Why the main shareholder in Ireland’s biggest private landlord has given up after 10 years
Grand Canal Square Dublin
WITH AVERAGE RENTS of €1,800 a month, a portfolio of thousands of apartments and essentially full occupancy, surely things should be going well for Ires REIT, Ireland’s biggest private landlord?
Well, as keen readers of this article’s headline may have figured out, that isn’t quite the case.
Ires REIT is struggling. Massively.
We’ll get into the why soon. But first to give some indication of the scale of the problem, which came when last week it was announced that Capreit sold its remaining shares in Ires.
‘Who – or what – is Capreit?’ you cry.
Capreit is a Canadian property investment firm – the largest publicly traded apartment landlord in Canada, which has almost CAD $17 billion (€11.5 billion) worth of assets across a gigantic portfolio of tens of thousands of homes.
In the wake of the 2008 financial crisis, it decided the Irish property market was a good bet and was the driving force behind the establishment of Ires REIT.
It both led the assembly of Ires’s initial collection of just over 300 apartments and its flotation on the Irish stock market in 2014.
Since then, Capreit has been Ires’s biggest shareholder, owning just under 19% of the company which then went on to amass a portfolio of almost 4,000 apartments across Ireland.
However, the company started cutting its stake in Ires earlier this year.
This culminated in it selling its remaining 10% of shares in the company last week, at a price of €0.90 per share, near Ires’s all time low.
This was below Ires’s flotation price of €1 per share a decade ago in 2014.
Analysts have also said that Ires is currently trading at a discount to its ‘Net Asset Value’, which essentially looks at assets such as the company’s portfolio of apartments to get a fair value for the business.
Based on this, it’s estimated that Ires should be valued at €1.32 per share, around the price of €1.19 that Ires shares hit in January.
Given that, it may seem puzzling that Capreit has decided to cash in its chips now, both with the share price low historically speaking and after it had already invested so much time and effort in the business.
The reason Capreit gave itself for the move is that the company is narrowing its focus to concentrate on the Canadian market.
In selling off assets across Europe, offloading its shares in Ires could make sense.
But again, the timing could be viewed as curious given how long Capreit has been invested in Ires and that it is selling just as the share price is hovering around a five year low.
It points to how low Capreit’s confidence in Ires is – that it would rather sell out and be done with the firm.
In terms of why it is so pessimistic, there are a few reasons.
As previously explained, Ires has been hit harder than many companies by rising interest rates.
The first obvious impact of that was that it hit property values, dropping the value of Ires’s portfolio.
But this then caused a knock-on impact, driving up the cost of the company’s debt.
Ires took on significant borrowings to fund its expansion pre-Covid, but due to rules around how REITs work, the most debt they can have is equivalent to 50% of the value of their property assets.
This then resulted in Ires selling some of its portfolio to help keep its debt payments under control.
But a smaller portfolio of course means it’s harder for a company to grow.
Cue Ires reporting a 4% drop in revenue in the first three months of 2024 compared to the same period in 2023.
Investors don’t like growth contraction.
These issues, along with the stalling share price, are likely why Capreit sided with Vision Capital, a smaller Ires investor, in a recent boardroom war.
While various problems were raised, Vision (and Capreit’s) main grievance was that they felt Ires could be doing more to get more money for shareholders.
One of Vision’s key ideas to do this was to get Ires to put itself up for sale, hoping for the share price bump which normally accompanies a corporate takeover, or get the firm to sell off its portfolio of apartments.
However, the two sides reached a truce in April.
While it resulted in Vision getting some seats on the Ires board, it also meant the investor did not have enough of a say in how the business is run to force through a sale.
With Capreit backing the smaller investor’s plan, it may have felt that once Vision reached an agreement with Ires management, the momentum behind a possible sale of the business was going to peter out. Hence, selling up.
Capreit’s decision to move on could represent an opportunity for Ires – swap a jaded long time investor for a fresh face which backs the management team’s vision.
Unfortunately for the Irish firm, that is not what has happened.
The list of names which bought Capreit’s stake, which was 18.7% at the start of 2024, are a hodgepodge of companies which look more interested in making a quick buck.
UK firm Asset Value Investors was one of those which upped its stake.
Starwood Capital is also a recent new name, buying into Ires earlier this year.
Analysts have speculated that both companies are more interested in a ‘liquidity event’ – ie, a sale of the business – than in long-term growth.
The result is that Ires is in something of a liminal space.
Revenue growth has stalled under interest rate pressure and it will find it hard to grow within its portfolio of apartments which have to abide by the state’s rent cap, which limits annual price growth to 2%.
While this is something which Ires and other real estate figures have complained of bitterly in the past, claiming that it is stifling investment in the rental sector, the cap does not seem to be going anywhere any time soon.
So the firm is left with a portfolio it is struggling to grow and an investor base which seems increasingly interested in a short-term sale rather than sticking around for the long haul.
The upshot is that Ires faces an uncertain future – one where few would bet on its newest shareholders following in Capreit’s footsteps and sticking around for another decade.