Subject: SHA
Vision Capital Corporation Issues Open Letter to IRES Shareholders: Vision to vote AGAINST certain directors and other matters at the upcoming IRES 2023 Annual General Meeting and asks other IRES shareholders to do the same
DUBLIN, Ireland, April 12, 2023 /PRNewswire/ -- We (Vision Capital Corporation, together with its affiliates, "Vision", "we", "us" or "our"), a significant shareholder of Irish Residential Properties REIT plc ("IRES," the "REIT" or the "Company") owning over 25 million ordinary shares representing approximately 5.0% of IRES' ordinary shares, are issuing this open letter to IRES shareholders expressing our concerns relating to IRES and in light of these concerns, outlining how Vision intends to vote its ordinary shares at the REIT's upcoming May 4th, 2023 Annual General Meeting (the "2023 AGM").
We believe that IRES 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. As one of the largest owners and operators of affordable and mid-market multifamily apartments in Ireland, IRES is a platform that can be a significant provider of housing stock in Ireland. Moreover, IRES' current corporate structure as a publicly-traded REIT has many inefficiencies (outlined herein) that hinder it from being a more relevant and viable entity to contribute, in particular, to new and economically viable developments to address the severe housing shortage in Dublin. Vision believes that there exists a distinct and significant opportunity for Ireland should IRES cease to be a public company and continue to operate privately with a different corporate and capital structure, which would have the corresponding benefit of value creation for IRES and its shareholders. Notably, the inefficiencies in IRES' structure, which include several factors, have resulted in the market price of the REIT's ordinary shares trading at a significant discount to the market value of the real estate it owns and its operating platform.
As discussed more fully herein, Vision has been an IRES shareholder since 2014 and has been actively engaged with IRES since July 2021. Vision has been in active dialogue with IRES' board of directors (the "Board") and has been continually misled, cajoled, and stymied in our efforts. Vision is concerned that the IRES Board and management ("Management") are choosing not to address fundamental structural issues, while at the same time benefiting greatly and disproportionately from the Company's compensation structure, which disincentivizes them from pursuing the required structural changes.
It is evident that fundamental change is necessary, and necessary now.
On this basis, Vision will be voting against the election of the following directors at the 2023 AGM:
- Resolution 2a- Declan Moylan, Current Executive Chairman
- Resolution 2c- Brian Fagan, Current Chief Financial Officer
- Resolution 2d- Joan Garahy, Remuneration Committee Member
- Resolution 2g- Tom Kavanagh, Remuneration Committee Member
Vision will also be voting against the following resolutions:
- Resolution 6- Advisory resolution on the Report of the Remuneration Committee on Directors' Remuneration
- Resolution 8a- Authority to disapply pre-emption rights in specified circumstances
- Resolution 8b- Authority to disapply pre-emption rights for an acquisition or other specified capital investment
Vision notes that resolutions equivalent to Resolutions 8a and 8b were rejected by shareholders at the 2022 Annual General Meeting (the "2022 AGM"). Nevertheless, the Board included them for consideration by the shareholders at the 2023 AGM without indicating in the meeting materials that these resolutions failed to be approved last year.
Vision asks that other shareholders vote against Resolutions 2a, 2c, 2d, 2g, 6, 8a, and 8b in order to communicate to the IRES Board their dissatisfaction for the reasons set out herein.
Vision sets forth below our thoughts and observations regarding the need for a fundamental and structural change at IRES and the steps that we are taking in an effort for the IRES Board to address the concerns that we have been expressing privately for several years.
The Vision Opportunity Funds (the "Vision Funds"), investment funds managed by Vision (further background information on Vision is available at www.visioncap.ca), with assets under management as at March 31st, 2023 of more than $900 million, have been long-standing active and supportive shareholders of IRES. The Vision Funds initially invested in IRES' ordinary shares ("Ordinary Shares") at the time of the REIT's initial public offering in 2014, added to this investment over the years and have held the Ordinary Shares as a core portfolio holding for much of the last nine years. Our portfolio team has also visited Ireland and toured IRES' property portfolio extensively on three separate occasions.
