Irish Residential Properties REIT Plc (IRES) Earnings Call Transcript & Summary

Good morning, and welcome to the 2019 final results investor conference call for Irish Residential Properties REIT. [Operator Instructions] Please note that today's event is being recorded. At this time, I would like to turn the conference over to Margaret Sweeney, Chief Executive Officer. Ms. Sweeney, please go ahead.

Thank you, Chris. Thank you all for joining our call today. This presentation we are making today is available to download on our website investorrelations.iresreit.ie, under our 2019 results, which we released this morning, are also available on the website. Just before we begin, I must remind everyone that certain statements we make today may be considered forward-looking and are subject to various risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. I direct you to our securities filings for a discussion of these risks and uncertainties. So turning to Page 3. We set out just the core areas to go through with you today. I am joined today by Priyanka Taneja, our Chief Financial Officer, and we will present to you an overview of our results for the 12 months to 31 December 2019, our balance sheet at the end of the year and an update on our strategy and outlook for the business. So moving to Page 4, 2019 highlights. This sets out the key highlights of our performance during 2019 and also our balance sheet at the end of 2019. So building on our successful year in 2018, we continued to deliver strong growth in 2019. Net rental income and earnings grew by 22.8%, with EPRA EPS growth of 6.2% up to EUR 0.069. The Board has also approved an additional dividend of EUR 0.031 per share, an increase of 3.3% compared to the final dividend that we declared in 2018. So this is in addition to our interim dividend of EUR 0.027, which brings the total dividend out of 2019 earnings to EUR 0.058 per share. The past 12 months have been very busy as we continued to deliver on our strategy, which we outlined to you previously. And through a combination of acquisitions and new developments, we added 987 apartments and houses to the portfolio. That's an increase of 37% to bring us to 3,666 rented residential homes at 31 December 2019. So the 2 large transactions are: we received 118 residential units we purchased on a forward purchase from Glenveagh Homes, and those were delivered to us by November 2019; and we also did an acquisition of the Marathon's portfolio of assets, closing that in August of 2019, and that was 815 units. So looking forward, we continue to have further growth opportunities. Contracted, we have 219 residential units due for delivery in 2020 and '21, under forward purchase commitments. And we also received successful planning permissions for the development of 627 units on sites that we currently own ourselves. On the -- some of those have already started under development. This is actually a further 23% growth opportunity. So turning to Page 5. We set out some of the key investment attractions, I think, in underpinning the business. The business has grown with scale in 2019, and this is underpinned by a very well-established operating platform, including CAPREIT's excellent IT system as well as a well-trained team of 65 people supporting our tenants and managing the assets in Ireland. We're well rounded up with very high occupancy levels and a very stabilized NRI margin of 81.4%. And this is actually similar to -- we had 81.3% last year and with the growth we stabilized in the new acquisitions and new developments very effectively into this operating platform. We're well invested with a very good quality asset base. We have very young assets with an average age of 11 years and with no significant CapEx investments required. We continue to deploy our capital effectively with continued growth in our earnings per share and dividends as well as NAV growth. Against this, we also see the drivers for our business in Ireland, remaining strong with forecast GDP growth of 4% to 5% for 2020 and continued population growth with current forecasting 20% population growth over the next 20 years. The supplier pricing remains constrained, and there is increasing uncertainty regarding rent regulation during the current period while a new government is being formed. However, we still continue to see strong opportunities in the private residential rental market in Ireland. I will now turn things over to Priyanka, who will review our financial and operating results for 2019. So turning to Slide 7.

