PRS REIT

6 October 2020

PRSR.L

The PRS REIT plc

("PRS REIT" or "the REIT" or "the Company" or "the Group")

Audited Full Year Results

for the year ended 30 June 2020

Good progress and well-positioned despite uncertainties

KEY POINTS

·     Good progress despite impact of COVID-19 pandemic - with 909 new rental homes added over FY2020 (2019: 768) to take portfolio at year end to 2,082 completed homes (2019: 1,173), with a further 2,803 homes at various stages of the delivery process (30 June 2019: 3,196)

-    national 'lockdown' and resultant delivery disruption is estimated to have delayed the completion of a further 600 homes in FY2020

-    despite this, in Q1 2021, 552 new homes were added to take the portfolio of completed homes at 30 September 2020 to 2,634, with estimated rental value ("ERV") at £24.3m p.a. (see separate First Quarter Update announcement issued today)

·      Rental income and demand for properties remained strong over the year and in Q1 of FY2021

·    Financial position is very robust, with net rental income covering cost base, low gearing of 25% and headroom on committed bank facilities

·     Total dividends paid, 4.0p per share (2019: 5p), in line with revised strategy taking into account pandemic impact.

Financial

*after dividend payments

Operational

Outlook

·    96% of the Company's net funding has now been deployed, with the portfolio now comprising 5,003 completed and contracted homes, including sites under forward contracts for purchase

·   Rental values have remained strong, and at 30 September a further 145 qualified applicants were due to take occupancy 

·      Long-term opportunity is strong with family rental housing market remaining critically undersupplied

Steve Smith, Chairman of the PRS REIT, commented:

"The PRS REIT plc continued to make good progress in its third year of activity, despite the impact of the COVID-19 pandemic. While construction was suspended in the fourth quarter, we reached the milestone of our 2,000th completed rental home by mid-June, and over the year as a whole added 909 new homes.  We are now at 2,634 completed homes, with a further 2,369 homes under way as we approach our target of 5,200 rental homes.  

"There are significant macroeconomic uncertainties ahead but the Company is well-positioned financially, and our risk-mitigated model and the scale and geographic spread of our portfolio limits our exposures.  Demand for our properties remains strong and the undersupply of good quality, well-located and professionally managed homes is significant. We are therefore confident in long-term prospects for The PRS REIT plc."

For further information, please contact:

NOTES TO EDITORS

About The PRS REIT plc
(www.theprsreit.com)

The PRS REIT plc is a closed-ended real estate investment trust established to invest in the Private Rented Sector and to provide shareholders with an attractive level of income together with the potential for capital and income growth. The Company is investing £0.9bn in a portfolio of high quality homes for private rental across the regions, having raised a total of £500m (gross) through its Initial Public Offering, on 31 May 2017, and a subsequent placing in February 2018. Both fundraisings were supported by the UK Government's Homes England with direct investments.  

LEI:  21380037Q91HU97WZX58

Chairman's Statement

Introduction

I am pleased to present The PRS REIT plc's audited financial results for the year ended 30 June 2020. While the year was dominated by the impact of the COVID-19 pandemic, the Company made good progress on housing delivery. In mid-June, the Company reached the milestone of its 2,000th new rental home, a little over three years since the launch of the PRS REIT in May 2017. At the year-end, the portfolio stood at 2,082 homes, having added 909 new homes over the year as a whole (2019: 768), including 465 homes in the second half (2019: 398). The Company remains financially and operationally well-positioned.

The delivery model provided significant downside protection when construction activity across all sites was suspended between the end of March and mid-May, as a result of the Government-imposed restrictions. In particular, fixed price design and build contracts limited financial exposure. The Company's financial position continues to be robust, with increased cash flows year on year, net rental income covering the cost base, and low gearing.

Demand for the PRS REIT's properties remained strong, and rental income increased significantly over the year as new homes were added to the portfolio. The amount of rent collected matched 98% of rent invoiced, and rental rates since the reopening of the market in May 2020 have reflected growth from new tenancies whilst rates for renewals have been frozen at pre-pandemic levels.  

Construction activity across all sites resumed by the end of May, though social distancing and other safety measures adversely affected the pace of delivery. The 909 new rental homes added to the Company's portfolio during the year (2019: 768) took the number of completed homes at the year-end to 2,082 (30 June 2019: 1,173), increasing the portfolio's estimated rental value ("ERV") by £8.4 million per annum to £19.1 million per annum (30 June 2019: £10.7 million). A further 2,803 homes, with an ERV of £27.4 million per annum, were at various stages of the delivery process at 30 June 2020.

By the end of September, another 552 homes, with an ERV of £4.4 million per annum, had been completed, taking the number of completed homes at that point to 2,634 and the completed portfolio's ERV to £24.3 million per annum. The number of homes contracted at 30 September was 2,369. Once completed, they will take the portfolio to 5,003 homes, providing an ERV of £47.6 million.

This delivery includes development sites that are under forward-purchase agreements with the PRS REIT (125 homes with an ERV of £1.6 million).

The Company's portfolio of assets is geographically widely spread, across 69 sites throughout the major regions of England, including the North West, North East, Yorkshire, the Midlands, the South East (excluding London) and the East of England.

