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Hibernia REIT plc (HBRN)
HALF YEARLY FINANCIAL REPORT
For the six months ended 30 September 2021
18 November 2021
Hibernia REIT plc ("Hibernia", the "Company" or the "Group") today announces results for the six months ended
Good progress with strategic priorities of asset clustering and ESG excellence
Continued high rent collection rates and increased contracted rent in the period from letting activity
Robust financial position and performance: interim dividend maintained at FY21 level
Balance sheet strength further increased by debt issuance and sale of Dockland Central
Kevin Nowlan, Chief Executive Officer of Hibernia, said:
"We are making good progress with our strategic priorities of asset clustering and ESG excellence, with the key achievements since March 2021 being the completion of the 2 Cumberland Place and 50 City Quay developments and the sale of Dockland Central. We are also in advanced discussions with KPMG regarding a significant pre-let at Harcourt Square.
"Our business continues to perform well, with strong rent collection, a stable portfolio valuation and new lettings agreed supporting an interim dividend of 2.0 cent per share, the same as last year.
"It has been pleasing to see the pick-up in activity in the Dublin office market since we reported in May, with particular interest in prime, ESG-efficient, city centre space. While the Government's decision this week to advise a temporary return to working from home is likely to impact activity in the near-term, with our clear strategy, an exciting development pipeline ready to start in 2022 and the team and funding in place to deliver it, we remain optimistic about our longer-term prospects."
Hibernia REIT plc +353 (0)1 536 9100
Kevin Nowlan, Chief Executive Officer
About Hibernia REIT plc
Hibernia REIT plc is an Irish Real Estate Investment Trust ("REIT"), listed on Euronext Dublin and the London Stock Exchange. Hibernia owns and develops property and specialises in Dublin city centre offices.
Results presentation details
There will be a results presentation at 10.00 a.m. Dublin time, today, 18 November 2021. If you think you will want to ask a question at the end, please register for the phone call as you will not be able to do this from the webcast.
Despite Ireland having had some of the most stringent pandemic restrictions in the world (source: Oxford Coronavirus Government Response Tracker), the Irish economy has performed remarkably strongly throughout. In 2020, Irish GDP grew 5.9%, helped by the contribution of the multinational-dominated sectors such as technology and pharmaceuticals. Since the phased easing of restrictions was announced in April 2021, economic momentum has accelerated and Irish GDP is currently projected to grow by 15.6% in 2021 and by 5.0% in 2022 (source: Department of Finance "DoF"). Modified Gross National Income, a more appropriate gauge of the domestic economy that strips out distortions caused by the multinational sector, is projected to grow by 4.7% in 2021 and 5.2% in 2022 (2020: -3.5%), primarily driven by a rebound in Modified Domestic Demand (source: DoF).
Significant improvements in Irish labour market metrics are also being seen: the standard measure of monthly unemployment was 5.2% in October 2021 (compared to 7.9% in March 2021 and 5.0% in March 2020), while the COVID-19 adjusted measure of unemployment was 7.9%, if all claimants of the Pandemic Unemployment Payment were classified as unemployed, compared to 25.6% at March 2021. The number of persons in employment in Ireland is expected to return to pre-pandemic levels by the end of 2022 (source: Davy), helped by continued job creation from foreign direct investment ("FDI"): in the ten months to October 10,900 new jobs have been created by FDI, more than double the same period in prior year and up 26% on the same period in 2019. The recovery of the Irish economy has been supported by a highly successful vaccine rollout. Ireland has the highest rate of full vaccination amongst persons aged 18+ in the EU at 92.5% (source: European Centre for Disease Prevention and Control), though this week the Irish Government started to reimpose some restrictions following a rise in COVID cases.
While Ireland is expected to benefit from the global rebound in economic activity, it faces a number of potential risks. According to the Central Bank of Ireland (the "CBI"), "the persistence of supply bottlenecks, higher input costs and insufficient labour supply could drive a wider gap between real and nominal growth.resulting in higher inflation than currently anticipated". There is a risk of central bank policy error: i.e. that interest rate rises are not implemented in an appropriate manner, leading to economic volatility. The news of the Irish government signing up to the OECD agreement on international corporate tax changes, which included a commitment to a 15% global minimum corporate tax rate, is encouraging, though important details of the agreement still need to be finalised and the deal must be approved by various countries. Nonetheless, it is better than might have been feared given calls from various commentators for higher rates. It is expected that the new regime will come into play in 2023 at the earliest (source: Goodbody). In addition, there is a risk of economic impact if further health restrictions have to be imposed in Ireland in the coming months.
