Description

Glenveagh Properties

Executive Summary

Glenveagh provides the opportunity to invest alongside a highly-incentivized and savvy management team, with a strong understanding of the favourable supply-demand characteristics for Irish landbanks (motivated sellers and few buyers of scale), a still-recovering Irish housing market where demand still outstrips current supply and the potential to partner with third-parties, for high-return/low capital outlay projects. If output meets management build targets by 2023, I comfortably see over 50% upside from the current share price.

Following the incentives/the set-up

Glenveagh Properties first hit my radar screen just prior to its IPO, when a good friend from business school (now working on the buyside) told me his firm was considering investing in the company pre-IPO and that the CEO of this newly-formed company was Justin Bickle, formerly a senior MD of Oaktree Capital's European operations. Our familiarity with Justin was as an adjunct professor for a distressed debt investing course at our Business School - one that unfortunately was only introduced after we had graduated, but had received rave reviews from mutual friends.  

Therefore, it certainly piqued our curiosity as to why a highly intelligent and capable individual in the prime of their career at a very well-regarded distressed fund and with several commercial options available to them would choose to leave this (presumably highly remunerative) job to head up an Irish small cap residential property developer.

Upon further examination there were some a couple of further interesting facts.

Firstly,  Justin was leaving with Oaktree's blessing. Glenveagh's landbank is predominantly inherited from land purchased by Oaktree during the depths of the Irish housing crisis. Given his seniority at Oaktree, it is likely that Justin is also highly familiar with the assets, having been part of the team responsible for acquiring them in the first place. Oaktree was also one of the largest shareholders of Glenveagh immediately following the IPO.

Secondly,  Justin (along with co-founder, Stephen Garvey) was the beneficiary of the potential highly lucrative founder share incentive scheme, based on long-term share price performance. Provided annual shareholder returns compound at a rate of at least 12.5% per annum, the three managers participating in the founder share scheme (Justin Bickle, Stephen Garvey and John Mulcahy), are entitled to 20% of the annual total share return, distributed in the form of ordinary shares annually for a period of 5 years. Based on Mr Bickle's 90mn (or 45% of total outstanding) founder shares, this could ultimately amount to over EUR50mn in total share-based payments, assuming a compound date of 12.5% is achieved over the five year period from listing.

So, provided Glenveagh shares perform well over the next few years, Justin Bickle stands to do very well financially, and thus would validate his decision to leave Oaktree to lead this company. Given Justin's familiarity with the supply-demand characteristics of the market, I next tried to determine what he saw as seeing so attractive about the opportunity in Irish real estate development.

Company Description

Glenveagh Properties (GLV), was formed through the combination of Bridgedale Homes Ltd (BDHL), an Irish property development firm owned by Glenveagh co-founder Stephen Garvey, and TIO RLF, an Irish residential property fund managed by Oaktree. BDHL had partnered with TIO prior to the creation of Glenveagh. The company IPO-ed in October 2017, raising eur550mn with the purpose of acquiring further land.

The company operates two separate divisions - Glenveagh Homes and Glenveagh Living. Glenveagh Homes is essentially a traditional home-builder, where Glenveagh will be developing a mix of homes (although starter homes to first-home buyers will initially be a focus), predominantly in the Greater Dublin Area. Glenveagh Living would seek to augment the group's operations with joint venture, license and partnership arrangements to develop residential schemes on land owned by third parties (institutional investors, social and affordable landlords, government entities and strategic landowners).

Since the IPO, Glenveagh has invested ~eur480mn acquiring land, and now has a total land bank capable of developing over 11,000 units. By the end of this year, the Group is targeting construction of 800 units, and has longer-term build targets of 1,000 and 2,000 units in 2021 and 2023, respectively for the Homes division.

Strengths of Investment Thesis

·        Lost decade in Irish housing construction combined with strong economy: Housing completions fell by over 80% peak-to-trough (2009-2013), following the bursting of the Irish housing bubble and still remain well below average historical levels. GLV management believe this lost decade in completions, combined with few developers of scale and strong demand creates excellent opportunities for a volume home builder. On the demand side, the Irish economy has been one of the top performing European economies, with favourable demographics for housing formation and a growing population.

Source: Company presentation

·        Land supply: Oaktree was not the only PE/distressed firm that had the foresight to purchase land banks during the depths of the housing crisis. There are a number of players who still own land banks that they will likely be looking to offload in the coming years. The below are estimates by Glenveagh management, and given Bickle's previous experience at Oaktree, he is likely familiar with several of the players involved.

Source: Company presentation

In fact, I believe this played a key part in Bickle's decision to found Glenveagh. Whilst just speculation on my part, I think he realised that when considering Oaktree's exit strategy from their Irish landbanks,  the supply/demand dynamics would be heavily in favour of property developers, as there are several sellers, but few developers with the ability to purchase and develop large amounts of land in the private market (Cairn Homes is the only other player of scale in an otherwise highly fragmented market).

·        Potential upside from Glenveagh Living: Glenveagh Living has already announced four deals (East Road, Tallaght, Gateway RP, Castleforbes), which it expects will deliver ~1,850 units between 2021-23. In these deals, the building is typically pre-funded by the eventual purchaser, as WIP funds are needed, thus making them capital-light for Glenveagh. Management has guided for a 2,500 unit pipeline by the end of 2019. As an example of the potential returns possible, Countryside Properties, a UK homebuilder generates ROCE of greater than 50% in its partnerships divisions. There also remains opportunities to partner with government agencies, such as NAMA, who acquired large amounts of land from Irish banks during the crisis, and will likely be looking for joint venture partners, such as Glenveagh, to help develop this land.

Valuation

Current profitability is not a useful guide to assess Glenveagh, as the company remains subscale and in ramp-up mode. However, based on very reasonable forecasts, broker Davy arrives at EPS of 20c in FY2023 (implying forward P/E multiple of slightly over 5x).

This forecast is based on following assumptions - 1) Glenveagh Homes build rate of 2,000 in 2023 (management have guided for minimum of 2000 units by 2023), 2) the current four announced deals for Glenveagh Livingand 3) ASPs/Gross Margins in-line with management LT forecasts.

Therefore, I comfortably see >50% upside in the share price from current levels, even after discounting to present, with further upside based on further announced deals by Glenveagh Living and long-term build-rate above the minimum targets set by management.

Catalyst

Future profitability as managmeent targets are met

Future deal announcements by Glenveagh Living