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Edited Transcript of HBRN.I earnings conference call or presentation 12-Nov-19 8:30am GMT

Half Year 2020 Hibernia REIT PLC Earnings Call

Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Hibernia REIT PLC earnings conference call or presentation Tuesday, November 12, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Edwina Governey

Hibernia REIT Plc - CIO

* Justin Dowling

Hibernia REIT Plc - Director of Property

* Kevin Nowlan

Hibernia REIT Plc - CEO & Director

* Mark Pollard

Hibernia REIT Plc - Director of Development

* Thomas Edwards-Moss

Hibernia REIT Plc - CFO & Director

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Conference Call Participants

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* Colin Grant

Davy, Research Division - Real Estate Analyst

* Colm Lauder

Goodbody Stockbrokers, Research Division - Real Estate Analyst

* Ronan Dunphy

Investec Bank plc, Research Division - Research Analyst & Economist

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Presentation

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Operator [1]

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Hello, and welcome to the Hibernia REIT PLC Interim Results. (Operator Instructions)

And just to remind you, this conference call is being recorded. Today, I'm pleased to present Kevin Nowlan, CEO. Please go ahead, Mr. Kevin.

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [2]

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Good morning to those here in the room and those on the line, and thank you for joining this presentation to discuss Hibernia's interim results for the 6 months ended 30 September 2019. I'm joined here by Tom Edwards-Moss, our CFO; Edwina Governey, our Chief Investment Officer; our Director of Development, Mark Pollard; and our Director of Property, Justin Dowling.

Looking at the agenda on Slide 3, you will see we plan to cover off the following areas: our financial results, an update on market conditions, an update on activity on our development pipeline; we'll take a look at the portfolio management initiatives underway; and we'll end with some thoughts on the longer-term outlook. There will be time at the end for those in the room and on the line to ask any questions you may have.

Just before we get into the details of the presentation, let me make a few headline comments. We've had a solid start to the year with our growing rent roll of EUR 62 million, helping to support strong growth in EPRA earnings and a 17% increase in our interim dividend. We are making good progress on our development pipeline with the key achievements in the period, including obtaining planning commission for an additional [assort] on our 2 Cumberland Place scheme and received our preliminary planning permission for our next cluster, the redevelopment of Clanwilliam Court.

Overall, tenant demand for offices and apartments in Dublin remains high and job creation from foreign direct investment is near record levels, notwithstanding external uncertainties such as Brexit. It remains to be seen how the Irish property investment market reacts to the tax changes announced by the government in the recent budget. These came in after the period end, but Tom will be outlining in more detail, how it will impact on the value of Hibernia's portfolio. We made progress in letting the first floor of 2 Windmill Lane and remain confident that when the space in The Forum and Central Quay is let along with the balance of 2 Windmill Lane, it will unlock significant rental upside.

We also have the upside to come from the completion of 2 Cumberland Place in 2020. Our value-add of development approach is a key part of our strategy, but it does mean that gains in portfolio value aren't just delivered in a smooth, straight line.

Turning now to Slide 4 and a brief summary of the key metrics for this reporting period.

The value of the portfolio rose 0.6% in the period, that's on a like-for-like basis and excludes acquisitions, disposals and capital expenditure. The main valuation gains came from signing a license agreement with a new tenant at The Observatory at the South Docks and the leasing deal agreed for the first floor of 2WML.

Total property return was 2.4%, below the 3.1% increase in our benchmark of the MSCI Ireland index. An underperformance we expect to reverse as we lease the vacant space in the portfolio.

EPRA NAV per share grew by 1.4% and EPRA earnings per share by 55.6%, helped by a reduced cost base following internalization of the management team and the increase in our rent roll due to new lettings and unsettled rent reviews.

Finally, total accounting return reflecting growth in EPRA NAV per share and, including dividends paid in the period, was up 2.5%.

Looking at Slide 5, the business highlights of the year so far were, we've successfully grown our rent roll to EUR 62 million, a gain of 8% since March 2019. This increased income, along with our reduced cost base, helped us deliver a 56% increase in EPRA earnings per share to EUR 0.028. We're making good progress on our development pipeline, with planning approval for a new floor that will add more than 6,000 square feet to our scheme at 2 Cumberland Place. We've also received provisional planning approval for our 152,000 square foot scheme at Clanwilliam Court. We continue to recycle capital effectively using the net sales proceeds of EUR 60 million in our last year -- financial year to fund acquisitions, development CapEx of our 25 million share buyback program.

