Home Reit Regulatory News (HOME)

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THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

FOR IMMEDIATE RELEASE

28 July 2023

Home REIT plc

("Home REIT" or the "Company")

Notice of General Meeting to consider changes to the Investment Policy and additional corporate updates

The Company announces that it has today published a circular (the "Circular") containing details of proposed amendments to the Company's investment policy and notice of a general meeting to be held at the offices of FTI Consulting at 200 Aldersgate Street, London EC1A 4HD on 21 August 2023 at 9.00 a.m. Details of the proposals, which have been extracted from the Circular without material amendment, are set out below.

On 23 May 2023, the Company announced that, following a competitive process, it has entered into an agreement with AEW UK Investment Management LLP ("AEW") pursuant to the terms of which AEW has been appointed to provide property advisory services to the Company. In addition, AEW will be appointed as the Company's Investment Manager and AIFM, subject to the approval by Shareholders of the proposed changes to the Company's existing investment policy and Alvarium Fund Managers (UK) Limited ceasing to act as AIFM. The FCA has approved AEW's appointment as AIFM.

AEW is now taking steps to assess and stabilise the property portfolio and the financial condition of the Company and will seek to maximise income and capital returns. AEW's immediate priorities will be a detailed assessment of the existing portfolio and tenant engagement, with a focus on understanding any tenant issues with properties, the identification of underlying occupancy of leased properties and an assessment of tenants' abilities to meet rental payments with a view to improving rent collection and maximising Shareholder value. This process will require a period of stabilisation, but it is the ultimate belief of the Board and AEW that the Company can deliver a sustainable business model whilst retaining the longer-term social objective of helping to alleviate homelessness in the UK. A key first step in this process is to make changes to the Company's investment policy.

Following consideration with AEW and the Company's financial adviser, Smith Square Partners LLP, and following consultation with key Shareholders, the Board believes it is in the Company's, Shareholders' and stakeholders' best interests to commence urgently this process of amending the Company's investment policy.

Material changes to the investment policy require the approval of Shareholders by ordinary resolution at a general meeting. The Directors are therefore convening a general meeting to seek the approval of Shareholders for the proposed changes.

The Resolution that will be put to Shareholders at the General Meeting is to approve the proposed changes to the Company's investment policy (the "New Investment Policy") (the "Proposal"). For the reasons set out in detail below, the Directors of the Company are recommending that Shareholders vote in favour of the Resolution at the General Meeting.

Additional corporate updates

For the period 1 May to 30 June, the Company has demanded £8.77m of rent, of which 7% has currently been collected. As noted above and in the Circular, the proposed changes to the Investment Policy are required to enable AEW to take steps to assess and stabilise the property portfolio and improve rent collection through extensive tenant engagement and asset management initiatives.

The Company is pleased to announce that it has appointed Jones Lang LaSalle Limited ("JLL") as its new property valuer. In addition, the Company has appointed a third party to complete inspections of each of the properties in the Company's portfolio, a process which has now commenced. This is a key step towards the completion of the annual and interim accounts and the subsequent restoration of trading in the Company's shares. The inspection and valuation process is expected to take a number of months given the number of properties in the Company's portfolio and, accordingly, the Company does not expect to publish its audited results for the period to 31 August 2022 until late 2023 at the earliest.

Further updates on corporate development will be made as part of AEW's commitment to provide monthly updates on progress against priorities and matters affecting the portfolio, as outlined in the Circular.

Summary of the key changes to the investment policy

Following consultation with major Shareholders, the Directors are proposing the following key changes to the investment policy. A full mark-up of the proposed changes is set out in the Circular.

The Listing Rules require any proposed material changes to the Company's published investment policy to be submitted to the FCA for prior approval and the FCA has approved the proposed New Investment Policy. The Listing Rules also require Shareholder approval prior to any material changes being made to the Company's published investment policy; this approval will be sought at the General Meeting. Any future material changes to the New Investment Policy will also require the prior approval of the FCA and Shareholders.

