
-- Rental level to be at or around LHA rates on a per bed basis
(LHA + 10%). This enables the Tenant to have certainty around its
exempt housing benefit claim, as the Local Authority cannot refuse
the rental cost aspect if it is in-line with LHA rates (per The
Housing Benefit and Council Tax Benefit (Consequential Provisions)
Regulations 2006). This structure has underpinned the Company's
pricing level discipline, deploying over GBP1 billion at an average
NIY of 5.8% (as at 25 November 2022), ahead of target.
-- Detailed planning due diligence is undertaken to ensure that
the rental level is based upon the number of bedrooms that meet the
relevant legislation requirements (such as minimum bedroom size
under Houses of Multiple Occupation ("HMO") legislation and that
the property has full planning permission for the number of
bedrooms proposed).
-- A building survey is carried out on every acquisition as well
as a full structural survey, where required. Should a property have
material structural issues (e.g. subsidence), the property will not
be acquired.
-- A full refurbishment is carried out, which is paid for by the
Vendor. The Vendor provides representations and warranties that
such refurbishment works will complete within twelve months of the
Company purchasing a property. For higher value refurbishments, the
Company is further protected by a retention fund provided by the
Vendor.
-- A full legal review of title documents is undertaken by the Company's acquisition solicitors.
-- The acquisition yield agreed on the property considers the
property type and location, Tenant covenant strength and length of
the lease term. Each acquisition is also accompanied by a valuation
by Knight Frank to ensure the Company is not paying above the
market level for the property (on average, valuations to date have
been c. 6% above the total acquisition costs incurred by the
Company).
-- Each property is inspected internally by the Company's
specialist fire and health and safety advisers following completion
of the refurbishment works and prior to occupation.
The Company "[purchases] property at vastly inflated prices"
This assertion is based on a misunderstanding of the process by
which the Company acquires its assets and how these are registered
at HM Land Registry (the "Land Registry").
As described in the summary, the Company typically acquires
portfolios of properties from Vendors. When the Company purchases a
portfolio of properties not held in a corporate wrapper, in advance
of the sale the Vendor will often first transfer the properties
into a special purpose vehicle ("SPV") so they are held in a
corporate wrapper (e.g. if the Vendor wishes to sell a portion of
its own portfolio of properties). This corporate SPV and the
properties held within it are then acquired all together as a
portfolio by the Company, hence there are often two transfers of
each property recorded with the Land Registry.
Land Registry process
When a transaction involving the transfer of a portfolio of
properties is registered with the Land Registry, the Land Registry
records the transfer of ownership on the title for each individual
property, but it does not record a "price paid entry" for each
individual property where there are no apportioned prices set out
in the portfolio transfer.
Further information on the Land Registry's processes can be
found in its "Practice Guide 7: Entry of Price Paid or Value Stated
Date in the Register", updated 17 January 2022
(https://www.gov.uk/government/publications/price-paid-or-value-information-registration-procedures/practice-guide-7-entry-of-price-paid-or-value-stated-data-in-the-register).
It should be noted in particular that this guidance document
states, in Section 3, that the sum entered for a transfer on the
title register will be the actual amount of money a buyer has paid
to a seller and that this may not be the same as the market value
of the property. It further notes, in section 10, that "price paid
entries" on the title register may not be made for transfers of
multiple properties (five or more) or of shares. Further, Land
Registry guidance states that the transfer of more than one
property as part of a portfolio is excluded from the Price Paid
Dataset (see https://landregistry.data.gov.uk/app/root/doc/ppd)
which is a separate record of price paid data available via the
Land Registry's price paid service (see
https://www.gov.uk/search-house-prices).
