Prs Reit Share Discussion Threads

[spectoacc] 18/1/2024 07:05

I regard PRS as a doomsday machine REIT. No one seems keen to debate it, but the majority of their property will all need Capex (kitchens, bathrooms) at the same time. I can't see any provision being made for this, even within the c.20% pa being taken from shareholders' rent.

Note that this won't happen for a good 5 years, likely 7-10.

[nexusltd] 17/1/2024 21:51

@Jimbo. Interesting take. Thank you.

I propose a thought experiment. Say this community owned the PRSR properties and:
1) We agreed to have a single nationwide managing agent to take care of finding renters, take care of contracts, respond to renters' calls for assistance, etc. What fee could we negotiate as a % of ERV?
2) Given the age profile, quality, and relatively low tenant turnover (low rents) what would be the annual maintenance capex we need to budget for, as a % of the EV?

[jimbobbaby] 17/1/2024 17:08

ERV of £63M. Mkt Cap ~£450M + net debt ~£300M = EV ~£750M=>ERV/EV yield of ~8.4% with rents growing at ~10% p.a.?Will be bumpy but cheaper and less hassle than trying to run your own BTL - esp if in a tax free wrapper.

[pillion] 24/12/2023 17:45

Tipped on Motley Fool today

[davebowler] 21/12/2023 17:47

htTPs://www.telegraph.co.uk/money/investing/stocks-shares/property-trust-prs-reit-valuation-big-discount/

[giltedge1] 14/11/2023 13:33

Great up leg, topped up low 70,s + div going in right direction.

[masurenguy] 05/11/2023 09:07

Interesting share tip - no position but added to my watchlist.

MIDAS SHARE TIPS: Home in on cash from PRS Reit
4 November 2023

The group was set up in 2017 to deliver high-quality homes at affordable rates, while generating robust income for shareholders. To date, it has delivered on each of those ambitions, amassing a portfolio of more than 5,000 purpose-built, private rental homes and paying attractive dividends along the way. Yet PRS shares have fallen from £1.10 in the summer of 2022 to just 79p today, with investors deserting property stocks in droves, concerned by rising interest rates and weak economic growth. For PRS, the decline seems overdone, reflecting neither the value of its properties nor its growth potential.

Earnings per share were 3.1p in the last financial year and dividends were 4p, so some of the money paid out to shareholders came from the company's balance sheet rather than tenants' rents. That should change this year as PRS is on track to add another 400 homes to its portfolio, taking the estate to 5,500 homes, each of which will be generating rent and ensuring that dividends are covered by earnings. Brokers predict a 16% increase in rental income to more than £46m by next June, rising to £51m in 2025. Dividends are likely to remain at 4p this year, but they should rise steadily from 2024.

Midas verdict: PRS Reit shares have been hit by stock market woes and now look like a bargain. At 79p, the stock offers attractive dividend income, capital growth potential and the opportunity for investors to help solve one of the UK's most pressing problems. Buy.

[giltedge1] 16/10/2023 11:18

BBC reported average rents outside London now over £1,200, this trust average £900 for new 3 bed homes so plenty of growth next few years. Disappointed with performance as all external variables since IPO, moved to their advantage. ie rents rising, portfolio fully let, no rent frees & void costs like commercial property & shortage of 3 bed homes after covid, most debt fixed, building cost inflation which is a barrier to entry. Should really be closer to £1. NAV is reasonable & real 5,000 homes at £200k average. Directors need to shape up fee structure, costing 1 _ 2p in dividends.

[spectoacc] 11/10/2023 08:52

"All homes for The PRS REIT plc are marketed under Sigma’s Simple Life private rental brand."



[...] (Edit - Trustpilot link blocked, but easy to Google it.)


I believe Simple Life are owned by Sigma and aren't a separate co. I assume it's Simple Life to whom the 8% +VAT is being paid by PRS shareholders.

So it sort of is "In-house", just that it's c.£6m a year being ripped out the trust.

Open to anyone putting me right.

It isn't even my main gripe:

1.PRS appear to be subprime lettings (or "cheap end", for want of a better description) without getting the enhanced rents for that end of the market;

2. There's a cliff edge CapEx cost ahead. No way should newbuild be costing this much in repairs/maintenance already, tho I acknowledge @Makinbuks' point about eg £700pcm = c£500 pa. But £500 on each of 5,000 relatively new properties? What will that look like when it's kitchens/bathrooms?


Would add that the RCF, which they're using to finish off a few hundred remaining houses, is costing c.6%.

And a cliff edge refinancing a long way down the line on the long-term debt, which isn't likely to be cheaper than now.