We're delivering on the sustainability and environmental commitments, receiving a 3-star GRESB rating and recently appointing a dedicated sustainability manager, who will join the business in January 2020.

We've also continued to increase our dividend as net income rises, today declaring a EUR 0.0175 per share interim dividend, up 17% on the prior year period.

Looking ahead on Slide 6. The Dublin marketing continues to be supported by strong economic growth and job creation.

Overall tenant demand for offices and apartments remains high, although we have seen some evidence of smaller domestic occupiers deferring decisions on leasing space, while the current geopolitical uncertainty persists.

We expect near-term income upside in our portfolio of EUR 11 million from renting unlet space with an estimated rental value of almost EUR 7.8 million and then a further EUR 3.2 million estimated rental value on the completion of 2 Cumberland Place.

Longer term, we have an exciting development pipeline that can deliver an incremental 260,000 square feet of new office space to the portfolio through planned redevelopments at Marine House, Clanwilliam Court and Harcourt Square.

We've also added an acquisition on Malahide Road to our other significant potential mixed-use schemes at Newlands Cross and Slaney Road. Our strategy is designed to cater to the changing nature of tenant demand. This includes tenants looking for office clusters, such as the ones we plan at Clanwilliam Court in Harcourt Square.

We are also open to offering further -- offering social leases, if the terms are right. For instance, our latest deal at 2WML. And we're offering a new tenant at The Observatory, a managed office solution that Justin will talk about in more detail in the presentation.

So overall, I think we're well positioned with a clear strategy, backed by cash and undrawn facilities of EUR 174 million.

Now I'd like to hand you over to Tom, who will take you through the financials.

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Thomas Edwards-Moss, Hibernia REIT Plc - CFO & Director [3]

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Thank you, Kevin, and good morning. Looking first at the financial highlights on Slide 8. With more developments completed or large lettings signed in the period, we saw the portfolio valuation grow in line with the wider market, increasing 0.6% on a like-for-like basis.

Net debt grew modestly, and EPRA NAV per share increased by 1.4%, helped in part by the accretive share buyback program, most of which was completed in the period.

Looking at the income statement, net rental income grew 7.3% and EPRA earnings per share grew almost 56%, thanks also to the reduced cost base we now have. We've declared an interim dividend of EUR 0.0175 a share, uplift of 16.7% on last the year's interim dividend and in line with our policy of paying out up to 50% of the dividends paid in respect to the prior year at the interim stage.

As you are probably aware, our stamp duty rates on commercial property were increased by 1.5% with effect from the 9th of October. Had this increase been effective at the 30th of September, our values estimated would have resulted in a decrease in the portfolio of value of around EUR 22 million, and we show, in blue on the slide, the impact this would have had on the key financial line items.

Looking now in more detail of the drivers of the increase in NAV per share on Slide 9. The portfolio grew in value by EUR 0.009 a share. EPRA earnings less dividends paid increased NAV by EUR 0.008 a share, and the effects of the share buyback added another EUR 0.007, taking the NAV at 30th of September to EUR 1.757 per share.

The increase in stamp duty reduces NAV per share by EUR 0.033 or a pro forma figure of EUR 1.724.

And now turning to the constituents of the increase in EPRA earnings on Slide 10. Commencement of the Hubspot lease in 1SJRQ in June 2019 added EUR 2.2 million. New lettings and rent reviews, which Justin will talk about in more detail later, added EUR 1.3 million net of lease breaks and expiries. And net sales made in the last 12 months, reduced EPRA earnings by EUR 1.9 million.

Overall costs reduced by EUR 4.9 million, thanks to the expiry of the investment management agreement in November 2018, leading to EPRA earnings of EUR 19.3 million, up 50% on the same period in prior year.

Looking now at the balance sheet. And as a reminder, we refinanced to a fully unsecured debt structure in December 2018, substantially extending our average debt maturity, which now stands at just under 5 years. Overall indebtedness at the end of September remained largely unchanged from March 2019 due to the receipt of the proceeds from the sale of 77 SJRQ and their reinvestments in development, CapEx, bolt-on acquisitions and the share buyback.

