Green REIT (GRN) posts very good H1 results

26 Feb 2019

Green REIT (GRN) has released interim results for the six months ending 31 December today.  At a headline level, EPRA NAV per share climbed 2.2% during the period to €1.83 (end-June 2018: €1.789). This is a little ahead of where we understand consensus to have been (Bloomberg-compiled consensus for end-June 2019 was at €1.845 before these results).

Total return for the year to 31 December was a strong 12.6%. EPRA EPS was 3.1c, in-line with 3.2c a year earlier notwithstanding the impact of disposals (Westend Retail Park), while the dividend has been upped to 2.8c from 2.6c in the prior year period.  The end-December WAULT stood at 8.7 years, little changed from 8.8 years at end-June, providing strong income visibility. Contracted rents have increased to €74.4m, up from €71.7m at end-June (and slightly up from the €74.3m guided in September’s results release). Since the start of H219 GRN has agreed a €1.1m pre-letting with Bunzl for its purpose-built 115,000 sq ft facility at Horizon Logistics Park. We note that there is 3% reversionary potential across the standing portfolio (versus 5% at end-June), while the EPRA vacancy rate has declined to 3.5% from 4.4% at end-June.
 
GRN has a very strong balance sheet, with LTV of 17.5% at end-December (15.5% at end-June), while €101m of undrawn facilities at the period end afford enhanced flexibility over the delivery of the group’s attractive development pipeline. The uptick in the LTV was driven by a €30m capex outlay (€19.9m in office and the balance in logistics). On developments, Building I (101,000 sq ft) at Central Park is still slated for Q119 completion. The top two floors of that have already been reserved, “with positive letting traction” over the other five floors. On the logistics side, GRN completed a unit at Horizon Logistics Park for a luxury goods retailer during the period, which adds €1.45m to annual contracted rents, while two further units are due to complete in Q219 totalling 58,000 sq ft. In the long-term, GRN’s development pipeline, when completed, has the scope to add €37m or c. 50% to the rent-roll. We note comments in today’s press (see separate comment on this) about the repurposing of in-place industrial stock in Dublin for housing, which is likely to drive more occupiers to the capital’s suburbs (including Horizon) and regional markets. GRN has added a further 9 acres to its c. 300 acre landbank at Horizon in recent months.
 
Dalata – FY18 EBITDA ahead of expectations
 
Dalata this morning reported FY18 adj. EBITDA of €119.6m, 4% ahead of our estimate (€115.0m) and consensus, but the re-classification of pre-opening expenses to an adjusting item helped to the tune of €2.5m. Excluding this, EBITDA of c.€117.1m was still c.2% ahead.
 
Revenue was +11.8% y/y to €393.7m with Group REVPAR +4.7%. On a LFL basis, Dublin RevPAR was +8.8%, Regional Ireland was +5.2% and the UK was +3.1%. Segments EBITDAR margin increased 40bps y/y to 42.8%, ahead of our estimate of 42.4%, but the re-classification helped here. A final dividend of 7c has been declared, 1c higher than we anticipated, bringing the FY dividend to 10c (1.7% yield). Trading across its three regions in Q119 is described as being in line with expectations while the group is “very confident” of announcing 1,200 additional rooms in 2019. It has acquired a small building adjacent to the Clayton Hotel Cardiff Lane, Dublin which will allow it to add 70 rooms.
 
The trading environment remains favourable for Dalata. The Irish market continues to benefit from a buoyant domestic economy and record levels of international visitors, even if the belated arrival of new room supply in Dublin is likely to constrain RevPAR growth this year. Although economic uncertainty weighs on the UK market, the latest STR data for the market is encouraging.
 
YEW/GRN/HBRN: Dublin industrial estates to be rezoned for housing
 
Today’s Irish Times reports that “up to two-thirds of Dublin city’s industrial estates and business parks are set to be redeveloped for housing under new plans from Dublin City Council”.
 