Irish property market overview
The Irish property market has shown more resilience during the pandemic than in previous downturns, helped by greater institutional ownership, significantly less debt, relatively controlled levels of speculative development and lower vacancy rates than in previous cycles. Emerging trends, which have also been seen elsewhere, include a bifurcation in the performance of prime and secondary assets and an increasing focus by both occupiers and investors on ESG credentials. CBRE notes that September and October 2021 have been busy months in the Irish property market although negotiations have been protracted and thus the extent of current activity is probably not fully apparent at present.
Irish property investment market
Investment volumes in the first nine months of 2021 were €3.6bn, approximately double the volumes in the same period in 2020 (€1.8bn) and comparing favourably to the first nine months of 2019 (€3.0bn). The private residential sector ("PRS") and office sector remained dominant, together accounting for 78% of transaction volumes (9mth 2020: 82%). Irish investors (excluding Irish REITs) accounted for 35% of purchases in the nine-month period (9mth 2020: 17%) and there was also continued interest from European investors (30%) and American investors (23%) despite restrictions on mobility and international travel during the first half of 2021 (source: Knight Frank). There are several investment transactions active at present, with 2021 total investment volumes expected to reach €4.5bn, a marked increase on the 2020 outturn of €3.0bn.
Top 5 office investment transactions (9 months to September 2021)
Source: Knight Frank
The main agents consider that prime Dublin office yields are stable at 4.00% (March 2021: 4.00%). Knight Frank reports that a significant weight of capital is chasing opportunities in Dublin, with new properties with strong covenant and ESG credentials in the best locations particularly sought after and potentially commanding yields tighter than 4.00%. However, yields on secondary assets have softened leading to the bifurcation in values of prime and secondary assets identified earlier: at 30 September 2020 yields on secondary office assets in prime locations were 4.75% and this yield had increased by 50bps at 30 September 2021 to 5.25% (source: Knight Frank).
In the first nine months of 2021, the PRS comprised 54% of overall investment (9mth 2020: 35%) (source: Knight Frank). In its Autumn 2021 yield matrix, Cushman & Wakefield reported that PRS yields for prime Dublin properties are 3.65%-4.25%, compressing by 10bps at the lower end of the range compared to their Spring 2021 matrix. CBRE notes that investors are taking time to interpret the consequences of recent regulatory changes in the residential market, including measures to limit residential rental growth in rental pressure zones to the lesser of 2% or inflation rather than the previous cap of 4% per annum.
Top 5 PRS (residential) investment transactions (9 months to September 2021)
Source: Knight Frank
In the six months to 30 September 2021, the MSCI Ireland Property All Assets Index (the "Index") delivered a total return of 2.4%, excluding Hibernia (September 2020: -1.6%). Over this period the Industrial sector was the top performer in the Index with a total return of 13.5%, followed by the Office sector at 2.4% (September 2020: 2.6% and 0.5%, respectively). Hibernia's total property return over the same period was 2.2% (September 2020: -1.7%), underperforming the Index (and the Index excluding Hibernia) by 0.2 percentage points.
Dublin office occupational market
Following very limited take-up in the second half of 2020 and first quarter of 2021, momentum is building again in the Dublin office letting market. In the nine months to September 2021 take-up of 0.6m sq. ft. was recorded, with 0.03m sq. ft. in Q1, 0.17m sq. ft. in Q2 and 0.44m sq. ft. in Q3. Whilst take-up in the first nine months remained approximately 30% of the corresponding take-up in 2019, it is encouraging to note that take-up for the most recent two quarters (Q2 and Q3 2021) was 58% higher than for the preceding two quarters (Q4 2020 and Q1 2021) (source: Knight Frank) and CBRE notes that the level of leasing activity in Q3 2021 was broadly on par with the volume of transactions recorded in Dublin in Q3 2019. No single sector dominated letting volumes in the first nine months of the year, with TMT accounting for 28% of take-up, professional services 21% and finance 17%. This is a change from recent years, with TMT accounting for 53% of take-up since Q1 2017 (source: Knight Frank). The city centre continues to be occupiers' preferred location. Knight Frank expects take-up to trend stronger again in Q4 2021 and estimates that annual take-up for 2021 is likely to reach 1.5m sq. ft. in total.
Top 10 office lettings (9 months to September 2021)
Source: Knight Frank
In March 2021 we reported that the first signs of a recovery in active demand were beginning to emerge following a c.30% fall between February 2020 and December 2020. Our active demand tracker, run in conjunction with Cushman & Wakefield, stood at 2.7m sq. ft. at the end of March 2021. Since then, active demand has risen as restrictions eased, reaching 3.5m sq. ft. at the end of August 2021. At the end of September 2021, active demand had fallen back to 3.0m sq. ft., mainly due to a number of larger requirements being satisfied. 79% of active demand is focused on the city centre, which is broadly comparable to demand patterns immediately before the pandemic (source: Cushman & Wakefield). Although the intensity of requirements (i.e. how soon the occupiers want the space) remains relatively low, it is encouraging to note that CBRE and Knight Frank are reporting approximately 1.1m sq. ft. of reserved office space at the end of September 2021, which bodes well for take-up in coming quarters.