Most of the EUR 25 million share buyback program was undertaken in the period, and it fully completed yesterday. In total, 17.6 million shares have been bought back at an average price of EUR 1.42 per share.

Overall, the balance sheet remains very robust with a 15.6% loan-to-value ratio and over EUR 130 million of cash and undrawn facilities net of committed expenditure.

On the left of Slide 12, you can see the consistent growth in rental income we have delivered over the past 5 years. And on the right, the resulting growth in EPRA earnings and dividends. With the expiry of the IMA reducing the cost base of the business significantly, we are now seeing the benefits to EPRA earnings. As you can see, the EPRA EPS in the first half of this financial year is already equal to that for the full year of FY '18. And as a reminder, our policy is to pay out 85% to 90% of EPRA earnings annually in the form of dividends.

There is also significant potential incremental rent rolls come from the portfolio, as shown on Slide 13. And with operating costs largely fixed, any uplift in rental income will drop mostly to the bottom line. Taking the categories on the slide in turn. You can see on the left, one with the Green Circle was the one that we've delivered growth in contracted rent of EUR 4.4 million in the period through a combination of net lettings, rent reviews and acquisitions. There is over EUR 12 million of incremental rent, shown by the 2 in green that can be delivered from letting the vacant space in the existing portfolio, completing and leasing 2 Cumberland and from a small amount of rent reviews.

And looking further ahead, we are now charting the potential rental impact of the future office development, shown by the 3 in green, which, based off value's current estimate, could add an incremental EUR 18 million contracted rent. This will see some reduction in rents initially as the buildings are vacated for the redevelopment starting in mid-2020 with Marine House, but we are comfortable paying a partly uncovered dividend while this is happening.

Turning on to Slide 14, which shows the revaluation gains expected to come from 2 Windmill Lane and 2 Cumberland Place. Based on the values assumptions at 30th September, which are an average cap rate of 4.8% and estimated rental value of EUR 56.57 a square foot. There is an estimated EUR 12 million left to come, and we would be hopeful of achieving tighter yields when it is fully let, consistent with the other completed developments in our portfolio.

So on Slide 15, the key financial messages to leave you with. We have seen strong earnings growth in the period, and there is plenty of further rental and valuation growth potential from the portfolio in the nearer-term and beyond. There is further detail on the recently announced tax changes in the appendix, but the immediate direct impact is estimated to be a EUR 22 million reduction in portfolio value. We've now reinvested most of the net sales proceeds generated in prior year, and we'll maintain our capital discipline. And looking ahead, growing earnings is a high priority. Any valuation increases are likely to come from our developments. And as a result, are unlikely to be recognized in a linear manner.

And with low leverage, we are well positioned to capitalize on any opportunities that present themselves. Thank you, and I will now hand over to Edwina to update you on the market.

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Edwina Governey, Hibernia REIT Plc - CIO [4]

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Thanks, Tom. On Slide 17, let's take a look at the Irish economic outlook. There's been some reduction in the expected rate of economic growth in Ireland. The core domestic demand, our preferred measure, is still forecast to grow by 3.6% this year and 3.2% in 2020, as shown on the top left. This compares with favoring to GDP forecasts for the Euro area of 1.4% in 2020. This slightly weaker economic sentiment is also reflected in our Ireland's composite PMI, which will -- while still in expansionary territory despite near-term uncertainties, is down from the 2018 average of 57.1 with a rating in October of 50.6. This is a decline that reflects the uncertainty, geopolitical environment that has also factored PMIs in the U.K., EU and U.S., as you can see on the top right.

Notwithstanding this slightly weaker economic sentiment, jobs created from FDI in Ireland continue to grow with cumulative jobs created year-to-date ahead of previous years based on data provided by the IDA.

You will see medium expectations for job office employment, which is a key driver of office space, with an additional 40,000 expected for 2023 according to CBRE the forecast shown on the bottom right.

On Slide 18, we look at trends in the Dublin office market, particularly in the rental market. And as you will see on the top left, take-up for the first 3 quarters of 2.1 million square feet is close to 10-year average of 2.4 million on a full year basis, with 3 months of the year still left to go. While it looks unlikely the take-up will top the record at 3.9 million seen in 2018, expectations are the total take-up for 2019 is likely to be around 3 million. The demand fundamentals remain strong.

