07 Aug 2019

IRES REIT: A Marathon, not a sprint!

We have a new note out this morning.

The just-completed purchase of the XVI Portfolio from Marathon is a landmark deal for Ireland’s largest private landlord, IRES REIT. The group now has 3,587 units (with a further 298 contracted for delivery by 2021 under pre-purchase contracts), a 10-fold increase in just five years. Looking ahead, IRES has a development pipeline that we believe will deliver further material growth in distributions. Irish housing market dynamics remain supportive.


On 2 August, IRES announced that it had completed the purchase of the XVI portfolio for €285m (plus costs). The portfolio comprises 815 residential units across 16 developments (all but one of which are in Dublin). The gross yield is 5.1% with a reversionary yield of 6.2% (although the rent caps of 4% per annum will make reversionary capture a medium-term project). 


In preparation for the purchase, IRES expanded its revolving credit facility (rcf) from €450m to €600m and amended the rcf to include a new uncommitted accordion facility of €50m. The group also raised €134m (gross) through the successful placing of 86.55m new ordinary shares. These moves have left the group with a pro-forma LTV of c. 45%.  


Symrise - H119 preview: margin expansion key

H119 results hinge around margin progression particularly as the market is looking for greater expansion (+70bps) than currently guided (flat).


Symrise reported stronger than expected organic revenue growth in Q119A but in its new truncated quarterly IMS format gave no indication of the margins achieved in its three divisions. 


Previously, management guided that the FY19 EBITDA margin would be “around 20%”, which compares to a five-year historical average of 20.9%, Through FY18A, margins contracted 105bps to 20.0% as lower-margin acquisitions were integrated into the business. Stabilisation and some margin expansion is now baked into expectations with the market looking for a 70bps increase to 20.7% (source: Bloomberg).


Markets stabilise as Trump Softens

Sentiment has stabilised somewhat over the past day, helped by comments from the US administration, which indicated the US President was still committed to negotiations with China. This despite the US having labelled China a currency manipulator just a day before. 


Larry Kudlow, the White House’s top economic adviser, told media yesterday that the Trump administration wanted to continue talks with China and suggested that the President could adopt a flexible approach on tariffs, nudging the door open to the possibility that President Trump might think again about imposing tariffs on another $300bn in Chinese products from September 1. Mr Kudlow also indicated that the US administration is planning for the Chinese team to come to the States in September. 


Equities up, no real change in yields

The adjustment in tone has helped to steady nerves that the US-China dispute was set to escalate further and potentially rapidly. In markets, US stocks closed up with gains in excess of 1% (S&P500 +1.3%) whilst Asia is more mixed this morning with the Shanghai composite up 0.25% and the Topix in Japan up 0.1%. US futures point to a weaker session on Wall Street today. The edging back in risk aversion was also evident across other asset classes, though with the extent of risk aversion priced in earlier in the week not unwound. Indeed, US 10-year Treasury yields are still down at 1.68% whilst 10-year Bund yields linger at -54bps. The yuan remains a focus too, at rmb7.0421 after the PBOC set the official midpoint reference for the yuan at 6.9996.


RBNZ announcement

Earlier this morning, the Reserve Bank of New Zealand (RBNZ) delivered an aggressive 50bps cut in the official cash rate (OCR), taking it to a fresh record low of 1.00%. Consensus was for the OCR to be lowered by 25bps, with none of the 20 economists polled by Bloomberg predicting a 50bps reduction. 


Recall that the RBNZ had last cut the OCR by 25bps in May, before which had been held steady at 1.75% since late 2016. In a statement accompanying the decision, the RBNZ’s MPC cited the slowdown in GDP growth and rising headwinds to the economic outlook. Note also that Governor Adrian Orr suggested that unconventional policy measures such as negative rates were “easily within the realms of possibility”, hinting that the RBNZ might eventually end up lowering the OCR into negative territory eventually. 


Markets have been caught off guard by the surprisingly aggressive cut and the dovish tone communicated, with the kiwi depreciating 2% to 0.6398 and the yield on 10-year bonds issued by Wellington plunging 15bps to 1.14%.


TOTD

German industrial production

Output fell by 1.5% in June, disappointing consensus, which hoped for just a 0.5% fall. Whilst year-on-year industrial output fell 5.2% (cons. -3.1%) in June, there were also marginal downward revisions to the May data, further raising concerns over Germany's slowdown as data continuously disappoints. This comes despite the stronger than expected new manufacturing orders figures from Tuesday morning, where factory orders rose 2.5% from May to June.


Economic Releases

08.30 UK Halifax House Price Index

15.30 US Crude Oil Inventories

17.00 US Chicago Fed President Evans Speaks