The overall Dublin office vacancy rate (which includes "shadow" or "grey" space that is available for immediate use) increased to 10.5% at the end of September 2021, up from 9.9% in March 2021 and 8.9% in September 2020. Notably, the September 2021 vacancy rate was 10 basis points below the vacancy rate recorded in June 2021, marking the first quarterly reduction since the onset of the pandemic. The Grade A vacancy rate in the city centre, where all of Hibernia's office portfolio is located, was 11.1%, up from 9.8% in March 2021 and 9.1% in September 2020 (source: Knight Frank). Of the 10.5% overall Dublin office vacancy at 30 September 2021, 4.4pp related to un-let new buildings and 3.7pp related to grey space.
The main agents marked down their headline prime Dublin office rent assumptions by 7-10% in 2020 and also suggested increased occupier incentives in some cases. There have been no further declines reported since the end of 2020 and prime office rents in Dublin currently stand at around €57.50psf. The gap between rents for prime and secondary buildings continues to widen, as occupiers increasingly favour more modern and sustainable buildings over secondary alternatives.
Office development pipeline
We currently expect 7.3m sq. ft. of gross new space to be delivered between 2021 and 2024 for the whole of Dublin (0.7m sq. ft. already completed), of which 82% will be in the city centre. 42% of office stock under construction in Dublin has been pre-let or reserved (43% in the city centre), meaning there is 3.1m sq. ft. under construction but not yet let (2.6m sq. ft. in the city centre) (source: Knight Frank/Hibernia). Since we last reported in May 2021, the expected supply between 2021 and 2024 is broadly flat in the city centre and for the whole of Dublin.
Source: Knight Frank/Hibernia
There were approximately 13,500 new home completions in Ireland in the first nine months of 2021, up 3% on the same period in 2020 but down 8% on 2019 levels, with the Greater Dublin Area accounting for just under half of delivery (source: CSO). Housing commencements in the past 12 months reached 30,500, up 40% year-on-year (source: Department of Housing). The apartment share of housing output stood at 22% in the 12 months to September 2021, the highest in the available 10-year data series for Ireland, and in Dublin apartments accounted for 55% of delivery (source: CSO, Goodbody). Goodbody expects over 21,000 units to be completed in 2021, c. 27,000 in 2022 and over 30,000 in 2023. While expected completions are increasing, these are still behind the estimated natural demographic demand for at least 34,000 units per annum (source: CBI). In September 2021, the Irish Government announced its "Housing for All" policy which sets out how it intends to increase supply to 300,000 units over the next nine years. The plan outlines that this will be achieved through a combination of incentives for home ownership, policies to mobilise the use of land for residential development and a significant increase in the scale of public investment in housing (source: Goodbody). Knight Frank estimates that there is €3.5bn of capital looking to deploy into the PRS sector in Ireland (March 2021: €3.0bn), with several new entrants amongst the many European investors already focussing on investing in the Irish PRS market at present. This is likely to keep prime yields in the sector stable at 3.65-4.25% for the foreseeable future.
The latest data from the Residential Tenancies Board for Q2 2021 show that nationally rents grew by 7.0% year-on-year and that the standardised average rent stood at €1,352 per month. Rents grew faster outside of Dublin than within: Dublin rents grew by 4.4% year-on-year while the Greater Dublin Area ("GDA") excluding Dublin grew by 8.7% and other regions outside the GDA grew by 10.8% year-on-year.
Progress against strategic objectives for FY22
We are making good progress with the strategic objectives set out in the 2021 Annual Report, as summarised in the table below.
Disposals and acquisitions
We made no disposals in the period (September 2020: none) and invested €18.4m in two acquisitions, both of which are adjacent to existing Hibernia assets and are "bolt-on" in nature (September 2020: €3.8m). In early October 2021, we exchanged contracts and simultaneously completed the sale of Dockland Central for €152.3m, a price marginally ahead of the property's March 2021 carrying value, equating to a net initial yield of c. 4.75% and a capital value of €1,032 per sq. ft. for the office accommodation. We expect to reinvest the proceeds in our substantial near-term development pipeline (see developments and refurbishments section below for more details). We continue to review both acquisition and disposal opportunities.
At 30 September 2021, the investment property portfolio consisted of 40 assets valued at €1,450.4m (March 2021: 39 assets valued at €1,427.4m) which can be categorised as follows:
Note: differences in summation of totals in above table are due to rounding
The key statistics of our office portfolio, which comprised 84% of our overall property portfolio by value at 30 September 2021 and 88% by contracted rent (March 2021: 84% and 89%, respectively), are set out below. The WAULT to break/expiry of our completed office developments (the majority of our office income) is 7.8 years. Our acquired office assets have a WAULT to break or expiry of just under three years, with those assets in our near-term development pipeline (Marine House, Clanwilliam Court and Harcourt Square) having a WAULT of less than one year: this is to facilitate future redevelopment activity.
