Morning, everyone. You've got Gareth, Charlotte, and Jamie all on the line. I'm Gareth Jones.
Morning
Fund Manager at Home REIT. Chartered Accountant with significant experience being a CFO of both listed and private companies. Coming up to the last 10 years now, I've been within this sector of real estate, both in private and public funds, sourcing and acquiring portfolios.
Thanks, Gareth. I'm Charlotte Fletcher. I'm the Fund Manager and Head of Transactions within the team. I have significant experience in the long income and social housing sectors in both public and private real estate markets, having executed and structured over GBP 1.2 billion worth of social housing transactions. I'm a qualified solicitor and trained to practice for five years in the City of London as a commercial real estate lawyer. The investment advisory team has extensive experience, having transacted on over GBP 2 billion of real estate deals in the social housing and commercial sectors, and is part of Alvarium Investments, the multi-family office and asset manager supervising over $20 billion of assets, including over $11 billion of real estate.
In addition, the investment advisor is signatory to the UN-supported Principles for Responsible Investment and contributes part of its management fee to homeless charities. Next slide, please.
This slide just takes you through our financial and operational highlights for the six months to 28th of February 2022. We're very pleased to have delivered a 7.9% total NAV return in that, in those six months, taking our NAV from 105p up to 111.2p, while distributing 2.2p of dividends in the period. Our total NAV return since IPO now is 17%. We've also generated 2.39p of earnings and on, and on track to deliver our 5.5p dividend target, having already paid or declared 2.7p-4p of dividends in relation to this year.
The current portfolio has been valued at GBP 713 million, more than 6% up on acquisition price due to the difference between our purchase yield of 5.9% and the valuation yield of 5.6%. In addition to the effect of indexation on the leases for properties bought more than a year ago. 100% of our leases are long-term in nature, typically 25 years, and indexed annually in line with the CPI, subject to a collar of 1% and a cap of 4%. Our average rent per week at the year period end was GBP 95 per bed, which has fallen to GBP 92 since the period end, with 100% of our rent collected.
Our WALT is currently standing at 24.3 years, which reflects that we're at the very start of the journey, really. Just moving on to the next slide. The P&L of the half year results really highlights the scale of the business with GBP 17.5 million of rent, generating an operating profit before fair value movements of GBP 14.2 million. Changes in fair value then account for GBP 26 million, giving an operating profit of GBP 40.2 million. Post-interest, the profit for the period was GBP 38.3 million or 7.43 pence per share. Stripping out the fair value changes gets you to the EPRA EPS, which was 2.39p.
Dividends paid in the period were 2.21p, made up of a 0.84p divi in relation to the last financial period and the first interim dividend of 1.37p in relation to this year. A further 1.37p dividend was declared earlier today. Balance sheet just highlights the investment property portfolio we've built up, having spent all the net proceeds of our fundraisers with cash on the balance sheet reflective of the availability of our new Scottish Widows facility. Our NAV per share, as I said, increased from 105p up to 111.2p, with loan to value, once all of that debt's been deployed, of under 30%.
Just moving on to the next slide, it shows you the tangible social impact that we're delivering. We've now purchased 1,585 properties, providing over 8,000 beds, addressing homelessness in 111 local authorities. We have 28 tenant partners helping those who are homeless or at risk of being homeless due to general poverty, mental health issues, those leaving prison, the armed forces or foster care without a home, drug and alcohol problems, individuals fleeing domestic abuse. All of our tenant partners are currently delivering a saving of 65% to local authorities when compared to alternative types of accommodation. Finally, all of our properties are centrally located near jobs, transport links, and local amenities, lowering their carbon footprint, in addition to all the tenants signing up to green leases.
Just moving on to the next slide, it shows what our portfolio looks like at period end and highlights the good geographic spread of the portfolio across England and into Wales. We're particularly pleased with our ability to get a foothold in London while maintaining a purchase yield of 5.9% and keeping rent well under 100 GBP per week. As I said, it's at 92 GBP per week with the latest acquisitions. The tenant table just shows the wide range of issues addressed by our tenants with it, and any exposure to any one tenant is ticking below down to 10%. The final graph just shows steady deployment that we've made since IPO, building to over 8,000 beds.
