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First Priority: the inside story of a housing association that almost went bust

When a small supported housing provider entered into a series of leasing deals with investment funds, it nearly spelled disaster for its vulnerable tenants. Luke Barratt finds out what happened

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First Priority: the inside story of a housing association that almost went bust #ukhousing

First Priority: the inside story of a housing association that almost went bust

Inside Housing Spotlight is a series of pieces showcasing the best of our investigative and data journalism.

 

It’s March 2018 – fund managers and private equity investors are heading to a crunch meeting with a housing association on the brink of collapse.

At stake are the homes of 759 of the UK’s most vulnerable adults, including many with learning difficulties, brain injuries or physical and mental disabilities. If things go wrong, warns one investor, these people could be “out on their ear”.

How did we get here?

The story of First Priority Housing Association, censured in February by the regulator for “a fundamental failure of governance”, is on one level the story of a small social landlord that got into deep financial trouble.

But it is also a cautionary tale of the potential risks attached to a new kind of social housing investment.

At first glance, this model is disarmingly simple: private equity funds amass large portfolios of supported housing and lease them to housing associations, who then pay a monthly return to the fund, which usually targets a yield of over 5%.

"At first glance, this model is disarmingly simple"

But simple doesn’t necessarily mean safe. These funds invariably ask housing associations for lease payments linked to inflation, meaning they are unpredictable and could increase dramatically.

“You take on a lot of future risk,” explains Bruce Moore, chief executive of large supported housing association Housing & Care 21, which has not struck any of these deals. “You lose the flexibility around future rent uncertainty or change of use or funding arrangements.”

To date it has typically been small associations which have used this type of structure.

The homes are usually found by ‘aggregators’, who package them together and sell them to investment funds, usually taking around 1% of the purchase price as their payment.

Once sold in this way, supported housing becomes extremely valuable.

One developer tells Inside Housing he was offered £22m for a portfolio he said was worth £15m purely because the homes had long leases on them.


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With investors demanding guaranteed returns, rents tend to be well above average, although they are usually lower than the cost of staying in a care home.

According to a recent data release from the Regulator of Social Housing (RSH), First Priority charges an average tenant £190.15 a week, more than double the English average for supported housing of £93.08. While these are extremely high, defenders of the model note that they are inflated due to the fact that the homes receive no public subsidy.

According to Guildford Council, one of the 88 authorities in which First Priority operated, First Priority received advice from a financial advisory firm to set its rents.

These rents, of course, are paid by local authorities through housing benefit. Solihull Council, another place First Priority operated in, tells Inside Housing: “When organisations charge high rents to those living in supported housing and they subsequently need to claim housing benefit from the council, this can place significant financial pressure on the authority.”

To understand how the housing association got involved in these deals, and how it eventually backfired, we have to rewind to 2011, when the entrepreneur Omar Al-Hasso created First Priority.

He tells Inside Housing: “We set up First Priority in 2011 to become a specialist provider of supported housing services, utilising leased accommodation.”

Fast-forward to 13 July 2012, and Omar and his brother Ryan Al-Hasso are founding Henley Healthcare Investments (HHI).

The company does not call itself an aggregator, but does package supported housing units with leases and then sells them to investment funds. Many of the leases on the properties Henley sourced were with First Priority. A year after founding HHI, Omar Al-Hasso officially joined the board of First Priority, staying there for two years.

So did Mr Al-Hasso create First Priority specifically to create investment opportunities for HHI? And if so, does this represent a conflict of interest?

Andy Brandon, managing director of HHI, says not.

“I’m pretty sure that even before he came to Henley, Omar had created First Priority with this idea in mind that the long-lease model might exist,” he tells Inside Housing.

"The company does not call itself an aggregator, but does package supported housing units with leases and then sells them to investment funds"

“Although with retrospect, you can look back and say ‘conflict of interest’, another way of looking at it – probably the right way of looking at it – is that this is how you need to make it work. Because you’re not likely to get to any completely third-party housing association and say, ‘Do this model’. We had to create something, and I think Omar was instrumental in creating the model in the first place.”

