Prs Reit Share Discussion Threads

[wingchan] 21/12/2020 10:28

Another massive conflict. The investment advisor sigma capital sells a site it developed and managed on behalf of BlackRock to the PRS Reit who it acts on behalf on.... presumably Sigma had a financial interest on the site depending on its performance for BlackRock which will have been driven largely by the sale price but don't worry, there was an "independent" valuation by Savills who undertake all of the Reit's and Sigma's valuation services...... total lack of corporate governance! An independent party and an independent valuer should have been appointed to act for the REIT in this transaction given the obvious conflict.

Also for clarity Sigma were contractually obliged to acquire shares in the REIT. Under the terms of their development management agreement where they receive a generous 4% fee, half must be re-invested in the REIT. That they paid Investors Champion to put out a research note implying that they were buying shares of their own free will is seriously misleading. The 1.5m shares acquired by Sigma on 25th Nov were done so as a contractual obligation. What is curious given they could have issued new shares at NAV and invested the funds in their "attractive proposition", was that they instead bought them from an institution that was prepared to sell 1.5m shares at 76p. That says more about the outlook than anything. I hope the appointment of a joint broker is not a preclude to attempting to raise more equity taking the REIT back to cash drag and negative dividend cover. On every financial metric the Reit has underperformed to date. It has some way to go before DEPLOYING the £900m gross which was originally targeted in two years... The dividend yield will be sub 4% not 6%+ and that is after many more years taken to deploy the funds than was originally advised with initial sites having the benefit of rental growth. The NAV remains significantly below the initial raise price inspite of beneficial headwinds through rising house prices. Yield compression and a robust rental collection rate that compares favourably to many commercial property sectors. The NAV was meant to be growing at 10%+ per annum at this point per original marketing forecasts. The only beneficiary has been the Investment Advisor and yet the conflicts of interest continue unchallenged

[sphere25] 27/11/2020 14:27

So we know who the big buyer has been in the market. Just watching the price movement and chart here, looks set to test a breakout. It's a turtle though, boring and slow.

82p by Christmas?

Probably need to stop knocking them because of what the FIF turtle has done recently.

[davebowler] 25/11/2020 09:26

Liberum;
£1.1m share acquisitions by investment adviser

Mkt Cap £372m | Prem/(disc) -19.2% | Div yield 5.2%

Event

Sigma Capital Group, the parent company of the investment adviser to PRS REIT, has acquired 1.5m shares in the company at a price of 76p per share. Sigma Capital now owns 5.9m shares (1.2% shareholding) in PRS REIT.

Liberum view

The £1.1m share acquisition demonstrates confidence in PRSR's portfolio. Capital deployment has progressed this year, with completed units representing 51% of the portfolio at the end of September. This remains the key area of focus for the company in order to build the level of dividend cover (0.03x dividend cover in the year to 30 June 2020). Portfolio performance has been resilient throughout 2020 as rent collection levels have been relatively unaffected. Rental demand remains high with with rent levels holding at pre-Covid levels.

[pswl] 17/11/2020 13:44

As noted by others, concerns around the non-recoverable direct property costs as a percentage of gross rent are materialising. The stated Gross to Net deduction in the 6 months to 31st Dec 2019 was 18.2% per the Interim Report. For the full year to 30 June 2020 the stated Gross to Net deduction had shot up to 21.1% per the Annual Report. Whilst not stated in the Annual Report, this implies a Gross to Net deduction in the last 6 months of the financial year to June 2020 of 24%+! The absence of any comment on this in the Annual Report is alarming and the following statement contained in the Annual Report is disingenuous: “All the KPIs are in line with management expectations. Increases in rental income, NON-RECOVERABLE PROPERTY COSTS, operating profit, and the number of properties available to rent reflect the increased size of the portfolio and the progression of development sites.” The Gross to Net deduction for the full year to June 2019 was 17.6% so there has been a marked and concerning trajectory since then. In the Interim Report to Dec 2019 the following statement was made: “Currently, costs are at 1.2% over the target 17% of gross rent during the development phase. However, the Gross to Net deduction during the development phase is well below published averages, at 18.2%, reflecting the benefits of our model. All other costs are in line with management’s targets. At stabilisation we are targeting the Gross to Net deduction to be 22.5%, under the sector average of 25%.” At an implied 24% for the first 6 months of 2020, the Gross to Net deduction is now a full 7% above target during the development phase. With completed investment assets of only £231m at 30 June 2020 against a target of £900m the PRS REIT still has some years to go in the development phase. Given the infancy of the portfolio this is a major concern as the figure is only likely to increase as the portfolio achieves stabilisation and then matures, at which point rolling refurbishment programmes will be required. It brings into question one of the much touted key attractions of the PRS REIT – new build portfolios that were marketed as having both low and predictable non-recoverable direct property costs as a result of homes clustered on individual sites that had standardised layouts, designs and fittings. The notion was that terraced housing would be significantly cheaper to manage and maintain than apartment blocks. These assertions no longer appear to hold true. The rising Gross to Net deduction may also have implications on the valuation of the assets and hence Net Asset Value moving forwards given Savills valuations currently assume a long-term 22.5% to 25% which now looks unsupportable. Critically the way the issue has been brushed under the carpet given the lack of any reference or explanation in the Annual Report to follow up on the comments in the Interim Report, is both a poor reflection on the PRS REIT Board and their governance, as well as a further tarnish on the investment adviser Sigma Capital’s reputation and credibility. After allowances for the impact of Covid, the PRS REIT’s financial performance since launch has still been sub-par and the increasing Gross to Net deduction is yet another concern to add to a growing list. It is reminiscent of the issues suffered by Empiric (ESP) a few years ago where the dividend was cut and there was a lack of cost control combined with operational issues culminating in the dismissal of the CEO (hxxps://citywire.co.uk/investment-trust-insider/news/empiric-student-property-sacks-boss-after-dividend-cut/a1077128). For clarity the Gross to Net deduction referred to excludes Sigma Capital’s annual investment advisory fee (£4.34m p.a.), administrative expenses in running the REIT (£1.68m p.a.) and Directors Remuneration (£140K p.a.).