In some instances (including two transactions flagged by
Viceroy), the Land Registry has recorded in the Price Paid Dataset
the entire purchase price of a portfolio against a single property
in the portfolio e.g. if the Company has purchased an SPV
containing ten properties each valued at GBP100,000, the Price Paid
Dataset shows the total GBP1 million consideration against a single
property in the portfolio. In addition, no new "price paid entries"
have been recorded in the title registers for the properties
included in the portfolio transfer. The two transactions where this
has occurred are the "Stoke-on-Trent Portfolio" and the "Plymouth
Portfolio", each of which is discussed in more detail below. The
Company acknowledges that the Price Paid Dataset can create a
misleading picture from the perspective of a third party reviewing
publicly available information about values of properties within
the Company's portfolio, especially where multiple transactions
have taken place on the same dates (as was the case for both
Stoke-on-Trent and Plymouth). The Company will ask the Land
Registry to advise what their practice is with respect to recording
the Price Paid Dataset and price paid entries on the title
registers for portfolio transfers. The Company is also querying
whether there is any action that can be taken in the future by the
Company to avoid a recurrence of this issue.
Notwithstanding any response from the Land Registry, it should
be noted that the Price Paid Dataset and any "price paid entries"
on the title registers are not necessarily the market values of the
properties (as stated in the Land Registry guidance) and are not
the property values used by the Company and its advisers to
calculate the Company's NAV (values provided by Knight Frank are
used for this purpose only).
Home REIT and the Investment Adviser are both incentivised to
pay as low a net purchase price as possible for the Company's
properties, hence the Company acquires portfolios of properties
off-market from Vendors. A lower purchase price enhances the
potential return provided by the asset, thereby supporting the
Company's return targets, NAV and dividend. Purchasing properties
at inflated prices, on the other hand, would not make commercial
sense. Additionally, noting that properties are independently
valued, from the Investment Adviser's perspective, overpaying for
properties which are then re-valued downwards would result in poor
performance for the Company, which would not reflect well on the
Investment Adviser.
The Company engages in "excessive revaluation of purchased
property"
For clarity, the total revaluation gain for properties purchased
by the Company between IPO and 28 February 2022 is GBP43.2 million,
which equates to an average of 6.4% per property. This revaluation
gain was established by the external valuation process undertaken
by Knight Frank as per the RICS Valuation - Global Standards, which
incorporate the International Valuation Standards, and the RICS UK
National Supplement. The gain reflects a yield compression movement
from an average acquisition yield of 5.9% (as at 28 February 2022)
and the average valuation yield of 5.6%. The assertion that the
Company has benefited from "unrealistic appreciation over a short
period of time" is incorrect and has been drawn from misinterpreted
figures derived from underlying SPVs. The change in fair value of
investment property at SPV level cited in the Report is not
comparable to a revaluation gain for the Company.
As described above under the heading "The Land Registry
process", the price of a property recorded on the title register
for a transfer is the total value paid by the buyer to the seller.
"Property values" recorded on the title register do not necessarily
reflect the market value of the property. By way of example, the
title register entries also do not reflect the net economics to the
Vendor nor show the cost of renovations and refurbishments that may
have happened or been committed to at the property. For every
property purchase Home REIT has completed, the Vendor:
-- Reimburses to Home REIT the Stamp Duty Land Tax ("SDLT") payable upon purchase;
-- Pay all property refurbishment costs and Energy Performance Certificate ("EPC") upgrades;
-- Has an agreement with the Tenant to provide an initial
minimum rent cover, which is typically at least twelve months;
and
-- Has an agreement with the Tenant to contribute to the property's sinking fund.
In addition, the Company has no visibility on when a Vendor
purchased its assets, the background under the top-Vendor's sale
motivations (e.g. a distressed sale), or the Vendor's financing
arrangements. For example, the Vendor could have purchased
properties sold to Home REIT several years ago in a distressed sale
with an onerous financing package. It is therefore challenging for
any third party to calculate an accurate return for a Vendor in a
sale to Home REIT.
For example, on 15 November 2022 the Company purchased a
property portfolio for a gross purchase price of GBP283,973 and a
net purchase price of GBP273,937, taking into account Land Registry
costs of GBP10,036. From the GBP273,937, the Vendor:
-- Allocated GBP44,000 in Vendor's refurbishment costs undertaken pre-Home REIT purchase;
-- Provided the Tenant with additional funding of GBP16,754
(representing twelve months of rent);
-- Provided GBP1,500 to the property's sinking fund
-- Provided GBP15,351 in legal, agent and survey fees on their
original acquisition price of GBP151,500; and
-- Paid GBP3,351 of SDLT on the Tenant's lease.
