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Edited Transcript of IRES.I earnings conference call or presentation 9-Aug-19 1:00pm GMT

Half Year 2019 Irish Residential Properties REIT PLC Earnings Call

Smithfield , Dublin Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Irish Residential Properties REIT PLC earnings conference call or presentation Friday, August 9, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Margaret Sweeney

Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director

* Priyanka Taneja

Irish Residential Properties REIT Plc - VP of Finance of CAP REIT

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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

* Jonathan Kelcher

TD Securities Equity Research - 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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Good day, and welcome to the Irish Residential Properties REIT 2019 Interim Results Investor Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Margaret Sweeney, CEO. Please go ahead.

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [2]

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Thank you. Thank you for joining our call today, and the presentation we're making today is available for download on our website, www.iresreitinvestorrelations. And our interim report and condensed financial statements, which were released this morning, are also available on the website.

Before we begin, I must remind everyone that certain statements we make today may be considered forward-looking and are subject to various risks and uncertainties that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. I direct you to our securities filings for a discussion of these risks and uncertainties.

So turning to Slide 3, where we start the presentation. I'd like to -- I'm joined here today -- my name is Margaret Sweeney, the Chief Executive Officer of Irish Residential Properties REIT, and I'm joined today by Priyanka Taneja, our Chief Financial Officer, and we will present to you an overview of our interim results for the 6 months through 30 June 2019 and an update on our strategy and outlook for the business.

Just turning to Slide 4, I will firstly set out for you just an overview of the highlights of the results for 2019 and Priyanka will then bring you through in more detail the financial results and operating results.

So following on from our successful year in 2018, we continue to deliver strong growth in H1 2019. Our net rental income and earnings grew by approximately 18% with our earnings per share growth of nearly 13%, bringing it to EUR 0.035 a share. The Board has also approved an interim dividend of EUR 0.027 per share. That's an increase of 4% compared to the interim dividend level in 2018.

We would have outlined the strategy for the business to you last year, and we continue to deliver and execute on our strategy during the first half of 2019. And through a combination of acquisitions and new developments as at the end of June 2019, our portfolio had increased to 2,771 residential units with a further 298 units contracted to deliver this coming year under prepurchase contracts.

Together with the recently announced acquisition of Marathon portfolio of 815 units, which we closed last Thursday evening, we're the proud owners since last Friday morning of those additional units in the portfolio, and this brings our portfolio as of today to 3,884 homes. That's a growth of circa 45% since December 2018.

We also have, as we would have told you previously, a development pipeline for 628 units, and we set an ambition in 2018 to submit [some] planning applications for all of our own sites. We actually have success in our planning process, and today, we've got positive approval for the development of 200 units and we're awaiting the final decision on planning in relation to the 428 unit development at Rockbrook.

We also completed a refinancing of our newly syndicated revolving credit facility of EUR 450 million in April. We also increased this to EUR 600 million in June 2019 and Priyanka will bring you through with to some further detail on that.

This was used to part finance the Marathon acquisition and other purchase contracts. And we also successfully completed an issue of new shares in a private placement for 86.55 million new shares in June and July, which raised net to EUR 131 million of proceeds from the growth strategy.

I will now turn things overs to Priyanka, who will review the financial and operating results for the first half of 2019 with you.

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Priyanka Taneja, Irish Residential Properties REIT Plc - VP of Finance of CAP REIT [3]

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Thanks, Margaret. Turning to our operating performance details on Slide 5. You can see the revenue and net rental income for the 6 months ended June 30, 2019, have increased by 15.7% and 17.6%, respectively. This is due to higher monthly rent, higher occupancy level and accretive acquisitions and development.

The net rental income margin was 81.6% for the 6 months ended June 30, 2019, which is higher compared to the 80.3% achieved in the same period last year, driven by lower vacancies and bad debt levels. This has resulted in our EPRA earnings per share growing by approximately 12.9% compared to the same period last year. We had a revaluation gain of EUR 22.5 million due to NRI growth and yield compression. The gross yield at fair value on the portfolio was 6% as at 30 June 2019.

