Investment adviser's report

Sigma PRS Management Ltd ("Sigma PRS"), the Investment Adviser to the PRS REIT is pleased to report on the Company's progress for the six months to 31 December 2021. Sigma PRS is a wholly-owned subsidiary of Sigma Capital Group Limited ("Sigma"), which is part of PineBridge Investments, a private global asset manager with over $150bn in assets under management.

Investment objective and strategy

The Company is taking advantage of the substantial opportunity in the private rented sector, and aims to provide investors with an attractive level of income, together with the prospect of income and capital growth. It is doing so by creating a large portfolio of newly-constructed rental stock that meets existing demand in the UK for well-located, high-quality, professionally -managed rental homes.

The PRS REIT has delivered a large number of private rented sector housing schemes, which are let under the 'Simple Life' brand. It has created a geographically diverse portfolio of properties that have easy access to the main road and rail infrastructure and are close to large employment centres and local amenities. Proximity to good quality primary education is of particular importance, being a major attraction for families with children. While the Company is focused on family houses, it has also invested in some low-rise flats in appropriate locations where a greater diversity of rental levels is required.

The PRS REIT has built and continues to build its portfolios in two ways:

·      by acquiring undeveloped sites sourced by Sigma PRS. The delivery is managed by Sigma PRS (or another member of the Sigma Group as development manager), and the completed units are let under the 'Simple Life' brand.

The PRS REIT aims to fund a minimum of two-thirds of the new properties in this way. Pre-development risks are identified and underwritten by Sigma and its partners, and sites will have an appropriate certificate of title, detailed planning consent and a fixed-price design and build contract with one of Sigma's housebuilding partners prior to acquisition by the Company. During the construction phase, many of the properties are pre-let and subsequently occupied as they complete.

·      by acquiring completed PRS sites from the Sigma Group, or from third parties. A pre-requisite is that these completed and stabilised developments must accord with the PRS REIT's investment objectives and satisfy both return and occupancy hurdles. The Company may fund up to a maximum of one third of new properties in this manner. To date, this route represents 17% of the Company's portfolio.

Sigma has a well-established PRS delivery platform, which sources and develops investment opportunities. The PRS REIT has first right of refusal over sites within Sigma's platform assuming they meet its investment criteria and it has available capital to fund the opportunities.

The platform benefits from well-established relationships with construction partners, including Countryside Partnerships PLC, previously known as Countryside Properties PLC ("Countryside"), Engie Regeneration Limited, Seddon Construction Limited, Springfield Properties plc and Vistry Partnerships Limited, as well as with local authorities and letting agencies. These relationships enable Sigma to identify and source land, and deliver and manage properties on behalf of the Company in the target geographies. Homes England, an executive non-departmental public body sponsored by the Ministry of Housing, Communities & Local Government, has been extremely supportive of Sigma, with both parties sharing the common goal of accelerating new housing delivery in England.

Delivery and pipeline

A total of 505 new homes were added to the PRS REIT's portfolio in the first half of the current financial year. This took the total number of completed homes in the Company's portfolio at 31 December 2021 to 4,489, a 42% increase year-on-year (31 December 2020: 3,163 homes). The homes have an estimated rental value ("ERV") of £43.5 million per annum (31 December 2020: £29.4 million per annum), a rise of 48%.

Purchases of investment property over the first half to 31 December 2021 totalled £48.0 million (H1 2020: £104.1 million). The year-on-year reduction reflects the maturity of the portfolio and the normal cycle of property development expenditure, where expenditure is typically higher during the earlier months of acquiring and developing a site, and reduces as homes complete across a site.

The Company completed an equity placing in September 2021, raising £55.6 million, which took its Company's gross funding to £956 million (including debt), the major part of which has been fully allocated.

During October 2021, part of the placing proceeds were used to acquire a completed and let 16-unit site in Bury St Edmunds, Suffolk and three development sites, in Derbyshire, Lancashire and Perthshire. When completed, these sites will add 383 homes to the portfolio.

