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

Hello, everyone, and welcome to the IRES REIT 2022 Interim Results Investor Conference Call. My name is Nadia, and I will be coordinating the call today. [Operator Instructions] I will now hand over to our host, Michelle Ang, Director of Investor Relations and Sustainability to begin. Michelle, please go ahead.

Good morning. Thank you for joining IRES REIT plc earnings call. I am Michelle Ang, Director of Investor Relations, and I'm joined today by Margaret Sweeney, CEO; and our CFO, Brian Fagan, to present to you our half year results for the 6 months to 30 of June 2022. The presentation we are making today is available to download on the Investor Relations section of our website, iresreit.ie. And our H1 2022 results press release released this morning is also available on our website and RNS. Before we begin, I'd like to 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 security filings for a discussion of these risks and uncertainties. I will now pass over to Margaret, who will go through the highlights from H1 2022.

Thank you, Michelle, and hello to everyone. Thank you for joining our conference call this morning. I am delighted to report a solid financial performance for the first 6 months of 2022. The first half year was one of significant change for the company and one could say that we have a hybrid model for the 6 months. For the first month in January, we were externally managed. Then we acquired the management company for 3 months from the 1 of February through to the end of April, we had a transition services agreement in place with Capreit, providing IT and service support to us where we transferred all the functions and data to the company's new IT system. And since the 1 of May, we're a fully internalized Irish REIT. Despite all the change, management and all employees ensured focus on the business with maintaining full occupancy across our properties and with occupancy increasing to 99.3% at 30 June 2022. Our revenue increased by 6.7% to EUR 42.1 million for the 6 months from continued investment in the portfolio and organic rental growth. This resulted in adjusted EPRA earnings increasing by 1% to EUR 19.2 million. This demonstrates the high quality of our assets, demand in the market for professionally managed rental accommodation and the resilience of our business. We incurred one-off nonrecurring costs relating to termination of the IMA, acquisition of the management company and internalization. And Brian will provide some further detail on this. We have a robust balance sheet and a healthy capital structure. Our funding mix is across a number of long duration facilities with a low weighted average cost of debt of 2.25%. This compares with a stable gross yield of 5.6% on our assets at our valuation at the end of June. And our LTV at 30 June was 42.6%. We have strong liquidity with no debt maturities before April '26, and there's good headroom in our facilities with circa 30% of our debt fixed, providing a helpful hedge against interest rate increases. We have a modern, high-quality portfolio of assets, approximately 4,000 apartments and townhouses located in Dublin and Cork. This is a unique well-invested and difficult-to-replicate portfolio of very high-quality assets with an average age of just over 13 years. At 30 June, the assets were independently valued at EUR 1.55 billion. That translated to 0.8% growth and EPRA net tangible assets to EUR 1.678 per share at 30 June. And that was up from EPRA/NAV of EUR 1.665 per share at December '21. We have strong sustainability potentials as well across the asset base with 94% of our properties holding Building Energy Rating Certification, A, B and C and 54% of that is A&B. So combining all of these factors across the portfolio, this translates to lower capital expenditure commitments for the business, enhancing returns. We would cover sustainability in greater detail later, but there are a few initial highlights that are worth calling out. In the first half of the year, we continued our efforts to increase transparency and positively influence communities in which we operate. We published our annual ESG report in March, and this is aligned to EPRA Sustainability Best Practice reporting guidelines. We also made our second public submission to growth in July. And climate change remains at the forefront of our minds and it is a priority topic for management and the Board in IRES. And we're working this year towards setting carbon reduction targets and setting out our carb rate to net zero. We continue to deliver on our strategy as accretive yields for shareholders. Following the acquisition of Ashbrook in January, we also have been continuing with the development of our own site. So Bakers Yard, I'm delighted to report that we took delivery of that from the builder on the 23 of July at 61 new apartments with a very nice outdoor garden very close to the city center. And with Hanover on the 23 of July, we had it fully leased and occupied as of the 1 of August. Our forward purchase of 69 apartments and townhouses at Merrion Road, which we've now called Tara View would close shortly at the fixed price we announced previously. And we expect to see very strong demand for this high-quality accommodation and fantastic sea view location in Dublin. We have one remaining capital commitment speaking the balance of the Ashbrook for reported contracts where we have 44 new build apartments due for delivery next year. Our focus is very much on effective and efficient asset management, and we have completed contracts for recycling one of our properties with closing expected in the next few weeks. This supports our effective balance sheet management and ongoing liquidity. Moving to Page 5. On the left-hand side, you would see the time line for our transition from an externally managed REIT to a fully internally managed REIT. We have now completed the acquisition of the management company, and together with the deployment of market-leading technology, we now have a unique operating platform in the Irish markets. We completed the transition from Capreit by close of the transition services agreement on the 30 of April this year. As I mentioned earlier, 2022 is a year of significant transition for the company. However, at the same time, management remains very focused on our core business and delivering value to all our stakeholders. We continue on our journey of embedding sustainability practices across all aspects of our business model, our asset development, property management and resident services, procurement, people and culture, supporting communities we provide homes in and hopefully adding social value in these areas. And to you, our shareholders, we are conscious of continually improving our reporting on our carbon impact and social impact. We were also pleased to be recognized with a number of notable achievements during the year. I will now hand over to Brian Fagan to bring you through our financial results.

