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

Ladies and gentlemen, welcome to the Irish Residential Properties REIT plc interim results Call. My name is Adam, and I'll be the operator for the call today. [Operator Instructions] I now have the pleasure of handing over to Priyanka Taneja, CFO; and Margaret Sweeney, CEO. Your host today is Margaret. Margaret, if you would like to go ahead, please.

Thank you, Adam. Thank you all for joining our call this morning. The presentation we are making today is available to download on our website, www.irisreit/investorrelations (sic) [ investorrelations.iresreit.ie ]. And our preliminary report for the 6 months to June 30, 2020, that we released this morning is also available on this website. So as Adam mentioned, I'm joined today by Priyanka Taneja, our Chief Financial Officer; and I'm Margaret Sweeney, the Chief Executive Officer of the company. 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 cause actual -- that may 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. We will present to you an overview of our half year results for the 6 months to 30 June 2020, and an update on our strategy and outlook for the business this morning. So to start off, could I ask you to turn to Page 4 of the presentation? Thank you. So we've all been living and working through an unprecedented few months with -- we are, I think, fortunate in that we actually have a very modern portfolio and attractive portfolio of residential accommodation that is spacious and attractive locations across Dublin and Cork, working to support all our tenants and residents in our apartments as well as our employees and partners and customers during this challenging period. I'm turning now to Slide 4. So building on our successful year in 2019, we continued to deliver strong growth in the first half of 2020. By the 30th of June, our portfolio had increased 35% to bring us to 3,739 residential homes over the same period last year at 30 June 2019. We invested in 968 additional accommodations through our 3-pronged strategy of acquisitions and forward purchases and some development. And the biggest of these acquisitions was the 815 unit Marathon portfolio acquisition, which we closed in August 2019. So this growth has translated into strong revenue growth for the period of 34% over the same period last year. And that's from both acquisitions and also organic rental growth in the 12 months. I'm glad to say that our underlying business has been very resilient, particularly over the last 4 months. Our rent collection rates have remained high across the portfolio at 98.4% since COVID, and we have strong occupancy across the portfolio of roughly 98%. So turning to Page 5. Our current portfolio of 3,739 homes has a fair value of EUR 1.36 billion at 30 June 2020. There was a reduction of EUR 27.2 million in the valuation by the independent valuers at the 30th of June and that reflected the short-term moratorium on rent increases and their expectation of a slight softening of the market due to COVID-19 and their assumptions as a result of increasing unemployment, which currently is approximately 17% in Ireland. The gross yield at fair value increased slightly to 5.7%, but there was minimal movement in the cap rate. Our NAV decreased by 3% to EUR 150.4 and that's since 31 December 31. We have a very strong balance sheet with additional facilities following our successful notes private placement program in -- on the 10th of March in 2020. And we also refinanced the RCF in 2019, which gives us a lower cost of debt. And we're also operating well within our leverage ratio. Turning to Page 6. You will see there that over the last year, we have successfully executed on our strategy through accretive acquisitions and forward purchase contracts as well as developments. As I mentioned, our portfolio increased 35%. We added 968 new homes, including the 815 unit Marathon portfolio in August 2019. And we took delivery earlier this year on 55 units at Waterside on North County Dublin, which is quite close to the airport and also 18 units in Tallaght Cross West, which is adjacent to the hospital in Tallaght. Moving to Page 7. We've been managing through the COVID-19 period and navigating the business through it successfully over the last 4 months. As we all know, it's caused unprecedented social and economic challenges for everyone and for all countries. And our priority as a company has been to ensure the health and well-being of our employees, our partners, our residents, our tenants and our suppliers. And we have worked effectively together with IRES Fund Management, our manager to navigate this challenging period, and we believe the company is well positioned going forward. We have a strong balance sheet with good liquidity and flexibility, and we're very comfortable within our financial covenants. And our manager's strong operating platform has enabled us to maintain high customer service and engagement with our tenants. Rental demand has continued to be very strong, and we continue to see demand levels in line with pre-COVID levels, and that's reflective of the supply demand challenges that still actually continue within the Irish market. We have the closure of nonessential construction sites for a period during the lock down here, which resulted in some delays on developments, but we are back operating on all sites since early June. We're also very conscious of our social responsibilities at this time with the immense pressures facing the medical frontline staff, and we have looked to provide practical assistance where possible to support them. So we provided, particularly the new units that we took delivery of in certain properties and Waterside, in Tallaght Cross West and at Elm Park to frontline hospital staff and also to assist Tallaght Hospital for its needs as well. I will now turn things over to Priyanka, who will review our financial and operating results for the first half of 2020.

