Update on Requisition Notice, Strategy and Board
PRSR.L
The PRS REIT plc
("the PRS REIT" or "the Company")
Update on Requisition Notice, Strategy and Board Composition
Requisition Notice
The Board, together with its advisers, has reviewed the requisition notice ("Requisition Notice" or "Notice") received on 29 August 2024 from the Requisitioning Shareholders (Harwood Capital, Waverton Investment Management Limited, CCLA Investment Management Limited, Alder Investment Management Limited, CG Asset Management Limited) seeking to convene a General Meeting ("GM"). The Notice requests that, at a GM, Shareholders of the Company consider and vote on ordinary resolutions to remove two of the five existing independent non-executive Directors, the Chairman, Stephen Smith and Steffan Francis. The Notice also requests Shareholders vote to approve the appointment of Robert Graham Naylor as non-executive Chairman and Christopher Harwood Bernard Mills of Harwood Capital Management as a Director.
The equity holdings of the Requisitioning Shareholders together account for c. 17.3% of the Company's total issued share capital and the Company understands that Ruffer LLP and Asset Value Investors Limited, representing in aggregate c. 1.6% of the issued share capital, have also given irrevocable undertakings to vote in favour of the resolutions to be proposed by the Requisitioning Shareholders.
The Board has formed a sub-committee (the "Sub-Committee") comprising the three independent non-executive Directors who are not the subject of the Requisition: Geeta Nanda (Senior Independent Director), Rod MacRae and Karima Fahmy. The Sub-Committee will lead the Board's response and engage with Shareholders.
Changing the composition of a Board through the mechanism of a GM is typically used under extraordinary circumstances. The process abruptly circumvents normal succession planning and UK corporate governance processes, and incurs additional cost, disruption, and potential reputational damage to a company. This type of action would usually occur when constructive prior private discussions have taken place over time and irretrievably broken down.
The Sub-Committee notes there have only been limited discussions with the Requisitioning Shareholders on the Requisition Notice. The Board also questions the necessity of requisitioning a GM shortly before the 2024 AGM, due to take place in early December, and notes the additional cost and complexity associated with convening two shareholder meetings in short succession. The Sub-Committee believes there are important areas of alignment between the Board and the Requisitioning Shareholders and will seek engagement with the Requisitioning Shareholders and other Shareholders, with a view towards seeking a resolution.
This update highlights and clarifies some of the points on the issues raised and provides information to help facilitate near-term discussions with Shareholders.
Background to the Company's performance
Since its IPO on 31 May 2017, the Board believes that the Company has successfully established the largest build-to-rent single-family homes portfolio in the UK and created significant asset value returns for its Shareholders.
As at the 30th June 2024, the PRS REIT portfolio stood at 5,396 much-needed rental homes across the UK and the Board believes that the portfolio performance to date has been excellent. Key measures, including total occupancy, rent collection, rental growth, arrears and affordability (average rent as a proportion of average household income) have been and remain very strong. In addition, the Board believes the portfolio's gross-to-net ratio, which is a measure of overall effective portfolio management, compares very favourably with other institutional UK residential portfolios. The portfolio is currently in the final stage of completion, with a balance of approximately 180 homes currently expected to be delivered by the end of Q1 2025.
The Company has generated a total accounting return (net asset value growth plus dividends) of 55.4% since IPO. The portfolio is also at the point where the annual dividend has, since March 2024, been covered on a run-rate basis. The Board believes this has been achieved through the combination of development delivery, efficient cost control and rental growth.
Strategy update
The Board fully acknowledges and shares the frustration raised by the Requisitioning Shareholders and other investors around the discount to NAV and a share price performance that does not reflect the strong operational performance and opportunity of the business.