Mr Al-Hasso recalls: “In January 2014 we set up an independent board at First Priority to help ensure First Priority’s decision processes were independently considered and in the best interest of First Priority. Every member of the board was fully aware of my involvement with Henley, everything was disclosed at all times.”

Mr Brandon says that Mr Al-Hasso left First Priority’s board “very quickly” after HHI started trading with the housing association, although another investor tells Inside Housing that he retained ‘observer status’ on the board, meaning he could not vote but still attended meetings and discussed decisions.

John Higgins, chief executive of First Priority, also insists: “Where the leases involved Henley, Mr Al-Hasso was not involved in the decision-making to avoid a conflict of interest.”

Although Mr Higgins and Mr Al-Hasso deny that he was involved in decision-making, Mr Al-Hasso admits he “discussed the advantages and disadvantages of entering into different proposed leased schemes, both Henley-leases and non-Henley-leases”.

He says that he did attend some board meetings after August 2015 "and I was asked to leave the room at certain points, on certain occasions for the board to discuss and vote on various matters".

He denies this amounted to ‘observer status’, explaining: “The purpose of my attending those meetings was to update the Board on new relationships with care providers, local authorities and landlords (Henley and non-Henley) and what, if any, impact that may have had on First Priority’s growth plans.”

First Priority began leasing homes from HHI in 2015 and, later, from other investors. One tells Inside Housing that no conflicts were declared when it bought its portfolio of homes.

He says the other purpose in attending was to update the board on the status of a large non-Henley deal he was brokering on behalf of First Priority and an independent care provider. Once this deal was concluded in October 2016 he says he "ceased having any involvement with First Priority at any level".

He also states that: “On many occasions First Priority declined to enter into a proposed Henley-lease. This decision was always accepted by Henley, I would never have tried to persuade First Priority to reverse such a decision.”

Not everyone is as relaxed about Mr Al-Hasso’s role.

Mr Moore comments: “Governance arrangements are crucial and it is important to ensure that these provide clear accountabilities without inherent conflicts of interest.”

First Priority began leasing homes from HHI in 2015 and, later, from other investors. One tells Inside Housing that no conflicts were declared when it bought its portfolio of homes.

The main funds buying these homes were Civitas, Equitix, Funding Affordable Homes (FAH), Henley Secure Income Property Unit Trust, and Supported Living Infrastructure Limited (SLIL).

Many of these investors do not make public the details of their deals, so it is difficult to track their involvement with First Priority over time.

One investor, however – Civitas – does share details. It launched in November 2016 and struck its first deal on 15 December that year, with First Priority. It then spent much of 2017 making further deals with the association, which would become one of its biggest counterparties.

It was near the start of 2017 that First Priority’s problems began behind the scenes. It contacted HHI asking for a £2m loan, which it granted. The money was needed, it seems, chiefly because of problems with property management and rent collection.

“First Priority’s board and [management company] BMA had managed these properties extremely poorly,” recalls one investor.

“There were payments being made to us, which were the correct payments, but they weren’t backed up by the collection of money from the underlying properties.”

First Priority had also, the investor says, fallen behind on repairs, and although it had done fire risk assessments on its homes, it had not carried out the necessary work after those assessments.

Another investor claims that BMA “hadn’t been collecting rents that were due, hadn’t been pushing through rent increases, or claiming from housing benefit, [it] hadn’t been – in some cases – actually claiming housing benefit, or not putting in the claims which meant they were
time-barred”.

Just as importantly, First Priority’s void rate had risen to 26.5%, far above the English supported housing average of 4.7%.

One investor describes this as the “number one” problem. He adds: “They simply failed to bring enough money in.”

First Priority’s void rate had risen to 26.5%, far above the English supported housing average of 4.7%.

Paul Bridge, chief executive of Civitas, confirms the problems were “around the collection of rent and obviously the collection of void payments”.

There was a voids insurance policy to cover some of these, while for those it didn’t cover, BMA was supposed to invoice the care provider. According to one investor, BMA never did this.

