Monthly Update

Home REIT PLC

04 September 2023

 

4 September 2023

Home REIT plc

("HOME" or the "Company")

Monthly Update

The Board and AEW UK Investment Management LLP ("AEW" or the "Investment Manager") have undertaken to provide monthly updates following the approval of the amended investment policy and the formal appointment of AEW as the Company's Investment Manager and AIFM, which was effective on 21 August 2023. AEW is focused on stabilising the property portfolio and financial condition of the Company and seeking to maximise income and capital returns. 

Summary

The Company and AEW highlight the following updates, with further detail on each of these items also provided below.

Portfolio assessment and tenant engagement

·    AEW has now engaged with 100% of the tenants with a focus on understanding their status, the underlying occupancy of leased properties and their ability to meet rental demands with a view to improving rent collection and, where appropriate, re-tenanting assets

·    AEW is continuing to conduct due diligence on all tenants and expects to rationalise tenants during the stabilisation period

·    AEW is engaging with the liquidators of Redemption Project CIC ("Redemption") and Serenity Support CIC ("Serenity"), which were non-performing tenants, to unlock opportunities to re-tenant and carry out other asset management initiatives

·    When completing re-tenanting exercises, there will be a focus on minimising any potential disruption to the underlying occupants and any support services

·    The Company has appointed Vibrant Energy Matters Limited ("Vibrant"), a subsidiary of Connells Limited, to inspect all 2,473 properties in the portfolio, with target completion by mid-November 2023

·    The Company has appointed Jones Lang LaSalle Limited ("JLL") as valuer to undertake valuations of the entire portfolio on the bases of market value and market value on the special assumption of vacant possession as at 31 August 2022, 28 February 2023 and 31 August 2023 with target completion by mid-November following completion of all property inspections.

Financial position and related matters

·    The Board and AEW continue to engage proactively and constructively with HOME's lender through regular meetings and continue to service interest payments in full as they fall due

·    As at 31 August 2023, the Company had cash balances of £13.5m including amounts held on account with the Company's lender and subject to certain restrictions regarding its availability. The Company has £0.8m of unrestricted cash, this low unrestricted cash balance was expected as it is after the quarterly interest payment was made and before proceeds from the sale of properties are received, which are due early September.

·    On 4 August 2023, the Company exchanged contracts on the sale at auction of 40 properties for £4.8m with completion due early September

·    Further sales are expected in the near term as part of the strategy to stabilise the financial position of the Company

·    100 leases of properties in the One (Housing & Support) CIC ("One CIC") portfolio were surrendered, with the Company assuming direct leases with the existing sub-tenant, Mears Limited, to generate £0.9m per annum of rent receipts

Publication of annual and interim reports

·   A key workstream required to publish the outstanding accounts and restore the Company's shares to trading is completion of the property valuations and inspections, a process which is underway

·    Revised accounting policies for lease income recognition and acquisition accounting are being finalised which may also result in restatement of the 2021 accounts

·    The Company does not expect to be in a position to publish its outstanding accounts until late 2023 at the earliest

Shareholder engagement

·  Following its appointment as property adviser, AEW has engaged with a significant proportion of the Company's shareholder register

·    The Company and AEW intend to provide quarterly presentations open to all shareholders from mid-October 2023

·    The Company intends to release monthly updates on the first Monday of each month

Corporate matters including the Board of Directors

·    The Board has initiated a formal and phased succession process

·    An individual with significant listed company expertise is being considered for the role of Senior Independent Director and will lead the succession process

FOR FURTHER INFORMATION, PLEASE CONTACT:

FTI Consulting (Communications Adviser) Dido Laurimore Eve Kirmatzis Ellie Perham-Marchant Oliver Harrison

[e-mail] [phone]

The Company's LEI is: 213800A53AOVH3FCGG44.

For more information, please visit the Company's website: www.homereituk.com

Monthly update - further information

Portfolio assessment and tenant engagement

Assessment of portfolio

Set out below are certain unaudited key portfolio metrics at 31 August 2023.