Thank you, Margaret. Good morning, everybody. Turning now to Slide 7, where I will discuss our financial performance in greater detail. We are pleased to announce a very strong set of underlying results. These have been achieved during a period when the company has undergone significant change. We completed the acquisition of the external manager, successfully transitioned business functions and data from Canada and installed brand new IT systems. The results have also been achieved against the background of geopolitical turmoil, lingering COVID effects, supply chain disruption and inflationary pressures. Our results for the first half of 2022 again demonstrates the resilience of our high-quality assets and the strong fundamentals of our business. Revenue from investment properties increased by 6.7% to EUR 42 million in the first 6 months. Occupancy in the portfolio strengthened to 99.3% at 30 of June. That compares with 98.6% the same time last year while our total rent collections for the portfolio remained excellent at 98.7% for H1 2022. The strong occupancy and rental collection performance further underlines the resilient characteristics of the business. Net rental income grew by 4.1% to EUR 32.6 million in the period due to investment in new properties and improved occupancy. The NRI margin moderated to 77.5% for the period compared to 79.5% for H1 2021. The decrease is attributable to increased local property taxes and employee utilities and repairs and maintenance costs when compared against the first 6 months of 2021. Adjusted EPRA earnings, which exclude the impact of nonrecurring costs, increased 1% to EUR 19.2 million. EPRA earnings per share at the adjusted level remained stable at EUR 0.036 per share. The company has a strong record of delivering consistent dividends to shareholders. An interim dividend per share of EUR 2.03 has been proposed. This compares with EUR 2.09 for the 2021 interim dividend and reflects the nonrecurring costs incurred from internalization. On Slide 8, we see we had nonrecurring costs of EUR 5.7 million, which relate to internalization, IT and transitional services agreement fees paid to Capreit. The acquisition of the external manager and internalization was a complex, difficult project undertaken in a short time period. The transition of business processes and migration of data onto new IT systems was a difficult undertaking. The project is now finished. We have acquired a unique operating platform for the equivalent of 1 year's fees to the external manager. Moving to Slide 9. As of 30 of June, the value of our assets was EUR 1.55 billion and a gross yield of 5.6% and stable relative to the 31 December 2021 valuation. The portfolio value increased by EUR 59 million during the 6 months due to new investment, capital expenditure and some valuation uplift. There was a EUR 9 million uplift in the fair value of the total asset base with a significant element of this driven by our new schoolyard assets transferring from a development property to an investment property and some marginal valuation changes. Looking at equivalent yields, the weighted average was 4.53% and as individual asset level ranges from 3.9% to 5.41%. Our average rents crossed our portfolio are estimated at 10% below market rents. Turning to Slide 10. Managing and maintaining a strong balance sheet with adequate liquidity is one of our key financial priorities for the business. Our net asset value grew to EUR 889 million, representing a stable portfolio valuation. EPRA net tangible asset per share increased by 0.8% to EUR 1.678 driven by fair value gains on investment properties as well as profits from operations. Turning to our capital structure. We take a proactive approach to managing our debt to ensure the group has laddering of debt maturities and also that the group's leverage ratio and interest cover ratio are maintained at a sustainable level. The company has total credit facilities of EUR 800 million with a weighted average debt maturity of 4.7 years and no debt maturities before April 2026. The weighted average cost of debt during the period ended 30 of June was 2.25%. The overall facilities of EUR 800 million can be split into 2 tranches. The company has a revolving credit facility of EUR 600 million with a consortium of 5 Irish and international banks. During the period, the term of this facility has been extended out to 2026 on the same terms. The EUR 200 million in outstanding private placement notes have a weighted average interest rate of 1.92%, inclusive of swap costs, giving a fully hedged position. The first repayment becomes due in March 2027 with laddering to 2032. Gearing increased marginally during the period with an LTV of 42.6% at 30 of June compared with 40.7% at 31 of December 2021. The increase can be attributable to our acquisition of Ashbrook. Our pro forma LTV will be 41.8%, following the completion of our schoolyard development in July, purchase of Tara View in August and the contracted disposal of Hampton Wood, which we have also announced today. Now turning to Margaret, who will speak further on our investment strategy and sustainability progress.

