Joe Brennan: Ires investors wrestle with reits and wrongs of sale after testy agm

Directors of Ires Reit, under siege from an activist shareholder as the apartment owner’s share price remains deep in the doldrums amid rising interest rates and a cap on rent increases, knew heading the company’s annual general meeting (agm) that they had enough proxy votes in the bag to ensure their re-election.

But the extent of dissent – with 38.5 per cent of investors voting against the return of chief executive Margaret Sweeney and 45.7 per cent registering dissatisfaction with her chief financial officer, Brian Fagan – heaps pressure on the company as the dissident, 5 per cent shareholder Vision Capital, vows to crack on with his campaign.

Vision’s chief executive Jeffrey Olin, who started an open battle against the company 3½ weeks ago after his private calls on the company to put itself up for sale fell on deaf ears, told reporters after the agm that he is hopeful the board will enter a “consultation process” to find ways to maximise value for shareholders.

However, lines have been drawn, Ires chairman Declan Moylan insisting at the meeting that “there could not be a worse time to sell” the company.

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Joe Brennan: Ires investors wrestle with reits and wrongs of sale after testy agm

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The next step is likely to involve Vision using its 5 per cent stake to force Ires to call an extraordinary general meeting (egm) on selling or breaking up the company. (While Irish law allows shareholders behind 10 per cent of a company to require it to convene an egm, only 5 per cent is needed in the case of a business whose shares are listed on a regulated market.)

Moylan said after the testy agm that he is confident, looking at the history of cycles in the real-estate sector, that Ires’s market value will see “a significant uptick in due course”.

Rising rates last year saw Ires write down the value of investment properties on its balance sheet by €45.6 million to €1.48 billion.

As a result, it pushed the loan-to-value (LTV) ratio on its portfolio up to 43.3 per cent from 40.7 in 2021 – compared to a 50 per cent limit under Irish reit legislation and the company’s own lending covenants.

Vision made its move to air its grievances shortly after Ires hit an all time low of 93 cents, which valued the stock at 7 per cent below its 2014 initial public offering (IPO) price and a 41 per discount to its net asset value

Comments from European Central Bank (ECB) president Christine Lagarde the same afternoon offered little hope that Moylan’s predicted uptick will come any time soon.

The Frenchwoman said that the ECB still has “more ground to cover, and we are not pausing”, after raising interest rates for the seventh straight monetary policy meeting.

[ Ires directors ride out revolt as dissident investor vows to pursue egm ]

Ires said in a trading statement on Wednesday that its LTV ratio improved marginally in the first three months of this year, to 43.1 per cent, as it raised €18 million from asset sales, including its Rockbrook development site in Sandyford, Dublin 18, which has planning permission for more than 400 apartments.

However, Goodbody Stockbrokers analyst Colm Lauder noted that the ratio was likely to have been based on last December’s valuations and doesn’t take into account that “the market has softened further” so far this year.

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Vision made its move to air its grievances shortly after Ires hit an all-time low of 93 cents, which valued the stock at 7 per cent below its 2014 initial public offering (IPO) price and a 41 per discount to its net asset value (NAV).

At the agm, Olin argued that by delaying fixing the rates on a chunk of its borrowings until December, even as market rates had soared over the course of the year amid “one of the most telegraphed rates cycles in history”, Ires added €10 million of unnecessary annual interest costs and led to the “destruction of €170 million” of value for shareholders. (He based this off how Ires has been valued at an average of about 17 times its funds from operations in recent years.)

[ Pressure mounts on Ires to sell up – but can it rely on Canadian founder? ]

Fagan responded, however, that increasing the group’s level of fixed-rate debt to 72 per cent was a “technically difficult and complex exercise” and that Ires sought to push it through “as efficiently and expeditiously as possible”.

Ires announced five days after Vision issued its first open letter last month that it plans to raise €100 million from the sale of non-core assets over the “short term” in order to lower its debt burden and avoid any threat of its covenants being breached.

While it is known that Irish Life Investment Managers has been in talks to buy the company’s upmarket Marker apartment block in Dublin’s docklands – with a reported price tag of about €70 million – Sweeney said there is “there is no process” ongoing.

The outlook for Ires’s properties, at a time of chronic housing undersupply, is a lot more solid than for the other, office-focused reits that left the stock market in recent times

Either way, the asset growth story at Ires, which saw its number of homes jump almost 50 per cent over the past five years to about 4,000, is over for now – as the company finds itself constrained by debt limits, the fact that Irish reits are required by law to distribute 85 per cent of their income to investors, and its inability to raise equity as its shares continue to trade at a deep discount.

Cantor Fitzgerald analyst John Blake sees dividends – which fell 15 per cent last year to 5.1 cents, partially due to costs associated with movement management of its investments in-house – declining by a further 20 per cent this year.

While Green Reit, the first of four Irish real-estate investment trusts that floated in the past decade, and Yew Grove Reit were taken private in 2019 and 2021, respectively, at slight premiums to their NAVs, a takeover deal for Hibernia Reit early last year was priced at an almost 6 per cent discount to net assets, as market interest rates started to creep higher.

[ Ires Reit founder Capreit joins forces with activist investor ]

The outlook for Ires’s properties, at a time of chronic housing undersupply, is a lot more solid than for the other, office-focused reits that left the stock market in recent times. Its occupancy levels and rent collections remain high, with both topping 99 per cent in the first three months of the year.

But there’s little prospect of a sale at the point in the cycle currently generating close to its most recent reported NAV of €1.60 per share, according to observers, especially when a 2 per cent cap on rent increases across its properties remain in place.

Ires’s own share price has rallied by only 9 per cent to €1.01 since Vision started to publicly agitate. The market is yet to be convinced that this one is currently in play.