[sphere25] 12/11/2020 10:49

Is this the FIF of the REIT world?

Ticking higher but sheesh!

Come on turtle, you can push on a quarter of a pence a day. If I can get near 80p to sell by Christmas, that would be enough of a present.

RGL just went up like a rocket, as per so many other moves out there.

[sphere25] 10/11/2020 08:11

Laggard from yesterday's rally.

Chart turning up here?

[harrabinr] 14/9/2020 09:08

The PRS REIT announced in its interim results published 31 March 2020 £400m of committed debt facilities in place: "Our lending partners are Scottish Widows (£250 million), Lloyds Banking Group plc (£50 million) and Royal Bank of Scotland plc (£100 million), to whom we would like to express our thanks for their support." Strange that in May 2020 the Investment Advisor Sigma Capital has put in place additional debt facilities for the PRS REIT with Barclays: THE PRS REIT (BARCLAYS) MEMBERCO LIMITED, THE PRS REIT (BARCLAYS) BORROWER LIMITED & THE PRS REIT (BARCLAYS) HOLDING COMPANY LIMITED. Perhaps one of the lenders has withdrawn funding post Covid but no official announcement issued to date. No doubt this will be clarified in the next trading update.

[packoflies] 07/4/2020 21:21

Analysis of Interim Results – Improper governance by REIT Board & time to sack the Investment Advisor Sigma Capital

• Claimed £771m completed and contracted GDC + £75m “strategically deferred” spending = claimed deployable funds of £846m

• The £75m balance of funds were meant to be contracted by end of March at the latest as per the 14th Jan “2nd Quarter Update”. Over the intervening period ZERO additional funds have been committed or contracted with the figure remaining static at £771m. Given that the Coronavirus did not impact the UK until early to mid March ( it was fortuitous that the PRS REIT had been unable to commit ANY of remaining £75m prior to this and can now look to "deploy it on strategic income producing opportunities". A more cynical view would be that the funds have not been “strategically deferred” to take advantage of opportunities but that these remaining funds are not available to be drawn under the PRS REIT’s 45% maximum gearing as detailed below.

• Current NAV of £470m supports debt of £385m assuming maximum permissible gearing of 45%. Taking account of dividends paid out of equity and overall cashflow to date, estimated deployable equity of approx. £430m. Max. total deployable funds of equity and debt of £815m, not £846m as claimed. Gross yield of 6.2% on GDC of £815m equates to £50.5m gross income. Deduction of 22.5% gross-to-net, administrative expenses and debt interest at 2.72% as per interim results, leaves estimated net income of £22.8m. Stabilised geared dividend of 4.61p per share pre any coronavirus related issues………

• Lack of comment on dividend in interim results other than indefinite deferral of dividend covering the 3 months to 31st March 2020. When the stabilised dividend target is reduced AGAIN from the already reduced 5.5p per share it will be blamed on the coronavirus but in truth would have comfortably been sub 5p regardless.


• 2 years and 7 months from inception up to 31 Dec 2019, the REIT’s rental income just covers costs and debt interest but it remains significantly cashflow negative as there remains no dividend cover. The cancellation of the uncovered dividend for the 3 months to end of March 2020 and subsequent dividends is the sensible option to preserve deployable funds and NAV irrespective of resultant Coronavirus issues.

• Deployed only £487m to 31st Dec 2019, of which only £212m are completed income producing assets (Notes to the Financial Statements 4.), of £900m gross funds. Noted under “debt facilities” it will take a further 18 months to complete the current phase of construction. Once again this makes a mockery of the comments by the Investment Adviser’s chief executive Graham Barnet in September 2018 where he outlined his desire to raise a third £250m in early 2019 with a clear intention to increase assets under management irrespective of the fact it was not in the best interests of PRS REIT shareholders as was the case with the raising of second £250m in Feb 2018……… There is a clear and fact based track record of Sigma acting in its best interests and not its investors but that is for another day. The 3rd raise thankfully did not happen but it illustrates the significant and ongoing conflicts of interest between the Investment Advisor and the PRS REIT. (hxxps://www.propertyweek.com/finance/the-prs-reit-aims-for-new-year-fundraising-of-250m/5098937.article)

• Claimed that completed and contracted sites have a GDC of £771m. However, Capital Commitments outstanding as at 31st Dec 2019 were £189m (notes to the financial statement 3&8). Add to that £487m deployed to 31st Dec 2019 (see notes to financial statement 4) equates to a total GDC of £676m, £95m less than the claimed figure……..