This is a typical property portfolio transaction for Home REIT
and reduced the Vendor's headline gross "profit" of GBP132,473 to a
net profit of GBP41,832, representing a 18.0% net profit on cost
for the Vendor compared to the headline 87.4% gross profit. A
reconciliation is provided below:
Home REIT gross purchase price GBP283,973 A
Less SDLT and LR fees (GBP10,036)
------------- -----
Home REIT net purchase price GBP273,937 B
------------- -----
Deductions:
------------- -----
Vendor original acquisition price (GBP151,500)
------------- -----
Refurbishment cost (GBP44,000)
------------- -----
Sinking fund contribution (GBP1,500)
------------- -----
Tenant additional funding (12 (GBP16,754)
months' rent)
------------- -----
Legal, agent and survey fees (GBP15,000)
------------- -----
Lease SDLT (GBP3,351)
------------- -----
Total deductions (GBP232,105) C
------------- -----
Estimated Vendor profit GBP41,832 B+C
= D
------------- -----
Estimated Vendor profit on cost 18.0% D /
C
------------- -----
Source: Investment Adviser.
As shown, this structure significantly reduces the net amount
received by the Vendor from a sale of property to Home REIT, while
ensuring that the Company receives a high-quality, newly
refurbished asset, typically on a 25-year lease, backed by an
acquisition valuation from an independent valuer at or above the
price paid by Home REIT.
With respect to:
-- Home Holdings 1
Stoke-on-Trent Portfolio
o As stated above, the conclusions Viceroy draws with respect to
the Stoke-on-Trent portfolio are incorrect and the Company believes
are based on a misunderstanding of the registration approach of the
Land Registry.
o Home REIT acquired a portfolio of 34 assets for a combined
consideration of GBP7.3 million, as part of an SPV purchase in
December 2020. SDLT on the transaction was paid by the Vendor.
o The Vendor had originally aggregated the portfolio together
for a combined purchase of GBP3.2 million (excluding purchase
costs).
o The Vendor then transferred the portfolio from their original
SPV (Vendor SPV 1) to a specific SPV for the purpose of the sale to
Home REIT (Vendor SPV 2). An internal transfer price arranged by
the Vendor was made for GBP5.9 million between Vendor SPV 1 and 2.
This entire GBP5.9 million transfer price was then listed by the
Price Paid Dataset against a single property, 144 Birches Head
Road. If the Form TR5 is reviewed (provided here
https://www.homereituk.com/wp-content/uploads/2022/11/TR5-Pathway-Homes-Group.pdf
) , it is clear that this GBP5.9 million transfer price relates to
the entire portfolio, not just 144 Birches Head Road. For a person
unfamiliar with the Land Registry's practices (described above),
this gives the misleading impression that the price of that single
property had increased from GBP0.2 million to GBP5.9 million. The
actual market value of this specific property, which is the value
used in the Company's NAV calculations and has most recently been
determined by Knight Frank, is GBP0.39 million (as at 31 August
2022).
o In terms of the Vendor net profit on cost, a reconciliation is
provided below. Overall, the Company estimates a 42% net profit on
cost, compared to the 127% gross profit on cost implied by Viceroy.
The Company notes that the net profit on cost is an estimate and
the actual figure may vary depending, in particular, on final
refurbishment costs and the considerations around the Vendor's
original purchase of the properties as outlined earlier in this
section.
Home REIT gross purchase price GBP7,271,333 A
Less SDLT and LR Fees (GBP174,200)
--------------- --------
Home REIT net purchase price GBP7,097,133 B
--------------- --------
Deductions:
--------------- --------
Vendor original acquisition (GBP3,201,250)
price
--------------- --------
Estimated original acquisition (GBP192,075)
costs (6%)*
--------------- --------
Refurbishment cost estimate** (GBP950,000)
--------------- --------
Sinking fund contribution (GBP46,000)
--------------- --------
Tenant additional funding (12 (GBP460,000)
months' rent)
--------------- --------
Estimated Survey, legal and (GBP145,427)
agent fees (2%)*
--------------- --------
Total deductions (GBP4,994,752) C
--------------- --------
Estimated Vendor profit GBP2,102,381 B + C =
D
--------------- --------
Estimated Vendor profit on 42% D / C
cost
--------------- --------
Source: Investment Adviser.
