Ires Reit, the State’s largest private residential landlord, is likely to sell about €50 million of assets in 2023 to ensure it has sufficient headroom over legal and financial debt covenants, even if property values decline more than expected in the coming years, according to Barclays analysts.
The company, which has a portfolio of 3,938 homes, mainly apartments, is allowed a maximum debt level equating to 50 per cent of the value of its property assets under Irish real-estate investment trust (Reit) laws and Ires’s own borrowing covenants.
Barclays analysts led by Eleanor Frew described the 50 per cent limit as “relatively tight” compared with the average 60 per cent debt level of other European real-estate companies that they cover. They estimate that Ires’s ratio stood at about 41 per cent of the €1.51 billion value of its properties at the end of last year.
The analysts forecast that the value of Ires’s properties will fall 10 per cent in value from 2022 to 2024 amid rising interest rates, but that rental growth will run at 2 per cent a year over the same period.
“We assume €50 million disposals over 2023 to manage leverage levels and at trough values LTV peaks at circa 45 per cent in 2024,” they said, adding that Ires could withstand a 15 per cent drop in asset values, with no asset sales, before the company’s LTV ratio reached 50 per cent.
Ires, led by chief executive Margaret Sweeney, has a target LTV range of 40-45 per cent, and is known to take a proactive approach towards balance-sheet management. Last year, the company sold 128 apartments in Finglas in Dublin for €54.5 million. It said in a trading update in January that it continued to “examine opportunities to optimise our portfolio”.
A spokeswoman for the company declined to comment on the Barclays report.
Barclays’s forecast is for Ires’s gross rental yield – or rental income as a percentage of property values – to rise from 5.6 per cent last year to 6.2 per cent in 2024, driven by the combined effects of rising rents and a decline in property values.
The analysts highlighted how the Dublin residential market, where Ires is focused, remains undersupplied, with Ires’s occupancy levels standing at 99.4 per cent.
“While in-place rental levels are highly regulated, we believe the strong underlying demand will result in sustainable market rental growth for the foreseeable future,” they said. “We believe Ires’s quality portfolio, strong underlying demand and higher gross yield than [European] peers makes them it of the best-placed residential names in our coverage.”
They also said that Ires’s lower debt and higher rental yield levels than the European average means its portfolio valuation decline is likely to be smaller than peers.
Still, Barclays estimate the weighted average interest rate on the company’s €657 million of drawn borrowings – compared with a total of €800 million of available facilities – has risen to 3.5 per cent from 2.25 per cent last June. This follows a move by Ires to increase the percentage of its debt that carries fixed rates to 72 per cent.
“While it is, in our view, positive that the company has now fixed a large proportion of drawn debt, providing a hedge should interest rates continue to rise, the level at which it has been fixed is elevated and will result in a material increase in finance costs,” the analysts said. “We forecast a finance expense of €26 million in 2023, an 84 per cent increase on the 2021 finance expense.”
Barclays cut its earnings-per-share forecast for this year by 20 per cent as a result, to six cents – which equates to a net profit of almost €32 million. Barclays has an overweight rating on Ires’s stock, the equivalent of a buy recommendation.
