Homelessness is an emotive subject, perhaps never more so than in the Christmas period, when charities go into campaign overdrive to transform festive goodwill or guilt into the funds they need to operate throughout the year. Equally emotive was US short seller Viceroy Research’s recent report on the UK investment company Home Reit, peppered with words such as ‘vultures’, ‘shenanigans’ and ‘bad actors’.
Since the report was published, shares in Home – which was set up in October 2020 to fund ‘the acquisition and creation of high-quality accommodation for homeless people’ – have fallen by around 35% to just over 50p, adding to an already precipitous drop from over £1 following September’s mini-Budget, down 50% from 21 September to 6 December 2022. The shares now stand at a discount to NAV of more than 56%.
Home’s objectives are laudable – to bring private capital to work in addressing a serious social problem, while rewarding investors with ‘superior inflation protected income and capital returns’ – and it certainly seemed to have tapped into investor appetite for investments with a purpose. It raised £240m at its IPO, and two further capital raises – both of which were oversubscribed – added another £513m of equity.
It also has £250m of long-term fixed-rate debt, with a weighted average all-in cost of 2.3% pa. It became a FTSE 250 company in July 2022 and its shares traded consistently at a premium to NAV. As well as rewarding investors with an 8.9% NAV total return in its first financial year (to 31 August 2021) and a further 7.9% in H122 (to 28 February), it also enabled the provision of more than 11,000 beds and associated support services for homeless people in vulnerable groups such as veterans, domestic abuse survivors and care leavers.
Viceroy’s attack was an unpleasant surprise to investors already grappling with the prospect of higher bond yields and the threat of recession, both of which have fed into a widespread sell-off in the listed real estate sector in recent months. While the report featured several lines of questioning – from the fitness, propriety and financial strength of the charities actually delivering the services, to Home’s manager Alvarium’s incentivisation from an NAV-based fee, via ostensibly high levels of rent arrears, sharp accounting practices and poor cash conversion – the central allegation was that Home had vastly inflated the value of its assets by engaging in obfuscation around acquisitions and refurbishment costs.
Home’s board issued a rebuttal to certain of Viceroy’s points – particularly those where a misunderstanding of UK Land Registry practices and the nature of exempt housing benefit had led the short seller to form erroneous conclusions – yet the market has so far seemed unconvinced by the case for the defence, and the share price remains largely at the level to which it fell in the immediate aftermath of the report.
Indeed, a second activist investor – and one associated with a long rather than a short position, which makes its motivation somewhat different from Viceroy’s – has weighed in to the debate, causing a further circa 5% fall in the share price at the start of this week. The Boatman Capital Research published an open letter stating its own estimates put the value of a typical Home property at between 39% and 51% below balance sheet valuations, as well as echoing many of Viceroy’s concerns over accounting policies, lease incentives, and the viability, experience and credibility of the tenants.
It is certainly beginning to look like more than a short-selling Scrooge sticking the boot in to the homeless at Christmas, and perhaps raises a broader question of whether return-seeking private capital is really compatible with the provision of services to the vulnerable at all. There are echoes of a similar short attack in mid-2021 on Civitas Social Housing (CSH), a provider of specialist supported social housing to adults with long-term mental or physical healthcare needs, whose share price had yet to recover before the wider real estate sell-off sparked another leg down in September this year.
Both Home and CSH (as well as its competitor Triple Point Social Housing [Soho]) provide (ultimately) government-funded accommodation at far lower cost than the alternatives – for Home, B&Bs and hostels, and for CSH and Soho, institutions and ‘bed blocking’ in hospitals. But given the central criticism that they are overpaying for assets, and that developers (which may or may not be parties related to the investment manager) are making excessive profits, could this not be achieved more cheaply still?
Home’s rebuttal of Viceroy’s short report states that developers in the examples used by Viceroy had made profit margins of between 18% and 42% (averaging 29.5%) on the sale of properties to the trust; The Boatman Capital points out in its letter that “the obvious corollary of this is that Home Reit shareholders have paid someone 18–42% above the potential cost had the company purchased the properties itself and managed any associated development or refurbishment”.
One of the reasons that the real estate sector is currently trading at such a wide discount to NAV is that the share prices of the trusts tend to anticipate changes in the value of underlying properties, which are only updated at the company’s half-year and year-end. Thus it may be argued that the current 39.5% average discount to NAV of the AIC’s Property – UK Residential sector (home to Home, CSH and Soho) already factors in the kind of valuation downgrades suggested by The Boatman Capital. Home’s latest published NAV per share is 111.2p per share; this dates back to 28 February given the final results (due in late November) were delayed following the short attack. If we deflate this by The Boatman Capital’s 39-51% estimate of property overvaluation, we see an NAV range of 54.5p-67.8p, which at the current share price of around 50p still equates to a discount of between 8.3% and 26.3%.
A brave investor might consider this an attractive entry point – indeed, one large institution topped up its holding in Home shares after the Viceroy report and now owns more than 15%. But the lack of transparency—a charge also levelled at others in the sector—that has now been highlighted by those with long as well as short positions may mean many will see Home as uninvestable for now, however worthwhile its aims.