The New Investment Policy contemplates a period of stabilisation and thereafter a longer-term policy. The key changes are as follows:

(i) The introduction of a stabilisation period

Pursuant to the New Investment Policy, the immediate priority of the Company will be stabilising the Company's financial condition through initiatives to maximise the income and capital returns from the Company's existing property portfolio. This will be referred to as the "Stabilisation Period" and will be in place from 22 August 2023 (the "Effective Date") until the second anniversary of the Effective Date, or such later date (not being later than the third anniversary of the Effective Date) approved by the Board.

During the Stabilisation Period, the Company is expecting to undertake a programme of re-tenanting and rationalisation of the portfolio to stabilise the Company's financial condition and satisfy the objective to maximise income and capital returns.

In deciding whether to extend the Stabilisation Period for up to an additional year, the Board will have regard to a number of factors including if: (i) the portfolio is capable of being operated according to the Post-Stabilisation Period investment policy; (ii) rent collection has stabilised; (iii) the Company has recommenced dividend payments; (iv) the Company's annual and interim reports and accounts are being approved and published in accordance with its regulatory obligations; (v) trading of the Company's shares has resumed; (vi) the sale of any non-core assets has completed; and (vii) the Company is in a position to raise equity or debt finance.

(ii) Amendment to lease approach

In conjunction with the above, amendments are proposed to the Investment Policy, to enable the Company to operate a leasing model which is better aligned to the needs of Local Authorities, Charities, Registered Providers and Housing Associations and the needs of the underlying occupants of the properties. The table below summarises the changes in the leasing models:

Although this will reduce long-term inflation-linked income for the Company, on a purely contractual basis, the Board and AEW consider that the changes will better align the interests of Local Authorities, Charities, Registered Providers, the Company and the underlying occupants to provide a more sustainable long-term model to address homelessness and other social issues, and ultimately is expected to provide Shareholders with greater income security in the future.

(iii) Diversifying the permitted uses of properties

The Company remains committed to contributing responsibly to alleviating homelessness in the UK. However, with the issues faced by the Company and the need to stabilise matters, the Investment Manager does not wish to be constrained during the Stabilisation Period and accordingly requires the flexibility to include any form of residential use. During the Post-Stabilisation Period, the Company shall invest in residential accommodation assets having any Social Use but which are predominantly homeless accommodation assets. By adopting a definition of Social Use real estate, the Company expects to benefit from the full extent of demand for specialist residential accommodation, align its provision of real estate with underlying needs of tenants and occupiers and underpin relationships with high-quality operators. Where it can be done responsibly, the Company may consider letting properties to organisations appointed by the Home Office to provide housing and support services to asylum seekers.

By allowing greater diversification of permitted uses, the Company expects to significantly enhance its ability to generate sustainable cash flows and meet its on-going liabilities.

(iv) Appointment of third party specialists

To ensure properties meet the required standards of quality, safety and compliance, the Company will (where required) appoint specialist third-party service providers for the delivery of repairs, refurbishment, building maintenance and health and safety. Although there will be an additional cost for such services, it will ultimately allow for the income from properties to be improved.

The new investment objective and policy

Upon approval of the Proposal, the Company will adopt the following investment objective and policy.

Investment objective

During the period beginning on 22 August 2023 (the "Effective Date") and ending on the second anniversary of the Effective Date, or such later date (not being later than the third anniversary of the Effective Date) approved by the Board (the "Stabilisation Period"), the Company will have the objective of stabilising the Group's financial condition through initiatives to maximise income and capital returns by investing in a portfolio of UK residential real estate.

After the expiry of the Stabilisation Period (the "Post-Stabilisation Period"), the Company will have the objective of providing income and capital returns by investing in a portfolio of UK residential real estate having any Social Use, but which are predominantly homeless accommodation assets.

Investment policy

The Company will invest in a diversified portfolio of residential accommodation assets.

During the Stabilisation Period, the Company shall invest in residential accommodation assets having any form of residential use. Whilst the Company will have regard to the Post-Stabilisation Period investment policy, it does not want its investment manager to be constrained during the Stabilisation Period and accordingly wants the flexibility for its portfolio to include assets having any form of residential use.