The total gross development cost ("GDC") of delivery by the year end stood at £757 million (2019: £661 million). This figure comprises the cost of the 21 completed sites in the portfolio and the expected cost of the 46 sites that were at various stages of progression at 30 June 2020. It also includes the nine fully-developed and let sites that we have acquired to date.

Approximately 96% of the Company's net proceeds from its gross funding of £900 million (comprising equity and debt), has been deployed to date. The remainder of the Company's available resource is expected to be deployed by the end of 2020.

Following full deployment of funds, the portfolio is expected to comprise approximately 5,200 rental homes, with stabilisation expected to be reached in the second half of calendar year 2022. 

The Investment Adviser's report provides further commentary on housing delivery and asset performance over the year.

Financial Results

Revenue increased to £12.9 million for the year to 30 June 2020 as more units were completed and let (2019: £6.0 million) and entirely comprises rental income. After the deduction of non-recoverable property costs, net rental income for the year was £10.2 million (2019: £4.9 million).

Expenses in the year increased to £6.2 million (2019: £5.9 million), in particular independent valuation costs reflecting the growth in the number of the Group's assets. The gain from the fair value adjustment on investment property was slightly up on the prior year at £15.8 million (2019: £15.6 million) due to the delay to construction works during the lockdown period in the current year. Operating profit increased to £19.9 million (2019: £14.6 million) as a result of the increase in completed units being let.

Finance income from short-term deposits was £0.2 million (2019: £0.8 million). Finance costs in relation to bank loans were £3.7 million (2019: £0.9 million). These reflect the drawdown and utilisation of debt funding during the year.

Profit after taxation increased to £16.4 million (2019: £14.6 million) and basic and diluted earnings per share rose to 3.3p (2019: 2.9p) on an IFRS basis.

The Group's net asset value ("NAV") per share at 30 June 2020, on an IFRS basis, was 95.1p (2019: 31 December, 95.0p and 30 June 95.8p) as was the EPRA NAV per share (2019: 31 December, 95.0p and 30 June, 95.8p).

Net assets of the Group at 30 June 2020 stood at £471 million (2019: £474 million) after paying dividends of £19.8 million in the year.

Dividends

The Company's policy is to pay a quarterly dividend during the development phase, even though it is not as yet fully covered by rental income.

For the year to 30 June 2020, aggregate dividends of 4.0p per share were paid to shareholders (2019: 5.0p per share), in line with the revised strategy set by the Board following the uncertainty and disruption caused by COVID-19.

The Board continues to target a minimum total dividend of 4.0* pence per ordinary share for the current financial year ending 30 June 2021.

Corporate Social Responsibility

The creation of high-quality, well-located, professionally-managed rental homes has a long-term social impact. We take this responsibility seriously and the 'Simple Life' brand, through which our properties are marketed and managed, directly connects the Company to the families and individuals who rent its properties, and to the local communities in which developments are situated.

It is important to create homes that tenants will enjoy and in which they feel that they can put down long-term roots. We aim to achieve this through the quality of our properties, the care we take in maintaining them, and through the high standard of customer support provided.

The Investment Adviser's support for schools and institutions close to the Company's developments continued over the financial year. This included the Salford Foundation, a charity providing opportunities for young people and adults in Greater Manchester and the North West, Salford Loaves and Fishes, which helps homeless and vulnerable people in Manchester, and Park Palace Ponies, an inner-city starter riding school based in Liverpool. However, in the second half, with the onset of the pandemic and lockdown, the Investment Adviser directed additional support to certain charities chosen by residents. Donations were made to Centre Point, which helps homeless young people, Mind UK, the mental health charity, Women's Aid, which combats domestic violence, and The Trussell Trust, which supports a nationwide network of food banks. The Investment Adviser also increased communications with tenants during the lockdown and sought to identify and resolve any financial issues supportively.

Our Investment Adviser will continue with these and other valuable initiatives. We believe that such support fosters a greater sense of community between residents and with the wider neighbourhoods in which our developments are located.

Other Company Matters

At the time of its IPO and launch in May 2017, the Board stated its intention in the medium term to move the Company to the premium segment of the Official List should the Directors consider that such a move would be in the best interests of the Company and its shareholders as a whole.  Given the Company's progress since then in delivering an initial portfolio of completed rental homes, the Board is commencing consideration of the benefits of migration to the premium segment.

Outlook

The Company is now in its fourth year, and is very well advanced in its target of creating an initial portfolio of 5,200 build-to-rent homes across most of the major regions of England, excluding London.

While we anticipate that the COVID-19 pandemic will continue to affect the Company's activities in the near term, both housing delivery and lettings are progressing well, within the necessary COVID-19 restrictions. A further 552 new homes were added to the portfolio in the first quarter of the new financial year. This has taken the total number of completed homes as at 30 September to 2,634, with 2,369 homes under way. When completed, this delivery will take the total ERV of the portfolio to £47.6m per annum.

Trading performance has remained robust across the portfolio. The number of units let and occupied now totals 2,337 with a rent roll of £21.6m. In the latest quarter to 30 September 2020, the rent collected matched the rent invoiced during the period. Reservations over the first quarter of the new financial were strong and at 30 September 2020, a further 145 qualified applicants were due to take occupancy. 