The table below provides a summary of development activity, and shows the cumulative number of PRS units that have been completed since the launch of the Company on 31 May 2017 and the ERV of homes under construction or completed.

Geographic diversification

The number of sites in the Company's portfolio increased to 67 sites at 31 December 2021 (31 December 2020: 65). They span the major regions of England and central Scotland.

Approximately 58% of homes in the portfolio, both completed and under development, are located in the North West of England, with the Midlands accounting for approximately 19%, and Yorkshire and the North East together representing around 14%. Homes in the South of England account for 7% of the portfolio, and the remaining 2% of homes are situated in central Scotland, the Company having acquired its first development site here in the period. The wide geographical spread of homes has created a diverse customer base, which helps to balance risk - particularly important given current geopolitical and economic uncertainties.

As at 31 December 2021, 52 sites were completed and income producing, with the remaining 15 sites still part-way through development. Many of the partially-completed sites are already producing rental income. This is because sites are developed in such a way that tranches of completed homes can be released for letting while construction continues, subject to health and safety reviews. The approach enables development sites to become income-generating relatively quickly.

Rental performance and key performance measures

The PRS REIT's homes remain in demand, and the portfolio continues to perform very strongly as it grows.

Increased rental income and rental growth

Reflecting the increasing number of assets in the portfolio and buoyant demand, annualised gross rental income as at 31 December 2021 was 48% higher at £43.5 million than a year ago, and 16% higher than at 30 June 2021 (31 December 2020: £29.4 million and 30 June 2021: £37.5 million). Acquisitions of completed assets during the period accelerated this rental income growth.

It is worth noting that rental growth was to some extent restrained by our decision in March 2020, during the first national lockdown, to freeze increases on existing tenancy renewals. Like-for-like growth in the 12 month period was 3.2% on stabilised sites, with just over 2% of this increase arising in the first half of the current financial year.

High occupancy levels

Occupancy levels were at 98% in December 2021, and including those prospective tenants who had passed referencing and paid their deposits, this figure increases to 99%. An average of 45 new applications were received each week over the period.

Strong rent collection

Rent collection remained strong at 99%; this ratio is measured as rent invoiced in the period relative to rent received in the same period (2021: 99%).  Rent arrears continued to be low, at £0.5m, which is approximately 1% of annualised ERV (2021: less than 1%).

Cost base covered

The Company's cost base is covered, and operating cash inflows have increased in the period as rental income from completed and let homes has grown.

As previously advised, legislative change in the form of the Tenant Fees Act 2020, which came into force on 1 June 2020, added almost 1.5% of additional cost to the lettings process, and contributed to an increase in overall running costs in the prior year. However, this cost has reduced with the growth in the portfolio triggering a revised letting agent fee structure that has lowered total lettings costs by over 1.0%. Currently, non-recoverable property costs are 17.6% of gross rent, reflecting the lower lettings costs. All other costs are in line with management's targets.

Bloomberg total return

The Bloomberg cumulative total return from IPO to 31 December 2021 is 27.7p.

Key performance measures and investment valuation of completed assets

The table below summarises key performance measures on completed assets:

Significant uplift in value of completed assets

The Investment Valuation completed in December 2021 showed an average uplift in the value of completed assets over the costs of delivery of 15.1%.

The average uplift in the value of completed assets on a vacant possession basis against the cost of delivery was 21.8%.

Both of these uplifts provide significant headroom between cost and value, underlining the benefits of the Investment Adviser's PRS model.

Latest data on delivery and asset performance

Between 1 January and 11 March 2022, we delivered a further 72 rental homes with an ERV of approximately £0.83 million per annum. This has taken the Company's portfolio of completed homes at 11 March 2022 to 4,561 homes, with an ERV of around £44.8 million per annum. A further 877 homes were under way at that point.

Out of 4,561 completed homes, 4,477 homes were let as at 11 March 2022, which provides an annualised rental income of £43.9 million, and a further 42 homes were reserved to qualified applicants with rent deposits paid at that date.