Thanks, Margaret. Turning to our operating performance detailed on Slide 7. You can see the growth for revenue from investment properties and net rental income, up by 22.7% and 22.6%, respectively, which was driven by organic rental growth, consistently high occupancy levels and accretive acquisitions. The net rental income margin was 81.14% (sic) [ 81.4% ] for 2019, consistent with 81.3% achieved in 2018. The group continues to monitor operating costs as the portfolio grows. The group has maintained strong residential occupancy levels. And as at 31 December 2019, the occupancy rate for like-to-like properties, excluding any acquisitions in 2019, was 99.4%. Strong net rental income growth and accretive acquisitions have resulted in EPRA earnings per share growing by 6.2% compared to the same period last year. We had a revaluation gain of approximately EUR 56 million in 2019, bringing the gross yield at fair value on our portfolio to 5.6% as at December 31, 2019. Now turning to our Slide 8. We have built a strong balance sheet in 2019. Our EPRA NAV per share grew by 8.9% compared to December 31, 2018, mainly due to property valuation gains and strong net rental income. The group's LTV increased to 40.8% as of December 31, 2019, up from 33.6% compared to last year due to additional acquisitions and development. This is well within our target of 45% loan-to-value ratio. We also completed the refinancing of the new syndicated revolving credit facility of EUR 450 million in April 2019 and increased this to EUR 600 million in June 2019 to finance the Marathon acquisition and other purchase contracts. This facility is at a lower interest rate than the previous facility and extends the maturity to 2024 with options to further extend to 2026. We also successfully completed a placing of 86.55 million new shares with shareholders in June and July, raising EUR 131 million net proceeds to support the funding of our growth strategy. Now I'll turn the presentation over to Margaret.

Thank you, Priyanka. So we continued to deliver on our strategy in 2019 that we outlined to you previously with the multichannel growth strategy across 3 core pillars: acquisition of completed assets, development partnerships and development of existing IRES-owned sites. And those 3 pillars are very much still open to us, and we have optionality as to how we deploy capital and flexibility across each of those pillars. We have a well-established platform in the partnership of CAPREIT and leveraging their technology, operational expertise and significant knowledge in the multifamily sector over 20 years. And this has actually enabled us to deliver strongly on our growth strategy during 2019, adding close to 37% growth and scale into the business. Turning to Page 11. You will see over the last 2 years the transactions that we have actually executed through accretive acquisitions and forward purchase contracts. So we completed acquisitions at Hampton Wood, The Coast, Taylor Hill and Semple Woods and also the Marathon assets under management portfolio, which I present to you in more detail on the next slide. And on the development partnerships, we successfully completed Hansfield Phase 1, which was delivered fully into the business last year and now generating a gross yield of 6.8%. Hansfield Phase 2 development contract is due to be completed in the first half of this year, and that will add a further 95 units to our portfolio. We also contracted forward purchases for 173 units in North Dublin at Swords, Donabate and Balbriggan, with expected gross yields of 6.7% to 7% and 118 units have already been delivered as of the year-end 31 December 2019. So we made positive progress as well across all our 7 planning applications and received positive planning permissions for 628 units. Turning to Page 12. The Marathon acquisition, we closed that on the 1st of August. It was a very significant acquisition for the business, adding 30% into scale for the company. And that has now been integrated into the portfolio, the overall portfolio of the business itself and the assets of the business. That comprised 16 properties in very good locations across Dublin with one asset in Cork. And you will see the map there highlighting the existing IRES properties in yellow with the Marathon locations in green. So it's a very high-quality portfolio, average age 11 years, with the apartments built between 2005 and 2010. And this acquisition was a unique opportunity of scale with immediate cash-generating assets. And due to our strong operating model, we've been able to integrate these assets quickly into the portfolio. And you can see that in our numbers for 2019, generating similar NRI margins to our current portfolio. Now I'd like to turn it over to Priyanka to walk us through the portfolio. Turning to Slide 14.