Just moving on to the next slide, and Charlotte will take you through the macro picture.
Thank you, Gareth. Now turning to look at the wider market backdrop and the challenge of homelessness in the UK. Homelessness is a persistent and growing problem for our society and devastates people's lives. It significantly affects their physical and mental health. As Gareth has touched on, there are a number of reasons why a person may become homeless. Causes include somebody finding themselves in financial difficulties, having served a prison sentence, struggling with addiction, leaving an institutional environment such as the foster care system or the armed forces, being a victim of domestic abuse, or struggling with mental health issues. The impact of homelessness is staggering. There has been a 111% increase in local authority expenditure on bed and breakfast accommodation in a 5-year period. People who are homeless are 10 times more likely to die than other people of a similar age.
67% of people who are released from prison without a home to go to reoffend within a year of their release. In one year alone, 20,000 victims of domestic abuse were made homeless. This has a significant cost to the U.K. economy, with local authorities spending GBP 1.1 billion housing homeless people in temporary accommodation. The estimated cost of reoffending to the U.K. economy is GBP 18 billion a year. Last year alone, local authorities spent GBP 410 million on housing people in bed and breakfast accommodation. Research concludes that homeless individuals who are housed in accommodation let to registered charities and housing associations, such as the type of accommodation that Home REIT provides, as opposed to private landlord accommodation, are substantially less likely to return to homelessness.
If we turn to the next slide and take a further look at our strategy. Home REIT executes its investment strategy by funding the acquisition and creation of high-quality accommodation by converting otherwise used existing commercial buildings such as defunct care homes, bed and breakfasts, small hotels, and small office buildings, or refurbishing existing poor quality residential accommodation, or may also look to forward fund new build properties. When acquiring, we ensure that all assets possess strong residual value by ensuring that the fund invests in central urban locations, and that we assess alternative use options such as PRS or student accommodation, and crucially, achieve low and sustainable rents for our tenant partners, which enables us to preserve capital values and achieve a low spread to vacant possession value.
All of the properties the fund acquires are refurbished and improved at the vendor's cost to provide good quality living space. All of the fund's assets are let to tenant partners on long, typically 25-year leases, which crucially provide long-term security of tenure to allow the registered charity tenant to make a sustained impact. There is a particular focus on training and rehabilitation at the properties, and this is to provide residents with the skills and the confidence that they may need to ultimately find long-term accommodation and reintegrate into society. All of the fund's assets have been acquired from an extensive network of private owners and developers, with referrals being received from housing associations, local authorities, and charities. If we turn to the next slide, we'll have a further look at some of the benefits that the fund delivers for its tenants and for local authorities.
As we've already addressed in the earlier part of this presentation, there's a critical need for homeless accommodation in the UK. There's an increasing population of homeless people and a lack of affordable, high-quality stock. As already mentioned, this comes at significant cost to local authorities and the wider UK economy. Home REIT's strategy enables local authorities to reclaim housing benefit directly from central government and remove that liability off their balance sheet. This is a cost-effective model that is attractive to local authorities. The fund focuses on providing property at a low and sustainable level of rent, as Gareth has mentioned, around GBP 90 per bed per week, while also providing quality housing and long-term security of tenure to the registered charity tenants and the residents at the properties.
You'll see from the case study at the bottom of the slide, the rental price differential between temporary accommodation options and the housing that Home REIT provides can be over 65%. Turning to look at the statutory and downside protection, the Homelessness Reduction Act 2017 came into force in 2018 and received strong cross-party support. It represented the biggest change to homelessness legislation in over 40 years. What this legislation achieved was to place legal obligations on local authorities to ensure that individuals threatened with homelessness or who are homeless are provided with accommodation. Public services also have a duty to refer individuals to a local authority if they come into contact with somebody who is at risk of becoming homeless. This statutory protection means that local authorities are obliged to take steps to continue housing individuals.