Now turning to our Slide 6. Our EPRA NAV was EUR 707 million with EPRA NAV per share of EUR 1.469 as of 30 June 2019, an increase of 3.5% compared to 31 December 2018, which is mainly driven through property valuation increases and profits in the period offset by dividends paid in March 2019. The group increased its loan to value to 38.6% at 30 June 2019, up from 33% at year-end as a result of additional acquisitions and development.

Turning to Slide 7. We successfully raised capital in 2019 through debt and equity to fund our growth opportunities, including the Marathon acquisition. We successfully completed the placing of 86.5 million new ordinary shares in the company at a price of EUR 1.55 per share, raising gross proceeds of approximately EUR 134.2 million in 2 tranches. The first tranche consisting of 43.4 million shares issued on 18 June 2019, and the remaining 43.1 million shares were issued on July 10 after shareholder approval at the AGM on July 9.

We also entered into a new accordion credit facility of EUR 450 million in April 2019 and canceled the previous revolving credit facility with onetime write-off of deferred cost and cancellation fees of EUR 3.2 million. The new facility has a 5-year term through 2024 and has an option to extend the term by further 2 years and has a reduced margin of 1.75% compared to the previous revolving credit facility of 2%.

In June, the group exercised this option under the new credit facility to extend its committed facility from EUR 450 million to EUR 600 million and to include a new uncommitted accordion facility in the amount of EUR 50 million.

I will now turn things back to Margaret.

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [4]

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Thank you, Priyanka. Turning to Slide 8. We set out our multichannel growth strategy to deliver sustainable long-term growth for the company in 2018. And we believe that we're still executing on our strategy. The market environment for Private Rented Sector accommodation remains positive, and we continue to deliver on this growth strategy, which we outlined to you.

We apply a disciplined capital allocation strategy to deliver value and growing dividends for shareholders through a combination of continued acquisition of completed assets at accretive yields similar to the recently acquired Marathon portfolio; future developments, subject to planning consent, on our own sites; and also investing in new supply through forward purchase contracts with developers of Private Rental Sector assets.

So if you turn to Slide 9, that sets out details of the various transactions both in terms of completed acquisitions and also forward purchase and development agreements that we entered into during 2018 and to date in 2019.

So over the last 18 months, we have successfully executed on our strategy through accretive acquisitions and forward purchase. We completed the acquisitions of Hampton Wood, The Coast, and more recently, the Marathon Asset Management fund portfolio, which I'll present to you in more detail, and also through development partnerships in relation to Hansfield Wood, both in Phase 1 and Phase 2. And in relation to Phase 1 at Hansfield Wood, we delivered a gross yield of 7.9% and we will deliver a further 95 units to the portfolio in the early part of 2020 through Stage 2 of the Hansfield forward purchase contract.

We've also contracted forward purchases for 173 units in North Dublin. So it's Donabate and Balbriggan with growth yields of between 6.7% and 7%. And 39 of these units have been delivered to us by 30 June 2019 and they're included in the portfolio numbers. They are included in our interim report. The remaining units will be delivered to us over the coming months in 2019. This brings our pro forma I-RES portfolio with the current pipeline to circa 4,500 units.

Turning to Slide 10. We set out details in relation to our significant acquisition, the Marathon acquisition, which we closed last week on August 1, and we became the proud owners of an additional 815 units last Friday, which we are now integrating very efficiently and effectively into our overall business.

This acquisition was a unique opportunity of scale with cash-generating assets. And due to our strong operating model, through I-RES Fund Management and CAPREIT, we are able to integrate these assets quickly into our portfolio and to generate similar net rental income margins to our current levels of 38%.

The Marathon portfolio is comprised of 16 properties in very desirable locations. You will see the map included on this slide which overlays the Marathon portfolio with the I-RES portfolio, and we'll see that they're very complementary to our existing portfolio.