Thanks, Margaret. Now turning to Slide 9. Revenues have grown 34%, and NRI has increased by 30% compared to the same period last year due to acquisitions and organic rental growth. These results demonstrate the resilience of the business with strong net rental income margins achieved of 79.2% despite being impacted by COVID-19 for 4 months by the end of June 2020. The drop in NRI margin in H1 2020 to 79.2% compared to 81.6% for the same period last year resulted from moratorium on rental increases, higher bad debt and vacancies due to COVID-19 and decreases in commercial parking revenue. Monthly rent collections have remained resilient post COVID-19 at 98.4%, and the occupancies remained strong at 98.9% for the residential portfolio for the first 6 months 2020. In H1 2020, EPRA earnings adjusted for nonrecurring expenses increased 19% to EUR 18.2 million compared to EUR 15.3 million for the same period last year. And the EPRA earnings per share adjusted for nonrecurring expenses increased to EUR 0.355 compared to EUR 0.035 for the same period last year. Nonrecurring items primarily included costs of transactions that would not be closed due to COVID-19 pandemic and had to be expensed in H1 2020. We intend to declare a dividend per share of EUR 0.0275 for the first half of 2020. This is a growth of 1.8% when compared to the DPS of EUR 0.027 for the same period last year. This dividend per share of EUR 0.0275 is a payout ratio of 89% of our distributable profits. The growth in our earnings and steady dividends show the resilience of the PRS sector in these uncertain times and a strong operating platform of IRES. Now turning to Slide 10. IRES has a strong balance sheet with sufficient liquidity and flexibility in place to manage through this period of uncertainty. The company has EUR 14.1 million of cash on hand and EUR 212 million of committed undrawn debt under its RCS, providing a strong liquidity position. IRES have successfully completed a private placement of notes of approximately EUR 200 million in March 2020, with a weighted average interest rate of 1.92% and a weighted average maturity of 9.7 years, laddered over 7, 10 and 12 maturities with the first repayment due in 2027. In addition, this transaction also enhanced IRES funding as needed and attracted high quality investors. The net proceeds of the notes were used to pay down the revolver facility creating liquidity while keeping the interest rates at attractive low levels. The group has abated average debt maturity of 5.7 years, and there are no debt maturities before January 2024. LTV increased to 42.9% as of June 30, 2020, driven by additional borrowings to acquire Waterside and the marginal decline in our fair value of investment properties. This LTV is below the 50% maximum allowed under the Irish REIT legislation and the financial covenants. Beyond the committed expense of EUR 3.1 million and development costs were EUR 15.8 million in 2020, there is no other current exposure. Basic NAV share decreased by 3.2% compared to 31st December 2019, mainly due to fair value losses on investment properties and revaluations. The fair value of the property -- of the portfolio decreased by approximately 2% compared to 2019 year-end arising from an independent valuation, the guidance for the change in fair values for lower forecasted cash flows in the short-term resulting from the COVID-19 pandemic, while there was little movement in the yield. Now turning to Slide 12. IRES portfolio consists of high-quality young properties with a weighted average age of approximately 11 years, which is favorable for managing ongoing maintenance and CapEx requirements. Our portfolio is located in locations and amenities and good transportation links resulting in strong occupancy levels and competitive rental rates. The majority of our portfolio is composed of patients' 2-bedroom units, which are innately more resilient to downturns given the cheaper average rent per room. In addition, the patients' 2-bedroom apartments also make the transition to working-from-home easier and more convenient. In terms of distribution by average monthly rent, the portfolio focus is on the mid-tier affordable market, which is also the most defensive segment. Now turning to Slide 13. IRES properties are dispersed across Dublin city center and commuter belts offering family-friendly locations that feature strong local employment, major transport lanes and vibrant community development activities. Now I'll turn it over to Margaret. Margaret?

