Law firm Harcus Parker has launched a group action against Home REIT over claims investors were misled by the company.
The commercial litigation firm has set up the action, on a “no-win, no-fee” basis, seeking “redress for shareholders of Home REIT” over claims they have been misled by information they were provided by the company and its associates.
Harcus Parker has instructed a barrister, Sebastian Isaac KC of One Essex Court, to prepare the claim on behalf of investors.
The law firm said it was seeking compensation for investors in relation to significant losses on their investments. Home REIT’s share price has fallen by more than 50% in the year to date.
Home REIT has already published a strong rebuttal to all allegations.
Harcus Parker’s claim follows an attack by short-seller Viceroy Research, which raised doubts over the ability of Home REIT’s tenants to pay rent, the prices paid for some of its houses and the structure that determines how much fund managers receive in fees.
In response to Viceroy’s dossier, Home REIT chair Lynne Fennah said: “This is a business whose sole focus is on providing safe and secure accommodation to some of the most vulnerable in society, whilst generating shareholder value. It is with deep frustration that the board is having to spend time and resources responding to these baseless and misleading allegations.”
The allegations meant that the company’s results, due out last week, had to be delayed. Home REIT has issued a 12,000-word rebuttal, but markets have been unimpressed, with Home REIT’s share price languishing at just over 50p. Three months ago shares were trading at 120p.
“Stark evidence”
Jenny Morrissey, a partner at the law firm who is leading the team, said: “The significant drop in the share price provides stark evidence as to the loss suffered by investors, and we are therefore in a position to bring a claim on behalf of shareholders who have suffered damage.”
He said Harcus Parker had “spent months investigating and analysing information available in the public domain about Home REIT”.
“What we have seen is troubling for its investors, particularly as many of them chose to buy shares in Home REIT because its stated purpose and vision are that it wishes to contribute to the alleviation of homelessness in the UK.”
It now intends to pursue a case against the company on the grounds that “it has used investors’ money in a way which runs contrary to what investors were told”.
Home REIT said it invests in and creates accommodation throughout the UK with the aim of helping to alleviate homelessness. It attracts investors’ funds by positioning itself as a vehicle to deliver a positive social impact with an investment strategy to “exclusively tackle homelessness”.
However, Harcus Parker claimed the shares had been mis-sold. “These shareholders include investors interested in delivering a positive social impact, such as impact funds, pension funds and charities. There is much concern among them about what Home REIT has been doing, as well as how this has affected people’s investments in the company.”
Stated investment objective
Harcus Parker alleged that investors “paid more for their shares than they were actually worth and that Home REIT has not invested the proceeds from its fundraising rounds in accordance with its stated investment objective and policy”.
It added, in concordance with Viceroy: “The company’s business model and the security of its income stream are in practice materially different from what investors were told about them, and that, because of this, Home REIT’s main asset – its property portfolio – is significantly overvalued”.
The law firm now wants to establish whether misleading information was provided by Home REIT in relation to its social impact; whether misleading information was provided in relation to the quality of its tenants; whether misleading information was provided in relation to Home REIT’s business model; and whether Home REIT’s valuation of its assets is correct.
Harcus Parker claimed that an analysis of a sample of the REIT’s property portfolio “indicates that Home REIT appears to have paid in excess of the market value for property to parties who are closely connected with some of Home REIT’s largest tenants”.
It added: “More specifically, it appears that properties are acquired by intermediaries who then ‘flip’ the properties between related parties over a short period of time, even on the same day, before the property is sold to Home REIT at a significant profit on the original acquisition price.”
The law firm claimed it had seen evidence that “the intermediaries who sell properties to Home REIT have made substantial payments to Home REIT’s tenants”.
Home REIT said in its rebuttal: “Vendors typically provide the company’s tenants with additional funding, usually representing 12 months of rent, to assist tenants at any stage of the lease where the residential property may not have full occupancy, including in the important ramp-up stage of a lease where properties may not be fully occupied.”
The law firm claimed that this was, in effect, using “the company’s own funds to enhance the covenant strength which forms one of the bases of the valuation of Home REIT’s property”.
Assurance to investors
The firm also claimed that Home REIT’s assurance to investors that it would only invest in “high-quality homeless accommodation” was incorrect. It alleged that properties owned by Home REIT had been found by local authorities to be unsuitable for housing vulnerable individuals and had consequently been denied “exempt accommodation” status under the relevant housing benefit rules. “Others are being advertised by agents and on websites such as Zoopla and Spare Room for students and professionals and even on booking.com as holiday lets,” it added.
Home REIT’s response to the Viceroy Research report was a strong rebuttal of all claims, but Harcus Parker said: “The response has not fundamentally changed the law firm’s view of potential claims, and, in fact, supports its argumentation.”
Alongside the response, Home REIT provided a list of its top 28 tenants as at 1 November 2022. But concerns have been raised as 16 of these were incorporated from the start of 2020 onwards, while 21 have been incorporated in the past five years.
Home REIT provided six examples of sales of property portfolios to the company. Each of these shows the intermediaries selling the portfolios to Home REIT at a significant mark up on the purchase price paid by the intermediaries, and at a significant profit on the intermediaries’ estimated costs. Harcus Parker calculated that the average estimated mark up on the purchase price across the six portfolios was almost double the intermediaries’ purchase price, at 99.4%. Home REIT’s estimated profit on cost for the intermediaries for each of the six portfolios was 18%, 42%, 37%, 33%, 20% and 27%.
The claims are likely be brought against Home REIT and its authorised investment fund manager, Alvarium Fund Managers (UK) Ltd.
Harcus Parker plans to pursue the claim against Home REIT under section 90, section 90A, and other provisions of the Financial Services and Markets Act 2000, which provides avenues for investor redress, “in relation to untrue and/or misleading statements and/or omissions in information” provided by sellers. The claims against Alvarium would likely be brought in the tort of negligent misstatement in relation to similar statements and/or omissions.
The law firm is asking anyone “who has held or continues to hold shares in Home REIT, either directly or through an intermediary” to join the claim, which will be brought on a “no win, no fee” basis.
Harcus Parker said it plans to donate a share of its fee on a successful outcome to a homelessness charity.
Home REIT declined to comment.
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