During the Post-Stabilisation Period, the Company shall invest in residential accommodation assets having any Social Use but which are predominantly homeless accommodation assets.

"Social Use" means real estate used to house vulnerable individuals, including but not limited to those affected by any of 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.

The Company will invest in assets directly or through holdings in special purpose vehicles and will seek to acquire good-quality properties, taking into account the following key investment considerations:

• the properties will provide good-quality accommodation;

• each property should demonstrate strong residual land value characteristics;

• lease lengths will vary depending on rent, the nature of the accommodation, the nature of the tenant, the needs of residents and the relevant local authority;

• there will be a combination of 'triple net, full repairing and insuring leases', leases that include a provision for a service charge that covers repairs and maintenance and direct let assets, where repairs will be the responsibility of the landlord; and

• rent review mechanisms will vary depending on the nature of the accommodation, the nature of the tenant and the requirements of any relevant local authority. 

The Company will look to appoint specialist third-party service providers for the delivery of repairs, refurbishment, fire safety and building maintenance services where required. Through professionally managed relationships and contracts the Company will look to drive cost efficiency while maintaining high standards of quality and safety.

The Company will neither undertake any direct development activity nor assume direct development risk. However, the Company may invest in fixed-price forward funded developments, provided they are pre-let to an acceptable tenant and full planning permission is in place.

Where the Company invests in forward funded developments:

• the Company will not acquire the land until full planning consent and tenant pre-lets are in place;

• the Company will pay a fixed price for the forward funded purchase, covering land, construction cost and developer's profit;

• all cost overruns will be the contractual responsibility of the developer/contractor; and

• if there is a delay to completion of the works, this will primarily be a risk for the developer/contractor, as they will pay the Company interest/rent until practical completion occurs.

The Company may utilise derivative instruments for efficient portfolio management. The Company may engage in full or partial interest rate hedging or otherwise seek to mitigate the risk of interest rate increases as part of the Company's portfolio management.

The Company will not invest in other investment funds.

 Investment restrictions

The Company will invest and manage its assets with the objective of spreading risk. In order to achieve a portfolio that is diversified by property, tenant and location, the Company will be subject to the following investment restrictions: 

• during both the Stabilisation Period and the Post-Stabilisation Period, the value of no single property, at the time of acquisition, will represent more than 5 per cent. of the higher of: (i) Gross Asset Value; or (ii) where the Company is not fully geared, Gross Asset Value adjusted on the assumption that the Company's property portfolio is geared at 35 per cent. loan to value;

• during the Post-Stabilisation Period, the aggregate maximum exposure to any one tenant will not be greater than 15 per cent. of the higher of: (i) Gross Asset Value; or (ii) where the Company is not fully geared, Gross Asset Value adjusted on the assumption that the Company's property portfolio is geared at 35 per cent. loan to value;

• during the Stabilisation Period, the aggregate maximum exposure to any one tenant will not be greater than 30 per cent. (the "Percentage Cap") of the higher of: (i) Gross Asset Value; or (ii) where the Company is not fully geared, Gross Asset Value adjusted on the assumption that the Company's property portfolio is geared at 35 per cent. loan to value; other than in exceptional circumstances where, with the consent of the Board, the Percentage Cap may be increased from 30 per cent. to 50 per cent. in respect of one tenant only (the "Relevant Tenant") for a period of no more than 18 months (the "Relevant Period"). The Relevant Period shall begin on the day that the Percentage Cap is increased above 30 per cent. for the Relevant Tenant and shall expire after 18 months or, if earlier, the first day following the start of the Relevant Period on which the aggregate maximum exposure to the Relevant Tenant is equal to or less than 30 per cent. of the higher of: (i) Gross Asset Value; or (ii) where the Company is not fully geared, Gross Asset Value adjusted on the assumption that the Company's property portfolio is geared at 35 per cent. loan to value. On expiry of the Relevant Period, the Percentage Cap shall return to 30 per cent. for the Relevant Tenant and the aggregate exposure to such tenant shall be reduced in accordance therewith. For the purpose of this investment restriction, "exceptional circumstances" shall mean circumstances where the Company's investment manager considers it necessary to take emergency action in the best interests of the Company and occupants of the Group's properties, requiring the Group to enter into one or more new leases in respect of existing properties in the Group's portfolio;

