Never stand between a gun and its target, as Van Cleef tells me in the 1967 Spaghetti Western day of rage. His advice sums up why FT Alphaville has so far been avoiding any mention of it Home Rhett, a UK-listed sheltered housing provider, and its battle with activist short sellers. But the noise of gunfire is becoming increasingly difficult to ignore.
On Wednesday, Home Reit delivered A very lengthy refutation Post a short sale note Since a week by Viceroy Research. Viceroy has already responded in usually in an aggressive manner with many repeating its original claims.
The main allegations are that Home Reit’s customer base is low-quality homelessness charities with too many overlaps; Straight-line accounting means that revenue is booked up front on long-term leases and charged back; And those relationships with independent appraisers and asset buyers seem distant.
Much of the controversy stems from the application of the traditional property management model to charities and community companies, where strong accounting practices cannot be assumed to persist.
Home Reit argues that its rental listing is state-subsidized and inflation-linked, which means it can offer multi-tenancy leases with rent-free periods and finance fit-out costs. Long-term leases also create a portfolio that can be valued by yield rather than market price. Critics object that the model amounts to a temptation for investors and sway the chair, Lin Fannh, to point it out.
After confirming that its rent listing through August 2022 has been paid in full, Home Reit profiles each of its tenants individually to explain why it is justified in trusting them. Clients sharing offices, services and staff are not a red flag within a small, underfunded sector, she says. No increase in rent dues has been highlighted by Viceroy, as it is a growing business and new tenants are not invoiced for up to three months.
However, Home Reit’s nearly 13,000-word response has some holes. More pressingly, there isn’t a lot of clarity around the ring housing’s anchor tenant, which entered administration earlier this year.
For Viceroy, Circle’s entry into administration shows Home Reit’s customer base is fragile, and state support illusory. Home Reit says the opposite, because in November the leases were transferred to another operator, one CICwith the same lease terms.
One missing piece relates to social housing group Mears, which leased the department’s portfolio for ten years. Home Reit says the conversion required a bribe from an unidentified real estate developer to Circle “to cover the difference over the lease term between the cost of the principal lease to Home Reit and the cost of sublease to Mears.” The unanswered question is why, as Peel Hunt analysts highlight:
While these leases (and the donation) have since been transferred to One CIC, it is not clear why the difference in rent exists, whether this affects the valuation of those assets, and what happens at the end of the Mears sublease. Noble Tree, another tenant, also sublets to Merz, and it’s not clear if similar issues exist here.
The Peel Hunt team is unconvinced by Home Reit’s rebuttal about its apparent conflicts of interest, particularly when charities’ directors are involved in property development, and question the company’s choice of rent affordability measures. (“We note that the bed price per week that Home Reit charges for renovated homes appears to be about 35 percent higher than the price they charge PRS RET for new construction properties. “)
But it mostly comes down to who pays for what. Home Reit explains that during the ramp-up phase of a property, the developer “usually provides company tenants with additional financing, typically twelve months’ rent.”
This interpretation matches chipsets from September 2022 onwards HomeRate websitesaying: “As part of every transaction, we ensure that the developer capitalizes the charity with at least a year’s rent cap and a contribution to a sinking fund.”
When vendor financing becomes a circular rent, it’s a matter of perspective. Back to Bill Hunt:
If this cost [of the sinking fund] Reflected in the purchase price paid by the home, is there a risk that shareholders have overpaid for the property, so that capital can be deployed quickly, and would that have been necessary had the house grown at a measured pace?
Another claim in Viceroy’s report is that properties quickly flip between tenants for a handsome profit. Home Reit warns against directly comparing sales prices, going into great detail about the hidden costs involved. However, the seller’s base profit margins in the examples cited—18 percent, 42 percent, 37 percent, 33 percent, 20 percent, and 27 percent—are not insignificant.
“Because the developments are largely risk free (pre-leased and pre-sold) and the developer requires minimal capital (provided by Home Reit), these margins still seem generous to us,” says Peel Hunt.
The appearance of an active short seller in any investment situation always stirs up drama. In the case of Home Reit, it paid delayed results so that its auditor can give the books a very hard fragmentation.
Although that all resolves for the Home Reit, broader questions about funding housing schemes for the homeless — in particular, whether a state-supported intermediate landlord needs to exist at all — are likely to find an answer through further parliamentary inquiry. them through a gunfight between long clothes and shorts.
As Bill Hunt says:
At the most basic level, there is a mismatch between the lease terms between the house and the tenants, and the income the tenant receives to finance those leases. In addition, there remains concern that many of the tenants are small entities, with potential conflicts of interest, and potentially high profit margins for developers. . .
While the investment opportunity is characterized by long-term leases (20-30 years), with inflation-linked rents (maximum 4 percent and 1 percent or containing fixed increments), and rental payments indirectly financed by local or central government We see reason for investors to continue to worry about the risk profile of such strategies, and we’re not surprised to see the share price show continued weakness.