Thank you, Priyanka. So turning to Slide 15. You'd see that the demand drivers are strong against increasing supply constraints. We see the multifamily sector continues to remain very strong. Ireland sees -- has -- continues to see strong population growth. This is driven by the highest birth rate in Europe and also inward migration. It's also supported by very strong SDI inflow by multinational corporations. In particular, we would have many of the very large IT and pharmaceutical companies based in Ireland and continuing to develop here. We have a young educated workforce, with 30% of the workforce aged between 25 to 44 years. Housing completions remain significantly behind demand due to COVID-19, and the various restrictions on work sites and protocols arising from that. The Central Bank of Ireland now expects house completions to decline by 10,000 compared to the pre-COVID estimate of 26,000 units, and that compares with an estimated demand of 35,000 units year-on-year in the market. We are ourselves and the brands continuing to see strong demand for our units doing -- with our turnovers and also for new units coming available. We took delivery of a development property last Friday and already 16 of those units are leased up. And we're continuing to see that reflection of the supply demand challenges for homes in the Irish market. Turning to Page 16. As I mentioned, we continue to deliver on our 3-pronged strategy for growth across acquisition of completed assets, development partnerships and development of existing Irish Properties. Last Friday, we took delivery of 95 apartments at Hansfield Wood Phase 2. And as I mentioned, we're already leasing those up with 16 already leased up. We've also taken delivery of Waterside, as I mentioned, and also the reconversion on Tallaght Cross west, 18 units. We've also locked in growth with visibility of close to 4,500 units. Of that, we have 135 residential units already contracted to be delivered in 2021 and 2022 across 3 projects. That's project Merrion on the Merrion Road with Dalata Hotel Group, which is under development, the Bakers Yard site, which we actually contracted for and is under development since January of this year and also 5 units at Priorsgate. In addition, the company has planning permission for an additional 543 homes for development on its own sites. Turning to Slide 18. We continue to advance ESG considerations in the business. We initiated our annual GRESB, Global Real Estate Sustainability Benchmark, the GRESB submission in 2020, and this is a key milestone for us and results of which will underpin the development of our ESG strategy and targets going forward. As I mentioned, we're also very conscious of our social responsibility at this time and also with a significant number of employees to both the company and the manager working from home, significant efforts have been made to support everyone, both our residents and employees in both companies, including their well-being through this period. Turning to Slide 20. We believe that the Irish multifamily sector remains attractive, underpinned by a structurally undersupplied residential market. We see also a society shift towards long-term renting and the scarcity of professionally managed high-quality rental stock. IRES is well positioned to continue growing as a leading provider of rental accommodation in Ireland with strong demographics, as we highlighted earlier. We currently have a portfolio of 3,739 modern assets with an average age of 11.5 years, located in historical locations close to transport links. We have a robust balance sheet to allow us further growth in our portfolio through acquisitions and development, to generate stable growing dividends and NAV appreciation. We have strong systems, and in particular, now, our IT systems and controls are strong given the current environment that we all have to work through with strong governance and a commitment to advancing our ESG considerations in the business. Our balance sheet, as Priyanka mentioned, provides financial flexibility to navigate this challenging period and to take advantage of opportunities in the market. I would like to thank you for listening to us. And I would now like to open up for any questions.

[Operator Instructions] We have our first question from Colin Grant of Davy.

Colin here. Just want to go through on the lettings market first. You mentioned Hansfield Wood, the 95 units there and 16 units let up. I wonder if you could give us a little bit more flavor on what you're seeing on the ground in terms of lettings in the market at the moment. Because 16 units seem quite strong, given the timing. And maybe just give an indication of whether or not you're happy with the rent levels there or maybe what you're seeing at some of the other developments like a Waterside or some of the other ones that you're doing. Maybe start with that, if that's okay, please.