If in a situation where a charity failed, we would look to move the property to an alternative charity provider or even enter into a new lease with the local authority. Ultimately, the respective individuals could not be at risk of further homelessness and protected by the legislation. Next slide, please. In May of last year, we carried out an independent audit through The Good Economy of whether we were delivering on our social impact goals. As part of this assessment, The Good Economy analyzed Home REIT's portfolio data, interviewed the fund management team. It carried out further interviews with the fund's charitable housing partners, residents of the properties, local authorities, and independent experts in the homeless space.
In addition, they undertook resident surveys to understand the longer-term benefits of the accommodation being provided by Home REIT. In conclusion, the independent report summarized that Home REIT is addressing the social need of those experiencing homelessness, having invested 79% of its properties are located in the 40% of local authorities with the highest rates of statutory homelessness. Home REIT funds high quality homes, forms quality partnerships, has increased a supply of homeless accommodation, and finally, provides good value for money to its housing partners and to the UK taxpayer. Finally, the report summarized that Home REIT is helping to improve the lives of those who are homeless or at risk of homelessness. Findings to date suggest that residents are very satisfied with the quality of accommodation and support from the housing partners is helpful and valued.
On the next three slides, we've included some social impact case studies. We won't run through them now, but would encourage people to have a read through those in their own time. Turning to slide 15, we'll look at the funding model in more detail. Government funding for each resident represents 100% of the cost for care and housing and is paid directly from the Department for Work and Pensions to the relevant local authority. The local authority then passes those funds directly on to the registered charity who lets the properties from Home REIT. Rental levels are set at low and sustainable levels with significant headroom between the property rent and the housing benefit allowance.
The headroom between core rent and housing benefit is typically around 40%-50%, and this provides the charity the surplus funds for housing management and necessary building upkeep associated with the services they are providing. All of our rents are pre-agreed with the local authorities, and as Gareth has touched on, the leases provide for a cap at 4% and a collar at 1% on the CPI-linked annual rent reviews. This ensures that rents are able to grow in a sustainable manner. Finally, all of the fund's leases are full repairing and insuring leases to our registered charitable partners on very long lease terms, typically 25 years. Turning to the next slide. Here we touch on our due diligence process, ongoing monitoring when it comes to charity and asset selection.
Pre-acquisition, we firstly meet with the local authority and a charity to discuss the specific homeless needs and requirements in that area. For example, if the local authority has a particular need to house victims of domestic abuse, then the type of accommodation that might suit those vulnerable individuals best will be small apartment blocks with self-contained flats within them. If a local authority is looking to house individuals who've left the armed forces or left prison, then small shared houses might be a better fit. We ensure that we're starting with the right type of accommodation. Following that conversation, we source the relevant assets and agree the core lease rents with the local authority and the charity, and that's to ensure they are at a low and sustainable level and have full local authority support.
We undertake full legal due diligence on each of the assets the fund requires and full property due diligence, carrying out full surveys. After reviewing those surveys, we agree a full scope of refurbishment works to be carried out by the vendor at their cost. In addition to this process, we carry out thorough financial and governance DD on each of the charities we partner with, and we also work with the developer to ensure that each charity is sufficiently capitalized as part of each transaction. That includes mandating a minimum of 12 years rent cover and a sufficient sinking fund contribution. Post-acquisition, our asset management team carry out ongoing monitoring steps, which include annual site visits to ensure the assets are being well-maintained and to also check that underlying occupants are receiving the required care and support.
We also continue to monitor and carry out due diligence on our tenant partners, including checking balance sheet and governance analysis. I'll hand back to Gareth for the next slide.
Thank you, Charlotte. This slide just takes you through our returns model. As you can see from the graph, it all starts by the fact that we can buy our properties on an average acquisition yield of around 5.87%. This is then added to by the availability of low-cost debt. We've got two debt facilities totaling GBP 250 million with an average all-in rate fixed for the duration of them at 2.3%. Those two things enable us to get a levered yield on equity of more than 7.5% at full deployment. When the running costs are taken off, that are around 1.3%. You can see from the net income bar on the graph, we're very comfortable with that sort of above 6% return on equity.