Notes:
* Estimated initial acquisition costs of 6%, and 2% costs on
sale to Company.
**The Company was not provided with an explicit refurbishment
cost estimate. Considering the average recommended refurbishment
costs per bed (excluding prelims and contractor profit) across
available data on the Company's entire portfolio at GBP7,633 per
bed, this equates to approximately GBP0.95 million (across 125
beds).
o The Report also states that GBP9.1 million was spent on these
properties by Home REIT. This is incorrect as the Report aggregates
the latest Price Paid Dataset for each individual property in the
portfolio to reach this value. This is erroneous because the entire
portfolio purchase price (GBP5.9 million) has been recorded in the
Price Paid Dataset solely against 144 Birches Head Road, creating
the misconception that this property was acquired by SPV 2 for
GBP5.9 million. The Price Paid Dataset for the remaining 33
properties showing as having been paid on 2 December 2020 plus the
GBP0.2 million acquisition price for 144 Birches Head Road recorded
on 14 October 2020 relate to the Vendor SPV1's GBP3.2 million
acquisition and not the Company's acquisition of the portfolio on 2
December 2020 . By not understanding this and aggregating all the
latest individual entries of the properties in the portfolio, the
Report is effectively double counting them.
Plymouth Portfolio
o Home REIT acquired a portfolio of 28 properties for a combined
consideration of GBP12.7 million.
o The Vendor originally aggregated the portfolio for a combined
purchase of GBP6.5 million (excluding purchase costs).
o The Vendor transferred the portfolio from their original SPV
(Vendor SPV 1) to a specific SPV for the purpose of the sale to
Home REIT (Vendor SPV 2). An internal transfer price arranged by
the Vendor was made for GBP11.7 million between Vendor SPV 1 and 2.
This entire GBP11.7 million transfer price was then then listed by
the Price Paid Dataset against a single property, 27 Neswick
Street. As with the Stoke-on-Trent Portfolio, after an inspection
of the Form TR5 (provided here
https://www.homereituk.com/wp-content/uploads/2022/11/TR5-Plymouth-25-02-2021-signed-by-transferor.pdf
), it is clear that this GBP11.7 million transfer price relates to
the entire portfolio, not just 27 Neswick Street. This gives the
misleading impression that the price of the property had increased
from GBP0.2 million to GBP11.7 million. The actual market value of
this specific property, which is the value used in the Company's
NAV calculations and has been most recently determined by Knight
Frank, is GBP0.39 million (as at 31 August 2022).
o Following the acquisition from Home REIT of Vendor SPV 2 for
GBP12.7 million, the portfolio was subsequently hived up (whereby
the assets of a subsidiary are transferred upwards to the parent
company) into Home Holdings 1 Limited for GBP13.0 million whilst
Vendor SPV 2 was closed. GBP13.0 million represented the book cost
of the asset at the time of transfer following an independent
valuation.
o In terms of the Vendor net profit on cost, a reconciliation is
provided below. Overall the Company estimates a 37% net profit on
cost. The Company notes that the net profit on cost is an estimate
and the actual figure may vary depending, in particular, on final
refurbishment costs and the considerations around the Vendor's
original purchase of the properties as outlined earlier in this
section.
Home REIT gross purchase price GBP12,672,626 A
Less SDLT and LR fees*** N/A
--------------- ------
Home REIT net purchase price GBP12,672,626 B
--------------- ------
Deductions:
--------------- ------
Vendor original acquisition price (GBP6,490,000)
--------------- ------
Estimated original acquisition (GBP389,400)
costs (6%)*
--------------- ------
Refurbishment cost estimate** (GBP1,297,500)
--------------- ------
Sinking fund contribution (GBP73,000)
--------------- ------
Tenant additional funding (12 (GBP730,000)
months' rent)
--------------- ------
Estimated Survey, legal and agent (GBP253,453)
fees (2%)*
--------------- ------
Total deductions (GBP9,233,353) C
--------------- ------
Estimated Vendor profit GBP3,439,273 B + C
= D
--------------- ------
Estimated Vendor profit on cost 37% D / C
--------------- ------
Source: Investment Adviser.
