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BEST PROPERTIES BEST MARKET FUNDAMENTALS +BEST MANAGEMENT = Best Long-Term Shareholder Value Irish Residential Properties REIT plc Annual Report 2015 Irish Residential Properties REIT plc Annual Report 2015 Profile Irish Residential Properties REIT plc (“I-RES” or the “Company”) is a growth-oriented Real Estate Investment Trust (“REIT”) that owns 2,064 apartments in Dublin, Ireland. As the largest non-governmental residential landlord in Ireland, the Company is focused on acquiring, holding and professionally managing interests in multi-unit residential rental properties in Ireland and developing sites included in its property portfolio. The Company’s shares are listed on the Irish Stock Exchange (ISE: IRES). For more information, please visit the Company’s website at www.iresreit.ie. B Irish Residential Properties REIT plc Annual Report 2015 Contents REVIEW 2 4 6 8 10 12 17 18 21 28 Financial and Operational Highlights Best Properties Best Market Fundamentals Best Management Chairman’s Statement Chief Executive Officer’s Statement IRES Fund Management, Investment Manager Statement Market Update Portfolio Overview Investment Policy and Strategy GOVERNANCE 34 36 38 45 49 52 53 65 I-RES Board of Directors CAPREIT and IRES Fund Management Senior Management Corporate Governance Statement Report of the Audit Committee Report of the Remuneration Committee Report of the Nomination Committee Report of the Directors Statement of Directors’ Responsibility FINANCIAL STATEMENTS 66 Independent Auditors’ Report to the members of Irish Residential Properties REIT plc 72 Consolidated Statement of Financial Position 73 Consolidated Statement of Profit and Loss and Other Comprehensive Income 74 Consolidated Statement of Changes in Equity 75 Consolidated Statement of Cash Flows 76 Notes to Financial Statements 96 Company Statement of Financial Position 97 Company Statement of Changes in Equity 98 Company Statement of Cash Flows 99 Notes to Company Financial Statements 105Glossary of Terms IBC Forward-Looking Statements Shareholder Information Annual Report 2015 Irish Residential Properties REIT plc 1 Irish Residential Properties REIT plc Annual Report 2015 Highlights 31 December 2015 31 December 2014 FINANCIAL Revenue (€ millions) Net Profit (€ millions) Basic EPRA EPS (cents) Basic NAV and EPRA NAV per share (cents) Pro-forma NAV per share (cents) Diluted EPRA NAV per share (cents) Total return Loan to Value 24.7 9.7 (1) 30.8 7.9 (1) 3.3 1.6 (1) 104.3 99.5 105.3 103.2 103.5 99.4 ( 2) 15.3% 5.9% 8.6% 37.6% OPERATIONAL Gross Yield at Fair Value (3) Net Rental Income Margin Occupancy Rate Average Monthly Rent (€) 6.2%6.0% 80.8%78.8% ( 1) 96.0%99.7% 1,372 1,250 (1) For the period 2 July 2013 to 31 December 2014. (2) Total return is calculated assuming shares have been held since the initial offering and based on a share price of €1.115 as at 8 February 2015 and including dividends declared to date. (3) Adjusted for fair value of development land. 2 Irish Residential Properties REIT plc Annual Report 2015 BEST PROPERTIES BEST MARKET FUNDAMENTALS +BEST MANAGEMENT = Best Long-Term Shareholder Value Accomplishments to 31 December 2015 since 31 December 2015 > Successful equity issuance in March 2015, raising net proceeds of approximately €204 million used for acquisitions and to partly repay the credit facility > Arranged a new credit facility with a reduced margin and five-year term > Strategic acquisitions of 410 high-quality apartments; €125.5 million invested in Dublin during the year > Dividends of €1.8 million paid in 2015 in respect of the 2014 accounting period > A further two properties (442 apartments and eight apartments, respectively) were acquired for €83 million and c. €2.3 million, respectively (including VAT, but excluding other transaction costs) > Dividends declared of €13.1 million (dividends per share of 3.15 cents) for the 2015 fiscal year > Announced first development for the construction of 68 apartments at Block B2B, which is expected to have a gross yield in the range of 8.5% to 9.0% Annual Report 2015 Irish Residential Properties REIT plc 3 BEST PROPERTIES I-RES has built a welllocated, highest quality and modern property portfolio with a weighted average age of only 7.9 years. By managing properties close to one another, I-RES is capturing cost synergies that could generate further benefits for shareholders. 8 Finglas Whitehall 9 13 Drimnagh 10 6 1 4 14 Inchicore Donnybrook Churchtown 5 Tallaght 3 15 Sandyford 16 2 7 11 12 Property Portfolio Property Location Year Built Date Acquired Number of Suites Owned 83 1 Kings Court Smithfield, D7 2006 Luxury 10 Sep 2013 2 Grande Central Sandyford, D18 2007 Luxury 10 Sep 2013 65 3 Priorsgate Tallaght, D24 2007 Luxury 10 Sep 2013 102 4 Camac Crescent Inchicore, D8 2008 Luxury 10 Sep 2013 90 5 The Laurels Tallaght, D24 2007 Mid-tier 27 Jun 2014 19 6 The Marker Docklands, D2 2012 Luxury 18 Jul 2014 84 7 Beacon South Quarter (1) Sandyford, D18 2007/2008 Luxury 7 Oct 2014 225 8 Charlestown Finglas, D11 235 9 Bakers Yard Portland Street North, D1 10 Lansdowne Gate 2007 Luxury 7 Oct 2014 2007/2008 Mid-tier 7 Oct 2014 85 Drimnagh, D12 2005 Luxury 7 Oct 2014 224 11 Rockbrook Grande Central Sandyford, D18 2007 Luxury 31 Mar 2015 81 12 Rockbrook South Central Sandyford, D18 2007 Luxury 31 Mar 2015 189 13 Tyrone Court Inchicore, D8 2014 Mid-tier 05 Jun 2015 92 14 Bessboro Terenure, D6 2008 Mid-tier 11 Dec 2015 40 Total owned portfolio as at 31 December 2015 1,614 15 Tallaght Cross West Tallaght, D24 2008 Mid-tier 15 Jan 2016 16 Forum Sandyford, D18 2007 Luxury 17 Feb 2016 8 Total owned portfolio as at date of this Report 2,064 (1) This includes eight additional apartments purchased on 6 November 2015 4 Building Class Irish Residential Properties REIT plc Annual Report 2015 442 Beacon South Quarter 225 residential apartments Sandyford, Dublin 18 The development was constructed in 2007/2008 and is a landmark mixed-use development on 13 acres. Annual Report 2015 Irish Residential Properties REIT plc 5 BEST MARKET FUNDAMENTALS We continue to see strengthening fundamentals in the residential rental business, as Ireland’s GNP is improving, unemployment is falling and the overall population is growing. In addition, there is little new supply of residential housing coming to the market and new housing starts are expected to remain well under forecasted requirements. Strong Real Estate Fundamentals 1 Significant supply and demand imbalance helps support the rental market 2 Strengthening Irish economy, with upward pressure being applied on employee compensation Strong Market Demand The continued shortage of housing supply in Dublin helps support the rental market 3 Strong pipeline of future acquisitions available through Ireland’s National Asset Management Agency (“NAMA”) and private market opportunities 4 Intensification opportunity to add approximately 600 to 650 apartments with significant infrastructure in place, subject to planning and any other approvals Growing Irish Population Growing immigrant and young population of renters (highest birth rate in Europe) 8.0% 3.5% 2.5% 5.7% 5.0% 2.0% 4.6% 4.0% 3.0% 2,891 8,000 Irish Residential Properties REIT plc 1.5% 3.3% 3.3% 1.0% 2.0% 0.5% 1.0% 0.0% 6 3.0% 6.9% 6.0% HOUSING REQUIRED 2015 Increasing apartment rental sector caused by various factors such as the central bank mortgage limits and the growing Irish population Growing Irish Economy Strong 2015 GNP growth and a strong forecast for 2016 7.0% HOUSING COMPLETIONS 2015 5 0.0% 20122013201420152016F Annual Report 2015 201120122013201420152016 Tallaght Cross West 442 residential apartments Tallaght, Dublin 24 The development was constructed in 2008 and consists of 507 residential apartments, of which 442 are owned by the Company. Annual Report 2015 Irish Residential Properties REIT plc 7 BEST MANAGEMENT From left to right: Charles Coyle, Vice President, Acquisitions; Daniel Mack, Associate; Darren O’Neill, Regional Accounting Officer; Jodi Lieberman, Chief Human Resources Officer; Scott Cryer, Chief Financial Officer; Corinne Pruzanski, General Counsel and Corporate Secretary; Thomas Schwartz, President and Chief Executive Officer, CAPREIT; Mark Kenney, Chief Operating Officer; and Roberto Israel, Chief Information Officer. I-RES’ fully-integrated management platform, between the Dublin office of IRES Fund Management Limited (“IRES Fund Management” or the “Investment Manager”) and the CAPREIT Limited Partnership (“CAPREIT LP”) head office resources, is driving solid increases in organic growth. Both IRES Fund Management and CAPREIT LP are subsidiaries of Canadian Apartment Properties Real Estate Investment Trust (“CAPREIT”). Proven Investment Manager 1 3 2 4 Experienced investment manager with a track record of growth and value creation in the residential sector CAPREIT is fully aligned with I-RES shareholders, with an indirect 15.7% beneficial ownership interest Proven acquisition acumen in the residential sector Strong leadership team specialising in residential real estate 5 Dedicated local team of 26 experienced staff in the Dublin office as of 31 December 2015, supported by the CAPREIT LP platform 8 Irish Residential Properties REIT plc Annual Report 2015 6 Benefits from CAPREIT LP’s infrastructure and resources available to I-RES, including management, due diligence, finance, training, risk management, marketing, legal and information technology 7 On 1 November 2015, IRES Fund Management became the alternative investment fund manager for I-RES The Marker 84 residential apartments Grand Canal Dock, Dublin 2 Within walking distance of the Dublin Convention Centre, the O2 Arena, Aviva Stadium, Croke Park and Grafton Street, The Marker has access to the DART at Barrow Street and the LUAS tram line in the North Docklands. Annual Report 2015 Irish Residential Properties REIT plc 9 Colm Ó Nualláin Chairman Chairman’s Statement I am pleased to present the Group’s (1) results for the year ended 31December 2015, being the first full year of I-RES’ operations. >> In March 2015, the Company raised gross proceeds of €215 million through the issuance of 215 million ordinary shares (the “Capital Raise”), which, together with the €200 million raised in the initial offering in April 2014, brings the total gross proceeds raised to €415 million. During the year ended 31 December 2015, the Group acquired a further 410 apartments for a total acquisition cost of €125.5 million (including VAT and other transaction costs), bringing its total number of apartments to 1,614 as at 31 December 2015. I-RES continues to be the largest non-governmental residential landlord in Ireland. As at 31 December 2015, the Group had invested approximately €441 million (including VAT and other transaction costs) across 13 locations in the Dublin area, funded through a combination of equity and debt. Financial Results The Group has generated strong rental growth and maintained a high level of occupancy across the portfolio during the year, indicative of the strong market fundamentals in the Irish residential rental sector. The portfolio Gross Yield at fair value was 6.2% as at 31 December 2015, compared to 6.0% as at 31 December 2014, adjusted for the fair value of development land. Basic EPS and Basic EPRA EPS for the period were 8.4 cents and 3.3 cents, respectively, for the year ended 31 December 2015. Basic NAV and EPRA NAV was €435.0 million, with Basic NAV and EPRA NAV per share of 104.3 cents as at 31 December 2015. Basic NAV and EPRA NAV per share increased by 4.8% for the year ended 31 December 2015, compared to 31 December 2014, driven by property valuation increases and rental profit in the period, partially offset by equity transaction costs. Dividends On 9 February 2016, the directors of the board (the “Directors”) declared an interim dividend of €13.1 million (dividends per share of 3.15 cents) for the 2015 accounting period, to be paid on 21 March 2016 to shareholders on record on 19 February 2016. (1) This report (“Report”) incorporates the financial information of the Company and its wholly-owned subsidiary, IRES Residential Properties Limited, together referred to as the “Group,” for the period from 1 January 2015 to 31 December 2015. 10 Irish Residential Properties REIT plc Annual Report 2015 Investment Manager The Company’s board of directors (the “Board”) is very satisfied with the significant contribution that the Investment Manager and senior management (as well as the other staff) of CAPREIT LP have made. As of 31 December 2015, there were 26 staff located in Dublin providing dedicated and experienced support to the I-RES portfolio. On 28 October 2015, IRES Fund Management became authorised by the Central Bank of Ireland as an alternative investment fund manager under the European Union (Alternative Investment Fund Managers) Regulations, 2013 (the “AIFM Regulations”). On 1 November 2015, IRES Fund Management was appointed by the Company as its new alternative investment fund manager in accordance with the AIFM Regulations and replaced the existing alternative investment fund manager. On 17 February 2016, the Company acquired a further eight apartments and 11 basement car parking spaces at the Forum, located in Sandyford, Dublin 18, for a total purchase price of c. €2.3 million (including VAT, but excluding other transaction costs), funded by the Company’s cash on hand. Effective 21 March 2016, I-RES will be added to the FTSE EPRA/NAREIT Global Real Estate Index Series, EMEA region (the “EPRA Index”). Outlook In summary, the Board is pleased with the Group’s performance. We believe the positive economic outlook for Ireland and its property market will lead to increased demand in the residential rental sector, which should result in continued improvement in the performance of the Company over a sustainable and long-term basis. Events Subsequent to 31 December 2015 On 14 January 2016, the Company signed a new revolving and accordion credit facility of up to €250 million, which can be extended to €350 million subject to certain terms and conditions (the “New Revolving Credit Facility”). On 15 January 2016, the Company acquired a further 442 apartments, commercial space and associated underground car parking for a total purchase price of €83 million (including VAT, but excluding other transaction costs), funded by the New Revolving Credit Facility. Colm Ó Nualláin Chairman Annual Report 2015 Irish Residential Properties REIT plc 11 David Ehrlich Chief Executive Officer Chief Executive Officer’s Statement 2015 was a busy and productive year for I-RES. In March 2015, the Company raised gross proceeds of €215 million through the issuance of 215 million ordinary shares, which, together with the €200 million raised in the initial offering in April 2014, brought the total gross proceeds raised to €415 million. As the most active consolidator in the Irish residential rental sector, I-RES completed the accretive acquisition of 410 apartments and 4,665 sq. m. (50,214 sq. ft.) of ancillary commercial space during the year. This increased our apartment count by 34% to 1,614 extremely high-quality, well-located apartments in the Dublin area near important transportation links and employment centres. Operationally, we generated solid increases in our key operational performance benchmarks, driven primarily by strong organic growth resulting from high occupancies and solid increases in monthly rents on renewals and turnovers. In 2015, approximately 25% renewed in each of quarter one and quarter two and 15% and 10% were renewed in quarter three and quarter four, respectively. Also, approximately 20% of the apartments turned over in 2015. On 14 January 2016, the Company signed a new revolving and accordion credit facility of up to €250 million, which can be extended to €350 million subject to certain terms and 12 Irish Residential Properties REIT plc conditions. This new facility replaces the €60 million revolving credit facility which was due to mature in August 2016. The new facility has a reduced margin and a five-year term. In addition, subsequent to the year ended 31 December 2015, the Company acquired a further 442 apartments and 18,344 sq. m. (197,460 sq. ft.) of commercial space and associated underground car parking at Tallaght Cross West, located in Tallaght, Dublin 24, for a total purchase price of €83 million (including VAT, but excluding other transaction costs). The acquisition was mainly funded by our New Revolving Credit Facility. On 17 February 2016, the Company acquired a further eight apartments and 11 basement car parking spaces at the Forum, located in Sandyford, Dublin 18, for a total purchase price of c. €2.3 million (including VAT, but excluding other transaction costs), funded by the Company’s cash on hand. With this acquisition, our total portfolio consists of 2,064 apartments at a total investment of €529 million to date (including VAT and other acquisition costs). Annual Report 2015 Rockbrook Portfolio 270 residential apartments Sandyford, Dublin 18 The development consists of 270 residential apartments and mixed-use commercial space of approximately 4,665 sq. m. (50,214 sq. ft.). The portfolio also includes a development site of approximately 1.13 hectares (2.8 acres) and associated basement car parking. Annual Report 2015 Irish Residential Properties REIT plc 13 Chief Executive Officer’s Statement (cont’d) Financial Results Balance Sheet of the Group: Total Property Value (€ millions) Basic and EPRA Net Asset Value (€ millions) Basic and EPRA NAV per Share (cents) Number of Apartments Bank Indebtedness (€ millions) Group Total Gearing 31 December 2015 472.2 435.0 104.3 1,614 41.5 8.6% 31 December 2014 323.6 200.9 99.5 1,204 125.0 37.6% Income Statement of the Group: Gross Rental Income (€ millions) Net Rental Income (€ millions) Profit (€ millions) Basic EPS (cents) Diluted EPS (cents) Basic EPRA EPS (cents) Year ended 31 December 2015 24.7 20.0 30.8 8.4 8.3 3.3 2 July 2013 to 31 December 2014 9.7 7.6 7.9 8.3 8.3 1.6 The property portfolio was valued at €472.2 million at 31 December 2015, with total net borrowings of €41.5 million, compared to €323.6 million at the end of 2014, with total net borrowings of €125.0 million. For the year ended 2015, there was a significant 6.7% increase in value for the properties held as at 31 December 2014. The Group’s loan to value ratio was 8.6%. Basic NAV and EPRA NAV were €435.0 million for the year, with Basic NAV and EPRA NAV per share of 104.3 cents in 2015, up 4.8% from 99.5 cents in 2014. The Company’s Pro-forma NAV per share as at 31 December 2015 was 105.3 cents, adjusting for acquisition transaction costs. Importantly, we have recovered all the costs incurred in connection with our Capital Raise in 2015 and the costs incurred with our acquisitions through appreciation in the fair value of the portfolio. The main drivers of the valuation movement in the year were primarily continued rental growth 14 Irish Residential Properties REIT plc as a result of effective management, achieved together with the continued increasing demand for high-quality rental accommodation and slight yield compression. Average monthly rent increased to €1,372 per apartment as at 31 December 2015, up from €1,250 at 31 December 2014, largely due to strong rental increases in monthly rental rates on renewals and turnovers during the year. Occupancy levels remained strong throughout the year, mirroring the strong market fundamentals in the Irish residential rental sector. As at 31 December 2015, the property portfolio had an annualised passing rent of €28.2 million, representing a Gross Yield at cost of approximately 6.9% (excluding the estimated cost for development land) and a net rental income (“NRI”) margin of approximately 80.8%. Basic EPS was 8.4 cents and EPRA Basic EPS was 3.3 cents for the year ended 31 December 2015. Annual Report 2015 ‘‘ We believe we have one of the highest quality rental property portfolios in any market, characterised by quite new, well-maintained buildings, large, attractive and modern apartments, and property management programmes aimed at ensuring our residents’ needs are met quickly and efficiently.” DAVID EHRLICH, Chief Executive Officer Dividends Outlook Under the Irish REIT regime, subject to having sufficient distributable reserves, the Company is required to distribute to shareholders at least 85% of the Property Income of its Property Rental Business for each financial year. Accordingly, in 2015, the Board paid dividends of approximately €1.8 million for the 2014 accounting period. Strong Market Fundamentals Ireland’s GNP is improving, unemployment is falling and the overall population is growing. As labour market conditions continue to tighten, upward pressure is being applied on employee compensation, which, together with a range of tax cuts introduced in the most recent budget, should boost disposable incomes. Ireland’s economy is expected to continue to grow in 2016, with consumer demand, trade and investment expected to increase going forward as consumer confidence remains solid. In addition, there is little new supply of residential housing coming to market, and new housing starts are expected to remain well under forecasted requirements over the next number of years. As a result, we continue to see strengthening fundamentals in the residential rental business. On 9 February 2016, the Directors declared an interim dividend of €13.1 million (dividends per share of 3.15 cents) for the 2015 accounting period, to be paid on 21 March 2016 to shareholders on record on 19 February 2016. Investment Manager We are very satisfied with the significant contribution that the Investment Manager and senior management (as well as the other staff) of CAPREIT LP have made. As of 31 December 2015, there were 26 staff located in Dublin employed by IRES Fund Management providing dedicated and experienced support to the I-RES portfolio. On 28 October 2015, IRES Fund Management became authorised by the Central Bank of Ireland as an alternative investment fund manager under the AIFM Regulations. On 1 November 2015, IRES Fund Management was appointed by the Company as its new alternative investment fund manager in accordance with the AIFM Regulations and replaced the existing alternative investment fund manager. Acquisition and Development Opportunities We continue to evaluate a significant pipeline of future acquisition opportunities available through NAMA as well as off-market sources. As at 31 December 2015, the Company has an acquisition (including development) capacity in excess of €300 million based on a target gearing of 45%, of which c. €90.3 million has been used subsequent to year end to purchase a property and for other miscellaneous payments. (Capacity as of the date of this Report is in excess of €200 million based on a target gearing of 45%.) Using this available financing under the New Revolving Credit Facility, the Company will enhance returns to shareholders. Annual Report 2015 Irish Residential Properties REIT plc 15 Chief Executive Officer’s Statement (cont’d) The current planning guidelines and the high cost of new construction will make it difficult for the severe shortage of accommodation to be rectified, at least over the short to medium term. The Company will benefit in two ways; firstly, it helps it to continue to build on its strong operational performance, and secondly, the Company has capacity at its existing properties to build between approximately 600 to 650 apartments, subject to required planning and any other necessary approvals. With respect to the Rockbrook Portfolio, approximately 470 apartments can be built. The planning process was postponed while we awaited the introduction of the new building regulations. We believe the effect will be to lower development costs. We are in the process of preparing a planning application under the revised regulations. We expect to begin development of the first phase of 68 units at Block B2B, Beacon South Quarter, Sandyford, Dublin 18, imminently and to have them available for rent in approximately 16 months. Based on management’s expectations of rents at the time of letting and the fixed price cost of completion, the apartments are expected to have a gross yield in the range of 8.5% to 9%. We believe these sites can be developed and leased on a highly accretive basis as infrastructure, particularly multi-storey parking, has largely been completed and paid for as part of the acquisition of those sites. Industry-Leading Property Management Our fully-integrated management platform, between the Dublin office of IRES Fund Management and the CAPREIT LP head office resources, both of which are subsidiaries of CAPREIT, is driving solid increases in organic growth, and we are confident this progress will continue as our property portfolio increases in size. We believe we have one of the highest quality rental property portfolios in any market, characterised by quite new, well-built, wellmaintained buildings, large, attractive and modern apartments, and property management programmes aimed at ensuring our residents’ needs are met quickly and efficiently. We are confident that the quality of the portfolio and market fundamentals will continue to drive strong occupancies and increasing monthly rents over the long term. Finally, as we further increase the size and scale of our property portfolio, we will benefit from economies of scale and operating synergies, enhancing our organic growth. I wish to thank the Board of Directors for all of their hard work this past year. We are excited about our future and look forward to keeping you apprised of our progress. David Ehrlich Chief Executive Officer 16 Irish Residential Properties REIT plc Annual Report 2015 Thomas Schwartz Director of IRES Fund Management IRES Fund Management’s Statement We are pleased with our progress in growing I-RES’ portfolio and enhancing its property operations. The strengthening fundamentals in the Irish multi-unit residential rental market are compelling, and we believe there are significant opportunities to further increase the size and scale of the Company’s property portfolio and generate continued solid organic growth. On 28 October 2015, IRES Fund Management became authorised by the Central Bank as an alternative investment fund manager under the AIFM Regulations. On 1 November 2015, IRES Fund Management was appointed by the Company as its alternative investment fund manager in accordance with the AIFM Regulations. IRES Fund Management is supported by CAPREIT LP. On completion of the I-RES initial offering, CAPREIT acquired an indirect beneficial interest in the Company. With the completion of the Company’s Capital Raise on 26 March 2015, CAPREIT indirectly made a further investment, bringing CAPREIT’s ownership interest at 31 December 2015 to 15.7% (total invested €63.5 million). CAPREIT continues to be well aligned with all I-RES shareholders. Our goal is to build I-RES into the residential landlord of choice in Ireland through professional property management, a rigorous focus on property maintenance, building and maintaining good relations with residents and responding quickly and efficiently to their needs, and attracting, retaining and training the best operating team in Dublin. We are bringing a dedicated professionalism to the Irish residential rental sector with proven property management programmes. I-RES has the benefit of CAPREIT LP’s team of senior executives (including myself). CAPREIT LP’s resources available to I-RES include management, due diligence, finance, training, risk management, marketing, legal, information technology and other expertise provided by a significant number of specialists. In addition, I-RES benefits from CAPREIT LP’s infrastructure, including an industry-leading IT platform, and its practices that have been developed and successfully implemented in Canada over the past 18 years. As of 31 December 2015, we had 26 staff located in Dublin taking advantage of CAPREIT LP’s systems and working seamlessly with its resources in Toronto, including the number of senior people who are also in Ireland on a regular basis. We are confident that through our attention to detail, we can continue to maintain high occupancy levels and achieve ongoing rental growth to generate strong cash flows over the long term. We have proven we can source and complete acquisitions, and we will continue to build on this success going forward. Thomas Schwartz Director of IRES Fund Management Annual Report 2015 Irish Residential Properties REIT plc 17 Market Update The significant supply/demand imbalance previously noted by I-RES continues to be a feature of the Irish residential property market. In Dublin, where all of I-RES’ current portfolio is located, the situation is even more acute, with only 2,891 residential completions recorded in 2015, which compares to the ESRI’s estimate of new household formation in the city of nearly 8,000 per annum. Data from the Department of Environment, Community and Local Government (“DoECLG”) shows that only 12,666 residential housing units were completed across Ireland in 2015. While this is 15% above the outturn for 2014, this level of output is well below the Economic and Social Research Institute (“ESRI”)’s estimate, using county-level analysis, of annual new household formation (18,000). Apart from new household formation, other drivers of demand are supportive as noted below. Total employment in Ireland has increased for 12 successive quarters (to the end of Q3 2015), with the numbers at work having increased by 139,700 (+7.6%) from the Q3 2012 trough. The employment components of all three Irish Purchasing Managers’ Indices (“PMI”) – the Investec Services PMI, Investec Manufacturing PMI, and Ulster Bank’s Construction PMI – suggest that this momentum continued through Q4 2015 and into the new year. The latest (January 2016) Monthly Unemployment release from the Central Statistics Office (“CSO”) shows that the rate of unemployment has fallen to a seven-year low of 8.6%. 