Earnings Call: H2 2021

Apr 28, 2021

Good morning, everyone, and welcome to Home REIT's interim results. I will start with a brief overview of the fund. Home REIT plc is dedicated to fighting homelessness through funding the acquisition and creation of new high quality homeless accommodation. The income is extremely secure, government backed and statutory protected, salting very low risk income and capital returns whilst delivering critical social impact. Since IPO in October 2020, Home REIT has delivered over 3,000 beds across five seventy homeless accommodation properties, creating new asset supply to meet the significant and growing demand for homeless accommodation. Home REIT also offers significant savings to local authorities by lower sustainable rents and better quality accommodation versus more expensive alternative housing, such as bed and breakfasts and hostels. Homelessness ranges from rough sleeping to those without permanent or suitable accommodation caused by many factors such as drug and alcohol abuse, leaving prison with no home to go to, eviction by private landlords, relationship breakdown, domestic abuse and mental illness. There is a particular focus on training and rehabilitation within the properties to provide the individuals with the skills and confidence to find their own long term accommodation and enable them to reintegrate back into society. And these properties, most importantly, will provide the charities that we work with with a long term security of tenure, crucial to rehabilitating vulnerable individuals. The Fund provides inflation protected income and capital returns underpinned by a portfolio of secure real estate assets with a low spread to vacant possession value. The assets were let on long term index linked fully repairing and insuring, typically twenty five years in duration, to predominantly specialist registered charities. The income is funded through the provision of uncapped exempt housing benefit paid directly to the registered charity tenants from the relevant local authority, who in turn are reimbursed by central government. In terms of financial performance, Home REIT's NAV and EPRA NAV per ordinary share has increased to 102.8p as at 02/28/2021, which is an increase of 4.9. Home REIT is targeting $0.75 per annum total net return, and it's already paid its first dividend of £0.83 per share, and the company is on track to deliver its £2.5 per share first year dividend. On the next slide, looking at the management team, Gareth and myself are the fund managers of Home REIT. I have significant experience in the public and private real estate market, long income, social housing and forward funding real estate space. Prior to joining Alverum, I was a lawyer in the city for six years. And since joining Alverum, I was Co Founder of LXI REIT, LLC and Home Loan Income Fund at Social Impact Fund. And I'll hand over to Gareth to introduce himself as well. Thanks, Jeremy. I've been in the city for over ten years post qualifying as an accountant with Ernst and Young, been a CFO of both listed and private company. The last six years I've spent within this sector at both private and listed social housing funds, both sourcing and acquiring portfolios. Charlotte Fletcher is also a senior partner of the investment team, and Charlotte heads up our transactions across the portfolio. In terms of our track record, we have transacted on over £1,500,000,000 of real estate deals, including HLIF, a social impact fund and LXI REIT's PLC, a C215 listed commercial real estate fund. We are part of Alvarium Investments, which is a multifamily office and asset manager with over $15,000,000,000 of assets under management. And in terms of responsible investment, the investment adviser is a signatory to the United Nations Supported Principles of Responsible Investment, which represents a global standard for investment managers to be incorporating ESG policies into its investment practice. And also noting that we contribute part of our management fee on an annual basis to a number of different homeless charities that we work with. Moving on to the next slide. As you can see, our Board is well diversified in terms of people and experience. Lynne Fenner is our Chair with huge amounts of experience within both real estate and finance. Simon Moore is a Non Executive Director with a highly respected analyst and is also Chairman of the AIC Property Committee. Marlene Ward is Chair of the Audit Committee and again has a vast amount of experience in both property and finance and also Peter Caldwell is an important nonexecutive director appointment for a central impact fund of this nature. Peter was the former Special Advisor to the Housing Minister, he led on The UK HOMA strategy. So he offers a wealth of sector and legislative knowledge to the fund. Going to hand over to Gareth now to touch on financial and operational highlights on the next slide. Thank you, Jamie. This slide just highlights how pleased we are to have delivered a 4.9% total return in the 4.5 from IPO to the February 28, taking our NAV and ECCRA NTA to 102.8%. Our current portfolio has been valued at £243,000,000 a 4.3% rise in value since acquisition. In terms of the earnings we've generated, 0.6 and declared a $0.83 maiden dividend, which was paid in March. This is in line with the $0.25 per share target for the financial year to the August 31, which we expect to be fully covered. Our modeled LTV post deployment of the debt facility is 32.8% without any further fair