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

Hello, everyone, and welcome to the Irish Residential Properties REIT Plc Conference Call. My name is Seth, and I'll be the operator on this call today. [Operator Instructions] I will now hand the floor over to Margaret Sweeney to begin. Please go ahead.

Thank you. Thank you all for joining our call this morning. The presentation we are making today is available to download on our website, iresreit.ieinvestorrelations (sic) [ investorrelations.iresreit.ie ]. Our 2020 preliminary results, which we released this morning are also available on the website. 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 Slide 2. I am joined today by Priyanka Taneja, our Chief Financial Officer. And we will present to you the highlights of our financial results for the 12 months to December 31, 2020, and an update on our strategy and outlook for the business. Turning now to our highlights on Slide 4. COVID-19, as you all know, has caused unprecedented social and economic challenges for the country and for everyone. We, in I-RES, responded swiftly, initiating the business continuity and crisis management plan. We also put in place working from home for all staff other than frontline site staff. Our priority over the last year has been to ensure the health and well-being of everyone: Our people, our residents, our partners and also ensuring the safety and maintenance of our assets as well as supporting the wider community in which we operate. We have a tremendous team of people working for I-RES who have effectively navigated the business through the many challenges of lockdowns, public health measures, safety protocols, with many of them working and managing all aspects of their lives from home as well as the frontline team continuing to provide excellent service to all the residents. Ireland is currently in its third wave of COVID-19 and a further restrictive lockdown since the 1st of January. There's some good news, however, on the horizon with strong reduction in cases over the last week, and the rollout of the vaccination program is also underway. We anticipate that there will be a gradual phased opening of the construction sector from early March. And while there is a lot of macro uncertainty out there, we believe the quality of our property portfolio with spacious homes, the strength of our balance sheet and an experienced management team will underpin our ability to successfully navigate the year ahead. So turning to the next slide. Building on our successful year in 2019, we continued to deliver strong performance in 2020. We had strong revenue growth of over 20%, largely driven by acquisitions, the Marathon portfolio in 2019 and also further acquisitions in 2020, together with some organic revenue growth. The operating performance of the portfolio was extremely resilient, with occupancy of 98.4% at year-end and continuing strong rent collections throughout the year of nearly 99%. Our NRI margin remained consistent at 80%, with a small reduction on 2019 due to slightly higher bad debt. We applied capital efficiently and accretively during the year to acquisitions as well as recycling some assets profitably. We have a strong balance sheet with gearing up 39.2% at the end of the year and EUR 246 million of committed undrawn facilities at attractive interest rates to fund future growth. We continue to provide stable and growing dividends for shareholders. The Board is approving an additional dividend of EUR 3.2 per share, giving an increase of 3% in the total dividend out of the 2020 profits. The portfolio value increased by 1.5% to EUR 1,380 million at December 31, with a 20 bps yield compression on revaluation. This has translated into NAV growth of 160.3 cents per share, up 3.2% on last year. So turning to Slide 6. Despite the impact of COVID-19, during 2020, we continued to execute on our three-pronged strategy for growth through accretive acquisitions, forward purchase contracts and development on own sites. We invested in 173 homes at an investment level of EUR 45.5 million. This included 55 units at Waterside and a further 95 units at Hansfield Wood Phase II, which we took delivery of and leased up during the year. We also completed the conversion of 18 residential units at Tallaght Cross West. We contracted in December for the acquisition of 146 high-quality homes at Phoenix Park Racecourse and completed the integration of that acquisition into our portfolio in January of this year. So in total, we brought on board 319 new homes add to the portfolio over the last 12 months. We also successfully completed the disposal of 151 noncore apartments spread across 10 properties for EUR 48 million, which was in excess of the original acquisition cost and at a premium of 6% to the December 2019 valuation. We currently have a pipeline of 673 units providing us with locked in portfolio growth of 18%. This will facilitate us to deliver enhanced risk adjusted returns for our shareholders. I will now turn things over to Priyanka, who will review our financial and operating results for 2020.