18 Irish Residential Properties REIT plc As labour market conditions continue to tighten, upward pressure is being applied on employee compensation. CSO data show that average weekly earnings rose 2.7% year-overyear in Q3 2015. Disposable incomes are also being boosted by tax cuts. In October the government unveiled a range of tax cuts in its budget, with reforms to the Universal Social Charge and Income Tax alone set to cost €589 million in 2016. It is estimated that, all else being equal, these measures will boost disposable incomes by approximately 0.6%. Given the supportive demand drivers and muted new build activity, it is no surprise to see that Irish residential property prices continue to increase. The latest Residential Property Price Index (“RPPI”) release from the CSO reveals that national prices rose at an annual pace of 6.6% in December 2015. The RPPI also shows that the cumulative improvement in national prices from the 2013 trough is 35.4%, although it should be noted that prices are still 33.5% below the September 2007 peak. Annual Report 2015 Key Market Indicators +7.6 % +11.1% +2.7 % Employment growth over the last 12 quarters Average rent increase in Dublin year-over-year Q3 2015 Increase in average weekly earnings year-over-year Q3 2015 With that being said, there has been a moderation in the annual rate of inflation in the Irish housing market (as per the RPPI), from a high of 16.8% in March 2015 to the current reading. The subindices of the RPPI also show a somewhat more pronounced softening in the annual rate of growth in Dublin prices, from 25.1% in August 2014 to 2.6% in December 2015. The introduction of new mortgage lending rules from the Central Bank of Ireland (“CBI”), which took effect in February 2015, has been a key factor behind the moderation in price inflation. The CBI introduced loan-to-value (80%, or 90% in the case of most first-time buyers) and loan-to-income (3.5x) ceilings which apply to the majority of Irish mortgage lending. These rules have had a more significant impact in the Dublin market, where prices are materially higher than in the rest of the country (data on asking prices from the country’s largest property website, Daft.ie, show that in Dublin these stood at €306,613, versus €164,838 in the rest of the country, in Q4 2015). However, while tighter mortgage lending standards are impacting price inflation, particularly in Dublin, they are failing to dampen demand for residential property, as evidenced by rising private rents. The Private Rent Index of the Consumer Price Index (“CPI”) was +9.6% year-over-year in December 2015, helping the cumulative increase in rents from the December 2010 trough to 37.1%. At 133.0 in December 2015, the CPI Private Rent Index is at an all-time high. Regional data from the Private Residential Tenancies Board (“PRTB”), a government agency tasked with ensuring the proper functioning of the rental market, show that average rents for a two-bedroom apartment in Dublin were +11.1% year-over-year in Q3 2015. In a bid to cool the rate of increase in rents, the Minister for the Environment, Alan Kelly, proposed the introduction of hard rent controls linked to the CPI. This was met with opposition from a variety of sources, leading to the compromise of the “rent certainty” measures unveiled in November 2015. The most meaningful aspect of these measures is that they will serve to limit the number of rent reviews to one every 24 months (most residential tenancies in Ireland were previously reviewed annually). Daft.ie data show that the national stock of units available to rent has fallen to just 3,600 on 1 February 2016, the lowest in the history of the series (which began in 2006). CSO Planning Permissions data show that permission was granted for only 785 apartments in 2014, the lowest annual outturn in the history of the series (which dates back to 1975). The latest data show that permission was granted for 1,331 apartments in the first nine months of 2015, but this is still well below what might be considered a normal level of activity (the average annual number of apartment permissions since 1975 is 7,721). In summary, a combination of robust demand and supply shortages suggests that the path of least resistance for both prices and rents is to the upside, at least until meaningful new supply begins to come onstream. As well, the CBI mortgage rules should help to cause rental inflation continuing to outstrip price growth. Annual Report 2015 Irish Residential Properties REIT plc 19 Lansdowne Gate 224 residential apartments Drimnagh, Dublin 12 The development was constructed in 2005 and is located adjacent to the LUAS light rail system, 5 km from the city centre and within walking distance of numerous large employers, as well as shopping and leisure facilities. 20 Irish Residential Properties REIT plc Annual Report 2015 Portfolio Overview The following table provides an overview of the Group’s property portfolio as at 31 December 2015. Commercial Space Average # of Apts. Total # Value as at Owned Monthly Rent Property and Location Year Built Date Acquired Owned (1) of Apts.(1) (8) 31 Dec 2015 (1) (sq. m.)(1) per Apt. (1)(2)(3)Occupancy (1)(2) Kings Court, Smithfield 2006 10 Sep 2013 83 83 € 17.2m 566 € 1,288 98.8% Grande Central, Sandyford (4) 2007 10 Sep 2013 65 195 € 19.3m – € 1,548 100.0% Priorsgate, Tallaght 2007 10 Sep 2013 102 198 € 17.5m 2,538 € 1,045 98.0% Camac Crescent, Inchicore 2008 10 Sep 2013 90 110 € 17.9m – € 1,221 98.9% The Laurels, Tallaght 2007 27 Jun 2014 19 19 € 2.8m 190 € 1,103 94.7% The Marker, Docklands 2012 18 Jul 2014 84 105 € 55.9m 1,218 € 2,328 96.4% 2007/2008 07 Oct 2014 225(5) 850 € 82.6m 2,395 € 1,479 93.3% 2007 07 Oct 2014 235 285 € 54.8m – € 1,165 94.5% Bakers Yard, Portland Street North 2007/2008 07 Oct 2014 85 132 € 19.6m 792 € 1,283 98.8% Lansdowne Gate, Drimnagh 2005 07 Oct 2014 224 280 € 60.3m – € 1,329 97.3% Rockbrook Grande Central, Sandyford (4) 2007 31 Mar 2015 81 195 € 26.1m 3,529 € 1,450 96.3% Rockbrook South Central, Sandyford 2007 31 Mar 2015 189 224 € 66.0m 1,136 € 1,454 95.8% Tyrone Court, Inchicore 2014 05 Jun 2015 92 128 € 20.0m – € 1,297 92.4% Bessboro, Terenure 2008 11 Dec 2015 40 40 € 12.2m – € 1,204 90.0% € 472.2m 12,364 € 1,372 96.0% (6) 83.0m (7) 18,344 € 1,006 (7)88.5% (7) – € 469 (7)37.5% (7) 30,708 € 1,290 (6)94.1% (6) Beacon South Quarter, Sandyford (5) Charlestown, Finglas Total owned portfolio as at 31 December 2015 1,614 Tallaght Cross West, Tallaght 2008 15 Jan 2016 442 507 € Forum, Sandyford 2007 17 Feb 2016 8 127 € Total properties owned as at the date of this Report 2,064 2.3m (7) € 557.5m (6) (1) As at 31 December 2015. (2) Based on residential apartments. (3) Average monthly rent (AMR) is defined as actual residential rents, net of vacancies, divided by the total number of apartments owned in the property. (4) Total number of owned apartments at Grande Central as of 31 December 2015 is 146. (5) Includes eight additional apartments purchased on 6 November 2015. (6) Weighted average, by number of apartments owned. (7) For Tallaght Cross West and the Forum, the fair value is the purchase price including VAT but excluding other transaction costs; the AMR and occupancy are as at the date of acquisition. (8) Total number of apartments in the development. Annual Report 2015 Irish Residential Properties REIT plc 21 Portfolio Overview (cont’d) Kings Court Grande Central Priorsgate 83 residential apartments Smithfield, Dublin 7 65 residential apartments Sandyford, Dublin 18 102 residential apartments Tallaght, Dublin 24 The Company acquired Kings Court, located in Smithfield, Dublin 7, in September 2013. The development was constructed in 2006 and is a residential development consisting of 83 residential apartments dispersed over four blocks and 566 sq. m. (6,093 sq. ft.) of commercial space, all of which is owned by the Company. The entire development is constructed over a common basement with 65 car park spaces. The Company’s 83 residential apartments consist of 25 one-bedroom, 54 two-bedroom and four three-bedroom residential apartments. The Company acquired Grande Central, located in Sandyford, Dublin 18, in September 2013. The development was constructed in 2007 and is a residential development located within the suburb of Sandyford, Dublin 18, approximately 8 km south of Dublin City Centre. The development is on a 0.5-hectare site and consists of a purposebuilt apartment block with 195 residential apartments, of which 65 are owned by the Company (which includes two additional residential apartments that were acquired in August and October 2014). The Company acquired Priorsgate, located in Tallaght, Dublin 24, in September 2013. The development was constructed in 2007 and is a residential development on a 2.6-acre site located approximately 10 km southwest of Dublin City Centre. The development consists of 198 residential apartments dispersed over three blocks, of which 102 are owned by the Company. The Company also owns eight adjacent commercial units with a total of 2,538 sq. m. (27,316 sq. ft.) of space. The purchase price was c. €12.5 million (including VAT, but excluding other transaction costs), compared to a value of c. €17.2 million as at 31 December 2015. The annualised rent roll at 31 December 2015 for both residential and commercial was c. €1.3 million, giving a gross yield of about 7.7% (approximate gross yield of 10.6% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy for residential apartments was at approximately 98.8%. 22 Irish Residential Properties REIT plc The entire development is constructed over a common basement with a single car park space per residential apartment. The Company’s 65 residential apartments consist of 10 one-bedroom, 34 two-bedroom and 21 three-bedroom residential apartments. The purchase price was c. €11.4 million (including VAT, but excluding other transaction costs), compared to a value of c. €19.3 million as at 31 December 2015. The annualised rent roll at 31 December 2015 was c. €1.2 million, giving a gross yield of about 6.2% (approximate gross yield of 10.6% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy was at approximately 100%. Annual Report 2015 The entire development is constructed over a common basement with a single car park space per residential apartment. Included with the property is an adjoining detached building on a site of 0.18 hectare (0.44 acre) known as Bruce House Site. The Company’s 102 residential apartments, which are dispersed over the three blocks, consist of 49 one-bedroom, 47 two-bedroom, five three-bedroom and one fourbedroom residential apartments. The purchase price was c. €9.0 million (including VAT, but excluding other transaction costs), compared to a value of c. €17.5 million at 31 December 2015. The annualised rent roll at 31 December 2015 for both residential and commercial was c. €1.4 million, giving a gross yield of about 8.2% (approximate gross yield of 16.0% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy for residential apartments was at approximately 98%. Camac Crescent The Laurels The Marker Residences 90 residential apartments Inchicore, Dublin 8 19 residential apartments Tallaght, Dublin 24 84 residential apartments Grand Canal Dock, Dublin 2 The Company acquired Camac Crescent, located in Inchicore, Dublin 8, in September 2013. The development was constructed in 2008 and is a residential development on a 0.56-hectare site located in Inchicore, Dublin 8, approximately 3 km west of Dublin City Centre. The Company acquired the Laurels, located in Tallaght, Dublin 24, in June 2014. The development was constructed in 2007 and consists of 19 residential apartments, all of which are owned by the Company. The Company acquired the Marker Residences, located in the Grand Canal Dock area of Dublin 2, in July 2014. The development was constructed in 2012 and consists of 105 luxury residential apartments, of which 84 were acquired by the Company, and approximately 1,218 sq. m. (13,111 sq. ft.) of commercial space, all of which was acquired by the Company. The Company’s 84 residential apartments are all two-bedroom residential apartments. The development consists of 110 residential apartments dispersed over six blocks, of which 90 are owned by the Company. The entire development is constructed over a common basement with a single car park space per residential apartment. The Company’s 90 residential apartments consist of 21 one-bedroom, 49 two-bedroom and 20 three-bedroom residential apartments. The purchase price was c. €9.9 million (including VAT, but excluding other transaction costs), compared to a value of c. €17.9 million as at 31 December 2015. The annualised rent roll at 31 December 2015 was c. €1.3 million, giving a gross yield of about 7.4% (approximate gross yield of 13.3% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy was at approximately 98.9%. The Company also owns 190 sq. m. (2,045 sq. ft.) of commercial space in the form of one large unit which could be split into two units. The Laurels consists of four one-bedroom, 13 two-bedroom and two three-bedroom residential apartments. The purchase price was c. €2.1 million (including VAT, but excluding other transaction costs), compared to a value of c. €2.8 million as at 31 December 2015. The annualised rent roll at 31 December 2015 for both residential and commercial was c. €0.3 million, giving a gross yield of about 9.0% (approximate gross yield of 11.8% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy for the residential apartments was at approximately 94.7%. Annual Report 2015 The purchase price was c. €50.1 million (including VAT, but excluding other transaction costs), compared to a value of c. €55.9 million at 31 December 2015. The annualised rent roll at 31 December 2015 for both residential and commercial was c. €2.7 million, giving a gross yield of about 4.8% (approximate gross yield of 5.4% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy for the residential apartments was at approximately 96.4%. Irish Residential Properties REIT plc 23 Portfolio Overview (cont’d) Beacon South Quarter Charlestown 225 residential apartments Sandyford, Dublin 18 235 residential apartments Finglas, Dublin 11 The Company acquired Beacon South Quarter, located in Sandyford, Dublin 18, in October 2014. The development was constructed in 2007/2008 and is a landmark mixed-use development on 13 acres. A number of major employers are located in the immediate neighbourhood, including Vodafone, Merrill Lynch and Microsoft, and the development is adjacent to the LUAS light rail line to the city centre. The Company acquired Charlestown in October 2014, a mixed-use development set on 40 acres in Finglas, Dublin 11. The development was constructed in 2007 and consists of 285 residential apartments, of which 235 are owned by the Company. The overall development comprises facilities for tenants including a shopping centre, a medical centre and a variety of leisure and restaurant operators. The Beacon South Quarter development includes many high-end occupiers, including private medical care, leisure and a selection of food and lifestyle shops. The development consists of 850 luxury residential apartments, of which 225 are owned by the Company. The Company’s 225 residential apartments consist of 26 one-bedroom, 173 two-bedroom and 26 three-bedroom residential apartments. The Company also owns approximately 2,395 sq. m. (25,777 sq. ft.) of ancillary commercial space within the development. In addition, the Company owns three adjacent development sites and 6,847 sq. m. (73,701 sq. ft.) of commercial space. The Company initially acquired 217 apartments on 7 October 2014 for a purchase price of c. €82.5 million (including VAT, but excluding other transaction costs) and on 6 November 2015, the Company acquired an additional eight apartments and eight car parking spaces for a purchase price of €2.24 million (including VAT, but excluding other transaction costs). At 31 December 2015, the property was valued at c. €82.6 million. The annualised rent roll at that time for both residential and commercial was c. €4.8 million, giving a gross yield of about 5.8% (approximate gross yield of 5.7% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy for the residential apartments was at approximately 93.3%. 24 Irish Residential Properties REIT plc Annual Report 2015 The property is located approximately 9.5 km from Dublin City Centre and 8 km from Dublin airport and is adjacent to the main M50 and M2 transportation corridors. The Company’s 235 residential apartments consist of 36 one-bedroom, 164 twobedroom and 35 three-bedroom residential apartments. The purchase price was c. €51.1 million (including VAT, but excluding other transaction costs), compared to a value of c. €54.8 million as at 31 December 2015. The annualised rent roll at 31 December 2015 was c. €3.3 million, giving a gross yield of about 6.0% (approximate gross yield of 6.4% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy was at approximately 94.5%. Bakers Yard Lansdowne Gate 85 residential apartments Portland Street North, Dublin 1 224 residential apartments Drimnagh, Dublin 12 The Company acquired Bakers Yard in October 2014, an apartment development on 1.4 acres adjacent to Dublin City Centre in Dublin 1. The development was constructed in 2007/2008 and is within walking distance of many large government and private sector employers, as well as local and national public transport infrastructure. The development consists of 132 residential apartments, of which 85 are owned by the Company. The Company acquired Lansdowne Gate in October 2014, a superior quality development on 5.5 acres in Drimnagh, Dublin 12. The development was constructed in 2005 and is located adjacent to the LUAS light rail system, 5 km from the city centre and within walking distance of numerous larger employers, as well as shopping and leisure facilities. The Company also owns approximately 792 sq. m. (8,525 sq. ft.) of ancillary commercial space within the development. In addition, the Company owns an adjoining 0.45-acre site with planning consent for a further 55 residential apartments and three ground-floor commercial units. The Company’s 85 residential apartments consist of 13 one-bedroom, 60 two-bedroom and 12 three-bedroom residential apartments. The purchase price was c. €17.3 million (including VAT, but excluding other transaction costs), compared to a value of c. €19.6 million as at 31 December 2015. The annualised rent roll at 31 December 2015 for both residential and commercial was c. €1.4 million, giving a gross yield of about 7.2% (approximate gross yield of 8.1% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy for the residential apartments was at approximately 98.8%. The development consists of 280 residential apartments, of which 224 are owned by the Company, set in 11 blocks over semibasement car parking, with the benefit of a centralised district heating system, landscaped gardens and a children’s playground. The Company’s 224 residential apartments consist of 23 one-bedroom, 146 two-bedroom and 55 three-bedroom residential apartments. The purchase price was c. €60.4 million (including VAT, but excluding other transaction costs), compared to a value of c. €60.3 million as at 31 December 2015. The annualised rent roll at 31 December 2015 was c. €3.6 million, giving a gross yield of about 5.9% (approximate gross yield of 5.9% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy was at approximately 97.3%. Annual Report 2015 Irish Residential Properties REIT plc 25 Portfolio Overview (cont’d) Rockbrook Grande Central and Rockbrook South Central (“Rockbrook Portfolio”) Tyrone Court Bessboro 92 residential apartments Inchicore, Dublin 8 40 residential apartments Terenure, Dublin 6 The Company acquired Tyrone Court, located in Inchicore, Dublin 8, in June 2015. The development was constructed in 2014 and consists of 128 apartments across four residential apartment blocks, of which 92 are owned by the Company. The Company also owns a three-storey detached crèche building extending to approximately 310 sq. m. (3,336 sq. ft.). The Company acquired Bessboro, located in Terenure, Dublin 6, in December 2015. The development was constructed in 2008 and consists of 40 residential apartments, all of which are owned by the Company. The Company’s 40 residential apartments consist of six one-bedroom, 32 two-bedroom and two three-bedroom apartments. 270 residential apartments Sandyford, Dublin 18 The Company acquired the Rockbrook Portfolio, located in Sandyford, Dublin 18, in March 2015 via the acquisition of IRES Residential Properties Limited. The development consists of 270 residential apartments, and mixed-use commercial space of approximately 4,665 sq. m. (50,214 sq. ft.). The portfolio also includes a development site of approximately 1.13 hectares (2.8 acres) and associated basement car parking. The property is located close to the Stillorgan LUAS light rail system stop, in an area serviced by numerous bus routes. Located nearby are the UPMC Beacon Hospital and large employers such as Microsoft, Vodafone, Volkswagen and Bewleys. The Company’s 270 residential apartments consist of 46 one-bedroom, 203 two-bedroom and 21 three-bedroom residential apartments. The Company’s 92 residential apartments consist of four three-bedroom duplex units, three three-bedroom, 62 two-bedroom and 23 one-bedroom apartments. The property is located in an established residential area, close to Drimnagh Station, which is a 15-minute commute to City Centre. Located nearby are St. James’s Hospital, Inchicore College, the Central Criminal Court and Heuston Station, all of which provide a strong employment centre and tenant market. The purchase price was c. €87.3 million (including VAT, but excluding other transaction costs), compared to a value of c. €92.1 million as at 31 December 2015. The annualised rent roll at 31 December 2015 was c. €4.9 million, giving a gross yield of about 5.3% (approximate gross yield of 5.6% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy was at approximately 95.9%. The purchase price was c. €19.5 million (including VAT, but excluding other transaction costs), compared to a value of c. €20.0 million as at 31 December 2015. The annualised rent roll at 31 December 2015 was c. €1.4 million, giving a gross yield of about 7.2% (approximate gross yield of 7.4% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy was at approximately 92.4%. 26 Irish Residential Properties REIT plc Annual Report 2015 Bessboro provides a strong suburban location only 7 km from Dublin City Centre and 4.6 km from the M50 motorway. The location provides a range of amenities including shops, schools, bars and restaurants, all within walking distance of Bessboro. The scheme is also in close proximity to Bushy Park, golf and rugby clubs. The purchase price was c. €12.2 million (including VAT, but excluding other transaction costs), compared to a value of €12.2 million as at 31 December 2015. The annualised rent roll at 31 December 2015 was c. €0.6 million, giving a gross yield of about 4.7% (approximate gross yield of 4.7% based on the original purchase price including VAT, but excluding other acquisition costs) and occupancy was at approximately 90%. The yield profile is anticipated to improve as approximately 82% of the existing leases, which are currently well below market rents, will be renewed within the next 12 months. Tallaght Cross West Forum 442 residential apartments Tallaght, Dublin 24 8 residential apartments Sandyford, Dublin 18 The Company acquired Tallaght Cross West, located in Tallaght, Dublin 24, in January 2016. The development was constructed in 2008 and consists of 507 residential apartments, of which 442 residential apartments are owned by the Company. The Company also owns 18,344 sq. m. (197,460 sq. ft.) of commercial space and associated underground car parking. The Company acquired the Forum, located in Sandyford, Dublin 18, in February 2016. The development was constructed in 2007 and consists of 127 residential apartments, of which eight residential apartments and 11 basement car parking spaces are owned by the Company. Tallaght Cross West has recently undergone significant capital expenditures to complete the fit out of the apartments. The vendor commenced a residential leasing programme for all 442 units in September 2015 and 15% of the apartments remained unleased at closing on 15 January 2016. The Company’s 442 residential apartments consist of 161 one-bedroom, 237 two-bedroom and 44 three-bedroom residential apartments. The purchase price was c. €83 million (including VAT, but excluding other transaction costs). On closing, the 442 apartments had annualised passing residential rents of €5.3 million at 88% occupancy, generating a gross yield of 7.4% based on the original purchase price appointed to the apartments, including VAT, but excluding other transaction costs. The current commercial annualised passing rent is c. €0.63 million at 10% occupancy. Based on current annualised passing residential rents on closing and lease up of the remaining 12% of unleased apartments at market rents, it will generate a gross yield of 8.5%. Annual Report 2015 The Forum is located on the LUAS tram line and next to the Royal College of Surgeons’ Sandyford facility. The development is also adjacent to the Company’s Rockbrook and Beacon South Quarter portfolios. The Company’s eight residential apartments consist of one one-bedroom and seven two-bedroom residential apartments. The purchase price was c. €2.3 million (including VAT, but excluding other transaction costs). Irish Residential Properties REIT plc 27 Investment Policy and Strategy Business Model IRES Fund Management applies the following professional business model to the growing I-RES property portfolio: (i) make strategic and accretive acquisitions to both maintain the outstanding quality of the portfolio and diversify and expand the size and scale of the Company’s property portfolio. (ii) apply proven property operating programmes to increase cash flows. (iii) reduce operating costs through efficient energy management initiatives and sophisticated purchasing programmes. (iv) employ a “hands-on” approach to managing properties to maximise occupancies and rents. Investment Policy The Company’s aim is to assemble a portfolio within its focus activity of acquiring, holding and managing investments primarily focused on apartment residential real estate located on the island of Ireland and ancillary and/or strategically located commercial property, for third-party rental, on the island of Ireland principally within the greater Dublin area and other major urban centres on the island of Ireland (the “Focus Activity”). The vast majority of such properties acquired will form the Company’s property investment portfolio for thirdparty rental. The Company may also acquire properties and portfolios which include other assets, subject always to a maximum limit of 20% of the overall gross value of property assets, provided there is a disposal plan in place in connection with such assets, which have been deemed non-strategic and do not meet the Company’s investment objectives or which could otherwise have an adverse effect on the Company’s status as an Irish REIT. 28 Irish Residential Properties REIT plc The Board intends to focus on creating both sustainable income and strong capital returns. The Company may also acquire indebtedness secured by properties (including in respect of buy-to-let properties) within its Focus Activity where it intends to gain title to and control over the underlying property. There is no limit on the proportion of the Company’s portfolio that consists of indebtedness secured by properties. The Board intends to focus on properties which require active management and which are expected to benefit from the expertise of its management team, which includes employees of CAPREIT LP (the “Management Team”). The Company will also have the ability to enter into a variety of investment structures, including joint ventures, acquisitions of controlling interests, acquisitions of minority interests or other structures, including, but not limited to, for revenueproducing purposes in the ordinary course of business, within the parameters stipulated in the Irish REIT regime. There is no limit imposed on the proportion of the Company’s portfolio that may be held through such structures. Warehousing and Pipeline Arrangements If the Company is unable to participate in sales processes for property investments because it has insufficient funds and/ or debt financing available to it, including where its gearing is at or close to the maximum permitted level under the Irish REIT regime, the Company is permitted to acquire property investments that meet the criteria specified in its Investment Policy (including the acquisition of shares in property holding companies) from time to time in accordance with the terms of warehousing or pipeline arrangements entered into or to be entered into by it with third parties, in each case, without shareholder approval and for a price calculated on a basis that has been approved in advance by the Directors of the Company. Annual Report 2015 The Company will not invest more than 20% of its gross assets, directly or indirectly, in a single underlying asset, or in one or more collective investment undertakings, or be more than 20% exposed to the creditworthiness or solvency of any one counterparty. Investment Criteria and Portfolio Characteristics The Board intends that the portfolio of real estate assets already acquired (and to be acquired) by the Company already have (and will normally have) a majority of the following characteristics: (a) Apartment residential properties across the affordable, mid-tier and luxury accommodation sectors and ancillary and/or strategically located commercial property located in the greater Dublin area and other urban centres on the island of Ireland; (b) Scope for short- and medium-term value enhancement through active asset management; (c) Opportunities to enhance the quality of the property; (d) Opportunities to create tangible value by undertaking initiatives to develop a sense of community among tenants consistent with the Management Team’s Canadian practices and expertise; (e) Properties at Cap Rates that the Company believes are attractive considering all factors, including growth potential, location, building quality, market and economic conditions and other relevant considerations, having regard to the Target Shareholder Return; (f) Properties which can be acquired at close to (and ideally below) replacement cost; (g) Properties which have strong prospects of generating income in the short to medium term in order to support the Company’s dividend policy; (h) Properties providing value enhancement opportunities through intensification, redevelopment or project completion, with such properties to be held for the purposes of the Company’s Property Rental Business, where the Investment Manager believes that this can be effected on a basis that will add value to the Company’s portfolio, subject always to the aggregate costs to be incurred in respect of assets under development at any time not exceeding 15% of the Company’s most recently published net asset value; and (i) Properties in markets where there is strong and/or improving demand for apartment residential rental accommodation and ancillary and/or strategically located commercial property. Investment Sourcing Many members of the Management Team have track records in acquiring multi-unit residential real estate investments which they have demonstrated in Canada, where they have grown CAPREIT’s property holdings from 2,900 residential apartments located primarily in Ontario and Nova Scotia to 46,790 apartments and land lease sites from coast to coast in Canada as at 31 December 2015. The Directors believe that the Company has a proven acquisition strategy, owning 338 apartments at its initial offering in April 2014 and now owning 2,064 apartments as at the date of this Report and is well placed to secure and develop properties which meet its investment criteria due to the Management Team’s acquisition experience, established relationships and availability of equity capital and debt financing. The Board is currently evaluating a number of potential property investments in line with the Investment Policy. Banking Institutions/Receivers/Borrowers The excessive use of gearing in the development of Irish residential real estate, particularly in the middle part of the last decade, and the subsequent severe re-pricing in values has resulted in banking institutions that provided credit for such developments having significant legacy exposure, both directly and indirectly, to Irish residential real estate assets. The Board believes that, based on the Central Bank of Ireland’s quarterly resolution targets for mortgage arrears, the banks operating in the Irish banking sector will have developed various strategies, including divestment of properties with respect to their legacy real estate exposures and apartment residential real estate assets that have not been transferred to NAMA. The Board also believes that assets may become available directly from Irish banks and from receivers appointed over the assets, from borrowers who are selling under the guidance of the banks or receivers and from private owners. In addition, legislation was enacted in February 2013 providing for the winding-up of Irish Bank Resolution Corporation Limited (formerly Anglo Irish Bank). The Board believes that property sales by any or all of these entities could result in