Yahoo Finance This property trust has bucked the trend of falling valuations but still trades at a discount
Professional investors are topping up their holdings in the PRS real estate investment trust (Reit) as Britain’s biggest developer of family rental homes appears finally to be on the verge of making enough profits to cover its dividend.
Stephen Smith, the former British Land chief investment officer who has been chairman of PRS Reit since its government-backed launch in 2015, last week spent ÂŁ29,000 buying 36,577 shares at 79.3p. The purchase lifts his stake to 341,577 shares, worth ÂŁ283,000.
In the previous week Waverton, a London-based fund manager that buys investment trusts to give its clients access to specialist areas, announced that it had increased its stake in PRS from 4pc to 5.9pc. Its £26.4m holding makes it the Reit’s third largest shareholder behind fund groups Invesco and Aviva.
The share buying comes as PRS shares have rallied by 25pc in the past two months to 82.9p, although they remain below a peak of 114p in April last year.
The stock has been buoyed recently by hopes that interest rates will fall next year, relieving some of the pressure on its finances and on property valuations.
PRS’s annual and first-quarter results, published together in October, showed that the trust was achieving significant scale and benefiting from strong rental growth thanks to the national shortage of affordable homes.
PRS, which stands for private rented sector, passed a landmark in April when it built its 5,000th home, on its Brookfield Vale site in Blackburn, Lancashire. By Sept 30 the number of completed homes had grown to 5,129, spread across the North, Midlands and South of England and in Perth in Scotland.
A further 395 are contracted to be built. The portfolio’s expansion boosted rental income. Total revenue was 17pc higher at £40.2m in the year to June 30 and like-for-like rents rose by 7.5pc. Homes re-let to new tenants achieved even higher rental growth of 12pc.
The addition of the new homes under construction by PRS’s manager, Edinburgh-based Sigma Capital, should add another £3.1m to annual rental value, the company said.
PRS says its rents are still affordable at an average of 22pc of households’ income against government guidance that rents should be no more than 35pc of tenants’ income.
At the end of last year 85pc of the properties also achieved a good EPC energy efficiency rating of B.
Demand for Sigma’s “Simple Life” properties has offset some of the impact from rising interest rates and the pressure of finance costs has eased on PRS as 82pc of its £427m of investment debt is fixed at an average interest rate of 3.8pc, lower than the average of 4.5pc that valuers think it will make from its properties.
At a time when double-digit percentage declines in commercial property funds’ asset values are common, PRS saw its underlying net asset value (NAV) per share rise by 3pc to 120.1p in the year to June 30.
Over five years the portfolio’s total underlying return of 55pc is one of the best among London-listed Reits, although the shares lagged badly in the downturn and have provided an actual shareholder return of not much more than 5pc with dividends included.
Full-year earnings also rose by 3pc to 3.5p per share but failed to cover 4p of dividends. With 90pc of the 4p dividend target for the current financial year said to be covered on an ongoing “run-rate” basis, investors will hope that a second-quarter update next month confirms that the payout is fully backed by earnings.
Having cut its annual dividend target from 5p per share four years ago, PRS has repeatedly pushed back the timing for full dividend cover, frustrated first by planning approval delays, then Covid and then the impact of higher costs as inflation rose. It yields 4.9pc.
The uncovered dividend is one reason why shares in PRS, which Questor last tipped at 83.3p in October last year, stand 31pc below Numis Securities’ estimated NAV per share of 119.7p.
The discount has narrowed from 45pc two months ago, when Numis analyst Andrew Rees said the valuation looked “undemanding given the compelling sectoral tailwinds”.
That’s an assessment with which we still agree. The trust performs a social good as well as offering a potentially decent return from this low level. The shares should climb when dividend cover is restored and the weight of higher borrowing costs eases further. Hold.
Questor says: hold
Ticker: PRSR
Share price at close: 82.9p
Gavin Lumsden is editor of Citywire’s Investment Trust Insider
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