Colin, thank you for joining us. Yes, in relation to the market, we see there's definitely, in the Irish market, as we've seen over previous years, very strong demand because of the constrained supply, which has been well under the demand dynamics. We're seeing that actually on the ground day-to-day. We have our own lettings team, so we have good visibility of it. We've been letting up Waterside very strongly. And also we took delivery of Hansfield Wood last Friday evening. We looked at 70 inquiries, and we've already leased up 16 units. So it's strong. We're actually -- we had 2 short-term lets with the Marker apartments, which we mentioned. And in relation to those, we actually took the units back actually and have been leasing those up ourselves since the end of June, and those have also been doing well. So we're seeing rent levels hold up as well. As you know, we're under the current rent regulations, which continue until at 4% maximum until December 2021. And over the last number of months due to emergency legislation by the government, there's also been a rent increased moratorium during the emergency period. And that actually continues for -- that was up until the 1st of August, and that continues for people impacted by COVID-19 through to early next year.

Just in terms of rent collection and vacancy. So I think you mentioned rent collection was around 98.4%, which is obviously very strong. And the residential occupancy, I think, is 97.9%. So they seem very modest declines in both of those. And I'm just wondering, was there may be a slightly deeper decline in April and May, and you're starting to see a slight recovery to those levels? Or are they just kind of flat and stable at those levels? I'm just trying to get a sense of the trend in those 2 areas.

We issued a trading update back in May, which give good visibility around our rent collections through really the first month of COVID impacting us would have been that -- we would have seen in April. We did an update in May and also at the AGM at the end of May, and rent collections are running at 98% at that period too. So we're seeing through those 3 months, April, May and June, and we're also seeing continuing into July as the economy is opened up again. We see a significant reduction of the number of people who have been on the government support, again, for COVID-19. I think that was at over 600,000. It's now down to under 300,000. We're actually seeing collections actually strong coming through in July as well.

Okay. I have one final question. Just on the investment market. So you have your 3-pronged growth strategy from developments for repurchases and acquisitions. And I'm just wondering if there's been any shift in preference within those as a result of COVID whereby, for example, yields might be stable and development costs may even have increased slightly. And I'm just wondering if forward purchases, is that now an area that would offer maybe the most attractive growth opportunity? Or how do you see those 3 areas at the moment?

We still continue with that growth strategy. We take every opportunity, I think, and evaluate against our own criteria. We would have set out our core areas of location as crucial, well serviced side, close to good public transport, good employers. So we'd still make sure that we make sure our basic criteria for determining our decisions on that strategy still remain in place. And then in terms of, actually, we will do a detailed financial evaluation as well to ensure that it's actually accretive to shareholders. So I think across each of those prongs, we will take each of those evaluators. Obviously, in the current environment of COVID-19. There are various restrictions as we've seen on some of our own development, impacting with social distancing requirements and obviously extending out the period for delivery. So obviously, in terms of new opportunities, all of those matters would now come into play in terms of assessment as well.

Our next question comes from Jonathan Kelcher of TD Securities.

First question, just on the moratorium that's in place until the end of the year, Margaret. I think did you just say that it's only for those that are impacted by COVID? Or is it a general moratorium for everyone?

Jonathan. It's very early morning for you, so thank you for joining the call. Yes the initial regulation was for 3 months from March, and then that was extended to the first of August and the government provided under emergency legislation for a moratorium on rent increases and also on evictions just this past weekend, so that legislation actually ended on the 1st of August. And then last weekend, this new legislation brought in, which actually provides for tenants actually impacted by COVID-19, and they must make a declaration to both, the landlord and to the Regulated Tenancy's Board (sic) [ Residential Tenancies Board ], the RTB, in relation to needing support. And if they're impacted by COVID-19, then there is a moratorium in terms of evictions and the longer period of notice.

Okay. So -- and it's still obviously early since that happened, but have you had many tenants come to you with that?