We're very comfortable with our 5.5p dividend target this year, which we're on track to pay. There's no property cost leakage with all leases triple net full repairing and insuring leases. In terms of income and capital growth, there's a strong focus on the long-term affordability and sustainability of the rent, meaning there's a material headroom between the total benefits received by our tenants and the rents that they pay us, usually 2.25 times cover. All rents are increased annually in line with CPI subject to a collar and a cap, collar of 1% and a cap of 4%, and inflation is due to grow at a faster rate than open market rental forecasts.
The only capital appreciation we have in our base case model is that capitalization of the rental growth, and that takes you from the sort of 6% return on equity to your total return target of 7.5%. As you can see from that graph, there is headroom in our targets. We haven't put in any scope for yield compression, but it should be noted that there's been around a 5% uplift in valuations for the properties that we've already purchased thus far. Moving on to the next slide, it just takes you through the long-dated low cost fixed rate debt that we have available to us. It's in two tranches, one 12 years, and one 15 years.
A total of GBP 250 million over those two facilities with an average rate fixed to maturity of 2.3%. What it means is it underpins the long-term free cash flow generation of our model. There's a 357 basis points spread between our triple net indexed rental income and the fixed cost of debt. That spread only increases through the expiry of the term to over 500 basis points, underpinning the deliverability and sustainability and growth in our dividend target. Just moving on to the next slide, it just takes you through a snapshot of our interim results, taking you through the NAV bridge. We started the year at 105p and in September, at the first of September.
Within September, we did an accretive equity raise, raising GBP 350 million at 109p per share compared to that 105p NAV. Added to that was a 5p increase in the underlying investment property value with earnings of 2.4p in the period. We then have paid 2.21p of divvies, meaning we've ended up with an NAV of 111.2p at the period end. That equates to a 7.9% total NAV return, and as I said, within the period, and it's a 17% NAV return since IPO in October 2020. The only other thing really to highlight on here is the capital value.
Increases are mainly being driven by the difference between what we acquire our properties on at 5.9% yield, and the valuation yield of 5.6%, which is done on an individual property basis. A bit more, we have had an increased growth in the period in capital value as well for the leases that we bought between October 2020 and February 2021, where we have had indexation coming through. Just moving on to the next slide, is just a summary really of what we've achieved since IPO. We feel we're a genuine social impact fund that is significantly reducing homelessness in the U.K.
We've delivered now since October 2020 nearly 8,500 beds using all of the net proceeds from our IPO and secondary raise which was deployed through the end of January 2022 and well into our debt facilities. All of our portfolio is resilient with strong residual values and alternative uses and is 100% let from the day we buy them. We then average and utilize the lease term currently at 24.3 years. All of our leases are index linked with a very low transparent cost base which will only get better returns with the gearing that we put into the model.
All of our investments are off market, meaning that we can get that yield compression from buying them, as we can buy at 5.9% and they're being valued at 5.6%. Longer term, looking at the long lease sector, yield compression has come through, but which we don't put into our base case model to deliver the targets that we have. We continue to see high quality pipeline, which will then have a quicker but prudent deployment of our debt facilities.
We achieved all of our targets in year one, delivering a 2.5p dividend and an 8.9% total NAV return, and we're targeting a 5.5p divvy for this year, which we're on track for, and have more than achieved that 7.5% total return in the first six months. We've now declared 2.74p of divvies within this, in relation to this year, so half of that target. Thanks for your time, guys. That concludes the presentation. Now just open for questions.
If you would like to ask a question or make a contribution on today's call via the telephone lines, please press star one on your telephone keypad. You will be advised when to ask your question. We are also accepting questions via the webcast lines. As a reminder, that's star one on your telephone keypads. We have had a question come through from Charlie Murphy from Singer Capital Markets. You are now unmuted. Please go ahead.