• The Investment Advisor Sigma Capital is paid a (generously high) 4% development management fee. This is separate to the profit it makes from selling its own completed sites to the PRS REIT and the 1% annual management fee it is paid (hxxps://citywire.co.uk/investment-trust-insider/news/liberum-rental-housing-trust-pays-fund-manager-too-much/a1313075). Sigma is required under its contract with the PRS REIT to invest half of the development management fee in PRS REIT shares. Since the REIT’s inception up to 31st Dec 2019 the Investment Advisor had been paid £15.51m in development management fees alone so should have invested approx. £7.75m in PRS REIT shares. Yet as at 31st Dec 2019 Sigma had 4.39m shares……….. even allowing for bi-annual subscription of shares something is awry.


• Stated gross to net of 18.2% in interim results but rental income in 6 months to 31st Dec of £5.607m less non-recoverable property costs of £1.140m as per income statement represents a 20.3% gross to net. This will spike significantly over the coming months in light of coronavirus but was already on an upward trajectory and will be a key determinant of the stabilised dividend yield. Year ended 30th June 2018 gross to net of 15.5%, Year ended 30th June 2019 gross to net of 17.7%.

[farhanmartinez] 20/2/2020 18:39

Steviet1 it is far higher than the £17.9m figure stated by analyst Liberum. That only includes the development management and investment advisory fees. Sigma the investment adviser to the PRS REIT have also made considerable amounts of money selling their own developed sites to the PRS REIT. It must be great for them having a guaranteed buyer lined up. Whilst there is an "independent valuation" all valuations can be skewed upwards or downwards within a range of 20% without the valuer being liable and you can bet your bottom dollar with Sigma being both seller and acting on behalf of the buyer these have been skewed to the upper end. The conflicts of interest are quite clearly unmanageable. It is outrageous that Sigma Capital has made significantly more than the PRS REIT itself and that is assuming the investment gains recognised within the REIT have not also been skewed upwards by teh valuers given the pressure on the deteriorating NAV and hence Sigma Capital. The PRS REIT Board really need to step up to the mark here and sort out these conflicts

[steviet1] 17/2/2020 17:32

Following Invesco's continued sell-down of their holding in the PRS REIT last month, Aviva another major institutional holder have today also significantly reduced their holding. Not encouraging signs.

Worth noting that Sigma Capital, the investment Adviser to the PRS REIT, have been contractually obliged to invest half of the 4% development management fees they receive into PRS REIT stock. Assuming they have developed approx. £500m of sites for the PRS REIT to date that would equate to development management fees of approx. £20m, with half used to acquire PRS REIT stock. One can only wonder how far the PRS REIT share price would have fallen without a forced £10m buyer in the market.

Given the PRS REIT is close to deploying all funds, Sigma will shortly no longer be a forced buyer of PRS REIT stock - at this point expect the PRS REIT share price to continue its downward trajectory.

[steviet1] 17/2/2020 17:22

Liberum: Rental Housing Trust Pays Fund Manager Too Much

Government-backed real estate investment trust (Reit) PRS (PRSR) may be doing an important job rolling out much-needed homes for rent, but Liberum analyst Conor Finn believes its fund manager Sigma Capital continues to get the better end of the deal over shareholders.

Responding to PRS’ second quarter trading update, Finn criticised the property development fees paid to Sigma that he said had seen the AIM-listed fund manager make as much money as the Reit's shareholders since its flotation, or initial public offer (IPO), nearly three years ago.

‘From IPO to June 2019, PRS has generated £17.8m of earnings but the manager has received £17.9m in investment and development management fees,’ he said.

‘The company does not charge a performance fee but the 4% development management fee seems high given it is generally dealing with established developers,’ Finn said in a note to investors.

The speed of rollout is important for investors after PRS last year cut its dividend target for 2021/22 from 6p to 5.5p, blaming planning delays and political uncertainty.

Finn said investors in the £448 million trust, managed by Sigma’s Graham Barnet, had had a ‘frustrating’ year due to ‘a high level of cash drag’ and the uncovered dividend.

[davebowler] 31/1/2020 16:31

Liberum:Real Estate PRS REIT3.9% NAV total return in 2019Mkt Cap £455m | Prem/(disc) -3.3% | Div yield 5.4%EventPRS REIT's NAV per share at 31 December 2019 was 95.0p, reflecting a 3.9% NAV total return in 2019 (H2: 2.3%). NAV performance has improved slightly as deployment progresses. 1,617 homes had completed by the end of December and the company expects this to rise to 2,000 by the end of March. The total number of completed and contracted units is 4,945 (September 2019: 4,783), representing a gross development cost of £771m (86% of total capital). The expected ERV of £47.6m represents a gross yield on cost of 6.2%. 