value uplift. The properties that we have acquired have been on an average acquisition yield of 5.83% versus a valuation yield of 5.57. All 100% of our leases are long term in nature, typically twenty five years and annually index linked pegged to CPI. Currently, our average rent per week is 86 and rent collection has remained at 100% as expected. Taking you on to the next slide, which highlights the social impact aspects of our fund. We have been able to acquire five seventy two properties over the period, providing over 3,000 beds addressing homelessness in 66 local authorities. We have 16 tenant partners, 15 charities on one housing association, helping those who are homeless or at risk of being homeless due to general poverty, mental health issues, those leaving prison without a home, drug and alcohol problems, individuals fleeing domestic abuse and foster care leaders. Our tenant partners that we have are currently delivering a saving of 65% on average to local authorities when compared to alternatives. Finally, all our leases are green leases with the properties located in urban areas close to amenities and transport lowering their carbon footprint. The next slide just takes you through our portfolio overview as at the February 28. As you can see on the map on the top left hand side, we are addressing every region in England and there's a good geographical spread that we've achieved. We are particularly pleased and continue to have been able to purchase London properties while still maintaining our low rents of £86 per week on average and at targeted yields across the whole portfolio. Also, the next table on the right hand side of the slide just shows you our top 10 tenants. You can see the diverse nature of our tenant space addressing a wide range of homelessness issues. Exposure to any one tenant is expected to be around 10% at full deployment. Finally, the bottom two slides just take you through our steady deployment profile since IPO, showing the strength of our pipeline and also how we've built up to 3,000 beds over the period. I'll just hand over now to Jamie for the next slide, homelessness in The UK. Looking now at homelessness in more detail. Homelessness is a persistent and growing problem for our society. Being homeless devastates people's lives, significantly affecting their physical and mental health. In terms of causes of homelessness, these include loss of income or financial difficulties, long term prison sentences, substance abuse, drug dependency, foster care leavers, domestic abuse and violence, unfortunately only on the rise in The UK, lack of adequate health care and mental health support. Looking also at the impact of homelessness, while there has been a 111 increase in local authority expenditure just on bed and breakfast over the last five years, those who become homeless are 10x more likely to die than those of a similar age. Sixty seven percent of people released from prison without a home re offend within one year of release and twenty thousand victims of domestic violence were made homeless last year. And the socioeconomic costs of homelessness are rising year on year. Pre COVID costs include £1,200,000,000 annual local authority expenditure on housing homeless people in short term accommodations such as B and Bs and hostels, pounds 18,000,000,000 being the cost of re offending to The UK economy and £410,000,000 was spent on bed and breakfast last year. And these costs will inevitably have increased over the last few months in light of COVID. Looking at the King's College table below, as you can see when homeless individuals are housed in accommodation led to charities and housing associations as opposed to private landlords, they are substantially less likely to return to homelessness. On the next slide now, looking at the property assets that Home REIT requires in order to tackle some of the issues just covered. Home REIT funds the acquisition and creation of high quality homeless accommodation. And we do this through conversion of other use of existing buildings, so looking at form pubs or townhomes, B and Bs and offices, refurbishment of existing full quality accommodation and go in and fully refurbish and enhance the value of that asset. And we also will look at forward funding new build schemes. The assets possess strong residual value by virtue of their town and city locations, alternative use options, so PRS private rented housing or student housing and low and sustainable rents. As Gareth mentioned, our average weekly rent to date is low £86 a week across our portfolio. The properties are all refurbished and built at the vendor's cost to provide good quality living space, and the assets are all lettled pre lettered charities. Crucially for this sector, we provide long term security of tenure to allow our charity tenants to make a sustained impact on the lives of the underlying occupants. This is vitally important for this sector as with so many of the organizations that we've worked with, one of their main grievances is early eviction by private landlords who realize they're actually going to get a higher rent in student housing or private housing. So that early eviction causes a massive amount of disruption to both charity, but more importantly, the individuals living there who are then unfortunately made homeless again. So that long term security we're giving these charities allows them to properly focus and deliver on their charitable goals. There is a particular focus on training and rehabilitation