Jonathan Walters, deputy director of strategy and performance at the RSH, highlights voids as the key to the problems at First Priority: “If a business’ void rate is 30% to 35%, you simply cannot manage a cashflow-based lease business with 35% void rate. You simply can’t do that. When we talked about ‘a fundamental failure of governance’, that’s what we were talking about. You’ve entered into a lease for 30 years say, that’s going up at CPI+1 [Consumer Price Index plus 1%], so your lease payments are going up all the time. But if you’re not collecting rents, you can’t afford to meet that lease payment.”

As for what drove such unusual levels of voids, Mr Walters’ assessment is equally damning.

“Some of the properties seemed to be in poor condition and First Priority had to work hard to ensure they met their commitments.”

When contacted for comment, BMA tells Inside Housing it has signed a non-disclosure agreement and cannot discuss its work for First Priority.

Some investors are keen to blame BMA for all of First Priority’s problems, but Mr Walters says that doesn’t give the full picture: “Fundamentally, what undid the business was that some of the leases were probably ultimately uneconomic.”

He adds: “One of the issues with First Priority was that it went from something like 50 to 60 units four years ago to, by the time they ran into problems, over the 1,000-unit limit.

“Managing a business growing that fast is very difficult. If you haven’t got the right policies and procedures, you might end up signing poor leases that aren’t economic for you.”

Funds such as these need to deploy capital quickly to provide the dividends their shareholders expect. But the small housing associations that act as counterparties can be ill-prepared for such growth. This can lead to the problems that First Priority encountered.

Last summer BMA was replaced as property manager by a subsidiary of First Priority called First Priority Property Management Services, since renamed Myshon. This company has since become an independent tenancy management firm.

In November, Mr Brandon remembers: “I got a call from John Higgins saying, ‘We need some more cash’.”

HHI put in another £2m to help fund Myshon’s efforts with the management problems, but they seemed to persist. An email to Ashfield District Council, seen by Inside Housing, reveals that housing benefit payments to one tenant were leaving a shortfall of nearly £200 a week.

In January this year, the investors were told how bad things truly were. Mr Higgins tells Inside Housing that it was only in January that he and the board realised that there were some leases “where the lease rent was unsustainable at full occupation”.

In other words, even with all the properties filled, First Priority still wouldn’t have been able to afford its payments to the fund.

Why, one might wonder, would either party sign up to a lease so obviously destined to fail?

How the deal works

How the deal works

The middleman, whoever that was, would still benefit, whether by taking a 1% commission or selling the homes on at a profit.

Mr Brandon explains the January situation: “At that point, it became a bottomless pit. It wasn’t a question of putting cash in to fix a short-term cashflow hole. It was a structural problem it had with making losses that there was no point us trying to plug with short-term cash, because it would have just re-appeared.”

Another investor adds: “It came as a complete bolt out of the blue, partly because we’d just received a payment.” That January payment turned out to be the last to the investor.

Civitas also tells Inside Housing that it had received all rents in full from First Priority as of 31 January.

In February, Mr Walters recalls: “John Higgins phoned us up and said, ‘We’ve got a problem’.” The regulator sent its enforcement team in immediately, with those close to the situation soon fearing the worst.

For First Priority, the storm may have abated but the story of lease-based supported housing is far from done.

First Priority appointed insolvency specialists Begbies Traynor, which quickly realised that its best hope was to reach a company voluntary arrangement (CVA), which would mean creditors accepting that payments would not be on time, and First Priority paying only what it was able to.

Mr Brandon comments: “From where we were in March and how things were looking there, it was very uncertain. We had no idea that they could land or we could land a CVA.”

It was at this point that investors, the regulator, HHI and First Priority locked themselves into a meeting to hash out a solution.

“Luckily all the landlords, ourselves included, accepted the pain that meant and it meant pain for everybody,” Mr Brandon relates.

“But the result of that was in many respects a soft landing versus what could have happened if [investors] and we had not played ball and had gone into an insolvent situation.”

For tenants, that pain could have seen them lose their homes.

Meanwhile with lease payments not coming in, some investors wanted out.

In May and June, Civitas, SLIL and FAH all transferred their properties to other small housing associations. The remaining creditors agreed to a CVA in July after negotiations, with all of them accepting reduced payments.

Mr Brandon explains the current situation: “First Priority is in a limbo state. They are effectively collecting housing benefit and passing it through to the [investors] that stayed with them.”

