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

Hello, and good morning, everyone, and welcome to the IRES REIT 2021 Interim Results Investor Conference Call. My name is Emily, and I will be your coordinator for the call today. [Operator Instructions] I now have the pleasure of handing over to our host, CEO of Irish REIT, Margaret Sweeney, to begin. Margaret, please go ahead.

Thank you, Emily, and good morning to everyone, and thank you for joining IRES' earnings call this morning. The presentation we're making is available to download on our website at investorrelations.iresreit.ie, under our 2021 interim report and financial statements which we released this morning, are also available on our website. Before we begin, I would like to remind everyone that certain statements we make today may be considered forward-looking and are subject to various risks and uncertainties that can cause actual results to differ materially from those expressed or implied by those forward-looking statements. I direct you to our securities filings for a discussion of these risks and uncertainties. So I'm joined this morning by Priyanka Taneja, our Chief Financial Officer. And we will present to you this morning the highlights of our financial results for the 6 months to 30 June 2021, an update on our growth strategy and review of the investment management agreement. We will also outline the continuing strong fundamentals underpinning the business and the future outlook. So I'm delighted to present to you another strong investment in operational performance for the 6 months to 30 June, despite the significant challenges posed by the COVID-19 pandemic environment that we all have to live and work through, including in Ireland significant restrictions for much of the first half of the year. Health, safety and welfare of our employees and residents remains a top priority for the company. We also continued, despite the challenging environment, to build on our attractive portfolio of residential homes for rental, primarily focused on the mid-tier market and in very desirable locations. We had a very busy start to the year with the acquisition of 148 units, and that brings our current portfolio to 3,836 high-quality modern homes as well as focusing on other asset management and value-enhancing opportunities. Coupled with a strong focus on professional management of our properties and focus on resident service, we maintained high occupancy at nearly 99%, and we also had strong cash collections of also 99% for the period. The economic environment in Ireland, despite the challenges caused by the pandemic, remains robust with one of the strongest GDP growth forecasts in Europe for this year. The operating environment in Ireland also remains supportive of future growth despite recent tax and rent regulation changes, which we will cover later. IRES continued to deliver a consistent strong performance, with growth in net rental income of 5.9% for the 6 months, and achieving a strong NRI margin of 79.5%. This resulted in EPRA earnings of EUR 17.8 million, an increase of 11.9% on the same period last year. So EPRA earnings per share came in at EUR 0.034, up 9.7%. And we propose to pay an interim dividend of EUR 0.0291 per share, an increase of 5.8% on our mid-year interim dividend in 2020. Our balance sheet is strong with good liquidity. LTV is 41% at 30 June, and we've also been lengthening the maturities in our debt, which now range between 4 and 11 years. I will now hand you over to Priyanka, our CFO, to present the financial results to you. Priyanka?

Thanks, Margaret. Thanks, Margaret. Now turning to Slide 7. Our results for H1 2021 demonstrate the strong resilience of our assets in our business. Revenue from investment properties increased by 5.5% to EUR 39.4 million due to acquisitions and organic rental growth. During the period, 10% of the portfolio units were turned, with majority of the units having rental increases in line with the maximum 4% per annum permitted under the previous rent legislation. Net rental income grew by 5.9% to EUR 31.3 million in the period. Our strong NRI margin of 79.5% for H1 2021 was driven by strong rent collections at 99% and high occupancies during the period. We again delivered a strong earnings performance with EPRA earnings per share of EUR 0.034 for H1 2021, up 9.7% for the same period last year. This is due to organic rental growth and accretive acquisitions. We have a track record of stable and growing dividends. EUR 0.0291 dividend per share has been proposed for H1 2021, up 5.76% from the same period last year. This is at a payout ratio of 86% of distributable profits. Now turning to Slide 8. Our EPRA NTA NAV per share increased by 1.1% to EUR 0.01617 due to higher portfolio value and income generated during the period, offset by dividend payments. The gross yield remained stable at 5.5% as of June 30, 2021, compared to the same period last year. Now turning to Slide 9. As of June 30, the portfolio was EUR 1.46 billion, up 5.6% from 2020 yearend due to investments and fair value increases. The fair value in investment properties increased due to slight yield compression, organic rental growth, offset by stamp duty transaction costs applied on houses. In May 2021, the Irish government increased the rate of stamp duty on the multiple purchase of 10 or more single-family houses from 2% to 10%. This caused a one-off reduction in the value of the company's property portfolio by EUR 8.5 million. It is important to note that apartments are fully exempt from this higher stamp duty. There has been significant investment in PRS in Ireland in H1 2021, close to EUR 1.5 billion, of which 90% were corporate purchases. The yields have been in line with 2020 yearend with a slight downward pressure. There has been a notable expansion of PRS buyer pool as market continues to mature. Now turning to Slide 10. We manage and maintain a strong balance sheet with adequate liquidity. The company has a revolving credit facility of EUR 600 million. In 2021, we extended the maturity to April 2025 for EUR 395 million of the revolving credit facility. The remaining facility matures in 2024. The weighted average cost of debt is 2.33% for H1 2021, with a weighted average debt maturity of 5.1 years. There are no debt maturing before April 2024. As of June 30, 2021, the company has EUR 14.4 million in cash and EUR 187 million available debt under the credit facility. The group's total gearing was 41% as of June 30, 2021, which is below the 50% maximum allowed under the Irish REIT rules and the financial covenants. The company also maintains significant headroom on its interest coverage ratio. Beyond the committed cost and development costs of EUR 11.6 million for 2021 and the Merrion Road acquisition cost was EUR 47 million, expected to close in quarter 2 2022. There are no -- there is no other current exposure. Now I will turn Slide 12 to Margaret.