Thank you, Brian. So the strong performance we delivered in H1 reflects the quality of our portfolio with modern homes with an average age of 13.1 years. Our assets are in very attractive locations with extensive amenity offerings in the local areas and all are close to excellent transport links. We are primarily focused on the mid-tier market segment with average rents of EUR 1,688 per month, which are 16% below the recent RTB quarterly index and approximately 10% reverse rent. The majority of the portfolio is made of 2 bed residences and 91% of our units have monthly rents below EUR 2,000 per month. This also includes professional management and service 24/7. IRES' portfolio is second to none in the Irish markets with 94% of our properties posting building energy rating certifications of A to C, which is value-added for residents and the company and the current environment of increasing energy costs. We are making good progress in reducing consumption across our portfolio. Last year, the like-for-like total electricity consumption decreased by 11% to circa 164 kilowatt hours, while our Scope 2 totally indirect greenhouse gas emissions decreased by 8.6% to 84 metric tons CO2 despite continued growth and additions into our asset base. Just moving to Slide 13. We have successfully continued to execute on our strategy with disciplined capital allocation and generating accretive returns. During 2022, we contracted under delivering circa 6% portfolio growth. We took delivery of 180 units in Ashbrook earlier this year with a further 44 due for delivery next year under a fixed price contract. This acquisition delivers a gross yield of 5.4%. As I mentioned earlier, we were delighted to take delivery of our new development of 61 apartments, now called School Yard in July 2022 and was successful lease-up by the 1 of August, giving gross yield on cost of 6.9%. We anticipate closing our forward-commit acquisition of 69 units at Tara View on the Merrion Road very soon. This is a fixed price with no variation and with lease-up expected to generate growth yield of 5.6%. As part of our continuing strategy delivery, we also announced the recent disposal of 128 apartments at Hampton Wood, which was also accretive to valuation. We have demonstrated a track record of effective strategy execution and balance sheet management with accretive returns for shareholders. All of our strategic investments over the last period brings our portfolio of assets across 39 properties to close to 4,000 homes. On Slide 14 and the next 3 slides, give further information on these 3 excellent additions to our portfolio of homes to [indiscernible]. These are high-quality assets acquired or developed accretively and adding much needed new supply to the Irish rental market. In total, our investment in these 3 assets was EUR 135 million. And through effective asset management, as Brian has outlined, our LTV pro forma increased by circa 1.1% over December '21 as a result. Slide 14 gives you some further details on Ashbrook. And on Slide 15, we set out details on School Yard. This asset I should mention also has strong sustainability credentials designed to LEED Gold Standard. This is now fully leased up. On Slide 16, you'll see some nice photographs of the Merrion Road development, we now call Tara View and that's expected to close very shortly and be made available for leasing. And we expect strong demand for this extremely high-quality asset in a fantastic location. This was a fixed price contract and it will be delivered with a variation with expected yield of 5.6%. So turning to Slide 17. We continue to invest in our people and the communities in which we operate. The IRES team have really embraced sustainability and ESG across the business, which I'm very proud to see. We are delighted to disclose our recent Diversity and Inclusion Silver award. We were also recognized in a review of Stock 600 listed companies across Europe to reach the highest standards and 1 of only 2 Irish companies awarded best practice leader in the European Women on Boards index, which we are particularly proud of. We actively engage with the residents to improve our service standards, and we've provided essential support to all our residents during the COVID lockdown. We are particularly proud of our social engagement with local communities in which we operate and through our ongoing contribution of volunteering donation sponsorships, online and in-person events we hope to make some contribution and add some value to the areas in which we operate. Just to mention a few, we actually partnered with Tallaght University Hospital, we provided this converted commercial space and to a day surgery facility, which is fully up and operating. And this supports the main hospital in Tallaght and we're also now currently discussing opportunities for them to develop a women's health facility, very close to their campus. We are proud supporters of Dragons at the Docks fundraising program for homeless and other charities and we're all training very hard for the 1 of September event. This social impact engagement is very important to all of us in IRES employees and management. So turning to Slide 18. I want to also assure you that climate and ESG considerations continue to take priority across our business, underpinning how we operate and our investment decision-making. We are committed to playing our part in supporting the transition to a low-carbon economy while continuing to positively influence communities we operate in, deliver sustainable living solutions and create long-term value for all of our stakeholders. We report under several ESG ratings to provide an overview of progress and activities and