In the top right, you'll see that there's been an increase in the overall vacancy rate to 6.8%. However, when you zero in on the city center, which is the focus of Hibernia's portfolio, the vacancy rate drops to 5%.

This 5% has increased from 3.7% since we last reported in May, mainly as a result of lease surrender on some previously leased space coming back into market on a similar basis. In the bottom left, you can see an analysis of take-up over the last 3 years broken out between quarters. In 2019, we had a very strong Q1, followed by softer deal flow in Q2 and 3. However, it's understood that 1.1 million to 1.6 million square feet of lettings are in discussions at the end of the third quarter, which we believe will lead to a more buoyant final quarter.

And as I mentioned previously, expectations are that the total take-up for 2019 is likely to be around 3 million square feet, well ahead of the 10-year average.

Finally, in the bottom right, we focus in on the first 9 months of the year for smaller (inaudible) of less than 20,000 square feet.

Compared to previous years, you'll see a noticeable dip this year, which we think reflects some companies, particularly domestic businesses, deferring big decisions on lettings due to uncertain geopolitical environment, particularly due to Brexit.

A similar dip in this 20 -- sub-20,000 square-foot category can be seen in 2017, a period also clouded by heightened geopolitical uncertainty, suggesting that smaller firms are more cautious about signing leases in times of uncertainty. In recent weeks, however, we have seen some signs of greater interest returning. And it may be that when some certainty on that is delivered after the U.K. general election, this trend will further accelerate.

The co-working sector has been a lot -- has had a lot of focus recently, particularly with news flows around WeWork.

On the top left of Slide 19, we take a look at how the big co-working and service office sector had been -- the co-working and service office sector is in Dublin, with our analysis showing that operators like WeWork, Iconic and IWG accounting for 3.8% of gross take-up in the first 9 months of the year.

In addition, they accounted for approximately 3.5% of total city center office stock in total. Not insignificant, but it's clear that the co-working trend is not yet as big as media attention might suggest.

We understand there are high occupancy rates in these existing co-working stock, suggesting that end-user demand remains strong, even if there are some uncertainty around the pace and scale of WeWork's expansion plans.

In the table on the right-hand side of the slide, you'll see the top 10 biggest takers of space in Dublin [real estate]. Tech-focused [FEI] occupiers like Salesforce, Facebook and DocuSign are well represented, but there is a diverse spread of other sectors. It's notable 63% of the take-up shown on the slides was in the CBD, and we continue to believe that Grade A, centrally located offices will attract the most demand.

Slide 20 shows our expectations on new office supply at 2022, with anticipated supply for the CBD shown -- for 2019 shown on the left-hand side, adjusted 0.8 million square feet. This compares with the 10-year average CBD take-up of 1.3 million square feet and makes us comfortable that new slates planned will be absorbed by the market.

Even when you include the suburbs and take a look at the whole of Dublin, as shown on the right-hand side, the story one -- main one - remains one where anticipated supply for the next 4 years is generally below the 10-year average take-up of 2.3 million square feet. A lot of the space in 2019, 2020 and 2021 has already been confirmed as pre-let as indicated by the red lines on both graphs. But these lines exclude a number of large pre-lets which are rumored to be close to signing.

On Slide 21, let's take a look at the Dublin Investment market. On the top left, you'll see the prime office yields have held steady in the past 12 months. There has, however, been some further yield compression in both the residential and industrial markets over the 12 months but no change since March.

It's too early to assess what impact the tax changes, entities and budget 2020 will have on office on the office market. Although, it's worth noting that yields didn't widened when the government changed stamp duty previously in 2017.

The amount of capital that is looking to be deployed in Ireland remains high at EUR 8 billion according to [my frank] estimates. With EUR 3 billion of that looking at offices, the demand dynamics look likely to ensure yields remain tight.

The table across the bottom of the slide shows the top 10 office investment deals in the 9 months to September. The investor base is geographically diverse, with international capital involved in 9 out of the 10 deals shown, a sign that Ireland has become a location of choice for international institutional investors and pension funds alike.