The asset quality is high around roughly a similar age profile to our existing units of an average of 10 years. The apartments were built between 2005 and 2010. The passing rent range in the portfolio is between EUR 1,486 to EUR 1,800 per apartment per month. And we estimate that reversion almost to be circa 20%. We paid a consideration of EUR 285 million, which gives an estimated growth initial yield in year 1 of 5.1% and a reversionary yield of circa 6.2%.

Turning to Slide 11. We set out there just details of the various planning proposals to our own development pipeline that we submitted during 2018 and early 2019, and we have had a success and positive progress on our planning, receiving permissions granted for 200 units to date. And there is one final planning application for Rockbrook, which is now expected for decision in the coming weeks.

So turning to Slide 12. I think in conclusion I would say that the market fundamentals for our Private Rental Sector business in Ireland remains supported with the growing population, continuing strong economic fundamentals in the economy, increasing demand for professionally managed rented accommodations and the continuing significant demand-supply imbalance in the market. The rent [requisite] cap, which was set back in mid-2017 at 4% per annum maximum rent increases per annum, those have been recently extended and legislation to 2021.

And with the operational excellence and track record of delivering stable returns by our investment manager, IRES Fund Management and CAPREIT, we believe that properly acquired and managed rental apartments can continue to provide value and steady growing dividend over the long term.

So our ambitions for the company, turning to Slide 13, is to build good quality living spaces with professional service for all our tenants, and really to bring places where people can live in homes, good quality homes.

So thank you very much for listening to us this afternoon, and we're now happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Jonathan Kelcher with TD Securities.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [2]

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First question, just on -- assuming you get the good news on Rockbrook in the next couple of weeks, how quickly do you think you can start construction on that project?

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [3]

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So still we're following planning permission that's still required, moving to detail design and also into tendering for construction -- contractor for construction. So realistically, it would be into 2020 before we would start actually physically the construction.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [4]

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Okay. And then just sticking with that, how much -- what's your budget for the back half of this year for spending on development and, although it might be tougher, for 2020 as well?

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [5]

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So under our existing capacity following the Marathon acquisition, we're looking at funding capacity of about EUR 70 million, which covers out the opportunities that we currently have within our line of sight.

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Jonathan Kelcher, TD Securities Equity Research - Analyst [6]

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Okay. And then just switching gears. On the Marathon portfolio, and I realize you've only owned it for a week, but how quickly do you think you can get the margins up to the levels of the rest of your portfolio?

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [7]

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So we took it onboard, our operations team took it onboard last Friday morning and they've already actually sent to us some [context] of the tenants and actually also had to a good review of the property operationally. And we've already on-boarded them onto the system, the SAP system. So I think recently, quickly, we would expect to see over the next 2 months that we would actually integrate them fully into the portfolio. And we see ourselves, starting into the quarter 4 of the year, capping them up to the same level of return as our existing assets.

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Operator [8]

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The next question comes from Colin Grant with Davy.

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Colin Grant, Davy, Research Division - Real Estate Analyst [9]

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Colin here. Great. Just -- firstly just on the rent caps. So we have 4% rent caps obviously in Ireland. We've seen some news abroad in Germany and so on to adjust the rent caps that are out there in Berlin. But we've extended them here in Ireland to the end of 2021. Can you talk a little bit around that and the impact it has in terms of risk profile of the market as you see? Maybe just to start with that question first, please.

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [10]

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Okay. Yes. No, it's -- I think it's been very positive to actually see the rent cap actually extended for a further 2 years at the same level of 4% per annum. We're also seeing in terms of the business that we're actually able to achieve 4% rent increases on the whole portfolio and the average across the portfolio for first 6 months in terms of rent increases was 3.8%. And we also have -- what we're also seeing in the market is that pay inflation is running at around -- between 3% and 4% as well. So actually, in terms of affordability, it's probably at similar levels to what it was at last year. So in that sense, we also would a very -- another indicator in terms of that would be that we have a very minuscule level of bad debt actually. So our recoveries are very strong. So in that sense, our sense is that actually we've been able to achieve those rental increases, it's actually still very positive.