Since 31 March 2021, Group contracted rent has increased by 1.5% to €68.2m, with the main drivers being a new lease agreed in 2 Cumberland Place, an increase in income from our residential assets and acquisitions, which outweighed the loss of income from the expiry of some leases in Clanwilliam Court. The rental impact of the three rent reviews completed and two lease variations was net neutral. The vacancy rate of the in-place office portfolio, which was 7% by lettable area in March 2021, increased to 11% at 30 September 2021, primarily as a result of the completion of 2 Cumberland Place and 50 City Quay, both of which have space available. For further details, please refer to the asset management section below.
At 30 September 2021, our 10 largest occupiers, all of which are large, multinational companies or state entities, accounted for 54% of our Group contracted rent of €68.2m. By sector, technology and state entities accounted for 58% of contracted rent (please see the selected portfolio information below). Factoring in the sale of Dockland Central post period end, our 10 largest occupiers represented 54% of our Group contracted rent of €60.2m and technology and state entities accounted for 56% of contracted rent, with the contribution of our largest occupier, HubSpot, reducing from 16% to 11%.
In the six months ended 30 September 2021 the portfolio value increased 0.4% on a like-for-like basis. In the prior financial year ended 31 March 2021, the portfolio value decreased 4.4% on a like-for-like basis, with the first six months seeing a 3.8% decline on a like-for-like basis. Please see details of the performance of our portfolio in the period by segment in the table below:
Note: differences in summation of totals in above table are due to rounding
The table below shows the performance in the period of the office portfolio by building type, rather than building location:
Note: Footnotes as per table above
The portfolio valuation remained broadly flat in both quarters of the financial period, with the key movements being:
CBD offices: 1.6% increase in value, largely due to positive valuation movements in our prime office portfolio, where Savills assumed tighter yields at Sep-21 than Cushman & Wakefield at Mar-21, although this was offset by Savills assuming lower ERVs than Cushman & Wakefield. Achieving practical completion and positive letting progress on our office developments at 2 Cumberland Place and 50 City Quay delivered a positive valuation movement of c.12% on these assets. Beyond our prime office assets, Savills assumed lower ERVs / longer void periods than Cushman & Wakefield at Mar-21, but valuation losses in this segment were moderated as Savills assumed slightly tighter yields on these assets. The value of our near-term office developments increased in the period, with Harcourt Square delivering the majority of the gain. Value gains were moderated by increased projected costs to deliver these development projects given inflationary pressures.
Residential: 1.3% decrease in value, mainly due to Savills taking a more conservative approach than Cushman & Wakefield at Mar-21 on ERVs, yields and the natural vacancy rate on our main residential assets at Wyckham Point, Dundrum View and Cannon Place.
Industrial/other: 19.4% decrease in value, primarily due to lower values per acre applied to our land at Newlands. However, the industrial portfolio of buildings located in Dublin Industrial Estate and Malahide Road Industrial Estate increased in value by 7.2% due to asset management initiatives and lower yields/higher market rents applied by Savills compared to Cushman & Wakefield at Mar-21.
Developments and refurbishments
Capital expenditure on developments in the period was €4.1m (September 2020: €8.4m) and related to work at 2 Cumberland Place and 50 City Quay, both of which completed in the period, as well as work on preparing our pipeline of future development projects. At present we have no active schemes and our focus is on our substantial near-term pipeline, comprising the Clanwilliam Quarter (Clanwilliam Court and Marine House), which we can start in early 2022, and Harcourt Square, which we can start in early 2023.
Completed development schemes
2 Cumberland Place and 50 City Quay were completed in July, delivering 62,500 sq. ft. of office space, 51% of which was let at 30 September 2021 and 63% of which is let at the date of this half year report. The eventual completion dates were delayed by COVID-19 restrictions, most notably the closure of construction sites in Ireland from early January to early May 2021, but both schemes were delivered within budget, achieving an aggregate profit on cost of over 85% and an expected yield on cost of c. 9.5% once fully let. 50 City Quay forms part of our Windmill Quarter cluster which totals c. 400,000 sq. ft. of offices and 2 Cumberland Place brings the office accommodation on the Cumberland Place site to c. 190,000 sq. ft.: both properties are highly energy efficient, with BERs of B2 and A3 expected, and will improve the average performance of our portfolio. In addition, 2 Cumberland Place is expected to achieve LEED Platinum certification.
Please see further details on the schemes below:
Total area post completion (sq. ft.)
Full purchase price
Total cost (incl. land)
Practical completion ("PC") date
Expected yield on cost1
2 Cumberland Place, D2