Prs Reit Share Discussion Threads

[jimbobbaby] 10/10/2023 21:12

Are you factoring in rates?

[spectoacc] 10/10/2023 20:53

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 19:22

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 17:15

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 17:15

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 16:57

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 16:52

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 15:56

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 15:42

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 12:17

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 12:01

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 11:51

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.)

[makinbuks] 10/10/2023 11:40

Interesting update. Model looks like it just about hangs together with a 4p dividend. the future all depends on the direction of interest rates. My prediction FWIW is two years from now the base rate is 2% lower and the share price goes to £1, still yielding 4%.

There is the risk of a really sharp recession with a crash in house prices pushing the LTV beyond the 45% covenants. Rent arrears would also increase, but rates would be cut more quickly cutting the cost of debt and the discount for the income stream

The real question as we complete the build out in that period is what next. The manager will want to increase AUM. Possible asset management approach? Could existing investors be invited to invest in a separate managed fund?

[wskill] 05/10/2023 19:49

Evening SpectoAcc got an email back from the company very fast but was out travelling today costs are a tad high but 5.5 % of cost is repair and maintenance of properties I will pick up a few more now .He did also say as most properties are out of the 1 year builder defect warranty they pay for repairs.

[wskill] 05/10/2023 10:06

Has the company given any explanation of these costs Spec was looking to buy here as like asset backed income investments .
Or has anyone asked them about this charge 18% every year means no free cash for dividends.

Have emailed them and asked what it is and why the 1.2% increase in cost .

[spectoacc] 04/10/2023 10:06

A thread of a bunch of people arguing whether something is true or not - which it probably isn't.

Can't see any Holdings RNS implying RICA have any large stake in PRS.

As for PRSR themselves - the substantial and largely unexplained "non-recoverable property costs" of 18% puts me off. As does the fact they now can't grow - plenty geared already, no chance of raising equity.

At some point, their houses age and need CapEx, with no new ones having been added.

Difficult to argue it's expensive here, but will that 18% recur each year? What is it?

[jonwig] 14/9/2023 17:11

1tx - the point is they can't raise new equity when the share price is at a discount to nav.

[1tx] 14/9/2023 17:00

Hardly much point raising new money to expand this company or for others to invest in this sector if the properties you buy are going to be worth 30% less than you paid for them.Maybe a case for buying these shares "second hand" however!

With Nimby Sir Keir Starmer,Ed Davey & their House of Lords Chums doing their best to block house building reforms with faux green agendas rents are going to continue to increase......

[jonwig] 14/9/2023 06:38

A number of pension funds and insurers are looking to move into the sector (L&G, Aviva I know about). They could build houses or buy companies.

I wonder how attractive PRSR would be to a buyer - at a discount, naturally!

[pdosullivan] 13/9/2023 23:31

This is it exactly. PRSR yields 5.7% here. Far higher yields available elsewhere, which puts a cap on near term share price appreciation. It is a good business and I am a happy long term holder, but we must be patient until it gets back up to 100p+

[jonwig] 13/9/2023 10:34

Growth will be limited by inability to raise new equity at this discount. Lower interest rates would help a lot.

[giltedge1] 13/9/2023 10:15

Yes agree seem very good value, almost 100% occupancy, shortage of properties, rents rising circa 5% pa, interest rates fixed, brand new homes EPC A or B. Only costs a bit higher than should be, but addressable by board. I am slowly accumulating. Board needs to forecast a dividend raise which should now be affordable.