We have actively engaged with the REIT's Management and Board members on multiple occasions and, beginning in July 2021, expressed to them the concerns that are set out in this letter. The initial communication in July 2021 set forth Vision's thoughts and observations and the need for fundamental change at IRES, requesting that the Board formally resolve, and publicly announce its intention, to explore value-maximizing transactions for the benefit of all IRES shareholders and retain financial advisors to do so, given the current market value of the Ordinary Shares at the time did not reflect the market value of the REIT's portfolio and its platform. After eight months with no changes being initiated, Vision subsequently corresponded with the Chairman of the Board in March 2022, during which Vision proposed adding several resolutions to the agenda of the REIT's 2022 AGM for shareholder approval with respect to a formal sales process for the Company. At the strong request of the Chairman, these resolutions were ultimately held in abeyance and withdrawn due to the Chairman's expressed commitment to bona fide actions to address Vision's detailed concerns. Vision agreed to stand down at the time based on the understanding that the Company was to consider a strong, shareholder-aligned candidate as a new non-executive member of the IRES Board and would provide an update to the market no later than the published results in the summer of 2022 on all options and activities in relation to the Board addressing the concerns that Vision had been expressing since July 2021. Notwithstanding the Chairman's commitment, which Vision relied upon, such an update was never provided, whether to Vision or to IRES shareholders more generally. When Vision enquired with the Chairman as to why this commitment was breached, we were told that the Board had concluded its review and determined that the status quo was the most appropriate course of action, therefore there was no reason to make any announcements when there was no change contemplated. In addition, Vision had expectations that certain Director candidates with experience and alignment to better serve the interests of IRES shareholders would be advanced; unfortunately, the Board ultimately appointed an additional Director who was not satisfactory to Vision in this regard.
At the request of the Board, we, in the past, have stepped back from making a public announcement expressing our concerns on the promise that matters would be addressed. With this not having occurred, we now feel compelled to be public with our concerns and take this step of corresponding directly with IRES shareholders by way of this letter.
The Vision team has deep experience and significant knowledge garnered over more than 35 years in the realm of real estate and publicly-traded securities. Over the past nine years, Vision has done extensive work on IRES and its markets. It is increasingly evident that the status quo is not sustainable and is leading to value erosion for IRES shareholders, while the remuneration of insiders is increasing. We believe that now is the time to communicate publicly to the IRES Board that enough is enough, and change is needed.
We are hopeful that Canadian Apartment Properties REIT ("CAPREIT"), which is the holder of approximately 18.7% of the Ordinary Shares, will support Vision in pursuing the much-needed change. CAPREIT's involvement since it conceived and sponsored the creation of IRES and its very significant shareholding place it in a unique position from a capital markets perspective. While a large shareholder, its involvement as the manager of the REIT was terminated in 2022, and (unfortunately, in our view) its President and CEO Mark Kenney also resigned from the IRES Board in 2021. Since CAPREIT is not typically a passive minority owner of real estate that it does not manage, its ownership position in IRES is an overhang on the market price of the Ordinary Shares. In addition, its large ownership stake may serve as a deterrent to potential acquirers of the Ordinary Shares and/or the entity itself. Although the IRES interest may not comprise a significant portion of CAPREIT's asset base, we urge CAPREIT to consider its shareholding both to serve the financial interests of CAPREIT's unitholders and IRES minority shareholders and in the broader context of ESG considerations as well as its corporate reputation. CAPREIT sponsored the creation of IRES and solicited and encouraged the support of many investors, including Vision, to join it as a shareholder of IRES.
While the destruction of value and structural impediments detailed herein may be inconsequential to CAPREIT, Vision believes it has a corporate responsibility to consider the interests of minority shareholders, particularly in the context of CAPREIT's sponsorship and the history of IRES. Of importance, by supporting the initiatives addressed herein, CAPREIT also can aid in changing the course of IRES to an entity that can more effectively and significantly contribute to solutions to address the severe housing shortage in Ireland. In light of CAPREIT's unique position, without its active engagement, minority shareholders are left with a "Catch 22" situation where CAPREIT ownership is on one hand a market overhang and on the other hand, its passive laissez-fair approach enables the continuation of a failed entity, missed opportunity and the ongoing erosion of shareholder value.
