28 Jun 2019

HBRN: New report – An unwarranted discount

We have published a new report on Hibernia REIT (HBRN) today.  


HBRN’s closest peer, GRN, is +17% since it commenced a sales process in mid-April. While HBRN’s shares have climbed 8% since then, the double-digit NAV valuation gap between the two appears anomalous given their very similar characteristics (Dublin office exposure of 83% at GRN and 85% at HBRN).

In the background, HBRN is doing all the right things. Its recent FY results showcased another year of progress, with a total property return (capital plus income) of 11.6%, well ahead of the 7.5% return from the MSCI Ireland Property index over the same period.

The company’s dividend story is building. HBRN declared a 3.5c DPS in respect of FY19, +16.7%. Its contracted rent roll was €57.6m at end-March, but (all else being equal) this could grow by a quarter (to €72m) as vacant space is let out, reversion is captured and the under-development 2 Cumberland Place is tenanted. Beyond that, the rent roll could grow by another quarter (to €90m) when the longer-term office development assets at Harcourt Square, Clanwilliam and Marine are completed (absent disposals). If you really want to go blue sky, HBRN has a 148 acre landbank in South-West Dublin which could accommodate a new urban centre in the long-term.

Earlier this (calendar) year HBRN sold one of its office assets at a premium to book value, the latest in a series of such disposals. It is returning most of the proceeds through a share buyback. Please contact the dealing room if you haven’t received a copy of the report.


Cairn Homes: Site visits highlight FTB product

We spent yesterday visiting a number of Cairn’s developments in the Greater Dublin Area.

 Perhaps the key message of the day was that demand remains strong, particularly at the first-time buyer (FTB)/affordable end of the market, but establishing a price point that is mindful of the current mortgage lending restrictions is critical. As a reminder, the majority of new mortgage lending is restricted to 3.5x income, so offering a product in the region of €350k or below is key to capitalising on this demand. The other pillar of the lending restrictions, the LTV limit (90% for FTBs), is perhaps less of a binding constraint at present, but FTBs are sheltered by the help-to-buy initiative which provides up to 5% of the cost of a new-build home. Clarity on the extension (or otherwise) of this scheme would be helpful as we head towards the current end-2019 expiry.

 Cairn is able to offer this product at a number of sites within Dublin (and in the commuter belt) by virtue of, firstly, its low-cost land and, secondly, its access to a deep pool of sub-contractors that is attracted by the prospect of a long pipeline of work with a large, well-funded company. In a fragmented, sub-scale market, this is perhaps an underappreciated point. At Citywest, located in West Dublin (naturally), where Cairn commenced work only earlier this year and is now selling 3-bed homes for c.€350k, it sold 40 units on the opening sales weekend. The sales absorption rate for a similar product at Shackleton Park is currently c.4 per week. Despite the slowdown in headline price inflation, the strength of demand and good earnings growth in the economy (+3.4% y/y in Q1) is still feeding through to decent rates of inflation at such schemes (mid-single digits, by our estimates).

 Bank of Ireland: Announces the sale of UK credit cards business

Bank of Ireland (BIRG) has today announced that it has agreed to sell its UK credit cards portfolio at par value.

This disposal was first floated at BIRG’s Investor Day in June 2018 as the group looked to lift returns at its UK operations. The unit comprises Post Office, AA and Bank of Ireland branded consumer credit cards which had a combined portfolio value of £545m at end-2018. Last year it contributed £35m of income but incurred operating expenses of £36m.

The sale will deliver a c. 70bps improvement in UK business RoTE and, importantly, deliver a c. 10bps uplift to BIRG’s CET1 ratio, although there will be a modest effect (~3bps) on NIM. The sales proceeds of £530m will be used for general corporate purposes.


This disposal comes as no surprise given management comments and the fact that the portfolio was put on the end-2018 balance sheet under “assets classified as held for sale”. We also covered this disposal in our note of the 10th of April.

G20 Summit

The two-day G20 Summit formally gets underway today in Osaka. In key focus will be the meeting between US and Chinese leaders Donald Trump and Xi Jinping which is set to take place on Saturday at 11:30am local time (03:30am Irish time). Both leaders have stressed their intention to reach a bilateral agreement in the trade dispute, which may possibly lead to a temporary truce not to impose any further tariffs, though there is also the risk that relations deteriorate further.

It’s also worth noting that President Trump is due to have a side meeting with Russian Premier, Vladimir Putin, over the weekend which could also send some ripples through markets.


Special EU leader’s summit

Away from the G20 summit we have a special meeting of the European Council in Brussels on Sunday where talks on nominations for some of the top EU’s jobs are due to continue. From a markets perspective, all eyes will be on who emerges as frontrunner for the ECB job. After being almost completely removed from the chase earlier in the year, there has been some chatter recently that the current Bundesbank President, Jens Weidmann, is coming back into contention. If Weidmann (a self-proclaimed hawk) is seen to be getting closer to the ECB Presidency we could see some hawkish impact across euro based asset classes.

As a side note, the current ECB President, Mario Draghi is rumoured to be up for nomination to replace Jean Claude Juncker as EU Council President that is if he doesn’t take the US Fed Chair first.

Eurozone Inflation

While trade developments over the weekend will be the main focus as Trump and Xi meet at the G20, Central bankers and market participants alike will be paying close attention to the latest inflation reading from the Eurozone.

Persistent undershooting of inflation targets in the Eurozone lead forward looking inflation expectations to their lowest levels on record last week. This prompted ECB chief Mario Draghi to echo his famous “whatever it takes speech” from the height of the Eurozone crisis and reassure markets that the ECB were prepared for further rate cuts and asset purchases if inflation metrics failed to take off. Since then, analysts have been at odds over whether or when the ECB will take firm policy action, or if they will stick to aggressive guidance which carried a lot of water for the central bank during the Eurozone debt crisis.

The main metric that could force them to act of course is continued weakness in upcoming inflation data prints. To that end, June’s EU preliminary inflation data will be released this morning at 10am. Markets are expecting YOY inflation to remain at an anaemic 1.2% this month. While the core measure is expected to rise from 0.80% to 1%, both measures remain miles away from the ECB’s 2% target and are unlikely to ease the pressure on Draghi & co.

Economic Releases

10.00     EC          CPI (Jun)
13.30     US          PCE inflation (May)