opportunities for the Company to acquire Irish apartment residential real estate assets at attractive price levels. Annual Report 2015 Irish Residential Properties REIT plc 29 Investment Policy and Strategy (cont’d) National Asset Management Agency (“NAMA”) NAMA was established in December 2009 as one of a number of initiatives taken by Ireland to address the problems which arose in Ireland’s banking sector as the result of excessive property lending. Having initially acquired property and construction loan assets from participating Irish financial institutions over 2010 and 2011, since then NAMA’s focus has been on managing its balance sheet down towards zero as soon as it is commercially practicable. NAMA’s primary commercial objective is to redeem all of its senior debt before the end of 2018, while it also aims to redeem its subordinated debt by 1 March 2020 and generate a surplus by the time its work has been completed. In order to meet its primary commercial objective, NAMA will manage and invest in its asset base so as to maximise its incomeproducing potential and disposal value. In this regard, the agency has also outlined plans for the delivery of Grade A office accommodation in the Dublin Docklands Strategic Development Zone (SDZ) and residential property in the Greater Dublin Area. The asset side of the core NAMA balance sheet peaked at €30.7 billion in Q4 2011 and since then it has steadily decreased to the latest (Q3 2015) level of €11.4 billion. Of the €30.2 billion of senior debt originally issued in exchange for NAMA’s initial loan assets, some €9.1 billion remained in issue at the end of Q3 2015. NAMA aims to further reduce this to c. €6.0 billion by the end of 2016, which implies that further disposals are likely over the coming months. Indeed, the agency says (see NAMA Annual Statement 2016) that it will “act to sustain the positive momentum in the market by ensuring that a pipeline of asset portfolios is available for sale to international and domestic investors.” The Company continues to expect NAMA’s orderly disposal of certain of its real estate asset-backed loan portfolios to create further liquidity within the Irish property investment market. Purchasers of such portfolios may also seek to dispose of some or all of the underlying real estate assets acquired. Moreover, the Directors continue to believe that the disposal of real estate assets held by debtors or NAMA and receivers acting on behalf of debtors or NAMA will also be a source of opportunities for the Company. Private Equity Investors A number of institutions, such as the commercial banks and NAMA, have sold Irish real estate and asset-backed loan 30 Irish Residential Properties REIT plc portfolios in recent years to international private equity firms and to the Company. The Board believes that further Irish real estate-related assets will be offered for sale over the coming year, possibly including some supply arising from the recycling of assets by private equity investors who purchased assets earlier in the cycle. This will provide opportunities for the Company to acquire assets that meet its investment criteria. Gearing The Company seeks to use gearing to enhance shareholder returns over the long term. The level of gearing is monitored carefully by the Board in light of the cost of borrowing and the Company may seek to use hedging where considered appropriate to mitigate interest rate risk. The Board intends that gearing, represented by the Company’s aggregate borrowings as a percentage of the market value of the Company’s total assets, will not exceed the 50% maximum permitted under the Irish REIT regime. The Board reviews the Company’s gearing policy (including the level of gearing) from time to time in light of then-current economic conditions, relative costs of debt and equity capital, fair value of the Company’s assets, growth and acquisition opportunities and other factors the Board may deem appropriate, with the result that the Company’s level of gearing may be lower than 50%. Given the stability of the apartment residential sector, 45% gearing is currently considered prudent by the Board. Restrictions Pursuant to the Irish REIT regime, the Company is required, among other things, to conduct a Property Rental Business consisting of at least three properties, with the market value of any one property being no more than 40% of the total market value of the properties in the Company’s Property Rental Business. The Company has a three-year grace period from the date of becoming an Irish REIT to comply with these requirements. The Company complies with these requirements as at the date of this Report as it already owns apartment residential properties in 10 separate locations, none of which currently accounts for more than 40% of the aggregate market value of those existing properties. Further, under the Irish REIT regime at least 75% of the Company’s annual Aggregate Income must be derived from its Property Rental Business and at least 75% of the market value of its assets, including uninvested cash, must relate to its Property Rental Business. Annual Report 2015 Key Operational and Financial Performance Indicators To assist investors in monitoring and evaluating the Group’s achievement of its objectives, the Group has defined a number of key operating and performance indicators to measure the success of its operating and financial strategies: KEY PERFORMANCE INDICATORS AS AT 31 DECEMBER 2015 Average Monthly Rent Growth (1) 9.2% Through active property management strategies, the lease administration system and proactive capital investment programmes, IRES Fund Management strives to increase rents as market conditions will permit. Occupancy 96.0% Although occupancy was 99.7% at the beginning of the year, IRES Fund Management managed occupancy to maximise the revenues in 2015 while creating opportunities for market rental increases in 2016, considering the new rent legislation allows for rental increases every two years (instead of annually). Net Rental Income 80.8% By applying proven property operating programmes, IRES Fund Management strives to achieve an annual net operating income margin that is approximately 80% of operating revenues. Gross Yield at Fair Value 6.2% Through generating higher revenues compared to last year, and maintaining high occupancies, IRES Fund Management has increased the gross yield for the total portfolio. EPRA EPS (cents) 3.3 Higher EPRA EPS compared to last reported period, 2 July 2013 to 31 December 2014 of 1.6 cents. EPRA NAV per Share €1.043 Focus on growing asset value and maximising shareholder value through active and efficient asset and property management. Pro-forma NAV per Share €1.053 Calculated as net asset value excluding one-off acquisition transaction costs incurred in relation to all the property purchases subsequent to 31 December 2014. The 3rd party valuator adjusts for all transaction cost on acquisitions that a purchaser will pay, notwithstanding that the intention of I-RES is to hold it for the very long term. (1) B ased on properties held as at 31 December 2014. Average monthly rent is defined as actual residential rents, net of vacancies, divided by the total number of apartments owned in the property. Annual Report 2015 Irish Residential Properties REIT plc 31 Investment Policy and Strategy (cont’d) Operational and Financial Results The Group has generated strong rental growth and maintained a high level of occupancy across the portfolio during the year, indicative of the strong market fundamentals in the Irish residential rental sector. Average monthly rent increased to €1,372 per apartment as at 31 December 2015, up from €1,250 at 31 December 2014, largely due to strong increases in monthly rental rates on renewals and turnovers during the year. Occupancy levels remained strong throughout the year, mirroring the strong market fundamentals in the Irish residential rental sector. The portfolio Gross Yield at fair value was 6.2% as at 31 December 2015, compared to 6.0% as at 31 December 2014, adjusted for the fair value of development land, and a NRI margin of approximately 80.8% for the year 2015. Basic EPS and Basic EPRA EPS for the period were 8.4 cents and 3.3 cents, respectively, for the year ended 31 December 2015. Basic NAV and EPRA NAV was €435.0 million, with Basic NAV and EPRA NAV per share of 104.3 cents as at 31 December 2015. Basic NAV and EPRA NAV per share increased by 4.8% for the year ended 31 December 2015, compared to 31 December 2014, driven by property valuation increases and rental profit in the period, partially offset by equity and acquisition transaction costs. Importantly, the Company has recovered all the costs incurred in connection with our Capital Raise in 2015 and the costs incurred with our acquisitions through appreciation in the fair value of the portfolio. The property portfolio was valued at €472.2 million at 31 December 2015, with total net borrowings of €41.5 million. The Group’s loan to value ratio was 8.6% as at 31 December 2015. 32 Irish Residential Properties REIT plc Annual Report 2015 Governance Annual Report 2015 Irish Residential Properties REIT plc 33 I-RES Board of Directors Colm Ó Nualláin Declan Moylan Aidan O’Hogan Thomas Schwartz Independent Non-Executive Chairman Independent Non-Executive Deputy Chairman and Senior Independent Director Independent Non-Executive Director Non-Executive Director (Nominee of IRES Fund Management) APPOINTED: 31 March 2014 APPOINTED: 31 March 2014 as Director APPOINTED: 31 March 2014 as Director APPOINTED: 5 March 2014 NATIONALITY: Irish as Director NATIONALITY: Irish as Director COMMITTEE MEMBERSHIP: NATIONALITY: Irish COMMITTEE MEMBERSHIP: NATIONALITY: Canadian Audit Committee: COMMITTEE MEMBERSHIP: COMMITTEE MEMBERSHIP: Appointed 31 March 2014 Audit Committee: Appointed 31 March 2014 Remuneration Committee: Appointed 31 March 2014 Nomination Committee: Appointed 31 March 2014 Audit Committee: Appointed 31 March 2014 Remuneration Committee: Appointed 31 March 2014 Nomination Committee: Appointed 31 March 2014 Remuneration Committee: Appointed 31 March 2014 Nomination Committee: Appointed 31 March 2014 Colm Ó Nualláin recently retired after more than 20 years as Finance Director of Grafton Group plc, a leading builders merchant group quoted on the London Stock Exchange. Mr Ó Nualláin is a qualified Chartered Accountant with international experience and has previously held senior financial positions in a number of public and semi-state companies. 34 Declan Moylan is a solicitor admitted in Ireland, with over 40 years’ experience in business law practice and in practice management. From 1999 until 2008, he served as managing partner of Mason Hayes & Curran, and subsequently as chairman of Mason Hayes & Curran from 2008 to 2013. Mr Moylan is currently of counsel to Mason Hayes & Curran (which role expires on 31 March 2016). He is a member of the Law Society of Ireland, the Law Society of England and Wales, the International Bar Association and the Irish Centre for European Law. Mr Moylan is a director of several Irish registered companies and is also an external member of the audit committee of the Office of Ireland’s Director of Public Prosecutions. In November 2015, he was appointed by the Minister for Arts, Culture and Gaeltacht to the board of the Irish Museum of Modern Art. Irish Residential Properties REIT plc Annual Report 2015 Aidan O’Hogan is a fellow of the Society of Chartered Surveyors Ireland and past president of the Irish Association of Valuers Institute. In 2009, Mr O’Hogan retired as chairman of Savills Ireland after 40 years as a real estate professional. Mr O’Hogan is currently chairman of Property Industry Ireland. Mr O’Hogan was previously managing director and chairman of Hamilton Osborne King for almost 20 years. He is also a non-executive director of Cairn Homes plc. Small Transactions: Appointed 22 July 2014 Thomas Schwartz, with over 35 years of real estate experience, is a director of IRES Fund Management. Mr Schwartz qualified as a Chartered Accountant in 1975 and went on to pursue a career in real estate development. Mr Schwartz founded Intraurban Projects to specialise in the development of new housing projects in mature communities. Intraurban has built and developed over 2,500 housing units serving all market segments and, through York Heritage Properties, has participated in the development, construction and management of over 600,000 sq. ft. of commercial space. In 1997, Mr Schwartz founded CAPREIT (TSX: CAR.UN), Canada’s first apartment real estate investment trust. Mr Schwartz is currently President and Chief Executive Officer of CAPREIT and has supervised CAPREIT’s growth from 2,900 residential apartments to 46,790, with an estimated total asset value of approximately C$7.1 billion as at 31 December 2015. Mr Schwartz is active in industry and government affairs and is currently on the Board of Trustees of CAPREIT; the board of Chartwell Retirement Residences’ companies (TSX: CSH.UN); and the Board of Directors of the Mount Sinai Hospital Foundation. Mr Schwartz is also a member of the Schulich School of Business Advisory Council – Program in Real Estate and Infrastructure. David Ehrlich Executive Director APPOINTED: 13 January 2014 as Director NATIONALITY: Canadian COMMITTEE MEMBERSHIP: Small Transactions: Appointed 22 July 2014 David Ehrlich is Chief Executive Officer of I-RES. Mr Ehrlich graduated from Dalhousie Law School in 1977 and has been a member of the Nova Scotia Barristers Society since 1979 (and a continuing member of the Law Society of Upper Canada since 1986). For over 10 years, until 31 December 2013, Mr Ehrlich was a senior partner at Stikeman Elliott LLP, a leading Canadian business law firm with offices in the principal cities of Canada as well as in New York, London and Sydney. During his years practising as a lawyer, Mr Ehrlich acted for a number of Canada’s leading real estate investment trusts, investment banks, life insurance companies, banks, pension funds, developers, property owners, asset managers and governmental agencies. Since 1986, he has focused his practice on the public real estate markets and was involved in creating the real estate investment trust industry in Canada from its inception, including the formation of CAPREIT. Mr Ehrlich has been involved in all significant aspects of CAPREIT’s acquisition, financing and capital market activities and has worked closely with all of its senior management. Mr Ehrlich is also a Trustee of CAPREIT. Annual Report 2015 Irish Residential Properties REIT plc 35 CAPREIT and IRES Fund Management Senior Management Thomas Schwartz Mark Kenney Scott Cryer Corinne Pruzanski President and Chief Executive Officer of CAPREIT Chief Operating Officer of CAPREIT Chief Financial Officer of CAPREIT General Counsel and Corporate Secretary of CAPREIT See Board of Directors’ profiles for further details. With over 24 years of experience in the multi-unit residential rental property sector and as Chief Operating Officer of CAPREIT, Mark Kenney is actively involved in creating and implementing company policy, directing the property management team, overseeing marketing, procurement and energy initiatives, and performing operational due diligence on potential acquisitions. Prior to joining CAPREIT in 1998, Mr Kenney held a senior position at Realstar Management Partnership, overseeing portfolios in Western Canada and Northern Ontario, as well as leadership roles at Greenwin Property Management and Tridel, where he managed various property portfolios in the Greater Toronto Area. Mr Kenney is the vice-chairman of the Federation of Rental-Housing Providers of Ontario and was a founding director of the Greater Toronto Apartment Association from 1998 to 2009. Mr Kenney holds a bachelor of economics degree from Carleton University. Scott Cryer joined CAPREIT in 2009 and is currently Chief Financial Officer. Mr Cryer most recently held the position of Vice President, Financial Reporting. Prior to joining CAPREIT, Mr Cryer had an 11-year career with increasing responsibility in the Real Estate Assurance and Advisory practice of Deloitte & Touche LLP. Mr Cryer received his Chartered Accountant designation in 2000 and holds a bachelor of economics degree from the University of Western Ontario. Corinne Pruzanski joined CAPREIT as General Counsel and Corporate Secretary in 2011 with responsibility for all legal and governance matters relating to CAPREIT, including CAPREIT’s acquisitions, dispositions, financing arrangements and compliance with laws. Ms Pruzanski is also company secretary to IRES Fund Management Limited. Prior to joining CAPREIT, Ms Pruzanski was a partner at the law firm Stikeman Elliott LLP, which she joined as an associate in 2004 after working as a lawyer in New York for seven years. Ms Pruzanski was admitted to the Bar in Ontario in 1996 and in New York in 1997, and holds a bachelor of law degree from the University of British Columbia and a bachelor of arts degree from York University. 36 Irish Residential Properties REIT plc Annual Report 2015 Roberto Israel Charles Coyle Jodi Lieberman Chief Information Officer of CAPREIT Vice President, Acquisitions Chief Human Resources Officer of CAPREIT Roberto Israel joined CAPREIT as Chief Information Officer in 2015 with more than 18 years of experience in Information Technology. Mr Israel was formerly Managing Director at PricewaterhouseCoopers LLP, where he was the National Forensic Technology Services practice leader and also directed PricewaterhouseCoopers’ technology real estate consulting practice. Prior to joining PricewaterhouseCoopers, Mr Israel held a variety of consulting, project management and IT systems roles with several leading companies including Deloitte & Touche LLP, Canadian Imperial Bank of Commerce, Manulife Financial and IBM Global Services. Mr Israel holds a Masters of Business Administration specialized in Strategic Management and Management Information Systems from York University’s Schulich School of Business, and a Bachelor of Science in Computer Science from the University of Western Ontario. He also holds a Project Management Professional (PMP) designation from the Project Management Institute and is certified in Information Technology Infrastructure Library (ITIL). With over 18 years of property investment and development experience, Charles Coyle was appointed by IRES Fund Management as Vice President, Acquisitions in December 2014. Prior to his appointment, Mr Coyle was employed in a senior position with NAMA executing asset management strategies across significant residential and commercial property portfolios. During his last 12 months with NAMA, Mr Coyle was the Senior Property advisor with specific responsibility for developing and implementing strategy across the NAMA residential portfolio. Prior to that, Mr Coyle worked with Goodbody Stockbrokers sourcing, structuring, financing and managing property transactions on behalf of private clients. Over the past two decades, Mr Coyle has been involved in property transactions valued at in excess of €2 billion. Following the completion of an MA in property and law at City University, London, Mr Coyle qualified as a Chartered Surveyor in 2000 with CB Richard Ellis and spent five years working in their Central London investment team. Jodi Lieberman joined CAPREIT in 2009 and has been instrumental in developing the Human Resources function at the company. Ms Lieberman has over 17 years of professional HR experience with large organizations such as Labatt Brewing Company, TELUS Mobility and Bentall Kennedy, and is responsible for leading the alignment of CAPREIT’s human resources strategy with its overall business strategy. Ms Lieberman has contributed significantly to the creation of a collaborative HR team, capable of meeting CAPREIT’s growing needs by uniting training and development, recruitment and retention, benefits and disability management, employee relations, office services, and compensation and payroll. As recognition for Ms Lieberman’s and the team’s accomplishments, CAPREIT has been named one of Canada’s 50 Best Employers for 2014 and 2015 by Aon Hewitt. Ms Lieberman has an Honours BA in Sociology from York University and has completed her graduate Certificate in Human Resources from Seneca College. Annual Report 2015 Irish Residential Properties REIT plc 37 Corporate Governance Statement Introduction The Board is committed to developing and maintaining a high standard of corporate governance. The Board considers that the Company has complied with the relevant requirements and procedures as set out by the Irish Corporate Governance Annex to the UK Corporate Governance Code (“Irish Annex”) (to be found at www.ise.ie/Products-Services/Sponsors-and-Advisors/ Irish-Corporate-Governance-Annex.pdf), UK Corporate Governance Code 2014 (“UK Code”) (to be found at https:// www.frc.org.uk/Our-Work/Publications/Corporate-Governance/ UK-Corporate-Governance-Code-2014.pdf) and the Association of Investment Companies Code of Corporate Governance (“AIC Code”) (to be found at www.theaic.co.uk/sites/default/files/ uploads/files/AICCodeofCorporateGovernanceFeb15.pdf) throughout the last financial year under review other than as set out below on page 44. This Report, including the Corporate Governance Statement, can be accessed electronically on our website at www.iresreit.ie. The Board is responsible for providing governance and stewardship to the Company and its business. This includes establishing goals for management and monitoring the achievement of these goals. The Company appointed IRES Fund Management as its alternative investment fund manager as of 1 November 2015, pursuant to the terms of an investment management agreement between the Company and IRES Fund Management (as amended from time to time) (the “Investment Management Agreement”), to provide the Company with portfolio management, risk management and other services in relation to assets or properties which may be acquired or held or disposed of by the Company (“Investments”) and to act with day-to-day authority, power and responsibility for the Investments. Prior to 1 November 2015, the Company had appointed Gandon Alternative Fund Management Limited (“GAFM”) as its alternative investment fund manager pursuant to the terms of an AIFM agreement between the Company and GAFM (as amended from time to time). The Board oversees the performance of the Investment Manager and the Company’s activities. The Investment Manager has discretionary authority to enter into transactions for and on behalf of the Company, except for certain matters that require the consent of the Board. Authority on certain matters is reserved to the Board. Unless required to be performed by the Investment Irish Residential Properties REIT plc • any acquisition/disposal of a property investment or the • • • • • • The Board of Directors 38 Manager as a matter of law or in order to respond to a bona fide emergency, the Company’s prior written approval is required for certain matters, including: entry into any agreement to acquire/dispose of a property investment; any new financing or refinancing, including associated hedging arrangements, entered into in respect of a property investment; any capital expenditure on a property investment in excess of an approved budget; any proposed lease event where the rent referable to the relevant lease is greater than 7.5% of the aggregate rental income of the Company; any acquisition or the entry into any agreement to acquire any property investment through a joint venture or coinvestment structure; any disposal of any right, title or interest in any of the Company’s properties at less than its acquisitions cost; and in relation to the valuation of the Company’s properties, any variation from the RICS Red Book. The Board is at all times free to offer ideas to the Investment Manager relating to the structure of a transaction so as to provide the Company the greatest value. In addition, the Board makes certain other key decisions, including: • formulation and monitoring of Company strategy; • the Company’s risk management and internal control systems; • dividend policy; and • review of the performance and contractual arrangements with the Investment Manager. Directors are expected to participate in all scheduled Board meetings as well as each annual general meeting. The Chairman oversees the conduct of all Board meetings including ensuring that all aspects of the Group’s activities receive appropriate attention. All Directors are furnished with the information necessary to assist them in the performance of their duties. The Board meets at least four (4) times each calendar year and, prior to such meetings taking place, an agenda and board papers are circulated to the Directors so that they are adequately prepared for the meetings. Annual Report 2015 The Company Secretary is responsible for the procedural aspects of the Board meetings. Directors have access to Elise Lenser, the Company Secretary, and, where appropriate, are entitled to have access to independent professional advice at the expense of the Company. if deemed necessary, ensures the most robust and objective approach possible. The senior independent non-executive director (the “Senior Independent Director”) also meets with the non-executive Directors (other than the Chairman) to appraise the Chairman’s performance. As required by the UK Code, the Chairman has held meetings during the year with the non-executive Directors without the presence of the executive Directors. Any director appointed to the Board by the Directors will be subject to election by the shareholders of the Company at the first annual general meeting after his or her appointment. Furthermore, under the Articles of Association, all Directors must retire each year and may seek re-election. The Board completed the performance evaluation process in March 2016. The various phases of the performance evaluation are set out below: Details of the remuneration of Directors are set out in the Directors’ remuneration report on page 50. The Articles of Association of the Company provide that the number of directors that may be appointed cannot be more than nine (9) nor less than two (2) and that two Directors present at a directors’ meeting shall be a quorum. The size and composition of the Board is reviewed regularly to ensure that the Board has an appropriate mix of expertise and experience. On appointment, new directors are provided with induction training. In addition, Directors are invited to tour part of the Company’s property portfolio with the Chief Executive Officer or a senior representative of IRES Fund Management in order to familiarise themselves with the Company’s operations, property management and a segment of the property portfolio. This meeting also provides new directors with an opportunity to ask any questions they may have on the nature and operations of the business, and on the implementation of the Company’s business strategy. The Board also arranges for presentations from IRES Fund Management and the Company’s other advisors on matters relevant to the Company’s business. The Nomination Committee, on behalf of the Board, assesses the training needs of the Directors on at least an annual basis. The Board carries out an evaluation of its performance on an annual basis. The evaluation reviews the balance of skills, experience, independence and knowledge of the Board and the effectiveness of the Board and its committees in their workings. Directors are also evaluated individually to assess their contribution and effectiveness. The evaluation is facilitated using a self-evaluation questionnaire-based approach and a member of the Nomination Committee reports to the Board on the results of the evaluation at a board meeting. The Board considers that the use of individual questionnaires and follow-up meetings, • Evaluation questionnaires were provided to each of the Directors to appraise the performance of the Board as a whole, the committees of which they are a member, their individual performance and the performance of each other Director. The results of the performance evaluation process were presented to the Board at a board meeting held on 11 March 2016; • Declan Moylan, the Senior Independent Director, met with the non-executive Directors (other than the Chairman) to appraise the Chairman’s performance; • Each of the Audit Committee, the Remuneration Committee and the Nomination Committee reviewed their own performance; • At the board meeting on 11 March 2016 the Board discussed its own performance, the performance of the committees and the performance of individual Directors, including the Chairman. The Company does not require an external facilitator for the performance evaluation process on the basis that the Company is a smaller company for the purposes of the Irish Annex. The Board has requested the Audit Committee to make an assessment of the Group’s position and performance and report back. As at the date of this Report, there are five (5) Directors on the Board. The Chief Executive Officer, David Ehrlich, is an Executive Director. Colm Ó Nualláin, Aidan O’Hogan, Declan Moylan and Thomas Schwartz are Non-Executive Directors. The biographies of all the Directors appear in this Report on pages 34 to 35. Colm Ó Nualláin (the Chairman), Declan Moylan (Deputy Chairman and Senior Independent Director) and Aidan O’Hogan are each considered independent for the purposes of the Listing Rules. The Directors have determined that although Declan Moylan was a partner in Mason Hayes & Curran and remains “of counsel” to that firm, which has a material business relationship with the Company, he may nonetheless be considered to be independent as he has retired from the partnership of Mason Annual Report 2015 Irish Residential Properties REIT plc 39 Corporate Governance Statement (cont’d) Hayes & Curran and the Directors are satisfied that his prior membership in the partnership of that firm and current role as “of counsel” to that firm (which role expires on 31 March 2016) and is an honorary role for which Declan Moylan receives only an honorarium, but does not share in the profits of the firm, has not and will not adversely affect the independence of his views and his contribution as a Director. Declan Moylan is the Senior Independent Director within the meaning of the Listing Rules. Thomas Schwartz is not considered to be independent due to his connection with CAPREIT, which is a significant shareholder of both the Company and IRES Fund Management (the Investment Manager). Thomas Schwartz is a trustee of CAPREIT and a trustee or director of each of CAPREIT’s subsidiaries, including IRES Fund Management. He is also the chief executive officer and president of CAPREIT and each of its Canadian subsidiaries. Pursuant to the terms of the Investment Management Agreement, IRES Fund Management is entitled to nominate and require the Company to appoint one person as a non-executive director. Thomas Schwartz is IRES Fund Management’s nominee. The Board has a strong focus on property investment management to allow it access to a good knowledge base. As highlighted in the biographies of the Directors on pages 34 to 35, each of the Directors brings a different set of skills and experience to the Board. The Directors’ diverse skill sets facilitate the consideration of issues at meetings of the Board from a range of perspectives. The division of responsibilities between the Chairman and the Chief Executive Officer has been clearly established, set out in writing and agreed to by the Board. Given the growth of the Company, the Board, on the recommendation of the Nomination Committee, thought it advisable to increase the size of the Board. Accordingly, the Board, on the recommendation of the Nomination Committee, has appointed Margaret Sweeney and Phillip Burns as independent nonexecutive directors effective 23 March 2016. Given that Ms Sweeney and Mr Burns have had no involvement in the activities of the Company in the period under review, the Board was of the view that their appointments should only be effective after the approval and issuance of this Report and the financial statements included therein. 