ESG Approach

The PRS REIT recognises that it is a long-term stakeholder in the communities and neighbourhoods it creates, and takes this role very seriously. It has delegated the day-to-day management of ESG strategy to the Investment Adviser, Sigma PRS.  Sigma PRS has also assumed responsibility for how the Company's ESG priorities are managed at both Company and asset level, and funds the PRS REIT's social and charitable activities. Sigma PRS reports to the PRS REIT's Board on ESG on a quarterly basis.

The Investment Adviser is a signatory of the United Nations Global Compact ("UN Global Compact"), which is a voluntary initiative designed to encourage business leaders to implement universal sustainability principles and in particular the UN Global Compact's Ten Principles. These are derived from the Universal Declaration of Human Rights, the International Labour Organisation's Declaration on Fundamental Principles and Rights at Work, the Rio Declaration on Environment and Development, and the United Nationals Convention Against Corruption.

The Company's 2021 ESG Report can be found on the Company's website at, www.prsreit.com.

Processes and strategies

As an industry leader in the provision of private rental homes, the PRS REIT is aware of its increased ESG responsibilities. Sigma PRS therefore aims to work alongside forward-looking partners who share the Company's goals and aspirations for reduced carbon emissions. The Investment Adviser also recognises the need for action in priority areas such as energy and water consumption, non-fossil fuel heating provision, and biodiversity.

As Sigma PRS continues to develop the Company's ESG agenda and strategy, the focus is on embedding best practice, monitoring supply chain activity, and ensuring policies and activities comply with the PRS REIT's commitment to the UN Global Compact.

Partnerships

Sigma PRS engages closely with all partners to deliver the PRS REIT's ESG commitments. Shared priorities include, reducing carbon emissions, measuring impact and gathering data, 'future-proofing' assets, and supporting biodiversity. Sigma PRS is pleased to report good progress in construction data gathering with Countryside and its Sustainability Team, and carbon reduction planning with Vistry Group and its Sustainability Team. Initiatives to reduce traffic flow and site waste, and to recycle and to divert waste from landfill remain areas of focus for all partners.

Maintenance Support

The Investment Adviser's repair and management app, FixFlo, continues to provide both a highly convenient way for Simple Life customers to report repair and maintenance problems and for maintenance services to be provided efficiently, with the minimum of physical contractor visits, which typically incur carbon emissions.

Over the first half of the financial year:

·      Of 11,000 issues raised:

-       48% were resolved through system advice and self-fix, and

-       52% continued to maintenance to fix/ contractor instructed

Energy Performance data

The energy performance of the homes in the portfolio is well above the Government's targeted levels for rental properties, with 84% of homes achieving an EPC rating in band B, 1% in band A and 15% rated in band C. The minimum rating band is E for rentals.

Charities

Sigma PRS continued to support chosen partner charities, and in addition has broadened the number of charities with which it has links. In particular, Sigma PRS has increased its focus on local charities, consulting with residents and colleagues over where to direct support.

An example of resident collaboration during the first half was the '12 Days of Christmas' campaign. The campaign received over 70 charity nominations from residents, and 12 charities each received £1,000. 

Projects

In the first half, Sigma PRS organised a Wellbeing Roadshow in conjunction with Clever Cogz Learning, which took mobile Escape Rooms to eight schools and 26 communities across the country. The idea was to promote wellness and well-being to children, as well as teamwork, at a time when children's mental health has been the subject of considerable debate arising out of pandemic-related restrictions.

In December 2021, Sigma PRS launched an outward-bound course, 'Building for my Future', in partnership with The Outward Bound Trust, an educational charity that aims to help young people to defy limitations through learning and outdoor adventures. Sigma PRS will be providing places for 12 young people, aged between 16 and 18, to develop life and leadership skills, confidence and resilience.