So just to summarize on market activity, notwithstanding some noise in the market over the last few months, the fundamentals of the Dublin office market remains strong. Supported by positive economic growth and job creation, 2019 is expected to be a strong full year in terms of take-up. The supply pipeline remains proportional and is likely to remain so in the near term. Investment demand remains strong for both prime and value-add opportunities.

And finally, just to note, it has been a quieter period in terms of acquisitions and disposals for Hibernia, with a total of EUR 18 million invested in 5 deals since the end of March, most of which were built on acquisitions. There were no disposals in the reporting period.

And now I'll hand over to our Director of Development, Mark Pollard for an update on our development portfolio.

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Mark Pollard, Hibernia REIT Plc - Director of Development [5]

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Thanks, Edwina, and good morning to all. Slide 23 looks at our current development project at 2 Cumberland Place, where we have been successful in obtaining planning permission for an additional floor. This will increase the area of the building by around 12% to 56,000 square feet. Whilst this will push out completion of the project to Q3 2020 and may increase the CapEx budget to EUR 35 million, the additional area and large roof terrace helps boost the estimated value of the building upon completion from EUR 2.8 million to EUR 3.2 million. We are making excellent progress in the construction and the new building will link with our existing 1 Cumberland Place office, which is home to Twitter and Travelport.

Slide 24 looks at our office development pipeline, which has the potential, when completed, to deliver 538,000 square feet of space compared to the existing 278,000 square foot footprint. There have been no significant changes to the options we have at Harcourt Square and One Earlsfort Terrace, and I'll look in a little more detail at Marine House and Clanwilliam Court shortly.

Slide 25 has a CGI of our planned developments at Clanwilliam Court and Marine House in a scheme we are calling the Clanwilliam Quarter, and where we plan to replicate the successful clustering concept we used around Windmill Lane.

At Marine House, we will get vacant possession next year and have planning approval for a 49,000 square foot redevelopment that is adjacent to and will link via the basement and courtyard with the redevelopment of blocks 1, 2 and 5 at Clanwilliam Court.

Our planning application for a 152,000 square foot scheme at Clanwilliam Court has been approved by Dublin City Council, but, as we had anticipated, has been appealed to An Bord Pleanála.

We hope that they will take a favorable view on the project, which could commence in late 2021 [stuck early]2022 when the buildings will become vacant.

On Slide 26, there is a reminder of the plans we have for the redevelopment of Harcourt Square, where we have planning consent for a 309,000 square foot scheme, as represented in the CGI on the slide. Lease to the OPW would expire in 2022. And given the scale of the project, we think that a pre-let well in advance of project completion may be possible.

Slide 27 lists our mixed-use development pipeline, where we see longer-term opportunities to create significant value.

This includes the 144 acres we have asset in Newlands Cross, which has excellent road and transport links, close to the M50 and N7 and also hosts the Luas Red Line. We also have 2 other smaller sites that currently are predominantly for industrial use but could be suitable for mixed-use developments in the future.

And now let me hand over to our Director of Property, Justin Dowling, who will look at our portfolio management activities in the year.

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Justin Dowling, Hibernia REIT Plc - Director of Property [6]

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Thanks, Mark, and good morning, everyone. Slide 29 provides a summary of the composition of our EUR 1.4 billion portfolio. The Dublin City center offices account for 83% of the total, a further 2% related to our office developments at 2 Cumberland Place, with remainder split between residential over 11% and industrial at 4%. The total contracted rent roll is up 8% in the past 12 months at EUR 62 million, with an estimated rental value of EUR 74.8 million based on our September 30 valuation.

Looking in more detail at Slide 30 at how the portfolio has performed in the past 6 months, there was a like-for-like increase of 0.6% in value. Main gains were a EUR 4.2 million uplift at The Observatory driven by a new license agreement signed with Marketing Technology firm N3. There was also a EUR 3.6 million uplift at 2 Windmill Lane after the 13,000 square foot first floor was let to Udemy.

Turning to Slide 31. Let me look at those deals in a bit more detail. Udemy is an online learning company, who have taken a 5-year lease over the first floor of 2 Windmill Lane, but it's a shorter lease, including a 3-year break, that is mitigated by the fact that the contracted rent level is 20% ahead of the ERV at the end of March. As Kevin said earlier, where this is offset by a higher rent, we are happy to look at shorter releases in certain situations. Our deal with N3 marks a new departure for us, and that it is a license agreement rather than a traditional lease. Through a managed office contract, Hibernia provides the space fully fitted out, helping us to generate net income after costs of EUR 0.6 million per annum, which is equivalent to an annual rent of around EUR 70 per square foot.