The underlying structural drivers of demand for the Company's high-quality family rental homes remain strong, and we believe this may have been strengthened by people reassessing their residential needs post-lockdown. We have considered the proposals set out in the Government's Planning White Paper, published in August, and do not anticipate any adverse impact on the prospects or activities of the PRS REIT. We continue to consult with the PRS REIT's advisers and others and expect to provide further comments on the proposals in due course.

We look forward to reporting continued progress, despite the disruption caused by COVID-19, and will declare our next dividend during October 2020.

Steve Smith

Chairman

* This is a target only and there can be no assurance that the target can or will be met and should not be taken as an indication of the Company's expected or actual future results. Accordingly, potential investors should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable.

IFRS AND EPRA PERFORMANCE MEASURES

Investment Adviser's Report

Sigma PRS Management Ltd ("Sigma PRS"), a wholly-owned subsidiary of Sigma Capital Group plc, is the Company's Investment Adviser, and is pleased to provide a report on the PRS REIT's activities and progress for the year ending 30 June 2020.

Business Activities

The PRS REIT plc is a public limited company incorporated in England on 24 February 2017. Together with its subsidiaries, it is the first quoted Real Estate Investment Trust ("REIT") to focus on the Private Rented Sector ("PRS").

The Company completed its IPO on 31 May 2017, raising initial gross proceeds of £250 million through the issue of 250 million ordinary shares of one pence each at an issue price of £1 each and its shares were admitted to trading on the Specialist Fund Segment of the Main Market of the London Stock Exchange. The Company has since raised additional funds, through a further placing and through gearing, taking its total available resources to £900 million (gross).

Investment Objective and Business Model

The PRS REIT is seeking to provide investors with an attractive level of income, together with the prospect of income and capital growth, through investment in newly-constructed residential private rented sector sites of multiple units, comprising mainly family homes. The homes are let on Assured Shorthold Tenancies (as defined in the Housing Act 1988) to qualifying tenants.

The Company is investing in multiple sites in cities and towns across the UK, mainly targeting the largest employment centres in England predominantly the Midlands and North, but outside of London. The locations closely follow the main rail and road infrastructure, and rental homes, being newly-built, come with the benefit of 10 year National House Building Council or equivalent warranties.

The Company is concentrating on traditional housing, which has a broad spectrum of demand, and differing house types for different life stages, including smaller houses for young couples and retirees, and larger houses for growing families. It also invests in some low-rise flats in appropriate locations to broaden its rental offering.

The PRS REIT is building its portfolio of PRS assets in two ways:

·      by acquiring residential development opportunities, with these development sites sourced and managed by Sigma PRS (or another member of Sigma Capital Group plc acting as development manager). When completed, homes on these sites are subsequently let to individual qualifying tenants; and

·      by acquiring already completed and let PRS sites that fulfil the Company's investment objectives, including appropriate return and occupancy hurdles. Completed sites are acquired from Sigma Capital Group plc, pursuant to a forward purchase agreement between the PRS REIT and Sigma Capital Group plc and subject to an independent valuation appraisal. Should the opportunity arise, the PRS REIT may acquire newly-built PRS assets from third party vendors. The Company has the ability to fund up to a maximum of one third of new properties in this manner.

The PRS REIT retains the right of first refusal to acquire and develop any sites sourced by Sigma PRS that meets its investment objective and policy.

There are certain restrictions in the PRS REIT's investment policy, for instance the PRS REIT will not invest in other alternative investment funds or closed-end investment companies.

Achieving Scale and Reducing Risk

The Sigma PRS Platform

The Investment Adviser is utilising Sigma Capital Group plc's well-established PRS property delivery and management platform ("Sigma PRS Platform") to help the PRS REIT achieve scale and to minimise development and operational risks. Specifically, the Sigma PRS Platform facilitates the efficient sourcing and development of investment opportunities.

The Sigma PRS Platform comprises relationships with construction partners, central government, and local authorities. Key construction partners include Countryside Properties, which is the primary house building partner, Engie, Seddon and Vistry. Homes England, an executive non-departmental public body sponsored by the Ministry of Housing, Communities & Local Government, works closely with Sigma in the common goal of accelerating new housing delivery in England.

All pre-development risks are identified and underwritten by Sigma Capital Group plc and its partners, and development sites will have an appropriate certificate of title, detailed planning consent and a fixed price design and build contract with one of Sigma Capital Group plc's housebuilding partners. During the construction phase, many of the properties are pre-let and subsequently occupied as they complete.

Through its wide network of relationships, the Sigma PRS Platform represents a very good source of land for development sites, and is able to deliver a variety of high-quality house types efficiently and in volume. This underpins the PRS REIT's objective to build at scale and across multiple geographies.

Multiple Geographies

By creating assets across multiple locations and regions, we aim to minimise the PRS REIT's concentration risk.

We are targeting a mix of locations that demonstrate both higher yielding profiles (predominantly those in the North of England) and developments where there is greater potential for capital appreciation (often in our Southern opportunities). Proximity to good primary schools is also a key requirement as the Company is focused on the family rental market.

