Prs Reit Share Discussion Threads

[giltedge1] 31/1/2023 17:33

PRS Reit is like an inflation linked Gilt, thousands of tenants to spread the risk almost 100% occupancy & properties brand new, I am hoping for a dividend increase this year. Only negative low LTV, 45%, 50 - 60 is the norm for residential property. Good buying at this level, should go to £1.00.

[davebowler] 11/1/2023 10:56

Liberum;
Mkt Cap £458m | Share price 83.3p | Prem/(disc) -28.5% | Div yield 4.8%

Event

PRS REIT (PRS) published a 2Q23 update this morning. Key take-aways are: (i) 57 new rental homes have been added to the portfolio. (ii) ERV has increased +17% y.y (iii) An additional 613 homes have been contracted at varying stages of the construction process. (iv) Occupancies are at 98% (after taking into account new applicants) with LFL rental growth at 5.7%.

Liberum view

We view the strong growth in LFL rentals and improvement in occupancies as encouraging data points, indicating that the BTR market is holding up. The statement mentions that affordability remains strong with average rent as a proportion of household income at c.25%.

[pdosullivan] 09/1/2023 06:51

The development surplus (market value > build cost) on the completions will help towards defraying downward pressure on asset values generally.

[boonkoh] 09/1/2023 01:35

Is there a debt to assets covenant ratio of 45%? I think I saw it somewherein the FY results.Looking at where debt is likely to be by mid next year, when more completions done... Looking like it might breach? Especially if EPRA values are revised downwards. What happens then?

[makinbuks] 29/12/2022 11:18

When you say struggling I don't think its that it cant be done, simply that they don't like the price and want to wait and see what conditions are like in another three months. That's a bit of a gamble but clearly they are of the view that rates will rise less than anticipated as inflation will be driven lower by recession

[nickelmer] 29/12/2022 07:17

It does not sound encouraging that they have to ask for a loan extension while they try to re-finance their debt, they will have been trying to do so prior to the deadline so they are either struggling to get a decent interest rate or simply struggling to refinance.

[giltedge1] 19/12/2022 13:11

Housing crisis fuelled by 20% drop in building work announced today.
The rising price of materials and the increased cost of carrying out construction work are shaking the industry to its core. With fewer new builds going ahead the housing deficit behind the housing crisis is only set to widen. PRS Reit has saved about 15 - 20% on build costs, buy building in past two years or so. Replacment cost is no guarantee for increase in NAV, but it helps!

[giltedge1] 28/11/2022 09:10

Thanks Smithers1 for detailed analysis, even your conservative analysis 4.6p 2023.
When I was referring to increase to 5.5p obviously not in one jump, but slow progressive. 2023 4.5p 2024 5p 2025 5.5p. I think achievable, as since portfolio built, costs have increased on average I would say 20%, rental market has tightened & tenants are targeting energy efficient home, which these are, so can potentially save up to £1k a year. Last report occupancy 98%, which is virtually 100%, allowing for move ins & outs. Also 10% growth on relets, next year maybe 5% & still rents affordable.
You could argue all metrics have gone in their favour since IPO, recent negative sentiment in Home & a few others, negative press on housing market in general (misplaced in my opinion) has created a buying opportunity. I am slightly down, but intend to add next year as just sold my buy to let (waiting for funds, probably February), with all the hassle & can buy these at 7% yield, brand new & sit back!.

[jonwig] 27/11/2022 07:47

Smithers thanks for your detailed comments. When you write:

It does leave one wondering where the targeted "6% or MORE" came from and what assumptions were used to arrive at that figure!

I think any macroeconomic assumptions made in 2017 will be well outdated in 2022. As a positive, employment appears to be holding up well (too well for the BoE) and private sector wage growth (if not public) will support rent affordability.

[smithers1] 27/11/2022 00:15

Giltedge thanks for the comments.

My own analysis is suggesting a lower div. and happy to share as this stock is not widely covered by analysts.

Annual results 2022 show ERV of completed & contracted sites of £56.7m. The ERV is above the actual rents received as it is based on the rents achieved on new lettings, with those rents then applied on a site by site basis across the portfolio to arrive at the estimated ERV. There is a slight lag until annual rent reviews complete across the portfolio over the period to catch up with the ERV but also and more importantly PRSR has opted to only increase rents on existing tenancies by an average of 4% V's 10% on lets to new tenants. Potentially rents received in 2023 year may be circa 6% below the stated ERV. Likely 4% increases are a truer reflection of the market as on a site of 80 homes for example, whilst you may achieve the 10% increase on a couple of new lets after previous tenants vacate, it is debatable if the remaining existing 70 or so tenants would tolerate a 10% increase without considering alternatives. One swallow doesn't make a summer as the saying goes but this is nonetheless how valuation surveyors arrive at the ERV and this is a contentious point for all REITs. Also the stated ERV of £56.7m includes estimated rents on some sites not built out yet so those rents are not yet being received. Notwithstanding lets look ahead and use £56.7m.