[andyrus62] 21/1/2020 23:43

2nd quarter update. Invesco continuing to sell down their holding and more misleading statements from the PRS REIT Board: "the balance (of the £900m gross) expected to be fully DEPLOYED by the end of the current financial quarter"


The net proceeds from the £900m have not even been fully CONTRACTED yet. What has been contracted plus completed sites have a combined estimated rental value of £47.6m gross. The annualised rent roll as at 31st Dec 2019 was £14.9m gross from 1,617 completed homes. If net proceeds from the £900m were to be fully DEPLOYED by end of March 2020 as claimed, the ERV needs to increase in 3 months by £32.7m (plus the rent to be genetrated from the remaining funds yet to be committed) with a further 3,328+ homes completed! It is a farcical statement and dangerously misleading.

In reality it will likely take several years to DEPLOY the remaining funds. As a result of the delay to income generation, with the current uncovered dividend burning through equity, it looks now certain the PRS REIT will need to downgrade it's stabilised dividend target again with sub 5p looking increasingly likely.

The misleading statements portend a further equity raise which as others have noted would be extremely premature, further increasing cash drag and negatively impacting returns. It would however, muddy the water sufficiently to push out the day of reckoning when all funds are deployed and the true fully covered stabilised dividend (likely to be much lower than forecast) is established whilst also no doubt allowing the Board directors to give themselves a pay rise....

The gross development cost of completed and contracted sites increased by £31.3m over the second quarter whilst the total ERV increased by only £1.6m. That would imply a gross yield of only 5.1% on the newly contracted sites versus 6.2% for the main portfolio. That does not seem right which leads to the next logical conclusion that rents on the main portfolio are declining and have been revalued downwards. Not an encouraging sign.

It is disappointing to say the least that the REIT Board continue to put out misleading statements regarding deployment of capital which is critical to the longer term dividend given the ongoing erosion of equity to enable the current 5p dividend. One can only wonder when the regulators are going to look into this.

[danield3] 25/11/2019 21:39

Disappointing AGM - PRS REIT granted authority to issue a further 165 million new shares which would increase cash drag and exacerbate declining financial performance. In the 25 months from inception up to 30th June 2019 the PRS REIT had DEPLOYED approx. £360m of total funds of £900m. It is inconceivable that the PRS REIT will have deployed the remaining £540m in the 18 months to Dec 2020. Target dividend already reduced and now almost certain to be reduced again following a planned 3rd fundraising. 99 million of the possible 165 million new shares can be granted by the PRS REIT board without first offering them to existing shareholders which shows contempt towards smaller holders. The new issue will take place at the prevailing NAV but as this is significantly below the original and second issue prices of £1.00 and £1.025 it will be dilutive to existing shareholders. However, the existing shares currently trade at a discount to NAV (notwithstanding NAV has been falling) so it remains unclear how a third raise will take place at a minimum of NAV when those wanting to participate and hamper returns further could simply instead acquire shares in the open market at a discount to NAV. As a final point, perplexing that resolutions 7-9 grant authority for the board to raise more funds whilst in direct contrast resolution 10 grants the board authority to buy back and cancel up to 15% of the shares in issue. The board do state they do not intend to do this but then why include it which leaves one feeling rather confused.

[mikesmi] 08/11/2019 21:42

17 million shares sold today at 84p in the PRS REIT. Given the ex-dividend date for the 1p div is 6 days away that is effectively a sell at 83p!! Given the volume we may find out who the seller is next week. It appears some institutions must agree with the negative outlook outlined previously by Quintus and 3ratty. Momentum is a powerful force in investing and the PRS REIT's is downward. The question now is how far will the share price fall. Don't try to catch a falling knife

[3ratty] 23/10/2019 22:21

Concerning points raised and noted Quintus.

The fact the NAV was not meant to drop below 98p is a real worry. Presumably when this was inserted into the Prospectus it was set at a level low enough to allow some headroom so as not to be breached. Yet two years on the reported 30th June 2019 NAV was 95.8p and is most likely now sub 94p following the 2p per share final dividend paid in August given the ongoing absence of any significant rental income. That suggests things are not going to plan and has the alarm bells sounding.

Following your comments Quintus I have like you focussed on the cashflow from the 2018 and 2019 year end results. Being a property REIT there are not many moving parts so it is fairly straightforward to analyse. Taking account of net funds raised, annual administrative costs (including investment management fee), dividends paid out, net rental income received, interest received on cash on deposit and debt interest paid, from the £500.5m gross raised, investable equity had reduced to £452.25m as at 30th June 2019. That was pre the deduction of the final 2p dividend which amounts to £9.91m paid out on 30th August.

As per the recent first quarter update, the rental value of completed homes had increased to £12.3m from £10.7m as at 30th June 2019. Whilst slightly crude if one estimates the rental value as at 30th June 2020 by applying the same percentage increase quarter on quarter it would take it to £19m as at 30th June 2020. For sake of argument and for optimism’s sake call it £20m, so an average rental income received estimate for the current financial year of £15.5m seems reasonable enough. Perhaps generously applying the 17.5% gross to net deduction as per the 2018/19 year end results (given this had increased from 15.5% year on year so may well be higher again this current financial year) produces a net rental income for the current year of £13.2m.