40 Irish Residential Properties REIT plc Margaret Sweeney (Nationality: Irish) Margaret Sweeney qualified as a Chartered Accountant with KPMG in 1985 and worked with the firm for 15 years. She has held a number of senior positions including CEO of Dublin Airport Authority plc and Postbank Ireland Limited and has worked in Ireland and overseas with international shareholders, business partners and funders. She is currently a non-executive director on the board of Dalata Hotel Group plc and a number of private companies. She sits on the Council of the Institute of Chartered Accountants in Ireland and the Governing Body of Dublin City University. She is a Fellow of Chartered Accountants Ireland and holds the Diploma in Company Direction from the Institute of Directors. Ms Sweeney has been a non-executive director on a number of boards in Ireland and internationally including Aer Rianta International plc, Flughafen Dusseldorf GmbH, Birmingham International Airport, Hamburg Airport, Shannon College of Hotel Management and Teagasc (Irish Agriculture and Food Development Authority). Ms Sweeney served as President of the Dublin Chamber of Commerce from 2008 to 2009. Phillip Burns (Nationality: American and British) Phillip Burns is the Founder and a Principal of Maple Knoll Capital and has been involved as a principal or advisor in transactions with an aggregate value of over €20.0 billion, with more than 70% centred around real estate across multiple geographies. Mr Burns has also been involved with raising in excess of €11.0 billion of equity for principal investment, including over €2.4 billion dedicated to real estate. Previously, Mr Burns was CEO of Corestate Capital, an investment manager focused on distressed real estate transactions in Europe. Prior to this, he was a Managing Director at Terra Firma Capital Partners, where he specialised in infrastructure, real estate and credit. Mr Burns also worked for Goldman Sachs, where he focused on mortgage finance, real estate and general corporate finance, and was a corporate attorney at Skadden Arps. Mr Burns holds a Bachelor of Science in Aerospace Engineering from the University of Michigan and a Juris Doctor, summa cum laude, from Syracuse University. Annual Report 2015 Senior Independent Director The Company has appointed Declan Moylan as the Senior Independent Director and Deputy Chairman. The role of the Senior Independent Director is mainly to: • provide a sounding board for the Chairman and to serve as Small Transactions Committee Membership: David Ehrlich and Thomas Schwartz The main roles of the Small Transactions Committee are to consider, negotiate and complete the purchase of one-off properties in residential developments in which the Company currently owns apartments, up to a maximum value of €1 million. an intermediary for the other Directors when necessary; • respond to shareholders where contact through the normal channels of the Chairman or the Investment Manager has failed to resolve any concerns, or for which such contact is inappropriate; • hold a meeting with non-executive Directors at least annually (and on such other occasions as are deemed appropriate) to appraise the Chairman’s performance, taking into account the view of the executive Directors (if any); and • obtain updates from the Chief Executive Officer and the Investment Manager on the views of major shareholders in order to help develop a balanced understanding of the issues and concerns of major shareholders. Committees of the Board As recommended by the UK Code, the Board has established the following three (3) committees: the Audit Committee, the Remuneration Committee and the Nomination Committee. The Board has also established the Small Transactions Committee in order to facilitate the consideration, negotiation and completion of smaller transactions by the Company. The duties and responsibilities of each of these committees are set out clearly in written terms of reference, which have been approved by the Board. Other committees have been and may be established from time to time in accordance with the Company’s Memorandum and Articles of Association, including the Small Transactions Committee. Internal Controls The Board acknowledges that it is responsible for implementing and monitoring the Group’s system of internal control and risk management and assessing its effectiveness. Such a system is designed to identify, manage and mitigate financial, operational and compliance risks inherent to the Group and allow the Group to meet its strategic objectives. The system is designed to manage rather than eliminate the risk of failure to achieve these objectives and can only provide reasonable, but not absolute, assurance against material misstatement or loss. During 2014, the Board delegated certain responsibilities relating to internal controls, risk management and reporting to the Audit Committee. Refer to pages 45 and 46 to see the procedures established by the Audit Committee to discharge the responsibilities delegated by the Board. The Board relies on management of IRES Fund Management and CAPREIT LP, as its service provider, to operate and manage certain business activities of the Group utilising the system of internal controls. This system of internal controls includes: • appropriately defined organizational structure and lines of authority; • policies and procedures surrounding corporate governance, Audit Committee Membership: Colm Ó Nualláin, Declan Moylan and Aidan O’Hogan (Chair) The main roles of the Audit Committee are set out in the Report of the Audit Committee on pages 45 to 48. • • Remuneration Committee Membership: Colm Ó Nualláin, Declan Moylan (Chair) and Aidan O’Hogan The main roles of the Remuneration Committee are set out in the Report of the Remuneration Committee on pages 49 to 51. • • Nomination Committee Membership: Colm Ó Nualláin (Chair), Declan Moylan and Aidan O’Hogan The main roles of the Nomination Committee are set out in the Report of the Nomination Committee on page 52. risk management, investment decisions, financial reporting, financial risk management, information technology and security, asset valuations and operations; establishment and monitoring of budgets and business plans, which includes consideration of key business risks; system of manual and automated internal controls, both preventative and detective in nature, around financial and operational transactions, as well as information technology systems and processes supporting these transactions; monitoring and oversight controls surrounding financial results and key performance/risk indicators; and disclosure and communication controls surrounding matters impacting key stakeholders. Annual Report 2015 Irish Residential Properties REIT plc 41 Corporate Governance Statement (cont’d) The Board has adopted a comprehensive signing authority and delegation policy which sets out the respective authority levels and responsibilities of employees of the Company, the Investment Manager and CAPREIT LP, with respect to dayto-day transactions and more significant business initiatives. An annual operating budget is reviewed and approved by the Board and is monitored at least quarterly against actual financial results. The annual report and financial statements are prepared and reviewed by the Investment Manager with the support of senior financial professionals at CAPREIT LP experienced in International Financial Reporting Standards as endorsed by the EU. Both the Investment Manager and CAPREIT LP have implemented underlying manual and automated transactional controls that support the amounts and disclosures in the financial statements. In addition to this, the Audit Committee of the Board reviews the semi-annual and annual reports and the financial statements. The Board has appointed a third-party valuations firm to provide valuations of the property-related assets of the Group. The Investment Manager, with the support of CAPREIT LP, reviews the assumptions and inputs used by the third-party valuator, as well as the results provided. The Investment Manager has appointed a third-party risk management firm to assist with the requirements of the Directive 2011/61/EU of the European Parliament and of the Council on 8 June 2011 on Alternative Investment Fund Managers (“AIFMD”) in respect of regulatory filings and also preparing reports surrounding financial risk management and compliance with the Company’s investment strategy, which are delivered to the Board. Additionally, the Investment Manager also provides the Board with updates on key performance indicators, such as occupancy, average monthly rents, net operating income, capitalization rates, gearing, and revenue collectability. The internal audit function assesses the operating effectiveness of the key internal controls, including those mentioned above. The internal audit function reports the results of these assessments to the Audit Committee of the Company. Risk Management The Board has overall responsibility for the Group’s risk management function and considers risk management key to ensuring the Group can meet its strategic and business objectives. The Board, together with the Investment Manager, undertakes the risk management on behalf of the Group. The Investment Manager has put policies and procedures in place which were designed to identify, measure, manage and monitor appropriately all risks relevant to the investment strategy and to which the Group is or may be exposed. 42 Irish Residential Properties REIT plc The Investment Manager, with the support of CAPREIT LP, has conducted a company-wide risk assessment based on meetings with business process owners and management across the Company, IRES Fund Management and CAPREIT LP. The process resulted in identifying strategic, operational, financial, and regulatory risks and the associated mitigating controls. An assessment of the likelihood and impact of each of the risks was carried out. The results of the overall process were captured in a risk register and summary results were provided to the Board. Key risks and mitigating controls are monitored by the Board throughout the year. To assist the Board of the Company in its assessment of the risk management process, the Investment Manager’s Internal Audit Function assessed and reviewed the results of the risk assessment process above and reported on this review to the Board of the Company. Additionally, the Investment Manager has appointed a thirdparty risk management firm to assist with its regulatory filings and also with preparing reports surrounding financial risk management, including compliance with the investment strategies of the Company. These reports are also delivered to the Board. The Investment Manager also provides an update on key performance indicators, such as occupancy, average monthly rents, net operating income, capitalization rates, gearing and revenue collectability. The Investment Manager also monitors and reports to the Board on compliance with REIT legislation, debt and other financial covenants. The Board is satisfied that the risk management processes and functions have the necessary authority, resources, expertise and access to relevant information to fulfil its role and are operating effectively as at the date of this Report. Further information on the principal risks that were identified through the risk management process are provided on pages 55 to 59. Review of the effectiveness of the risk management and internal control systems Taking into account the information on principal risks and uncertainties provided on pages 55 to 59, and the ongoing work of the Audit Committee in monitoring the risk management and internal control systems on behalf of the Board, the Board: • is satisfied that it has carried out a robust assessment Annual Report 2015 of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; and Review of the Investment Manager • has reviewed the effectiveness of the risk management and internal control systems including all material financial, operational and compliance controls (including those relating to the financial reporting process) and no significant failings or weaknesses were identified. Internal Audit The Board has reviewed the business model under which the Group operates in the context of its activities and, in particular, the external fund management model put in place to manage the Group’s business operations. Having undertaken such a review, and in light of the nature, scale and range of operations of the Group, the Board does not intend to establish an internal audit function and instead will rely on the Investment Manager’s internal audit function with other monitoring procedures as described above. The Investment Manager’s internal audit function has adequate authority and access to the personnel, processes and records of the Investment Manager, as well as the Group, to perform its work. The Investment Manager’s internal audit function is invited to present on its work related to the internal controls of the Group to the Audit Committee of the Board. As an internal audit function has not been established, the Audit Committee will consider annually (in accordance with the UK Code) whether there is a need for an internal audit function and make a recommendation to the Board. Model Code on Share Dealing The Company must comply with the Model Code on Directors’ dealing in securities set out in the Listing Rules (“Model Code”), which imposes restrictions on share dealings for the purposes of preventing the abuse, or suspicion of abuse, of inside information by Directors and other persons discharging managerial responsibilities within the Company. The Board is responsible for taking all proper and reasonable steps to ensure compliance with the Model Code by the Directors and others to whom the Model Code is applicable. The Board has reviewed the performance of and contractual arrangements with the Investment Manager and is satisfied with the overall performance of the Investment Manager for FY 2015. For a detailed review of the key operational and financial performance indicators, see page 31 in the “Key Operational and Financial Performance Indicators” section. The Investment Manager will continue in its performance of its duties and, in the opinion of the Directors, the continuing appointment of the Investment Manager on the terms of the Investment Management Agreement is in the interests of the shareholders as a whole. The Directors have formed this view for the reasons set out in the section “Review of the Investment Manager,” and based on the “Key Operational and Financial Performance Indicators” section on page 31. Communications with Shareholders The Company recognises the importance of communications with shareholders. Presentations are made to both existing and prospective institutional shareholders, principally after the release of the interim and annual results. Major acquisitions are also announced to the market, and the Company’s website (www.iresreit.ie) provides the full text of all press releases. The website also contains annual and interim reports and incorporates audio and slide show investor presentations. The Board is kept informed of the views of shareholders by the Chief Executive Officer and the Investment Manager and receives analysts’ reports on the Company. Furthermore, relevant feedback from investor meetings is provided to the Board on a regular basis. The Chairman and the other Directors also have the opportunity to meet shareholders and analysts at the Company’s annual general meeting. Should shareholders wish to communicate directly with the Board, they should contact David Ehrlich or Elise Lenser, contact details for whom are provided in the “Shareholder Information” section on the inside back cover of this Report. The Company has in place a share dealing code that gives guidance to the Directors, the Investment Manager, CAPREIT LP, any persons discharging managerial responsibilities as defined in regulation 12(8) of the Market Abuse Regulations and persons identified by the Board to fulfil this role, along with anyone listed on the Company’s insider list, on the pre-clearance notification procedures to be followed when dealing in the shares of any class of the Company or any other type of securities issued by or related to the Company. Annual Report 2015 Irish Residential Properties REIT plc 43 Corporate Governance Statement (cont’d) Compliance with Relevant Codes The Directors are committed to maintaining high standards of corporate governance and this Corporate Governance Statement describes how the Company has applied the UK Code, the Irish Annex and the AIC Code in 2015. The Board considers that, except where non-compliance is explained below, the Company has complied with the provisions set out in the UK Code, the Irish Annex and the AIC Code throughout the last financial year under review. (a)Board Recruitment No external recruitment consultants were used in the recruitment of the Board, all members of which were appointed while the Company was still a private limited company and prior to the establishment of the Nomination Committee and the listing of the Company. As discussed above, the Board, on the recommendation of the Nomination Committee, has appointed Margaret Sweeney and Phillip Burns as independent nonexecutive directors effective 23 March 2016, but without the engagement of an external recruitment consultant, on the basis that the Nomination Committee had access to a list of qualified candidates and therefore an external recruitment consultant would not add value in the circumstances. (b)Board Diversity Given the size of the Board and the development stage of the Company, the Board does not consider it appropriate at this time to set gender quotas for Board representation, but a female director (Margaret Sweeney) has been appointed effective 23 March 2016, and the Board will continue to monitor developments in best practices. Before any appointment is made by the Board, the Nomination Committee evaluates the balance of skills, knowledge and experience and diversity of the Board. The Board is committed to supporting diversity on the Board. During the selection process for new non-executive directors, the Nomination Committee ensures that diversity is considered when developing a candidate pool. In considering diversity, all potential considerations are taken into account, including diversity of skills, background, experience and gender, in all cases having regard to the Company’s current and future plans and objectives. The Board will continue to monitor whether it is taking diversity into account when appointing new Board members, and the Board evaluation process addresses diversity. 44 Irish Residential Properties REIT plc (c)Management Engagement Committee The Board fulfils the responsibilities typically undertaken by a management engagement committee. On this basis, the constitution of a separate management engagement committee of the Board as proposed by the AIC Code has not been considered necessary. These duties and responsibilities include the regular review of the performance of, and contractual arrangements with, the Investment Manager. Only the independent non-executive directors are involved in undertaking this review. (d)Internal Audit The Board has reviewed the business model under which the Group operates in the context of its activities and, in particular, the external fund management model put in place to manage the Group’s business operations. Having undertaken such a review, and in light of the nature, scale and range of operations of the Group, the Board does not intend to establish an internal audit function and instead will rely on the Investment Manager’s internal audit function, along with other monitoring procedures. The Investment Manager’s internal audit function has adequate authority and access to the personnel, processes and records of the Investment Manager, as well as the Group, to perform its work. The Investment Manager’s internal audit function is invited to present on its work related to the internal controls of the Group to the Audit Committee of the Board. As an internal audit function has not been established, the Audit Committee will consider annually (in accordance with the UK Code) whether there is a need for an internal audit function, and make a recommendation to the Board. (e)Performance-Related Remuneration The remuneration of the Directors under the long-term incentive plan (“LTIP”) does not comply in full with Schedule A to the UK Code. There is no minimum holding period for shares granted under the LTIP and options vest over three years from the date of grant on the basis of one third per completed year the recipient of the option completes in respect of the relevant service which has qualified him or her for the option grant. The terms of the LTIP and options to be granted in connection with the initial offering and the Capital Raise were disclosed in the relevant prospectus. Annual Report 2015 Report of the Audit Committee Members: Colm Ó Nualláin, Declan Moylan and Aidan O’Hogan (Chair) The Audit Committee is chaired by Aidan O’Hogan, who is also an independent non-executive director. Colm Ó Nualláin is considered by the Board to have recent and relevant financial experience. All members of the Audit Committee are independent non-executive directors, appointed by the Board for an initial period of up to three (3) years. The Audit Committee is constituted in compliance with the UK Code, the AIC Code, the Irish Annex and the Articles of Association regarding the composition of the Audit Committee. The Chief Executive Officer also attends the Audit Committee, as required. The Audit Committee meets at least four (4) times per year and as otherwise required. The Audit Committee met ten (10) times during the period from 1 January 2015 to 31 December 2015, including five (5) times with the external auditor. The terms of reference established for the Audit Committee were approved and adopted by the Board on 31 March 2014 (as amended on 2 April 2015 and 11 March 2016). Prior to the adoption of the Audit Committee, the Board was responsible for all matters delegated to the Audit Committee. The roles and responsibilities delegated to the Audit Committee can be accessed electronically at http://investorrelations.iresreit.ie/ corporate-governance.aspx. The Audit Committee’s principal duties include: i) to monitor and keep under review the scope and effectiveness of the Group’s financial reporting and internal control policies and procedures for the identification, assessment and reporting of risks and shall ensure that it receives regular reports on such matters from the Company’s Investment Manager, internal auditor (if any) and management; ii) to monitor the integrity of the financial statements of the Group, including its annual and half-yearly financial reports and any other formal announcement relating to its financial performance, reviewing and reporting to the Board on summary financial statements, significant financial returns to regulators and any financial information contained in certain other documents, such as announcements of a price sensitive nature; iii) to keep under review the adequacy and effectiveness of the Group’s internal financial controls and internal control and risk management, whether these are carried out by an internal audit function or by another service provider, such as the Investment Manager; iv) to oversee the relations with the external auditor and to consider and make recommendations on the appointment, reappointment and removal of the external auditor; v) to ensure the independence and objectivity of the external auditor annually; vi) to ensure that the provision of non-audit services by the external auditor does not impair the external auditor’s independence or objectivity; and vii)to review with the external auditor the findings of their work, including any major issues that arose during the course of the audit and have subsequently been resolved and those issues that have been left unresolved. The Audit Committee reviews its terms of reference on an annual basis and, if necessary, proposes for formal board adoption, amendments to the Audit Committee’s terms of reference. The Audit Committee evaluates its own performance relative to its terms of reference. How the Audit Committee has Discharged its Responsibilities in FY15 During FY15, the Audit Committee held ten (10) meetings. The Audit Committee members’ attendance is set out on page 60. The Audit Committee’s agenda is set based on the Group’s financial calendar, which allows the Audit Committee to fulfil its role in an efficient manner. In the year under review, the principal activities of the Audit Committee were as follows: • reviewed the appropriateness of Group accounting princi- • • • • • ples, practices and policies and monitored changes to and compliance with accounting standards on an ongoing basis; reviewed the Group’s interim report and this Report including the financial statements contained therein and considered the key areas of judgement before recommending them to the Board for approval; reviewed and approved the annual audit plan presented by the external auditor and approved the audit fees; reviewed and discussed the reports received from the external auditor following the audit process; reviewed and considered the Group’s key risks, internal control policies and procedures and risk management systems, with particular reference to the operations of the Investment Manager; reviewed the policy on the supply of non-audit services by the external auditor, particularly in the context of the level of non-audit fees in 2015 in order to assess the independence and objectivity of the external auditor; Annual Report 2015 Irish Residential Properties REIT plc 45 Report of the Audit Committee (cont’d) • reviewed and considered the approach adopted by the external valuer, including assumptions, procedures and methodologies applied in valuing the Group’s property portfolio; • considered the necessity for an internal audit function on an ongoing basis; • reviewed the Investment Manager’s and the external auditor’s fraud detection procedures; and • reviewed the Company’s whistleblower policy and code of ethics. Financial Reporting and Significant Financial Judgements With respect to this Report and the financial statements included therein, the Audit Committee assessed whether suitable accounting policies had been adopted and whether management had made appropriate judgements. The Audit Committee paid particular attention to matters which it considered could have a material impact on the Group’s results and those matters which involve a higher level of complexity, judgement or estimation by management. The most significant matters considered by the Audit Committee in relation to this Report and the financial statements contained therein for the year were as follows: Investment Property Valuations The Group had investment property with a fair value of €472 million as at 31 December 2015, as set out in note 5 to the Group financial statements. The Audit Committee considered the investment property valuation process which had been carried out by management in order to satisfy itself that the balances were stated appropriately. These reviews involved understanding management’s analytical procedures, management’s discussions with the external valuer, and assessment of the market inputs utilized on each property prior to recording the valuations obtained. Following a review of the detailed valuation analysis provided by management and detailed discussions with management, the Audit Committee was satisfied that the significant inputs used for valuation and valuation of the investment properties were appropriate. Transactions with CAPREIT Due to the close nature of the relationship between CAPREIT (or its affiliates) and I-RES, CAPREIT’s shareholding in I-RES at 31 December 2015, and the provision of investment management services provided by IRES Fund Management, a subsidiary of CAPREIT, to I-RES, the Audit Committee and the external auditor 46 Irish Residential Properties REIT plc discussed the risk of undisclosed related party transactions for the 2015 consolidated financial statements. The Audit Committee discussed the level of fees incurred in respect of management services received from CAPREIT and its affiliates and discussed these with management. The Audit Committee also considered the disclosures in the notes to the financial statements. Other Matters Other matters considered by the Audit Committee included the accounting treatment appropriate for the Group’s acquisition of the Rockbrook Portfolio. The Audit Committee considered management’s determination that the Rockbrook acquisition should be treated as the acquisition of a property rather than the acquisition of a business and confirmed the appropriateness of this accounting treatment. The Audit Committee also considered revenue recognition, compliance and regulatory obligations and accounting disclosures including presentation of comparative figures. Fair, Balanced and Understandable The UK Code requires that the Board should present a fair, balanced and understandable assessment of the Company’s position and prospects, and specifically that they consider that the annual report and financial statements included therein, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. At the request of the Board, the Committee considered whether this Report and financial statements included therein met these requirements. The Audit Committee considered the process put in place by management for the preparation of the annual report and financial statements included therein and in particular the timetable, coordination and review activities. The Audit Committee discussed these arrangements with management. Arising from the Audit Committee’s work in this regard, the Audit Committee and the Board concluded that this Report and financial statements included therein, taken as a whole, is fair, balanced and understandable and that it provides the necessary information for shareholders to assess the Company’s position and performance, business model and strategy. Annual Report 2015 Risk Management and Internal Controls The Board has delegated responsibility to the Audit Committee to monitor the Group’s internal controls and risk management. In order to discharge this responsibility for the period from 1 January 2015 to 31 December 2015, the Audit Committee: i) conducted an annual review of the effectiveness of the Group’s risk management and internal control systems and reported to the Board on its findings; ii) received presentations from the Investment Manager’s internal audit function; iii) reviewed the Group’s risk register semi-annually; iv) reviewed quarterly reports from the Investment Manager relating to monitoring of investment policy, strategy and performance, compliance, risk management and liquidity management; v) received quarterly updates on any internal control compliance issues or material legal matters; vi) reviewed quarterly reports relating to the internal controls of the Investment Manager and CAPREIT LP; and vii)reviewed the Group’s signing authority and delegation policy. In addition, the Board, as a whole, reviews quarterly reports from the Investment Manager and operations updates relating to key performance indicators. The Chairman of the Audit Committee reports to the Board at each meeting on the