PRS REIT (PRSR) is the only real estate investment trust investing in the private rental housing sector. The manager – Sigma PRS Management – is in the process of building a portfolio of large developments, the majority of which it has developed, marketed and let specifically for the portfolio. This means there is a delay between capital being committed, construction being completed and tenants being contracted.
Launched in May 2017, the intention was to have a fully stabilised portfolio paying a 6p dividend within three years. Delays to the construction process, blamed first on planning delays and latterly on the impact of the pandemic, mean that the 6p target dropped to 5.5p and now no target is given. Anticipated stabilisation has been delayed to the final half of calendar year 2022. In the Portfolio section we give our estimate of the current economics of the portfolio.
With PRSR targeting quarterly dividends at an annualised rate of 4p, annualised for this financial year (ending June 2021), the forward yield is 5.1%, with a discount of 16%.
In December 2020, PRSR announced that it had completed its 3,000th home, with a total of 5,200 expected to make up the initial portfolio. The portfolio is spread across England in developments which have an average of 83 homes each. PRSR’s strategy is to bring a professional approach to the sector, building a portfolio of high-quality assets which would encourage longer tenancies and appeal to the ‘modern renter’. Thanks to the UK’s housing supply crisis, this person is typically older and more likely to have a family and want security than the renter of previous generations.
It is no surprise to see PRSR fall onto a significant discount. The delays to completion of the initial portfolio have been significant, and there are other opportunities out there covering and paying a 5% or higher yield on NAV. Furthermore, we are dealing with the impact of a recession which has yet to work through fully to labour markets thanks to the furlough scheme and various other government support measures. A more economically sensitive sector like residential housing could be under pressure as these schemes roll off, unemployment potentially rises, and consumer spending power takes a hit.
However, PRSR remains an interesting proposition and a unique one in the REIT space. It is hard to argue with the managers’ contention that the UK rental market is under-supplied, fragmented and often of poor quality. PRSR’s strategy of building high quality homes in livable communities and which appeal to this era’s older renting cohort could well see it more resilient in a poor economy and perhaps able to generate good rental growth over the long run. In our view it will not likely be until there is more concrete news about the initial portfolio’s completion and an indication of the fully-stabilised dividend that a re-rating could occur, but if the full dividend was 5p or above we think it quite possible PRSR could trade at par rather than the current discount of 16%.
Market opportunity in the private rented sector which is seeing demand outstrip supply
||Stabilisation of the portfolio has been repeatedly postponed and a firm dividend target dropped
|Wide discount could offer share price uplift as and when uncertainty subsides
||The housing market could suffer as the effects of the pandemic-inspired recession work through the economy
|Offers diversification through a unique proposition
||Fees are not low, especially when the development fee paid to the manager is included