of the properties to provide individuals with the skills and the confidence to find long term accommodation of their own and to reinspect back into society. And where do we acquire these assets from? Well, these are acquired from a wide and well established network that we've gained over the last few years from private owners, developers and also referrals from housing associations, charities and local authorities. Moving on to the next slide, looking at the benefits for our tenants and local authorities when working with Home REIT. Looking firstly at the benefits for local authorities. There is a critical need for further homeless housing in The UK due to an increasing homeless population and a lack of available and affordable fit for purpose housing. The limited supply and current cost of accommodation for the homeless is felt acutely by local authorities. In 2018 to 2019, they spent over £1,000,000,000 on housing homeless people in temporary accommodation. Home REIT's strategy enables local authorities to reclaim 100% of the housing costs from central government and therefore removing that liability, removing that cost from off their balance sheet. Just to explain that in more detail, say local authority directly houses an individual in, say, B and B or private house, then it cannot recover that cost from central government. However, if the property is let to a charity or a housing association, as is the case with Home REIT, then it can recover 100% of that cost from central government. And so our model is an extremely cost efficient and attractive way for the local authority to tackle homelessness in their borough, particularly in the current COVID climate, where local authorities are very much feeling the financial pinch and homelessness is on the rise. In terms of the benefits for our tenants, well, are three key elements here. One, Henry leases property at a low and sustainable level of rent to the tenant. It also provides better quality housing versus alternative accommodation and importantly, gives that tenant the crucial long term security of tenure. And as you can see in the case study below, the price differences between the weekly rents that Home REIT are charging versus comparable bed and breakfast, so it's genuine and significant cost savings to the public first. Looking also at statutory and downside protection for the fund. The Homelessness Reduction Act 2017 came into force in April 2018 with strong cross party support. It is the biggest change to homelessness legislation in over forty years. In essence, the act provides legal duties, which mean that local authorities are obligated to take steps to house individuals who are threatened with homelessness or who are homeless. Public services now also have a duty to refer individuals to a local authority if they come into contact with someone they think may be homeless or is at risk of becoming homeless. And this act also provides significant and unique downside risk protection for the fund. In the situation of a charity failing, the respective individuals will be at real risk of homelessness, meaning that the local authority would be legally required to take steps to continue housing these individuals. In this situation, one could therefore look to assign the leases to a different charity or enter into a new lease directly between the local authority and Home REIT to continue to house such individuals and therefore allowing the local authority to adhere to its legal obligations under the act. Moving on to the next slide. So on the next three slides, one can see case study examples of our assets, both with external and internal images, showing the high standards across our portfolio. You can also see testimonials from some of our charity tenants giving real color to the positive impact being achieved within our assets. In case study one, the individual was due to leave prison without a home to go to and the big health charity housed this person and has worked hard with him to tackle his drug addiction and he is now making very positive steps to rehabilitation. And in the following two case studies, on the next two pages, one can see the tremendous work carried out by Lotus Century, who primarily focus on housing women fleeing domestic abuse or violence. Both examples, can see the positive impact Lotus has had on these women's lives. Moving now on to Slide 14. Looking now at the funding flow for our assets, which is relatively simple and direct. Typically, government funding for each tenant in this sector represents 100% the cost for care and housing and is paid from the Department of Work and Pensions to the relevant local authority. The local authority then passes the funds directly on to our charity tenant, who then passes the funds on to Hymri. The rental levels are set at a sustainable level with significant headroom between the lease property rent and the total housing benefit received. The headroom between the core lease rent and the gross housing benefit is typically 40% to 50%, which provides the charity with significant surplus funds for housing management or any necessary building upkeep. The rents are pre agreed with local authorities and the leases provide for a cap of 4% and a collar of 1% on the inflation linked annual rent reviews to ensure the rents grow in a sustainable manner. And lastly, the leases are full repairing and insuring leases, which mean there is no cost leakage to the fund. On the next slide, looking at how we partner with charities. In terms