This is considerably ahead of what the space would let for under a traditional long-term lease. We've also agreed to let South Docks to house an Irish plc on a lease with a 10-year term certain of rents 2% ahead of the March ERV.

This deal will mean Hibernia moves out of this building to a new home in 1 Windmill Lane, where it'll be good to have our HQ in the heart of our landmark Windmill Quarter.

Looking at the rent reviews agreed since March, all have been achieved at rents in line with or ahead of ERVs, delivering a total uplift in rent of EUR 2.7 million.

Turning to Slide 32, we take a look at more detail at some of the key statistics of our office portfolio. Our construction rent is up 8% to EUR 54.3 million. The vacancy rate remains elevated at 12%. And plus we'd obviously prefer that to be lower, we are in discussions on a majority of this space, and we are confident of attracting tenants in the near term.

I'll touch on this further in the next slide. In the left-hand stack, you will see the portfolio barrier breaks down between 1.1 million square feet in our in-place office portfolio with 56,000 square feet to come from 2 Cumberland Place. There is also a further 260,000 square feet that can be delivered when we complete our longer-term pipeline of office development.

In the Middle stack, you can see the sector spread of tenants within the portfolio. Whilst on the right-hand stack, the top 10 tenants are listed.

On Slide 33, you will see that we currently have 134,000 square feet of vacant space. You can see how that is largely from the empty space at 2 Windmill Lane, the Forum and Central Quay. We are in discussion on the vacant 48,000 square feet at 2 Windmill Lane as well as the 28,000 square feet in Central Quay and are making good progress at The Forum.

In total, there is a further EUR 7.4 million of rents that, on that space, will contribute at current ERVs. In terms of the rent reviews, we are just moving rent review on the rate that the tenant who occupies 23,000 square feet in the Hardwicke House.

In terms of rent there, it's EUR 33 per square foot, and we expect a considerable uplift at review.

On Slide 34, you can see the different characteristics of our acquired office portfolio and the developments we completed ourselves. Rent levels from the offices developed or refurbished by Hibernia comfortably exceed those we acquired and also have a greater term certainty with a WAULT to break or expiry of 9.8 years versus 3.7 years for acquired offices.

2 Cumberland Place should further support this trend when it is completed next year.

And now I would like to hand back to Kevin to wrap up.

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [7]

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Thanks, Justin. So just to wrap up with some final remarks on Slide 36. The execution of our strategy has helped to deliver continuing growth in rental income, plus we have also reduced our cost base, thereby allowing us to grow earnings and our dividend. There is near-term potential upside that we plan to deliver that would contribute an additional circa EUR 11 million in rent at current ERVs from unlet and development space. And longer term, we also anticipate our development pipeline making a major contribution as the schemes are contribute -- are completed by our highly experienced development team.

Despite some slowdown from smaller occupiers, demand for space in the Dublin market remains strong and continuing high levels of FDI job creation bode well for Hibernia in a market for the supply of new space is still limited.

And with our clear strategy, talented team and low leverage, we are well positioned to deliver on our future plans.

Thank you very much for your patience and attention. I would now like to hand back to the operator before we start taking your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [2]

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We're going to take questions, I think, in the room first.

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Colm Lauder, Goodbody Stockbrokers, Research Division - Real Estate Analyst [3]

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Great. Colm Lauder at Goodbody. Just a couple of questions on my side. And maybe starting off on sort of the capital value side of things.

And I noticed, obviously, in the table in the statement that there was a negative revaluation move in the traditional core, in your sort of Dublin 2 and Dublin 4 focus areas, which you put down to Marine House in terms of higher-than-expected capital expenditure. Could you perhaps update us in terms of what sort of moves you're seeing in construction costs and, given that Marine House and the broader Clanwilliam campus development is still 2 years out, and is there any read-through for other construction costs in terms of your experiences at Cumberland Place as well?