• during both the Stabilisation Period and the Post-Stabilisation Period, the aggregate maximum exposure to properties located within the boundary of any one local authority will not be greater than 15 per cent. of the higher of: (i) Gross Asset Value; or (ii) where the Company is not fully geared, Gross Asset Value adjusted on the assumption that the Company's property portfolio is geared at 35 per cent. loan to value;

• during both the Stabilisation Period and the Post-Stabilisation Period, the aggregate maximum exposure to forward funded developments will not be greater than 20 per cent. of the higher of: (i) Gross Asset Value; or (ii) where the Company is not fully geared, Gross Asset Value adjusted on the assumption that the Company's property portfolio is geared at 35 per cent. loan to value; and

• during both the Stabilisation Period and the Post-Stabilisation Period, the aggregate maximum exposure to any single contractor in connection with any forward funded developments will not be greater than 10 per cent. of the higher of: (i) Gross Asset Value; or (ii) where the Company is not fully geared, Gross Asset Value adjusted on the assumption that the Company's property portfolio is geared at 35 per cent. loan to value.

The investment limits detailed above will be calculated at the time of investment, which includes entering into a new lease, using the last published Gross Asset Value. For the avoidance of doubt, the Company will not be required to divest any of its investments should, after the time of investment, such an investment cease to adhere to the limits set out in the investment policy (whether due to changes in the value of investments or any other reason not relating to an active investment decision).

The Directors are focused on delivering capital growth over the medium term and intend to reinvest net proceeds from future potential disposals in assets in accordance with the Company's investment policy, unless a decision is made to apply such net proceeds towards the Group's operating costs, capital expenditure or the reduction of the Group's indebtedness. However, should the Company fail to re-invest the proceeds or part proceeds from any disposal, or to apply such proceeds towards the Group's operating costs, capital expenditure or the reduction of the Group's indebtedness, within 12 months of receipt of the net proceeds, the Directors intend to return those proceeds or part proceeds to Shareholders in a tax efficient manner as determined by the Directors from time to time.

Cash held for working capital purposes or received by the Company pending reinvestment or distribution will be held in sterling only and invested in cash, cash equivalents, near cash instruments and money market instruments.

The Directors currently intend at all times to conduct the affairs of the Company so as to enable it to qualify as a REIT for the purposes of Part 12 of the CTA 2010 (and the regulations made thereunder).

The Company will at all times invest and manage its assets in a way that is consistent with its objective of spreading investment risk and in accordance with its published investment policy and will not at any time conduct any trading activity which is significant in the context of the business of the Company as a whole.

Borrowing policy

The Company may seek to utilise borrowings to enhance equity returns.

The level of borrowing will be on a prudent basis for the asset class and will seek to achieve a low cost of funds, whilst maintaining flexibility in the underlying security requirements and the structure of the Company.

The Directors intend that the Company will maintain a conservative level of aggregate borrowings with a maximum level of aggregate borrowings of 35 per cent. of the Company's Gross Asset Value at the time of drawdown of the relevant borrowings.

Debt will be secured at the asset level and potentially at the Company or SPV level, depending on the optimal structure for the Company and having consideration to key metrics including lender diversity, debt type and maturity profiles.

In the event of a breach of the investment policy and investment restrictions set out above, the Directors upon becoming aware of such breach will consider whether the breach is material, and if it is, notification will be made to a Regulatory Information Service.

No material change will be made to the investment policy without the approval of Shareholders by ordinary resolution at a general meeting, which will also be notified by an RIS announcement.