of the pre acquisition due diligence steps undertaken by Home REIT, well, these include firstly, a meeting with the local authority and the charity tenant to discuss specific homeless needs and requirements in their borough because, of course, they differ per region. These can be domestic abuse housing or people leaving prison or drug and alcohol, and that will dictate which type of housing we will then look to acquire. We then source the required assets and agree with the charity and the local authorities, the core lease rents to ensure that they are low and sustainable and have full local authority support. We then undertake in-depth legal due diligence from the asset and importantly carry out a full structural survey as we will not buy any assets with structural issues. We also conduct thorough financial and governance due diligence on the charity to ensure it has a robust governance procedures in place and sufficient balance sheet and P and L strength to meet its lease obligations. And we also work with the developer vendor to ensure that the charity is sufficiently capitalized as part of the transaction, so including a minimum of one year rent cover and the sinking fund contribution. And in terms of post acquisition, well, we carry out annual site visits to ensure the assets are being well maintained and the underlying occupants are receiving the required care and support. And we also monitor the tenants on a monthly basis, including balance sheet and governance analysis. I'm now going to hand over to Gareth on the next slide to talk about generating returns. Thank you, Jamie. This slide just highlights and explains our returns model. It all starts with the free cash flow generation that we can produce, which is produced by the widespread between our average acquisition yield, currently at 5.83%, and the low cost of debt, which is fixed at 2.07% for 12. What that enables us to do is produce a levered yield on equity of more than 7% at full deployment on an LTV of 35%. Then the running costs of around 1.5% are taken off this. And as you can see by our net income bar on the chart, we're very comfortable with our target of 5.5p per share dividend target. What should be noted here is that there's no property cost leakage. All our leases are triple net for repairing and insuring leases. Moving into the income and capital growth within the model. Jamie and I have a strong focus on the long term affordability and sustainability of rent. Rents are set usually at the lowest rate, the local housing allowance rate, which means there's material headroom between the total benefits received by our tenants and the core rents that they pay us, usually 2.5 times covered. And this allows them to build up surpluses for things like maintenance and voice. All of our leases have rental increases that will annually rise in line with inflation subject to a collar and cap, collar of 1%, cap of 4%. And this inflationary uplift is due to grow at a material higher rate than open market rental forecast. If you look at 2020 CPI 2021 CPI of 1.5%, that with our gearing, that would translate into a capital uplift of 2.25, only taking into account the rental growth. And that takes us from our 5.5% per share dividend target to our 7.5% total annual return. What we haven't put in that simple model is any scope for yield compression, but it should be noted obviously that we've had a 4.3% uplift in valuations of the properties we've already purchased. The next slide just takes you through the long dated low cost fixed rate debt that we have secured. This has been secured with Scottish Widows on a twelve year interest only term on an LTV of 35%. And we've had we've got an all in rate fixed to maturity of 22.07%. What that does is underpin our long term free cash flow generation and predictability of the dividend. There's a three seventy six basis point spread between our triple net index rental income and our fixed cost of debt at the outset of an acquisition. And this spread would increase to five twenty four basis points by the expiry of the term, as I said, underpinning sustainability and growth of these dividend returns. The next slide just takes you through our interim results and the NAV and portfolio bridge, taking you from our 98 P NAV at the outset at IPO through to our NAV at the end of the period of 102.8 per share. And that's been a 4.9% increase over those four point five months. That has been driven by a 0.6p cash earnings and a 4.2p per share uplift in capital value of our portfolio. That uplift has been created by us being able to buy our assets on a 5.83% acquisition yield and then being valued on a 5.57% valuation yield. What also should be noted here is that we've declared a 0.83p per share dividend in February, which was paid in March and this is in line with our full year 2021 target of 2.5p per share, which we will be fully covered by the end of the year. What should also be noted here is our LTV at full deployment on current metrics will be 32.8% without taking into account any further fair value uplift within the property portfolio. The next slide just gives you detail on the income statement and balance sheet. In the income statement, we generated over $3,000,000 of rental income, and this produced $1,600,000 of operating profit before valuation changes. We then had a $10,000,000 uplift in the fair value of the property, which gives us $11,700,000 operating profit. Once finance costs are taken off this, we've had a profit before tax for the period of $11,400,000 Our EPS is 4.75p per share and our EPRA EPS, which strips out the fair value uplift, is 0.57p per share. As I've mentioned already, we declared a dividend within the period of 0.83p. In terms of the balance sheet, you can see that we've now have a property portfolio that has been valued at $243,000,000 and we have most of the debt facility of $120,000,000 in cash at the moment. What that means, the total assets of $377,000,000 and once the liabilities are taken off, it takes us to our net asset value of 2 and $47,200,000 This translates to a NAV per share and a net per NTA per share of102.75p. And as I've discussed, the loan to value at full deployment will be 32.8%. Just going on to the next slide, just talking about the outlook and what we've achieved thus far. Jamie and I are very proud to have created Home REIT, a fund that is having genuine social impact and is helping to significantly reduce homelessness. We've now deployed all of our IPO net proceeds and fully committed allocated our $120,000,000 debt facility. The portfolio that we created is resilient, 100% let and has strong residual value and alternative uses if required. We have got all of our properties on long term leases, typically twenty five years at first break, and all of our leases are 100% index linked, Hector CPI subject to a cap on colo. We have a low transparent cost base with our FRI leases and low management fees and structure costs, which means that we can predict long term debt geared returns. All of our investments have been off market and continue to deliver value right at the point of purchase, where we can see ongoing yield compression down the line. All of our looking at the pipeline going forward, we have a strong group of assets that we can deploy quickly but prudently. Finally, we are on target to achieve our targeted returns, which is a minimum 2.5p per share dividend in year one. Thereafter, we're targeting a 5.5p per share dividend and a 7.5% per annum total return based on the IPO price. Thank you. Think that's the end of the initial presentation. We have a question from Joel Swift saying, thanks all for the update. When are you planning to come back to the market and for how much? At the moment, obviously, we've got our pipeline, we've got our debt to deploy. I think at the time of the IPO, we said our ambition was to grow to £1,000,000,000 over the next three years. That's still our ambition. And there was ongoing assessments of when the right time to come to the market is once we've responsibly deployed the debt facility. Okay. One from Mark Bentley. Please outline the methodology for calculating fair value of borrowings as compared to book valued. In terms of sorry, say that again. Please outline the methodology for calculating fair value of borrowings as compared to book values. The book value is obviously the debt that we have on the books at the time in terms of the fair valuing. We work with Scottish Widows, our provider, at the balance sheet date to look at what the rate that we fixed into the twelve years currently compared to the swap rate associated with the twelve year facility to see what the difference would be at the time and also taking in time exit costs. Obviously, we are in the money for that at the moment due to the very low rate that we secured at the time in December. '1 from Brian Riot. What, if any, competition do you have for assets in this sector? We are the only institutional player in this sector. So from an institutional perspective, there is no competition. But on an individual property by property basis, then competition can be, for example, from a high net worth looking to acquire that property for PRS or student housing. The benefit that we have is that we have a very good track record and proven deliverability and we're also able to be pretty competitive on pricing. So we are normally successful even when going against a high net worth. Another one from Mark Bentley. Have you had any issues with cladding at any of your properties? No. We, as a point of principle, will not acquire a property with cladding. So therefore, have not encountered that problem. Okay. And from Andrew Reiss, are you seeing increased competition in the space? Where do you see acquisition yields now? Are the off market discounts achieved so far repeatable in future? Let me know if you'd like me to repeat that. Is it okay, actually, if you just repeat, there were a couple of questions within that. There were three questions. The first question is, are you seeing increased competition in the space? No, not particularly, no different really to how it was seven, eight months ago. And because our deals are done off market, not through agents, then actually we're able to avoid competition. And actually, the truth is if an opportunity was being widely marketed and there was a lot of competition, that probably means that the yield will end up going too sharp and we will just step away. The second question was where do you see acquisition yields now? We see well, I can only compare them, I suppose, to IPO date and similar level with still able to achieve our disciplined approach of where we are. I suppose we're pleased with what we've achieved thus far, being able to be slightly ahead of our targeted 5.75% average acquisition yield whilst being able to get a footprint. In London, we see London is more expensive. They are on lower yields than 5.75%, but in different geographical locations. Sometimes we can achieve above 6% and we haven't really