In addition, no investment will be made in any single completed PRS site or PRS development site that exceeds 20 per cent of the aggregate value of the total assets of the Company at the time of commitment.

'Simple Life' Brand

The PRS REIT's rental homes are marketed under the 'Simple Life' brand. The brand has created an identity for the PRS REIT's product and, over time, we would like it to be recognised as a 'gold standard' for the tenant experience, providing a combination of a high-quality, sensibly-priced product together with high customer service levels.

The PRS REIT's long-term approach to the ownership of its assets provides further reassurance to tenants, and the neighbourhood initiatives that we sponsor also help to foster a sense of community within our developments.

Financing Resource

Equity Placing Programme

Two tranches of equity have been raised to date, £250m (gross) at the Company's IPO on 31 May 2017, and a further £250m (gross) in February 2018. Homes England participated in both fundraisings, taking its direct investment in the Company to a total of approximately £30 million.

Debt Facilities

The Company is using gearing to enhance equity returns, and in June 2019, agreed terms with Scottish Widows and Lloyds Banking Group to increase its total debt facilities to £400 million. Further details can be found in the 'Financial Results' segment of this report. After the financial year end, the Company arranged a further £50 million development debt facility with Barclays Bank PLC. The PRS REIT's aggregate borrowings will always be subject to an absolute maximum, calculated at the time of drawdown of the relevant borrowings, of not more than 45 per cent of the value of the assets.

Operational Review

Development Activity and Acquisitions

Delivery of new homes from the development pipeline remains the key focus. However, during the second half of the financial year, the COVID-19 pandemic interrupted delivery when the Government implemented a national lockdown. Construction activity was suspended for approximately six weeks, from the end of March to early May. Sites were reopened with social distancing and other safety measures in place, which has had the effect of slowing the pace of delivery. We estimate that the shutdown and decrease in productivity reduced unit delivery in the year by 600 homes.

Notwithstanding the disruption, a total of 909 homes were completed in the year to 30 June 2020, compared with 768 in the prior year. This reflected the significant increase in the number of sites in the delivery programme and took the total number of completed homes at the end of June 2020 to 2,082 (2019: 1,173) across six of the eight major regions of England.

The Company also acquired one fully-developed and let site, comprising 50 homes from Sigma Capital Group plc. As with previous sites acquired from Sigma Capital Group plc, the site was independently assessed by Savills before acquisition. The site is located in the Wigan and provides an ERV of £0.48 million per annum.

The estimated rental value of the portfolio at 30 June 2020 amounted to £19.1 million per annum, a 79% increase year-on-year (30 June 2019: £10.7 million).

The table below provides further detail in summarised form of our development activity in 2020 and 2019, including activity in the first quarter of the new financial year.

Construction Resource

The construction resource provided by the Sigma PRS Platform now has national reach. It underpins the continued expansion of the Company to key population centres in England, supporting the creation of a geographically diverse portfolio.

There are many clear benefits for our construction partners in partnering with us. These include strengthening their ability to bid for land with local councils and improving operational efficiencies with their own housing delivery. This partnership approach is working well and the model we operate of using standard family house types, fixed price design & build contracts, and standardised specification, helps to ensure that developments are built to budget and that our PRS assets can be maintained and managed efficiently.

In our annual report last year we highlighted that we had started to take delivery of homes produced by Countryside Properties new sectional-building technology. We are delighted to announce that over 530 of our new homes have now been constructed using this system.

Financial Results

Income statement

The Group's revenue (which is wholly derived from rental income) more than doubled over the year to £12.9 million (2019: £6.0 million). After the deduction of non-recoverable property costs, the net rental income was £10.2 million (2019: £4.9 million). Administration expenses were marginally higher at £6.2 million (2019: £5.9 million). The gain from the fair value adjustment on investment property was £15.8 million (2019: £15.6 million), the small increase reflecting the delay to construction works during the lockdown period in the current financial year. Operating profit was £19.9 million (2018: £14.6 million). Finance income for the period from short-term deposits was £0.2 million (2019: £0.8 million), whilst finance costs were £3.7 million (2019: £0.9 million) reflecting the debt utilisation during the year. The profit after finance income and taxation was £16.4 million (2019: £14.6 million).

The basic and fully diluted earnings per share on an IFRS basis for the year was 3.3p (2019: 2.9p)

Dividends

The Company has declared and paid a total of 4.0p per ordinary share for the year under review, which comprised the following:

·      On 31 October 2019, the Company announced the declaration of a dividend of 1.0 pence per Ordinary Share in respect of the period from 1 July 2019 to 30 September 2019, which was payable on 29 November 2019 to shareholders on the register as at 15 November 2019.

·      On 31 January 2020, the Company announced the declaration of a dividend of 1.0 pence per Ordinary Share in respect of the period from 1 October 2019 to 31 December 2019, which was payable on 28 February 2020 to shareholders on the register as at 7 February 2020.

·      On 18 June 2020, the Company announced the declaration of a dividend of 1.0 pence per Ordinary Share in respect of the period from 1 January 2020 to 31 March 2020, which was payable on 17 July 2020 to shareholders on the register as at 26 June 2020.