Thank you, Priyanka. So Priyanka has outlined the strong operating performance of the portfolio, despite the more challenging environment over the last 16 months. This reflects the quality of our properties, modern homes with an average age of 12 years in very attractive locations. We are primarily focused on the mid-tier market segment with average monthly rents of slightly over EUR 1,600 per month, which are approximately 10% reversionary based on their most recent valuation. Our portfolio is second to none with near 60% with A and B building energy ratings, close to good transport links and amenities. The IRES team has been even more closely focused on service to our residents as well as professional management of our properties during these times. We have a mix of office onsite and working from home across the company and manager employees, and everyone is working very effectively as evidenced by the continuing strong performance of the business. Turning to Slide 13. We continue to focus on proactive asset management and value creation. And the results for the 6 months reflect the continuing execution of our growth strategy and value for shareholders. We invested in 148 new residential homes for rental. 146 of these are located besides the Phoenix Park, a very attractive mature residential area on the edge of the city. Our own development site at Bakers Yard and our fixed price forward purchase development at Merrion Road, a total of 130 units were impacted by construction shutdown periods due to COVID, but these are now reopened, and the units are scheduled for delivery in 2022. And both these developments are built to very high standards and embracing many sustainability features. With the stabilization of the construction sector post lockdown, we will focus now on our current pipeline and capacity to increase the portfolio to circa 4,500 units. In addition to growth, we have also continued to focus on value creation and asset management. As Priyanka mentioned, we sold an unoccupied commercial space at our Tallaght property for EUR 1.7 million and achieved a profit on disposal of EUR 900,000 during the period. Today, we complete a 25-year social housing lease on one of our properties, Hampton Wood, to an approved housing body. And this lease provides for indexation of rents every 3 years under asset value enhancing. So turning to Slide 14. You will see there just photographs of our most recent -- of our current developments and our most recent acquisition. We took ownership of the 146 units at the Phoenix Park Racecourse in January of this year. The estimated gross yield on this acquisition is 5.3% under a development of 61 units at Bakers Yard. It's progressing well, and that is designed to lead gold standard, and the estimated year 1 gross yield on lease-up at 6.1%. Under forward commitment, acquisition of 69 units on the Merrion Road from Dalata Hotel worth a fixed price contract, and it's located in one of the most attractive and well-located sites in Dublin. This is now due for delivery in 2022, with delays on construction due to government and public health measures, pushing both of those developments out from -- which were initially due for delivery this year, out into 2022. So turning to Slide 16. As previously advised to our investors, IRES Fund Management -- the manager served 12 months’ notice of termination of the investment management agreement on 31 March 2021. An independent subcommittee of the Board has been evaluating the relative strategic and financial merits of the various options available to the company in relation to the IMA and related services agreement, and helps determine that it is in the best interest of the company to internalize its management. Yesterday, the Board approved and the company served a notice of termination of the IMA to internalize its management, with internalization and acquisition of the manager to take effect on 31 January 2022, and this acquisition of IRES Fund Management is subject to Central Bank approval. In the interim, the manager and CAPREIT shall pay -- will continue to provide all the services pursuant to the current IMA agreement. Internalization is expected to be earnings per share enhancing in the first full year, following completion of the internalization, adjusting for one-off setup costs. We have a significant transition project in place across a number of different work streams, technology and systems, building out the corporate organization as well as significant data migration. And more recently, we have announced that we have appointed Brian Fagan as our Finance Director, and Anna-Marie Curry joined us as Company Secretary and General Counsel. So the internalization is expected to bring benefits to the company. We see the ability to realize economies of scale with the growth in the company's property portfolio going forward to create a more simplified organization structure and decision-making process, and it provides the ability to directly incentivize the local team. And there is also a relative preference for internally managed REITs among the investment community. So turning to Slide 18. Sustainability is important to me and continues to take priority across our business, influencing our operations and investment decision-making. In the first half of 2021, we achieved some significant milestones. We appoint -- we announced the appointment of Stephanie French as a non-executive independent director to the Board on the 1st of July. Stephanie brings significant experience in the residential real estate sector, and particularly in Europe. She has also joined the Board's Audit Committee and the newly established Board Sustainability Committee. And Mark Kenney, who's been a significant contributor to the business, stepped down from the Board on the 1st of July as representative of the investment manager. We published a separate ESG report in March 2021, and we made our first public submission to GRESB this year. We have completed our materiality metrics with widespread stakeholder engagement, and this forms the foundation of our ESG strategy. As we will continue to build out our capability as well as actually prioritizing the safety, health and wellbeing and professional management and service to residents, which are top priority areas on the basis of our interaction with our stakeholders. So turning to Slide 20. IRES' strategy is focused on the Irish private residential rental market and the macro environment is very supportive of our strategy. In 2020, Ireland was the only EU country to grow GDP. And the forecast for Irish GDP growth in 2021 are still being revised up and is now estimated to average 8.3%. Demand for housing remains strong, underpinned by Ireland's continued strong population growth and a young population. The population of Dublin is forecast to grow at circa 1% per annum to 2040, driven by the highest birth rate in Europe and inward migration, supported by strong foreign direct investment capital inflows by multinational corporations, and particularly in the IT and pharmaceutical sectors. The fundamentals underpinning the business continue to be robust. Investor interest in the Irish residential investment market, as Priyanka mentioned, remained strong, with EUR 1.5 billion worth of transactions closing in H1 2021 according to [indiscernible]. And prime doubling yields for multifamily held firm at 3.6% at Q2 2021, and CBRE expect yields to remain stable throughout 2021. Housing demand remains strong due to ongoing structural undersupply of housing, which is forecast to continue for some years. And for 2020, housing completions came under around circa 21,000, similar to levels back in 2018 and 2019. COVID has had an impact and exacerbated the challenge in terms of actually trying to ramp up supply to meet the estimated demand of 34,000 new homes needed every year for a young and growing population. Rental stock is also at record low nationally and in Dublin, and rent growth remained positive throughout COVID. A lack of standing stock of scale resulted increasingly in transaction activity for forward purchase of apartment schemes to be built over the coming years. It's worth also mentioning that the PRS market represented by institutional ownership in Ireland is still small at approximately 5% of the total market for private residential accommodation. And turning to Slide 23. The Irish multifamily sector is attractive and positioned for continued growth. This is underpinned by the favorable demographic and society shifts as well as the continuing supply shortage of housing across all segments of the market. Despite the uncertainties and risks from taxation and regulation changes, yields remain attractive. IRES is well-positioned to take advantage of continuing growth opportunities as well as active asset management. Our balance sheet is strong and the internalization of management and the operating platform will provide further opportunities for the company going forward. Thank you for listening. And I will now hand you back to Emily.