Good morning, and thank you for the presentation. I've got a couple of questions. I may have missed it, but what's the EPCs on your properties, and what's the strategy around that? Can you talk a bit about how well capitalized the organizations are that are leasing the properties from you, and how you help them with ramp risk if they get a new property, how long does it take to get occupied? Do you provide assistance there? I'll just stop with those two questions at the moment.
Of course. Thank you for the question. Turning to EPCs first, we have a strategy to improve all of the EPC ratings across the fund's portfolio to a C. At the moment, we carry out thorough due diligence at acquisition stage and ensure that any property we acquire can have affordable improvements made to improve the EPC rating. We mandate in our legal contracts that our developer or seller counterparties carry out those improvements in the first 12-month period to achieve that C rating. Currently across the portfolio, over 80% of assets are a C and a D, and we're looking to improve that throughout the refurbishment programs.
Mm-hmm.
Gareth, do you want to turn to stabilization and-?
Yeah, in terms of when we do a deal, the underlying tenant gets at least 12 months rent cover. We are pushing that to be towards 18 and 24 months. That puts them in a really good position at the outset of any deal. We've obviously done all of the analysis to make sure that they can take on that portfolio. Also what we've seen is that this isn't bespoke specialist accommodation, therefore the underlying occupancy, these things get filled up very quickly in a matter of weeks. Which again minimizes the stress on tenant partners from when they take on a property.
In addition, a key part of our decision to partner with a charitable tenant is their relationship with the local authority, and that's key to ensuring a good referral process and that they're able to fill beds quickly. That's part of our operational due diligence, ensuring that they have that good relationship established.
Okay. Thank you. I've got one final question. In your The Good Economy report from last year, there was a suggestion that you ought to be developing your in-house expertise. This is, I appreciate from 12 months ago now. How has that evolved?
In terms of building out our housing expertise in the team, but we're always looking at team and assessing that. We're just in the process of bringing on our fourth asset manager. As I said, we're bringing on expertise all the time. We were always going to do that, and we take that on board.
In addition, one of our asset managers has specific social care qualifications, so has the necessary understanding and expertise to ensure that when inspecting properties, our team are also able to ensure they're able to audit the standards of care that's being provided as well.
Brilliant. Thank you very much.
We currently have no further questions via the phone lines, so I'll hand back to Rosie for the webcast questions.
Thanks, Rhiannon. We have a number of questions through from the webcast. Our first question is from Priyan from Alvarium Securities. Can you confirm the like-for-like rental growth across the portfolio is at the 4% cap? Also, can you talk to the like-for-like capital movements in the valuation? Have yields remained stable outside of the acquisitions made?
Thanks, Priyan. The like-for-like rental growth is just ticking to 3%. That's because obviously we did a lot of our. We deployed quickly post-IPO, and CPI uplifts in that initial parts were around 2.5%. They are at all indexation at the moment is obviously at the 4% cap, with CPI running at a higher rate than that. They broadly, those increases have been broadly reflected in the like-for-like capital movements in the valuation. Yields have remained stable, and our valuation yield is still at 5.6%.
Thank you. Our next question is from Shayan Ratnasingam from Winterflood Securities. How does the rental headroom compare to social housing?
In terms of, I suppose it's the clarification on the question. Social housing is obviously quite a wide spectrum. General needs, obviously, you have direct, the underlying occupant will pay the social housing in supported social housing sector without knowing the underlying metrics that they have. We would imagine that our rent at around 40%-50% of the total benefits package is a lower percentage.
If you look at the average rents across our portfolio at around GBP 90 per week per bed, that's significantly lower than the average social housing rent, which is around GBP 106 per bed. As Gareth mentioned, there are various funding packages available for different cohorts of individuals within the social housing sector. It depends on that specific subsector of individuals.
Thank you. Our next question is from Connor from Liberum. What is the underlying occupancy within the portfolio? Are properties filling up in line with expectations?
Short answer is yes, the underlying occupancy is within the mid-90%. That's where we would expect it to be. It's deemed then as full occupancy because there will always be some empty beds.
Another question from Priyan. Have the recent acquisitions gone towards specific subsectors or geographies?