seen a squeeze on that. And the last question from Andrew Rees was, are the off market discounts achieved so far repeatable in the future? Yes, we believe so, and we're seeing that with the pipeline deals we have in. From Tom Dewey, to follow from a previous question, how will competition impact your initial yields? I think as Hoopi just said, we aren't seeing any impact on our yields on the pipeline deals that we are working on and seeing coming through. So we're confident that we are still able to maintain that yield discipline for the medium term? For sure. We will benefit from the network that we've already built up. And quite frankly, the macro problem is so vast. We've got a long way to go until when anything gets saturated. One from Jamie Carswell. Can you give an indication of the typical EPC ratings of your properties? And will there be any impact from the government's plans to mandate a rating of C or better on all rental properties by 02/1930? No, for us, that's positive. The vast majority, 82% memory of our portfolio has C plus and that's primarily because of the refurbishment works, which go on to the properties to ensure that energy efficiency is high. From Simon Smith, how will the management fee change as the REIT gets larger, I. E, will it reduce on larger amounts? Yes. It's up to 0.85p per share 0.85% on NAV for the first two fifty five hundred, sorry, then it takes it down to 0.75% of NAV after from 500 to seven fifty and then 0.65 over seven fifty. Question from Robert Murphy. How can you buy assets leased at rents way below market without the seller taking a loss on the property? Basically, of the yields that we're paying and the people we're coming up against, whilst our rents are the lowest in the market, probably the yields that a private individual would demand are higher. So whilst we have lower rents and we're buying on lower yields, they would have a higher rent and typically between wanting between 78% yield when they're purchasing properties. So we haven't had significant issues on that basis. We do sometimes pay a lower price than someone could probably get on a property on an individual basis. But our certainty of deal and relationships we have with people mean that they will maybe take a lower amount on an individual property knowing as I say that there's volume there. From Abigail Rothero, how many of your current partners have you worked with before? We probably got 60 ish percent new charity tenants. So around 40 are from existing relationships. From Richard Williams, what is your relationship with local authorities? What is the supply of homeless accommodation like? Any plans for forward funding development? So relationships with local authorities, are they like? Local authorities are sometimes slightly difficult organizations to work with, but the great thing with this model is that the charity so highly regarded by the local authorities because of the excellent work that they do, that they can open up the doors pretty easily and allow those conversations to happen. In terms of the demand, think the next part of the question was, well, the demand for such a combination is unfortunately with everything going on in the world is only growing. Kindly just say the last part of the question, please. What is the supply of homeless accommodation like? And any plans for forward funding development? In respect to forward funding, yes, are looking at some forward funding schemes. So we're not first towards doing them. And the likelihood is we will probably be doing some forward fundings in the near future. From Sasha Piroult, which regions are most affected by homelessness? And have you been able to acquire assets in these areas? The unfortunate situation across the country is that every single borough has a homeless problem. Obviously, in the larger cities, that problem is more acute. And therefore, we will acquire and we have acquired more beds in those expected cities like Manchester, Birmingham, Liverpool, London, Leeds, etcetera. But even the smaller towns like Hole, for example, have got significant homeless problems. So we are always looking at those areas, what the micro problem is in those areas and then acquiring the required properties for those borrowers. I suppose that the thing that's changed since IPO and what we're pleased about is that we've been able to create significant presence in London, the problem is acute and that's geographical spread and weighting we have been able to get in London is probably better than we thought we've been able to achieve at the rents and yields that we obviously need to work to. From Martin King, your follow-up monitoring includes ensuring maintenance of required level of care. How is that measured and whose requirements is that? Sure. So that's all requirements because that's us monitoring the charities. So in terms of the repair, keeping the property in good repair, that should be akin to how it's been handed over on completion. And then in terms of the care and support given, again, that's our asset management team speaking directly to the individuals living there to make sure that they are happy with what's being provided. It appears we don't have any more questions coming in. So I'll hand it back to yourselves, Jamie and Yes. Fine. Just wanted to say thank you to everyone for listening. Thank you to everyone for their support. Thank you also to the Board. And always happy to reach out if you have any further questions. Thank you very much. Thank you, everyone.