It has been readily apparent that the Ordinary Shares have traded, and continue to trade, at a significant discount to the underlying net asset value ("NAV") of the REIT's real estate holdings and the enterprise as a whole. Evidence of this disconnect in valuations can be seen in the REIT's most recently reported EPRA NDV NAV of ?1.677 per share, with the REIT's Ordinary Share price of ?0.94 on April 11th, 2023, trading at an approximately 44% discount to the REIT's own assessment of value as reported in IRES year-end Financial Statements published on February 24th, 2023.
In addition, the implied value of its real estate on a price per-unit basis based on its market trading price has consistently depicted a valuation well below the sale price on a per-unit basis of comparable multifamily apartment transactions for several years. Further, while there have not been many recent transactions, select recent transactions that have been consummated underscore this, including a March 2023 report of Pontegadea acquiring the 120-unit Opus at Six Hanover Quay in Dublin for just over ?100 million. While the Opus at Six Hanover Quay targets a higher market segment than the average IRES apartment unit, the ?842,000 per suite price point is noteworthy in that it is greater than the highest reported price point in 2022 of ?741,000 per unit and greater than the average transaction price in 2022 of ?454,000 per suite, thus reflecting apparent investor appetite to still acquire assets at compelling valuations. In addition, the sale was estimated to have occurred at a 4.25% net initial yield, according to React News. The REIT's shares, on the other hand, currently trade at an implied yield that is approximately 135 basis points greater than the Pontegadea transaction and imply an average price of ?295,000 per suite which is approximately 35% below the average price per suite of transactions that occurred in 2022.
It is also apparent that the implied stock market trading price per unit of approximately ?295,000 per suite is at least 30% to 40% below the replacement cost valuation of creating new apartments in Dublin, which are estimated to be in excess of ?460,000 per unit. In fact, a new report shows construction costs for apartments in this market increased by approximately 10% in 2022. This is particularly relevant when the vacancy rate for apartments in Dublin is approximately 1.2%, according to EY Ireland and GeoDirectory Residential Buildings Report for Q4 2022, and the development of new affordable and market housing is the only solution that can help alleviate the market's severe housing shortage.
As another relevant replacement cost metric, we would note that IRES acquired its Tara View site on Merrion Road for ?47.1 million (including VAT but excluding other transaction costs) in August 2022 to complete its forward purchase agreement of a new development. As this property includes 69 residential units, the purchase price indicates a valuation of ?683,000 per unit. At its current share price of ?0.94, indicating a value per unit of ?295,000, IRES' Ordinary Shares are trading at an approximate 57% discount to this replacement cost valuation.
None of the above-noted valuation metrics ascribe any value to IRES' operating and management platform overseeing the largest portfolio of multifamily apartments in Ireland, nor its unique position to contribute to and benefit from the returns of the new development of apartments.
Vision believes the discounted valuation of the REIT's Ordinary Shares is in part attributable to the following inefficiencies of IRES as a publicly-listed REIT:
To qualify as a REIT, pursuant to Irish tax regulation, the REIT is required to distribute to shareholders at least 85% of the Property Income of its Property Rental Business for each accounting period. As such, by distributing such a large proportion of its cash flow annually to its shareholders, it does not retain sufficient cash flow to grow and, in particular, fund new developments and contribute new supply to help alleviate the housing shortage. This ongoing short-term withdrawal of capital does not promote nor enable prudent longer-term investment decisions and opportunities. Moreover, this high dividend payout makes IRES vulnerable to reliance on capital markets, which are extremely inefficient as outlined herein.
Even though IRES has been an established public REIT for over nine years, the average daily trading volume of the Ordinary Shares remains exceedingly low, both on an absolute basis and relative to its market capitalization. Moreover, published trading volumes overstate actual trading volume. This reflects "double printing" by investment dealers whereby they record both the purchase and sale of any one trade. Accordingly, the estimated average daily trading volume of the Ordinary Shares over the past year is approximately 423,000. We would note that this is a de minimis 0.1% of the total Ordinary Shares outstanding.
This illiquidity represents a disservice to all IRES shareholders, presenting challenges to the efficient purchase and sale of the Ordinary Shares, as it limits the number and breadth of investors (including smaller investors who can execute smaller trades but may determine that the overall general illiquidity is a deterrent to the prospective investment) and fosters a persistent undervaluation of the Ordinary Shares.
