This article reflects the opinions of its author and not necessarily those of ShareSoc.
Initial Period
Home REIT (HOME) appeared to offer rather an attractive proposition. It was intended to purchase residential properties and lease them at affordable rents to charities and public bodies (“the tenants”) providing accommodation for the homeless. The rent was supposed to be covered by housing benefits paid directly to the tenants, i.e. fully government backed. Rental income was expected to be sufficient to support a dividend of at least 5.5% of the shares’ issue price.
So, a REIT with an admirable social purpose and offering attractive shareholder returns, to boot. What’s not to like? I duly invested at the company’s IPO in October 2020 at 100p.
I was rather pleased with the progress that the company appeared to be making. It deployed its IPO proceeds of £240m rapidly and the market approved, with the shares swiftly moving to a strong premium to NAV. Dividends were paid, in line with expectations. Less than a year after launch, the company came back to the market to raise a second tranche of funds, to finance further acquisitions from its “significant pipeline of investment opportunities”. It raised a further £350m, at 109p, a premium to NAV. I participated in that fund raise, given the apparently good performance to date.
By January 2022, the company announced that it had fully deployed all the funds raised and it came back to the market in May, raising a further £263m at 115p. So far, so good: published results were in line with expectations, with solid asset valuations, good rental income being paid and dividends meeting the company’s target.
All appeared well until September, when the share price declined, alongside many other REITs, as interest rates rose. I took advantage and added to my shareholding. The shares continued declining and I added again on 17th November.
Short Report
Then, on 23rd November came a bombshell: a short report published by Viceroy Research, which made serious allegations against the company. Key allegations, from the investor perspective, were that property valuations were overstated and future income was at risk.
The company published a brief rebuttal (promising a full rebuttal ASAP). Nevertheless, the shares fell by 25% from my last purchase price, to 57.7p that day, vs a last published NAV/share of 111.2p. Whilst it was conceivable to me that there might have been some overstatement of property values, I found it hard to believe that the overstatement could be that large. That was taking into account that net debt was relatively modest, and so falls in property valuations would not be significantly amplified in NAV reductions as a result of gearing (considering the impact of the fundraise earlier in the year and subsequent announced deployments).
Another factor that made me somewhat sceptical of the short report were the controls that should have prevented the alleged wrongdoing from occurring:
- A respectable board, well experienced in the property sector.
- Independent property valuations conducted by leading estate agency/property consultancy, Knight Frank.
- Auditors BDO.
Could all of these have missed major problems with management of the REIT and valuation of its properties?
I therefore decided to add to my holding at what appeared to be a bargain price.
I was not alone: major shareholder M&G Group increased its shareholding from 9.8% in September to 13.2% by 17th November and then up to 15.4% after the short report was published.
Annual results
Annual results for Home REIT, for the year to 31st August, were due on 27th November. On 25th November the company announced that those results would be delayed, as the firm’s auditors needed to carry out “enhanced audit procedures” in the light of the allegations.
BDO would not want to be on the hook for a defective audit, if the allegations subsequently proved to be correct!
Rebuttal
On 30th November, the company published a full rebuttal. In that announcement, investors were invited to join a webinar later that day. I duly applied to join the webinar and was informed, initially, that it was open to institutional investors only. This is wholly unsatisfactory and not conformant with FRC guidelines for engagement with investors (principle 7, p12), which ShareSoc had helped to develop. I pointed this out and the company’s representatives relented and agreed to open the webinar to individual investors as well as institutions.
The rebuttal and webinar left some worrying issues. In particular, whether Home REIT had overpaid for property portfolios acquired, generating excessive profits for the vendors of those portfolios. David Stevenson wrote an excellent article about these issues more broadly in the infrastructure fund space.
It was disconcerting when the company revealed that the sums paid to developers often included the first year’s rental on the property, which was passed on to the tenant, meaning that the tenant didn’t have to obtain any income to cover the first year’s rental payments. That does raise doubts about rental payments beyond the first year.
Action
On 7th December, it was reported in the press that law firm Harcus Parker proposed to take action against Home REIT on behalf of shareholders. ShareSoc engaged with Harcus Parker. In principle, we would support a claim to obtain redress for shareholders and provide some sanction for those responsible for any failings at Home REIT. However, ShareSoc is concerned that any claim should not be met from Home REIT funds, which would harm then current shareholders, but should instead be directed at Home REIT’s manager, Alvarium. We are still seeking comfort on that before wholeheartedly endorsing a claim. We continue to engage with Harcus Parker on this issue.