Thanks, Margaret. Now turning on Slide 8, our results, which include approximately 10 months of the impact of COVID-19, demonstrates the strong resilience of our assets in our business. Revenue from our investment properties increased 20.4% to EUR 74.7 million and net rental income grew by 18% to EUR 59.8 million in the period. Our rent collections for the residential portfolio were strong at 98.9% for 2020 and were consistent with 2019 at 99.1%. We -- our occupancies were also strong at 98.4% as of December 31, 2020, and were consistent with 2019. Our NRI margins were achieved at 80% underline the resilience of our business. This represents a very strong outturn under our current market conditions. We continued our growth in revenue from investment properties to EUR 74.7 million, which was driven by acquisition of new units and organic rental growth. 34% of the residential units turned and/or renewed during 2020, with majority of the units turned or renewed with strong rental increases. There was a temporary rent moratorium in Ireland during part of the year from March 27 to August 1 and evictions legislation. I-RES did not implement any rental increases on renewals since April 1, 2020, for the remaining 2020. NRI margin of 80% compared to 81.4% for 2019. The decline is due to higher bad debts and vacancies expenses post declaration of the COVID-19 pandemic. A limited number of commercial parking and commercial leases. In total, less than 3.5% of total revenue have been negatively impacted due to restrictions and regulations due to COVID. We delivered strong earnings performance with adjusted basic earnings per share before nonrecurring costs of EUR 0.07 for 2020, up 1.4% from last year. This has been due to organic rental growth and accretive acquisitions. We have had a track record of stable growing dividends. 2.7 cents dividend per share was declared in H1 2020 and 3.22 cents dividend per share has been proposed for H2 2020, up 1.9% and 3.9%, respectively, compared to the same period last year. This is at a payout ratio of 90% of distributable profits. And we have required the minimum 85% distributions under the REIT legislation. Now turning to Slide 9. We are managing and maintaining a strong balance sheet with adequate liquidity, which is our pre priority during this uncertain time. The company has a revolving credit facility of EUR 600 million and has a fixed interest rate margin of 1.7% on it and is maturing in January 2024. The group completed a private placement note of circa EUR 200 million equivalent in March 2020, with a weighted average rate of 1.92%, inclusive of swap costs and a weighted average maturity of 9 years as of December 31, 2020, laddered over 6, 9 and 11-year maturities with the first repayment due in March 2027. The company's total cost of debt is 2.25% for 2020 and has a remaining weighted average debt to maturity of 5.3 years. As of December 31, 2020, the company has EUR 11 million of cash and EUR 246 million of committed undrawn facilities under its RCF. Subsequent to December 31, 2020, the group's loan-to-value ratio increased to 41.8% post completion of the Phoenix Park acquisition on January 20, 2021. Our NAV per share increased by 3.3% to 160.3 cents due to the higher portfolio value and income generated during the year, offset by dividend payments. As of December 31, 2020, the portfolio was EUR 1.38 billion, up 1.5% on the year due to investments. We had new investments of EUR 45.5 million. We had a further revaluation gain of EUR 19 million, principally due to yield compression with EPRA net initial yield now at 4.2% for year-end. We have efficiently recycled capital through the disposal of assets of EUR 43.5 million. Now turning to Slide 11. Over the last 3 years, we have successfully executed on our strategy, increasing our portfolio by 50%. We have delivered on our three-pronged strategy for growth, which involves accretive acquisitions, development on sites and partnering with developers or forward purchase opportunities. In addition, the company has a pipeline growth of 649 units that can be delivered over the coming years. We have 135 residential units to be delivered in 2020 comprised of the 61 units on I-RES side at Bakers Yard and a forward purchase of 69 units at Merrion Road. This provides us with a locked-in growth and clear visibility in how we will grow our rental income over the coming years. Now turning to Slide 12. Our investment strategy is focused on property assets with well positioned in mid-tier markets with large apartments. Approximately, 2/3 of our portfolio is composed of spacious 2-bedroom units which has been very sustainable during this period of market uncertainty. With average monthly rents of EUR 1,624 per month, I-RES assets are more competitive compared to the average rents of EUR 1,984 per month reported by Daft, which positions us for continued sustainable growth. I-RES properties are dispersed across currently Dublin with no overconcentration in 1 location and 1 property in Cork. And we are located next to strong local employment, schools, major transport links and good neighborhoods. I-RES portfolio consists of modern properties with a weighted average age of 11 years, which is decreasing as we add new builds. Now I will turn back to Margaret for Slide 13. Margaret?