The more limited options to raise equity capital for Irish-listed securities results in comparatively inefficient and expensive solutions relative to, for example, North American listed securities.
In other global equity capital markets, a wider array of equity financing options is frequently employed. Some examples include "Forward Sale" agreements in the United States, "Bought Deals" in Canada, and "At the Market" or "ATM" regular course financings. The less flexible Irish equity capital markets limit the opportunity to maximize shareholder value.
The requirement for an EU approved prospectus for new equity issuances presents a cumbersome, costly, time-consuming, and relatively inefficient burden when IRES chooses to issue equity.
We would also note that IRES has historically had a relatively poor track record of effectively raising equity capital.
As a smaller capital market, the Irish public markets contain a smaller pool of institutional and retail investors that may be receptive to purchasing the Ordinary Shares. This contributes to reduced demand for the Ordinary Shares on a day-to-day basis and an imbalance of market power when IRES seeks to raise equity capital in a new issue offering, which manifests itself in an excessive and unnecessarily dilutive discount from recent market trading prices to execute a new offering of Ordinary Shares. It is noteworthy that the Irish REIT market never flourished as it was hoped it would when legislation was passed in 2013 and has, to the contrary, contracted with the privatization of Green REIT and Hibernia REIT, as well as the sale of Yew Grove REIT. A dedicated investor base has never emerged and, as a result, European investors have not been incentivized to focus on Irish REITs as they became a very small part of core European benchmarks.
A fundamental rationale for any entity to be publicly-listed is to enable expedited and profitable growth by increasing access to capital-raising opportunities and expanding the investor base.
Dublin and other Irish property markets generally present limited growth opportunities for a REIT focused on Ireland. Moreover, at this juncture, IRES already has the leading market share position.
As a publicly-traded company listed on the Euronext Dublin exchange and solely focused on the Irish market, employing lower financial leverage relative to its non-publicly traded peers, IRES is currently positioned to be either less competitive or less profitable than well-funded private owners or a larger public company or REIT listed on another exchange that benefits from scale, a wider investment universe and a lower cost of capital.
In addition, the collective challenges emanating from the valuation and capital markets constraints and practicalities, summarized herein, dictate that raising additional equity capital to fund growth through acquisition and/or development would require issuing new Ordinary Shares well below the REIT's net asset value (as previously detailed), and would therefore be highly dilutive for current shareholders.
In summary, it is apparent that at this juncture, IRES cannot effectively and profitably grow as a publicly listed entity. As a result, a course correction is warranted and necessary.
While Vision believes IRES as a publicly-traded REIT is an inappropriate structure, we recognize the important market need and opportunity the REIT is failing to address and its great potential to be a more effective part of the solution in solving the housing crisis in Ireland.
To this point, the availability of rental accommodations in Ireland remains excessively low, with Daft.ie (one of Ireland's leading property websites) estimating there are only 1,100 homes listed as available to rent nationwide as of February 2023, down from over 23,400 homes fourteen years ago. Furthermore, this low availability is likely to persist for the next few years. According to the government's "Housing for All ? a New Housing Plan for Ireland," it is estimated that Ireland will need an average of 33,000 new homes to be provided each year from 2021 to 2030. This goal is not likely to be met over the near term as, based on the Central Bank of Ireland's most recent Quarterly Bulletin, it is estimated that housing completions totaled 29,000 in 2022, with forecasts showing only 27,000 and 29,500 houses will be developed in 2023 and 2024, respectively.
As such, we believe that IRES, as one of the largest and most experienced residential operators should continue to aid in this effort. However, with the REIT currently unable to raise additional non-dilutive equity capital, as previously detailed, the Company is likely to limit its investment activities and will be unable to be a material source of capital for the creation of housing in Ireland. Underscoring this limitation, IRES recently decided to walk away from developing its long-touted premier development site known as Rockbrook, which was expected to deliver 428 residential units in a core transit-connected Dublin market. Management has acknowledged, and it is evident that, the significant discount in the market trading price of the Ordinary Shares relative to the net asset value per share of the REIT's owned real estate makes it economically unattractive to advance this development.