And an uncovered divi.

I can see rents rising, the divi getting covered, but costs steadily rising up to the cliff edge of bathrooms/kitchens. So no divi growth of note.

Is it unreasonable to assume say two years of "repairs/maintenance" at 10x existing? ie £500 pa per house atm; you'd be doing well to get a bathroom or kitchen for just £5k these days but do them in consecutive years, and 6% of rent becomes 60% of rent :)

What am I missing?

Having been involved exposing HOME, have become increasingly cynical, & more than happy to hear counter-arguments. One is "It's all in the price". PRS isn't HOME, but I'm not sure it's what it was sold as either.

[makinbuks] 11/10/2023 08:42

Firstly, wskill thanks for posting and congratulations on eliciting such a thorough response from the company. Why that text isn't the basis of a note to the accounts I don't know.

Secondly, unlike some other posters I was fully aware that an external management company was managing the properties and that a fee would be payable for that service. I hadn't factored that VAT would be irrecoverable (as VAT is not charged on the rent to tenants). I didn't think they would disclose what they are paying but again I appreciate it. 9.6% with VAT is of course 8% without which seems reasonable. Like Spec I own BTL properties in the North West and while I think his 12% is top of the range I do think 8% is reasonable. I note the suggestion that the management should be brought in house. Interestingly this happened recently at PHP and the justification was cost saving and synergy savings for shareholders. At the time there I did think, OK but Harry has profited for years from this.

I intend to look further into exactly who the management company is and who controls them, but don't have time right now

Thirdly I'm not sure about the repairs and maintenance and certainly not as outraged as Spec. If you rent for £700pcm, 5% is £35. £420 per year doesn't seem a ridiculous budget for repairs and maintenance on a property if you think of it like that. None the less the comments about deposits, dilapidations, etc were interesting

This conversation has greatly improved my understanding of this business. thanks to all

[jimbobbaby] 11/10/2023 03:01

Is there any chance of getting the manager to change the model? Write to CEO questioning how it is in the best interests of shareholders rather than the manager?Manager has to be making a decent margin on this which should rightly be captured by shareholders.

[giltedge1] 11/10/2023 02:00

I feel mislead on costs I naively assumed mgt costs means managing properties, not passing mgt to letting agents then charge again. Fixed interest savings wasted on admin fees. Dividend could be 5p to 6p if double charging removed. Think will stop adding & move to GRI. More London centric & internally managed, should match PRS yield in a few years.

[jimbobbaby] 10/10/2023 20:12

Are you factoring in rates?

[spectoacc] 10/10/2023 19:53

I just don't see how it makes a viable long-term business. I've run BtL for ages, and yes, agents charge a fortune (12%+VAT seems standard), but they do next to nothing for it, beyond send you bills for repairs. No one half-competent needs them, unless eg not local.

A co of PRS's size needs no agent (bring it in house, no pun intended), no tenant-finding service, and should have huge buying power for things like insurance. Who is being paid these fees?

If repairs & maintenance are high now, what will they be like when the properties have all aged together? When they need new kitchens, bathrooms? Given the age, there should be zero needing those so far. Followed by a lot in a short time period in say 8 years time.

I just don't see how repairs/maintenance can possibly be that high, now.

If all those costs were 10 percentage points lower, I'd still question them. The only half-reasonable one is the insurance.

Are these junk tenants? If so, why aren't the yields far higher?

On the plus side - anyone with an ounce of nous could buy them out and see where costs could be halved. Maybe wait until the portfolio has its new kitchens/bathrooms tho.

[arbus5000] 10/10/2023 18:22

Grainger PLC doesn't report non-recoverable property costs, but has a epra cost ratio of 34% vs 36% for PRS. This measure includes administrative costs on top of any property costs.

its valued at 75% of NAV, vs 58% for PRS.

[wskill] 10/10/2023 16:15

This is the whole reply its no secret some are a tad high but within acceptable limits.


The non-recoverable property costs are effectively the cost of sales relating to the letting and management of the assets. These include the following:



Lettings and management fee paid to the management agent
Repairs and maintenance
Insurance
Void costs
Bad debts
Legal costs
Rent and legal insurance (taken out in respect of certain tenants who have passed referencing but are considered to be a potential covenant risk – this covers rent payments for 6 months)
Service charge (limited due to the low number of apartments and shared sites)


The largest three costs are the lettings and management fee – 9.6% including VAT which is non recoverable –, repairs and maintenance – c.5.5-6% at present - and insurance at 2%.