Keeping administrative expenses flat at £5.9m as per the 2018/19 financial year reduces cashflow to £7.3m. Interest from cash on deposit should likely be lower than the £0.8m received last year as the remaining £130m (from the original £500.5m of funds raised) is expended but for sake of argument again assume +£0.8m. However, having drawn a full £100m of debt pre 30th June 2019 at a swap rate of 1.588% plus margin (albeit not having yet spent any of it) and committed to a further £250m of debt, debt interest and charges will be significantly higher in the current financial year. If one assumes a not unreasonable margin of 2%, debt interest on the £100m would amount to £3.6m. Charges relating to the other debt will likely push this higher but again being optimistic stick with £3.6m. Including the recent dividend payment made in August, the dividend payments made in the 2019/20 financial year will be approximately £24.8m.

That results in a NEGATIVE cashflow for the 2019/20 financial year of -£20.3M. Investable equity is therefore reduced from £452.3m to £432m. As per the 2018/19 year end results that figure is pre the final 2p dividend of £9.9m to maintain the 5p target likely to be paid 30th August 2020.

As per Quintus the concern is around the significant reduction in investable equity and consequential impact on the amount of debt that can be drawn within the 45% gearing restriction, and ultimately on the stabilised dividend.

If optimistically the PRS REIT is able to support a NAV of 94p per share that equates to £465m which would enable £380m of debt to be drawn assuming 45% gearing. £380m of debt plus the say £420m of investable equity (given the REIT is likely to remain in negative cashflow into the 2020/21 year), provides an estimated total of £800m of investable equity. As per the first quarter trading update, the £740m GDC of contracted and completed sites is stated to generate an estimated £46m of rent, so a 6.2% gross yield on cost. If that gross yield is applied to the assumed £800m of total investable equity it would generate rent of £49.6m. Applying a 17.5% rent reduction as per the 2018/19 results (albeit this could well be higher if it continues to trend upwards) reduces income to £40.9m. Administrative costs of £5.9m reduce this further to £35m.

Total debt interest costs are the big unknown. £150m of debt is at a low swap rate of 1.164% plus margin and the existing £100m of debt is at 1.588% plus margin. That would leave £130m to draw from the revolving credit facility at three month libor (currently 0.8%) plus margin. A best guess but if a 2% margin is assumed that would result in annual debt interest charge on £380m of debt of £12m. It is worth noting the revolving credit facility is of a short term nature being only for two years (with an ability to extend for a further two) so it is likely the interest cost on this element of debt would go up if it were to be fixed longer term. Notwithstanding, £12m of debt interest would reduce net income to £23m.

Given 495,277,294 shares currently in issue that equates to a dividend of only 4.64p per share against shares issued at £1.00 and £1.025 respectively.

The uncertainties in that estimate lie in the cost of debt (which could be higher or lower as margins are unknown), the actual gross to net rental reduction against that adopted of 17.5% (which is arguably optimistic given it is trending upwards and certainly longer term will be a key variable to monitor), and rental growth. The above has not assumed any rental growth over and above a 6.2% gross yield on GDC. The 2018/19 annual report provides a portfolio analysis as does the maiden annual report. Comparing the market rental values on those sites featured in the 2017/18 report to the same sites listed in the 2018/19 report produces an aggregate annual rental growth of only 0.39%. Whilst one would hope this picks up it has certainly not been evidenced over the last year.

In conclusion, there is a real possibility the stabilised dividend will be sub 5p per share and as Quintus noted the NAV is likely to remain under pressure. The REIT is currently targeting a stabilised dividend of 5.5% down from the original 6%+ but the evidence suggests this will have to be downgraded again. Given the PRS REIT will be geared to 45% and the risk that brings with it, plus significant uncertainty around the longer term gross to net reduction to the rental income and whether or not rental growth materialises, the PRS REIT is arguably not offering attractive return prospects at present. The annual report states valuations range from 4.3% - 4.8% investment yields. At these levels (which applies to the majority of REITs) any change in yields is likely to have a significant impact on NAV. Were yields to compress by only a marginal amount there could be a significant boost to NAV whilst also allowing debt drawn to increase. Equally were yields to move out marginally, NAV could fall significantly, correspondingly lowering the amount of debt that could be drawn or, if already fully drawn, requiring further equity from investors to provide sufficient security to lenders.

Until the equity and debt are drawn and deployed with stabilised returns established it would be premature to raise additional equity without detrimentally impacting returns through further cash drag. Equally a raise given the current share price is significantly below the initial two raises would be dilutive to existing shareholders and is therefore unlikely.

[quintus1] 04/10/2019 10:00

Despite the positive remarks from the PRS REIT Chairman Steve Smith, the actual financials for the full year results 2018/19 make for disappointing reading. It follows June’s RNS announcement that the forecast stabilised dividend had been reduced from 6% to 5.5%. In light of the restated commitment to pay a 5% dividend until stabilisation in FY 2022, with the majority of the dividend still continuing to be from return of equity given the ongoing absence of significant rental income generation, it appears likely the 5.5% dividend target will have to be lowered again with NAV set to fall further.