to allow comparison with our peers and other companies. We continue to review rating agencies and assess the need to engage with them. And as such, we have added a number of rating agencies, for example, CDP, and we will make our inaugural submission this year to CDP. We have made significant progress across several key rating criteria, receiving sBPR Gold Award and most improved award from EPRA in 2021, and we expect to maintain this award in 2022, and we have also submitted our second submission to [indiscernible] in July. Management and the Board of IRES are committed to net zero and in 2022, we were working on setting our science-based targets. We have conducted our baseline assessment, which will inform the target setting process. We are using CRREM, the Carbon Risk Real Estate Monitor to assess science-based energy and emissions reduction pathways in order to align with Paris agreement ambitions to limit global warming to 1.5 degrees. Market fundamentals are on Slide 19. And just to cover some of the key highlights for the market in which we operate. The macro fundamentals underpinning the business remain very strong and continue to be supportive of long-term sustainable income and growth. Earnings GDP for '21 was the highest in the Eurozone at 13.5%. And after several adjustments by many economists, as we're seeing of the number of loans, earnings GDP now is forecast to grow by 5% this year, well ahead of Germany, which is up 1% and France around 2%. Rental stock is near record lows nationally and in Dublin in terms of availability. DAT estimated that there were circa 700 homes listed to REIT nationwide in August 2022. In addition, smaller number continue to exit the rental markets with quality and professionally managed rental accommodation increasingly in demand. Ireland continues to boast a low unemployment rate. And currently, we're below the 2019 pre-COVID level and 1.7% below the average euro zone unemployment rate. Ireland's population is forecast to grow by almost 1 million people by 2040. That's roughly 20% growth on the current population of 5 million people, according to the latest census. This growth is driven by a high birth rate and inward migration supported by strong foreign direct investment in float by multinational corporations across several sectors, including IT, pharmaceuticals and finance. We also have one of the youngest populations in the EU with about 1/3 of the population under the age of 25 based on recent sales of 2022 figures. Growth is actually exceeding estimates that were made in the past in relation to population book. So all of this is actually translating to, you'll see on Slide 21, how the demand remaining very strong and against the structural undersupply of housing, which is forecast to continue for some years. This is of real concern to everyone in the housing sector in Ireland across government and the real estate sector itself. New housing completions in [indiscernible] reached 20,400 homes in '21 just below the 2020 level. So it's a strong start to completions in quarter 1 of 2022. And the expectation now is to deliver approximately 23,000 homes in 2023 and 27,000 homes in 2024. This is significantly behind the current demand levels and estimated supply needed every year for the growing population. The IDA announced that 18,000 new jobs are expected to be created in H1 of 2022 alone. Investment in IDA-supported companies have grown by 9% in the period and there are now close to 1,700 multinational operations supported by IDA in Ireland. The strong growth in H1 '22 exceeds '21 figures, which was itself a record year for foreign direct investment into the country with over 29,000 new jobs announced in '21. Our asset portfolio is ideally located near many of these centers of investment in commerce and with very good public transport connectivity. So to summarize, against a significant transition and change for the company to an internally managed REIT this year and an increasingly challenging macroeconomic backdrop as we come out of COVID, the company has continued to deliver a strong performance across all parts of the business for the first half of 2022. We are acutely aware that the year ahead will be impacted by heightened macroeconomic and geopolitical uncertainty. However, the company is well-positioned and have the right strategy and business model to meet the challenges of rising inflation, increased our cost of living and interest rate increases as well as energy challenges that will arise. As I've outlined, the fundamentals in the Irish market remains strong. The company has a strong track record of proven execution on strategy with the internalization of management and the new technology, we are well-positioned to drive operational efficiencies and achieve scale from this integrated and unique operating platform in the market. Our modern ad portfolio of 4,000 units across apartments and townhouses and 2 main cities, Dublin and Cork has strong operating metrics with a 99.3% occupancy. The business is highly cash-generative and has high sustainability credentials. Our balance sheet is robust with cost of funding at circa 2.25%, and with no maturities for the next 4 years before April 2026. These loan data, including approximately as Brian said, 30% fixed rate debt facilities provide us with a hedge against interest rate increases. And Irish -- as an Irish company listed on Euronext Dublin will continue to play a key role in delivering housing solutions to the Irish market on a sustainable basis for the long term. I'd like to thank you all for joining us this morning and your time, and I now will hand back to the call operator for questions and answers. Thank you.