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

First question -- the first question, I guess just -- and it might still be too early to know this, but with the change in the rental legislation announced about a month ago, do you expect to see -- like has there been any change in competition for acquisitions? Is there still the same demand or has that changed or is it really too early to say?

It's probably relatively early at this point. The new regulations came into effect in the middle of July, just a few weeks back. And -- however, we're seeing the fundamentals of the market are still very strong with index-linked rentals going forward, it's still showing attractive opportunities in the market. It's probably a little bit too early to see the effect of it, but we're still seeing transactions closing, until transactions coming to the market over the last number of weeks as well.

Okay. And then secondly, the social housing lease agreement that you announced today, can you maybe walk through the mechanics of that and maybe the reasoning behind doing that?

Yes. So we have -- one of our properties, Hampton Wood -- we actually -- in that property, we have probably a significant number of our residents there as well who are probably getting more housing assistance support, and particularly through the COVID period. And so it was actually one of the approved housing bodies -- has other property and units also in the same development. So in that context, we have been in discussions to see if there were some opportunities to collaborate in relation to it. And so that culminated actually in us agreeing with an approved housing body to a housing association, a 25-year lease, which I think is -- gives good security and tenure for the residents in Hampton Wood, and also, I think, for IRES. We're happy to enter into that collaborative lease structure on a long-term basis.

So who is the tenant -- so the tenant still pays the rent, and is it guaranteed by the housing body?

Yes. Yes. So instead of having a large number of tenants, we have one tenant now, which is Tuath Housing Association. It's -- the rents are index-linked and on a 3-yearly review basis.

Okay. Okay. So you basically get one check a month?

Check a month, exactly. Yes. And so we are still the owner of the asset and responsible for the structures of the building, both the full operating and maintenance moves to be approved housing body.

Our next question comes from Colin Grant from Davy.

A couple of questions. Maybe just -- initially just follow-on from the previous question on the social housing. Could -- Margaret, could you give an outline of the level of rents you've got on that social housing lease, if it's sort of broadly comparable with the rents that you were getting previously from those tenants? And I suppose the follow-on to that would be, are there more of these types of leases that you could do? Because Hampton Wood obviously raised 128 of the units. Maybe there are other sites where similar structures could take place in the future, maybe just start with that, Margaret.

So in terms of the Hampton Wood, yes, the level of rents in Hampton Wood would be broadly comparable to rents across our portfolio. It's a very good development close to the airport. And in terms of -- as I mentioned, it provides good security, I think, for the residents in Hampton Wood as well. I think we've always, actually, as a company, provided integrated schemes. As you know, under new developments, there would always be part 5 for social housing. And we also would always -- across all our schemes, we would have integrated. So I think that particular opportunity allowed us to enter into a good partnership with one of the approved housing bodies. I think going forward, if there are opportunities, we think that we can actually enter into partnerships like that and it's supportive of our residents -- our other residents, then we're happy to engage in looking at those opportunities too.