Benefits of the Proposal

The Directors believe that the Proposal will have the following benefits for Shareholders:

· ensuring the Company is able to continue to operate in the sector and preserve its longer-term social objective of helping to alleviate homelessness in the UK;

· aligning the investment policy with the demands and needs of the underlying occupants and with Local Authorities, Charities, Registered Providers and Housing Associations, particularly in respect of lease terms, and therefore providing for a long-term stable business model;

· provides the flexibility to stabilise the Company's financial position, with a longer-term focus on maximising income and capital returns from the existing portfolio of assets; and

· allowing the flexibility to explore demand for all residential uses in the Stabilisation Period and from other Social Use occupier groups.

Considerations associated with the Proposal

Shareholders should have regard to the following when considering the Proposal:

· Should the Company not receive Shareholder approval for the Proposal, the appointment of AEW as AIFM and Investment Manager will not take effect and the Board will need to consider an alternative strategy.

· There is no guarantee that the changes to the Company's investment policy will provide the returns sought by Shareholders. There can be no guarantee that the Company will achieve its investment objective or target returns to Shareholders.

· At the time of the Company's IPO, the Company adopted a dividend policy whereby a target dividend of 5.5 per cent. (based on the IPO issue price) would be paid to Shareholders. During the Stabilisation Period it will be necessary to evaluate the long-term sustainable income profile of the portfolio and the level of dividend that can be paid. However, it will remain an objective for the Company to pay a regular and sustainable quarterly dividend supported by income, through the revised lease model, that should be attractive to Shareholders, although it is not possible to comment on a target dividend amount or the timing for recommencing dividends at this stage.

· The Company's shares were suspended from trading as a result of not being able to publish the annual report and accounts for the year ended 31 August 2022. The Company is in constructive dialogue with the Financial Conduct Authority regarding restoration of trading, which will depend, amongst other things, on the publication of the Company's annual report for the year ended 31 August 2022 and half-yearly report to 28 February 2023.

· The adoption of the New Investment Policy, as well as the appointment of JLL as property valuer, are key steps in AEW's immediate priorities to stabilise the Company's financial position, as the Board, AEW and Bill Starn, the highly experienced turnaround CFO appointed as a consultant to the Company, work towards the completion of the annual and interim accounts and the restoration of trading in the Company's shares.

Recommendation

The Board considers that the Proposal is in the best interests of the Company and its Shareholders as a whole. Accordingly, the Board unanimously recommends that Shareholders vote in favour of the Resolution to be proposed at the General Meeting. The Directors intend to vote in favour of the Resolution in respect of their holdings of Ordinary Shares, amounting to 151,000 Ordinary Shares in aggregate (representing approximately 0.01 per cent. of the issued share capital of the Company as at the date of this announcement).

Further details of the New Investment Policy, additional information on the appointment of AEW and the formal notice convening the General Meeting are set out in the Circular which will be posted to Shareholders today. Copies will shortly be available for inspection on the Company's website, https://www.homereituk.com/, and at the National Storage Mechanism, which is located at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.The person responsible for arranging the release of this announcement on behalf of the Company is FTI Consulting.

FOR FURTHER INFORMATION, PLEASE CONTACT:

The Company's LEI is: 213800A53AOVH3FCGG44.

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

Inside Information

The information contained within this announcement is deemed by Home REIT to constitute inside information as stipulated under the Market Abuse Regulation (EU) no. 596/2014 (as it forms part of domestic law by virtue of the European Union (Withdrawal) Act 2018). On the publication of this announcement via a Regulatory Information Service, this inside information is now considered to be in the public domain.

Disclaimer

Smith Square Partners LLP ("Smith Square"), which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting for Home REIT and no one else in connection with the matters set out in this Announcement. In connection with such matters, Smith Square will not regard any other person as its client and will not be responsible to any persons other than Home REIT for providing the protections afforded to clients of Smith Square, or for providing advice in relation to the contents of this announcement or any other matter referred to herein. Smith Square does not owe or accept any duty, liability or responsibility whatsoever (whether direct, indirect, consequential, whether in contract, in tort, under statute or otherwise) to any person who is not a client of Smith Square in connection with this announcement, in any statement contained herein or otherwise.