Thanks, Margaret. Now turning to Slide 14. It shows the location of our properties on the Dublin and Cork map. As noted previously, our portfolio grew by 37% to 3,666 units in 2019 across 42 properties in Dublin and Cork. Marathon acquisition provided a first entry into the wider Irish market with one property in Cork through 50 well-established rental apartments. All our assets have good transportation links and community infrastructure, particularly schools. All properties are within 45 minutes to the city center and are connected to it via buses or Luas rail. City center assets are well within walking distance to each other. Now turning to Slide 15. So I'd like to highlight some of the key characteristics of our high-quality asset base. Majority of our portfolio is formed of 2-beds, which are more resilient during a downturn. 94% of our portfolio is in the affordable to mid-tier market, which is the most defensive segment. Also our existing portfolio is entirely located in locations with amenities and good transportation lines. And lastly, it is a relatively young portfolio with a weighted average of 11 years, which is favorable for managing ongoing maintenance CapEx. Now turning to Slide 16. We believe that ESG is an important element of delivering on our vision to the Ireland's leading landlord. We are focused on energy reduction, waste diversion and water conservation. IRES is also committed to placemaking and community building through focus on occupant safety, sponsoring and participating in local community events. Lastly, IRES has a highly experienced Board, which is committed to continued improvement in ESG performance. Now I'll turn it over to Margaret.

Thank you, Priyanka. So turning to Page 19. We're Ireland's largest private residential landlord with a strong track record of accretive growth since inception. I believe that the economic fundamentals in the Irish market remain very strong, with significant demand and supply imbalance. And with our operational excellence leveraging best-in-class asset and property management expertise, together with a high-quality asset base with very defensive attributes supporting strong occupancy level, turnover rates and yield, we believe that we can deliver a strong and growing dividends to our shareholders. And with this, we have a clearly defined and prudent financial policy and believe that we're well positioned to actually deliver continued growth for the business. Thank you all for listening, and we are now happy to take questions.

[Operator Instructions] Today's first question comes from Jonathan Kelcher of TD Securities.

First, just on the acquisition front. I guess, with the current political uncertainty, has that slowed acquisition activity or potential pricing?

Jonathan, Margaret here. It's probably too early to say. We actually had an election just less than 2 weeks ago. So it's probably too early to say or to say what impact that might have. It definitely has increased uncertainty in relation to -- obviously, housing and rents are very topical and were during the election really over the last month. So it's -- as we see it, the market share, the fundamentals are very strong, with population growth, very high levels of employment, the highest we've ever had in the history of the state, strong forecast economic growth as well of 4% to 5% through this year. And in the context of the uncertainty around the core future rent regulations going to settle with the new government being formed, we think there's uncertainty for the next number of months. And ultimately, it comes down to our underwriting decisions in relation to that.

Okay. Fair enough. And then I guess, a related question, it still might be too early to answer this, but if the maximum amount of rent, if that max increase changes, are there areas where you can lower your cost growth? Or would you expect to take a small hit on your margins?

I think we would definitely be very focused on our cost. I think a key driver for our business is making sure that we maintain strong operating margins, net rental income margins, for the business. I think we also have scale now that we can start looking at the economies of scale. Now that we're at close to 3,700 units, it does give us more opportunities, particularly in the procurement area to look at opportunities around operational efficiencies with that scale and size that we've now achieved.

Our next question comes from Colin Grant of Davy.

A couple of questions. Just firstly, you've obviously had very, very strong growth in 2019. And at the same time, you've referenced some political uncertainty in your press release. And I just want to get a general sense of -- do you still have the same levels of growth ambition in Dublin? I just wondered if you could just reiterate and give us an update on that. That would be the first question. And just on the second question, just to do with your net rental income margins, which were extremely strong, 81.4% in the period in 2019, and the Marathon portfolio came in within that, which I think had a lower margin. So I'm just wondering if you could go through a bit more detail about some of the things you've done that have enabled you to achieve that margin while introducing Marathon. And whether or not there's more gains and cost benefits and so on you can make through integration of that particular portfolio?

I'll take the first part of the question and then I might get Priyanka to actually take up the second part of your question. So I think similar to -- with the answer to Jonathan, there is, obviously, with the new -- with the general election having been held here less than 2 weeks ago, there is -- we're in a current period of uncertainty while a new government is being formed. For the first time, we actually have a permutation of 3 political parties, each with about 1/4 of the vote, which could go into a coalition government. And therefore, it's likely to take -- and our sense would be that it will take actually probably a couple of months to see where that actually all stabilizes. But we actually see that the nature of our business is transactions take some time from the time they originally come into the market until the time they're actually completed out. And so nothing really happens within a short space of time. The quickest acquisition we did was Marathon. That came to the market in May, and we completed that out on the 1st of August. So we see ourselves still the fundamentals in this market remain very strong. I think one aspect, which is uncertain, which is around where the rest of pricing will be and how that will impact underwriting our future transactions. But I actually think that the nature of this business takes a number of months for anything to work through that comes in the market. So I don't see any real shift in us, and it's too early to call it. So I might hand over to Priyanka maybe in terms of dealing with the Marathon, just our margins and how we've ensured that's integrated before effectively.