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [4]

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Sure. So from an industry perspective, dealing with the office sector, I think we're probably seeing cost inflation running at mid-single digits, 5% to 6%. We do a lot of work with the QF industry, and the view is that, that's going to soften as we go, that it's at an elevated level at the moment, but it's likely to soften over the coming years.

And maybe Edwina might just give you an insight on how we deal with those on a valuation basis and how we update our valuation.

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Edwina Governey, Hibernia REIT Plc - CIO [5]

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Yes, I think it's worth noting on Marine House, there was an element of cost inflation there, but also there were some design improvements on some proprietary work that we've completed and the costs there for -- to prepare us for delivering Clanwilliam. But in terms of cost inflation, what we do is the valuer strike in the residuals, the [LMCs] are not on any inflation since the [LMC] days, and but they don't allow for any future inflation in those residual appraisals, but there's no inflation laid for it in -- on the rental side either.

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Unidentified Company Representative, [6]

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It shouldn't impact on Cumberland though because that's when we do -- when we start a project, we'll buy out the cost inflation at that point. So it's around future projects is where if you -- if the question is around inflation risk, maybe more around future projects that we have yet to start where we haven't got a contractor on site.

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Colm Lauder, Goodbody Stockbrokers, Research Division - Real Estate Analyst [7]

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Okay. And then just one other point, maybe on the occupational side. I thought it was interesting looking at one of your lettings at 2 Windmill Lane to Udemy, if I'm pronouncing that correctly, quite a significant premium to ERV, then you're the foot or so above the valuers guide. Just in terms of -- it's in the trade-off in terms of -- for a shorter lease term. Is this something you're seeing driven from the tenant side in terms of increased flexibility? Or is it a model you're willing to sort of adapt to, particularly, as we see perhaps a shortage of more flexible space in the market given how long lease terms are getting in the Dublin office?

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [8]

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I think there are certain tenants, particularly in the tech sector that are growing very quickly and that are prepared to pay a premium for flexibility. And I think that -- I think the co-working industry has been built on that foundation. So I think that bigger landlords like ourselves are going to have to adapt. And I think you're going to see more of these type leasing deals because, potentially, these companies could end up being Hubspots of the future and ends up taking hundreds of thousands of square feet from you.

So I think you have to have that platform within your organization if you're going to capture that upside potential in future.

Is there any questions on the line, operator?

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Operator [9]

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Yes, we have a question from the line of Ronan Dunphy from Investec.

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Ronan Dunphy, Investec Bank plc, Research Division - Research Analyst & Economist [10]

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I -- it's interesting, or as you just covered off the demand and from the tech sector, in particular, for those type of license type agreements. And I suppose just extending that a little bit further and just wondering how you see demand from other sectors or tenants, and obviously, the tech and the state sectors are quite prominent in leasing deals at the moment. And then, you've referenced the, perhaps, some softening in demand from smaller domestic tenants.

So just in perhaps an overall view of how you see the demand mix shifting at the moment if indeed there is a shift.

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [11]

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I'd like to just ask Justin Dowling to answer that question.

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Justin Dowling, Hibernia REIT Plc - Director of Property [12]

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Yes. As Edwina referred to earlier that, that there was a period where things have quieted down for some of the smaller occupiers. We've fairly seen that change in the last number of weeks. And it's a mix of -- there is still a lot of tech demand. We're seeing more of the, say, the pharma side. And it is broadening out. Obviously, the [old buildings] are quite active at the moment. But there is a high level of demand at the moment, and it is across probably all sectors coming back in, but probably we're seeing a lot driven by still the TMC sector.

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [13]

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I think as a market, you're seeing kind of 2 markets really have -- are being created in the Dublin market, which has been the case for the last [5], but you have a strong tech sector and you look at, in the 6-month period, with the Salesforce deal and reported LinkedIn deal, Amazon deal, Facebook deal, very strong growth from those kind of big organizations. And also, it's good to see the state back taking a significant amount of space. But I do think what we've seen in the last 6 months, there definitely was an impact of change in PM in the U.K. and a potentially no-deal Brexit becoming a reality for the first time. And what's positive, I think, is that we've seen a significant increase in demand post end of October, and where people that previously had maybe postponed decisions have kind of reengaged.

And I think we're confident that, and particularly, where you see our vacancy level, that we should see significant activity over the next 3 to 6 months.

