Trading in the shares of Home Reit has been suspended after the self-styled “landlord for the homeless” was unable to get its annual accounts signed off in time following a recent attack on its business model and practices from a short-seller.
The company, which rents out thousands of homes to councils and charities, had been due to publish its results for the year to the end of August in late November.
However, a few days before, Viceroy Research published a critical report flagging a number of concerns with the business. They included doubts about tenants’ ability to pay rent, the prices that Home Reit paid for some of its houses and the structure that determines how much the fund managers received in fees.
Boatman Capital, another short-seller, piled on, questioning the purported value of properties, which it believed to be “significantly inflated”, and describing the position of Lynne Fennah, the company’s chairwoman, as “untenable”.
Soon after Viceroy’s report was published, Home Reit responded, stating that the claims were “inaccurate and misleading . . . based on mistaken assumptions, misinformed comments and disputable allegations”. A lengthier, 13,000-word rebuttal followed a few days later.
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Despite its denials, Home Reit was forced to delay the publication of its results to give BDO, its auditor, more time to look into the allegations made by Viceroy.
Under stock exchange rules, companies must submit their annual accounts within four months after the end of their financial year, otherwise their shares will be suspended until the numbers have been signed off. Home Reit’s deadline was December 31.
The expectation had been that Home Reit would miss that deadline, given the “enhanced set of audit procedures” to which BDO was subjecting it. The landlord previously had told shareholders that it was hopeful of getting its accounts signed off before the end of January and was “working tirelessly” to do so.
It said yesterday that it would publish the results “as soon as practicable”, although it did not repeat its belief that that would happen before the end of this month.
Fraser Perring, the former social worker who runs Viceroy, has questioned in the past whether Home Reit’s shares would ever return to trading should they be suspended.
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The Financial Conduct Authority has the power to permanently cancel the shares of any company whose shares have been suspended for longer than six months.
The suspension means that Perring will be unable to close his £5 million “short” bet for the time being. Another short-seller, Oasis, a hedge fund, closed out its larger short position in the week before Christmas.
While regular investors generally bet on stocks they think will go up in value, short-sellers profit when companies’ share prices fall. They borrow shares and immediately sell them, hoping to buy them back at a cheaper price further down the line, pocketing the difference.
In this instance, both Perring and Oasis will have made a profit — if only on paper, in Perring’s case — given the stock’s sharp fall.
Shortly before Viceroy’s report was published in November, Home Reit shares were changing hands for about 77p. They have since halved in value and closed at 38p last Friday. Its stock market value has dropped from about £610 million to £300 million over the past six weeks.
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Home Reit was floated in October 2020 at 100p. Since then it has tapped investors for £850 million to build a portfolio of almost 12,000 beds in houses and small blocks of flats that it has bought and renovated. It says “robust tenants”, such as charities and local councils, rent the properties, typically on 25-year leases, to house homeless people, including those who have just left prison or foster care or are victims of domestic abuse.
Despite its belief that Viceroy’s “allegations are without substance”, in a bid to placate the City, Alvarium, which runs the fund, promised last month to beef up the senior management team. It also has committed to getting an independent valuer to assess any buildings it is looking to buy to allay fears that it overpays for properties.
Behind the story
The allegations that have rocked Home Reit have also thrown a spotlight on to BDO, Britain’s fifth largest auditor, which signs off the landlord’s accounts (Tom Howard writes).
BDO has been Home Reit’s auditor since it joined the stock exchange in October 2020. In the company’s maiden financial year, which ran until August 2021, BDO was paid £326,000 for its work checking over Home Reit’s accounts. It also earned £240,000 for non-audit work, such as helping with the initial public offering.
Its team of auditors, led by Ed Goodworth, are carrying out an “enhanced set of audit procedures” in the wake of Viceroy’s allegations and it is because of this that Home Reit’s accounts are yet to be published.
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They will be working around the clock to double-check their work and will look into any concerns raised by Viceroy that they might have overlooked. BDO declined to comment on the specifics of the extra work.
Critics will argue that any issues within a business should be uncovered by the auditor and not by other parties, such as short-sellers. Auditors will say that there are only so many areas that they can properly investigate and that much of their work depends on the quality of the client’s internal processes and controls.
BDO, as well as other auditors trying to challenge the Big Four, came under fire last year from the Financial Reporting Council, the accountancy sector regulator, for picking up too many “challenging audits” that they did not have the resources to handle. “These firms have been growing too fast, picking up higher-risk audits being dropped by their peers, without adequate controls to ensure high-quality audits,” the watchdog said in a report.
In that report, the FRC said BDO’s results “have again been unacceptable”. Only 58 per cent of BDO’s audits passed the FRC’s checks, though that was up on the 44 per cent for 2021.
