HBRN: Solid trading update

13 Feb 2019

Hibernia REIT (HBRN) has released a trading update covering the period from 1 October (the start of its H2) today. A key highlight of today’s release is the continued uplift in the portfolio value. This rose by 2.5% to €1.4bn during Q3, bringing the end-December EPRA NAV per share to 170.1c (during H119 the EPRA NAV rose 4.5% to 166.3c). The group also made good progress on the asset management; acquisition; and balance sheet fronts.

On the development side, both 1SJRQ and 2WML are expected to reach practical completion this month. As announced in November, all of 1SRJQ has been fully let to HubSpot on attractive terms (20 year lease, with 12 years term certain, at an initial rent of €59.75psf after the expiry of a four month rent free period). There were also some planning wins in the period, with final grants of planning permission received for a redevelopment of Harcourt Square (where HBRN intends delivering 315,000 sq ft of office space) and (as confirmed today) a refurbishment and extension of Marine House to 49,000 sq ft (from 41,000 sq ft currently). HBRN’s in-place office portfolio has 1.0m sq ft of space of which c. 3% is currently vacant. This vacancy rate will rise in the near term due to the completion of 2WML and Depfa Bank’s scheduled departure from the 47,000 sq ft Forum building in March, but we would expect good interest in all of that space given the strong market conditions. On the plus side, nine office rent reviews are outstanding on €2.5m of annual rental income, with the ERV for that space at €4.6m.
 
Turning to the balance sheet, HBRN refinanced its debts during the period, moving its funding from secured to unsecured basis and extending the weighted average maturity from 1.9 years to 5.7 years. This provides enhanced flexibility and visibility to the group. At end-December HBRN had net debt of €205m (a LTV of just 14.5%) and cash and undrawn facilities of €115m.
 
As previously announced, the five year term of the investment management agreement (IMA) between HBRN and WK Nowlan expired at end-November. A valuation exercise was conducted by Cushman & Wakefield in order to help calculate any fees due under the IMA, which provides the updated EPRA NAV picture at end-CY18.
 
On acquisitions, HBRN acquired 92.5 acres of land at Newlands Cross, Dublin 24 (8km south-west of the city centre), which brings its landbank there to 143.7 acres, providing a strong base for development in the medium-to-longer term.
 
In the background, the Dublin office market remains supportive, with strong take-up and low vacancy rates which are combining to produce strong rents.
 
Irish REITs: Reflector building offered for sale at €155m
 
In what is likely to be one of the largest commercial real estate sales in 2019, Park Developments has put its Reflector office building on Dublin’s Hanover Quay up for sale, with agents Saville and CBRE placing a guide price of €155m on the six-storey over basement building in the Dublin docklands.
 
The Reflector produces an annual rent roll of approximately €7m (this includes an underwrite for some remaining vacant space in the process of being let) with a WAULT of 12 years and an indicated net yield of 4.2% (4.5% gross) on its c.11,250sq m of office space and 329sq m of restaurant space. Its current core tenants are technology companies Airbnb, LogMeIn and Wix, with the Reflector building situated beside Airbnb’s European headquarters and acting as an additional office space for the company. Savills has said it is in active discussions to let the remaining vacant office space of c.2,045sq m across two floors, and is quoting c.€60 per sq ft on this, while it believes the vacant restaurant space on the ground floor can generate c.€100,000 once let. The Reflector also incorporates 40 apartments, but these will be to be offered for sale separately.
 
The sale of the Reflector building looks well timed given the strong interest in Irish rental assets (both residential and commercial), as demonstrated recently by the reported (though not yet confirmed) c.€150m purchase of the Charlemont Exchange office scheme by South Korean fund Vestas Management. This development would come with a similar 4.5% indicated gross yield as the Reflector is guiding at, and would suggest upside valuation prospects for the likes of GRN and HBRN given higher book value yields on much of their portfolios.
 
Overheard in Brussels
 
ITV News has reportedly overheard the Prime Minister’s chief Brexit negotiator, Olly Robbins, gossiping with two colleagues in a Brussels hotel bar about Brexit, the Cabinet and MPs. His remarks cast doubt on the Prime Minister’s threat to MPs that failing to back her negotiated treaty with Brussels would result in a “no deal” Brexit on 29 March. Instead, Mr Robbins suggests that MPs will instead be presented with a different choice in the “week beginning end of March”; either vote for the Prime Minister’s revised deal or face a lengthy extension to Article 50. This follows reports that the EU would allow the UK to extend the Brexit process, but potentially for a minimum of a year to allow for a more fundamental shift in Westminster’s Brexit strategy. On this front, Mr Robbins is said to have remarked that “the issue is whether Brussels is clear on the terms of extension… in the end they will probably just give us an extension”.
 
Backstop protocol change
 
He was also reported to have outlined a strategy to satisfy parliament’s disdain for the Irish ‘backstop’, saying the European Commission would need to agree that the word “necessary” in the protocol is defined as “necessary subject to the future trade deal”. Currently the text of the protocol specifies that the backstop must “maintain the necessary conditions” for North-South cooperation under the Good Friday Agreement. Overall, providing Mr Robbin’s comments are indeed genuine, they will no doubt frustrate the government’s Brexit plan and put further pressure on the Prime Minister. It looks like tomorrow’s debates and amendment votes are still likely to go ahead but what those amendments may be, as of yet no one is exactly sure.
 
US-China trade discussions
 
Trade discussions between the US and China are set to step up a gear in the second half of this week, with US Treasury Secretary Mnuchin and US Trade Representative Lighthizer arriving in Beijing yesterday, a day earlier than expected. There remains quite some ground to cover for an agreement to be reached, but President Trump yesterday hinted at some progress noting that talks are going well and that there is a “very big team” in Beijing negotiating. The President also seemed to confirm what had been leaking out of the White House in recent days, in that the 1 March deadline could be moved if a deal was on the horizon.  Asian markets are higher this morning on trade hopes, with the Shanghai gaining 1.8% and the Nikkei is up 1.3%.  Away from trade there may also be some progress to avoid a renewed partial government shutdown at the end of this week. Currently on the table is a bi-partisan deal which provides $1.375bn for the border wall, less than President Trump had wanted, which he himself stated he was not happy about yesterday, but various reports are suggesting the President may begrudgingly accept the proposal to avoid a shutdown. 
 
Economic releases 
 
09.30 UK CPI
09.30 UK PPI
10.00 EZ Industrial Production
13.30 US CPI
15.50 US FOMC Member Bostic Speaks
19.00 US Federal Budget Balance