The Board notes that PRS REIT is not alone in trading at such a discount with the UK REIT and UK Investment Trust sectors all trading at meaningful average discounts, with c.60% of UK REITs trading at a 20% discount or more as of 28 August 2024[1]. As of the same date PRS REIT was trading at a discount of 27.6% to NAV compared to the 31.3% average discount across comparable housing REITs[2]. Material NAV discounts across the market reflect both the UK macroeconomic environment and broader pressures on UK institutional equity inflows into the small/mid cap REIT sector.
The Board has not been complacent in the face of these pressures and continually reviews actions under its control that may act to address the discount to NAV. The communication of these actions is important and the Board recognises the need for increased dialogue with Shareholders about measures under consideration, including any timing or financial constraints to implementing such measures.
The Board is due to announce the Company's final results for the year ended 30 June 2024 in early October 2024. At the same time, it will provide an update on strategy and capital allocation policy as well as provide guidance on the dividend outlook for 2025. The Board confirms an ongoing review of asset disposals, which will continue, taking into account market conditions, as well as technical, debt and tax implications, which are not insignificant.
PRS REIT and the members of its group (the "Group") are governed by the UK REIT regime in Part 12 of the Corporation Tax Act 2010, which includes a three-year development rule[3]. As such, where the costs of developing an asset exceed 30% of its value prior to development, the Group must hold the asset for a minimum period of three years from completion of the development to qualify for the favourable REIT tax treatment on disposal of such asset post-stabilisation.
Those assets that have been owned for sufficient time are held in asset security pools for the purposes of the Company's long-term investment debt currently priced at an attractive blended 3.8% fixed interest rate.
To avoid expensive break-costs and the permanent loss of comparatively inexpensive debt on a sale of assets, the Board believes it would be necessary for the PRS REIT to grant security over replacement assets of equivalent value (acceptable to the lenders). The PRS REIT currently has c.£75m of assets that is not securing long term debt and could potentially be used as replacement security. Once the remaining assets under development have been completed (currently scheduled by the end of Q1 2025) the value of available assets is expected to have risen to c.£175m. This increased scale is more likely to attract a higher premium and improve the effectiveness of any strategy involving asset sales and replacement security.
A summary of the relative asset ages and overlapping debt security pools will be provided to Shareholders at the full year results presentation, to facilitate more detailed understanding of the related constraints and current issues with property-level disposals.
The Board believes that immediate disposals would not be value maximising and that future disposals must be balanced against income loss, dividend coverage and the benefits of portfolio scale including further potential investor interest. However, the Board expects the market conditions that may allow selected asset disposals to improve in 2025 as the interest rate environment further ameliorates.
The Board continuously reviews all options to maximise value for Shareholders, actively considers actions to narrow the discount to NAV and is fully aware of its fiduciary duties. The Board believes some of the options under consideration in the Requisitioning Shareholders' Explanatory Statement carry considerable risks and that short-term asset sales would be value destructive. If the currently significant discount to NAV persists, the Board will further consider its options which may include the introduction of continuation votes, share buybacks subject to available cash and/or conducting a strategic review. In addition, Rothschild & Co have been appointed to advise the Board on strategy and value maximisation for Shareholders.
The Board also confirms it has no intention to issue equity at a discount to NAV, as set out in the Company's 2023 Notice of AGM.
Extension of the Investment Advisory & Development Management Agreements
The Requisitioning Shareholders have raised points with regard to the relationship and the extension of the Investment Advisory & Development Management Agreements with Sigma PRS Management Limited ("Sigma"), part of the Sigma Capital Group. Sigma operates the largest build-to-rent platform in the UK and has established a leading position in the single-family homes market. The Board would like to clarify for Shareholders and reiterate the benefits of the contractual arrangements with Sigma and the extension. Details of the extension were set out in the announcement dated 9 July 2024, confirming that the Company had agreed to extend its agreements with Sigma for a period of an additional 2.5 years, from a minimum contractual term ending 31 December 2026 to a minimum contractual term ending 30 June 2029, on terms which delivered an immediate £0.46m p.a. saving for the Company.
