Things may not be looking very bright for the housing market in the UK. The country’s home prices have fallen at its sharpest annual pace since 2009 after interest rates were raised in March. Homes in the UK were also taking nearly twice as long to sell this year, according to an April 5 Bloomberg article. To add to the stress, the UK will be seeing a shortage in council housing as local authorities cut back on their building targets in April.
Amid these headwinds, we still like Residential Secure Income (RSI) for several reasons including its defensive portfolio, scale and valuation.
RSI invests in residential and social-housing sectors with a focus on independent retirement rentals and shared ownership. According to the REIT, these are “inflation-linked income streams” with “strong supply and demand imbalances and supportive property fundamentals”. Its portfolio is also meant to be able to “weather economic stress”, says chairman Rob Whiteman in the REIT’s annual report for FY2022 ended Sept 30, 2022. As at Sept 30, 2022, 97% of the REIT’s income is inflation-linked, generated from rents and supported by strong market drivers.
In the same report, RSI notes that its independent retirement living housing segment sees rent growth that increases with the retail price index (RPI) every year. The RPI is an older measurement of inflation that calculates the cost of living and higher wages, but it is not officially recognised by governments as a means of inflation.
Its shared ownership housing also sees rent growth that increases contractually by RPI and an additional 0.5% each year.
The REIT’s income is also secured, with rent paid from pensions and welfare in its retirement living housing segment. Its shared ownership portion is attractive among its target market who enjoy below-market rents that are also subsidised. The latter also offers its target market a home-buy equity stake. As at Sept 30, 2022, the REIT saw a 26% y-o-y growth in recurring profit of GBP9.0 million ($14.94 million) before change in fair value and property disposals.
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In terms of scale, the REIT is the UK’s largest private independent business for retirement rentals. As at March 31, 2022, its portfolio consists of 3,284 homes in 926 unique locations within the UK. In total, the REIT has GBP383 million worth of investment property as at the same period.
RSI is listed on the Premium Main Market of the London Stock Exchange (LSE), which is the highest of the LSE’s four markets. This means it has to meet the exchange’s highest standards of regulation and corporate governance. Companies on the list also has the potential to join the FTSE UK Index Series.
While RSI’s earnings did not enjoy steady growth from FY2018’s GBP16.11 million to FY2022’s GBP13.33 million due to a dip of GBP2.45 million in FY2020 due to lower fair values and one-off shared ownership facility set-up costs amid the pandemic, its annual dividend has grown along with inflation. In FY2018, the REIT’s annual dividend stood at GBP0.03. In the years from FY2019 to FY2021, the REIT distributed an annual dividend of GBP0.05. In FY2022, this was increased to GBP0.0516.
As at Sept 30, 2021, the group’s net assets stood at GBP201.4 million while cash and cash equivalents stood at GBP16 million.
“We anticipate that FY2023 will see earnings growth from inflation-linked rents, as well as shared ownership acquisitions and leasing activity but this could be offset by one-off operating expenses increasing ahead of rent increases and increases in floating-rate interest expenses,” says Whiteman in his letter to shareholders in FY2022.
“In light of these headwinds, we are currently focused on maintaining (and growing beyond) dividend coverage on a dividend in line with FY2022 at GBP0.0516 per ordinary share,” he says, noting that any revision in the REIT’s dividend target requires “greater confidence” that interest rates have peaked and energy costs have stabilised.
Units in RSI are hovering around their all-time lows, if the stock market crash in March 2020 was excluded. Year to date, units in the REIT has fallen some 21.4% to close at some GBP0.66 on April 18. This is 34% lower than GBP1.00, the opening price of the REIT on July 2017.
The current unit price is also a 39.4% discount to its NAV of GBP1.09 per share as at Sept 30, 2022.
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