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Priyanka Taneja, Irish Residential Properties REIT Plc - VP of Finance of CAP REIT [11]

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And we have an occupancy level almost close to 100%.

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Colin Grant, Davy, Research Division - Real Estate Analyst [12]

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Okay. I just have another question on the Marathon portfolio. It kind of relates to your questions asked previously. So you've had a chance to have a good look at the assets and you mentioned you think you might be able to guess up margins up towards similar levels. I mean you obviously also had a huge net rental income margin in the first half there of 81.6%. But if you can get it somewhere to around 80%, I'm just wondering, just to be clear, do you assume any additional kind of CapEx to get to that level or any enhancements expenditure? Or do you think you can actually just do that from the existing state of the assets that you've acquired?

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [13]

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The portfolio that we took on and we've had a good look over them over the last number of days, they're actually in very good -- they were well invested by Marathon. And also, they're in very good standing. Actually, we don't see any significant level of CapEx required over the coming years, just a small amount to bring it to the standards that we would ourselves expect in terms of professionally managing our rented accommodation. But after that, we don't see at this stage foresee any significant CapEx requirement.

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Operator [14]

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The next question comes from Ronan Dunphy from Investec.

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Ronan Dunphy, Investec Bank plc, Research Division - Research Analyst & Economist [15]

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Just having the other guys cover a couple of my potential question there, just one perhaps on the Marathon acquisition, which is given you an entry into the Cork market, first market outside of Dublin. And I'm just wondering whether you see -- well, I suppose not just Cork or perhaps some other locations around the country, as providing some attractive opportunities over the next couple of years and how you see those opportunities maybe coming about in terms of your different growth options that you set out already.

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [16]

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Ronan, yes. We actually, through the Marathon portfolio, have acquired 50 units in Cork, very close to the city center in Harty's Quay. So it's actually a very good entry point in terms of our strategy. We would, as we've said previously, focus on recently large urban centers around the country, and we would have seen Cork as, obviously, an attractive location in terms of its population and growth as well and also strong -- and with investments into it. There wasn't (inaudible) also by (inaudible), so it's actually a very attractive location.

Equally, there are other cities in Ireland as well that are attractive. So this gives us, I think, with the revenue-earning assets, a good opportunity in relation to Cork. There aren't too many completed assets of scale available for acquisition in the Cork market. The Elysian would have been the last largest acquisition that was still dynamic over a year ago. So in terms of actually any assets of size, they're probably more going to become available through forward purchase of future development in Cork.

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Ronan Dunphy, Investec Bank plc, Research Division - Research Analyst & Economist [17]

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Great. And is that how you'd see it as well sort of potentially for purchase agreements in other areas?

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [18]

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Yes. I think our strategy would be to look at both through acquisitions that are available and immediately requires some revenue enhancing. Actually, it means that we use our capital very quickly and very efficiently into revenue-earning assets. We don't see, in the medium-term operations, opportunities of that currently available to us. But we do see a number of opportunities on the forward purchase side actually where they're already starting to go into planning stages in Cork.

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Operator [19]

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Next question comes from Colm Lauder with Goodbody.

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Colm Lauder, Goodbody Stockbrokers, Research Division - Real Estate Analyst [20]

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Congrats on another strong period of growth in the Irish PRS market. Just a couple of questions from my side on -- particularly on the operational side, looking at the net income margin and sort of thinking how that might evolve on the Marathon perspective. So obviously, a very impressive figure, 81.6% achieved in this period, up 130 bps. Could you perhaps elaborate on some of the drivers behind that? Is this a case of perhaps tenants staying longer, so lower turnover, lower reletting cost, refurb-ing costs? Is this part of the assumption of the strategy to look at perhaps having more unfurnished apartments?

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [21]

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Thank you. So I'm going to hand over to Priyanka on the detail. I think in terms of the business, we would definitely see very much probably stabilizing at around the 80%. So we see ourselves being able to bring the Marathon assets to that level of return for us recently quickly. They would have all -- about 18 of those units are already fully let up and they're fully furnished units as well. In terms of looking at where we achieved, we would always try and seek out, and particularly with our operations team, they're very focused on seeking out accretive opportunities for value for us. And I think that's what demonstrated through the first half. I'll let Priyanka to bring you through some of the detail on it.

