REG-Irish Residential Properties REIT plc Conclusion of Strategic Review
08/08/2024 07:15
============
Irish Residential Properties REIT plc (IRES)
Conclusion of Strategic Review
08-Aug-2024 / 07:00 GMT/BST
══════════════════════════════════════════════════════════════════════════
For immediate release
08 August 2024
Irish Residential Properties REIT plc
(“I-RES” or the “Company”)
Conclusion of Strategic Review
I-RES today announces that the Board of Directors (“the Board”) has
unanimously decided to conclude the Strategic Review (“The Strategic
Review” or the “Review”) and is updating shareholders with the outcomes
and the Board’s strategy to maximise value.
Background
On 8 January 2024 the Company announced it would be conducting a rigorous
and comprehensive Strategic Review to consider and appraise all strategic
alternatives available to maximise and unlock value for shareholders in
the Company. The Review commenced following the release of the Company’s
full year 2023 financial results on 23 February 2024, and the Board
provided an update to shareholders on the progress of the Review on 25
April 2024.
The Review considered a range of options including a sale or liquidation
of the entire issued share capital or assets of the Company, operational
and asset management initiatives and the regulatory environment including
the REIT status of the Company. The Review was overseen by a Board
sub-Committee, led by Chair Hugh Scott-Barrett with newly appointed CEO
Eddie Byrne and non-executive directors Denise Turner, Philip Burns and
Richard Nesbitt who joined the Board on May 10, 2024. The Board
sub-Committee was supported in conducting the Strategic Review by
independent international financial and real estate advisors.
Key conclusions
Sale or liquidation of the entire issued share capital or assets highly
unlikely to deliver value
The Strategic Review conducted an extensive analysis on whether returning
capital to shareholders through a sale of the Company or a sale of its
assets would maximise value. This evaluation included rigorous market
testing with suitable counterparties familiar with the Irish PRS market
and possessing the requisite capital to execute such transactions. Despite
the public announcement of the Strategic Review and the active market
testing, the Board confirms that no proposals were received to acquire the
Company or a significant proportion of its assets. The Board believes the
outcome of this market testing process is reflective of the current market
environment such as the higher interest rate environment (and the
resultant impact on financing potential leveraged takeovers), the current
regulatory environment (specifically rent caps) and uncertainty created by
an upcoming Irish general election.
As outlined in the Strategic Review update released by the Company on 25
April, comprehensive analysis has also indicated that a strategy requiring
an accelerated sale of the Company’s assets in the direct market,
including to occupiers and social providers such as the government, would
be challenging to maximise value for shareholders in the short-term. This
view remains unchanged. Analysis has also observed that residential
investment volumes are not currently supportive of a material asset
disposal. Volumes in the Irish residential sector remain at historically
low levels, with c. €240 million of transactions completed in 2023, c. 73%
below the historical 10-year average1.
The Board has unanimously concluded that, in the current macroeconomic and
regulatory environment, a sale of the Company or a liquidation of its
assets is highly unlikely to deliver an outcome that maximises value for
shareholders at present. The Board remains open minded to the possibility
of a sale of the Company or its assets in the future and will carefully
assess any potential proposals that are received.
I-RES can be a market consolidator in an Irish PRS market characterised by
exceptional demand and low supply
Based on data from Savills, the total PRS market in the greater Dublin
area currently stands at c. 125,000 units, with c. 100,000 of those units
held by micro landlords where 90% own 3 units or less1. These micro
landlords, many of whom purchased rental properties during the Celtic
Tiger era, are now exiting the market at an increasing rate due to factors
including the loss of incentives and more restrictive tax treatment on
rental income. As a result, one in three houses being sold in Dublin is an
individual property investor leaving the market. Estimates suggest that
the 100,000 units held by individuals is now shrinking by 8 to 10% per
annum, creating demand for a minimum 8,000 additional PRS units per year
in an already undersupplied market.
The remaining c. 25,000-units held by institutional capital remains
relatively static, with supply constrained by current rental regulation
including the 2% cap on annual rental increases, and by prevailing
short-term debt and equity market headwinds. State bodies have been the
primary purchaser of developments over the past 24 months, with these
developments allocated to social and affordable housing and therefore not
increasing the supply of PRS units available to rent.
The 25,000-unit institutional Irish PRS market can be segmented into three
categories of capital investment:
1. I-RES (largest individual market share) and a very limited number of
other market participants possessing a permanent capital base.
