23 May 2019

Hibernia REIT: NAV and earnings ahead

HBRN has released FY19 (year-end March) results. At a headline level, EPRA NAV, EPRA EPS and the DPS were €1.733, 4.0c and 3.5c respectively, which compare favourably to our €1.716, 3.7c and 3.5c forecasts. The results reflect a year of solid progress, with achievements on the development, asset management, deal flow and balance sheet fronts.  


To start with asset management, the annual contracted rent roll now stands at €57.6m (March 2018: €56.0m; September 2018: €60.9m) with the sequential decline down to disposals. We note that the group’s in-place CBD office portfolio has reversionary potential of €3.6m and average period to capture of 2.1 years. The WAULT at end-March was 7.5 years (March 2018: 7.3; September 2018: 7.7), giving significant income visibility. The headline vacancy rate rose to 12% at end-March from 3% in September, reflecting new build activity.


On developments, HBRN completed the 1SJRQ and 2WML office schemes during the year, adding 191,000 sq ft of mostly office space to its portfolio. HubSpot took all of the 112,000 sq ft of office space at 1SJRQ, while at 2WML “discussions continue with potential occupiers”. During FY19 the group commenced work on the 50,000 sq ft Cumberland Phase II office scheme, while the acquisitions of 129 Slaney Road and lands at Newlands Cross in particular during FY19 provide longer-term optionality.


Turning to the balance sheet, in FY19 HBRN completed a refinancing, achieving enhanced security (longer-term) and flexibility (unsecured). The group had gearing of only 15.6% and cash and undrawn facilities (net of committed capex) of €143m at end-March.
 In terms of deal flow, apart from the aforementioned acquisitions, HBRN has sold two assets, New Century House and 77SJRQ, at better-than-book value prices (the latter closed after the financial year end).


HBRN’s shares trade on a 22% discount to the end-March EPRA NAV. Dublin’s commercial property market is booming, with office take-up at an all-time high, the vacancy rate is flirting with its all-time low and prime rents as strong as they have ever been. HBRN also has an 11% exposure to the Dublin PRS sector which is also characterised by low vacancy rates and record high rents. 


Irish REITs: GRN (reportedly) sets a date

According to a report in The Irish Times, Green REIT (GRN) has set a deadline of 12 June for indicative bids for the company.


The report suggests that a number of property industry players, including Kennedy Wilson and Irish Life, are carrying out detailed work on GRN’s assets with a view to preparing a bid for the company. Other interest is said to be coming from European pension funds along with US and Asian institutions.


GRN surprised the market on April 15 by putting itself up for sale, citing “a material and persistent structural discount to its NAV per share for three years”. The shares closed at €1.708 yesterday, below the end-December EPRA NAV per share of €1.83 but about a tenth higher than the €1.534 level they closed at before last month’s announcement.


Irish Banking Sector: Mortgage lending assumptions under pressure

With all five of the Irish retail banks (the three domestic banks; KBC; Ulster Bank) having now provided a Q1 trading update, in addition to timely data on mortgage market activity, house prices and new home construction, we review our assumptions for mortgage lending in the Irish banking sector in 2019E in our note published this morning.


While it is perhaps too early to make a definitive call, Q1 data suggests our current forecasts are subject to downside rather than upside risk, and that pressure on volume growth appears to be coming from multiple vectors. We keep our 2019E mortgage lending forecast unchanged at €10.1bn, but drawdown and approvals data over the course of Q2 may cause us to revisit this, and thus our forecasts for domestic bank balance sheet and earnings growth.


Given the relative sensitivities of earnings for each of the three domestic Irish banks (a 10% reduction in new mortgage lending vs current forecast would see FY19E/20E/21E EPS: AIBG -0.4%/-1.3%/-2.4%, BIRG -0.5%/-1.1%/-1.5%, PTSB na/-20.0%/-18.7%), any concern about potential mortgage market headwinds would support our current top pick within the sector, BIRG, given its more diversified asset and income base (35% of total group income from Irish NII). However, AIBG would only see a slightly greater EPS impact from a 10% decline in new lending versus our current forecasts compared with BIRG. The biggest impact would be for PTSB given its higher exposure to mortgage lending as a proportion of total assets and total income generation (c.85% of total income from Irish mortgages); so as a more direct play on Irish mortgage market growth, PTSB would see a greater adverse impact from any undershoot in actual mortgage volumes versus forecasts. Please contact the sales desk if you haven’t received a copy of the report.