Vision is concerned that IRES Management and its Board are choosing not to address the fundamental issue of Board and Management remuneration with the Company while at the same time benefiting greatly and disproportionately from the Company's compensation structure, which disincentivizes them from pursuing the required structural changes. In addition, Vision is concerned with two recent amendments to the compensation structure that were enacted by the Remuneration Committee (the "Committee"):
- In 2022, the Committee proposed to change the REIT's current long-term incentive compensation from the current performance based LTIP structure to Restricted Share Units ("RSUs"). Vision believes this would have been detrimental to the REIT as RSUs implicitly reduce Management's alignment with the Company and its shareholders. In fact, according to IRES, other shareholders had also questioned whether this form of long-term incentive is appropriately aligned with the shareholder experience. The mere suggestion of this change demonstrates that the Committee is not aligned with shareholder interests.
Further evidence of this misalignment can be seen from the Committee's alterations of the 2023 LTIP structure: the benchmark on which the TSR (Total Shareholder Return) component is based has been changed from the original benchmark to a narrower subset that focuses on residential REITs. While Vision acknowledges that the new benchmark could be more comparable to IRES, Vision finds it suspect that the Committee has decided to change the benchmark in 2023 rather than in prior years and believes that the reason for the change is to set an easier target for Management to attain. The Committee has not provided any assurance that the benchmark will be kept the same going forward, and in fact, has informed investors that it will be consulting again this year on a revised proposal for a new remuneration policy. - In March 2023, the Committee decided to increase Chief Financial Officer ("CFO") Brian Fagan's salary and maximum bonus opportunity for this year despite the poor performance and execution over the past two years and in opposition to Vision's expressed concerns. Mr. Fagan was only recently hired by IRES in April 2021 as Finance Director and then appointed CFO in April 2022. There has been no material change in his responsibilities. The internalization of the REIT management was being negotiated by the REIT and was known to both IRES and to Mr. Fagan at the time of his employment commencement in 2021.
A key duty of the CFO acting on behalf of Management and the Board is to prudently manage the REITs balance sheet. It is evident that the market trading price of IRES' Ordinary Shares was acutely and negatively impacted due to the mismanagement of the Company's balance sheet. IRES took excessive risk by maintaining an unnecessary amount of floating rate debt and inexplicably did not hedge this debt against interest rate movements until December 2022, despite going through perhaps the most telegraphed interest rate hiking cycle in history. The increase in the CFO's compensation is egregious, as not only has Mr. Fagan's role not materially changed since his recent hire, but IRES' performance in this specific area has been poor if not reckless. Of additional concern is the appointment of Mr. Fagan to the Board. The intertwined entitlements of this Board and Management as reflected in the "you scratch my back; I scratch your back actions" are increasingly egregious.
Vision expressed concern over two years ago that the total ownership of the collective members of the Board was extremely low, which suggested that the Board had little, if any, alignment with IRES shareholders. As at December 31st, 2022, this fact had not changed, as the Board members owned just 0.99 million shares representing approximately 0.22% of the total Ordinary Shares.
For the same period, the Vision Funds collectively owned over 25 million Ordinary Shares representing approximately 5.0% of IRES' Ordinary Shares. As such, Vision, as just one shareholder of IRES holds more than 25 times the amount of shares of the 9 Directors of IRES combined.
On several occasions over the past two years, after Vision raised substantive concerns on various matters including the limited ownership of Ordinary Shares by the Board, the Chairman, Mr. Declan Moylan informed Vision that the Board would seriously consider the matters Vision raised. A subsequent and typical response was that its practices were consistent with other public comparable companies. Often the Board's failure to respond constructively to serve shareholder interests was cloaked behind "hired gun" professional advisors skilled in maintaining the self-serving interests of entrenched boards, all funded at the expense of shareholders.
Shareholders should not accept comparisons to other companies in other markets used to obfuscate and deflect the issues at hand including those addressed herein, to enable continued Board entrenchment. A highly aligned, committed, and effective Board should consider the specific circumstances of IRES as an entity, its financial circumstance, the specific needs, requirements and opportunities in Ireland and the structural and practical flaws and inefficiencies that it faces in its marketplace.