For First Priority, the storm may have abated but the story of lease-based supported housing is far from done.

The regulator has written to 30 housing associations with similar business models warning about “conflicts of interest” and the importance of “stress-testing”.

This week, it declared one of them – Trinity – non-compliant, saying it was “potentially putting its tenants at risk”.

It is still investigating three others for possible breaches of its standards on governance and financial viability: Inclusion, Westmoreland and Encircle.

Figures from the regulator indicate that the first two of these charge rents significantly above the average, just like First Priority.

Westmoreland has a void rate of 35% and Inclusion has 25.7%, according to the regulator – both are worryingly high. Trinity and Encircle did not provide a figure.

One investor calls voids the “number one” problem at First Priority, and so it is difficult to ignore these numbers, though Neil Brown, chief executive of Inclusion, says they reflect “healthy growth” and Westmoreland said it was working on reducing this.

The regulator will issue judgements on the other three housing associations soon. After that, the sector can judge for itself whether deals like this are worth the risk.

Inside Housing Spotlight

Inside Housing Spotlight

Inside Housing Spotlight is a series of pieces showcasing the best of our investigative and data journalism.

 

Spotlight pieces:

14 December 2018: Starting to bite - how Universal Credit is making people homeless: we reveal new figures showing a clear link between Universal Credit and homelessness

9 November 2018: First Priority - the inside story of a housing association which almost went bust When a small supported housing provider entered into a series of leasing deals with investment funds, it nearly spelled disaster for its vulnerable tenants. We investigate why.

12 October 2018: The ballad of Knowsley Housing Trust the inside story of the first housing association made non-compliant by the sector's watchdog for fire safety issues

13 September 2018: How tweaked building guidance led to combustible insulation on high rises: an investigation shows how lobbyists from the plastic insulation industry supported a quiet tweak to building guidance to permit combustible insulation on tall buildings

31 August 2018: The true cost of homelessness Freedom of Information requests reveal the soaring costs of temporary accommodation

30 August 2018: The forgotten threat to high rise tenants We investigate the threat posed by combustible window panels on social housing high rises

13 June 2018: The Biggest Ever Survey of Fire Risk Assessments Data journalism revealing widespread fire safety issues in more than 1,500 tower blocks across the country

12 April 2018: A Section 106 Story An investigation into allegations of "sham transactions" involving Section 106 deals in south London

23 March 2018: The Paper Trail: The Failure of Building Regulations A lengthy investigation into the failures of building regulation that may have contributed to the Grenfell Tower disaster, and the many missed warnings

23 February 2018: The Kingspan Papers Leaked meeting notes reveal some worrying issues, including allegations of fire safety report doctoring by manufacturers

9 February 2018: Gentoo: a Sunderland story We look back at the recent history of Sunderland’s largest housing association.

25 January 2018: Homeless families face long stays in council-owned hostels we reveal how councils in London are skirting the law by using hostels to house people in temporary accommodation for more than six weeks

7 December 2017: Council house to private rent We reveal the percentage of former Right to Buy homes in the private rented sector has passed 40%

17 November 2017: Rent to buy, or rent to rent? A look at how successful the government's Rent to Buy schemes have been

7 September 2017: Once upon a time in the west The history of KCTMO in the years before the Grenfell Tower fire

11 August: 2017 Grenfell: The paper trail - our news editor Pete Apps examines seven years of council documents to tell a story of the missed opportunites to prevent the Grenfell tragedy

4 August 2017 : Knowing the risks – the most common fire safety problems in tower blocks

26 May 2017: Rents hiked for RTB replacements – Sophie Barnes reveals less than half of Right to Buy replacement homes are for social rent

12 May 2017: A stark warning – a prescient piece looking at lessons to be learned from the Shepherds Bush tower block fire

13 April 2017: Where the axe will fall – a look at plans to axe housing benefit for younger people

10 Feb 2017: Circle of Despair – the inside story of Circle's repairs and maintenance troubles

3 Feb 2017: The Benefit Cap Tightrope – Sophie Barnes unveils the first exclusive analysis of the lower benefit cap

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