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Ronan Dunphy, Investec Bank plc, Research Division - Research Analyst & Economist [14]

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Okay, great. I suppose, maybe just a follow-up. So the vacancy rate that's unchanged in the period when, in July, you had mentioned that there was space under offer. So would you put that down to some of that and maybe domestic tenants deferring demand. Is there a link there? Or is it sort of other company-specific factors?

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [15]

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Yes, I think we had a few deals that just didn't get over the line. Unfortunately, mainly in 2 Windmill Lane. But I'm pretty confident that those deals will get done over the next few months.

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Operator [16]

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And the next question comes from the line of Colin Grant from Davy.

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Colin Grant, Davy, Research Division - Real Estate Analyst [17]

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A couple of questions just to do with the medium-term opportunities. So your Slide 13, which has a lovely chart that shows a lot of data on your near-term developments, but I'm thinking more in the medium term, so Marine has Clanwilliam, Harcourt Square. Could you give a flavor as to where you think the gross development value of those assets could be? Do you work off a cap rate or something in the low 4s? Or where do you think that could get to?

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [18]

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I might ask Edwina Governey to answer that question.

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Edwina Governey, Hibernia REIT Plc - CIO [19]

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Yes. The cap rates generally range between 4.25% and 4.5% on this. And obviously, they're valued at the moment on the basis of the existing income until expiry and then they're valued on a residual appraisal, where the valuers would have a profit and cost element on a high proportion of finance costs in the residuals there.

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Colin Grant, Davy, Research Division - Real Estate Analyst [20]

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Great. So Edwina, if I'm thinking about this EUR 29.2 million of ERV, which I think is [54 of force]. And I should be working off a 4.25% cap rate in terms of getting a GDV, is that correct?

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Edwina Governey, Hibernia REIT Plc - CIO [21]

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Well, I suppose it's up to you as to what you want to assume they're valued at when they're finished, but I suppose, if they were finished today, it wouldn't be imprudent to have a 4% to 4.5% yield on that income.

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Colin Grant, Davy, Research Division - Real Estate Analyst [22]

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Great. And in terms of the cost side of this, you've given some numbers here of EUR 270 million, which I think is about [500 of force]. How much confidence do you have on that? Because you mentioned the cost inflation, we're seeing 5%, 6%, but it says in the note that doesn't factor in any future cost inflation. So is there any risk the EUR 270 million becomes a EUR 300 million number, for example?

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [23]

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Yes, that is a risk, Colin, but we are seeing inflation reducing and the forecast is that it is going to significantly reduce over the next number of years.

But, look, there's no doubt that, that is going to be an eroding factor. But I do think that our rental levels are probably in -- at a modest level there as well and we've tended to, when we do deals, significantly outperform the ERVs on the letting deals that we'll do, as you've seen previously.

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Colin Grant, Davy, Research Division - Real Estate Analyst [24]

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Sure. Yes. [54] looks conservative. And can you talk a little bit about -- sorry, go on.

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Edwina Governey, Hibernia REIT Plc - CIO [25]

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No, I might just say that the EUR 270 million, it doesn't include an element of contingency above the (inaudible) current estimate of what it would cost to build out the teams.

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Colin Grant, Davy, Research Division - Real Estate Analyst [26]

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Great. And just in terms of the pre-letting opportunities there and the timing, if at all, when they might happen on Clanwilliam Court and on Harcourt Square. Is there anything you can give us on who or when something like that might materialize?

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [27]

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No, we can't, really. I mean I think on Marine, we have some tenants within the Clanwilliam blocks that potentially might have an interest in Marine House. So that would be a natural transfer over that we relocate people from the older Clanwilliam blocks into the newly refurbished Marine House. So potentially, that might create an opportunity there. And look, I think Harcourt Square is a pretty unique proposition. It's pretty rare that a 2-acre site in that part of town comes available all at the same time. So I think we're in a pretty good -- I think we've a high likelihood that we will get a pre-lease, but just when that happens, I suppose, at this point, we have no clarity on.

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Operator [28]

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(Operator Instructions) And as there are no further questions, I'll hand it back to the speakers.

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Kevin Nowlan, Hibernia REIT Plc - CEO & Director [29]

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Okay. Thank you very much. We'll see you all on the road. Take care.

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Operator [30]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.