	31 August 2023
Number of properties	2,473
Number of beds	11,861
Number of tenants	29
Number of leases	2,473
Annual rent roll 1 2	£53.9m
In period:	1st June 2023 to 31 August 2023
Properties exchanged for sale	40
Rent collection 2	£0.9m
% rent collection 2	7%
Number of leases surrendered to the Company	140

¹ Contracted rent as at period end

² Excluding 115 properties under separate management agreements

Geographic Region	Number  of Properties	Number of Properties (%)
North East	813	32.9%
North West	424	17.2%
Yorkshire and the Humber	337	13.6%
East Midlands	277	11.2%
West Midlands	212	8.6%
South West	146	5.9%
London	87	3.5%
East of England	86	3.5%
South East	68	2.7%
Wales	23	0.9%
Total	2,473	100.0%

Top 10 Tenants	Number of Properties	Number of Beds	% of portfolio annual contracted rent
One (Housing & Support) CIC	234	1,200	11.9%
The Big Help Project	382	1,441	11.2%
Redemption Project CIC*	152	960	11.1%
Supportive Home's CIC	209	1,046	11.1%
GEN LIV UK C.I.C.*	107	571	6.5%
Bloom Social Housing CIC	94	645	5.6%
CG Community Council	54	386	5.2%
Dovecot & Princess Drive Community Association	52	396	4.6%
Noble Tree Foundation Limited	143	527	4.6%
LTG Vision CIC	200	646	4.2%
TOTAL	1,627	7,818	76.0%
* In liquidation

JLL was appointed in July 2023 to carry out a valuation of the portfolio as at 31 August 2022, 28 February 2023 and 31 August 2023 on the bases of market value and market value on the special assumption of vacant possession. In addition, Vibrant was appointed in August 2023 to inspect all properties and report on condition (including standards of quality, safety and compliance), occupancy levels, and Countrywide Surveyors Limited, another subsidiary of Connells Limited, has been appointed to provide building surveys on the required repairs and refurbishment to bring the properties to a good condition. Once a property has been inspected, a decision will be made regarding the type of residential use that can be offered.

Inspections require access to be organised through tenants, any relevant property managers, individual occupiers and for vulnerable occupiers the attendance of support providers may be required. The inspection program of 2,473 properties comprising 11,861 beds requires significant co-ordination and communication between relevant parties. The inspection program is targeting mid-November for completion. AEW will provide updates on the valuation process, inspection program and additional key metrics as part of future monthly updates.

Tenant engagement

AEW has engaged with 100% of the tenants as part of its ongoing process to assess each tenant. It is expected that those tenants who are paying rent, providing a good quality service and are able to satisfy due diligence requirements will remain within the portfolio. AEW is aware that some of the current tenants will not be able to satisfy these standards and therefore will be deemed unsuitable and will require replacement over time. AEW will be seeking quality providers with Local Authority support, as well as relationships directly with Local Authorities and/or governmental departments. The removal of lease length and index-linked restrictions and the flexibility to include any form of residential use during the stabilisation period in the amended Investment Policy allows AEW to consider tenants from the private rental sector, and other social housing occupier groups. Stringent covenant analysis and due diligence will be undertaken on all proposed tenants in accordance with AEW's rigorous processes.

Following Redemption and Serenity entering into voluntary liquidation, AEW expects more tenants will enter liquidation.  When a tenant enters into liquidation, the first priority is to work with the appointed liquidator, where possible, to establish the status of the underlying occupiers and put in place a suitable stabilisation partner (e.g. residential property manager or intensive housing manager) to ensure, where applicable, any support services remain in place for the occupiers.  Whilst Redemption and Serenity were non-performing tenants, liquidation provides opportunity for AEW to unlock the ability for the Company to re-tenant the properties or carry out other asset management initiatives.  Discussions with prospective tenants and quality providers remains on-going in respect of properties suitable for occupation.

Financial position and related matters

Portfolio rationalisation

On 4 August 2023, the Company announced it had exchanged on the sale of 40 properties at auction, representing 1.6% of the portfolio by number, for £4.8m. The properties selected for sale had been identified as liquid assets with limited prospects for income and capital return, in part given the level of capital expenditure required to bring them up to specification. The average sale price at 39.4% of purchase price reflected the vacant status of the majority of the properties (73%) and condition of the properties.  The property sales are expected to complete in early September. AEW is undertaking a comprehensive assessment of the remaining portfolio which is expected to vary in terms of overall condition and suitability for occupancy and will provide further detail in future monthly updates.

