Residential Secure Income (RESI) is a real estate investment trust (REIT) that invests in the social housing sector, aiming to generate an RPI-linked 5% dividend yield and 8% total returns per annum.
RESI takes a cautious approach to selecting assets, which requires the ability to raise debt equivalent to investment grade against each proposal. RESI has a target gearing level of 50% of GAV. Investments have so far been focused on the retirement homes sub-sector and shared ownership sector, with other investments made in local authority housing. Importantly, it is worth noting that RESI has no exposure to the specialist supported-housing sub-sector, which has been the focus of regulatory attention thanks to the weak balance sheets of some housing associations (HAs) in this sub-sector.
RESI is now close to being fully-invested, having invested £300m of a targeted £340m, split 50/50 between debt and equity. Deployment was initially slower than expected, but recent deals in the shared ownership sector have brought RESI close to fully invested and created a more diversified portfolio.
RESI pays quarterly dividends and has declared aggregate dividends of 5p for 2019, in line with its target, which the managers aim to increase broadly in line with inflation and represents a yield of 5.5%. The dividend is not yet covered by rental income from the portfolio (although it is covered from total earnings). However, the manager projects full rental cover to be achieved by the end of 2020 as the shared ownership portfolio becomes income producing.
The shares currently trade on a discount of 12.5%. While this is wide in absolute terms, it is tighter than RESI’s social housing peers, which have seen their discounts move out markedly following the Regulator of Social Housing announcing it was investigating the business models in the specialist supported housing sector they invest in (and RESI does not).
RESI is managed by a team at RESI Capital Management Limited, a subsidiary of TradeRisks, which has been a specialist treasury adviser and debt arranger to the social housing and broader social infrastructure sector for 18 years.
RESI is now close to being fully invested. While it was disappointing that deals fell through in 2018 and it has taken more time to get to this point than intended, we believe the benefits of the cautious diligent approach can now be seen. RESI’s two peers in the social housing sector are dealing with the potential fallout of investing in a sub-sector with riskier balance sheets, while RESI is raising debt equivalent to investment grade against its assets in areas of no concern to the regulator.
As a result, we believe that RESI deserves the tighter discount rating than its peers that it currently enjoys. A 5% inflation-linked dividend from investment grade assets is an attractive proposition for many, we believe, so once RESI is fully invested and generating this income from its portfolio, there is no real reason for the wide discount to remain. In our view, therefore, once the dividend is fully covered by income, or imminently so – projected to be by the end of 2020 by the manager – this should see the shares trade much closer to NAV.
|A 5% inflation-linked prospective yield is highly attractive
||Full dividend coverage depends on RESI making remaining investments in line with its business plan
|The high level of demand for social housing should support future investment opportunities
||A hard-left government might seek to restrict further private sector investment in the sector
|The management company has extensive specialist experience in social housing in every function
||Relatively high gearing – target level of 50% on LTV basis or 100% on NAV basis