The announcement after European stock markets closed on Thursday was brief and to the point. Core Industrial Reit, a fledgling logistics and industrial real estate trust that was being lined up to become the sixth property-related company to float on the Irish Stock Exchange in five years, had decided to pull its €225 million initial public offering (IPO).
“Despite encouraging institutional support, Core Industrial Reit has decided not to proceed with its potential initial offering at the current time due to market conditions,” it said.
As excuses for scrapping IPOs go, “market conditions” are something of a hardy perennial. In this case, though, it’s difficult to see how it stands up to scrutiny.
While the Iseq index in Dublin has fallen as much as 10.8 per cent so far this year, all of the movement had taken place before Core Industrial formally announced on February 13th that it was proceeding with an IPO. Since then, the market has moved sideways. Meanwhile, the MSCI All Country World Index, a broad gauge of global equities, has actually advanced 2.5 per cent in the past three weeks, clawing back some of the sharp losses over the previous two weeks.
A quick review of the IPO prospectus for Core Industrial, a draft copy of which has been seen by The Irish Times, suggests that there were more central issues relating to this particular deal – hatched by US hedge fund York Capital – than external factors.
York Capital had planned to put almost €83 million of industrial units it had acquired on the cheap in Ireland following the property crash into Core Industrial. It’s standard practice in the flotation of a property play like this to lump some “seed” assets into the company before sending it on its way, with fresh equity, to buy more property.
However, the IPO document indicates that York Capital has been taking its cut at every turn.
Buried two-thirds of the way through the 230-page prospectus is a declaration that Core Industrial’s parent company, Savile Row SARL, an affiliate of York Capital, had extended the business a €14 million loan, secured against properties in the portfolio and carrying a 14 per cent annual interest charge.
That’s a multiple of the 3.75 per cent that AIB has been charging on a similar-sized loan, also secured against company properties. (Core Industrial had planned to redeem both loans, along with another facility, with the proceeds from the stock sale.)
Meanwhile, total loans against the €83 million of initial assets (which were independently valued by Lisney) amount to €39.5 million. This indicates that the New York hedge fund has already benefitted from a substantial valuation rise since acquiring them between 2015 and 2016, according to market sources, limiting the amount of upside left for new investors.
The fact that York Capital was planning to sell down part of its stake – or €18 million worth of shares as part of the IPO – underscores this point.
The industrial sector emerged last year as the hottest sector of the Irish commercial property market, delivering total returns of about 14.5 per cent for the 12 months to the end of September, according to the MSCI Ireland Property Index. That compares with a 10.5 per cent return for the office market, and 10.8 per cent for the retail investment sector.
However, analysts at Goodbody Stockbrokers said last month that they were “surprised” by the small lot sizes of some 106 industrial units in the initial portfolio – including property in locations such as Rathcoole, Clondalkin and Finglas in Dublin – that York Capital was putting into the Reit. (The portfolio also includes 167 acres of land, about a fifth of which is zoned and serviced industrial land.)
Then there’s the small matter of €6.4 million of accrued expenses that have built up on the balance sheet – greater than the company’s €4.1 million current rent roll and equivalent to almost 16.5 per cent of its net assets.
Most relate to unpaid performance fees owed to York Capital and companies controlled by Daniel Donovan and William Redmond, two advisers to the hedge fund in recent years on its Irish property deals, who have been lined up as Core Industrial's top two executives.
Previous owner’s bills
It’s the corporate equivalent of selling a house and landing the buyer with the previous owner’s bills.
Core Industrial had planned repaying the accumulated fees through cash raised from the IPO and issuance of shares in the company.
The prospectus also revealed that the company was in dispute with its main tenant, Danish transport and logistics giant DSV, which accounts for a quarter of its current rent roll. The conflict is over who is responsible for the estimated €1.75 million cost of making various units currently and previously used by DSV in Naas Enterprise Park fire-safety compliant.
Meanwhile, the management team was being lined up with a bonus plan that would entitle them to 15 per cent of shareholder returns above an initial threshold of 10 per cent total returns a year – rising to 20 per cent of returns in excess of a 15 per cent annual “hurdle”.
In the past five years, investors have largely ignored sponsors of property IPOs taking as much as they could off the table before going to market – and eye-watering private equity-type incentive plans – as Irish real estate appeared again to be a one-way bet.
We may now be at an inflection point in the cycle, with potential investors becoming more discerning and cautious.