Audit Committee’s activities in regard to the Group’s risk management and internal control systems. External Audit One of the key roles of the Audit Committee is to monitor the performance, objectivity and independence of the external auditor. Open, direct and honest communication between the Audit Committee, the external auditor and the senior management team is essential and it is our belief that effective oversight of the activities undertaken by the external auditor assists in ensuring both an effective audit and audit independence. In November 2015, the Audit Committee met with the external auditor to agree the FY15 audit plan. To ensure a quality audit, the external auditor needs to be aware of the business risks; therefore, the Audit Committee discussed and agreed upon the key business, financial statements and audit risks, and the materiality being used for the audit to ensure that the audit was appropriately focused. In advance of the commencement of the annual audit, the Audit Committee reviewed the external auditor’s letter of engagement, together with a presentation from the external auditor confirming its independence within the meaning of the regulations and professional standards. In February 2016, in advance of the finalisation of the Group’s financial statements for the year ended 31 December 2015, the Audit Committee received a report from the external auditor on its key audit findings, including the key areas of risk and significant judgements, and discussed the issues with them in order for the Audit Committee to form a judgement on the financial statements. In order to assist the Audit Committee in evaluating the external audit process and to ensure continuous improvement, following the completion of the audit, the Audit Committee members discussed with the management team the effectiveness of the external auditor and the external audit process generally. At least annually, the Audit Committee meets with the external auditor without the presence of management to discuss any matters the external auditor may wish to raise. The Audit Committee continues to be satisfied with the performance of the external auditor who remains effective, objective and independent. The Audit Committee has therefore recommended to the Board that PricewaterhouseCoopers, the external auditor, should continue in office as the Company’s auditor. PricewaterhouseCoopers was initially first appointed in July 2013. PricewaterhouseCoopers has expressed its willingness to continue in office and is eligible for reappointment as the Company’s auditor. It will continue in office in accordance with Section 383 of the Companies Act, 2014 and is deemed to be reappointed as the Company’s auditor in the absence of a resolution for its removal. A resolution to authorise the Directors to determine the auditor’s remuneration will be proposed at the Company’s annual general meeting to be held on 16 May 2016. Annual Report 2015 Irish Residential Properties REIT plc 47 Report of the Audit Committee (cont’d) Non-Audit Services Internal Audit The Company has a policy on non-audit services. The level of non-audit services provided is reviewed at least on an annual basis and, in conjunction with the external auditor, the impact on independence and objectivity is assessed. The Audit Committee has considered the Group’s business model and in particular the external management structure put in place to manage operations. Having considered the scale, complexity and range of operations of the Group, the Audit Committee does not believe it is necessary to establish an internal audit function. The independence and objectivity of the auditor was addressed by the Audit Committee in conjunction with the level of fees for non-audit services in the reporting period. Following discussion with the external auditor, the Audit Committee determined that while the fees for non-audit services are higher than the audit fees for the period to 31 December 2015, there are mitigating factors which reduce the potential threat to independence and objectivity. These factors include the following: While the Audit Committee is not recommending the establishment of an internal audit function at present, the Audit Committee will review this position annually and make appropriate recommendations to the Board. • the quantum of the non-audit fees are deemed non- • • • • substantial relative to the overall size of the external auditor’s firm-wide fee income; the non-audit services do not involve a significant amount of judgement nor are they likely to have a material effect on the Report and the financial statements included therein; the professionals involved in the non-audit services were different from those involved in the audit; the Group is in its initial phase of operation and has essentially been assembling its property portfolio; and the non-audit services include work associated with the Company’s Capital Raise and the Group’s property acquisitions. The Audit Committee concluded that the independence and objectivity of the external auditor have not been compromised. Details of the amounts paid to the external auditor during the year for audit and non-audit services are set out in note 20 to the Group financial statements. 48 Irish Residential Properties REIT plc Annual Report 2015 Report of the Remuneration Committee Members: Colm Ó Nualláin, Declan Moylan (Chair) and Aidan O’Hogan The Remuneration Committee is chaired by Declan Moylan, who is also the Deputy Chairman and Senior Independent Director. All members of the Remuneration Committee are independent nonexecutive directors, appointed by the Board for an initial period of up to three (3) years. The Remuneration Committee is constituted in compliance with the UK Code, the Irish Annex, the AIC Code and the Articles of Association regarding the composition of the Remuneration Committee. As highlighted in the biographies of each member of the Remuneration Committee on page 34, each of the members of the Remuneration Committee brings a different set of skills and experience to the Remuneration Committee. (f) to review the design of all share incentive plans for approval by the Board and shareholders, and for any such plans, to determine each year whether awards will be made and, if so, the overall amounts of such awards, the individual awards to eligible individuals as it so determines and the performance targets to be used. The Remuneration Committee meets at least once per year and as otherwise directed. Executive Compensation The Company’s policy is to ensure that executive compensation includes a mix of base salary and short-term and long-term incentive awards. The mix of executive compensation should be designed to reflect the relative impact of the executive’s role on the Company’s performance and should consider how the compensation mix aligns with long-term shareholder value creation. The Remuneration Committee met five (5) times during the period from 1 January 2015 to 31 December 2015. The terms of reference for the Remuneration Committee were approved and adopted by the Board on 31 March 2014 and amended on 26 May 2015. Prior to the establishment of the Remuneration Committee, the Board was responsible for all matters delegated to the Remuneration Committee. The roles and responsibilities delegated to the Remuneration Committee can be accessed electronically at http://investorrelations.iresreit. ie/corporate-governance.aspx. The Remuneration Committee’s principal duties include: (a) to determine and agree to with the Board the framework or broad policy for the remuneration of all executive directors and the chairman, including pension rights and any compensation payments, and to recommend and monitor the level and structure of remuneration for senior management; (b)to take into account all factors which it deems necessary in determining any such remuneration policy; (c) to liaise with the Nomination Committee to ensure that the remuneration of newly-appointed executives is within the Company’s overall policy; (d)to determine the policy for and scope of pension arrangements, service agreements, termination payments and compensation commitments for the executive directors; (e) to approve the design of, and determine targets for, any performance-related pay schemes operated by the Company, approving the total annual payments made under such schemes and asking the Board, when appropriate, to seek shareholder approval for any long-term incentive arrangements; and No Director shall be involved in any decisions in respect of his or her own remuneration. Statement on Remuneration Policy In determining the target mix of compensation, the Remuneration Committee considers market compensation data available for comparator real estate investment trusts, which shall include real estate investment trusts in jurisdictions inside and outside of Ireland (including countries where executives are employed and paid by the real estate investment trust), to ensure that the compensation mix is competitive with comparator real estate investment trusts and appropriate in light of the Company’s business strategy. Pursuant to an employment contract entered into as of 14 April 2014 between the Company and Mr Ehrlich (as amended from time to time), Mr Ehrlich is entitled to an annual base salary of C$500,000 and upon the recommendation of IRES Fund Management and subject to the discretion of the Remuneration Committee, a bonus of up to but not exceeding 100% of his base salary. The bonus is subject to clawback where the amount of bonus received was calculated based upon, or contingent on, the achievement of certain financial results that were subsequently the subject of or affected by a restatement of all or a portion of the Company’s consolidated financial statements; and Mr Ehrlich engaged in gross negligence, intentional misconduct or fraud that caused or partially caused the need for the restatement, as finally determined (beyond any right of appeal) by a court of competent jurisdiction; and the bonus payment received would have been lower had the financial results been properly reported. Annual Report 2015 Irish Residential Properties REIT plc 49 Report of the Remuneration Committee (cont’d) In addition, Mr Ehrlich is entitled to participate in the LTIP and under his employment contract, he is entitled to be awarded options over shares equivalent to 3% of the total number of shares allotted in any capital raise by way of an allotment of ordinary shares. Non-Executive Director Fees The remuneration of the non-executive directors shall be determined by the Board as a whole. No director shall be involved in any decisions in respect of his or her own remuneration. Levels of remuneration for non-executive directors reflect the time commitment and responsibilities of the role. The fees paid to non-executive directors should therefore be set at a level which aims to attract individuals with the necessary experience and ability to make a significant contribution to the Company and to compensate them appropriately for their role. The Board will review its performance on an annual basis and will review the remuneration level of the directors during the term of their respective appointments. Remuneration Policy of the Investment Manager The Investment Manager has established a remuneration policy which it applies in accordance with AIFMD and the guidelines on sound remuneration policies under AIFMD as issued by the European Securities and Markets Authority from time to time. In the implementation of its remuneration policy, the Investment Manager aims to ensure good corporate governance and promote sound and effective risk management. It will not encourage any risk taking which would be considered inconsistent with the risk profile of the Group. The Investment Manager will ensure that any decisions are consistent with the overall business strategy, objectives, values and interests of the Group and will try to avoid any conflicts of interest which may arise. The Investment Manager ensures that the remuneration policy is reviewed internally annually. The total remuneration paid to the staff of the Investment Manager in the period, all of whom are engaged in managing the Group activities, was €685,000, of which €653,000 comprised fixed remuneration and €32,000 comprised variable remuneration. The number of staff employed as at 31 December 2015 was 26 (16 as at 31 December 2014). 50 Irish Residential Properties REIT plc Directors’ Remuneration Report The Company has one executive director. The only significant decision made on remuneration during the period was the annual bonus for the Chief Executive Officer and the grant of options to the Chief Executive Officer and employees and senior executives of CAPREIT and its affiliates under the Company’s LTIP in connection with the Company’s secondary offering in March 2015. For further details on the LTIP, refer to note 10 of the Group financial statements on page 85, which have been reviewed by the external auditor. Directors’ Remuneration Fees Annual Fee Name Period to 31 December 2014 Period to 31 December 2015 €’000 €’000 €’000 Colm Ó Nualláin Declan Moylan Aidan O’Hogan 100 50 50 75 38 38 100 50 50 Totals 200 151 200 (1) Neither David Ehrlich nor Thomas Schwartz received remuneration for their role as a Director. (2) David Ehrlich is the only permanent employee of I-RES, and his total remuneration as the Chief Executive Officer for the period 1 January 2015 to 31 December 2015 was €753,000 (which included base salary of €376,500 and bonus of €376,500), and for the period to 31 December 2014 was €642,000 (which included base salary of €244,000, bonus of €245,000, and other of €153,000). Outstanding Awards of Options over Shares to Directors Options over shares were awarded in April 2014 and in March 2015 in accordance with, and as governed by, the LTIP. The options granted under the LTIP have a maximum life of seven years less a day and vest over three years from the date of grant on the basis of one third per completed year the recipient of the option completes in respect of the relevant service which has qualified him or her for an option grant. The LTIP provides that any award to executive directors, participants in the LTIP who report directly to the Chief Executive Officer and such other participants as the Remuneration Committee shall determine will include a provision for clawback if the financial results of the Company for a relevant period have been misstated to a material extent. Annual Report 2015 Under the terms of his employment contract with the Company, David Ehrlich is entitled to be awarded options over shares equivalent to 3% of the total number of shares allotted in any capital raise by way of allotment of ordinary shares. The exercise price for such options is the greater of the issue price in the capital raise and the closing price of ordinary shares on the date of admission of such shares to listing. The table below sets out the details of outstanding awards of options over shares held by Directors under the LTIP. Fair Options Options Options value at No. of No. of Granted Vested Exercised No. of 31-Dec-15 Latest ExerciseOptionsOptions during during duringOptions per Option VestingDate for Director Grant Date Price (€) 16-Apr-14 (1) 01-Jan-15 the Period the Period the Period 31-Dec-15 (cents) Date(s) Exercise David Ehrlich 16-Apr-14 1.04 6,060,000 6,060,000 – – – 6,060,000 8.8 One third 15-Apr-21 in each year from 16-Apr-2015 David Ehrlich 26-Mar-15 1.005 – – 6,450,000 – – 6,450,000 7.3 One third 25-Mar-22 in each year from 26-Mar-2016 Thomas 16-Apr-14 1.04 2,020,000 2,020,000 – – – 2,020,000 8.8 One third 15-Apr-21 Schwartz in each year from 16-Apr-2015 Thomas 26-Mar-15 1.005 – – 1,075,000 – – 1,075,000 7.3 One third 25-Mar-22 Schwartz in each year from 26-Mar-2016 (1) Options were first granted at I-RES’ initial offering on 16 April 2014. The options granted to the non-executive director were granted in relation to his role with the Investment Manager and were considered by the Board in the best interest of the Company and its business. The Directors did not receive any additional remuneration for duties beyond those normally expected as part of each Director’s appointment. Interests of Directors and Secretary in Share Capital The Directors and the Secretary had no interests in the share capital at their date of appointment. Outstanding Outstanding Ordinary Shares Ordinary Shares at % of Company at Option Awards at Option Awards at Name as at 1 January 2015 31 December 2015 31 December 2015 1 January 2015 31 December 2015 Ordinary Shares as at 21 March 2016 Colm Ó Nualláin Declan Moylan Aidan O’Hogan Thomas Schwartz David Ehrlich Elise Lenser 200,000 – – 1,000,000 500,000 – 333,333 – 90,000 1,000,000 500,000 – 0.08% 0.00% 0.02% 0.24% 0.12% 0.00% – – – 2,020,000 6,060,000 – – – – 3,095,000 12,510,000 250,000 333,333 – 90,000 1,000,000 500,000 – Totals 1,700,000 1,923,333 0.46% 8,080,000 15,855,000 1,923,333 The interests disclosed above include both direct and indirect interests in shares. Annual Report 2015 Irish Residential Properties REIT plc 51 Report of the Nomination Committee Members: Colm Ó Nualláin (Chair), Declan Moylan and Aidan O’Hogan The Nomination Committee is chaired by Colm Ó Nualláin, who is also the independent non-executive Chairman. All members of the Nomination Committee are independent non-executive directors, appointed by the Board for an initial period of up to three (3) years. The Nomination Committee is constituted in compliance with the UK Code, the Irish Stock Exchange Annex, the AIC Code and the Articles of Association regarding the composition of the Nomination Committee. The Nomination Committee meets at least once per year and as otherwise required. The Nomination Committee met four (4) times during the period from 1 January 2015 to 31 December 2015. The Nomination Committee leads the process for considering appointments to the Board. The Nomination Committee may not be chaired by the Chairman when it is dealing with the matter of succession to the chairmanship of the Company. The terms of reference for the Nomination Committee were approved and adopted by the Board on 31 March 2014. The roles and responsibilities delegated to the Nomination Committee can be accessed electronically at http://investorrelations.iresreit.ie/ corporate-governance.aspx. Prior to the establishment of the Nomination Committee the Board was responsible for all matters delegated to the Nomination Committee. The Nomination Committee’s principal duties include: (a) to regularly review the structure, size and composition of the Board and the Board committees, evaluate the balance of skills, knowledge and experience on the Board and the Board committees and make recommendations to the Board with regard to any adjustments that are deemed necessary; (b)to be responsible for identifying and nominating for the approval of the Board candidates to fill board vacancies as and when they arise, ensuring that the procedures followed are formal, rigorous and transparent; and (c) to satisfy itself with regard to succession planning that processes and plans are in place with regard to both Board and senior appointments. Before any appointment is made by the Board, the Nomination Committee evaluates the balance of skills, knowledge and experience and diversity of the Board. The Board is committed to supporting diversity on the Board and a female director 52 Irish Residential Properties REIT plc (Margaret Sweeney) has been appointed effective 23 March 2016. During the selection process for new non-executive directors, the Nomination Committee ensures that diversity is considered when developing a candidate pool. In considering diversity, all potential considerations are taken into account, including diversity of skills, background, experience as well as gender, in all cases, having regard to the Company’s current and future plans and objectives. The Board will continue to monitor whether it is taking diversity into account when appointing new Board members, and the Board evaluation process addresses diversity. Given the size of the Board and the development stage of the Company, the Board does not consider it appropriate at this time to set gender quotas for Board representation, but will monitor developments in best practices. In its work in the area of Board renewal, the Nomination Committee looks at a range of issues: • skills, knowledge and expertise in areas relevant to the operation of the Board; • diversity; and • the need for an appropriately sized Board. Each non-executive director participates fully in Board discussions and attends all possible Board and/or committee meetings in order to do so; in addition, each non-executive director brings a distinct range of abilities and experience that complements those brought by the other non-executive directors. Non-executive directors, including the chairman of the Board, are expected to serve for a three-year term unless they are invited by the Board and agree to serve for an additional period. Given the growth of the Company, the Board, on the recommendation of the Nomination Committee, thought it advisable to increase the size of the Board. Accordingly, the Board, on the recommendation of the Nomination Committee, has appointed Margaret Sweeney and Phillip Burns as independent non-executive directors effective 23 March 2016 (refer to page 40 for their biographies). Following the evaluation conducted by the Board, it has been confirmed that each director continues to be effective and to demonstrate commitment to the role and should be put forward for re-election, together with Margaret Sweeney and Phillip Burns (who will be put forward for election since they were appointed after the 2015 annual general meeting), at the Company’s annual general meeting to be held on 16 May 2016. Annual Report 2015 Report of the Directors The Directors of the Company present their report and the audited financial statements for the financial period from 1 January 2015 to 31 December 2015. Principal Activity and Business Review The Company was incorporated in Ireland on 2 July 2013 as Shoreglade Limited (formerly known as CAPREIT Ireland Limited, Irish Residential Apartments REIT Limited and Irish Residential Properties REIT Limited). On 16 April 2014, I-RES obtained admission of its ordinary shares to the primary listing segment of the Official List of the Irish Stock Exchange for trading on the regulated market for listed securities of the Irish Stock Exchange. Its registered office is Unit 4B Lazer Lane, Grand Canal Square, Dublin 2, Ireland. Ordinary shares of I-RES are listed on the Irish Stock Exchange under the symbol “IRES.” The Company owns interests in multi-unit residential rental apartment properties located in and near major urban centres in Dublin, Ireland. I-RES’ net assets and operating results are derived from real estate located in Ireland, where it is also domiciled. The Company purchased its first investment interests in investment properties on 10 September 2013. Refer to note 4 of the Group financial statements on page 81 (which lists all the investment property acquisitions since 10 September 2013 that have contributed to the operating results effective from the acquisition date of those properties). The Corporate Governance Statement on pages 38 to 44, the Report of the Audit Committee on pages 45 to 48, the Report of the Remuneration Committee on pages 49 to 51, the Report of the Nomination Committee on page 52 and the Review on pages 2 to 32 are deemed to be included in this Report of the Directors for the purposes of the Companies Act, 2014. This Report and the documents referred to herein are deemed to be the management report as required by the Transparency (Directive 2004/109/EC) Regulations 2007 (the “Transparency Regulations”). Results for the Financial Period Revenue for the financial period amounted to €24.72 million. The profit for the year attributable to shareholders amounted to €30.82 million. Earnings per share amounted to 8.4 cents. REIT Status The Company elected for REIT status on 31 March 2014 under section 705 E of the Finance Act 2013. As a result, the Company does not pay Irish corporation tax on the profits and gains from qualifying rental business in Ireland from that date, provided it meets the conditions. As an Irish REIT, the Company is required to distribute to its shareholders (by way of dividend), on or before the filing date for its tax return for the accounting period in question, at least 85% of the Property Income of the Property Rental Business arising in each accounting period (provided it has sufficient distributable reserves). Failure to meet this requirement will result in an Irish REIT incurring a tax charge calculated by reference to the extent of the shortfall in the dividends paid. The Company is in compliance with all the above REIT requirements for the period from 1 January 2015 to 31 December 2015. Dividends Under the Irish REIT regime, subject to having sufficient distributable reserves, the Company will be required to distribute to shareholders at least 85% of the Property Income of its Property Rental Business for each accounting period. Accordingly, in 2015, the Board paid dividends of approximately €1.8 million for the 2014 accounting period. On 9 February 2016, the Directors declared an interim dividend of €13.1 million (dividends per share of 3.15 cents) for the 2015 accounting period, to be paid on 21 March 2016 to shareholders on record as of 19 February 2016. Share Capital The authorised share capital of the Company is 1,000,000,000 ordinary shares of €0.10 each, of which 417,000,000 shares were in issue at 31 December 2015. All of these shares are of the same class. They all carry equal voting rights and rank equally for dividends. Other than dividends declared, no shares in the Company were acquired or redeemed by the Company during the financial period ended 31 December 2015, or made subject to charge or lien. There are no securities holding special rights with regard to control of the Company. Particulars of the authorised and issued share capital of the Company as at 31 December 2015 are set out in note 11 of the Group financial statements on page 86. Annual Report 2015 Irish Residential Properties REIT plc 53 Report of the Directors (cont’d) There are no restrictions on the transfer of shares in the Company and no requirements to obtain approval of the Company, or of other holders of securities in the Company, for a transfer of shares in the Company, save that the Directors may decline to register any transfer of a share: • to or by a minor or a person with a mental disorder (as defined by the Mental Health Act 2001); • in certain circumstances where the Directors have given notice to a shareholder under the Articles of Association requiring such shareholder to notify the Company of his or her interest in any shares in the Company and is in default for a prescribed period in supplying such information to the Company; • if the transfer is in favour of any person, as determined by the Directors, to whom a sale or transfer of shares, or whose direct, indirect or beneficial ownership of shares, would or might cause a specific regulatory burden to be imposed on the Company, such as under the US Securities Exchange Act of 1934; • in certificated form where the following documents have not been produced: the original share certificate and the usual form of stock transfer duly executed by the holder of the shares and stamped with the requisite stamp duty; and • in uncertificated form only in such circumstances as may be permitted or required by the CREST Regulations. By Resolution 7 passed at the Company’s 2015 annual general meeting, the Directors were granted authority to make market purchases of the Company’s ordinary shares up to 10% of the issued ordinary shares in the Company and to reissue those shares. This authority is due to expire at the conclusion of the 2016 annual general meeting of the Company or 15 months from the passing of the resolution, whichever occurs first. As at 21 March 2016, the Company held no shares in treasury. The Directors are proposing resolutions on the same terms (except up to 15% of the issued ordinary shares) at the 2016 annual general meeting and will take advantage of the flexibility afforded by the resolution, if passed, as they deem appropriate. 