Residents social events

As lockdown restrictions lifted, Sigma PRS was able to resume 'resident events' for the PRS REIT's communities. Over the summer, these events include ice-cream vans visits to 47 sites, with over 3,000 ice creams consumed. In the autumn, evening pizza events were organised for a number of locations and an extended entertainment evening held at our Empyrean development, providing over 1,300 pizzas in total. At Christmas, Sigma PRS arranged for Father Christmas, his elves and accompanying band, to visit 54 sites. The Investment Adviser continues to place great importance on the value of these events and other opportunities for residents to come together and socialise.

In August 2021, Sigma PRS launched the 'My Simple Life' mobile app. While the app provides an easily accessible hub for home documents, manuals, statements, it is also designed to provide residents with social and neighbourhood news as well as information on special offers. Over 1,600 residents have currently registered to use the app.

The activities of the Company in all aspects of Environment, Social and Governance are set out in the ESG Report 2021, which can be obtained from the Company's website at, www.prsreit.com.

Human Rights

The obligations under the Modern Slavery Act 2015 (the 'Act') are not applicable to the Company given its size. However, to the best of the Investment Adviser's and Company's knowledge, principal suppliers and advisors comply with the provisions of the Act. The Company operates a zero-tolerance approach to bribery, corruption and fraud.

Health and Safety

In order to maintain high standards of health and safety for those working on sites, monthly checks by independent project monitoring surveyors are commissioned to ensure that all potential risks have been identified and mitigated. These checks supplement those undertaken by development partners. The data is reported to the Board on a quarterly basis in the event of a nil return, and immediately in the event of an incident. There were no reportable incidents over the year.

Gender diversity

The PRS REIT plc has five Board Directors. The male-to-female ratio of Directors in 2021 was 80: 20 (2020: 100: 0).

Governance

Appropriate and proportionate governance is essential to ensure that risks are identified and managed, and that accountability, responsibility, fairness and transparency are maintained at all times.

The Group is subject to statutory reporting requirements and to rules and responsibilities prescribed by the London Stock Exchange and the Financial Conduct Authority. The Board has a balanced range of complementary skills and experience, with independent Non-executive Directors who provide oversight, and challenge decisions and policies as appropriate. The Board believe in robust and effective corporate governance and is committed to maintaining high standards and applying the principles of best practice.

Summary

With the balance of the PRS REIT's gross funding effectively fully committed, Sigma PRS remains wholly focused on the delivery of homes currently under development. Based on current schedules, we expect to deliver the portfolio's 5,000th home towards the end of calendar 2022. Fixed price design and build contracts provide protection against raw material price inflation on current contracted development, and therefore we expect the portfolio to lag current inflation impacts. 

Since January 2022, the start of the third financial quarter, a further 72 new homes have been completed, taking the portfolio to 4,561 completed homes as at 11 March 2022, with a further 877 homes under way. The ERV of the portfolio at that date is expected to be £44.8m per annum.

Demand remains strong, and occupancy and reservation levels are high. Between 1 January and 11 March 2022, the percentage of occupied homes stood at 98%. Including applicants who have paid deposits and passed our qualification process, the let portfolio increases to 99%. Rent collection in the period was very strong at 99%, with arrears low. These figures continue to demonstrate not only the attraction of our homes and our high standards of customer care but the ongoing structural undersupply of quality family rental homes.  We expect rising interest rates to boost demand for rental homes as mortgage affordability pressures increase, especially for first-time buyers.

Looking ahead to the remainder of the financial year and beyond, we remain confident that the PRS REIT is in a strong position to achieve market expectations.

The Board will consider the payment of an interim dividend in respect of the three months to 31 March 2022 in the fourth quarter of the current financial year. It continues to target* a minimum total dividend for the current financial year of 4p per ordinary share.

The 4p dividend is expected to be almost fully covered by earnings on an annualised basis by the end of the 2022 financial year, with coverage continuing to grow thereafter as construction, completions, lettings and asset management advance.

The global backdrop since the inception of PRS REIT has been extraordinarily turbulent, so let us hope that the remainder of 2022 and beyond will bring greater stability.

Sigma PRS Management Ltd

22 March 2022

*These are targets only and not forecasts. There can be no assurance that these targets will be met and they should not be taken as an indication of the Company's expected future results.