We've maintained really the weighting and geographic spread. We go really where the demand is, where the local authorities are crying out for, and unfortunately, that is across the country. In terms of subsectors, again, what we're seeing is a lot of people being at risk of being homeless specifically because of general poverty. That is only on the rise, and that is probably where we've tried to address it most in the last round of acquisitions.
Our next question is from Justin Bell from Numis. Do you get visibility of operating metrics from tenants to monitor headroom on rent cover?
Yes, we do. At acquisition stage, so pre-acquisition, we sit down with our tenant partners and work through a model with them to check that headroom, that projected rent cover. We carry out ongoing monitoring with them on the operational side to ensure we have visibility on that whole piece.
Another question from Justin.
Are the charity's housing benefits paid by the local authority inflation-linked similarly to their rent liability to the REIT?
No. It's not, but it comes from the uncapped exempt pool. Essentially any of the rent increases can just be claimed in full from within their housing benefit claim. Similarly, things like increases in living costs and things like that can be put into the housing benefit, so they are insulated to a certain degree.
In addition, when we are agreeing rents at the outset of the deal, we peg our rents to what's known as Local Housing Allowance rates, which are the lowest rates in the market, which is set by local authorities. Those rates are increased every year in line with cost of living and inflation as well. They're not directly linked, but those also increase.
The final question from Justin Bell. Who are typical vendors you're buying from, and is there any developer specialism required in repurposing the accommodation before you purchase or are the works fairly straightforward?
I'll answer the last question first. The works are usually fairly straightforward. These are sort of homogeneous residential assets that could be put into PRS or student. That's the standard of them. You can probably see them in the pictures on the case studies. There's no specialism needed in repurposing them. What type of typical vendors you're usually buying off small to medium-sized buy-to-let landlords who are feeling the pinch from differences in taxation and being able to claim back their interest that they pay on debt. It is suddenly an unlevered return for them, and it becomes far more penal, and people are exiting the market, which we still see.
That's really the largest part of where we get our properties.
Ultimately, all of the properties are straightforward residential properties with no specialist works carried out to them. They're just brought up to a good living standard. The usual fit-out you would acquire. As I've already mentioned, try and improve the EPC ratings of those properties, but there's no planning restriction on their use. What that means is that, in an ideal scenario, if homelessness was eradicated, we'd be left with, in essence, a good portfolio of excellent quality residential assets with no specific development requirements or need to inject further CapEx for them to be used on the general residential, as PRS or student accommodation.
Thank you. Our next question comes from Tom Horn of Berenberg. Could you please explain the financial and operating strength of registered charities you contract with? How does this compare to registered providers in the specialist supported housing sector?
In terms of, they are smaller charities, but we make sure at the outset that they have already got the financial strength and have increased financial strength by the capitalization at the outset, of any deal. We monitor that on an ongoing basis. Our model also, because of the low rents and the proportion of rent to benefit that they get, means that our properties, our charities run operational surpluses, which builds their balance sheet strength, even more. In terms of how it compares to registered providers in the specialist supported, that is, I suppose, something, not me commenting on the strength of the balance sheet of the supported housing sector and the registered providers.
It is probably not something that I have an intimate knowledge of because we're concentrating on our charities that have the financial strength.
Thank you. We have one final question from Andrew Rees of Numis. Who are the other participants in the market for new acquisitions that you look at? Is there much competition from PRS buyers?
We hear of other people coming into the market, other institutional capital coming into the market, which we welcome. It's obviously an endemic problem in the UK and other people contributing beds. It is fantastic. On the ground, we're not really seeing that competition. The pipelines, the quality pipeline that we have is all at and around the yields that we've currently achieved. We would see competition really from high net worth individuals who might be trying to buy it to put houses into a company structure. They are looking usually at PRS and student accommodation, which is a higher rent, but an individual is usually looking for a higher return, usually around 8%.
Thank you. There are no further questions on the webcast. I'm just gonna hand back to you, Gareth and Charlotte, for any additional or closing remarks.
No. I mean, thank you everyone for attending. Your interest is always appreciated. Any other questions, please do reach out.
Thank you.