2. Private equity and closed end fund participants represent the largest
segment of the market (c. 50%+), spread across multiple institutions. A
significant proportion of this segment is expected to come to market over
the next 12 to 24 months as closed end funds begin to reach maturity and
institutions seek to either refinance in a more challenging interest rate
environment or return capital to investors.
3. The remainder of the PRS market comprises pension and insurance funds,
who have long-term investment horizons but are generally focused on
individual assets or a portfolio of assets rather than business operations
which are typically outsourced.
The demand fundamentals that underpin the Irish PRS market remain some of
the strongest globally. The greater Dublin area population, estimated at
c. 2.1 million in 2022, is forecasted to grow by c. +18% out to 20351.
Population growth alone will therefore increase demand for PRS by c.
20,000 units or 2,000 units per annum over this period. Other factors
contributing to elevated levels of demand include the low level of the
Irish population currently living in apartments (11% versus the EU average
of 48%) and net inward migration driven by an economy which continues to
outperform EU averages.
Recent publications from the Irish government have indicated that it is
set to publish revised completion targets for the Housing for All
programme under the National Planning Framework in Autumn 2024. The new
target is currently estimated by the government to be approximately 50,000
units per year, up from the prevailing 30,000 target. If PRS maintains its
current share of c. 8% of the housing market, the increased targets will
translate to a demand for c. 4,000 additional units per annum but, due to
factors such as those outlined above, the Board believes that the actual
level of demand is between 10,000 and 14,000 new units per annum.
Considering this new product demand and the fact that a very significant
share (c. 50%) of the existing stock may trade over the next 24 to 36
months, the Board believes that there is a significant market opportunity.
Following the conclusion of the Strategic Review, the Company will
continue to actively engage in constructive discussions with other
relevant participants in the Irish PRS sector around these potential
opportunities through consolidation and other capital-light joint ventures
which are accretive to earnings. I-RES holds a market-leading position,
supported by a permanent capital base and a leading operating platform and
retains significant agility to scale effectively and capitalise on the
attractive long-term opportunities created from the demand-supply
backdrop. The Board believes that I-RES is therefore well placed to act as
a consolidator in the Irish PRS market post the Strategic Review, with
significant organic and inorganic opportunities expected to arise in the
short to medium term.
The Review has identified Operational and Asset Management levers to
create value
The Strategic Review has considered the key levers for generating further
operational efficiencies within the I-RES platform to maximise returns.
The Review has identified three primary initiatives to achieve this
objective: (i) conducting selective capital recycling which is accretive
to value; (ii) generating supplementary revenue consistent with existing
Irish regulations; and (iii) managing costs, both in relation to Net
Rental Income Margin (“NRI”) and General & Administrative costs (“G&A”),
to ensure the Company is best placed to leverage future growth
opportunities.
As outlined in the Strategic Review update on 25 April, analysis has
explored achieving value accretion through selective asset recycling,
including individual unit sales. Commencing in the latter part of H1 2024,
the Company has completed the disposal of a small number of individual
units, all to the private market, and generated sales proceeds at a
significant premium to latest book value. These transactions, while small
in scale to date, reflect the disparity between liquidity in the
institutional real estate market and the retail market, the latter of
which remains buoyant.
The Review has identified approximately 315 suitable units (c. 8% of the
portfolio and c. 23% of the Company’s market capitalisation2) for disposal
which would generate between €110 and €115 million of proceeds over a 3 to
5 year timeframe, based on estimated current Open Market Value (“OMV)3.
Disposals are expected to take place over a 3 to 5 year period as turnover
of current tenancies is a prerequisite for the disposal of these units
under Irish law. Factors contributing to suitability for disposal include
assets located in properties that are not wholly controlled by I-RES and
assets with upcoming capital expenditure requirements. The Company
intends to deploy proceeds from the asset disposal programme in line with
our capital allocation priorities, initially reducing higher cost debt and
actively managing LTV, whilst retaining flexibility for initiatives that
are accretive to our earnings profile over time. This ongoing strategy is
expected to be value enhancing, optimise overall portfolio quality, and
generate capital which can be reallocated in line with our capital
allocation strategy.
In addition to 3,728 residential units, the I-RES portfolio includes
4,500+ dedicated car parking spaces. The Review has identified
implementing an extensive car parking policy across the Company’s
portfolio to drive supplementary revenue from underutilised parking
facilities by leveraging demand from the I-RES commercial footprint, which
includes 50 units covering c. 270,000 square feet of floor space. The
Review has also identified several other incremental revenue generating
initiatives, realising the Company’s significant real estate footprint,
which will continue to be actively explored post the conclusion of the
Strategic Review.