The previously announced surrender of 100 leases in the One CIC portfolio allows the Company to benefit from immediate rental income of £0.9m per annum. The surrender agreement allows the Company to receive a sustainable income stream from a strong tenant covenant and is expected to generate significantly higher rent collection than has previously been received from One CIC in relation to the properties, despite a lower headline rent (previously £1.2m per annum). The transaction is part of AEW's strategy to stabilise the property portfolio and stabilise the financial position of the Company.

Cash position

As at 31 August 2023, the Company had cash balances of £13.5m including amounts held on account with the Company's lender and subject to certain restrictions regarding its availability. The Company has £0.8m of unrestricted cash, this low unrestricted cash balance was expected as it is after the quarterly interest payment was made and before proceeds from the sale of properties are received, which are due early September. The Company is carefully managing its liquidity with the proceeds from disposals expected to be received early September to provide working capital and repay borrowings. The Company has incurred one-off exceptional expenses which relate to valuation, inspection and professional advisers of £8.2m for the calendar year to date, which is expected to significantly decrease in the subsequent period.   The exceptional costs of £8.2m include £3.0m for valuation and inspections, £2.0m for legal advisers and A&M report, £1.8m for strategic advisers and £1.0m for advisers and additional audit fees in relation to the 2022 annual accounts. The Board continues to review all third-party appointments and manage costs.

Borrowings

The Company has total borrowings of £220m, comprising a £120m interest-only term loan, repayable in 2032, with a fixed all-in rate of 2.07 per cent. per annum, and a £100m interest-only term loan, repayable on 2036, with a fixed all-in rate of 2.53 per cent. per annum. The Board and its advisers continue to work proactively and constructively with HOME's lender and the Company has continued to service interest payments in full as they fall due.

Rent collection

For the quarter period ending 31 August 2023, the Company has demanded £13.2m of rent, excluding amounts due in respect of 115 properties under separate management agreements, of which 7% has currently been collected.  AEW is continuing to assess tenants' ability to meet rental demands with a view to improving rent collection.

Publication of the annual and interim reports

The appointment of JLL as the Company's valuer and Vibrant and Countrywide to provide condition reports and quantification of capital expenditure required to bring properties up to specification are key steps towards obtaining independent valuations as at August 2022, February 2023 and August 2023.

The Board and AEW have determined that revised accounting policies for revenue recognition (lease) and acquisition accounting are required in order to better reflect the substance of historical acquisitions and lease arrangements.  These revised policies are being presented to the Company's auditor BDO LLP ("BDO") and are being finalised, which may also result in restatement of 2021 accounts.

With inspections not scheduled to complete until mid-November and the revised accounting policies being applied back to inception, the Board currently anticipates publication of the outstanding accounts by the end of 2023 at the earliest.  The Company has communicated this timeline to the FCA and is also in contact with Companies House about the Company's filing obligations. As previously announced, BDO as auditor of HOME is conducting an enhanced audit; the Board and AEW will continue to work with BDO to publish the results and progress to restore trading in the Company's ordinary shares as soon as is practically possible.

Shareholder engagement

Following its appointment as property adviser, AEW has engaged with a significant proportion of the Company's shareholder register.

The Company intends to release monthly updates on the first Monday of each month.  Future reports will focus on key activity and developments in the month.

AEW, in order to engage further with retail investors and other stakeholders, intends to provide quarterly presentations open to all shareholders from mid-October 2023. Further details will be provided in the next monthly report.

Corporate matters including the Board of Directors

Board succession planning

The Board has worked tirelessly to address the issues facing the Company and continues to do so. Following the appointment of AEW and the commencement of the stabilisation period, as well as consultation with major shareholders, the Board has initiated a formal and phased succession process. An individual with significant listed company expertise is being considered for the role of Senior Independent Director. This individual would be expected to join the Board in the coming weeks and to lead the succession process. It is expected that the majority of the current Board will have departed at or around the point of restoration of trading in the Company's shares, and that the Board will transition entirely within 12 months, allowing a period of handover. In assembling the new Board, careful consideration will be given to the appropriate skills, experience, knowledge, culture, capacity and independence of the incoming Board members. Further announcements will be made in due course.

Other matters

The Board is aware that certain shareholders wish to receive further details of the Alvarez & Marsal Disputes and Investigations, LLP report (the "A&M Report").  The Company has reserved all of its rights in respect of the matters referred to in the A&M Report and cannot comment further at this stage in respect of any potential claims, as to do so may prejudice the Company's position in any potential proceedings. Any relevant announcements in this regard would be made to the market at the appropriate time.

 

END