·      On 7 August 2020, the Company announced the declaration of a dividend of 1.0 pence per Ordinary Share in respect of the period from 1 April 2020 to 30 June 2020, which was payable on 18 September 2020 to shareholders on the register as at 21 August 2020.

Balance Sheet

The principal items on the balance sheet are investment property of £577.1 million (2019: £362.3 million), cash and cash equivalents of £59.3 million (2019: £229.9 million), long-term loans of £150.0 million (2019: £100.0 million) and trade and other payables of £23.9 million (2019: £23.4 million).

The investment property includes completed assets and assets under construction at fair value. Trade and other payables includes £8.0 million of development expenditure that was paid in July 2020.

Debt Financing

The PRS REIT has the following debt facilities:

·      £150 million revolving credit facility with Lloyds Banking Group / RBS for an initial term of two years, which can be extended further for up to two years. Interest is based on three month LIBOR plus applicable margin and the loan is secured over assets allocated to Lloyds Banking Group. This was undrawn at 30 June 2020 but drawdown commenced shortly after the year-end;

·      £100 million term loan of 15 years with Scottish Widows, which was drawn in two equal instalments in March and April 2019. Interest is fixed at the 15 year swap rate of 1.588% plus applicable margin and the loan is secured over assets allocated to Scottish Widows;

·      £150 million term loan for 25 years with Scottish Widows of which £50 million was drawn in April 2020, a further £60 million was drawn in July 2020 and the remaining instalment is due to be drawn in October 2020. Interest was fixed at the relevant swap rate of 1.164% plus applicable margin and is secured over assets allocated to Scottish Widows; and

·      Subsequent to 30 June 2020, the Company arranged a further £50 million development debt facility with Barclays Bank PLC. Interest is based on three month LIBOR plus applicable margin and the loan is secured over assets allocated to Barclays Bank PLC.

Key performance indicators

The Group's key performance indicators ("KPI") include:

All the KPIs are in line with management expectations. Increases in rental income, non-recoverable property costs, operating profit, and the number of properties available to rent reflect the increased size of the portfolio and the progression of development sites.

Market Overview

New housing delivery over the course of 2019/20 continued to fall short of annual government targets of between 240,000 and 340,000 new homes per annum. It is estimated that the deficit over the year was a minimum of 70,000 new dwellings. The COVID-19 crisis of 2020, which saw the shutdown of all building sites for at least six weeks and reduced activity levels thereafter, has further dampened unit output.

The supply of rented properties has also reduced following tighter regulation and increased tax burdens, which caused large outflows from the 'Buy-to-let' sector. According to Savills, in 2010, 78% of landlords in the private rented sector owned more than one property, but by 2018, this had reduced to 45%. This represents a gross loss of over 40,000 buy to let homes per annum in each of the last three years.

With the average home in the UK now a multiple of 7.7 times gross average salary, the choices available to those who are too economically active to qualify for affordable housing but without sufficient savings to pay for a minimum deposit (including to qualify for "Help to Buy"), are increasingly limited.  The Build-to-Rent ("BTR") sector can absorb some of this demand, although currently there are only 43,000 operational homes, and just 33,500 under construction.

BTR currently accounts for just 1% of all private rented homes in the UK, which when compared to 45% in the US and 35% in Germany, indicates the sector's potential growth. Savills estimates that the sector, currently estimated to be worth £10 billion, could expand to nearer £550 billion at full maturity.

The UK market continues to focus on high-density flatted developments in city centre locations whilst the PRS REIT has maintained its focus on regional family homes. The relevance of the PRS REIT's housing model has been brought into sharp relief this year with COVID-19 and home-working causing tenants to rethink their space requirements and the need for private outdoor space.

Post Period Review

Progress since the start of the new financial year has continued positively, in line with management expectations.

Over the first quarter of the new financial year, 552 new homes were added to the portfolio, taking the number of completed homes at 30 September 2020 to 2,634, providing an ERV of £24.3m. The development pipeline also grew over the first quarter with a number of acquisitions of additional plots from existing sites and further commitments to new sites, including at Hexthorpe in Yorkshire. This increased the development pipeline by a further 124 homes at the end of September 2020, taking contracted homes to 2,369 homes, with an ERV of £23.3 million per annum. The total ERV of contracted and completed homes at 30 September amounted to £47.6 million.

Approximately 96% of the Company's total net funding has now been deployed and the balance is expected to be contracted over the coming months. The total portfolio is anticipated to comprise approximately 5,200 new family homes.

The table below provides further information of delivery activity over the first quarter of the new financial year.

Summary and Outlook

The growth opportunity available to the PRS REIT remains substantial, driven by the strong underlying supply and demand fundamentals in the housing market. We also believe that PRS housing (at scale) can play a part in accelerating the overall delivery of new homes, a key agenda with local authorities and Central Government.

In addition, the track record that we have established in delivering high quality new homes over multiple sites through our efficient supply chain platform places the Company in a strong position in the PRS market.

Notwithstanding current political uncertainties, we believe that the Company remains firmly on track to invest its full available capital and associated gearing to time and budget.

COVID-19 and Going Concern review

COVID-19 and Going Concern

This going concern review summarises the risks that the COVID-19 pandemic continues to pose to the Group and the parent Company of the PRS REIT, together with actions we have taken to ensure that the business is well-placed to emerge from the crisis in a position of financial strength.