The Review also conducted a thorough examination of the Company’s cost
base and the Company intends to develop a detailed business plan to
further refine both direct property and G&A costs. The Review notes the
challenges presented for cost and margin management by the current rental
regulation, where rental income growth is capped at 2% but costs remain
uncapped, and no allowances are made for investment expenditure in
properties. However, the Board is confident that it can leverage its
existing cost base to own and operate a greater number of properties than
is currently the case.
Review of the Company’s REIT status and the regulatory rental environment
The REIT structure offers I-RES shareholders access to the highly
attractive long-term dynamics of the Irish PRS market through a low risk,
moderate returns investment vehicle, and offers significant advantages
over non-REIT structures such as increased liquidity and tax efficiency.
The Strategic Review has confirmed that certain elements of the Irish REIT
regime remain somewhat restrictive when compared to more progressive REIT
frameworks in other European countries. Most notably, the Irish REIT
structure does not allow constituents to transition from the designation
of Alternative Investment Funds (“AIFs”), while in the UK, Germany,
France, the Netherlands, and several other jurisdictions, designated AIF
status is optional and self-determined by the REIT. The requirement for an
AIF status adds an additional regulatory, resourcing, and financial burden
to I-RES, and also makes it more difficult to market shares to small
private investors which significantly reduces the scope of available
capital for real estate investment.
During the Strategic Review the Company has had further direct engagement
with the relevant policy makers to outline this inconsistency between the
Irish and other comparable European REIT regimes. Such changes could offer
significant flexibility to the Company both operationally and
strategically. The Irish government’s review of the Funds sector is
expected to be published in the coming months at which point the Board
will carefully assess any potential impact from the review.
The Board continues to believe, and findings from the Review have
supported the view, that the current regulatory structure in the Irish
rental market, in particular the acute restrictions currently in place on
annual rent increases, is negatively impacting the market and curtailing
the delivery of new developments required to address the increasing
supply-demand imbalance. The Company welcomed the findings from the
Department of Housing review of the PRS sector in July, which highlighted
several limitations and unintended consequences of the current regulatory
structure and recommended a dedicated review of Rent Pressure Zones to be
carried out by the Housing Agency to see what rent control measures, if
any, should continue beyond the expiration of the current measures. The
Company will continue our engagement with industry stakeholders and
government to support the development of a fair regulatory regime that
balances both the interests of tenants, who can access accommodation at
sustainable rent levels, and the interests of property owners and
developers in order to attract the necessary significant capital
investment required to address the supply deficit.
Summary
In conclusion, the Strategic Review has identified the following
initiatives or actions, which the Board believes will drive value
maximisation for shareholders over the medium-term:
• Initiating a programme to drive value accretion and improve portfolio
composition by recycling c. 315 units and releasing between €110 and
€115 million of value over a 3 to 5 year period (based estimated
current OMV3). The programme represents c. 8% of the current portfolio
and c. 23% of the Company’s market capitalisation1. Disposal proceeds
are expected to be deployed in line with our capital allocation
priorities, initially strengthening our balance sheet by reducing
higher cost debt, whilst retaining flexibility for initiatives that
are accretive to our earnings profile over time.
• Generation of supplementary revenue streams consistent with existing
Irish regulations.
• Optimising the Company’s cost structure to maximise Net Rental Income
Margin and adjusted EBITDA Margin to ensure the Company is best placed
to leverage future growth opportunities.
• Exploring the very significant growth and consolidation opportunities
which currently exist in the Irish PRS market over the medium-term.
The Board believes that’s I-RES is uniquely positioned to take
advantage of these and is actively exploring them alongside other
commercial ventures.
• Continuing to work constructively with stakeholders, including
government, to push for positive change in the Irish residential
regulation system, most particularly the current acute restrictions on
annual rent increases which, the Board believes, have had a severe
negative impact on the supply of new product into the Irish rental
market.
• Continuing to advocate with the relevant Irish authorities for changes
to the Irish REIT regime to better align with progressive REIT systems
in other European jurisdictions.
• Seeking attractive opportunities to partner, inter alia, with Irish
government bodies to deliver new supply to the affordable housing
market; the most relevant scheme for the Company is the Secure Tenancy
Affordable Rental programme (“STAR”) and the Company is in dialogue
with government agencies to support the development of a workable
scheme
The Board will continue to actively review all strategic options available
to the Company as part of its normal course duties, maintaining its open
and constructive approach to potential value creation avenues.