The PRS REIT pays out approx. £25m per annum as a dividend to achieve the development phase 5% dividend “target”. The majority of the dividend is still coming by way of return of equity, after the investment adviser Sigma Capital has first charged a 1% annual management fee which is calculated as a percentage of NAV and therefore notably includes unspent cash. Net rental income was £4.9m for the full 2018/19 year. However, that is pre the deduction of £5.9m of administrative expenses leaving the PRS REIT in negative cashflow of £1m for the year. This increases further to negative £26m after payment of the 5p dividend. Looking ahead to the 2019/20 year the annualised gross rental income at 30th June 2019 was £10.7m which nets down to approx. £8.8m after property maintenance/running costs. Further deductions of Sigma’s £5m per annum investment management fee and £0.9m for the REIT board’s salaries and administrative running costs will reduce this to £2.9m. There were also finance costs of £0.9m for the year although this was largely offset by interest received from unspent cash (as the REIT has unexplainably drawn £100m of debt before first spending the remaining £130m of equity raised).  As the remaining equity is expended in 2019/20 and beyond, interest on funds on deposit will undoubtedly decrease and debt interest increase as more debt is drawn.  It is not unreasonable therefore to assume a net cashflow position of only £2m for the 2019/20 year, prior to payment of the £25m annual dividend. From a cashflow position, two years in the REIT is barely breaking even. Once the dividend is paid, cashflow remains significantly negative with NAV likely to continue to fall as a result. Gross rents received should increase from £10.7m as the year progresses with more homes completing and becoming income producing however, a significant proportion of the dividend will continue to be paid out of funds raised for the foreseeable future.


NAV at 95.8p has not deteriorated as much as feared (although the stated figure was pre the final 2p dividend which has since been paid and will have reduced NAV further) given investment gains on completed as well as ongoing development sites, but is nonetheless disappointing. From net funds raised of £500m, approx. £491m after costs of the share issues, £50m of dividend payments over the last two years and administrative costs uncovered by net rent in years 1 and 2, investable funds will have dropped to approx. £430m and falling. This was to be supplemented with £400m of debt and whilst NAV has been supported to a degree by investment gains, given the REIT’s gearing restriction at a maximum of 45% of NAV it is hard to see how the originally intended full £400m of debt can be drawn. Tellingly the REIT has only committed to £350m of debt facilities, with an ability to extend by a further £50m. Given the current situation it appears unlikely the additional £50m will be drawn without breaching gearing restrictions. One positive is that £150m of 15 year debt (yet to be drawn) has been secured at an exceptionally low swap rate of 1.164% plus margin which should be return enhancing. Notwithstanding, the significant reduction in investable equity, fall in NAV, and associated reduction in accompanying debt (albeit at low interest rates) will likely result in a further lowering of the stabilised dividend target. NAV could potentially be supported by further investment gains but regrettably the dividend cannot.


In retrospect raising the second £250m in Feb 2018 was premature and the Board should take a large degree of the responsibility for this. It significantly increased cash drag and lowered overall returns. In light of the concerns above it would be imprudent to raise further equity until the current equity and debt are deployed and the actual stabilised dividend and NAV established. Equally, any future fundraise must surely be by way of a separate share class so as not to again adversely impact any existing shareholders who do not wish to participate in further equity injections.


On analysis of the 2018/19 full year accounts, the Chairman, Steve Smith’s statement that the 5p dividend paid in the full year to 30th June 2019 “is in line with target” is disingenuous. The majority of the dividend was paid from funds raised. NAV has declined to 95.8p and is likely to be significantly lower as at today’s date, with the final 2p dividend having been paid post the year end. The NAV situation is more worrying still when considering the second £250m was raised at a premium of £1.025. The Prospectus stated equity could be used to top up the dividend provided it did not reduce NAV per share below 98p. However, equity has and it appears will continue to form the majority of the dividend into 2019/20 with the NAV already some way below the 98p criteria. It is concerning that the REIT board have allowed this given it explicitly contravenes the Prospectus. The apparent ability to reduce the NAV as low as required by paying out sufficient equity to achieve a 5p dividend, renders the 5p dividend target meaningless and undermines the Chairman’s statement: “Acta deos numquam mortalia fallunt”. Total return (including NAV) is critical but worryingly absent from Steve Smith’s comments.


The Chairman goes on to state “the remainder of the £900m funds will be DEPLOYED over the coming months” with “91% of net proceeds already DEPLOYED”. This is misleading and one can only hope not deliberately so. Certainly the chairman should be more careful with his choice of words in future. The REIT board have prior to this adopted strict and defined definitions for the terms “committedR21; and “contracted221; for good reason. Deployed to the vast majority implies the £900m funds will have been spent ;within the next few months and therefore be generating an income. However, this is not the case. Investment property as at 30 June 2019, including recognised gains on partially developed sites, stood at £362m. The REIT had £230m of cash (which included £100m of debt drawn). It is unclear why the £100m of debt was drawn earlier this year, £50m of which as early as March according to a previous RNS, with debt interest chargeable, when at 30 June 2019 there would still have been £130m of equity to spend without having drawn any debt. Had the second fundraise not taken place, under the Prospectus the intention was to supplement the initial £250m raised with £200m of debt. This would have significantly enhanced returns and notably even then the £450m combined would not have been fully deployed as at 30 June 2019. As at year end the REIT had £230m of cash plus a further £250m of debt still to be drawn (potentially £300m of debt subject to gearing restrictions). Therefore there was £480m (potentially £530m) still to deploy. Given it had taken two years to deploy less than £362m (as that includes investment gains) it is simply incredulous for the Chairman to state 91% of funds have already been deployed with the remainder of the £900m funds to be deployed over the coming months. Perhaps he meant “committedR21; but sadly committed funds do not generate an income until they are deployed which as we have seen to date can take some time. One can only hope such rhetoric does not precede a further equity raise which would only increase cash drag and hamper returns further.