As a shareholder myself, this development did cause me great concern: should a successful claim be made against the company, that could impact the NAV significantly, I therefore decided at that point to sell most of my holding in Home REIT, at a price of ~50p, crystallising a loss. I retain a small token holding for monitoring purposes.
Until Harcus Parker are able to provide the comfort we are seeking, I feel it would be unethical, given my role at ShareSoc, to join their claim. If they are able to give that comfort, however, I would be keen to do so.
Mixed Bag
Home REIT’s announcement on 12 December was rather a mixed bag, for shareholders.
On the plus side, the expected dividend for the quarter ending 31st August was declared. In addition, the investment manager would deploy additional resources into management of the property portfolio and reimburse costs that the company had incurred as a result of the short report.
On the minus side, the “enhanced audit procedures” may delay publication of the annual results until 31st January 2023. If the accounts were not published by 31st December (four months after the year-end), the company’s listing would be suspended, as required by the premium listing rules.
In the absence of published accounts, the shares were duly suspended on 3rd January, at a suspension price of ~38p.
Alvarium Divestment
Whilst all these events unfolded, the parent company of Home REIT’s investment manager, Alvarium, was undergoing its own restructuring. In late 2022, it merged with another firm and sought a SPAC combination to effect a NASDAQ listing. This duly completed on 4th January.
That same day Home REIT announced that an MBO had taken place of the entity that managed the company’s portfolio. This made me suspicious that it was an attempt to shield the newly listed parent from any liabilities of that entity. ShareSoc has subsequently learnt that such a manoeuvre was unlikely to be effective in law, which is pleasing.
Rent Arrears
On 12th January the company announced that two of its major tenants had ceased rent payments. Another announcement on 25th January revealed a further deterioration of rent collection.
Despite previous rebuttals, it appeared increasingly that there was substance to Viceroy’s short report.
Criminal Investigation!
On 27th January, City A.M. reported that a criminal investigation had been launched:
The National Crime Agency is scrutinising property deals involving beleaguered social housing investor Home REIT, City A.M. has learned.
A number of documents have been handed over to the National Crime Agency, and City A.M. understands the agency is considering passing them on to the Financial Conduct Authority (FCA) and the National Investigation Service (NATIS), which investigates serious organised crime relating to the public sector.
City A.M. can also reveal that London-listed Home REIT, which invests in housing for the homeless, has also begun an internal investigation into payments made to a previously undisclosed third party as part of deals where the Home REIT appears to have significantly overpaid for rundown housing stock.
These allegations correspond to some of those made in the short report.
Substandard Homes and More Arrears
At the point of purchase by Home REIT, the acquired properties were supposed to have been fully refurbished and ready for occupation.
On the 7th February, The Guardian reported that a number of Home REIT’s properties were not fit for habitation, again in accordance with previous allegations in the short report.
On 16th February, the company admitted that 25% of a sample of 67% of its properties required at least some level of refurbishment. Further, that only 23% of rent due for the quarter ended November 2022 had been collected.
The announcement also disclosed that the company had received an offer from Bluestar Group Limited. It appears that this entity is connected to Alvarium.
Will a lowball offer now be forthcoming?
Conclusions and Further Action
This chain of events is very disturbing (to say the least!), both for investors and for the vulnerable individuals Home REIT was supposed to be helping. How is it that all these issues went undetected for so long?
I met with the AIC (Association of Investment Companies) last week, as they and ShareSoc are concerned about the damage these events might do to confidence in companies investing in alternative assets generally (as highlighted in the article by David Stevenson referred to above). I was pleased to hear that they hold regular forums with directors of investment companies, to raise awareness of matters that those directors should be attending to.
It seems to me that directors of companies investing in such assets (as opposed to companies investing in liquid securities that can easily be valued) need to do more work to ensure that a) assets are acquired at fair prices; b) users of those assets have sufficient financial and other resources to pay to use the assets for the agreed term (where applicable); c) NAV is calculated prudently.
In those cases, directors, independent valuers and auditors need to be remunerated sufficiently such that they can reasonably be expected to do a sufficiently thorough job to protect shareholder and other stakeholder interests. And directors need to ensure that audits and inspections are sufficiently thorough.
ShareSoc will continue to monitor this situation carefully and will engage, as it sees fit, to seek remedies and, where necessary, to recommend measures that may help prevent future similar cases.
Mark Bentley, Director, ShareSoc
DISCLOSURE: The author holds shares in Home REIT
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