IT MAY BE hard to believe, but even with the average rent it charges steadily creeping towards €2,000, Ireland’s largest private landlord is struggling.
Owning almost 4,000 homes, Ires Reit is one of the biggest players in Irish property.
On the surface, it looks like it is making hay at a time of record rents and soaring demand. Its results for the first half of the year show the average rent across its properties was €1,772 per month, up from €1,688 the year before.
Revenue is slowly increasing, while the company’s earnings before any deductions rose by 7% over the last 12 months.
So why is Ires one of the worst-performing stocks in the Irish market, and in the grips of a corporate crisis?
Formed in 2014 by Capreit (the Canadian Apartment Properties Real Estate Investment Trust), Ires seemingly perfectly timed its launch as one of the first real estate investment trusts in Ireland.
The idea was for the company to be at the forefront of ‘professionalising’ the rental sector, which at the time was dominated by small landlords who owned just one or two homes.
It was also looking to take advantage of a recovering market, with prices still low following the financial crisis, but starting to rise again.
Buying up land and apartment blocks relatively cheaply, many of which were from the State’s ‘bad bank’ Nama, Ires was well-placed to generate steady returns for backers. The vast majority of properties it owns are apartments in areas slightly outside the centre of Dublin which are popular with city commuters, such as Sandyford and Tallaght.
The company was getting a rent yield of about 5% per year, and the value of its properties were steadily rising as the housing crisis bit.
It also endured occasional public protests about its rent prices, which have also consistently crept up over the years. From an average of €1,364 per month across its portfolio in 2015, the prices it charges have increased by about 30% since, with even this limited by rent caps.
The company has defended its prices, saying its tenants are happy with its services and it provides value for money.
Around 2019 was Ires’s peak. The firm raised more than €134 million from backers in a move to buy up hundreds of apartments, as investors were keen to get into Irish property amid a backdrop of surging prices.
Shares in Ires rose to €1.82 near the end of the year, almost twice the price compared to its initial public offering in 2014.
Although this nearly halved to €1 following the Covid outbreak, there was a bounceback to €1.73 around the start of 2022, followed by a slow decline since.
This is despite the fact that the company consistently records 99% occupancy at its properties, driven by the rent crisis, and average rents are still on the rise.
The issues
The biggest worry about Ires is its exposure to interest rates, which hits it a few ways.
First off, it raises the company’s borrowing costs. There was some criticism after the company only closed a deal on an important €275 million credit facility in December, locking in higher repayments than if it had acted sooner.
But more importantly, by limiting how much people can borrow, there is a knock-on impact on property. In previous years, the paper value of Ires’s properties consistently rose.
Now it’s going the other way, with the firm writing down the value of its assets just a few months ago.
Like all Irish Reits, Ires has to abide by legislation which states that the most debt Reits can have is equivalent to 50% of the value of their property assets. This is called a loan-to-value (LTV) ratio.
Ires took on significant borrowings to fund its expansion pre-Covid and its LTV recently rose to just over 45%, near the maximum allowed.
Analysts estimate the value of Ires’s properties could fall by 10% by the end of 2024, meaning it would be in danger of breaking this limit.
To prevent this, Ires moved into ‘sell’ mode to get some more cash in the door.
Last week it reached a deal to sell almost 200 west Dublin apartments to the Tuath Housing Agency for €72 million and is looking at offloading further assets.
While this generates cash, it has created another headache. Some investors feel Ires moved too late. They argue that it was obvious from the middle of last year that interest rates would rise significantly.
By waiting until recently to pull the trigger on asset sales, the rate rises have already started to bite and Ires is getting worse prices now than it would otherwise.
Essentially, the argument is the company’s management acted too slowly and is now selling too cheaply because it has little choice.
The impact
This has caused a wave of shareholder unrest. At the company’s annual general meeting in May, almost 40% of investors opposed the re-appointment of chief executive Margaret Sweeney to the board. Brian Fagan, the company’s chief financial officer, squeaked through his own vote with the backing of just 54% of shareholders.
Those opposed include Capreit, Ires’s founding investor which still holds 19% of the business, and Vision Capital, a Canadian firm with a 5% shareholding which has spearheaded the opposition.
Vision’s grievances stem from what it claims is company mismanagement, claiming that issues such as its asset sales have led to the destruction of €170 million of shareholder value. These claims have been rejected by the Ires board, which say its business plan is on track and values have been hit by market forces largely outside its control.
But that, really, is at the heart of Ires’s issues – its share price.
Trading at just under €1, almost the same as at launch in 2014, investors will likely continue to agitate as long as they feel they’re not getting as much value as they could.
With interest rates rising sharply and property price growth finally slowing (although still going up), for some investors there’s not much attraction to bet money with Ires when they can get decent returns from low-risk sources such as government bonds.
While this is the case, despite the fact that rents have never been higher, Ires will likely continue to face problems.
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