Residential Secure Income

Inflation-linked dividends from positive social impact

06 Jun 2019 / Corporate research

96% of Residential Secure Income plc (ReSI) income is inflation-linked. ReSI is an REIT invested in UK residential sectors. At IPO, it projected a 3.0p dividend in year one and 5.0p thereafter; it is on track, with 2.5p in 1H’19. The equity is fully deployed in assets, primarily in southern England, with a geared equity average yield of 6.7%. With a mix of sectors – all residential – there is a spread of investment drivers; but, income streams benefit from below-market rents ensuring ongoing tenant demand or from less economically sensitive tenants. Shared owners risk their part ownership on any rent default. Local authority housing is via eight-year leases in refurbished properties.

Strategy: ReSI invests in shared ownership residential, retirement and local authority homes, sectors with high covenant strength and predictable, growing income streams. It has secured experienced and credit-worthy property managers and the social housing regulator controls its subsidiary.

Achievement: The £180m IPO proceeds were invested by summer 2018. The current portfolio comprises £320m assets (£257m at March 2019 balance sheet) in 2,674 units. There is a strong pipeline, especially in shared ownership. Asset management openings such as a lease extension have added value.

Valuation: Several UK REITs target secure long-term income streams. We calculate their average rating to be 103% NAV. ReSI’s strong prospects make the rating anomalous. Equity is fully deployed; it has reached initial dividend targets thus validating its IPO total return target of 8% plus.

Risks: Leases vary in length, end-dates often at tenant discretion. Ca.40-year debt secured on shared ownership will be RPI-linked (mirroring built-in RPI+0.5% rent escalators); other debt, mostly 25-year fixed. IPO, naturally, had deployment risk but equity is invested, and a 50% LTV target now the aim.

TradeRisks – the manager: TradeRisks provides risk management and other advice/debt financing globally within the housing, social infrastructure and public sectors. There is thus a team of nearly 30 people at TradeRisks and ReSI Capital Management combined, led by Alex Pilato, TradeRisks’ group CEO. The management fee is 1% on the first £250m of NAV, tapering thereafter.

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