During the period of the lockdown imposed by the Government from the end of March, house building and letting activity effectively ceased, resulting in delays to homes being completed, let and occupied. The Group's contractual obligations only provide for payment to house builders in respect of work undertaken and independently certified. Accordingly, development expenditure and associated cash outflows during lockdown reduced significantly. However, the knock-on impact of the disruption is that practical completion dates for construction and subsequent letting activity have all been delayed in comparison to original schedules.

The pandemic reduced planned construction activity by approximately 60% during the four month period ended 30 June 2020 reflecting actual construction spend of approximately £40 million during this period. As a result, the 2,000th completed home was not delivered until June 2020 instead of March. Compared to forecasts prior to the pandemic this reflects a reduction of over 600 units which will not be caught up until June 2022, a year later than previously planned.

Although lockdown restrictions began to ease in May, construction activity only began to resume comprehensively from the beginning of June. Even allowing for this, continuing requirements for social distancing and guidance around using public transport mean that construction activity has not fully returned to pre-lockdown levels.

A further complication has been the introduction of localised lockdown restrictions in response to outbreaks of COVID-19 in particular areas.

COVID-19 continues to have the potential to impact the Group and Company as a result of the Government introducing or re-introducing restrictions limiting, either wholly or partly, construction and letting activity on a regional or national basis. This has the potential to impact the Company and Group in the following areas:

COVID-19 Stress Test

In light of the above, the Group and the parent Company of the PRS REIT have performed a prudent financial stress test geared towards ensuring that it has sufficient cash resources to weather the pandemic and subsequently emerge in a robust condition to continue to implement its build-to-rent strategy. The stress test incorporated the following sensitivities:

-       availability of funds pursuant to the terms and conditions of the Group's existing borrowing facilities with Scottish Widows, Lloyds Banking Group / RBS and Barclays Bank PLC;

-       cessation of construction activities across all sites for a period of four months from the beginning of October 2020 to the end of January 2021 reflecting the risk of a second lockdown;

-       absence of development management fees, which are payable to the Development Manager with reference to independently assessed construction activities during the four month period of the lockdown;

-       absence of further asset purchases during this period, in particular aborting the purchase of completed asset sites from both Sigma Capital Group plc ("Sigma") and third parties;

-       loss of 15% of rental income in relation to increased hardship and redundancy levels affecting tenant occupancy rates and arrears levels for a period of eight months from October 2020 to the end of May 2021;

-       inclusion of only contracted revenue from existing tenancies and exclusion of any additional revenue from new potential sources;

-       inability to progress with lettings activity during the four month period from October 2020 to the end of January 2021;

-       maintenance of the Group and Company's existing administrative overhead base of c.£6 million per annum, comprising £4 million of investment advisory fees and £2 million of other overheads, without reduction from cost saving initiatives or mitigating action; and

-       continuation of the Company's stated dividend policy of a minimum of 1.0p per quarter and 4.0p per annum.

Conclusion of COVID-19 Stress Test

The conclusion of our stress test is that the parent Company of the PRS REIT and the Group have more than adequate cash resources to sustain an extended cessation of construction and letting activity lasting at least four months together with a longer period of income reduction from tenant hardship resulting from an economic downturn. The Group and Company also has the flexibility to reduce further asset acquisitions from Sigma should it have insufficient funds to complete planned asset purchases.

The Directors therefore believe the parent Company of the PRS REIT and Group are well placed to manage its business risks successfully and have a reasonable expectation that both will have adequate resources to continue in operational existence for the foreseeable future and for a period of at least 12 months from the date of the approval of the Group and parent Company of the PRS REIT's financial statements for the year ended 30 June 2020. The Board is therefore of the opinion that the going concern basis adopted in the preparation of the consolidated and parent Company financial statements for the year ended 30 June 2020 is appropriate.

COVID-19 Conclusion

Overall, COVID-19 remains a risk that requires careful monitoring and management in conjunction with our house building partners and letting agents in order to mitigate the potential issues pending the restoration of a more normal working and living environment. The Group and the parent Company of the PRS REIT will continue to review and assess objectively the impact of the COVID-19 outbreak and government response on both its strategy and focus of activities.

Portfolio Analysis

As at 30 June 2020, the valuation of the Group's property portfolio was £577 million (2019: £362 million) and the investment value of all sites under way at that date was £722 million on completion (2019: £552 million) with their ERV on completion at £42 million (2019: £33 million).

Property Portfolio by Regional Split - at 30 June 2020

·      The regional split by investment value was - North West (NW) 56% (2019: 70%), West Midlands (WM) 20% (2019: 20%), South East (SE) 13% (2019: nil), Yorkshire (Y) 7% (2019: 10%), North East (NE) 3% (2019: nil) and East Midlands (EM) 1% (2019: nil).

·      The majority of the portfolio is located in the North West with units in the West Midlands and South East accounting for a growing proportion.

Other Metrics - at 30 June 2020

·      The rent roll at 30 June 2020 was £19.1m (2019: £10.7m) and the average rent was £9,175 per annum or £765 per month (2019: £9,120 per annum or £760 per month).