Non-recoverable direct property costs (property management charge which is outsourced, landlords insurance, maintenance, bad debts etc.) was 18.2% in recent results. Deduct that from ERV of £56.7m = £46.4m.

The REIT's admin expenses for 2022 were £2.2m and the investment adviser's asset management fee was £5.2m = £39.0m.

Interest on bank loans is the trickiest part and slightly subjective when forecasting. Ignoring non-cash amortisation charges for legals and arrangement fees, debt interest was £8m in 2022. £350m of the £440m total debt facilities were drawn as at 30 June 2022. The facilities will likely become fully drawn as the remaining sites complete in 2023. £190m of the £440m of debt is on a variable rate which will now be higher. Add to that in 2022 the £90m of undrawn debt was all variable rate so was probably only being charged at non-utilisation rates rather than full rate. At the existing debt interest rates as at 30 June 2022 per the annual results, once fully drawn annual debt interest would be £13.9m. Not factoring in increased rates on the variable debt, debt interest deduction of £13.9m = £25.1m.

No. of shares in issue 549.3m = 4.6p div. per share.

The key variables are:

-rents received / how close PRSR can get this to the stated ERV. My analysis above could currently be overstating by circa 6% even once remaining sites in progress are fully built out
-Ongoing rental growth which will hopefully counterbalance some of this. As you have noted the rents are affordable so hopefully despite the outlook there is scope to drive further increases
-debt interest costs and the uncertainties around the cost of the variable rate debt and whether or not if will be fully drawn once the remaining sites are built out

As an aside and for the sake of clarity, the Prospectus of 2017 actually stated an initial dividend of 5 pence per share paid out of capital initially, with a targeted covered dividend of "6 pence or more" by June 2020...... The targeted dividend has since been downgraded a couple of times. It is somewhat irrelevant now but disappointing that despite reported stronger than anticipated initial rents achieved, strong rental growth, tightening of yields, and a strong housing market (until June 2022 at least) the dividend remains an as yet not fully covered 4p per share. It does leave one wondering where the targeted "6% or MORE" came from and what assumptions were used to arrive at that figure!

[jonwig] 26/11/2022 14:54

mb - I thought the same. These are homes for people who want to rent - no charities sitting in the middle. And rent affordability at 25% (in the last AR) can't be excessive when "stress" is estimated at 35%.

[makinbuks] 26/11/2022 14:03

Current weakness due to HOME read cross. No reason for that so I see a recovery in the coming months

[giltedge1] 25/11/2022 14:40

All metrics are fine rents rising, shortage of affordable housing (500K immigrants 2022) brand new EPC A or B, no maintenance issues. Only bug bear is LTV set at a lowish 50% of Assets, which is odd should be 60%+. I rate these as a buy as hopefully will start raising dividend from 4p this year, prospectus said 5.5p & I think achievable.

[jimbobbaby] 08/11/2022 12:44

Fair points. But there will be somewhat of a counterbalance to the yield increase in the valuation. Yields will be assumed to be higher as a result of higher inflation but would be expected to decrease once inflation moderates. Mgt should be able to get the benefit or higher rental projections in future years which may reduce the impact of yield increases.

[jonwig] 05/11/2022 07:35

Smithers - thanks for your comments. Just a couple of things -

I was encouraged by this in the 2022 AR:

The PRS REIT’s average rental affordability ratio
has improved to 25% in 2022 (2021: 29%). This
is notwithstanding rental growth over the year and
compares to Homes England’s affordability target of 35%.
We believe it indicates a stronger tenant base.

Scope to increase rents to some extent.? Renters are likely to suffer less financial stress than mortgage holders.

The second point is that as a REIT it must pay out at least 90% of net rental income. I haven't checked whether it overpays, but it does mean that there is little scope to hold back dividends.

By the way, I don't know what the loan covenants are, but in 2020 and 2021 they said they were comfortable. They omit that in the current year (!)

[smithers1] 04/11/2022 17:21

Debt is low at circa 30% with 60% fixed.

Whilst house prices might only fall by 10-20% the PRS Reit's NAV is calculated on an investment yield basis. The debt covenants with lenders in terms of max loan to value ratios will also be based on the investment value. The concern with yields moving out to adjust to the higher interest rate environment is therefore that a small movement in yield could knock significantly more than 20% off the investment value of the portfolio with the negative effect on NAV enhanced further by the (modest) gearing. With the portfolio previously valued off an approx. 4% yield and the outlook uncertain as to where rates will end up, it is plausible that values could fall by 30-40%.

The REIT may also need to retain cash/income that could otherwise be paid out as dividends to provide additional security to its lenders to ensure compliance with the max LTV debt covenants.

Add to that the increasing debt interest costs on the circa 40% of debt that is not fixed.