Irish Economy: NTMA cancels another €500m of legacy debt

Ireland’s NTMA yesterday announced the cancellation of the final €500m of the Irish 2049 Floating Rate Treasury Bond that had been outstanding.


These bonds are linked to the landmark IBRC transaction in 2013, which was a major milestone on Ireland’s journey back to creditworthiness. To date the NTMA has repurchased €15.0bn (nominal) of the €25bn of bonds issued as part of the ‘Prom Note’ deal, with €1.5bn of these repurchases taking place in the year to date. All of the bonds were held by the Central Bank of Ireland, whose holdings have previously attracted adverse comment from the ECB relating to monetary financing concerns, although Frankfurt has since acknowledged the progress made in reducing the stock of IBRC-related assets. While the effective servicing cost of the IBRC-related bonds is immaterial (as the Central Bank repatriates most of its profits to the Exchequer), the repurchases serve to improve the optics of Ireland’s headline debt metrics.


The continued tidying up of legacy matters is another reminder of the progress the State has made in recent years. We expect that the two remaining IBRC-related bonds will be repurchased over the medium term, several decades ahead of their scheduled maturity dates (which are June 2051 and June 2053 respectively).


May refuses to resign

Yesterday saw a rush of speculation as to whether UK Prime Minister, Theresa May, was going to step down voluntarily or be forced out. In the end she stood fast, refusing to meet various cabinet ministers. These developments followed PM May’s ‘bold new offer’ earlier in the week, which included a ten point plan to try and entice Labour support for the Withdrawal Agreement Bill (WAB). However the inclusion of the a Commons vote on a second referendum galvanised opposition within the Tory Party and even within the Cabinet, where Leader of the House Andrea Leadsom resigned last night.


It would now appear that PM May’s remaining time is very limited, perhaps just days, although she will not go today given the European Parliamentary elections, as political coverage is restricted. There has been some talk that she may go by the end of the weekend, but at this point it is simply not clear.


UK political playbook

It should be worth noting that the executive committee of the 1922 Committee of backbench MPs met last night, where it refrained from altering the leadership rules to allow an immediate confidence vote in the PM. The committee has however reportedly agreed in principle to change the rules by mid-June should PM May have not stood down by then.


Despite the great deal of uncertainty over the Prime Minister, the broad points we would make are that; i) PM May’s time is almost up; ii)  a leadership contest is therefore likely to take place in early summer; iii) the limited time between a new Tory leader (and Prime Minister) taking their position and the end of the current extension (31 October) means another extension is becoming likely; and lastly iv) that the risks of various tail risks are increasing, including those of a general election and a no deal Brexit. One final point is that our forecasts are under review and will be published later today in our May ‘Global’.


UK data releases

CPI inflation rose to 2.1% in April from 1.9% in March, though the rise did not quite match market expectations which had been for an increase to 2.2%. Meanwhile ‘core’ inflation held steady at 1.8%, matching our own expectation, but defying the consensus view which was for a tick-up to 1.9%.  From the input price data, factory gate inflation was seen to be relatively contained, with output price inflation edging down in year-over-year terms (2.2% to 2.1%) and ‘core’ output price inflation steady (at 2.2%). Separately, public sector net borrowing figures published at the same time printed close to expectations with the PSNBX at £5.8bn (consensus £5.9bn), matching our forecast.


Economic Releases 

          UK European Elections
09.30 UK Retail Sales
09.40 EZ ECB’s De Guindos Speaks
12.30 EZ ECB meeting minutes
13.30 US Initial Jobless Claims
14.45 US PMI
15.00 US New Homes Sales
17.00 EZ ECB’s Nowotny Speaks
18.00 US FOMC Speakers