·      Forecast average rent across the current portfolio when complete is £9,514 per annum or £792 per month (2019: £8,953 per annum or £746 per month).

·      The average size of site was 83 (2019: 85) housing units.

·      The split between 1, 2, 3 and 4 bed properties was approximately 4%, 26%, 61% and 9% respectively (2019: 5%, 25%, 60% and 10% respectively).

·      Contractor split was - Countryside 86%; Engie 10%; Vistry (formerly Galliford Try) 3%; and Seddon 1% (2019: Countryside 84%; Engie 11%; Keepmoat Homes 4% and Vistry (formerly Galliford Try) 1%).

·      The deduction from gross to net rent across the portfolio for the year ended 30 June 2020 was 21.1% (2019: 17.6%).

·      Bad debt expense stood at £24,000 (2019: £13,000) and bad debt provision was £35,000 (2019: £13,000).

Age Groupings

The percentage split by age of tenants was consistent with the same point in the prior year. The 26-35 age bracket still accounted for around 42% of tenants, which demonstrates the Company's young family demographic. There was a small increase in the under 25 age bracket, and a small increase in tenants aged 56 years and over.

Household Income Bracket

The household income profile remained consistent year-on-year. Households with an income of above £35,000 per year (an increase of about 2%) accounted for 54% of total households, with the balance having an income lower than £35,000. The proportion of households earning under £25,000 has decreased to 23% (2019: 26%). The figures below indicate the wide range of customers.

Tenancies with Children

Over the financial year, the number of tenant households without children increased significantly (58%, compared with 43% last year). This could be attributed to the completion of new apartment schemes within the past 12 months. There was an increase in tenancies with 4+ children (7% last year, compared to 13% this year).

Distance Travelled

The data showing distanced travelled from previous address is broadly consistent with the prior year across the segments. Around 30% of households previously lived locally (less than 3 miles away) (2019: 28%) and approximately 17% previously lived over 50 miles away (2019: 19%).

All 2020 statistics are based on new applicant data between July 2019 and June 2020 and include sites acquired from Sigma. The prior year's statistics are based on all successful 'Simple Life' applications referenced between June 2018 and June 2019.

Investment Strategy and Business Model

Business Model

Demand for homes continues to outstrip supply in the UK and while the delivery of new homes reached a 13-year high in 2019 at 160,000, the annual construction of new homes remains significantly short of the Government's target of 300,000 new homes per annum. Demand continues to grow, assisted by historically low levels of interest rates (for those with deposits) and a change in household formation. This has further exacerbated house price growth, which has outstripped wage inflation and pushed home ownership out of reach for many.

In the private rental sector itself, where those unable to buy would usually find housing, the number of homes owned by small scale and amateur landlords is falling as changes to taxation make 'buy-to-let' a less attractive investment proposition without scale. It is within this context that the Company is providing a professionally-managed alternative tenure with the creation of accessible, quality family homes to rent.

The Company has developed a scalable business model, which delivers brand new houses across multiple geographies and sites, utilising the Investment Adviser's PRS property platform. New home designs are carefully selected from house builders' standard range of house types and have a consistent specification together with fully costed delivery metrics, including above ground cost and construction time. By standardising the housing types at a portfolio level and the internal specification at the dwelling level, predictability of total delivery cost is improved and the cost of managing assets over the long-term is reduced.

The Company's exposure to development risk has been minimised through the use of fixed price design and build contracts and the acquisition of sites that have detailed planning consent already in place. House building partners, meanwhile, look to maximise their return on capital by building the Company's homes at construction pace rather than 'for sale' pace. This is at least four times quicker, so generating income flows for partners much more quickly than a traditional build-out of a purely 'for sale' construction site. The modern methods of construction now employed by some of the construction partners further speeds up delivery. At a time of low housing delivery, this delivery methodology is extremely attractive to councils and local authorities, not only because it accelerates council tax receipts, income from 'New Homes Bonus' scheme, and regeneration, but also because it provides a new managed tenure for constituents.

The active management of developments and the creation of communities is key to the long-term success of the Company and all its homes are managed under the 'Simple Life' brand. As the portfolio grows, 'Simple Life' is becoming increasingly familiar to the wider market, and its identity is becoming defined by the Company's high quality properties and professional customer service. Regular communication and customer events foster the creation of thriving neighbourhoods and a satisfied customer base, thereby promoting longer term tenancies.

When planning developments, research drives decisions on the mix and types of houses, and the Company's seeks to create developments that will appeal to a wide range of potential customers, as well as its main demographic of young families. This diversification helps to create a mixed community of ages and mitigates against letting and void risk.

The Company's scale and approach to site locations as well as its focus on houses, rather than apartment blocks, mitigates further risks. By creating a portfolio with geographic diversity and multiple locations the Company's minimises the risks from local factors, such as the failure of major employers. Individual developments are relatively small by comparison to the overall size of the portfolio, and the Company's large and growing customer base also offsets overall income volatility, especially as average tenancy terms are expected be three years. Furthermore, the targeted expansion of the Company's geography creates a good mix of sites which, once built, demonstrate both higher yielding profiles (predominantly those in the north) and developments where there is significant headroom between the delivery cost and market value.