Thank you, Priyanka. So looking at the market itself, demand for housing remains strong, underpinned by Ireland's continued strong population growth. The population of Dublin is forecast to grow at approximately 1% per annum to 2040, driven by the highest birth rate in Europe and inward migration, which is supported by strong foreign -- FDI inflows by multinational corporations, particularly in the pharmaceutical sector, IT sector and biomedical devices. For 2020, housing completions declined to just over 20,000 from an original estimate of 26,000. And this is significantly below estimated demand of the need for 35,000 new homes every year. This ongoing structural undersupply of housing is forecast to continue for some years, with output expected to increase only modestly in 2021. The ongoing closure of the majority of the construction sector in January and February this year will continue to add further constraints to the delivery of new units and the commencement of new sites. In addition, smaller landlords continue to exit the market as well as ongoing stock obsolescence. Despite the challenges caused by the pandemic, investor interest in the Irish Residential investment market remains strong with EUR 1.75 billion worth of transactions closing in 2020, according to the most recent CBRE report. Prime doubling yields for multifamily held from at 3.75% through 2020, and CBRE expect yield to remain stable through 2021. In terms of structures, a lack of standing stock of scale resulted increasingly in transaction activity focused on forward purchases of apartment schemes to be built out over the coming years, and this accounted for 54% of transactions last year. The PRS market, represented by institutional ownership in Ireland, is approximately 5% of the market or 15,500 units. I-RES remains the largest landlord, holding 23% of all units that are in institutional ownership in Ireland. Turning to Slide 15. The Irish economic performance remained robust in 2020, with Ireland showing a positive 2.5% GDP growth, one of the strongest performances in Europe, primarily due to buoyant exports and robust tax receipts. Modified domestic demand, which strips out the more volatile components, such as R&D, aircraft leasing and intellectual property, has declined by 7% in 2020 as the pandemic gave rise to increasing unemployment and a drop in consumer spending. However, this is expected to rebound to 3% in 2021. Unemployment increased sharply from 5% at the end of 2019 to a level of 25% in February due to COVID. The government continues to provide strong support with pandemic support payments to those experienced job disruption of between EUR 203 and EUR 350 per week as ongoing employer supports and supports to business as well. Turning to Page 17. I-RES remains fully committed to aligning ESG measures to our business strategy. We have continued building on our ESG program throughout 2020. Our goal is to create communities with quality service and resident experience across our whole portfolio. We have built this into our planning for new developments. We also have strong governance with an Independent Chairman and a majority of independent directors with the diversity of skills, experience and backgrounds around the Board table. Our employees and the company and the manager are the most important resource underpinning the business, and their commitment, flexibility and efforts in 2020 and continuing into this year has been outstanding. Our residents' wellbeing, their safety and security with professional service delivered, underpins the ethos of the company and the manager. We continued to develop our plans in conjunction with partners and suppliers to reduce our impact on the environment as well as building up our engagement and contribution to the communities we live and work in. I can assure you that ESG is high on our Board's agenda, and we will continue to build on our work to ensure a sustainable business, meeting the needs of our shareholders and other stakeholders. So turning to Slide 19. While the macro environment remains uncertain due to the COVID-19 pandemic, we believe the Irish multifamily sector remains an attractive investment opportunity, structurally undersupplied with strong demand drivers from population growth shift to smaller household sizes and a scarcity of professionally managed high-quality rental stock. I believe I-RES is well positioned to continue to grow as a leading provider of private rental accommodation in Ireland. We currently have a portfolio, as Priyanka mentioned, of 3,834 modern homes with an average age of 11.2 years, located in very desirable areas and close to good transport links. We have a pipeline for growth of 18% through forward purchase contracts and development on our own sites. We also have a strong balance sheet with significant committed undrawn bank facilities at attractive interest rates. And we have an established operating platform, delivering consistent performance with a strong NRI margin of 80%. As I mentioned, ESG is core to the business, and we are continuing to develop our strategy and capabilities in that area. Despite the impact on everyone's life of the pandemic-related restrictions, including working from home, I can assure you that the I-RES team is very motivated and committed to ensuring the continued growth and success of the business. Thank you for your time today, and I will now turn back to the moderator for Q&A.

[Operator Instructions] The first question today comes from Jonathan Kelcher from TD Securities.

First question, just on the rent increases. Is that -- the normal rent increases you're doing now, is that currently government mandated or is that now voluntary by you guys?