Notes:
* Estimated initial acquisition costs of 6%, and 2% costs on
sale to Company.
**The Company was not provided with an explicit refurbishment
cost estimate but was provided with building surveys with
recommended refurbishment works. The final refurbishment total may
have been in excess in this figure.
*** 'Gross' purchase price already net of SDLT.
o The Report also states that GBP19.2 million was spent on these
properties by Home REIT. As is the case with the Stoke-on-Trent
Portfolio, this number is calculated by aggregating the latest
Price Paid Dataset entries against each individual property in the
portfolio, thereby double counting them as the price of all the
properties in the portfolio has been recorded against 27 Neswick
Street.
-- Home Holdings 2
Peterlee Portfolio
o Home REIT acquired a portfolio of 10 properties for a combined
consideration of GBP0.85 million.
o The Vendor had originally aggregated the portfolio together
for a combined purchase of GBP0.36 million (excluding purchase
costs).
o In terms of the Vendor net profit on cost, a reconciliation is
provided below. Overall the Company estimates a 33% net profit on
cost, compared to the 137% gross profit on cost implied by Viceroy
(the Report incorrectly aggregates the total initial purchase
prices and then calculates its gross profit from this amount. The
Company notes that the net profit on cost is an estimate and the
actual figure may vary depending, in particular, on final
refurbishment costs and the considerations around the Vendor's
original purchase of the properties as outlined earlier in this
section.
Home REIT gross purchase price GBP848,500 A
Less SDLT and LR fees*** N/A
------------- ------
Home REIT net purchase price GBP848,500 B
------------- ------
Deductions:
------------- ------
Vendor original acquisition price (GBP358,000)
------------- ------
Estimated original acquisition (GBP10,740)
costs (3%)*
------------- ------
Refurbishment cost estimate** (GBP190,825)
------------- ------
Sinking fund contribution (GBP5,400)
------------- ------
Tenant additional funding (12 (GBP54,000)
months' rent)
------------- ------
Survey, legal and agent fees (actual) (GBP16,970)
------------- ------
Total deductions (GBP635,935) C
------------- ------
Estimated Vendor profit GBP212,565 B + C
= D
------------- ------
Estimated Vendor profit on cost 33% D / C
------------- ------
Source: Investment Adviser
Notes:
* Estimated initial acquisition costs of 3% (lower for small lot
size).
**The Company was not provided with an explicit refurbishment
cost estimate. Considering the average recommended refurbishment
costs per bed (excluding prelims and contractor profit) across
available data on the Company's entire portfolio at GBP7,633 per
bed, this equates to approximately GBP0.19 million (across 25
beds).
*** 'Gross' purchase price already net of SDLT.
-- Home Holdings 3
o Home REIT acquired a portfolio of 6 properties for a combined
consideration of GBP2.7 million. The transaction was structured as
a purchase of an existing Vendor SPV (Allerton SPV17 Limited)
o The Vendor acquired the original portfolio for GBP1.2
million
o In terms of the Vendor net profit on cost, the Vendor has
provided a full P&L statement of the actual costs as outlined
below. Combined this equates to a 20% net profit on cost, compared
to a c. 125% gross profit on cost implied by Viceroy.
Home REIT gross purchase GBP2,704,000 A
price
Less SDLT & LR Fees N/A
--------------- --------
Home REIT net purchase price GBP2,704,000 B
--------------- --------
Deductions:
--------------- --------
Vendor original acquisition (GBP1,195,000)
price
--------------- --------
Original acquisition costs (GBP36,350)
--------------- --------
Refurbishment cost (GBP690,000)
--------------- --------
Sinking fund contribution (GBP7,774)
--------------- --------
Tenant additional funding (GBP155,480)
(12 months' rent)
--------------- --------
Survey, legal and agent (GBP104,098)
fees
--------------- --------
Lease SDLT (GBP14,597)
--------------- --------
Other costs (GBP44,353)
--------------- --------
Total deductions (GBP2,247,652) C
--------------- --------
Estimated Vendor profit GBP456,348 B + C =
D
--------------- --------
Estimated Vendor profit 20% D / C
on cost
--------------- --------
Source: Investment Adviser.