The extension followed due process including benchmarking of fees and term in parallel with the negotiation with Sigma, and the agreed terms were the subject of a fair and reasonable opinion provided by Singer Capital Markets, the Company's Sponsor. The Company's contractual arrangements with Sigma retain important and valuable contractual protections, including the Company's right of first refusal to acquire single family housing development opportunities introduced by Sigma. In summary, the Board believes the terms of the contract extension provided appropriate incentivisation for Sigma to continue to deliver for the Company. Sigma has delivered and manages a highly granular portfolio for the Company, which the Board considers to be best-in-class. The Sub-Committee emphasises to Shareholders that the Company's relationship with Sigma operates with appropriate challenge and accountability between the Board and Sigma.
Board Composition
Succession planning is reviewed regularly to ensure the Board balances skills, knowledge, experience, independence and diversity and all Board members are submitted for re-election each year at the AGM.
The PRS REIT Board has been well supported by Shareholders and every Board member has received support of over 93% of the votes submitted over the past three AGMs.
The Company's Senior Independent Director, Geeta Nanda (with over 30 years' experience in real estate), was appointed in 2021, and in the last 12 months the Board has appointed another new independent non-executive Director, Karima Fahmy, with a background in legal and governance in the real estate sector. The Board has conducted these appointments in accordance with the principles of the UK Corporate Governance Code including the help of external consultants and through an open and transparent process to ensure selection of the best candidates.
Three members of the Board (Chairman Stephen Smith, Rod MacRae and Steffan Francis) are approaching nine years in tenure in the next two years. The Nomination Committee has a succession plan for these positions to facilitate an orderly transition to replace in particular their considerable property expertise and experience. The Nomination Committee intends to run a fair, transparent and considered process to identify the most appropriate individuals to fill these roles. Further details are due to be provided with the full year results.
Next Steps
The Board continues to act on behalf of all Shareholders and is fully committed to maximising shareholder value. The next steps for the Sub-Committee, with its advisers, will be to engage with Shareholders and seek to meet with the Requisitioning Shareholders around the Requisition Notice and on the substantive issues raised to seek a resolution in the interests of all Shareholders. An update will be provided in due course on the progress of these actions and around the convening of a GM if appropriate.
For further information, please contact:
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The PRS REIT plc Geeta Nanda, Senior Independent Non-Executive Director Rod MacRae, Independent Non-Executive Director Karima Fahmy, Independent Non-Executive Director
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Tel: 020 3178 6378 (c/o KTZ Communications) |
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Singer Capital Markets James Maxwell Asha Chotai
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Tel: 020 7496 3000 |
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Jefferies International Limited Gaudi Le Roux Tom Yeadon
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Tel: 020 7029 8000
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Rothschild & Co Alex Midgen Peter Everest Alice Squires
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Tel: 020 7280 5000
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G10 Capital Limited (AIFM and part of IQ-EQ group) Maria Baldwin
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Tel: 020 7397 5450
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KTZ Communications Katie Tzouliadis Robert Morton |
Tel: 020 3178 6378 Tel: 07771 663380 Tel: 07904 399919
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NOTES TO EDITORS
About The PRS REIT plc
The PRS REIT plc is a closed-ended real estate investment trust established to invest in the Private Rented Sector ("PRS") and to provide Shareholders with an attractive level of income together with the potential for capital and income growth. The Company is investing over £1bn in a portfolio of high-quality homes for private rental across the regions, having raised a total of £0.56bn (gross) through its Initial Public Offering, on 31 May 2017 and subsequent fundraisings in February 2018 and September 2021. The UK Government's Homes England has supported the Company with direct investments. On 2 March 2021, the Company transferred its entire issued share capital to the premium listing segment of the Official List of the FCA and to the London Stock Exchange's premium segment of the Main Market. With 5,396 new rental homes as at 30th June 2024, the Company believes its portfolio is the largest build-to-rent single-family rental portfolio in the UK.
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