The 2018 UK Corporate Governance Code and the Irish Corporate Governance Annex suggest best governance practice is that Mr. Moylan's tenure as Chairman should cease after nine years. However, IRES has recently decided to extend his term for a tenth year on the premise that there has been significant change at the Board that warrants this extension. Mr. Moylan and the Board had at least two years to plan for and accommodate these changes. Perhaps his failure to do so should be considered as another reason to terminate his role as Chairman to comply with the nine year rule rather than an excuse to extend it.
Shareholders continue to suffer, and IRES fails to contribute effectively or efficiently to the housing shortage in Ireland, while an extraordinarily entrenched Board enriches and serves itself from the public company trough. This misalignment must be addressed.
In 2022, Vision requested that the IRES Board put forth a resolution to the 2022 annual general meeting to initiate a process to advance and execute value maximization opportunities for the Company. At IRES' urging and advancement of expectations for change, Vision withdrew the request.
In addition to the matters to be considered and voted upon by shareholders at the currently scheduled Annual General Meeting on May 4th, 2023, Vision intends to proceed to requisition an extraordinary general meeting to consider the resolutions it withdrew in 2022. The resolutions, if approved, would require IRES to commence a bona fide process to execute a value-maximizing transaction for the REIT.
Unfortunately, due to the settlement structure of shares listed on Euronext Dublin and the requirements of the Irish Companies Act, Vision is required to transfer the Ordinary Shares currently held in nominee accounts for the benefit of the Vision Funds to a direct registration in the names of the Vision Funds on the books of the registrar to effect the shareholder meeting requisition. Hence, unless IRES agrees to amend the 2023 AGM Agenda and proxy materials to better serve shareholder interests and avoid the unnecessary and duplicate costs of two meetings, a shareholder meeting to vote on the resolution to pursue a process to optimize value for IRES shareholders will be delayed to a date after the May 4th, 2023 Annual General Meeting.
In the interim, shareholders can communicate their desire for change by voting against resolutions 2a, 2c, 2d, 2g, 6, 8a, and 8b at the 2023 AGM as discussed below.
To reiterate, Vision will be voting against the election of the following directors at the 2023 AGM:
- Resolution 2a- Declan Moylan, Current Executive Chairman
- Resolution 2c- Brian Fagan, Current Chief Financial Officer
- Resolution 2d- Joan Garahy, Remuneration Committee Member
- Resolution 2g- Tom Kavanagh, Remuneration Committee Member
To reiterate further, Vision will also be voting against the following resolutions at the 2023 AGM:
- Resolution 6- Advisory resolution on the Report of the Remuneration Committee on Directors' Remuneration
- Resolution 8a- Authority to disapply pre-emption rights in specified circumstances
- Resolution 8b- Authority to disapply pre-emption rights for an acquisition or other specified capital investment
It is important to note that Resolutions 8a and 8b were overwhelmingly rejected by shareholders at the 2022 Annual General Meeting. Nevertheless, the arrogant entrenchment of this Board has resulted in the same resolutions being included by them for consideration by the shareholders at the 2023 AGM without indicating in the meeting materials that these resolutions failed to be approved last year. Particularly for the reasons noted above, any issuance of Ordinary Shares by IRES would be extremely dilutive to all shareholders and should proceed only after each shareholder has an opportunity to participate in such share offering pro rata. Without this rejection, this entrenched Board could tactically choose to issue new equity to a select group of existing or prospective shareholders that may further entrench their position and exclude other shareholders at their will. This is a key factor as to why these resolutions were rejected by shareholders last year and that is why Vision will vote against these resolutions at the 2023 AGM.
Vision asks that shareholders complete their proxies or otherwise vote at the 2023 AGM in the same way that Vision is with respect to Resolutions 2a, 2c, 2d, 2g, 6, 8a, and 8b.
We would ask any IRES shareholder who shares our concerns or has any questions, to reach out to us at [email protected] with your telephone contact information and we will be pleased to further discuss this matter with you.
We believe that together we can make a great change that will benefit Ireland, while at the same time maximizing value for all IRES shareholders. We hope that you will vote in the manner that we are, as a first and important step to making this happen.
Yours truly
VISION CAPITAL CORPORATION
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