No, this just went in place actually last weekend. So we haven't seen anything. July rent collection is strong. So we haven't actually seen anything coming through yet. It would be too early days. We have a very good thing that's our investment manager, IRES Fund Management and CAPREIT put in a very strong system of communications and engagement with tenants during the period of the crisis, and that continues, actually, that support for tenants and working with them as well and making them aware of what supports are available through a system.

Okay. Do you have any sense of how many tenants will be impacted by that?

We don't. We're seeing strong collections. So we've actually had a very small number actually, who needed some support, a very, very minor number. And in July, we're seeing strong rent collections come through, too. So -- but we work with all of our tenants. Our main area that was at more significantly impacted, we have a small commercial portfolio that actually is a ground floor of a lot of our properties, and that would be small retailers, hairdressers, fresh and some coffee shops. Those, obviously, were significantly impacted during the lockdown. So with that small number, it represents less than 3% of our revenues. We've worked with them actually on forbearance and support because we want to make sure that they come through this period and operate successful businesses going forward.

Okay. And then secondly, the onetime G&A cost sounds like a transaction that couldn't be closed. Is that something that could potentially come back either this year or next?

I think in relation to, we've decided, I suppose, as we've always been, we tend to be conservative in our numbers, and we made an assessment in relation to transactions impacted by COVID-19. They may or may not come back. So we actually decided the prudent thing to do is to actually make sure we provided for anything we didn't have certainty yet.

Our next question comes from Ronan Dunphy of Investec.

I am just -- so I'm looking at the NRI margin, which has come down a bit on last year, very high, above 81%, I think, in the same period last year. And you've mentioned that, that's what's contributing to that, being the bad debts and vacancy costs on some of the commercial tenancies as well. Is it fair to assume then that the rates that we've seen in the first half is likely to persist over the course of the year, given that, I suppose, we're still in those circumstances that contributed to that fall during the first half? Or perhaps with some of those commercial -- some of the commercial tenants you mentioned there being back to work soon or perhaps in the recent weeks, that there is hope for that to increase from here? And then I suppose not unrelatedly then, you've previously talked about tenant turnover being lower during the pandemic or maybe the early stages of the pandemic and no issue with extended leases. And is that still the case? Or has tenant turnover started to tick back up a little bit to what you've seen over the last couple of years?

Ronan, thank you for joining us this morning as well. And what we're seeing is actually obviously a slight softening with the increasing unemployment in the market, and obviously, the lockdown restrictions. There was obviously some softening, which we so translated into a small increase in bad debts and vacancies over the period. We're seeing actually positive signs since the economy here has started opening up since the end of May with construction sites and also into June and then and the government accelerated. It's opening up programs as well for the economy. So we're down to, I think, the last phase, which is more in relation to bars, et cetera, which have been pushed out, but significant parts of the business economy is now back operating again, which is also, I think, positive, and we've seen that reduction in what is called the PUP payments, the income supports COVID-19 payments from over 600,000 claimants down to under 300,000 currently. Our current unemployment is still 17%. And obviously, we still have that risk in the market around spikes due to COVID-19. So it's difficult to predict, I think, in this environment. There's a lot of uncertainty. I think we're managing the business closely and very carefully, and there's very good focus on it day-to-day by both the company and our investment manager, IRES Fund Management. Maybe I'll hand over to Priyanka, if you'd like to add something and maybe give you some color on the turnover, Ronan.

Yes, in terms of your first question around the margins, I think given the uncertainty, like Margaret mentioned, we're comfortable with that 79% NRI margins for the remaining year, which is still quite strong. And in terms of the turnovers, we had roughly around about 20% for the first 6 months at a 3.2% rental increases. So you're right, it kind of slowed down in the second part of the 2020 between April to June, but we're starting to see that pick up a bit more. But our -- the investment manager made arrangements to the -- for leasing even during the COVID situation, so we could -- we had made arrangements that people could kind of come in safely and view the apartments, which has been helpful.

Our next question comes from Colm Lauder of Goodbody.