54 Irish Residential Properties REIT plc Lock-up Arrangements Other than as disclosed below, the Company is not aware of any arrangements between its shareholders which may result in restrictions on the transfer of securities or voting rights. CAPREIT LP has agreed to a lock-up arrangement pursuant to which, subject to certain customary exceptions, none of the shares in which CAPREIT LP held a beneficial interest on or before the initial offering (including thereafter any shares derived therefrom, which includes the shares subscribed for by CAPREIT LP pursuant to the open offer in the Capital Raise) may be sold for two years from initial admission on 16 April 2014, as long as the Investment Management Agreement has not been terminated. Powers of the Board The Directors are responsible for the management of the business of the Company and may exercise all the power of the Company subject to the provisions of the Company’s Memorandum and Articles of Association. The Directors’ powers to allot, issue, repurchase and reissue ordinary shares are dependent on the terms of the resolutions from time to time in force so empowering the Directors. Review of Activities and Events since the Year End The Chairman’s Statement on pages 10 to 11, the Chief Executive Officer’s Statement on pages 12 to 16 and IRES Fund Management’s Statement on page 17 contain a review of the development and performance of the business during the year, the state of affairs of the business at 31 December 2015, recent events and likely future developments. The key performance indicators used by the Board for monitoring the business are on page 31. Information in respect of events since the year end as required by the Companies Act, 2014 is included in these sections and in note 21 of the Group financial statements on page 95. Annual Report 2015 Principal Risks and Uncertainties The Directors of the Company set out below the principal risks and uncertainties that the Group is exposed to and that may impact performance in the coming financial year. The Group proactively monitors and manages these risks with the assistance of its Investment Manager, as well as the combined expertise of the Board. The principal risks and uncertainties are summarised as follows: RISKS POTENTIAL EXPOSURE MITIGATION MEASURES General Economic Conditions The Group’s investments are concentrated in Ireland. Although there are clear signs of a general economic recovery in Ireland, this recovery is nascent and there can be no assurance that current growth levels will be sustained. Poor economic conditions could impact the Company’s income and capital performance. The Company deployed the capital raised from shareholders in an efficient manner. In addition, the Company’s focus is on Dublin, which has been more resilient economically than other areas of Ireland in the past. The Investment Manager monitors and reports to the Board quarterly on investment performance and economic factors that may affect such performance. The Company also employs prudent cash flow management and monitoring to ensure that it can maintain attractive distributions to its shareholders. Availability of Capital The Company may not be able to source debt financing at attractive rates, which could impact the Company’s future growth through acquisitions and development. There is also a limited number of banks providing financing against property in Ireland. The Company may also not be able to raise equity, which could also impact the Company’s future growth through acquisitions and development. The Investment Manager has made a concerted effort to develop relationships with lenders both in Ireland and abroad. The quality of the Company’s property portfolio and the conservative gearing target of 45% on total assets are attractive credit characteristics for potential lenders, which to date have facilitated the raising of debt financing. The Investment Manager also monitors the Company’s compliance with existing debt covenants and gearing ratios and reports to the Board quarterly on these items. The Company invests in properties that generate a strong rate of return for its investors and, in turn, increases the attractiveness of its shares. As such, the Company believes it has the ability to raise additional capital if required and only after considering existing shareholders’ interests, as seen with the Capital Raise. Investment Strategy The Group could significantly underperform due to inappropriate or poor execution of the Group’s investment strategy. This could impact the valuation of the properties and a resultant reduction in return to shareholders may occur. The Investment Manager is made up of a wellregarded multi-disciplinary team of property and finance professionals experienced in the selection, financing and management of property investments. The Investment Manager and the Board carry out a detailed evaluation of every investment opportunity to determine its fit with the Group’s stated investment policy and to ensure that it Annual Report 2015 Irish Residential Properties REIT plc 55 Report of the Directors (cont’d) RISKS POTENTIAL EXPOSURE Investment Strategy (cont’d) MITIGATION MEASURES enhances the firm’s risk return goals as articulated in the investment strategy. The Investment Manager reports certain key metrics on investment performance and risk, as well as compliance with the Group’s stated investment policy on a quarterly basis to the Board. Occupier Demand and Income Sustainability Occupancy levels are currently very strong; however, there is a risk that due to a lack of occupier demand resulting from possible weakness in the macro economy or a significant increase in housing completions, this could fall, thereby impacting the Group’s income and capital performance. The Group’s strategy is to acquire prime and good secondary residential property with a Dublin focus, which is where all of the existing apartments in its portfolio are located. The Investment Manager monitors the Group’s exposure to the letting market and deals with any lease expiries well in advance of their expiry dates to ensure that the income from the portfolio is managed proactively to minimise any interruptions and vacancies. The Investment Manager reports to the Board quarterly on occupancy rates and economic factors that may impact these. Tenant Default Tenant default may adversely impact the Group’s income and the capital performance of the portfolio. This may result in a reduction of rental income. Letting staff evaluate the creditworthiness of prospective tenants within the means available to them from a regulatory perspective. The Investment Manager closely monitors the rental payments of occupiers to identify any weaknesses in their ability to meet their ongoing obligations to the Group. In addition, no individual tenant would have a material impact on the total rental revenue. The Investment Manager reports to the Board on revenue collections and key economic factors that may impact these. Investment Manager’s Performance The Group is reliant on the Investment Manager and CAPREIT LP for its property investment, asset management and development expertise, in particular, which drives the financial performance of the Group. The Group is reliant on the skills and the ability of the Investment Manager and CAPREIT LP to retain the management team and key staff. It may be difficult to find replacements with the same expertise, resulting in financial or business reputation loss to the Group. The Investment Manager is made up of a wellregarded multi-disciplinary team of property and finance professionals experienced in the selection, financing and management of property investments. The Board oversees the work of the Investment Manager and there is a close working relationship between the Board and the Investment Manager. 56 Irish Residential Properties REIT plc Annual Report 2015 RISKS POTENTIAL EXPOSURE MITIGATION MEASURES Investment Manager’s Performance (cont’d) The Investment Manager was authorised as an alternative investment fund manager on 28 October 2015 by the Central Bank of Ireland under recently adopted EU regulations. Should the Investment Manager cease to be authorised as an alternative investment fund manager, the Company would then be required to appoint a replacement alternative investment fund manager and could suffer losses arising from the transition from the Investment Manager to another alternative investment fund manager. Key management of the Investment Manager, CAPREIT LP and its affiliates are financially incentivised through the long-term incentive plan. The board of the Investment Manager oversees compliance with the AIFM Regulations to ensure that the Investment Manager meets its regulatory obligations at all times. Interest Rate and Credit Risk The Company is exposed to risks associated with movements in interest rates on its floating rate bank debt and on the cash it holds. The Company has entered into a revolving and accordion credit facility of up to €250 million, which can be extended to €350 million subject to certain terms and conditions. This facility has been secured from Barclays Bank Ireland plc and Ulster Bank Ireland at a rate of EURIBOR +2% for a five-year term commencing 14 January 2016. With regard to floating rate bank debt which the Company intends to raise, the Investment Manager consults on a regular basis with the external lenders with regard to interest rate exposure and whether hedging should be put in place, which would be approved by the Board. The Company does not have a substantial amount of cash on deposit. Competition The Group faces competition from other property investors for suitable properties, which could impact its ability to purchase suitable properties for renting at satisfactory rates and to successfully deploy the funds from future equity offerings. The Investment Manager has made a concerted effort to develop relationships and contacts in Ireland to seek out suitable properties for the Group’s portfolio. The Investment Manager has appointed the appropriate management resource. The Investment Manager monitors supply and demand for rental apartments in operating areas where the Group’s investment properties are located. The Group is well-capitalised and is also one of Ireland’s largest residential real estate owners, which gives it a competitive advantage. Annual Report 2015 Irish Residential Properties REIT plc 57 Report of the Directors (cont’d) RISKS POTENTIAL EXPOSURE MITIGATION MEASURES Tax Risks – Failure to Abide by REIT Rules The Group operates under the Irish REIT regime, which, among other benefits, means that the Group does not pay corporation tax or capital gains tax on income from its Property Rental Business as long as the Group is in compliance with these rules. Failure to comply with the rules may result in the Group losing its REIT status, which could result in the Company having to pay corporation tax and capital gains tax. This in turn would result in a financial loss to the Group. The Investment Manager monitors and tests the Group’s compliance with the REIT rules and regularly reviews and considers how the Group’s planned operations will ensure compliance with these rules, the results of which are reported to the Board. The Investment Manager has received independent legal advice in relation to the issues it needs to monitor and manage and therefore, is alert and vigilant in regard to these matters. Additionally, the Board of the Company has also obtained independent legal advice. Regulatory Risk The Company operates in a very challenging and increasingly complex corporate governance environment with significantly more compliance rules and any failure to meet or to adhere to these rules could result in a financial and reputational loss to the Company. There is also a possibility that the government authorities could change the rental housing regime in a way that is adverse to the Group. The Board and the Investment Manager monitor compliance by the Company with the regulations so that, should any issues arise, the Company is forewarned and can deal with any potential disruption that might result. The Investment Manager has engaged experienced third-party advisors, who, along with management of the Investment Manager, ensure that compliance with the regulations are achieved through detailed policies and procedures. The Investment Manager reports to the Board on its compliance with regulations quarterly. The Company has also appointed experienced third-party advisors. The Company has also appointed a depositary, BNP Paribas Securities Services. The depositary has a number of roles relating to the oversight of certain activities of the Company including, but not limited to, overseeing the safekeeping of the assets owned by the Company (including cash), verification duties regarding the assets of the Company and the depositing of cash not yet invested by the Company. In addition, the depositary also has custody duties in respect of any assets acquired by the Company and monitoring duties regarding the Company’s cash flows. 58 Irish Residential Properties REIT plc Annual Report 2015 RISKS Development Risk POTENTIAL EXPOSURE MITIGATION MEASURES Property development comes with planning risk, construction risk, additional cost exposure and overrun risk, engineering risk and the risk of delayed delivery of a development with resulting additional costs, and potential failure to pass the completed space to tenants who have entered into pre-letting agreements, thereby delaying rental income receipts. In sourcing/reviewing potential development opportunities, the Investment Manager undertakes detailed planning and cost review and budgeting exercises around all capital expenditures. The Investment Manager uses competitive tendering procedures to obtain fixed price contracts negotiated with reputable and experienced building contractors to minimise delivery, quality and cost overrun risks. Development projects undergo a detailed investment analysis by the Investment Manager, the results of which are presented to the Board for review. The Board approves all development opportunities prior to commencement, as well as an annual capital expenditures budget for upgrades to existing investment properties. The Investment Manager will closely monitor each project and will work closely with the contractor. The Company’s investment policy contains restrictions on the amount of development spend that can be incurred. The Investment Manager reports quarterly on the amount of actual development spend in relation to these restrictions to the Board of the Company. The principal contractor is responsible for monitoring the viability of subcontractors appointed by them. There is an increasing number of contractors and subcontractors operating in the Irish market, in the event that the need to replace a subcontractor was to arise. The Company allows for timing contingencies as well as possible cost contingencies at the project planning phase. Annual Report 2015 Irish Residential Properties REIT plc 59 Report of the Directors (cont’d) Directors The names of the Directors for the financial period ended 31 December 2015 and a short biographical note on each Director appear on pages 34 to 35. The Company has adopted a requirement in its Articles of Association that all Directors will submit to re-election at each annual general meeting. In accordance with paragraph B.7.1 of the UK Code, which applied to the Company for the financial year ended 31 December 2015, and the Company’s Articles of Association, each of Colm Ó Nualláin, Aidan O’Hogan, Declan Moylan, David Ehrlich and Thomas Schwartz will retire and, being eligible, will offer themselves for re-election at the 2016 annual general meeting to be held on 16 May 2016. In addition, the Board, on the recommendation of the Nomination Committee, has appointed Margaret Sweeney and Phillip Burns as independent non-executive directors effective 23 March 2016 and, being eligible, they will offer themselves for election at the 2016 annual general meeting to be held on 16 May 2016. Other than Mr Ehrlich, the Directors do not have service contracts but do have letters of appointment which reflect their responsibilities and commitments. Mr. Ehrlich’s service contract is due to expire on 30 September 2016, or such earlier or later date as set out upon the extension or termination of the service agreement. Each Director has the same general legal responsibilities to the Company as any other Director and the Board as a whole is collectively responsible for the overall success of the Company. The Directors were appointed for an initial term of three (3) years, and their dates of appointment are set out on pages 34 to 35. The Company may lawfully terminate a Director’s appointment with immediate effect in certain circumstances, including where a Director has breached the terms of his letter of appointment, and no compensation would be payable to such Director in such an event. In addition to their general legal responsibilities, the Directors have responsibility for the Company’s strategy, performance, financial and risk control and personnel. Copies of the letters of appointment are available for inspection by any person at the Company’s registered office during normal business hours and at the Company’s annual general meeting for 15 minutes prior to the meeting and during the meeting. There are no agreements between the Company and its Directors or employees providing for compensation for loss of office or employment, whether through resignation, purported redundancy or otherwise, that occurs because of a bid for the Company, except under the terms of the LTIP. Meetings and Attendance Directors’ attendance records at board and committee meetings from 1 January 2015 until 31 December 2015 (the end of the period) are set out in the table below. For board and committee meetings, attendance is expressed as the number of meetings attended out of the number that each Director was eligible to attend. Board Colm Ó Nualláin Aidan O’Hogan Declan Moylan David Ehrlich Thomas Schwartz 12 of 13 13 of 13 13 of 13 13 of 13 13 of 13 Audit Committee Remuneration Committee 10 of 10 9 of 10 10 of 10 N/A N/A 5 of 5 5 of 5 5 of 5 N/A N/A Details of the Directors’ and Secretary’s interests in the share capital of the Company are set out in the Interests of Directors and Secretary in share capital on page 51. The Chairman does not have any other significant commitments. Key Management Personnel The Company is managed by the Chief Executive Officer of the Company and through the external Investment Manager (and prior to 1 November 2015 by GAFM) under the supervision of the 60 Irish Residential Properties REIT plc Nomination Small Transactions Committee Committee 4 of 4 4 of 4 4 of 4 N/A N/A N/A N/A N/A No meetings held No meetings held Board. The Company has engaged the services of the Investment Manager (which is authorised as an alternative investment fund manager by the Central Bank of Ireland under the AIFM Regulations) to act as the Company’s alternative investment fund manager under the AIFM Regulations and has delegated certain portfolio, risk management and other functions to the Investment Manager, pursuant to the Investment Management Agreement. The Investment Manager also has access to the expertise and resources provided by CAPREIT LP, pursuant to the services agreement among the Company, CAPREIT LP and IRES Fund Annual Report 2015 Management (as amended from time to time) (the “Services Agreement”), which also covers property and asset management services. Conflicts of Interest – Directors Section 231 of the Companies Act, 2014 requires each Director who is in any way, either directly or indirectly, interested in a contract or proposed contract with the Company to declare the nature of his interest at a meeting of the Directors. The Company keeps a record of all such declarations, which may be inspected by any Director, secretary, auditor or member of the Company at the registered office of the Company. Subject to certain exceptions, the Articles of Association generally prohibit Directors from voting at Board meetings or meetings of committees of the Board on any resolution concerning a matter in which they have a direct or indirect interest which is material to, or a duty which conflicts or may conflict with the interests of, the Company. Directors may not be counted in the quorum in relation to resolutions on which they are not entitled to vote. Pursuant to the Investment Management Agreement, the Investment Manager is entitled to nominate and require the Company to appoint one person as a non-executive director. Thomas Schwartz is a director of the Investment Manager and is the Investment Manager’s nominee. Thomas Schwartz is also a trustee of CAPREIT and a director or trustee of each of CAPREIT’s subsidiaries. He is also the Chief Executive Officer and President of CAPREIT and each of its Canadian subsidiaries. David Ehrlich is a trustee of CAPREIT. CAPREIT is the parent company of CAPREIT LP and the Investment Manager is wholly-owned and controlled by CAPREIT LP. The Articles of Association prohibit Directors who are officers of the Investment Manager or trustees of CAPREIT or any CAPREIT affiliate from participating in deliberations of the Board concerning the appointment or engagement by the Company of IRES Fund Management or of any CAPREIT affiliate. David Ehrlich and Thomas Schwartz accordingly will not be permitted to vote on any matter at Board level relating to CAPREIT, CAPREIT LP or IRES Fund Management. Conflicts of Interest – Investment Management Agreement and Services Agreement Each of the Investment Management Agreement and the Services Agreement include non-compete provisions in favour of the Company, subject to certain exceptions. Corporate Governance The Company has complied, from 1 January 2015 to 31 December 2015, with the provisions set out in the UK Code (issued in September 2014) and in the Irish Annex (issued in 2010), which applied to the Company for the financial period ended 31 December 2015, except as disclosed on page 44. The Corporate Governance Statement on pages 38 to 44 sets out the Company’s application of the principles and compliance with the provisions of the UK Code and the Irish Annex and the Company’s system of risk management and internal control. Going Concern Statement The Directors, after making enquiries, have a reasonable expectation that the Company, and the Group as a whole, have adequate resources to continue operating for at least 12 months. For this reason, the going concern basis continues to be adopted in preparing the financial statements included in this Report. Assumptions are built for the income statement, balance sheet and cash flow and these are rigorously tested by management and the Directors. Sensitivity analysis has been applied to reflect the potential impact of some of the principal strategic and commercial risks of the Company as described on pages 55 to 59. After making enquiries and having considered the uncertainties facing the Group and the options available to the Group, the Directors have a reasonable expectation that the Group will have sufficient funds available to it to meet other planned expenditures when they fall due for the foreseeable future. Based on the above, the Directors continue to adopt the going concern basis for the preparation of the financial statements. Viability Statement The Directors have assessed the viability of the Group over a three-year period to December 2018, taking account of the Group’s current position and the potential impact of the principal risks. Based on this assessment, the Directors have a reasonable expectation that the company will be able to continue in operation and meet its liabilities as they fall due over the period to December 2018. In making this statement, the Directors have considered the resilience of the Group, taking account of its current position, the principal risks facing the business in severe but reasonable Annual Report 2015 Irish Residential Properties REIT plc 61 Report of the Directors (cont’d) scenarios, and the effectiveness of any mitigating actions. This assessment has considered the potential impacts of these risks on the business model, future performance, solvency and liquidity over the period. Assumptions are built for the income statement, balance sheet and cash flow included in the business model, and a sensitivity analysis has been performed based on some of the principal risks of the Group, as described on pages 55 to 59, to reflect a comprehensive range of outcomes. These risks could affect the level of revenues of the Group and the amount of capital required to operate and grow the business. The Directors concluded that three years was an appropriate period for the assessment given that this is the key period of focus within the Group’s strategic planning process, and it reflects the development stage of the Company. The objectives of the strategic planning process are to consider the key strategic choices facing the Group and to build a consolidated financial model with various scenarios, taking into account the principal risks and uncertainties facing the Group. Substantial Shareholdings As at 31 December 2015, the Company has been notified of the following substantial interests in the Company’s shares: Holder 31 December 2015 Holdings % CAPREIT Limited Partnership 65,500,000 15.7 Franklin Templeton Institutional, LLC 54,608,952 13.10 Setanta Asset Management Limited 49,663,753 11.91 Irish Life Investment Managers Limited 24,872,228 5.96 INVESCO Limited 17,392,844 4.17 Schroder plc (1) 25,230,000 6.05 APG Asset Management N.V. 15,000,000 3.60 GLG Partners LP 13,207,986 3.17 Alken Fund SICAV 12,889,378 3.09 Prudential Financial, Inc. 12,528,785 3.00 (1) Based on public filings, Schroder plc only has 16,830,000 voting rights (4.036%). As at 21 March 2016, the Company has been notified of the following substantial interests in the Company’s shares: 21 March 2016 Holder Holdings % CAPREIT Limited Partnership 65,500,000 15.70 Franklin Templeton Institutional, LLC 54,608,952 13.10 Setanta Asset Management Limited 50,818,214 12.19 Irish Life Investment Managers Limited 24,872,228 5.96 INVESCO Limited 17,392,844 4.17 Schroder plc 25,062,965 6.01 APG Asset Management N.V. 15,000,000 3.60 GLG Partners LP 13,207,986 3.17 Alken Fund SICAV 12,889,378 3.09 Prudential Financial, Inc. 12,528,785 3.00 (1) (1) Based on public filings, Schroder plc only has 16,662,965 voting rights (3.996%). Subsidiaries and Joint Ventures Details of the Company’s subsidiaries as at 31 December 2015, which include IRES Residential Properties Limited, which was acquired on 31 March 2015 in connection with the acquisition of the Rockbrook Portfolio and holds the Rockbrook Portfolio, and certain owner management companies in which the Company holds a majority of the voting rights, are set out in note 16 of the Group financial statements on pages 90 to 93. In addition, on 15 January 2016, TC West Residential Owners Management Company Limited and TC West Estate Management Company Limited, the owner management companies for Tallaght Cross West residential and commercial, respectively, became subsidiaries of the Company. All of the Company’s subsidiaries are incorporated in Ireland. Financial Instruments Financial instruments are set out in note 12 of the Group financial statements on pages 87 to 89. Financial Risk Management The financial risks include market risk, liquidity risk, credit risk and capital management risk. The financial risk management objectives and policies of the Group are set out in note 12 of the Group financial statements on pages 87 to 89. 62 Irish Residential Properties REIT plc Annual Report 2015 Credit Facility Agreement On 14 January 2016, the Company signed a new revolving and accordion credit facility of up to €250 million, which can be extended to €350 million subject to certain terms and conditions. Details of the Company’s previous credit facility agreement, which was entered into on 15 August 2014, are set out in note 9 of the Group financial statements on page 84. The financial covenants under the new credit facility agreement provide that for so long as any amount is outstanding under the new credit agreement: (i) adjusted EBITDA in respect of the relevant period being tested expressed as a percentage of the interest payable at that time (“Historical Interest Cover”) for the group (which for the purposes of this section is defined as the Company and its subsidiaries excluding any management companies), must, at all times, be at least 200%; (ii) adjusted EBITDA in respect of the relevant period being tested expressed as a percentage of the projected interest payable for such period (“Projected Interest Cover”) for the group must, at all times, be at least 200%; (iii)the aggregate amount of all obligations of members of the group for or in respect of its total financial indebtedness (“Total Debt”) (taking into account only indebtedness and other obligations which are secured by security over the Charged Assets (as defined in the facility agreement) must not at any time be greater than 50% of the aggregate of (i) the aggregate market value of all interests in real property held by the Company and members of the group (unless any such interest in a property ceases to be a Charged Asset) (the “Properties”) and (ii) the value of all loans made by the Company and/or IRES Residential Properties Limited to a third party for the purpose of carrying out development work in respect of a Property, both such values as determined from the most recent financial statements once the value of any work in progress on the Company’s consolidated balance sheet funded by such loans has been deducted; (iv)Total Debt (taking into account only indebtedness and other obligations which are secured by security over those Properties in respect of which rental income is being earned by a member of the group) shall not at any time be greater than 60% of the aggregate market value of all Properties in respect of which rental income is being earned by a member of the group in respect of the letting of completed buildings to tenants; (v) adjusted EBITDA in respect of the consolidated income of the group derived from Charged Assets in respect of the relevant period being tested expressed as a percentage of the interest payable at that time (relating only to indebtedness and other obligations which are secured by security over the Charged Assets) is, at all times, at least 200%; and (vi)adjusted EBITDA in respect of the projected consolidated income of the group derived from Charged Assets in respect of the relevant period being tested expressed as a percentage of the projected interest payable for such period (relating only to indebtedness and other obligations which are secured by security over the Charged Assets) is, at all times, at least 200%. The Company will be deemed to be in default under the new credit agreement if any one of a number of events occurs. Such events of default include, but are not limited to, non-payment, breach of financial covenants, cross default in respect of any other financial indebtedness of the Company, insolvency, loss of REIT status or the occurrence of any event or circumstance which, in the opinion of the majority lenders, has or is reasonably likely to have a material adverse effect on the Company. The occurrence of an event of default will entitle the agent, if directed by the majority lenders, to accelerate the facilities, cancel the commitments, exercise the security or require that the facilities are immediately repayable on demand. Political Contributions There were no political contributions which are required to be disclosed under the Electoral Act, 1997. Accounting Records The Directors are responsible for ensuring accounting records, as outlined in Sections 281 to 285 of the Companies Act, 2014, are kept by the Company. The Directors believe that they have complied with this requirement by providing adequate resources to maintain accounting records through the delegation of these functions to the Investment Manager, including by ensuring that it has adequate numbers of appropriately trained and experienced staff to perform such functions with an appropriate standard of care. The accounting records of the Company are maintained at its registered office located at Unit 4B Lazer Lane, Grand Canal Square, Dublin 2. Takeover Regulations The Company has certain banking facilities which may require repayment and cancellation of the commitments thereunder in the event that a change of control occurs with respect to the Company. In addition, the LTIP contains change of control provisions which allow for the acceleration of the exercisability of share options or awards in the event that a change of control occurs with respect to the Company. Annual Report 2015 Irish Residential Properties REIT plc 63 Report of the Directors (cont’d) There are no other significant agreements to which the Company is a party that take effect, alter or terminate upon a change of control of the Company following a bid. The information on Directors on pages 34 to 35 and the disclosures on Directors’ Remuneration on page 50 of this Report cover the information required for the purposes of Regulation 21 of the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006. Resolutions are categorised as either ordinary or special resolutions. A bare majority of more than 50% of the votes cast by members voting on the relevant resolution is required for the passing of an ordinary resolution, whereas a qualified majority of more than 75% of the votes cast by members voting on the relevant resolution is required in order to pass a special resolution. Matters requiring a special resolution include, for example: altering the objects of the Company; altering the Articles of Association of the Company; and approving a change of the Company’s name. Auditor Memorandum and Articles of Association PricewaterhouseCoopers will continue in office in accordance with the provisions of Section 383(2) of the Companies Act, 2014. A resolution authorising the Directors to set their remuneration will be proposed at the Company’s annual general meeting to be held on 16 May 2016. The Company’s Memorandum and Articles of Association set out the objects and powers of the Company. The Articles of Association detail the rights attaching to shares, the method by which the Company’s shares can be purchased or re-issued, the provisions which apply to the holding and voting at general meetings and the rules relating to Directors, including their appointment, retirement, re-election, duties and powers. The Articles of Association may be amended by special resolution of the shareholders, being a resolution proposed on not less than 21 days’ notice as a special resolution and passed by more than 75% majority of those voting on the resolution. General Meetings The Company holds a general meeting each year as its annual general meeting in addition to any other meeting in that year. Not more than 15 months shall elapse between the date of one annual general meeting and that of the next. The Directors are responsible for the convening of general meetings. Information is distributed to shareholders at least 20 working days prior to the annual general meeting. No business other than the appointment of a chairman shall be transacted at any general meeting unless a quorum of members is present at the time when the meeting proceeds to business. Except as provided in relation to an adjourned meeting, three (3) persons entitled to vote upon the business to be transacted, each being a member or proxy for a member or a duly authorised representative of a corporate member, shall be a quorum. Directors 21 March 2016 Colm Ó Nualláin Chairman Votes may be given either personally or by proxy or a duly authorised representative of a corporate member. Subject to rights or restrictions for the time being attached to any class or classes of shares, on a show of hands, every member present in person and every proxy or duly authorised representative of a corporate body shall have one vote. No individual shall have more than one vote, and on a poll, every member present in person or by proxy or a duly authorised representative of a corporate body shall have one vote for every share carrying voting rights of which the individual is the holder. 