This approach has created a robust business which meets an important social need and provides investors with an attractive level of income and the potential for capital growth.

Investment Objectives

The Company seeks to provide investors with an attractive level of income together with the prospect of income and capital growth through investment in a portfolio of newly constructed residential private rented sector sites of multiple units ("PRS units") comprising mainly family homes, to be let on Assured Shorthold Tenancies (as defined in the Housing Act 1988) to qualifying tenants.

Investment Policy

The Company's investment policy is to pursue its investment objective by investing in PRS units in or near towns and cities in the UK predominantly the Midlands and the North.

The Company is creating a portfolio of homes targeted at the family market, the largest cohort within the private rented sector, and therefore is investing predominantly in housing with the addition of some low rise apartments to provide both choice and wider market appeal, in the major conurbations and larger employment centres in the UK, predominantly England, outside London. The locations are chosen for their accessibility, in that they are situated on the main road and rail links, with access to good primary schooling and economic activity, promoting long term employment prospects and thereby a strong need for housing. The new build nature of the assets, alongside standardised specifications, means that they benefit from a 10-year building warranty, typically from the NHBC (National House Building Council) as well as manufacturers warranties, providing for a low level of capital expenditure allied to a predictable and low cost maintenance regime.

The sourcing of assets is undertaken by the Investment Adviser ("Sigma PRS") and is done so by two principal methods. In the first instance, development sites ('PRS development sites') are selected and assessed, detailed planning permission achieved and a fixed price design and build contract signed with one of the Sigma PRS's construction partners and the delivery process is managed on behalf of the Company by Sigma PRS. As the assets are acquired with detailed planning consent and fixed price design and build contracts, the Company is exposed to minimal development risk. The construction risk is mitigated with standard design and build contracts containing liquidated damages clauses for non-performance, financial retentions for one year post completion and a parent company guarantee ensuring the satisfactory performance by the contractor and providing an indemnity for losses incurred. The Company will source approximately two thirds of its assets in this way.

To expedite the growth of the Company, the balance of assets are acquired by entering into forward purchase agreements with the Sigma Capital Group plc ("Sigma"), the ultimate holding company of Sigma PRS, which are acquired as completed and stabilised developments using the same construction partners and supply chain, thereby ensuring homogeneity of the housing stock. A variation on this method is the purchase of completed and stabilised developments from third parties using approved construction partners.

Investment Restrictions

The Group is aiming to create a high quality, diversified portfolio and the following investment restrictions are observed: 

·      the Group is only investing in private rented residential houses and apartments located in the UK (predominantly in England);

·      no investment in the Group in any completed PRS site or PRS development site will exceed 20 percent of the aggregate value of total assets of the Group at the time of commitment, as determined in accordance with the accounting principles adopted by the Group from time to time (the 'gross asset value'); and

·      the Group is not investing in other alternative investment funds or closed ended investment companies.

Debt Financing and Gearing

The PRS REIT is using gearing to enhance equity returns. The level of borrowing will be on a prudent basis for the asset class, whilst maintaining flexibility in the underlying security requirements and the structure of both the PRS portfolio and the Group. The Group has raised debt from banks, Homes England and the capital markets. The aggregate borrowings of the Group is always subject to an absolute maximum, calculated at the time of drawdown of the relevant borrowings, of not more than 45% of the gross asset value, although the Investment Adviser expects actual gearing to settle to around 40% following stabilisation of the PRS portfolio.

At the end of June 2019, the Group agreed term debt facilities of £150 million with Scottish Widows in addition to the previous term debt facility of £100 million with Scottish Widows. The £150 million facility is a 25 year fixed rate term loan. Interest is fixed at 1.164% plus a margin. It was drawn on fixed dates between April and October 2020.

The total facilities available to the Group at 30 June 2020 comprise a £150 million revolving credit facility with Lloyds Banking Group / RBS; and two fixed rate term loans with Scottish Widows for £100 million and £150 million respectively. Following the year end, the Company entered into a £50 million development debt facility with Barclays Bank PLC.

Although the aggregate debt facilities total £450 million, £75 million of the Lloyds Banking Group / RBS facility and the £50 million Barclays Bank PLC debt facility can be drawn as development debt facilities to enable a larger number of sites to be developed simultaneously. Following practical completion and stabilisation of lettings on sites partially funded by development debt, the assets are refinanced using the Company's longer-term investment debt facilities. On this basis, the total borrowings will not exceed the maximum gearing level of 45% highlighted above.

Derivatives

The PRS REIT may utilise derivatives for efficient portfolio management. In particular, the Company may engage in full or partial interest rate hedging or otherwise seek to mitigate the risk of interest rate increases on borrowings incurred, in accordance with the gearing limits as part of the management of the PRS Portfolio.

REIT Status

The Company will at all times conduct its affairs so as to enable it to remain qualified as a REIT for the purposes of Part 12 of the Corporation Tax Act 2010 (and the regulations made thereunder).

THE PRS REIT PLC

Consolidated Statement of Comprehensive Income

For the year ended 30 June 2020

All of the Group activities are classed as continuing and there were no comprehensive gains or losses in the period other than those included in the statement of comprehensive income.