04 Apr 2019

IRES: Planning Ahead

We have released a new report on IRES REIT today. The company’s recent results revealed a strong operating performance, with good cost control, near-full occupancy and solid underlying rental growth.



Favourable market conditions delivered a better-than-expected jump in the NAV. IRES has been navigating the planning system in respect of its development assets and agreeing forward purchase deals which, combined, will grow the estate by 35% and help to materially increase dividends (to a 5%+ yield by FY22E).


The group continues to set a high standard in terms of operational performance. Its portfolio occupancy was 99.8% at end-December; the NRI margin of 82.2% in H218 was the second-highest in IRES’ history; and stabilised rents grew 3.6% last year. In the background, the market dynamics remain favourable for holders of residential assets. The Dublin rental market remains characterised by a chronic lack of accommodation, which is putting upward pressure on rents and keeping occupancy elevated. PRS yields are trending lower, which helps to support our forecast of ongoing NAV expansion.


The group has a three-pronged growth strategy encompassing acquisitions, its own developments and forward purchase agreements. During 2018 IRES advanced planning applications in respect of all of its development assets. It has also agreed forward purchase agreements in respect of properties at four locations. Collectively, we estimate that these measures will add 955 units to IRES’ residential portfolio by Q122, adding 35% to the current stock of properties. Given that Irish REITs must distribute a minimum of 85% of their net income from property rental activities, this implies a material step-up in dividends. We see a DPS of 8.3c in FY22E (a 5.2% yield), up from FY18’s 5.6c.


In terms of the investment case, IRES offers growing income returns and a rising NAV. Its (FY) dividend per share has grown by 78% in the past three years. We see it expanding at a CAGR of 8.0% to the end of our forecast period (FY24E), by which time the stock is expected to be delivering a yield of 5.6%. Rising underlying rents, development surpluses and yield compression (Dublin prime PRS yields have tightened by 40bps in the past 12 months, while one agent estimates that there is €7bn of institutional capital chasing multifamily assets) should deliver ongoing advances in NAV. Please contact the sales desk if you haven’t already received a copy of the note. 

AIB Group: $1bn HoldCo issue

AIBG yesterday issued $1bn in dollar denominated HoldCo debt, as part of its ongoing MREL issuance programme. 


The 6NC5 (a six maturity with an issuer call available after five years) REGS/144A fixed-to-FRN was issued at a spread of 195bps over the T 2.125% 03/24. Initial spread pricing thoughts of 215bps were tightened in by 20bps due to strong investor demand (the issue was 2.6x covered).


The issue represents another successful bond sale as part of the Group’s plans to issue around €3-4bn equivalent in total MREL debt over 2019-2020, after the €1bn issuance in 2018. MREL issuance will, however, continue to act as a small NIM headwind in 2019 given the excess liquidity which the bank already operates with.


Irish Banks: Dilosk securitisation deal

Today’s Irish Times reports that BTL specialist Dilosk is lining up a €210m securitisation deal.


When completed this will be the third RMBS transaction in four years for the company, which was founded in 2014. Management have previously executed a €200m RMBS in 2015 and follow-on €286m deal which involved the securitisation of loans acquired from GE Capital and Leeds Building Society. This new deal will involve BTL mortgages that Dilosk has itself originated under its ICS brand.


Management told the newspaper that they aim to continue their policy of acquiring performing and re-performing residential mortgage books, in addition to new mortgage lending under its own banner.


This funding move and associated management commentary presumably signals Dilosk’s ambition to increase its presence in the Irish mortgage market. This follows Finance Ireland’s recent move to enter the residential mortgage space, while the Credit Union movement has been champing at the bit to lend more for house purchases. While the vast majority of the mortgage market is dominated by the high street banks, these smaller players’ ambition will likely lead to increased competitive forces ahead.


Donegal Investment Group Investing in Indian partnership

Donegal this morning announced that its subsidiary IPM Potato Group has made a strategic investment in Utkal Tubers, a seed potato start-up based in Bangalore, India. No financial details have been provided but Utkal will have access to 12 new IPM potato varieties for both the fresh and processing markets. As no financial details have been given we presume that this is a small investment but see it as a positive step for Donegal as it established a foothold in what is the second largest potato market in the world after China.


No deal defeated, but still no solution

There were two themes to Brexit developments yesterday. Firstly, the House of Commons approved legislation (by 313 votes to 312!) which would force Prime Minister Theresa May to seek a Brexit delay to prevent a disorderly no-deal outcome on 12 April. The legislation still needs to pass the House of Lords (debate starts later this morning) and be signed into law. Even then, the UK would still be required to take action to actually avert a no-deal outcome, with this still the ‘default’ outcome. As such, whilst the vote moves to put in law the will of the House, it still does not avert no deal. It will though allow the UK to argue in talks with Brussels that Parliament can at least agree that a Brexit delay/aversion of no deal is something UK Parliament wants to avoid.


Labour talks positive, but Tory discontent grows

Yesterday we also saw talks take place between PM May and Labour leader Jeremy Corbyn to try and find a way forward on the shape of future arrangement for UK-EU relations, which might be able to carry the will of the House and therefore form the basis of a further Brexit extension request to be taken to the EU Summit on 10 April. The mood at these talks looks to have been a positive one, but the Labour leader also said that the PM had not yet moved enough. Talks will continue today whilst there look to be continuing internal discussions within the Labour party over whether to demand another (confirmatory) referendum. In the Tory ranks, there continue to be significant grumblings over the discussions taking place with Labour. We saw two government resignations yesterday and there continue to be reports that more could follow, depending on the direction talks move in. The latest resignations brings the number of Tories who have resigned from Theresa May’s government over her approach to Brexit policy to 31 so far, a pace of almost 1.5 MP’s per month since she formed the government in June 2017. Sterling struggled for momentum early in the day yesterday following the poor UK services PMI, but recovered those losses through the day with the pound at $1.3186 at the time of writing.


Trump’s trade war will backfire, warns IMF

US President Donald Trump is desperate to reduce the Unites States trade deficit with China, but according to the International Monetary Fund (IMF), the trade war and tariff regime he has launched on Beijing will ultimately fail. In a new report released yesterday, the IMF said that countries looking to reset trade imbalances should address their own macroeconomic issues instead of launching barriers to trade. According to the report a 25% tariff increase on all US-China trade would be self-defeating. Not only would it reduce GDP growth in the US and China by 0.6 and 1.5%, respectively, the US's total global trade balance would be little changed.


Economic releases

12:30 EZ ECB Minutes

13:30 US Jobless Claims

18:00 US FOMC Mester and Harker Speak