Sovereign Reversions – Positive Outlook

Sovereign Reversions, a retirement planning company specialising in equity release, is announcing good prospects in an unstable market.  Essentially, Sovereign is a part property investment group without concern about the decline in UK property prices and is an interesting story as it is contra-cyclical and expects to exploit the current market.

In brief Sovereign Reversions is currently trading at less than half of its net asset value.  Their market cap is just under £24m.  Their net assets are over twice their market cap at £57.7m.  However their embedded value is £93.2m (because the company buys the assets at well below market value, but will unlock this big discount when the assets are ultimately sold), meaning the stock is trading just a quarter of its true underlying asset value. 
A drop in house prices allows them further opportunities to invest in more assets at even bigger discounts.  The discounts are the key to the way SOV generates value.  That’s why they’re not the same as a real estate investment trust.  Sovereign pays a discount to market value for its assets because it expects to hold them until vacant possession – allowing the inhabitant to live there until they die as part of that individual’s retirement planning. The reversionary surplus is the name for the discount and is where the embedded value arises.  Normal property companies merely trade at a premium or discount to their marked to market book value.  Sovereign has the extra value kicker embedded in the assets. 

Note, however, that their net profit is therefore rather a meaningless number as it merely represents the marked to market effects on their net assets of movements in the property market thanks to the vagaries of international accounting standards. As you would expect this is downwards this year, hence creating a loss.  Reported profits are low when the property market is weak, but the company can exploit the market to build future value very rapidly.  When the market is strong, asset revaluations means high reported profits, but limited chances to build future value.

Graeme Marshall, Chief Executive Officer of Sovereign Reversions, said: “Sovereign has been well placed to ride out the economic difficulties we’ve seen over the last year.  The development of our advisory business this year has provided us with a revenue stream which is unhindered by the falls in property prices.  Indeed, the weakened property market offers us good opportunities to expand our portfolio of assets at a further discount to value at vacant possession.
The Institute of Actuaries has predicted that the equity release market will grow from the current £1.2bn per annum to £2bn by 2010.  The recent developments in the economy are expected to be a catalyst for the next stage of market growth.  Demand for equity release is intrinsically counter-cyclical and, combined with increasing life expectancy and the under-provision of pension finance, homeowners are most likely to turn to it at times of economic uncertainty when there are fewer available alternatives.”

More infomation can be found at www.sovereign-reversions.co.uk