Serious conflicts of interest remain (hxxps://citywire.co.uk/investment-trust-insider/news/john-spiers-what-put-us-off-popular-prs-reit/a1036956) around the investment adviser Sigma Capital who is:

-investment adviser to the PRS REIT;
-development manager to the PRS REIT and;
-sells its own completed investment assets to the PRS REIT.

The IA fee is 1% of NAV so approx. £5m p.a.. Notably the second £250m fundraise in Feb 2018, whilst being extremely premature and lowering returns given the resultant cash drag, doubled assets under management and hence doubled Sigma’s IA fee.

The REIT is set to use a minimum of two thirds of the £900m gross funds, so £600m, on developing its own assets (although as noted above this is likely to be lower given cash leakage and potential gearing restrictions). Of this Sigma charges a 4% development management fee which if one adopts the £600m equates to £24m.

The amount Sigma earns from completed investment sites it sells directly to the PRS REIT is unknown but if one assumes a not unreasonable 10-20% developers margin, the £300m (again likely to be lower) of investments sold to the REIT will generate approx. £27m - £50m of profits for Sigma.


It is clear the fees to the company are substantial. That in itself is not necessarily an issue although in this case they do appear excessive. Given the poor financial performance to date and the REIT board’s contrasting positive and misleading comments in the full year results it does not instil faith that they are appropriately managing and overseeing the obvious conflicts of interest that Sigma Capital has with its many roles on both sides of the fence: “Quis Custodiet Ipsos Custodes”


Outlook: Stabilised dividend target likely to be lowered further with potential for NAV to continue downward trajectory. One to revisit once all equity and available debt fully invested and income producing.

[davebowler] 25/9/2019 08:27

Liberum;
Event

PRS REIT's NAV per share at 30 June 2019 was 95.8p (June 2018 98.3p). NAV total return over the year was 3.1%. NAV performance in the period has been driven by revaluation gains on completed units.

The total number of completed and contracted units at 31 August 2019 was 4,718 (June 2019: 4,369), representing a gross development cost of £734m (82% of total capital). The units are spread across 54 sites. The expected ERV of £46m represents a gross yield on cost of 6.2%. 1,351 homes have completed to date which represents a 15% increase since 30 June 2019. Completions are expected to rise materially this year given the number of sites under construction.

91% of the company's total capital is in deployment and the balance of £90m is expected to be committed in the coming months. The company has reaffirmed the overall dividend target of 5.5p for 2022.

Liberum view

PRS REIT is making progress on deployment but it has been a frustrating two years for shareholders since IPO, illustrating the challenge of pursuing a development strategy in a listed structure. Underlying earnings have been low in the period since IPO due to a high level of cash drag. The company also raised a significant amount of additional equity post-IPO before achieving the target gearing on the original proceeds. The portfolio is expected to comprise 5,400 units once the company is fully invested. 1,351 (25% of total) have completed to date.

Earlier this year, the company reduced its stabilised covered dividend target for FY2022 (June period end) to 5.5p from an original target of 6.0p. Expected delays in some of the current construction schedules due to the political backdrop were cited as the reason for the dividend reduction. We also believe increased investment competition played a part in making the 6p dividend unattainable. We think the reduced 5.5p target will still be challenging for the company to achieve. PRS REIT will most likely seek to raise further equity over the medium term, which may push out the timeframe to achieve a covered dividend target of 5.5p by 2022.

Private Equit

[davebowler] 17/9/2019 07:41

https://www.insidermedia.com/insider/northwest/sigma-benefits-from-prs-activity?utm_source=northwest_newsletter&utm_campaign=northwest_news_tracker&utm_medium=property_article

[mulls1] 22/3/2019 10:56

If you look at interim results announced 12th March, under "condensed consolidated statement of financial position" as at 31st December the PRS REIT had cash and cash equivalents of £230m. So that plus the £400m of debt (£200m of which is not yet secured) left £630m still to deploy. On that basis agree next raise some way off. As you say, very odd indeed that Sigma chief exec suggested last year that PRS REIT would be raising another £250m in January just gone.... Equally perplexing that interim results state PRS REIT will be drawing £50m of debt this month from agreed existing £200m debt facility. Cannot envisage the cash and cash equivalents of £230m as at 31st December having been deployed in 3 months, given it had taken 19 months to expend £270m up to that point. Need some clarity from the board in future trading updates