The largest variable element are repairs and maintenance. This includes normal wear and tear together with any dilapidations at the end of tenancies which tenants are responsible for but either don’t pay or are not covered by deposits. In valuing the assets on the balance sheet the valuers use a long-term sustainable gross to net (or non-recoverable property cost) level of 22.5% for houses and 25-26% for apartments. Given the mix of housing to apartments in the PRS REIT, the overall average would be c.23%. The current run rate is c.19% as you have noted.



The difference between these two figures reflects the fact that the PRS REIT assets are new build and repairs and maintenance are therefore lower at present. Operating below the 23% level is a positive sign in terms of delivery.



The increase you refer to reflects the fact that the substantial majority of units in the PRS REIT are now beyond the house builder warranty period for defects (1 year) and therefore no longer cover certain repairs and maintenance. This proportion is now 90%.



I do hope that the above is helpful but please don’t hesitate to contact me should you have any further queries. The financial statements for the year to 30 June 2023 are due for release next week.

[makinbuks] 10/10/2023 16:15

They do seem to provide a very tenant supportive service. See the section headed "Social Engagement". Although in another section referencing "Outward Bound Trust" it does say the cost is met by Sigma Capital Group.

Is it as simple as 5%- 6 % direct repairs and maintenance costs, c.12% management fee to Sigma and maybe 1% - 2% for insurance

Carpets, white goods (possibly not provided) and decorating could be capitalised and amortised through this line

There could also be p & l charges to build a provision on the BS as is routine with a maintenance company but I don't see any obvious BS entries

It would be interesting to see the full text of the reply received by wskill

[spectoacc] 10/10/2023 15:57

Good spot. To me, that makes PRS uninvestable. Even assuming all entirely above board, how can expenses on what is fairly new housing stock run to anything like that?

Eg carpets/redecorating/white goods/boiler should be a long way from needing replacement on all the portfolio (but will be cliff-edged over a few years when it comes, assuming they're unable to add "duration" by issuing shares & adding to the portfolio).

[makinbuks] 10/10/2023 15:52

Spec queried what was in last years 18% non recoverable property costs and whether it was recurring. clearly it was, 19.2% this year! No explanatory note. The portfolio is self managed so I'm suspicious what fees are within this for the manager. Wskill got a response that 5.5% was repairs and maintenance. What else?

[makinbuks] 10/10/2023 14:56

Fully agree. However, a potential bidder may have a completely different WACC and therefore opportunistically bid closer to the NAV. I can't see it personally but a number of IT's have received bids in recent months when discounts have been judged excessive

[pdosullivan] 10/10/2023 14:42

I would be inclined to disregard NAV based valuations. The dividend is 4.0p and will only be covered by underlying earnings this year. I don't see much room for the dividend to grow in the near term. At 70p that is a yield of 5.7%. Considering the returns available on safe investment products at this time I think we are close enough to fair value absent a shift in market rates.

[makinbuks] 10/10/2023 11:17

I don't necessarily think lenders would foreclose (indeed Govt would pressure them to hold off), but they would extract a price at the expense of equity.

I agree that gap between the share price and NAV could attract an outright bid, but the insurers are not operators. Why not take a stake in PRSR and then invest in a fund managed by them?

[davebowler] 10/10/2023 11:01

Liberum-

Room to go to cover dividend
Analyst: Shonil Chande

Mkt Cap £364m | Share price 66.3p | Prem/(disc) -43.4% | Div yield 6.0%

Event

PRS REIT’s EPRA NTA per share 120.1p, as at 30 June 2023, represented a 3.2% increase over the FY period and a 6.6% total return. Like-for-like rental growth over the year on stabilised sites was 7.5%, based on a blended growth rate of c.12% on re-lettings to new tenants and c.7% on existing tenant renewals. The average net investment yield, as at 30 June 2023, was 4.47%, This compared with an average interest cost of 3.8% on total fixed long-term debt of £352m (37% gearing).

As at 30 September 2023, the ERV of the completed and contracted homes was c.£61m p/a, based on total completed homes of 5,129. In terms of the reversionary potential, the ERV, based on contracted homes, was £5.1m higher than passing rent, as at 30 June 2023. PRSR is targeting an unchanged 4p dividend for FY24, which it expects to be run-rate covered. The cash cost of the dividend is c.£22m.

[jonwig] 10/10/2023 10:51

Makinbucks - good points.

Would banks be keen to enforce covenants in a sharp recession? The PRS property portfolio will be classed as high quality, and a stay or minor adjustment seems more likely.

Large insurers (L&G, Aviva) are looking to enter the rented sector. Easier to buy a company that build themselves? (I've mentioned this before.)