Yew Grove Reit doesn't exactly occupy the glamorous end of the Irish commercial real estate market, compared to fellow listed real estate investment trusts Hibernia Reit, owner of some of the shiniest office blocks in Dublin's city centre, and Ires Reit, the State's largest private residential landlord.
But as Covid-19 set in last year, it came into its own. That was thanks to its focus on office assets outside the capital’s central business district, and industrial units, which are almost entirely let to State entities, IDA-supported companies and large corporates, mainly in the life sciences sector.
Rent collections ranged between 97 per cent and 100 per cent between the second and fourth quarters of 2020, among the highest rates across listed property groups in Ireland and Britain.
For example, Hammerson, the retail landlord co-owner of the Dundrum Town Centre, collected as little as 16 per cent of UK rents due at the start of the third quarter of 2020. It subsequently managed to recover much of what was owed.
London-listed Supermarket Income Reit topped the league as its tenants, including Tesco, Sainsbury's and Morrisons, remained fully up to date with payments throughout the period.
But Yew Grove’s problem was it is just too small for most large, institutional investors to care. In addition, government policy has, increasingly, made it difficult for Irish reits in recent years.
It’s of little surprise, therefore, that Yew Grove revealed on Tuesday that it plans to sell itself. The proposed buyer, Canadian property group Slate Office Reit, is preparing to pay €127.8 million for its shares. Adding in its €49.5 million of borrowings implies an acquisition enterprise value of €177.4 million. (Yew Grove confirmed on Friday that a formal offer had been made, which its board is unanimously recommending to shareholders.)
Yew Grove's 23 properties include IDA business parks in Athlone and Waterford, a number of office blocks in Millennium Park, outside Naas, Co Kildare, and office buildings in Citywest, Co Dublin.
However, it came late to the party that saw Green Reit, Hibernia Reit and Ires Reit swashbuckle onto the market following the enactment of reit-enabling legislation in 2013.
Its top team – Jonathan Laredo, Michael Gibbons and Charles Peach – were all executives of UK-based Peak Capital Partners, which set up a fund, Yew Tree Investments, to buy Irish property in the wake of the crash. They rolled an initial portfolio of 10 such properties valued at €25.9 million into the trust.
The flotation came three months after the €225 million initial public offering (IPO) of Core Industrial Reit, an Irish logistics and industrial property company backed by US hedge fund York Capital, had been pulled, with the promoters citing prevailing "market conditions" at the time.
In the event, Yew Grove’s IPO raised €75 million, the bottom end of a range of up to €100 million that had been targeted. The small size of the equity raise had precluded a number of typical reit investors from even having a look at it.
It managed to raise almost €49 million in three follow-on share placings – two in 2019 and one earlier this year – to lump the funds together with debt to buy more assets. But it has been an uphill battle – not helped by transactions largely drying up for much of last year as the property industry dealt with the Covid-19 crisis.
The €168 million value of its property portfolio at the end of June was well below the €300 million to €500 million asset base it had target by then, on the third anniversary of its IPO.
South Africa-born Laredo, a former investment banker and one-time part owner of Pepper Group, the mortgage lender and servicer, secured permission from shareholders at in May to extend an existing 100 million of share-sale programme for a further 12 months as it continued to chase acquisitions.
The problem was that it has largely struggled – partly virtue of Yew Grove’s size – to get enough interest from large investors to back his plans.
But, for Colin Grant, an analyst at Davy, the main stumbling block has been the 7.5 per cent stamp duty that applies to Irish commercial real estate deals.
The rate trebled from 2 per cent in the Finance Act 2017 before increasing to its current level two years later, as part of a suite of measures targeting the real estate sector at a politically charged time when Green Reit was being taken over by London-based Henderson Park for €1.34 billion. (Slate Office is buying Yew Grove by way of a so-called scheme of arrangement share purchase, which is subject to a 1 per cent stamp duty.)
"Irish reit legislation also has significant restrictions on growth due to the minimum 85 per cent [dividend] payout ratio, maximum 50 per cent loan to value and other tax-related restrictions on selling assets and recycling the proceeds," Grant said in a note to clients during the week. "The favouring by investors of growth stocks over value stocks has been a further issue. Management was left with no other strategic option."
There was speculation around the time of Yew Grove’s IPO that a number of others were waiting in the wings to come to market, to continue a democratisation of commercial property investment. Might Yew Grove have been the last?
Laredo, who owns about 2.5 per cent of the company, and his management team have long regretted putting an investor sweetener into Yew Grove’s IPO prospectus saying they would only take 50 per cent of their basic salary until its net asset value rose to €175 million.
The board decided to ease the pain earlier this year by hiking the CEO’s salary from €250,000 to €350,000. No doubt, he’ll negotiate a better deal with the Canadians.