It's a combination of both, Jonathan. The current position is, there are restrictions for rent increases in relation to tenants who are actually impacted by COVID-19, who can make a declaration. And in other cases, there is an open where it's currently subject to the normal rent regulation, which is a maximum of 4% per annum.

Okay. So you're not pushing those through on renewals, right?

Yes. So we haven't done any renewals since April 1, 2020, Jonathan.

Okay. Now those -- on turnover, are you allowed to -- are you able to push through like a catch-up on that? So for instance, can you -- will you be able to get 8% on some of the units if there's no renewals for 2 years?

No, it's just a catch-up going forward. So the maximum is 4% per annum just on an ongoing. There is no catch-up.

Okay. And then my second question, just on the asset sales, what was the gross yield on that?

Sorry, Priyanka -- I'll let Priyanka.

So the gross yield on it was around about 5%, Jonathan.

Okay. And do you see any other noncore asset sales that you might do in 2021?

So that was the first actually disposal that we did, Jonathan. It principally came out of the Marathon acquisition in 2019, where there was actually a lot of fragmented small assets across that we put together as a portfolio of 151. So we will now continue to look at the portfolio, particularly around operational efficiencies and review it to see for opportunities where we can get efficiencies and accretive value on recycling.

Okay. And then lastly, just what's your outlook on acquisitions for this year?

So the market currently, we have a very restrictive lockdown. So for January, February, it's -- there's very little activity because, obviously, everyone is restricted to a 5-kilometer movement area. And obviously, so there hasn't been that much coming through so far. However, just looking at it in terms of what's out there in terms of planning permissions that come through and also in terms of people waiting to both pent-up and someone is waiting for construction to reopen in March, hopefully, I think there is good opportunity in the market. And also, there is a lot of reviews at government level to really try and increase the level of housebuilding in Ireland through 2021, cognizant of the constraints that were imposed through the pandemic. So I think there is quite a bit of planning permission out there and also people waiting to get into a more stable environment, particularly for large-scale construction.

Our next question comes from Ronan Dunphy at Investec.

I might just follow-up a little bit, I suppose, on Jonathan's question in terms of acquisitions and maybe thinking about forward purchases and just -- and how you, I suppose, think about the type of units that you might be most interested in? And I know you've acquired houses and apartments in the recent past. And is -- I suppose, do you have a preference for the type of units. And has that changed at all over the past year in terms of COVID? Or, I guess, if the housing demand strong enough, I suppose it all the parts of the market and for all types of units because I suppose you just test each opportunity as it comes?

So we actually -- in terms of the market, I think there will be plenty of opportunity there. In relation to it, in terms of how we assess and look at opportunities that fit our business model and fit our business, we would always have, and I think they still hold through going forward, we have criteria where we look at locations where there's good population growth and attractive neighborhoods with good employment and the locality, also well serviced by the local authorities with near to schools. So if you look at where we're located between Sandyford, Tallaght, even North and West Dublin, now it's close to also retail and universities, hospitals or the airport. So we tend to still use those criteria in terms of determining location. In terms of types of units, we have -- and the current portfolio, 2/3 of the portfolio would be 2-bedroom apartments. We would also have 3 beds. And then we have a small number of houses, which we have been purchasing over the last couple of years as well, which actually have rented up very well, and it allows that sort of life cycle, providing a portfolio of assets that actually is suited to the market and allows people on a life cycle basis to go from smaller units to slightly larger or even to houses in family situations. And -- so we see that still fitting the current market here in Ireland, and we would still see those criteria being really important in terms of making sure that what we select is sustainable. And for Rockbrook, which we -- is our largest, that has got planning permission, we decided to go for the standard planning permission for that. So it would still be with the predominance of 2-bedroom apartments, which we think there is a good demand for and the reports coming through and what we've seen ourselves on the ground is the 2-bedroomed apartments are higher in demand than, say, 1-bed for studios. So we didn't go for the build-to-rent planning permission. We went for a standard planning permission. So I think as a result, our new -- our pipeline for growth is well-structured for sort of a post-COVID world as well, and people are looking for a bit more space.

Yes, yes, sure. And just, I suppose, on those -- the direct build opportunities that Rockbrook can speak itself for quarter and you must be confident given the strength of the market, but I know you've mentioned previously that, I suppose it's difficult actually start those projects in this COVID environment. Are you any closer to maybe making a final decision to start on those?