Investors are topping up their holdings in PRS (PRSR ) real estate investment trust (Reit) as the UK’s biggest developer of family rental homes looks to be on the verge of finally covering its dividends.

Stephen Smith, the former British Land chief investment officer who has chaired PRS Reit since its government-backed launch in May 2017, last week spent £29,000 buying 36,577 shares at 79.3p. 

The purchase on 12 December lifts Smith’s stake to 341,577 shares – worth nearly £271,000, or just 0.06% of the £448m residential property fund.

In the previous week, Waverton, a London-based fund manager that buys trusts to access specialist areas for its private clients, announced it had increased its position in PRS from 4% to 5.9%. That gives the firm a £26.4m stake, making it the Reit’s third-largest shareholder behind fund groups Invesco and Aviva.

The spree comes as PRS shares have rallied 19% in the past three months to 82.3p. The stock has been buoyed by hopes that interest rates will fall next year, relieving some of the pressure on its finances and property valuations.

Over 5,000 homes

In October PRS published its annual and first-quarter results together, showing the company was achieving significant scale and benefiting from strong rental growth due to the 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 30 September, the number of completed homes had grown to 5,129, spread across the North, Midlands and South of England, as well as Perth in Scotland, with a further 395 contracted to be built. 

The portfolio’s expansion boosted rental income with like-for-like rents rising 7.5% and pushing total revenue 17% higher to £40.2m in the year to 30 June. With homes re-let to new tenants achieving higher rental growth of 12%, the Reit’s estimated rental value jumped 15% to £55m.

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 says despite this, its rents are still affordable, taking an average of 22% of households’ income compared to government guidance that rents should be no more than 35% of tenants’ income. At the end of last year, 85% of the properties achieved a good EPC energy efficiency rating of ‘B’.

Simple Life

Demand for Sigma’s ‘Simple Life’ properties has offset some of the impact from rising interest rates, although the pressure of finance costs has eased on PRS, with 82% of its £427m of investment debt fixed at an average of 3.8%, lower than the average 4.5% valuers think it will make from its investments.

At a time when double-digit percentage declines in commercial property funds are common, PRS saw net asset value (NAV) per share rise 3% to 120.1p in the year to 30 June.

Over five years the portfolio’s total underlying return of 55% is one of the best of a London-listed Reit, although the shares lagged badly in the downturn and have provided a five-year shareholder return of just 5.5%.

Full-year underlying earnings also rose 3% to 3.5p per share but failed to cover 4p of dividends.

With 90% of the 4p dividend target for the current financial year said to be covered on an ongoing ‘run-rate’ basis, investors will hope a second-quarter update in January will confirm the payout is fully backed by earnings.

Dividend nearly covered

Having cut its annual dividend target from 5p four years ago, PRS has repeatedly pushed back the timing for dividend cover, frustrated first by planning approval delays, then Covid and the impact of higher costs as inflation rose.

The shares yield 4.9% and the government’s Homes and Communities Agency owns 4.6%, having bought at flotation to support expansion of the rental homes sector.

The uncovered dividend is one reason why PRS – whose shares Questor last tipped at 83.3p in October last year – stands 32% below Numis Securities’ estimate of 119.7p NAV per share.

That discount has narrowed from 43% in the past two months, 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 company performs a social good as well as offering a potentially decent return from this low level. The shares should re-rate when dividend cover is restored, and the weight of higher borrowing costs eases further.