That was an interesting pronunciation of my name. Just a couple of questions on the valuation standpoint, really. Obviously, there was a negative valuation move, 2% here. Obviously, NAV came back. Just sort of reading through some of the comments in the report, one of the rationales behind that is down to the CBRE making assumption for lower forecasted rental income. I feel it's a bit surprising, given, obviously, there's a very significant level of reversion in the key assets at this stage. And obviously, then your exposure to high-end is quite constrained with the exception of the Marker. I was just wondering if you can perhaps explain some of the rationale on the lower forecasted rental income assumption and perhaps elaborate on what those assumptions are from CBRE.

Priyanka, could I ask you to take those? You're closer to the details.

Yes, of course. Colm, in terms of the valuations, like you mentioned, it is an independent valuation. And the movement was more related to the forecasted rental income side versus the yield. There hasn't been much activity on the transaction side post the COVID pandemic declaration. So it was more impacted by the forecasted rental income, which includes your vacancies and bad debts, et cetera, and the valuers had to -- took a macro view of the economy and the unemployment rates and build that in into the model, which had an impact on the valuations. But again, the yields haven't moved and we're still seeing very strong rent collections and strong occupancy rates. So it was more of a short-term view on the lower forecasted rent income. And then after 18 months, they kind of went back to stabilized projections. So that did result in a slight decrease on our fair value.

Okay. So would it be correct to say that your valuers are pricing in or building in their assumptions market rental declines, given that, again, the portfolio is largely in reversion rate?

Yes. It has built in some softening of the market, Colm.

Okay. And then just one other final question from me. And I thought the details you gave on the valuations around the development sites was quite interesting in terms of particularly the prices per foot when you're looking at comparable evidence. Obviously, one of the key areas, and it's elaborated in the results that the commercial space as well as the development land were one of the key drivers behind that valuation softness this half. I was just trying to understand, to delve into a bit more detail on that write-down in development site values. When you adjust for the reclassification, it does look quite significant, in some cases, around sort of a 12% to 14% write-down in your remaining development land. I was just wondering if, again, the drivers behind that is this, given that obviously would be a residual valuation, is this an increase in construction costs or is it a simple write-down as well -- or, sorry, just a simple write-down in the market value of those developing sites?

Yes. So this is done based on comparable land. And based on that, the values went down. And our development land value is a very small component of our total value portfolio. It's around about 2%, but it did also add to the sales here and declines.

Okay. And then just one final point. I know it was referenced in Colm's question as well as the start. The units handed back by the short occupier at the Marker Residences, could you provide any more details on how they're letting up? I think it was around 30 units or so, I think, that were handed back. What proportion of these have been relet? And what proportion are still vacant?

So we're saying yes to, Colm, the Marker was actually -- it came with the acquisition. When we purchased it, there was an agreement there with a short letting agents for 36 units, I think, Priyanka correct me if that number is wrong. And we actually -- which I think we spoke with them and worked with them. Their business, obviously, with all the lockdown and restrictions changed very fundamentally overnight. And an agreement with them, actually -- it was better for them actually continuing to especially to actually manage the process. And we -- an agreement with them just backs the units and are letting them up. So they're letting up well. Definitely, the luxury end of the market wouldn't have the same level of rent inflation as might have been the case or estimated back in the past. But they're renting up well, assuming the rent levels to what we achieved under that agreement. And so we'll do that over the coming months. That's reflected -- we just took them back in June. So that's reflected in our -- that's what's tipped on our occupancy actually as well, those particular 35 units. Thankfully, I think we -- that's -- we only have 2 small, that one and another very small one for, I think, 17 units. They're the only short-term contracts we have. And we actually have a very well diversified tenant base across the properties. And thankfully, we don't have any -- other than those, which are a small percentage of our portfolio. Other than those 2 contracts, we don't have any other of that nature.

We currently have no further questions. [Operator Instructions] It looks like we have no further questions.

Okay. Thank you to everyone for joining us this morning, and I hope you all stay well. Enjoy what remains of our summer. So thank you very much.

Ladies and gentlemen, this does conclude today's call. Thank you for joining, and you may now disconnect your lines.