[Operator Instructions] And our first question comes from Colin Grant of Davy.

I have a couple of questions, if I could. Just firstly, I noticed the interim dividend was cut from, I think, EUR 0.29 last year to EUR 0.23 in H1. And I'm just wondering if you could just give an update just to make sure there's no change in dividend policy and so on. Just maybe give an update on the outlook on dividend policy going forward? That's the first one. And then secondly, just in terms of your debt, the mix between fixed and floating, could you just give us an update, please, on what plans you have around how the fixed versus floating is going to evolve going forward? And any plans for change you might have in that direction.

Colin, so I'll take the dividend policy, and I'll just hand over to Brian on the debt question. So our interim dividend of EUR 2.03 per share, as you know as a REIT in Ireland, we have to pay out a minimum of 85%. Our policy is approximately to pay out 90%. So our policy is actually consistent. What's impacted in the first half year, we had a significant transition in the company from an externally managed REIT to an internally managed REIT. In addition to that, we also implemented very significant new technology, market-leading technology across the business. So we now have a very unique operating platform. And this actually costs money, as Brian has outlined. And we've achieved all of that transition, which now fully delivers. And that actually has impacted the dividend, and we decided to be prudent and told to a consistent probity of 90%, and that has impacted the interim dividend as a result.

And Colin, just in relation to your debt question, okay, currently, approximately 1/3 of our debt is fixed, fully fixed and fully hedged position of 1.92%, okay? Our RCF has been a floating facility, okay, by reference to Euribor, there was a floor on it, okay. So when rates were negative, we didn't get the benefit of that, right, okay. But obviously, rates have to go above 0 before it starts impacting. So what we've seen has been Euribor has -- I mean, obviously, the ECB announced increases in rates in July. We've seen Euribor go up slightly above ratio to 0.38% ratio, okay. So that has a certain impact I would say.

Yes. And is there any change, Brian, just on that, do you have any plans to, for example, take out more fixed debt and change the mix or plans just to leave out...