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Liberum: rental housing trust pays fund manager too much

14 January 2020

Government-backed PRS Reit ticked off by Liberum analyst for paying Sigma Capital £17.8m in fees over three years.

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 today, 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.

PRS shares, which are 6% owned by the government's Homes and Communities Agency, added 0.5p close to 91p today but remain well below the 100p at which they listed in May 2017.

A spokeswoman for PRS said Sigma receives a development fee when a project is directly funded by the trust and ‘50% of that fee is reinvested in PRS Reit shares at six-monthly intervals’.

'Sigma holds key responsibilities, which include sourcing sites and securing detailed planning consent, as well as agreeing construction programmes with approved contractors, project managing developments to secure the delivery of homes and overseeing the handover of completed homes,' she said.

'The model means that Sigma assumes some development risk not desired by the PRS Reit.'

The update for the three months to 31 December showed PRS completed 256 homes, up from 188 in the previous quarter, bringing its total portfolio to 1,617 homes.

PRS said the new properties would contribute £2.6m in rental income lifting the annual total this year to £14.9m.  The Reit said ‘demand remains strong’ and its properties continued to ‘rent well’ with 98% occupied.

Equally important, the company has deployed the bulk of its £900m of funding, £500m of which was raised from shareholders and the rest borrowed from banks. 

It says the pace of delivery continues to pick up and expects its 2,000th home to be built by around the end of the quarter. 

PRS has a total of 3,300 homes under development across 42 sites which, when completed, are expected to generate a gross rent of £32.7m.

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.

PRS has continued to pay and target 5p a year from quarterly dividends.

At yesterday's close the shares offered a 4.4% yield and stood on a discount of 5% below their estimated net asset value (NAV) of 95.5p. This was an improvement on the 83p low at the end of November when the discount widened to 13%, according to Numis Securities. 

Meanwhile, since PRS launched Sigma has seen its shares rise from 88p to 113p, down from a peak last summer of 147.5p, good news for investors, such as Henderson Alternative Strategies Trust (HAST), who spotted their potential early.

Investment company news brought to you by Citywire Financial Publishers Limited.

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