Notes: Actual final costs provided for this portfolio by the
Vendor.
o The fair value at GBP2.78 million as at 31 August 2021
represents the independent valuation undertaken by Knight Frank,
not the purchase price.
-- Home Holdings 4
o Home REIT acquired a portfolio of nine properties for a
combined consideration of GBP5.1 million. The transaction was
structured as a purchase of an existing Vendor SPV (Grolar
Developments SPV 4 Limited).
o The Vendor acquired the original portfolio for GBP3.1
million.
o The Vendor has provided a full cost estimate breakdown as at
the acquisition date as below. This produces an estimated net
profit on cost of 27%, compared to gross profit on cost implied by
Viceroy of 65%.
Home REIT gross purchase GBP5,063,757 A
price
Less SDLT & LR Fees (GBP87,548)
--------------- --------
Home REIT net purchase GBP4,976,209 B
price
--------------- --------
Deductions:
--------------- --------
Vendor original acquisition (GBP3,065,440)
price
--------------- --------
Refurbishment cost* (GBP167,599)
--------------- --------
Sinking fund contribution (GBP207,000)
--------------- --------
Tenant additional funding (GBP68,161)
(12 months' rent)
--------------- --------
Lease SDLT (GBP47,032)
--------------- --------
Other costs (GBP360,469)
--------------- --------
Total deductions (GBP3,915,701) C
--------------- --------
Estimated Vendor profit GBP1,060,508 B + C =
D
--------------- --------
Estimated Vendor profit 27% D / C
on cost
--------------- --------
Source: Investment Adviser.
Notes: *Vendor's estimate at time of acquisition.
o The fair value at GBP5.37 million as at 31 August 2021
represents the independent valuation undertaken by Knight Frank,
not the purchase price.
-- These examples highlight that the Company has not benefited
from the excessive revaluation of purchased properties. The price
paid for acquired assets typically includes SDLT, the combined
refurbishment and sinking fund contribution, additional funding for
the Tenant and the Vendor's profit. The revaluation gain
experienced by the Company, determined by independent valuer Knight
Frank, was GBP42.3 million or 6.4% on average for properties
purchased between IPO and 28 February 2022. For the interim report
as at 28 February 2022, BDO conducted a review in accordance with
International Standard on Review Engagements (UK) 2410, "Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity" ("ISRE (UK) 2410"). The valuations for the
respective period were also subject to extensive challenge and
review from the Company's independent board of directors as well as
other advisers.
-- Whilst these selected transactions have shown good levels of
profitability for some Vendors, Home REIT notes the risks assumed
by the Vendors in providing this service, including in areas such
as potential inflation of construction/refurbishment costs, overall
pricing in the residential market, as well as the time and capital
they commit to their projects. Home REIT has also been provided
with aggregated data from two Vendors that shows example aggregate
net profit on costs of 12% over GBP47 million of sales, and 8% over
GBP43 million of sales respectively, demonstrating the long run
expected profitability for the Vendors. Home REIT has rigorous
controls and processes in place to ensure that the assets it
acquires represent fair value for all stakeholders. As noted above,
a core foundation of the Company's existence is that there is a
role for private capital to help alleviate homelessness in the UK;
by making an appropriate return on their investment in residential
property, Vendors can deliver additional high-quality accommodation
for homeless people at an attractive cost to taxpayers.
-- The Company has prioritised providing high quality housing in
the two years of its life since IPO. As the Company continues to
grow, it is committed to increasing its public disclosure. Enhanced
future disclosures around property transactions will include:
o Reporting total refurb costs experienced annually
o Reporting percentage of the portfolio currently being
refurbished
o Reporting Vendor profit margin over a larger sample of the
portfolio
Background on Viceroy
Viceroy, registered in Delaware, produces articles about listed
companies that are designed to cause their share prices to
fall.
As evidenced in a decision of the South African Financial
Services Tribunal dated 15 November 2022, Viceroy is linked to
Oasis, a Cayman Islands-based hedge fund that takes positions to
profit when share prices fall, through the production of
short-selling reports for companies of Oasis' choice. The decision
goes on to state that Viceroy would be remunerated with 12.5% of
the net profit Oasis made on the relevant short-selling transaction
based on Viceroy's report, plus a retainer. Per the latest
disclosure of net short positions to the FCA, Oasis Investments II
Master Fund Ltd. and a partner of Viceroy held short positions of
2.22% and 0.82% of the Company's shares in issue respectively.