Irish Takeover Rules
As noted above, the Board has unanimously decided to conclude the
Strategic Review. The Company also confirms it is not currently in receipt
of any approach nor in any discussion with any offeror or in talks with
any potential counterparty generally in connection with a transaction. The
Company is therefore no longer deemed to be in an “offer period” for the
purposes of the Irish Takeover Rules. Shareholders are advised that the
obligation to file Rule 8 disclosures pertaining to dealings in the
Company’s shares has now ceased.
2024 Interim Results
The Company has today separately published its interim results for the
six-month period to 30 June 2024 and will host a live audio webcast and
conference call of the results presentation this morning at 09:00am BST.
Access details are listed in Interim Results statement released this
morning.
1: Savills Research
2: based on closing share price on 7 August 2024
3: Open Market Value at 30 June 2024 based on expected proceeds from
individual sales
END
For further information please contact:
For Investor Relations:
Luke Ferriter, Investor Relations 1 investors@iresreit.ie Tel: +353 (0)
1 563 4000
Eddie Byrne, Chief Executive Officer Tel: +353 (0) 1 557 0974
For Media Queries:
Padraig McKeon, I-RES PR and Communications Tel: + 353 (0) 87 231 2632
Jonathan Neilan, FTI Consulting 2 ires@fticonsulting.com Tel: +353 (0)
86 231 4135
About Irish Residential Properties REIT plc
Irish Residential Properties REIT plc (“I-RES”) is a growth oriented Real
Estate Investment Trust providing quality professionally managed homes in
sustainable communities in Ireland. The Group owns 3,728 apartments and
houses for private rental in Dublin and Cork. I-RES aims to be the
provider of choice for the Irish living sector, known for excellent
service and for operating responsibly, minimising its environmental
impact, and maximising its contribution to the community. The Company's
shares are listed on Euronext Dublin. Further information at
3 www.iresreit.ie.
Important notices
This announcement is not intended to, and does not, constitute or form
part of any offer, invitation or solicitation of any offer to purchase,
otherwise acquire, subscribe for, sell or otherwise dispose of, any
securities or the solicitation of any vote or approval in any
jurisdiction, whether pursuant to this announcement or otherwise.
The release, distribution or publication of this announcement in
jurisdictions outside Ireland may be restricted by laws of the relevant
jurisdictions and therefore persons into whose possession this
announcement comes should inform themselves about, and observe, any such
restrictions. Any failure to comply with the restrictions may constitute a
violation of the securities law of any such jurisdiction.
Responsibility Statement
The directors of I-RES accept responsibility for the information contained
in this announcement. To the best of the knowledge and belief of the
directors (who have taken all reasonable care to ensure that such is the
case), the information contained in this announcement is in accordance
with the facts and does not omit anything likely to affect the import of
such information.
══════════════════════════════════════════════════════════════════════════
Dissemination of a Regulatory Announcement, transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
══════════════════════════════════════════════════════════════════════════
ISIN: IE00BJ34P519
Category Code: MSCH
TIDM: IRES
LEI Code: 635400EOPACLULRENY18
OAM Categories: 3.1. Additional regulated information required to be
disclosed under the laws of a Member State
Sequence No.: 339224
EQS News ID: 1963463
End of Announcement EQS News Service
══════════════════════════════════════════════════════════════════════════
4 fncls.ssp?fn=show_t_gif&application_id=1963463&application_name=news&site_id=reuters~~~787b94c3-8286-43cc-98b3-26b1dc52d810
References
Visible links
1. mailto:investors@iresreit.ie
2. mailto:ires@fticonsulting.com
3. https://eqs-cockpit.com/cgi-bin/fncls.ssp?fn=redirect&url=69193c58673bda82b8867e09925c0315&application_id=1963463&site_id=reuters~~~787b94c3-8286-43cc-98b3-26b1dc52d810&application_name=news
============Recent news on Irish Residential Properties REIT
See all newsREG-Irish Residential Properties REIT plc Total Voting Rights
AnnouncementREG-Irish Residential Properties REIT plc Transactions in Own Shares
AnnouncementREG-Irish Residential Properties REIT plc Transaction in Own Shares
AnnouncementREG-Irish Residential Properties REIT plc Transaction in Own Shares
AnnouncementREG-Irish Residential Properties REIT plc Holding(s) in Company
Announcement