[jasper52] 21/3/2019 21:21

Article on PRS REIT that features comment from analyst Liberum:
hxxps://citywire.co.uk/investment-trust-insider/news/prs-reit-cuts-2022-dividend-target-blaming-planning-delays/a1209116

In total agreement. Spoke with property contacts who confirmed 4% development management fee to Sigma the investment advisor is excessive. Advised norm is half that! The institutional investors who signed up to this originally must take responsibility for giving Sigma an overly generous fee structure. If more equity raised that must surely be renegotiated down to 2% in advance. However cannot see more equity being raised for some time yet as still no announcement confirming second £200m of debt is secured. Bizarre that Sigma Chief Exec told PropertyWeek in Oct 2018 that PRS REIT would be raising a third £250m of equity in Jan 2019. That would have increased assets under management by 50% - clearly great for Sigma but extremely premature, which would have further increased cash drag and accelerated decline in NAV. Despite £900m "committed", on further analysis the definition adopted is very loose and includes sites actively under appraisal which could be anything. Use of such ambiguous wording smacks of Sigma focusing on asset gathering when really need to see how much equity has actually been deployed to date which frustratingly has been omitted from recent trading updates. Need to see full deployment and stabilisation of current £900m of equity and debt before more funds raised to avoid further hammering of NAV. After reading Liberum comment that Sigma fees exceed earnings to date, combined with current dividend being paid predominantly from equity as actual rents received are minimal cannot help but feel this is akin to a legalised ponzi scheme with the only person winning being the investment adviser Sigma. I certainly won't be touching until fully deployed and stabilised position is achieved and can assess from there. On reflection John Spiers article at launch in 2017 seems to have been on the money: hxxps://citywire.co.uk/investment-trust-insider/news/john-spiers-what-put-us-off-popular-prs-reit/a1036956

[davebrog] 14/3/2019 21:44

Decline in stabilised dividend by 0.5% to 5.5% not overly concerning. Agree would like to see NAV stabilise or even better start rising. Sigma bi-annually subscribe for PRS REIT shares which gives indication of spend and hence cash drag. Last two were in Jan & Aug 2018 so would have expected to see an RNS issue of shares beginning of this year but nothing as yet

[daveff] 12/3/2019 13:32

PRS REIT announces lowering of stabilised dividend due to planning delays. Sharp fall in NAV to 96.3p as at 31st Dec 2018. Since then a further 1p (£5m) dividend has been paid which one can only assume has reduced NAV further given only £2.3m of gross rent was received in the last 6 months of 2018. With the intention to continue paying a total 5p dividend per annum until stabilisation in FY 2022 this is likely to have a continuing detrimental impact on NAV and hence total return. When considering the second £250m raise was at £102.5p the ongoing deterioration in NAV is alarming. Cash drag a continuing issue until full £900m deployed. Unclear why second £250m was raised in Feb 2018. Should have first deployed initial £450m (£250m equity plus £200m debt) then gone back to the market for a further raise. Tail wagging the dog here as second raise was very much in the interests of Sigma as Investment Adviser (asset gathering) but not in the best interests of PRS REIT shareholders. Very frustrating in total return terms

[davebowler] 31/1/2019 12:53

Liberum;
Event

Civitas Social Housing's NAV per share at 31 December 2018 was 106.5, reflecting a 2.6% NAV total return in the quarter. The portfolio has been valued using a cap rate of 5.2%. The company has invested £674m to date across 557 properties. The portfolio is leased to 15 housing associations. The company expects to increase the dividend from Q1 2019 to reflect the index-linked nature of portfolio income. It would appear the regulatory judgement on Westmoreland (23% of NAV at 2 December 2018) has not had an impact on portfolio valuations in the quarter. In addition to Westmoreland and Trinity Housing Association (7% of NAV), the regulator has also put the gradings of three of the company's other housing association tenants under review (total exposure - 18% of NAV). The shares trade on a -2.3% discount to NAV.

PRS REIT's NAV per share at 31 December 2018 was 96.3p (June 2018 98.3p). NAV total return over the half-year was 1.5%. The company's recent trading update highlighted that £900m of capital has been committed to funding new PRS properties (5,600 properties). 775 homes had completed by the end of December with an annualised rental income of £7.0m. We believe shareholders will expect the company to start delivering on return expectations now that the company has committed all of its equity and debt capital. The NAV return since launch in May 2017 is 4.5% and approximately 40% of this was due to the accretive impact of the £250m placing in February 2018. The company has some way to go to achieve the challenging 6% dividend yield target. The shares trade on a 0.9% premium to NAV.

Target Healthcare REIT's Q4 2018 update highlights a 0.8% NAV increase to 106.9p (September 2018: 106.1p); NAV total return for the quarter was 2.3%. NAV growth was driven by a 1.6% like-for-like increase in the operational portfolio value over the period. The portfolio now comprises 61 assets (54 operational and 7 developments) with a gross value of £404m. Nine rent reviews completed in the quarter, resulting an average uplift of 3.3%. The weighted average unexpired lease term is 28.5 years. Net LTV at the year-end was 9.2%. The shares trade on a 4.3% premium to NAV (5.8% dividend yield).