Description

Glenveagh Properties is a leading Irish housebuilder listed in Dublin, with a market cap of €780m. The company operates primarily in three segments: suburban housing, urban apartments, and partnerships with local authorities and state agencies. It’s been written up on VIC five and six years ago by ad17 and Jumpman23 when the stock was at €0.69 and €1.05 respectively. The stock went to €0.44 in the middle of covid and recovered to €1.35 but it’s still on less than 8x EPS and around 1x book on 2024 numbers.

The market cap, thanks to buybacks, has only grown by ≈35% in the last 6 years:

Net income is expected to double this year thanks to accelerating deliveries:

Quick background

I first got to know the business as the company was listing in 2017, I then took a pre-IPO meeting with management, with an entity called Bridgedale (which was the name of the company that was founded by Stephen Garvey, the current CEO, which then became Glenveagh). As I went into the meeting room I recognised Justin Bickle, the previous CEO, as he was the teacher of a distressed investing course at the business school I went to, and I had seen one his lectures. He was a principal at Oaktree and he was leaving Oaktree to lead Glenveagh: I later found out the management was highly incentivised with a PE-like incentive plan (which eventually didn’t trigger and didn’t dilute sharholders), but I thought that he was a brilliant guy and he wouldn’t leave Oaktree if he didn’t see an opportunity, so it grabbed my attention. Justin left in 2020, probably after realizing that the PE-like payoff was out of reach and set up Eagle Street, a RE investment vehicle, leaving co-founder and COO Stephen Garvey as the new CEO. Then Justin tragically passed away suddenly in the summer of 2022 at 51.

The opportunity that he saw at the time of listing was based on a set up that was clearly described by the previous write ups, with the homebulding sector recovering from a decade-long slump, land availability from NAMA (the nationalized owner of development land) and PE sellers, growing economy with increasing mortage availability and only two listed sizeable housebuilders poised to get increasing share from smaller players and generate cash, that would be used to repay shareholders.

The investment case hasn’t radically changed but it's been some years since the last write up (and a couple from the latest write up on peer Cairn Homes): I believe there is still plenty of upside so I thought I could write an update on how things are evolving.

Macro environment and government support measures

Last month, Home.ie (a leading property website in Ireland) published a report on the state of the housing market. The report shows that “the number of homes listed for sale is climbing, but we are nowhere near the levels needed to satisfy the demand generated by a buoyant labour market. The number of properties listed for sale on MyHome.ie was just 12,500 at the end of June, still close to the historic low in Q1 2024 and down 11% on 2023.”

https://news.myhome.ie/property-report/myhome-ie-q2-2024-property-report-in-association-with-bank-of-ireland-32727

A tighter housing market constrasts with population growth in Ireland from 2006 to 2022 which has grown at an average 57k per year. A trend that has accelerated from 2016 to 2022 to 65k per year.

Source: CSO https://www.cso.ie/en/releasesandpublications/ep/p-cpsr/censusofpopulation2022-summaryresults/populationchanges/

And annual population growth in 2023 was 97,600:

With population growth driven by both natural increase and net migration, the demand for housing continues to outstrip supply.

Cairn and Glenveagh’s annual reports and presentations provide plenty of data and background on the situation. The Irish macro environment remains robust with high employment levels, healthy public finances, and strong economic growth. The unemployment rate remains low at 4.2%, with 2.7m people employed (a record). Public finances have a €8.4bn surplus: and the shortage of housing has consistently been recognized as a major political and societal priority for the Irish Government. As a consequence, several political initiatives have been introduced: the Housing For All Plan has been launched in 2021, to address the housing crisis by delivering 300,000 new homes by 2030.

On the other hand, supply still needs to improve to meet the increasing demand and government’s targets:

Housing supply is gradually improving, thanks also to better planning and supportive policies, but current activity levels are still insufficient to address the long-term under-supply. This shortfall has been exacerbated by latent housing demand accumulated over the past decade coupled with the robust economic growth and population growth that the country is seeing.

Government policies

Government policies that have been recently introduced include the Housing for All plan (launched in 2021) which has committed to a €4bn annual investment in housing and sets yearly targets for social, affordable, and cost rental housing.

There’s a Help to Buy scheme which provides a tax rebate up to €30k or 10% of the property value, it was introduced first in 2018, then enhanced in 2020 and it has been extended to 2025. Other affordability schemes include the First Home Scheme and the Affordable Purchase Scheme. The First Home shared equity Scheme provides funding for first buyers for up to 30% of a property purchase or self-build costs: this launched in July 2022. The state takes an equity share of up to 30% (20% if HTB is used in conjunction) to help first time buyers that are not able to reach the required deposit. There are regional price caps but these have also increased with time (in Dublin and Cork it’s €500k with lower limits in other regions). There’s also an Affordable Purchase scheme that is managed by local authorities and involves the local authority providing homes at a reduced price and taking an equity stake in the home equivalent to the difference between the market value and the reduced purchase price. Two additional measures supporting affordable housing that have been recently introduced or enhanced are the Cost Rental Equity Loan (CREL) and Secure Tenancy Affordable Rental (STAR) schemes: CREL provides state funding (up to 55% from previous 45%) of the cost of a unit acquired by approved housing bodies; STAR is a €750m scheme that aims to deliver 4,000 cost rental units in high demand urban areas, with the state making an equity investment of up to €200k per new home and private developers together with approved housing bodies can apply to provide cost-rental homes.