The council believes that Dublin City will “run out” of residentially zoned development land in four years, necessitating the repurposing of industrial space as a source of new housing land. A review of 82 industrial zoned sites found that only 35% of them should be retained for their future job potential, with the remainder rezoned for housing.
 
Councillors will need to approve the rezoning, which is not necessarily a given due to Irish politicians’ default preference for pandering to the NIMBY elements in their constituencies, even at a time when there is a severe housing shortage in Dublin. Indeed, the fact that industrial land is being considered for rezoning is partly down to vertiginous public representatives preventing high-rise development across much of the city.
 
Nonetheless, any rezoning will be of interest to the three commercial REITs. Yew Grove has industrial exposures in suburban Dublin and regional Irish markets, GRN’s Horizon Logistics Park is in the northern suburbs of Dublin and HBRN’s Gateway site is in south-west Dublin. It is not hard to see businesses in centrally located industrial estates relocating to YEW and GRN’s heartlands, while in terms of reimagined sites, HBRN is likely to lead by example in transforming Gateway from its current logistics usage into a mixed-use scheme (see our comment below on this).
 
HBRN: Planning developments
 
Today’s Irish Times reports that Hibernia REIT (HBRN) was unsuccessful in its initial engagement with South Dublin County Council regarding the rezoning of its landbank at Newlands Cross (The Gateway site). The land is currently zoned for agricultural use and HBRN would like to replace it with a residential-led scheme. Separately, a letter sent to apartment owners at The Northumberlands building on Lower Mount Street (seen by Investec) suggests that HBRN is set to submit a planning application in the near future for a redevelopment of its Clanwilliam Court building.
 
A key hold-up with Gateway is that the council’s development plan runs to 2022, which means that the necessary rezoning and permissions wouldn’t be in place to facilitate residential construction until 2023 or 2024 at the earliest – this hardly seems reasonable given wider housing market issues in Dublin. While the council is presently disinclined to review the planning at this juncture, we would not be surprised if it elects to engage on the matter ahead of the scheduled revisiting of the development plan.
 
Elsewhere, according to a letter sent to apartment owners, HBRN intends to submit a planning application to Dublin City Council’s planning department in April 2019 seeking clearance to demolish the existing office space at Clanwilliam Court and replace it with a new larger (and taller) office scheme and associated infrastructure upgrades for the area. It is unclear from the letter if all of the three blocks (1, 2 and 5) under HBRN’s control will be the subject of these works. HBRN’s interests at Clanwilliam total 93,700 sq ft of space at the 1970s era office buildings, which have tenants in situ with leases running to January 2022. Any planning permission will be unlikely to be acted on in the immediate future (unless HBRN relocates tenants to some of its other nearby office space), so we would view this as HBRN getting its ducks in a row to be ready to act swiftly once the building is vacated.
 
The above serve as reminders of HBRN’s ‘tail’ of attractive development assets, which provide ample value creating opportunities for shareholders.
 
Irish Economy: Tight labour market conditions spark wage inflation break-out
 
The latest ‘Earnings and Labour Costs Quarterly’ release from the CSO shows that wage inflation in Ireland has accelerated to a post-crisis high of 4.1% y/y. The Q4 data also show that seasonally adjusted average weekly earnings climbed 1.2% q/q.
 
The 4.1% y/y rise in unadjusted earnings in Q4 was comprised of a 3.8% y/y increase in average hourly earnings and a 0.3% y/y rise in average weekly paid hours. The latter is not a surprise given the disproportionate increase in full-time employment in the economy (previously released CSO data show that the number of part-time, underemployed workers fell by 6.0% y/y in Q418).
 
All of the 13 different segments of the labour market posted annual growth in average weekly earnings in Q418, with particularly strong growth seen in Administrative & Support Services (+10.5% y/y); Transportation & Storage (+9.1% y/y); Construction (+8.0% y/y) and IT (+5.6% y/y). Private sector wage inflation is running at +4.4% y/y, while earnings in the public sector were +2.3% y/y in Q4.
 
