Home REIT has announced an update on its internal investigation into allegations of wrongdoing including matters raised in the Viceroy Research report. As announced on 16 February 2023, the company instructed Alvarez & Marsal Disputes and Investigations (A&M), as independent forensic accountants to conduct an investigation.
A&M delivered to Home REIT a detailed report prepared from documents and information including emails and telephone messages of relevant parties.
Key findings from the A&M report are summarised below.
Arrangements for the refurbishment of properties were not brought to the Board’s attention by the Investment Adviser
The information reviewed by A&M indicates that some arrangements with the company’s corporate tenants and developers relating to the cost of refurbishment of properties were not brought to the attention of the board by the investment adviser, so that the board was unable to consider whether a release of a developer’s liabilities for refurbishment of properties was appropriate. In addition, although it is accepted by all parties that the developer (from whom the company acquires properties) is responsible for any required refurbishment works, A&M has identified certain situations in which a settlement was entered into by a number of the company’s tenants and a key developer, without the knowledge of the board, to release the developer from future liability to complete refurbishment works. Where settlement amounts have been paid by the developer pursuant to such arrangements, the A&M Report identifies that in certain cases these settlement amounts have been utilised by the tenants, with the knowledge of the investment adviser, to settle outstanding rent arrears due from such tenants instead of being used to complete refurbishment works, as described further below. In addition, A&M has identified a number of examples whereby refurbishment works have not been completed, leading to complaints by tenants and resulting in unlettable properties.
Settlement of rent arrears and arrangements with tenants were not brought to the board’s attention by the investment adviser
In its announcement dated 30 November 2022, the company stated that, “There are no overdue arrears in relation to amounts billed to 31 August 2022”. Whilst this statement was correct at the time it was made, A&M has identified, through its investigation, a number of different methods used by the investment adviser to offset or clear outstanding rent arrears accrued by tenants up to 31 August 2022 which gave the appearance that rents were being settled in the normal course by tenants, but which were not from sustainable cashflow sources and were not paid or collected in the form of rent. These methods included: (i) the company receiving funds from developers as part of a settlement payment in relation to a dispute in which the company and the investment adviser were not a party and which were subsequently allocated to accrued rent arrears, (ii) the allocation of receipts from developers against rent arrears due from tenants beyond the additional funding typically provided by developers, usually representing 12 months of rent, to assist tenants where the residential property may not be fully occupied, (iii) certain tenants settling the rent arrears for other tenants, (iv) the retention of funds due to be paid to developers to offset against rent arrears from tenants, and (v) proposed additional or extended rent free periods being granted to tenants who had outstanding rent arrears due to various reasons, including refurbishment and capital expenditure costs, cash flow issues and disputes between developers and tenants.
The A&M Report findings show that the board had not approved, or been provided with information regarding these alternative arrangements to settle outstanding rent arrears. Consequently, the board believes that this lack of transparency on the part of the investment adviser hampered the board’s ability to assess the medium term financial strength of its tenant base and the ability of its tenants to pay rent to the company on a sustainable basis.
Ongoing monitoring of tenants was limited by the investment adviser
As part of its investigation, A&M undertook an exercise in relation to the initial and ongoing due diligence performed by the investment adviser in relation to a sample of the company’s tenants. As a result of this sampling exercise, and based on the information reviewed, A&M concluded that, although evidence of initial tenant due diligence, at the point of taking on a new tenant, was present, there was limited evidence of detailed ongoing monitoring of tenants being undertaken by the investment adviser.
Information provided to The Good Economy by the investment adviser was inaccurate
The Good Economy is a consulting firm specialising in providing advice, analysis and research to organisations seeking to improve their social, environmental and economic impact. TGE was engaged by the company to provide annual impact reports in 2021 and 2022. The TGE impact report for 2021 was made available on the company’s website and key findings from the report were referenced in the company’s annual report for 2021. The impact report for 2022 was not finalised or published.
The evidence reviewed by A&M indicates that inaccurate information was provided, without the knowledge of the board, by the investment adviser to TGE in both 2021 and 2022, including inaccurate information about occupancy rates for portfolio properties in the sample properties reviewed by TGE for the purposes of their reports. In addition, TGE was informed by the investment adviser that the board was unwilling to allow TGE to carry out physical inspections of certain identified properties. This matter was never discussed with, or approved by, the board who would have authorised full and unrestricted access to the company’s properties.
The board believes that these matters were likely to have had an impact on the conclusions reached by TGE in their assessment of the company.
Other matters
Other matters, in addition to those noted above, were considered by A&M as part of its investigation, including some matters where no firm conclusion could be reached on the basis of the information available to A&M. Such other matters include information obtained by A&M which indicates that certain allegations were made by third parties to the investment adviser about the affairs of the company which were not properly investigated nor brought to the attention of the board. A&M also identified the existence of certain undisclosed potential outside business interests and undeclared potential conflicts of interest as between certain persons associated with the investment adviser and third parties. The board may decide to investigate some or all of these additional matters further, particularly if new information comes to light.
The board is still considering the conclusions and implications of the A&M Report with its advisers, and what actions it may take in response to the matters raised by the A&M report. All of the company’s rights are therefore reserved.
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