Government has also supported supply of housing by suspending development levies, suspension that applied up to April 2024 (deadline to submit a commencement notice) and where completion is by December 2025. This suspension has also been extended for an unspecified period. Savings from this measure should be in the region of €12k per new home, which should benefit developers and incentivize accelerated development.

Planning was acting as a bottleneck in 2022-2023 but the government has also passed a bill to make planning more efficient and clearer and companies have seen upticks in permissions as 2023 progressed. The planning and development Bill is part of a broader effort to streamline the planning process, reduce delays and facilitate quicker project approvals. The government is also reviewing the National Planning Framework which will take into account new data and evidence so that the planning system reflects the structural housing need.  

Another initiative under the Housing for All plan is Croí Cónaithe, aimed at addressing housing shortages and revitalizing urban and rural areas. This initiative consists of two main components: Croí Cónaithe (Cities) Scheme and Croí Cónaithe (Towns) Fund. In November 2023, Glenveagh has been approved to develop apartments in Blackrock, Cork, under the Croí Cónaithe (Cities) Scheme. This scheme provides financial support to bridge the "viability gap" between the cost of building apartments in cities and the market sale price, when the cost of building is greater than the market price. Given the company’s scale and operational capability, Glenveagh is in a superior position to win this kind of partnership and urban development models.

Housebuilding sector

The housebuilders sector in Ireland remains highly fragmented, as opposed to the UK market, despite Glenveagh and Cairn homes substantially increasing their market share in recent years. DB estimates the two biggest builders contribute to ca. 12% of national completions. Leaving room for further market share growth:

Glenveagh revenues have grown from a small base as the company was ramping up to scale. Completions have grown from 844 in 2019 to 2700 expected this year. The company now splits developments in Suburban, Urban and Partnerships. The latter has two sites (Oscar Traynor Road and Ballymastone, Donabate) comprising over 2000 units operating at scale and should deliver north of 300 units this year. Whoever read the Vistry and Countryside Properties write ups here knows the benefits of partnerships businesses, with lower capital employed with forward land and WIP cash contribution from partners. At Glenveagh, these are the first two partnership agreements but will pave the way for others in the coming months and years. The CEO recently has done an interview with Davy, available on GLV’s website, where he says that Oscar Treynor Road took 3-4 years to get to the end of the line, but now the ones expected for H2 took 6-12 months. A third partnership contract is now in its final stages and a fourth one is also in advanced stage, which should bring additional 1,000 units to the Partnership pipeline (which, assuming that’s a 5y project, could add €60-70m a year to revenues which could add, in a capital light manner, a msd % addition to the bottom line).

Overall, Glenveagh should deliver revenues close to €1bn, operating profit of €130m in 2024, and profits of €100m. Sell side has revenues growing by low single digits from 2025 onwards (and EPS growing by msd), as I believe (after I’ve seen a couple of models) that they mechanically estimate revenues by estimating deliveries of each current site and don’t take into account Partnership deals that haven’t been signed yet. Which is understandable but not how one should think about the opportunity going forwards as Glenveagh is perfectly poised to get market share in Partnerships thanks to their ability to scale and deliver quickly. In addition, the company replaces its land at target ROE (15%) and buys back stocks (in 2022-2023 returned €450m through buybacks).  

As a builder of scale, Glenveagh has scaled up its manufacturing process, focused on modern methods of construction (MMC). These enable production of key components of homes like high quality timber frames and light gauge steel frames. Once manufactured, these components are then transported to construction sites for rapid assembly. This approach not only accelerates the construction timeline but also improves precision and reduces waste. Glenveagh’s manufacturing capabilities are unmatched in the country and the company has created a standalone manufacturing arm of the company (called NUA) which was established in 2023. They have three factories and employ more than 100 people and the percentage of units manufactured offsite has grown to 85% in 2023 from 71% in 2022. By the end of the year capacity across the three factories is expected to deliver more than 2,000 homes per year. Glenveagh is best positioned to be a partner of choice for the government to deliver and turn assets more quickly.

So, consensus is modelling 17c of EPS this year and 19c in 2026: this is already less than 7x the current price, but I believe the company will be able to outgrow the two-year forecasts between new deals and buybacks. And five years from now, the strategy is to grow partnerships to be roughly the same size of Suburban, which increases EPS with much less capital investments, cash which will be returned to shareholders.

Glenveagh’s stock has underperformed Cairn’s in recent months, as the market was anticipating a buyback announcement, which has yet to materialize.

As ad17 commented in a recent thread on Cairn, this was mostly due to a working capital buildup from the two partnership deals and increased activity which is expected to unwind in the second half, in addition to strategic investments that the company is considering: these are large sites that the company is considering as they come with an adjacent partnership deal. In the interview hosted by Davy mentioned earlier the CEO said something like “We’ll always have to invest in land, but if we can take these opportunities down, the returns for the business will be ginormous.” The target remains to retain the size of the landbank around €400m so, once the phase of investment normalizes, the company should have excess cash for buybacks.

Catalyst

- cash flow in H2 and eventual buyback announcement