Home REIT Proposes Investment Policy Overhaul As Rent Collection Falls To 7%

In a stock exchange notice published today (28 July), the board advised shareholders that if they do not approve the proposal, the recent appointment of AEW as AIFM and investment manager will not take effect.

The board also revealed rent collection for the period from 1 May to 30 June has fallen to just 7%, which it believes can be remedied by policy overhaul.

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Of immediate priority for the board is the introduction of a stabilisation period to "maximise the income and capital returns" from the trust's current portfolio.

If approved, the period would be in effect from 22 August 2023 to 22 August 2025, or a later date approved by the board, but no later than 22 August 2026.

During this period, Home REIT would undertake a programme of re-tenanting and a "rationalisation of the portfolio" in order to stabilise its financial condition.

Such a change would alter the investment policy of the trust, allowing the managers to invest in "residential accommodation assets having any form of residential use", shifting the focus away from the alleviation of homelessness in the UK, as per the current investment objective.

Following this period, the company will enter a post-stabilisation period, which will see the investment policy change again, provided the trust satisfies six factors: the portfolio is capable of being operated according to the post-stabilisation period investment policy; rent collection has stabilised; dividend payments have recommenced; the annual and interim reports and accounts have been published; trading of shares has resumed; the sale of non-core assets has completed; and the trust is able to raise equity or debt finance.

If these factors are not met by 2025, the stabilisation period can be extended by up to one further year.

Investment policy overhaul

Following this period, the company policy will shift again, requiring the managers to invest in "residential accommodation having any social use but which are predominantly homeless accommodation assets".

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Social use is defined as real estate used to house vulnerable individuals, including but not limited to those in the following circumstances: homelessness, ex-service men and women, individuals fleeing domestic abuse, vulnerable women, people leaving prison, asylum seekers and refugees, foster care leavers, substance misuse, care leavers, mental illness, disability, specialist supported living and general needs social housing.

As such, the company may expand its pool of tenants, including to organisations appointed by the Home Office.

Lease alterations

In the post-stabilisation period, the investment policy will alter the leasing model of the trust, which currently requires leases in excess of 20 years.

According to the new policy, the lease length will be determined by the rent, nature of the accommodation, nature of the tenant and the needs of residents and the relevant local authority.

The rent review mechanism will shift from its current inflation-linked or fixed uplift model and will vary according to the nature of the accommodation, tenant and any requirements of the relevant local authority.

The trust will also expand its requirement to repair and maintain the property beyond the current triple net, full repairing and insuring leases, to include a provision for a service charge to cover repairs and maintenance, except where repairs and maintenance will be the responsibility of Home REIT.

Third-party specialists will now be required to ensure the quality, safety and compliance of Home REIT properties.

Restrictions

Home REIT will still be able to invest in fixed-price forward funded developments on the provision they are pre-let to an "acceptable tenant" and hold full planning permission, but all cost overruns will be the contractual responsibility of the developer or contractor. Any delay to the completion of works will be a risk for the developer or contractor, which will pay Home REIT interest or rent until practical completion occurs.

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The trust will not invest in other investment funds but can utilise derivatives for efficient portfolio management.

There will be a variety of concentration restrictions affecting the stabilisation and post-stabilisation period of the trust, including no single property comprising more than 5% of the trust's gross asset value and no one tenant representing an aggregate maximum exposure in excess of 30% of the trust's gross asset value.

Continued annual report delay

Home REIT has appointed Jones Lang LaSalle as its new property valuer, along with a third party to complete inspections of each property in its portfolio.

The inspection and valuation process is expected to take "a number of months" and, as such, the trust does not expect to be able to publish its audited results for the period to 31 August 2022 until "late 2023 at the earliest".

The company has not offered a timeline on the publication of its half-yearly report to 28 February 2023.

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