Whilst the underlying income stream is to date holding up very well, giving consideration to the 3 factors -investment yield sensitivity on NAV; additional security provision to banks to comply with max LTV covenants; and increasing debt interest costs on the 40% variable rate debt - I am not convinced the current share price has fallen far enough to properly account for these. I will be sitting it out to see if and how these factors materialise next year

[jonwig] 19/10/2022 13:40

Sounds good, but when you factor in can't pays and won't pays the landlord needs to be prudent.

[giltedge1] 19/10/2022 13:36

Data provided to i by estate agents Barrows and Forrester show that average rents have increased in Manchester by 17.1 per cent from £817 in August 2021 to £958 in August 2022.

Other cities across the UK have seen similar increases, including Glasgow (18.3 per cent), London (17.3 per cent), Newcastle (16.7 per cent) and Birmingham (15.1 per cent).

[jonwig] 17/10/2022 07:31

hindsight - correct calculation, but is the current discount a recognition of that risk?

[jonwig] 17/10/2022 07:00

Chairman buys 80,000 @ 88.4p.

[hindsight] 14/10/2022 13:26

If take the nav 116.4p, then allow for 20% property price fall with 31% gearing, get to 82.7p nav

[jonwig] 14/10/2022 07:10

NED buys 25,000 @ 85.5p.

[jonwig] 13/10/2022 07:25

Telegraph Questor -

Matthew Norris, Gravis Capital ...

first invested in the fund, which describes itself as “the largest portfolio of single‑family rental homes in the UK”, in September last year in the belief that it benefits from what he calls the “generation rent” megatrend: an acceptance among younger people that they are unlikely to be able to buy a property for some time and that they will instead seek high‑quality rental accommodation.

He says PRS Reit’s annual results, published on Tuesday, illustrated the robust performance of generation rent assets. It said its portfolio was performing strongly and rental demand continued to grow.

It added that rising interest rates were expected to reduce mortgage affordability and “drive demand in the rental sector as prospective homeowners turn to rental alternatives”, while “high‑quality, well located homes combined with customer service remain highly attractive to prospective renters”.

While the overall rise in rents during the year was 5.1pc, it achieved 10pc increases on properties let to new tenants, compared with about 4pc on renewals with existing ones. Rent arrears were just £600,000 at the end of the financial year in June, compared with net rental income for the year of £34.3m. The portfolio grew by 20pc from 3,984 homes to 4,786 over the year.

Despite all these promising facts, we must acknowledge the continuing dangers of the wider economic environment. As we wrote above, rising interest rates and bond yields tend to push up yields on other assets – and hence push down their prices.

We don’t know where interest rates will peak so downward pressure on the valuation of the assets of this and other property funds is possible. Equally, markets look ahead so some of the expectation of higher rates will already be “in the price”. We also have the buffer of a 28pc share price discount to the portfolio’s net asset value.

Norris notes that many Reits are currently trading at discounts of nearer 50pc but says his research suggests that buying “quality”; Reits at either a more modest discount or even a premium has tended to produce better returns than simply buying those on the widest discounts.

“PRS’s discount of 28pc to the last reported net asset value is not the widest around but the trust is certainly among the highest‑quality portfolios of assets, especially in the private rental sector,” he says.

[davebowler] 11/10/2022 08:47

Liberum;
Robust occupier demand drives performance

Mkt Cap £486m | Share price 88.5p | Prem/(disc) -23.8% | Div yield 4.5%

Event

PRS has delivered a good set of results in the 12 months to 30 June 2022, with EPRA NTAps up +18% to 116.4p on strong NRI growth (+60% y/y). Performance has been driven by robust occupier demand as rising interest rates make home ownership more unattainable for some yet leave room to increase rents on affordable dwellings. LfL blended rental growth over the year was 5.1% with re-lets to new tenants achieving c.10% uplifts in rents and the average tenant spending 25% of their income on rent, down from 29% last year. Adjusted EPS increased +150% from 1.2p to 3.0p and the group’s gearing ratio remains low at c.31% with 62.5% fixed at an average rate of 2.9%. Notwithstanding affordability pressure from the cost of living crisis, increasing mortgage rates will continue to boost demand within the UK rental market. Management guide for the portfolio to reach 5k homes by the end of CY22 with completed assets performing strongly.

Liberum view

We continue to see value on the occupier demand for UK rental market as increasing mortgage rates make home ownership increasingly unattainable for some. While we would expect rental growth to moderate from here due to increasing utility cost pressures, rental homes remain a more affordable option than ownership, which should help to somewhat support residential values in the face of rising interest rates.

[jonwig] 11/10/2022 06:42

The answer would be "because they can raise the rents and therefore the dividend". But this of course raises the question of arrears and defaults.

A shame, but virtually every investment decision these days has to refer back to politics, which is a toxic situation.