The uptick in wage inflation is not a particular surprise given the extent of the tightening that has taken place in the Irish labour market. The unemployment rate peaked at 15.9% during the financial crisis but it has since declined by more than 1,000bps to a post-crisis low of 5.7%. Total employment is at a post-independence high of 2.3m.
 
The headline inflation rate has been sub-1% for 71 successive months, so wage growth of 4.1% y/y translates into a material advance in living standards in Ireland. However, were this rate of wage growth to persist it then would likely have ominous implications for competitiveness.
 
Pound boosted as delay/referendum hopes rise
  
News late yesterday provided support to the pound as the two big stories seemingly lowered the perceived threat of a no-deal Brexit whilst also raising the possibility of the Brexit decision being reversed in its entirety. Various news sources were reporting last night that UK Prime Minister Theresa May would look to take the initiative and pave the way for a Brexit extension herself, if her Brexit deal is not backed in a “meaningful vote” on/by 12 March. This shift in position, looks to try and stem a rebellion from pro-remain MPs within her government ranks whilst also seeking to arm-twist the Eurosceptic ERG grouping to back her deal in the 12 March vote, given that they would see a delay to Brexit as particularly unwelcome. Note that there is no detail at this stage on what length of delay the PM might seek, though an amendment led by Simon Hart, a Tory backbencher, proposing a delay of eight weeks looks to be a key focus. A short delay such as this would look to be less politically damaging to the PM, who has so far insisted a delay would be avoided altogether. 
 
The second piece of news was that the Labour party announced that it would back a new referendum on whether to leave the EU. Here Labour is expected to put forward an amendment today proposing a 5-point “alternative plan” for Brexit. It is then thought that if, as is likely, that plan is rejected by the House of Commons on Wednesday, the party will support a second referendum going forward. Note that the PM gives a statement in Parliament today, ahead of tomorrow’s vote on this progress update statement. Sterling is firmer against both the USD and the euro this morning.
 
Fed chief semi-annual testimony to Senate
 
The Fed have lead the way in policy normalisation over the last few years, but following a wobble in equity markets in December, and some weaker than expected data points since the start of the year, the Fed are now firmly in wait and see mode. The US have gone from the most likely (of the Fed, ECB and BoE) to hike rates in 2019 in early December, to now being viewed as the least likely according to market expectations. While the Fed’s own expectations (the dotplot) still suggests 2 rates hikes are a possibility, Mr Powell’s testimony to the Senate Banking committee could help guide markets as to whether this is likely to be reviewed lower or not when the Fed next meet on 20 March.
 
Central bank expectations in flux
 
As mentioned above, rate hike expectations in the US, UK & Europe have completely turned on their head in the past 6 months. Both the Fed and ECB’s are now no longer expected to hike rates in 2019, leaving the bank of England as the most likely to hike rates next, despite the looming uncertainty of Brexit. With uncertainty surrounding all major economies, central bank policies are in flux across the board. In the Eurozone, where economic data has been hit the hardest recently, expectations for a rate hike have drifted from H1 2019, to the second half of this year, and now not expected to hike rates until 2020, although recently calls for a rate hike have been building momentum. In the US, outlook has shifted between a hike, no change and a cut on an almost weekly basis since the start of the year. Meanwhile in the UK, where Inflation has been running above 2.5% for the past 2 years, and with record employment data, the decision to hike rates would be the most obvious if not for the uncertainty associated with Brexit.   
 
Central bank speakers are out in force today, which may help provide some clarity to the outlook. In addition to the Fed’s testimony to the Senate and House today and tomorrow, Bank of England policy makers (Carney, Ramsden, Vlieghe and Haskel) have the UK equivalent, appearing before a Treasury Committee hearing to discuss the recent inflation report. In Europe, we hear from ECB members Coeure, Visco, Hernandez de Cos, Mersch, and our own Philip Lane.
 
Economic releases
 
09.30   EU        ECB’s Lane speaking
10.00   UK        BoE’s Carney and Ramsden at Treasury Committee
14.30   EU        ECB’s Mersch speaking
15.00   US        Richmond Fed Manufacturing survey
15.00   US        Consumer confidence