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Priyanka Taneja, Irish Residential Properties REIT Plc - VP of Finance of CAP REIT [22]

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Yes. Just in terms of our 81.3% margin, we have had significantly lower vacancies and bad debt levels compared to the same period last year. So just in terms of operating platform, we have done really well. And like I mentioned before, our occupancy levels for like-to-like properties was 99.6%. So low vacancies and very, very low bad debt levels because we do have tenants of very high quality. I think that's a couple of -- 2 main reasons why we have our margins increase compared to last year.

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Colm Lauder, Goodbody Stockbrokers, Research Division - Real Estate Analyst [23]

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Okay. And is tenant turnover, is that at a stronger or a lower level than the previous periods in terms of tenants...

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Priyanka Taneja, Irish Residential Properties REIT Plc - VP of Finance of CAP REIT [24]

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So the turnover actually is very -- sorry, so the turnover was actually very low for the first 6 months. It was only 6%, so you're right. We also have low R&M costs when we turn tenants because it's very low.

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Colm Lauder, Goodbody Stockbrokers, Research Division - Real Estate Analyst [25]

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Okay. And just one question related to the margin but integrating it into the Marathon portfolio. Obviously, it was a portfolio of 16 properties. There was a mix in terms of large lot sizes with full control. But I'm just thinking and applying the I-RES model, the CAPREIT infrastructure, the economies of scale into running some of the smaller assets within the Marathon portfolio, so buildings like Heywood Court and Spencer House and things where you don't have control in terms of majority ownership, so you won't necessarily have control of the managing company. Is there an objective perhaps either to gain majority control of some of these schemes or dispose of the ones where you can't get control? And how would that likely impact -- if you're not property manager of those, how would that likely impact the operating margin on those assets?

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [26]

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So we actually -- we're just probably, at this stage, quite diversely across the portfolio. For some, we have a majority ownership. We have, I think, around 5 properties where we have complete ownership of the property, and then there's a few smaller ones we have more a minority. With Marathon, actually, it's quite complementary to our existing portfolio. I think it gives us -- it's brings us to -- and also bring in some of the forward purchase transactions this year. It brings our portfolio up to over 3,800 units. And I think that gives us the opportunity to also look at it from an operating efficiency point of view and to do some tidy up.

I think our preference is always to make sure that we have high standards in terms of the properties that we actually operate and to give a good service to our tenants and to create good places to live in. So I think there's an opportunity for us for that reason, and also operating efficiencies to look at it now as the bigger portfolio and to see opportunities where we could do some tidy up, really, to enhance it in that way as well. And that could mean that, in some cases, we might dispose of smaller holdings for these minority interests to achieve that.

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Colm Lauder, Goodbody Stockbrokers, Research Division - Real Estate Analyst [27]

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Okay. So for example, you take a building like Heywood Court in Santry managed by Lansdowne, would you look at engaging with that existing property manager to see if you could take over the property manager and to bring that in-house even though you don't have majority in terms of the managing company?

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [28]

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I think we've just, let's say, on-boarded, I think, the portfolio just last week. So I think it's, over the coming months, actually, Charles and Alan and the team will actually start looking at it and looking at this, and to be sure that we do it in a well-managed way and always provide [covenants always] up to tenants and the people who live in the apartments as well. And I'm sure we'll do it in a well way. So it will take us a number of months to actually look at it and do it well.

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Operator [29]

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This concludes our question-and-answer session. I would like to turn the conference back over to Margaret Sweeney for any closing remarks. Please go ahead.

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Margaret Sweeney, Irish Residential Properties REIT Plc - CEO, Head of IR & Executive Director [30]

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Thank you all for joining us today and also for your questions. We very much appreciate it. And thank you also for the support for the business.

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Operator [31]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.