Prs Reit Share Discussion Threads

[nickelmer] 23/3/2023 07:22

I may have misread things, but in prior full-year and half-year results, profits have been partly increased by re-valuation of properties, this cannot continue forever and in the current climate what happens if they have to lower the valuation due to falling property prices which would reduce profits and NAV. Maybe this is what the market can sense coming.

[hindsight] 22/3/2023 16:24

Well they are a landlord and I know how landlords feel

[spectoacc] 22/3/2023 12:01

Yet interest rates shouldn't really bother fixed-rate PRSR, I think? Or at least only marginally on the variable. And rental market is absolutely gangbusters still, at least anecdotally.

But yes, guess rates rises alters the risk-free and the opportunity cost, to the detriment of all existing investments.

Didn't see any bounce when SVB/CS made it look like rates may have peaked tho.

Not a holder, but watching.

[jonwig] 22/3/2023 11:56

Vistry (FY results today) builds most of their homes and doesn't seem unduly stressed (yes, slowdown next year, but balance sheet sound). I wonder if today's fall is down to something as simple as the inflation numbers and implication for rates.

[spectoacc] 22/3/2023 11:26

At some point, it bottoms. Not sure when tho.

[jimbobbaby] 10/3/2023 10:25

2.9% cost on the 250m with a 17 year average term looks pretty solid. Even if the interest cost on the other £200M increased 5% worst case they will still have plenty of interest cover (even before rent increases)From what I'm seeing locally prices on energy efficient homes are holding up much better than the general market and they have rents at an affordable level so have scope to increase. I think is is a decent time to add for long term hold.

[jimbobbaby] 10/3/2023 10:15

Extract from last published details on debt. Company had GBP440 million of committed debt facilities available for utilisation as at 30 June 2022. Gearing on portfolio (measured as net debt vs. investment value) remains low at 31%, and 62.5% of the GBP400 million of investment debt is fixed rate at an average of 2.9%.The GBP440 million of committed debt facilities comprised GBP400 million of investment debt facilities and GBP40 million of development debt facilities although a small portion of the investment debt facilities can also be utilised as development debt facilities.Our lending partners are: Scottish Widows (GBP250 million); The Royal Bank of Scotland plc (GBP100 million); Lloyds Banking Group plc (GBP50 million); and Barclays Bank PLC (GBP40 million). GBP25 million of the Lloyds Banking Group/ RBS facility and the GBP40 million Barclays Bank PLC debt facility are available to be drawn as development debt facilities, which enables sites to be developed simultaneously.The debt facilities are subject to the maximum gearing ratio of 45% of gross asset value. Approximately GBP350 million of these facilities have been drawn to date, with the remainder presently forecast to be utilised over the next 12 months as we finish the current phase of construction, completion and letting activity. The fixed interest long-term investment debt facilities of GBP250 million have an average term of 17.6 years and an average weighted cost of 2.9% once fully drawn.

[makinbuks] 07/2/2023 12:37

I'm pleased with todays announcement, further good operational performance and the real prospect of completing the 5600 homes this year.

I'm slightly confused by the debt position

Total facilities £440m, however the Barclays £40m is for development purposes. Hence, when they say 62.5% is fixed interest they refer to the Scottish Widows portion £250m as a percentage of £400m, ie the investment debt.

Does that mean that if the current planned build were completed to budget PRSR would have £400m investment debt drawn and £40m development undrawn awaiting further opportunities? Grateful if anyone could confirm or correct that understanding.

It matters for the LTV calculation and how safe we would be in the face of a further 0,5% rise in rates

[jimbobbaby] 07/2/2023 08:19

NAV @117 on 31 Dec. Increase in rents offset yield softening. Affordability is still decent showing there is scope for growth in rents yet. Seems solid enough to me.

[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