Conclusion
Viceroy's disclaimer states that its Report represents its
"opinions", however, the Board believes that such "opinions" are
either not reasonably held or they represent a misinterpretation of
matters. The Board regrets the material losses that its investors
have suffered as a direct result of the Report's publication.
The Company must ensure all information it publishes into the
public domain is true, accurate, and not misleading. The Company
and its advisors have worked assiduously since the Report's
publication to provide a response that fulfils these market
standards of completeness and transparency. This announcement and
the statements made by the Company in it have been verified under
the supervision of the Company's legal advisers, Stephenson Harwood
LLP.
This is a financial promotion and is not intended to be
investment advice. The content of this announcement, which has been
prepared by and is the sole responsibility of the Company, has been
approved by Alvarium Fund Managers (UK) Limited, which is
authorised and regulated by the Financial Conduct Authority, solely
for the purposes of section 21(2)(b) of the Financial Services and
Markets Act 2000 (as amended).
FOR FURTHER INFORMATION, PLEASE CONTACT:
FTI Consulting (Communications HomeREIT@fticonsulting.com
Adviser) +44 (0)20 3727 1000
Dido Laurimore
Eve Kirmatzis
Ellie Perham-Marchant
Oliver Harrison
The Company's LEI is: 213800A53AOVH3FCGG44.
For more information, please visit the Company's website:
www.homereituk.com
About Home REIT plc
The Company is now providing 11,861 beds, across 2,473
properties spread throughout 135 Local Authorities, to homeless
people in the UK, where the demand for long-term high quality and
affordable homeless accommodation continues to far outweigh the
supply. With over 270,000 people sleeping rough, in homeless
shelters or other temporary housing in Great Britain and in England
a household became homeless every four minutes (only exacerbated by
the cost of living crisis) this is a huge, growing problem in the
UK, which Home REIT is proud to help alleviate. There is also a
focus on training and rehabilitation at the properties by the
Tenants to provide individuals with the skills and confidence to
reintegrate back into society. With the obligation for Local
Authorities to secure accommodation for homeless people from 2018
cross-party legislation, Home REIT's properties offer significant
savings to local authorities of approximately 70 per cent. via
lower rents and better-quality accommodation versus expensive
alternatives e.g. bed & breakfast.
Home REIT plc seeks to contribute to the alleviation of
homelessness in the UK, whilst targeting inflation-protected income
and capital returns, by funding the acquisition and creation of a
diversified portfolio of high-quality accommodation assets across
the UK which are dedicated to providing accommodation to homeless
people. The accommodation assets are let or pre-let on very long
(typically 20 to 30 years) leases, containing inflation-linked or
fixed uplift rent review provisions, to registered charities,
housing associations, community interest companies and other
regulated organisations which have a proven operating track record
in providing low-cost accommodation to homeless people and which
receive exempt housing benefit or comparable support from local or
central government to fund the provision of such accommodation to
homeless people.
There is a critical need for further accommodation for homeless
people in the UK, due to an increasing homeless population and a
lack of available and affordable high-quality, fit-for-purpose
stock to address the problem. Local housing authorities are under a
statutory duty to secure accommodation for individuals who are
unintentionally homeless and in priority need but current
accommodation for homeless people is limited in quantum and often
sub-standard and uneconomical.
The Company focuses on investing in and creating well-located
properties that provide a sustainable level of rent for the Tenant.
Within the homeless accommodation assets, there is a focus on care,
support, training and rehabilitation to provide vulnerable homeless
people with the skills and confidence to find long-term
accommodation and enable them to reintegrate back into society.
Savings are expected to be made to local authorities and other
providers of accommodation to homeless people via lower rents
versus more expensive alternative accommodation.
The Company is listed on the premium segment of the Official
List of the UK Financial Conduct Authority and its Ordinary Shares
were admitted to trading on the main market of the London Stock
Exchange, premium segment, on 12 October 2020.
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