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Annual General Meetings (AGM) at Ireland’s largest public companies have become pretty pedestrian affairs in recent years.
But this Thursday’s AGM of Irish Residential Properties REIT or I-RES REIT is shaping up to be an unusually interesting event.
Over the last couple of weeks, one of the company’s larger shareholders has been trying to generate opposition to a number of resolutions to be put to the meeting, out of frustration with how the business is being run.
What is I-RES REIT?
I-RES REIT began operating in 2013 when it acquired multi-unit predominantly residential rental properties in four locations in Dublin for around €42m.
The following year it floated on the Irish stock market, raising €200m from Irish and international investors with the aim of expanding its portfolio.
The timing of the capital raise was aimed at taking advantage of property prices which were still on the floor following the financial crash.
Its stated intent at the time was to build and manage property investments to provide stable, sustainable and growing cash flows for shareholders.
“Improving economic conditions and demographic trends, a lack of significant historical institutional ownership in the residential property rental market and the potential for significant asset sales by banks, the National Asset Management Agency (NAMA) and other sources combine to provide what the Board believes to be a significant opportunity to build a significant residential rental portfolio at attractive yields,” it said pre-flotation.
It also claimed that it intended to take a long-term view in relation to holding and enhancing its assets and would specifically look to identify acquisition properties which require active management.
The company is a REIT or Real Estate Investment Trust – a business which earns rental income from commercial or residential properties which are generally exempt from corporation tax on money earned from their property rental business only.
They are also generally exempt from capital gains tax on the disposal of assets of their property rental business.
Instead the tax is paid by shareholders who, by law, must get at least 85% of the annual property income and pay tax on it.
REITs became possible here when the Government introduced legislation in 2013 in order to help attract fresh capital into what then was a stagnant property market.
What has happened to I-RES since then?
Across the intervening years, I-RES REIT has grown into Ireland’s largest private residential landlord.
Today it owns around 4,000 residential rental accommodation units, predominantly in Dublin but also in Cork.
The company floated its shares nine years ago at around the €1 mark.
In January of 2019, the shares hit a peak of €1.83. But during the early part of the pandemic in 2020 the price took a hammering, falling at one point to €1.06, before recovering again.
By September of last year the shares were back to another peak of €1.73.
But since then, the price has been on a more or less steady downward trajectory, hitting an all-time low of 93c in February, before clawing back to a little over the €1.00 mark, where it sits now.
Today the company has a market capitalisation of €539m, despite having investment properties worth €1.48 billion.
And even when debt is taken into account, the market value is a third less than that the book value of its apartments and other assets.
So what is all this about shareholder dissent?
For those who got in at the start and have held onto their shares, that recent share performance is not something they would have hoped for.
Some of the company’s problems have been beyond its control.
Rising interest rates, inflation, stricter renting regulations, rent pressure zones, the eviction ban and more have all conspired to make the rental market far less attractive for landlords.
Indeed rental limits mean I-RES’s average rent across its portfolio is 13% below that of new properties entering the market.
Multi-unit residential investment properties have also become less attractive to investors, prompting I-RES REIT to mark down the value of its assets by €45.6m, it said in March.
Doubt over the future of the REIT structure, prompted by a review initiated by the Minister for Finance, as well as Sinn Féin’s stated plans to raise dividend withholding tax and apply a 33% capital gains tax on the sale of REIT assets if it gets into power, haven’t helped.
But on the other hand, some analysts suggest I-RES management could have and should have done more to help its own cause.
The company has high debt levels compared to peers and was slower than others to fix its interest rates on its credit facilities when they started to climb last year, resulting in a higher cost of borrowing.
Enter Vision-Capital, a Canadian fund manager with assets under management of $900m and which focuses on investments in publicly traded securities in the real estate sector.
It has been a shareholder of I-RES since 2014, owns 5% of it and just over two weeks ago published a lengthy and excoriating open letter.
In it, the investor said it plans to vote against the re-election of the company’s chairman and a number of other directors, as well as several resolutions, at Thursday’s AGM and implored other shareholders to do the same.
It claimed that I-RES has increasingly become an “ineffective platform and continues to poorly address the interests of both its shareholders and the critical needs of the Irish housing market”.
The company alleged that I-RES has many inefficiencies because it is a publicly traded REIT and if it were to cease to be such and were to go private, a “distinct and significant opportunity for Ireland” would arise.
Vision claimed it has been actively engaged with I-RES’s board since 2021, but has got nowhere with its arguments towards a sale.
Since the initial letter, Vision has weighed in several more times, making a host of other claims, including that Canadian Apartment Properties (CAPREIT) is intending to vote consistently with its recommendations at the AGM.
CAPREIT holds around 18.7% of I-RES, making it the largest shareholder.
It is also a co-founder of I-RES and up to last year was investment manager of the I-RES portfolio.
CAPREIT didn’t respond to enquiries from the author about its intentions.
Toronto based Ewing Morris & Co Investment Partners, which owns 3m shares in I-RES, also chimed in and said it would be voting with Vision Capital.
While on Friday, the Irish Independent reported that Wellesley Investments, which holds a 3% portion of I-RES, is unhappy with the pay being given to I-RES’s Chief Executive, Margaret Sweeney, and the company’s Chief Financial Officer.
What has I-RES to say about all this?
I-RES has, as you would expect, hit back at the claims made by Vision Capital.
In a statement on 17 April, its board said it is actively engaged in seeking ways to deliver value to shareholders.
“The I-RES share price and wider real estate sector has been impacted by a wide range of macro-economic factors including interest rate hikes, inflation, and geo-political issues,” it said in its defence.
“The Irish residential real estate sector has additionally been impacted by regulatory controls with the tightening of rental caps to 2% per annum introduced in December 2021.”
“Against this challenging backdrop, I-RES has outperformed the listed European Real Estate sector (the STOXX Europe 600 Real Estate index) by 6.4% since 1 December 2021.”
But it also said it had identified non-core assets worth €100m for disposal and will continue to review further disposals of non-core assets in order to optimise capital and shareholder value.
It also said that it remains open to considering “all value maximising options including offers for assets or the business as a whole” but does not believe a formal sales process is in the best interest of shareholders at this time.
The board also defended its remuneration policies and the roles being played by management and directors.
In subsequent market announcements, the board also confirmed that it is fully compliant with all of its disclosure obligations and rebutted a range of Vision’s allegations.
“The AGM will proceed as previously indicated on 4 May 2023,” it said.
“The Board recommends shareholders vote in favour of all the proposed AGM resolutions which are in the interests of all stakeholders.”
Proceedings on Thursday will determine if a majority of shareholders agree, or not.
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