Analyst Mark Thomas discussed his recent note on MORhomes, Sustainable bond framework and earnings, with Larissa Adams.
Q1 You recently wrote a note on MORhomes. Who is this investment opportunity targeted at?
It is rather unusual for us in that it is a fixed income security targeted at professional investors like wealth managers and institutions. It is not one for retail investors or the man on the Clapham Omnibus, though with prices of houses in Clapham these days, you never know!
Q2 So, what can you tell us about MORhomes?
MORhomes is a pooled borrowing vehicle for the social housing sector. Over 60 major borrowing housing associations came together to set up a PLC, whose public debt is traded on the London Stock Exchange (LSE). In essence, for many small and medium sized housing associations trying to raise debt funding was prohibitively expensive, but MH, as a pooled vehicle, can get the pricing benefit of being a large and reasonably regular issuer. So, it raises bond market finance, and then lends it on to housing associations. The first issue of £250m was completed in February 2019 and there is now nearly £450m of bonds outstanding.
Q3 What are the risks in being a housing association pooled vehicle?
In our initiation a year ago called “Low-risk issuer in a low-risk market”, we noted that the housing association market had shown extraordinary resilience with no known losses of capital. There have been only a handful of problem associations in over a hundred years, and these were resolved by a stronger association taking over the one in difficulty. This resilience, though, is not an accident but rather reflects what housing associations do and how they do it. They have i) largely economically insensitive tenant income, with significant government support and with wide diversification, ii) high-quality, conservatively valued security, iii) direct government financial support, and iv) strong regulatory supervision. MORhomes had further reduced risk in what is a low-risk market with i) robust credit risk processes, ii) tight borrower conditions, iii) borrower financial resilience, iv) equity, contingent convertible and senior debt support, v) portfolio diversification, vi) excess, effective security, and vii) significant undrawn liquidity facilities. In our initiation, we said we believed HAs and MH would be resilient through the COVID-19 crisis, and this has proved to be the case with strong liquidity and interest cover throughout and only small rises in arrears and unlet properties.
Q4 One focus of this note was the sustainable bond framework. What is that about?
Until recently, MH issued “social bonds”, reflecting the strong benefits that its lending brought to society. There is, however, a strongly growing cohort of investors who invest in “sustainability bonds”, which require evidence not only of social benefit but also environmental ones. We believe MH’s approach has always followed such thinking, but, to qualify as a sustainability bond, this needs to be evidenced. It is our view that the dangers of greenwashing ‒ where a company claims ESG credentials but, in practice, is not adopting them ‒ mean that both an audit trail of compliance, and also multi-layered independent verification, will become increasingly valuable. MH’s processes and reviews appear to be in line with best practice. Sustainability investing is a rapidly growing asset class where investor demand appears to be rising faster than the supply of appropriate investments. By accessing this investor base, MH should be able to reduce its own cost of funds and diversify its funding. Importantly, it appears to be well ahead of the other Housing Association pooled vehicles in accessing this large and growing market.
Q5 ESG is a hot topic and everyone is saying they have the best ESG practices and policies. What makes you so confident that it is real for MORhomes and that it is ahead of the pack?
Great question and, as you say, Uncle Tom Cobley and all are making such claims. I go back to fundamental analysis. First, what does the company actually do? To my mind, you could not get a more ESG-friendly business than one providing low-cost housing to people in need and that is what MORhomes is funding. Secondly, you have to examine not only what it does but also is there evidence of what it does. Our note goes into a lot of detail on that. Thirdly, you have to know it has been verified independently of the company and we go into that too. The bottom line is that, on 3 August 2021, MH announced that it had received an MSCI ESG Rating of AA, putting it in the “leader” category, which represents the top 20% of all companies. We have not been able to access MSCI ESG ratings for peers, but we understand that MH is several grades above them. Fourth, and finally, you have to judge the character of the team and company. This is highly subjective, but we have now had extensive discussions across several layers of management and we believe that conservatism and doing the right thing is totally embedded in MORhomes’ culture.