Sure, Margaret. Colin, so in terms of Marathon, we acquired it on August 1. So it was already well integrated into our portfolio for 5 months, and we were still able to achieve very strong NRI margins of 81.4%. And that's because the assets that we've bought on Marathon are very close in proximity to our other assets. So there's economies of scale as well as because of our strong operating platform, we've been able to integrate it quickly. And we are seeing high occupancy levels on the Marathon portfolio as well. So we believe that we'll be able to manage that margin between 80% to 81% for 2020, obviously, depending on the -- on how the rents are go forward.

Our next question comes from Ronan Dunphy of Investec.

Margaret and Priyanka, I just -- I suppose, 2 questions. Firstly, the revaluation gain was quite strong in the second half and in the full year. And I'm wondering whether there is an element of catch-up perhaps from the valuer's point of view. I know it's independent valuations and you take somewhat of a hands-off approach to it. But is there -- perhaps, given the amount of transactions that we've seen in the market over the last 12 months, has that perhaps allowed the valuers to take a less conservative view in terms of their valuation approach? And in that sense, is that somewhat of a one-off catch-up? Or is there still some upside to come from there? And then secondly, just in terms of rental inflation, rental affordability, and we know the constraints that are imposed by the rental caps set at 4% at the moment. But just perhaps on an underlying basis in terms of rental demand, feeding through to rental inflation, would you characterize that as being stronger at the sort of lower price points, lower-priced units rather than, I suppose, the higher-priced units in terms of perhaps they're reaching some sort of affordability constraints?

Ronan, just dealing with your 2 questions, one in relation to the revaluation, we actually have -- we appointed a second valuer at the end of 2019 because we now have the largest portfolio for residential -- private residential accommodation in Ireland. And the Audit Committee and Board felt it would be good to ensure that deal to come in, that there's 2 valuers looking at the portfolio, and the planned policy going forward would be that 1/3 of that portfolio would get a 4-eyed view every year. So I think what we are seeing over the last 2 years is definitely more liquidity in the residential -- private residential market in Ireland. That wouldn't have been the case back in 2014 to 2016, where most assets were purchased from NAMA. So it's definitely -- and also we're seeing more planning permissions coming through and more developments coming out of planning. That's definitely created just news for the valuers, I think, more comparability in terms of actually establishing value around large scale private residential in Ireland. That's what we would see come through into our valuations as well. I'm not an independent valuer, so I will give no indication as to what they see going forward or their assessment. And there are different benchmarks there from the different agencies that come out of the market. But in terms of other cities, we're not out of line in terms of other cities you would see in Europe, actually. Probably the similar dynamics might have some lower yields than we would have. In terms of rent affordability, our -- you would see that our portfolio that Priyanka went through with you were probably more mid-tier. We're in very good locations in Dublin, particularly good Luas and Docklands light rail systems to the city center, which is fantastic for us because it probably gives us a very, very good portfolio in terms of demand. And what our tenants would say are, 2 most significant issues for them is actually good transport accessibility and being nearer to schools, and I think we deliver on that across the portfolio. So as a result, we're seeing very high occupancies and also we're seeing that we're able to deliver on our rented base year-on-year as well with a very low bad debt levels.

Our next question comes from Cian O'Sullivan of Goodbody.

Quick questions from me, if I may. The first one is just flipping back to Slide 11. And I wonder, would you be able to clarify the gross yield for me on the Glenveagh transaction? Because I just think the 4.2% looks a little bit low versus the transactions detailed there.