64 Irish Residential Properties REIT plc Annual Report 2015 David Ehrlich Executive Director Statement of Directors’ Responsibilities The Directors are responsible for preparing the Report and the financial statements in accordance with applicable laws and regulations together with a description of the principal risks and uncertainties that it faces. Company law requires the Directors to prepare financial statements for each financial period. Under such law the Directors have prepared the Company’s financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”) and in accordance with the provisions of the Companies Act, 2014. The financial statements are required by law and IFRS to present a true and fair view of the financial position of the Company and the Group and the performance of the Group. In preparing the financial statements, the Directors are required to: • select suitable accounting policies and apply them consistently; • make judgements and estimates that are reasonable and prudent; • comply with IFRS as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and • prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business. The Directors are responsible for keeping adequate accounting records which are (i) sufficient to correctly record and explain the transactions of the Company and the Group, (ii) enable, at any time, the assets and liabilities, financial position and profit or loss of the Company to be determined with reasonable accuracy, and (iii) ensuring that the financial statements are prepared in accordance with IFRS as adopted by the European Union and in accordance with the provisions of the Companies Act, 2014. The Directors are also responsible for safeguarding the assets of the Company and the Group and for taking reasonable steps for the prevention and detection of fraud and other irregularities. In accordance with applicable law and the Listing Rules issued by the Irish Stock Exchange, the Directors are also required to prepare a Report of Directors and reports relating to Directors’ remuneration and corporate governance. The Directors are also required by the Transparency (Directive 2004/109/EC) Regulations 2007 (the “Transparency Regulations”) to include a management report containing a fair review of the business and a description of the principal risks and uncertainties facing the Group. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in Ireland governing the preparation and dissemination of the financial statements may differ from legislation in other jurisdictions. The Directors have contracted with the Investment Manager in order to ensure that those requirements are met. The books and accounting records of the Group and the Company are maintained at its registered office located at Unit 4B Lazer Lane, Grand Canal Square, Dublin 2. The Directors have delegated investment management and administration functions, including risk management, to the Investment Manager without abrogating their overall responsibility. The Directors have in place mechanisms for monitoring the exercise of such delegated functions, which are always subject to the supervision and direction of the Board. These delegations of functions and the appointment of regulated third-party entities are set out in the Corporate Governance Statement on pages 38 to 44. Each of the Directors, whose names and functions are listed on pages 34 to 35, confirms that, to the best of each person’s knowledge and belief: As required by the Transparency Regulations: • the financial statements, prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities and financial position for the Group and the Company as at 31 December 2015 and of the results of the Group, taken as a whole, for the period 1 January 2015 to 31 December 2015; • the Report of the Directors, the Chairman’s Statement, the Chief Executive Officer’s Statement and the IRES Fund Management, Investment Manager Statement include a fair review of the development and performance of the Group’s business and the position of the Group as at 31 December 2015, together with a description of the principal risks and uncertainties that it faces; and As required by the UK Corporate Governance Code: • the Report and financial statements contained therein, taken as a whole, are fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s position and performance, business model and strategy. Colm Ó Nualláin Chairman David Ehrlich Executive Director The Directors confirm that they have complied with the above requirements in preparing the financial statements. Annual Report 2015 Irish Residential Properties REIT plc 65 Independent Auditors’ Report to the members of Irish Residential Properties REIT plc for the year ended 31 December 2015 Report on the financial statements Our opinion In our opinion: • Irish Residential Properties REIT plc’s Group financial statements and Company financial statements (the “financial statements”) give a true and fair view of the Group’s and the Company’s assets, liabilities and financial position as at 31 December 2015 and of the Group’s profit and the Group’s and the Company’s cash flows for the year then ended; • the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; • the Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union as applied in accordance with the provisions of the Companies Act 2014; and • the financial statements have been properly prepared in accordance with the requirements of the Companies Act 2014 and, as regards the Group financial statements, Article 4 of the IAS Regulation. What we have audited The financial statements, included within the Annual Report, comprise: • the Consolidated and Company Statements of Financial Position as at 31 December 2015; • the Consolidated Statement of Profit and Loss and Other Comprehensive Income for the year then ended; • the Consolidated and Company Statements of Cash Flows for the year then ended; • the Consolidated and Company Statements of Changes in Equity for the year then ended; and • the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information. Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited. Our audit approach Overview Materiality • Overall Group materiality: €4.5 million which represents 1% of net assets. • Specific Group materiality: €625,000 (5% of profit before tax excluding movement in fair value of investment properties) used for profit and loss items other than movement in fair value of investment properties. Audit scope • We conducted audit work in one location, Dublin. • The location and functions where we performed our audit work accounted for 100% of revenues and 100% of profit before tax. Areas of focus • Valuation of investment properties. • Transactions with related parties. The scope of our audit and our areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”). We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as “areas of focus” in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole. This is not a complete list of all risks identified by our audit. The financial reporting framework that has been applied in the preparation of the financial statements is Irish law and IFRSs as adopted by the European Union and, as regards the Company financial statements, as applied in accordance with the provisions of the Companies Act 2014. 66 Irish Residential Properties REIT plc Annual Report 2015 AREA OF FOCUS Valuation of investment properties We focused on this area because the valuation of investment properties involves significant judgement in the estimation of stabilised Net Rental Income (“stabilised NRI”) and in the selection of the appropriate capitalisation rate to be applied to stabilised NRI for each multi-unit residential property. As set out in note 5 to the financial statements, the capitalisation rate to be applied to stabilised NRI for each multi-unit residential property is dependent on the actual location, size and quality of the property, taking into account any available market data at the valuation date. HOW OUR AUDIT ADDRESSED THE AREA OF FOCUS We obtained an understanding of the controls put in place by management over the valuation process. We read and considered the valuation report prepared by the external appraiser at 31 December 2015. We performed testing on the underlying data provided to the external appraiser on which NRI is based. We discussed with management and the external appraiser the valuation process, the significant assumptions used in estimating future rental incomes and the key judgements used in the selection of the appropriate capitalisation rates. We considered these assumptions and judgements in the context of available market data. We considered the competence, integrity and independence of the external appraiser. We also considered the year on year movements in capital values (or movements from the acquisition date to the year end date where properties were acquired during the year) by reference to relevant published benchmarks. We considered the disclosures made in the financial statements in relation to the valuation of investment properties. Transactions with related parties As set out in note 16 to the financial statements, a number of related party relationships exist between the Group and CAPREIT and its affiliates. We focused on this area to address the risk of non disclosure of relationships and of transactions between the parties. We read Board Minutes and Agreements with related parties. We tested that amounts charged in the financial statements in respect of fees from CAPREIT were calculated in accordance with the investment management agreement. We considered the disclosures included in the financial statements for consistency with the agreements in place and transactions recorded during the year. How we tailored the audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. The Group comprises a number of legal entities, all located in the Republic of Ireland and all of the audit work was performed in Ireland by the Group engagement team. In establishing the overall approach to the audit, we determined the type of work that needed to be performed on the individual financial statement line items for the Group and the Company depending on risk assessment and materiality. Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Annual Report 2015 Irish Residential Properties REIT plc 67 Independent Auditors’ Report (cont’d) Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Overall Group materiality €4.5 million (2014: €2.0 million). How we determined it 1% of net assets. Rationale for benchmark applied We determined materiality using net assets for the following reasons: • As a property Group the primary ‘value’ of the entity is in its net assets. • Typically market investors will invest in a property entity in expectation of net asset growth. Market commentators will often quote a share price as a premium or discount to net assets rather than as a multiple of earnings. In addition, we set a specific materiality level of €625,000 for profit and loss items other than the net movement in the fair value of investment properties. This approximates 5% of profit before tax excluding net movement in the fair value of investments. In arriving at this judgement we had regard to the fact that a number of key performance indicators of the Group are driven by income statement items. We agreed with the Audit Committee that we would report to them misstatements identified during our audit above €225,000 (2014: €100,000) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons. Going concern Under the Listing Rules we are required to review the directors’ statement, set out on page 61, in relation to going concern. We have nothing to report having performed our review. Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to the directors’ statement about whether they considered it appropriate to adopt the going concern basis in preparing the financial statements. We have nothing material to add or to draw attention to. As noted in the directors’ statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group and Company have adequate resources to remain in operation, and that the directors intend them to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s and Company’s ability to continue as a going concern. Other required reporting Consistency of other information Companies Act 2014 opinion In our opinion the information given in the Report of the Directors is consistent with the financial statements. ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: • information in the Annual Report is: – − − materially inconsistent with the information in the audited financial statements; or apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Company acquired in the course of performing our audit; or otherwise misleading. • the statement given by the directors on page 65, in accordance with provision C.1.1 of the UK Corporate Governance Code (the “Code”), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s and Company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and Company acquired in the course of performing our audit. 68 Irish Residential Properties REIT plc Annual Report 2015 We have no exceptions to report. We have no exceptions to report. ISAs (UK & Ireland) reporting (cont’d) • the section of the Annual Report on pages 45 to 48, as required by provision C.3.8 of the Code, describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. We have no exceptions to report. The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to: • the directors’ confirmation on pages 42 to 43 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. • the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. • the directors’ explanation on page 61 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing material to add or to draw attention to. We have nothing material to add or to draw attention to. We have nothing material to add or to draw attention to. Under the Listing Rules we are required to review the directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and the directors’ statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review. Directors’ remuneration and transactions Under the Companies Act 2014, we are required to report to you if, in our opinion, the disclosure of directors’ remuneration and transactions specified by sections 305 to 312 of that Act have not been made, and under the Listing Rules of the Irish Stock Exchange we are required to review the six specified elements of disclosures in the report to shareholders by the Board on directors’ remuneration. We have no exceptions to report arising from these responsibilities. Corporate governance statement • In our opinion, based on the work undertaken in the course of our audit of the financial statements: − the description of the main features of the internal control and risk management systems in relation to the financial reporting process; and − the information required by Section 1373(2)(d) of the Companies Act 2014 included in the Corporate Governance Statement is consistent with the financial statements and has been prepared in accordance with section 1373(2) of the Companies Act 2014. Annual Report 2015 Irish Residential Properties REIT plc 69 Independent Auditors’ Report (cont’d) • Based on our knowledge and understanding of the Company and its environment obtained in the course of our audit of the financial statements, we have not identified material misstatements in the description of the main features of the internal control and risk management systems in relation to the financial reporting process and the information required by section 1373(2)(d) of the Companies Act 2014 included in the Corporate Governance Statement. • In our opinion, based on the work undertaken during the course of our audit of the financial statements, the information required by section 1373(2)(a),(b),(e) and (f) is contained in the Corporate Governance Statement. • Under the Listing Rules of the Irish Stock Exchange we are required to review the part of the Corporate Governance Statement relating to the Company’s compliance with ten provisions of the UK Corporate Governance Code and the two provisions of the Irish Corporate Governance Annex specified for our review. We have nothing to report having performed our review. Other matters on which we are required to report by the Companies Act 2014 • We have obtained all the information and explanations which we consider necessary for the purposes of our audit. • In our opinion the accounting records of the Company were sufficient to permit the Company financial statements to be readily and properly audited. • The Company Statement of Financial Position is in agreement with the accounting records. Responsibilities for the financial statements and the audit Our responsibilities and those of the directors As explained more fully in the Statement of Directors’ Responsibilities set out on page 65, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: • whether the accounting policies are appropriate to the Group’s and the Company’s circumstances and have been consistently applied and adequately disclosed; • the reasonableness of significant accounting estimates made by the directors; and • the overall presentation of the financial statements. We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements. We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Our responsibility is to audit and express an opinion on the financial statements in accordance with Irish law and ISAs (UK & Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with section 391 of the Companies Act 2014 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this 70 Irish Residential Properties REIT plc Paul Hennessy for and on behalf of PricewaterhouseCoopers Chartered Accountants and Statutory Audit Firm Dublin 21 March 2016 Annual Report 2015 Financial Statements Annual Report 2015 Irish Residential Properties REIT plc 71 Consolidated Statement of Financial Position as at 31 December 2015 Note 2015 €’000 2014 €’000 5 6 472,230 322 323,580 618 472,552 324,198 6 9,494 3,563 2,004 6,146 Assets Non-Current Assets Investment properties Other non-current assets Current Assets Other current assets Cash and cash equivalents 13,057 8,150 485,609 332,348 9 – 125,000 Current Liabilities Current portion of bank indebtedness 9 Accounts payable and accrued liabilities 7 Security deposits – 125,000 Total Assets Liabilities Non-Current Liabilities Non-current portion of bank indebtedness Total Liabilities 41,529 – 6,960 4,911 2,100 1,519 50,589 6,430 50,589 131,430 Shareholders’ Equity Share capital Share premium Other reserve Retained earnings 11 11 41,700 20,200 354,978 172,374 1,553 574 36,789 7,770 Total Shareholders’ Equity 435,020 200,918 Total Shareholders’ Equity and Liabilities 485,609 332,348 The accompanying notes form an integral part of these financial statements. Colm Ó Nualláin David Ehrlich Chairman Executive Director 72 Irish Residential Properties REIT plc Annual Report 2015 Consolidated Statement of Profit and Loss and Other Comprehensive Income for the year ended 31 December 2015 1 January 2015 to 31 December 2015 Note €’000 2 July 2013 (date of incorporation) to 31 December 2014 €’000 Operating Revenues Revenue from investment properties 24,721 Operating Expenses Property taxes Property operating costs (364)(199) (4,389)(1,850) Net Rental Income (“NRI”) General and administrative expenses Asset management fee Share-based compensation expense Net movement in fair value of investment properties Depreciation of property, plant and equipment Operating Profit Financing costs on credit facility Interest on intercompany loan Investment income Profit before Taxes Current income tax expense 9,675 (4,753)(2,049) 19,968 7,626 10 5 (2,990)(2,218) (1,938)(723) (979)(574) 18,639 7,364 (13)(11) 9 8 32,687 11,464 (1,865)(1,147) – (1,464) – 23 13 30,822 – 8,876 (946) Profit for the Period 30,822 7,930 Total Comprehensive Income for the Period Attributable to Shareholders 30,822 7,930 Basic Earnings per Share (cents) 18 8.4 8.3 Diluted Earnings per Share (cents) 18 8.3 8.3 The accompanying notes form an integral part of these financial statements. Name David Ehrlich Position Executive Director Annual Report 2015 Irish Residential Properties REIT plc 73 Consolidated Statement of Changes in Equity for the year ended 31 December 2015 Share Capital Share Premium Retained Earnings Other Reserve Total Note €’000 €’000 €’000 €’000 €’000 Shareholders’ Equity at 1 January 2015 Total comprehensive income for the period Profit for the period 20,200 172,374 7,770 574 200,918 – – 30,822 – 30,822 Total comprehensive income for the period – – 30,822 – 30,822 Transactions with owners, recognised directly in equity Issue of ordinary shares for cash Share issue costs Long-term incentive plan 11 11 10 21,500 – – 193,500 (10,896) – – – – – – 979 215,000 (10,896) 979 Transactions with owners, recognised directly in equity 21,500 182,604 – 979 205,083 Dividends of ordinary shares Dividends paid 14 – –(1,803) –(1,803) Dividends of ordinary shares – – (1,803) – (1,803) Shareholders’ Equity at 31 December 2015 41,700 354,978 36,789 1,553 435,020 Share Capital Share Premium Retained Earnings Other Reserve Total Note €’000 €’000 €’000 €’000 €’000 – – – – – Shareholders’ Equity at 2 July 2013 Total comprehensive income for the period Profit for the period – – 7,930 – 7,930 Total comprehensive income for the period – – 7,930 – 7,930 Transactions with owners, recognised directly in equity Issue of ordinary shares for cash Share issue costs Capitalisation of bonus shares (1) Long-term incentive plan 11 11 11 10 20,040 – 160 – 180,000 (7,626) – – – – (160) – – – – 574 200,040 (7,626) – 574 Transactions with owners, recognised directly in equity 20,200 172,374 (160) 574 192,988 Shareholders’ Equity at 31 December 2014 20,200 172,374 7,770 574 200,918 (1) €1.6 million of the retained earnings as at 30 June 2014 arose prior to the Company registering as an Irish REIT, with effect from 31 March 2014. €160,000 was transferred to ordinary share capital, being the total par value of the bonus issue of 1,600,000 ordinary shares on 11 April 2014 (see note 10). The €1.6 million has been designated as an undistributable reserve within the meaning of the Companies Act, 2014. The accompanying notes form an integral part of these financial statements. 74 Irish Residential Properties REIT plc Annual Report 2015 Consolidated Statement of Cash Flows for the year ended 31 December 2015 1 January 2015 to 31 December 2015 Note €’000 2 July 2013 (date of incorporation) to 31 December 2014 €’000 CASH FLOWS FROM OPERATING ACTIVITIES Operating Activities Profit before taxes Items related to operating activities not affecting cash: Fair value adjustment – investment properties Depreciation of property, plant and equipment Amortisation of other financing costs Share-based compensation expense Straight-line rent adjustment 9 10 (18,639)(7,364) 13 11 370 173 979 574 (196)(73) Taxes paid Profit items related to financing and investing activities Changes in operating assets and liabilities 15 15 13,349 2,197 –(946) 1,495 2,415 (4,860)4,426 Net Cash Generated from Operating Activities 30,822 8,876 9,984 8,092 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of investment properties Investment property enhancement expenditure Purchase of property, plant and equipment Direct leasing cost Investment income (125,480)(315,684) (4,326)(459) – (58) (9)– – 23 Net Cash Used in Investing Activities (129,815)(316,178) 8 8 9 9 8 15 14 –45,000 –(45,000) (87)(744) (83,471)125,000 (1,495) (974) – (1,464) 204,104 192,414 (1,803)– CASH FLOWS FROM FINANCING ACTIVITIES Intercompany loan advanced Intercompany loan repaid on maturity Arrangement fee on credit facility Bank indebtedness Interest paid on bank indebtedness Interest paid on intercompany loan Net proceeds on issuance of shares Dividends paid to shareholders Net Cash Generated from Financing Activities Changes in Cash and Cash Equivalents during the Period Cash and Cash Equivalents, Beginning of the Period (2,583)6,146 6,146 – Cash and Cash Equivalents, End of the Period The accompanying notes form an integral part of these financial statements. Annual Report 2015 117,248 314,232 3,563 6,146 Irish Residential Properties REIT plc 75 Notes to Financial Statements as at 31 December 2015 Note 1 General Information Irish Residential Properties REIT plc (“I-RES” or the “Company”) was incorporated in Ireland on 2 July 2013 as Shoreglade Limited (formerly known as CAPREIT Ireland Limited, Irish Residential Apartments REIT Limited and Irish Residential Properties REIT Limited). On 16 April 2014, I-RES obtained admission of its ordinary shares to the primary listing segment of the Official List of the Irish Stock Exchange for trading on the regulated market for listed securities of the Irish Stock Exchange. Its registered office is Unit 4B Lazer Lane, Grand Canal Square, Dublin 2, Ireland. Ordinary shares of I-RES are listed on the Irish Stock Exchange under the symbol “IRES.” I-RES was previously a wholly-owned subsidiary of CAPREIT Limited Partnership (“CAPREIT LP”), prior to the Initial Offering (as defined in note 11) on 16 April 2014. As a result of the Initial Offering, CAPREIT LP’s interest in I-RES was diluted to 20.792%. As of 26 March 2015, as a result of the Capital Raise (as defined in note 10), CAPREIT LP’s interest in I-RES was diluted to 15.707%. IRES Residential Properties Limited is a wholly-owned consolidated subsidiary of I-RES, acquired on 31 March 2015, and owns directly the beneficial interest of its properties. I-RES and IRES Residential Properties Limited together are referred to as “the Group” in these consolidated financial statements. The Group owns interests in multi-unit residential rental apartment properties located in and near major urban centres in Dublin, Ireland. Specifically, IRES Residential Properties Limited owns an interest in the “Rockbrook Portfolio,” which consists of 81 apartments at Rockbrook Grande Central and 189 apartments at Rockbrook South Central, mixed-use commercial space of approximately 4,665 sq. m., a development site of approximately 1.13 hectares and associated basement car parking. Note 2 Significant Accounting Policies a) Basis of preparation These consolidated financial statements of the Group have been prepared in accordance with International Accounting Standards (“IFRS”) as adopted by the European Union (“EU”), IFRS Interpretations Committee (“IFRIC”) interpretations and those parts of the Companies Act, 2014, applicable to companies reporting under IFRS. The Company has availed of the exemption to present an individual statement of profit and loss and other comprehensive income provided in the Companies Act, 2014. 76 Irish Residential Properties REIT plc The consolidated financial statements of the Group are prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of investment properties at fair value through profit or loss. The consolidated financial statements of the Group have been presented in euros, which is the Group’s functional currency. The consolidated financial statements of the Group cover the twelve-month period from 1 January 2015 to 31 December 2015. The Group has not early adopted any forthcoming International Accounting Standards Board (“IASB”) standards. Note 2(t) sets out details of such upcoming standards. Going concern The Group meets its day-to-day working capital requirements through its cash and deposit balances. The Group’s plans indicate that it should have adequate resources to continue operating for the foreseeable future. Accordingly, the Directors consider it appropriate that the Group adopts the going concern basis in the preparation of the consolidated financial statements. b) Basis of consolidation These consolidated financial statements incorporate the financial statements of I-RES and its subsidiary, IRES Residential Properties Limited. I-RES controls IRES Residential Properties Limited by virtue of its 100% shareholding in that company. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Subsidiaries Subsidiaries are entities controlled by I-RES. I-RES controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity. The financial information of subsidiaries (except owner management companies) is included in the consolidated financial statements from the date on which control commences until the date on which control ceases. I-RES does not consolidate owner management companies in which it holds majority voting rights. For further details, please refer to note 16. c) Investment properties The Group considers its income properties to be investment properties under IAS 40, Investment Property (“IAS 40”), and has chosen the fair value model to account for its investment properties in the consolidated financial statements. Fair value represents the amount at which the properties could be Annual Report 2015 exchanged between a knowledgeable and willing buyer and a knowledgeable and willing seller in an arm’s-length transaction at the date of valuation. Investment properties comprise investment interests held in land and buildings (including integral equipment) held for the purpose of producing rental income, capital appreciation or both, but not for sale in the ordinary course of business. The Group’s investment properties have been valued on a highest and bestuse basis, but do not include any portfolio premium that may be associated with the economies of scale of owning a large portfolio of properties. All investment properties are initially recorded at cost, which includes transaction and other acquisition costs, at their respective acquisition dates and are subsequently stated at fair value at each consolidated statement of financial position date, with any gain or loss arising from a change in fair value recognised within operating income in the consolidated statement of profit and loss and other comprehensive income for the period. Gains and losses incurred on the disposal of investment properties are also recognised in the consolidated statement of profit and loss and other comprehensive income. The fair value of investment properties is determined by a qualified external appraiser. Management undertakes a review of its investment property valuations between external appraisal dates to assess the continuing validity of the underlying assumptions, such as cash flows and Capitalisation Rates. These assumptions may be modified based on market information obtained from the external appraiser. Where increases or decreases are warranted, the carrying values of I-RES’ investment properties are adjusted. See notes 3 and 5 for a detailed discussion of the significant assumptions, estimates and valuation methods used. d) Property asset acquisition At the time of acquisition of a property or a portfolio of investment properties, the Group evaluates whether the acquisition is a business combination or asset acquisition. IFRS 3, Business Combinations (“IFRS 3”), is applicable only if it is considered that a business has been acquired. A business, under IFRS 3, is defined as an integrated set of activities and assets conducted and managed for the purpose of providing a return to investors, or to lower costs or provide other economic benefits directly and proportionately to investors. When determining whether the acquisition of an investment property or a portfolio of investment properties is a business combination or an asset acquisition, the Group applies judgement when determining whether an integrated set of activities is acquired in addition to the property or portfolio of properties. Activities can include whether employees were assumed in the acquisition and whether an operating platform has been acquired. When an acquisition does not represent a business as defined under IFRS 3, the Group classifies these properties, or portfolio of properties, as an asset acquisition. Identifiable assets acquired and liabilities assumed in an asset acquisition are measured initially at their fair values at the acquisition date. Acquisitionrelated transaction costs are capitalised to the property. e) Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation, and mainly comprise of head office fixtures and fittings and information technology hardware. These items are depreciated on a straight-line basis over their estimated useful lives ranging from three to five years. f) Tenant inducements Incentives such as cash, rent-free periods and move-in allowances may be provided to lessees who enter into a lease. The incentives are written off on a straight-line basis over the term of the lease as a reduction of rental revenue. g) Financial instruments Financial assets and financial liabilities Financial assets and financial liabilities are initially recognised at fair value and are subsequently accounted for based on their classification, as described below. Their classification depends on the purpose for which the financial instruments were acquired or issued, their characteristics and the Group’s designation of such instruments. Annual Report 2015 Irish Residential Properties REIT plc 77 Notes to Financial Statements (cont’d) Classification of financial instruments The following summarises the classification and measurement the Group has elected to apply to each of its significant categories of financial instruments: Type ClassificationMeasurement Financial Assets Cash and cash equivalents Cash and cash equivalents Amortised cost Other receivables Loans and receivables Amortised cost Financial Liabilities Bank indebtedness Other liabilities Accounts payable and accrued liabilities Other liabilities Security deposits Other liabilities Amortised cost Amortised cost Amortised cost h) Intercompany loan An intercompany loan was recognised at amortised cost using the effective interest rate method. Under the effective interest rate method, any transaction fees, costs and discounts directly related to the intercompany loan were recognised within interest on intercompany loan in the consolidated statement of profit and loss and other comprehensive income over the expected term of the intercompany loan. The intercompany loan was repaid in full on 16 April 2014. i) Revenue recognition The Group recognises rental revenue using the straight-line method, whereby the total amount of rental revenue to be received from all leases is accounted for on a straight-line basis over the term of the related leases. The difference between the rental revenue recognised and the amounts contractually due under the lease agreements is accrued as rent receivable. j) Interest on intercompany loan This amount includes interest and other financing costs payable on the intercompany loan, which is expensed at the stated interest rate specified by the terms of the intercompany loan agreement between I-RES and CAPREIT LP. The intercompany loan agreement terminated when I-RES repaid the intercompany loan in full on 16 April 2014. k) Bank indebtedness, borrowing costs and interest on credit facility Bank indebtedness is recognised at amortised cost. Interest and other financing costs includes interest on the credit facility, which is expensed at the effective interest rate, and transaction costs 78 Irish Residential Properties REIT plc incurred in connection with the revolving credit facilities, which are capitalised and presented as other non-current assets and amortised over the term of the facility to which they relate. l) Operating segments The Group operates and is managed as one business segment, namely property investment, with all investment properties located in Ireland. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker, which has been identified as I-RES’ Board. m)Foreign currency transactions Transactions in foreign currencies are translated into the Group’s functional currency at exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the exchange rate prevailing at that date. n) Statement of cash flows Cash and cash equivalents consist of cash on hand, balances with banks and investments in money market instruments with an original term to maturity of three months or less at acquisition. Investing and financing activities that do not require the use of cash or cash equivalents are excluded from the statement of cash flows and are disclosed separately in the notes to financial statements. o) Income taxes Current tax Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous periods. I-RES elected for REIT status on 31 March 2014. As a result, from that date I-RES does not pay Irish corporation tax on the profits and gains from its qualifying rental business in Ireland, provided it meets certain conditions. For the period from 2 July 2013 to 31 March 2014, I-RES is liable for corporation tax on any profits and gains that would have arisen prior to and upon election to REIT status. Going forward, corporation tax is still payable in the normal way in respect of income and gains from any residual business (generally including any property trading business) not included in the Property Rental Business. I-RES would also be liable to pay other taxes such as VAT, stamp duty land tax, stamp duty, local property tax and payroll taxes in the normal way. Annual Report 2015 Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. p) Equity and share issue costs The equity of I-RES consists of ordinary shares issued. Shares issued are recorded at the date of issuance. Direct issue costs in respect of the issue of shares are accounted for as a deduction from equity. Direct issue costs include the costs of preparing the prospectus, accounting, tax and legal expenses, underwriting fees, and valuation fees in respect of the shares and other assets. q) Net asset value (“NAV”) The NAV is calculated as the value of the Group’s assets less the value of its liabilities measured in accordance with IFRS as adopted in the EU, and in particular will include the Group’s property assets at their most recent independently assessed market values and also the Group’s debt and hedging instruments at their most recent independent valuations. EPRA NAV is calculated in accordance with the European Public Real Estate Association (“EPRA”) Best Practice Recommendations, September 2011 and the additional guidance issued in December 2014. r) Share-based payments I-RES has determined that the options issued to senior executives qualify as “equity-settled share-based payment transactions” as per IFRS 2. In addition, any options issued to the directors have also been based on “equity-settled share-based payment transactions.” This implies the fair value of the options measured on the grant date will be expensed over the vesting term with a corresponding increase in equity. The fair value for all options granted are measured using the Black-Scholes model. s) IFRIC 21, Levies This is an interpretation of IAS 37, Provisions, Contingent Liabilities and Contingent Assets. IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event (known as an obligating event). The interpretation clarifies that the obligating event that gives rise to a liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. This standard is applicable to annual reporting periods beginning on or after January 1, 2014. The Group assessed the standard and completed an analysis of the government levies that the Group is subject to and determined IFRIC 21 does not impact the Group on adoption in its current form. t) Future accounting changes The following new or amended standards and interpretations have been issued by the IASB and are expected to apply to the Group for future financial reporting. However, management does not expect them to have a material impact. IFRS 9, Financial Instruments (“IFRS 9”) The complete version of IFRS 9 replaces most of the guidance in IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets: amortised cost, fair value through other comprehensive income (“OCI”) and fair value through profit or loss. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. Investments in equity instruments are required to be measured at fair value through profit or loss with the irrevocable option at inception to present changes in fair value in OCI. There is now a new expected credit loss model that replaces the incurred loss impairment model used in IAS 39 for financial liabilities. For financial liabilities, there were no changes to classification or measurement, except for the recognition of changes in credit risk in OCI for liabilities designated at fair value through profit or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the hedged ratio to be the same as the one management actually uses for risk management purposes. Contemporaneous documentation is still required but is different to that currently prepared under IAS 39. The effective date is 1 January 2018, and the EU has not yet endorsed it. Annual Improvements 2014 IFRS 5, Non-Current Assets Held for Sale and Discontinued Operations IFRS 7, Financial Instruments – Disclosures IAS 19, Employee Benefits IAS 34, Interim Financial Reporting These amendments are effective 1 January 2016 and are EU endorsed. Annual Report 2015 Irish Residential Properties REIT plc 79 Notes to Financial Statements (cont’d) IFRS 10 and IAS 28, Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture The amendment clarifies an inconsistency between the two standards, and establishes that a gain or loss on the sale or contribution of assets between an investor and its associate or joint venture is fully recognised when the transaction involves a business, and a partial gain or loss is recognised when the transaction involves assets that do not constitute a business. The effective date is to be determined, and the EU has yet to endorse it. IAS 27 and IFRS 1, Equity Method in Separate Financial Statements Amended to restore the option to apply the equity method when accounting for investments in subsidiaries, joint ventures and associates in an entity’s separate financial statements. This amendment is effective 1 January 2016. IAS 16 and IAS 38, Clarification of Acceptable Methods of Depreciation and Amortisation The amendment clarifies, in both standards, that the use of a revenue-based depreciation and amortisation method is not appropriate. This amendment is effective 1 January 2016 and is EU endorsed. IFRS 11, Accounting for Acquisitions of Interests in Joint Operations This amendment provides specific guidance for the acquisition of an interest in a joint operation that is a business. This amendment came into effect on 1 January 2016 and is EU endorsed. IFRS 15, Revenue from Contracts with Customers New standard on revenue recognition, superseding IAS 18, Revenue, IAS 11, Construction Contracts and related interpretations. This standard is effective 1 January 2018. IAS 27, Consolidated and Separate Financial Statements This amendment restores the option to use the equity method to account for investments in subsidiaries, joint ventures and associates in an entity’s separate financial statements. The amendment came into effect on 1 January 2016 and is EU endorsed. IAS 1, Presentation of Financial Statements This amendment clarifies guidance on materiality and aggregation, the presentation of subtotals, the structure of financial statements and the disclosure of accounting policies. This amendment came into effect for years beginning on or after 1 January 2016 and is EU endorsed. IFRS 14, Regulatory Deferral Accounts This standard permits first-time adopters to continue to recognise amounts related to rate regulation in accordance with their previous GAAP requirements when they adopt IFRS. This standard came into effect on 1 January 2016 and is not yet endorsed by the EU. IFRS 16, Leases This standard specifies how an IFRS reporter will recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value. This standard is effective 1 January 2019. IAS 7, Statement of Cash Flows This amendment clarifies that entities shall provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities. This amendment is effective 1 January 2017. IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors This amendment clarifies the distinction between a change in accounting policy and a change in accounting estimate. I-RES is currently assessing the impact of the above standards and amendments but does not expect to be significantly affected on adoption in its current form. Note 3 Critical Accounting Estimates, Assumptions and Judgements The preparation of the financial statements in accordance with IFRS requires the use of estimates, assumptions and judgements that in some cases relate to matters that are inherently uncertain, and which affect the amounts reported in the financial statements and accompanying notes. Areas of such estimation include, but are not limited to, valuation of investment properties. Changes to estimates and assumptions may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates under different assumptions and conditions. The valuation estimate of investment properties is deemed to be more significant. See note 5 for a detailed discussion of valuation methods and the significant assumptions and estimates used. 80 Irish Residential Properties REIT plc Annual Report 2015 Note 4 Recent Investment Property Acquisitions The Group has completed the following investment property acquisitions since 1 January 2015, which have contributed to the operating results effective from the acquisition date: For the period 1 January 2015 to 31 December 2015 Total Acquisition Interest Term to Apartment Count Region Costs Funding Rate Maturity €’000€’000 (Years) 31 March 2015 5 June 2015 6 November 2015 11 December 2015 270 92 8 40 Dublin, Ireland Dublin, Ireland Dublin, Ireland Dublin, Ireland 90,603 19,968 2,283 12,626 410 125,480 –(1)–(1)– (1) –(2)–(2)– (2) (3) (3) –(3)– – (2) (2) (2) – – – – (1) The acquisition was funded from equity proceeds raised on 26 March 2015. The acquisition of IRES Residential Properties Limited, which owns the Rockbrook Portfolio, is considered an asset acquisition. Upon acquisition, I-RES undertook the day-to-day property management services of IRES Residential Properties Limited. In addition, no processes or existing employees of IRES Residential Properties Limited were acquired as part of the transaction. The purchase price is based on the value of the investment property acquired. (2) The acquisition was funded from I-RES’ Credit Facility (as defined in note 9). (3) The acquisition was funded from the Group’s cash reserves. For the period 2 July 2013 to 31 December 2014 Total Acquisition Interest Term to Apartment Count Region Costs Funding Rate Maturity €’000€’000 (Years) 10 September 2013 27 June 2014 18 July 2014 7 October 2014 (3) 338 19 84 763 Dublin, Ireland Dublin, Ireland Dublin, Ireland Dublin, Ireland 44,173 2,172 51,945 217,394 – (1)– (1) – (1) (2) (2) – – – (2) (2) – (2)–(2)– – (4)– (4)– (4) 1,204 315,684 – (1) The acquisition was funded from an intercompany loan payable to CAPREIT LP at a stated interest rate of 5.3% per annum. The loan was repayable on demand, but in any event, no later than 29 August 2014, with interest on such amount at the stated interest rate. The loan was repaid on 16 April 2014. (2) The acquisition was funded from equity proceeds raised on 16 April 2014. (3) Included are two residential apartments purchased in August and October 2014 relating to the initial portfolio aggregating to €424,000, which was funded from cash on hand. (4) The 761 residential apartment acquisition was funded from the proceeds of the Initial Offering (as defined in note 11) and from the Credit Facility (as defined in note 9). Annual Report 2015 Irish Residential Properties REIT plc 81 Notes to Financial Statements (cont’d) Note 5 Investment Properties Valuation basis Investment properties are carried at fair value, which is the amount at which the individual properties could be sold in an orderly transaction between market participants, considering the highest and best use of the asset, with any gain or loss arising from a change in fair value recognised in the consolidated statement of profit and loss and other comprehensive income for the period. The fair values of all of the Group’s investment properties are determined by a qualified external appraiser. The qualified external appraiser holds a recognised relevant professional qualification and has recent experience in the location and category of the respective property. Valuations are prepared on a bi-annual basis at the interim reporting date and the annual reporting date. For investment property, the income approach / yield methodology involves applying market-derived Capitalisation Rates to current and market-derived future income streams. These Capitalisation Rates and future income streams are derived from comparable property transactions and are considered to be the key inputs in the valuation. Other factors that are taken into account include the tenure of the property, tenancy details, planning, building and environmental factors that might affect the property. Information about fair value measurements using unobservable inputs (Level 3) The Group tests the reasonableness of all significant unobservable inputs, Capitalisation Rates and stabilised net rental income (“Stabilised NRI”) used in the valuation, and reviews the results with the external appraiser for all independent valuations. The Stabilised NRI represents property revenue less property operating expenses, adjusted for market-based assumptions such as longterm vacancy rates, management fees, repairs and maintenance. At 31 December 2015, the Group considers that all of its investment properties fall within Level 3 fair value as defined by IFRS 13. As outlined in IFRS 13, a Level 3 fair value recognises that not all of the inputs and considerations made in determining the fair value of property investments can be derived from publicly available data, as the valuation methodology in respect of a property has also to rely on a number of unobservable inputs including technical reports, legal data, build costs, rental analysis, professional opinion on profile, lot size, layout and presentation of accommodation. In addition, the valuers also utilise proprietary databases maintained in respect of similar properties to the assets being valued. 82 Irish Residential Properties REIT plc Sensitivity analysis Estimated Stabilised NRI and market-observed Capitalisation Rates are key inputs into the valuation model used. For example, completed properties are valued mainly using a term and reversion model: i.e., the present values of future cash flows from expected rental receipts are calculated. For the existing rental contract or “term” this is the expected net rents from tenants over the period to the next lease break option or expiry. After this period, the “reversion,” estimated Stabilised NRI is used to calculate cash flows based on expectations from current market conditions. Thus a decrease in the estimated Stabilised NRI will decrease the fair value, and an increase in the estimated Stabilised NRI will increase the fair value. The Capitalisation Rates magnify the effect of a change in Stabilised NRI, with lower Capitalisation Rates resulting in a greater effect on the fair value of investment properties than higher Capitalisation Rates. Across the entire portfolio of investment properties, a 1% increase in the Equivalent Capitalisation Rate would have an impact of an €81.8 million reduction in fair value while a 1% decrease in the Equivalent Capitalisation Rate would result in a fair value increase of €126.5 million. The direct operating expenses recognised in the consolidated statement of profit and loss and other comprehensive income for the Group is €4.8 million for the year ended 31 December 2015, arising from investment property that generated rental income during the period. The direct operating expenses are comprised of the following significant categories: property taxes, utilities, repairs and maintenance, wages, insurance, service charges and property management fees. The direct operating expenses recognised in the consolidated statement of profit and loss and other comprehensive income for the Group is €nil for the year ended 31 December 2015, arising from investment property that did not generate rental income during the period. There were no investment properties for the reporting period that did not generate rental income. An investment property is comprised of various components, including undeveloped land and vacant units for residential and commercial; no direct operating costs were specifically allocated to these components noted above. Annual Report 2015 Quantitative information A summary of the Equivalent Capitalisation Rates and ranges along with the fair value of the total portfolio of the Group as at 31 December 2015 is presented below: As at 31 December 2015 Weighted Type of Interest Fair Value WA NRI(1) Rate Type (3) Max. Min.Average €’000 €’000 % % % Investment properties Development land (2) 456,180 16,050 Total investment properties 472,230 2,315 Equivalent Capitalisation Rate 7.14 3.52 5.02 (1) Weighted average (“WA”) net rental income (“NRI”). (2) Development land is fair-valued based on the value of the undeveloped site per acre. (3) The Equivalent Capitalisation Rate disclosed above is based on the Stabilised NRI divided by the fair value of the investment property. As at 31 December 2014 Weighted Type of Interest Fair Value WA NRI(1) Rate Type (3) Max. Min.Average €’000 €’000 % % % Investment properties Development land (2) Total investment properties 316,580 7,000 2,361 Equivalent Capitalisation Rate 6.95 4.56 5.22 323,580 (1) Weighted average (“WA”) net rental income (“NRI”). (2) Development land is fair-valued based on the value of the undeveloped site per acre. (3) The Equivalent Capitalisation Rate disclosed above is based on the Stabilised NRI divided by the fair value of the investment property. The following table summarises the changes in the investment properties portfolio during the periods: Reconciliation of carrying amounts of investment properties For the Period 1 January 2015 to 31 December 2015 2 July 2013 (date of incorporation) to 31 December 2014 €’000 €’000 Balance at the beginning of the period Additions: Acquisitions Property capital investments Capitalised leasing costs (1) Direct leasing costs Unrealised fair value movements 323,580 125,480 4,326 196 9 18,639 – 315,684 459 73 – 7,364 Balance at the end of the period 472,230 323,580 (1) Comprised of straight-line rent. All the lease terms are one year or less. The carrying value for the Group of €472.2 million for the investment properties at 31 December 2015 (and €323.6 million at 31 December 2014) was based on an external valuation carried out as at that date. The valuations were prepared in accordance with the RICS Valuation – Professional Standards, January 2014 (Red Book). Annual Report 2015 Irish Residential Properties REIT plc 83 Notes to Financial Statements (cont’d) Note 6 Note 8 Other Assets Intercompany Loan As at 31 December 2015 2014 €’000 €’000 Other Non-Current Assets Property, plant and equipment (1): At cost Accumulated amortisation 58 (24) 58 (11) 34 288 47 571 322 618 Other Current Assets Prepaid expenses Other receivables Deposits (3) 303 1,089 8,102 288 654 1,062 Total 9,494 2,004 Net property, plant and equipment Deferred loan costs, net (2) Total (1) Consists of head office fixtures and fittings and information technology hardware. (2) Includes deferred loan costs related to the Credit Facility (as defined in note 9), net of accumulated amortisation of €543,000 as at 31 December 2015 and €173,000 as at 31 December 2014. (3) Consists of €7.4 million paid as a deposit on an acquisition that closed subsequent to the 2015 year end. Note 7 Accounts Payable and Accrued Liabilities As at 31 December 2015 2014 €’000 €’000 Accounts Payable and Accrued Liabilities Rent deposits and early payments 1,010 Trade creditors 414 Accruals 5,254 Value-added tax 282 787 32 3,750 342 Total 6,960 4,911 On 16 April 2014, I-RES repaid an intercompany loan payable to CAPREIT LP, a related party, aggregating to €45.0 million with a stated interest rate of 5.3% per annum. The intercompany loan was repayable on demand, but in any event, no later than 29 August 2014, with interest on such amount at the stated interest rate. Note 9 Credit Facility I-RES entered into a facility agreement on 15 August 2014 (as amended on 16 February 2015) with Barclays Bank Ireland PLC and TD Bank, which provides for a credit facility of up to €130.0 million, comprising a revolving facility of €60.0 million and a bridge facility of €70.0 million (the “Credit Facility”). The revolving facility has a two-year term from the date of the agreement, and the bridge facility of €70.0 million was repayable at the earlier of: (i) an issue of shares by I-RES; and (ii) the termination date of the bridge facility, which was 15 May 2015. The Credit Facility is subject to compliance with various provisions of the facility agreement (including certain financial covenants and commitments and limitations on indebtedness). The interest on the Credit Facility is at an annual rate of 2.5%, plus the one-month or three-month EURIBOR rate (at the option of I-RES). The debt is secured over the properties of I-RES and there was a onetime arrangement fee of €740,000 relating to the Credit Facility. Pursuant to the terms of the Credit Facility, on 27 March 2015 I-RES repaid the entire €70.0 million of borrowings under the bridge facility out of the net proceeds from the completion of the I-RES Capital Raise (as defined in note 10) on 26 March 2015 and partly repaid the borrowings under the €60 million revolving facility. The €60 million revolving facility will remain available for borrowing to the extent that any amounts are undrawn or repaid under the facility agreement, which has a termination date of 15 August 2016. Refer to note 21, Subsequent Events, for details of a new facility agreement signed since 31 December 2015. 84 Irish Residential Properties REIT plc Annual Report 2015 Note 10 Share-based Compensation Options are issuable pursuant to I-RES’ share-based compensation plan, namely, the long-term incentive plan (“LTIP”). Options were granted on 26 March 2015 and 16 April 2014 by I-RES to certain trustees and employees of Canadian Apartment Properties Real Estate Investment Trust (“CAPREIT”) and its affiliates and to David Ehrlich, CEO of I-RES. The LTIP will have a maximum life of seven years less a day and will vest over three years from the date of grant. The LTIP limit cannot exceed 10% of I-RES’ issued ordinary share capital (adjusted for share issuance and cancellation) during the 10-year period prior to that date. As at 31 December 2015, the maximum number of additional options issuable under the LTIP is 14,885,070. The fair value of options has been determined as at the grant date using the Black-Scholes model. The assumptions utilised to arrive at the estimated fair value for the outstanding grants at the respective periods are shown at right. The expected volatility is based on historic market volatility over the past five years and four years for the options issued on 26 March 2015 and 16 April 2014, respectively. The risk-free rate is based on Irish government bonds with a term consistent with the assumed option life. LTIP For the period 1 January 2015 to 31 December 2015 Number of Units Share options outstanding as at 1 January 2015 Issued, cancelled or granted during the period: Issued or granted Exercised or settled Cancelled (1) Share options outstanding and exercisable in accordance with the LTIP as at 31 December 2015 17,080,000 11,900,000 – (2,165,070) 26,814,930 (1) Cancelled the unvested shares resulting from the departure of certain CAPREIT employees in 2015. LTIP Issuance Date 26 March 2015 Number of shares Share price on date of grant (€) Award grant price (€) Risk free rate (%) Distribution yield (%) Expected years Volatility (%) Award option value (€) 16 April 2014 11,900,000 17,080,000 1.005 1.040 1.005 1.040 0.4 1.2 5.0 5.0 7.0 7.0 20.2 20.3 0.07 0.08 The total number of LTIP shares outstanding and exercisable as at 31 December 2015 was 26,814,930 (31 December 2014 – 17,080,000). Annual Report 2015 Irish Residential Properties REIT plc 85 Notes to Financial Statements (cont’d) Note 11 Shareholders’ Equity On 13 March 2014, I-RES had an authorised share capital of €100.0 million divided into 1,000,000,000 ordinary shares of €0.10 each. On 20 March 2014, I-RES was converted to a public limited company. On 11 April 2014, prior to the Initial Offering (as defined below), I-RES issued 1,600,000 ordinary shares to CAPREIT LP by way of a capitalised issue. On 16 April 2014, I-RES raised gross proceeds of €200.0 million through the issuance of an aggregate of 200,000,000 ordinary shares at an issue price of €1.00 per share, nominal value of €0.10 per share (the “Initial Offering”). CAPREIT LP’s initial investment in I-RES’ share capital (prior to the dilution of its beneficial interest) was €40,000 at a par value of €0.10 per share, resulting in 400,000 ordinary shares. On 26 March 2015, I-RES raised gross proceeds of €215.0 million through the issuance of an aggregate of 215,000,000 new ordinary shares at an issue price of €1.00 per share, nominal value of €0.10 per share (the “Capital Raise”). The funds raised from all the ordinary shares issued during the period were used for the purchase of investment properties and to pay down the Credit Facility. All equity shares outstanding are fully paid and are voting shares. Equity shares represent a shareholder’s proportionate undivided beneficial interest in I-RES. No equity share has any preference or priority over another. No shareholder has or is deemed to have any right of ownership in any of the assets of I-RES. Each share confers the right to cast one vote at any meeting of shareholders and to participate pro rata in any distributions by I-RES and, in the event of termination of I-RES, in the net assets of I-RES remaining after satisfaction of all liabilities. Shares will be issued in registered form and are transferable. The number of issued and outstanding ordinary shares is as follows: For the Period 1 January 2015 to 31 December 2015 2 July 2013 to 31 December 2014 Ordinary shares outstanding, beginning of period CAPREIT LP’s initial ownership Shares issued to CAPREIT LP prior to Initial Offering New units issued 202,000,000 – – 215,000,000 – 400,000 1,600,000 200,000,000 Ordinary shares outstanding, end of period 417,000,000 202,000,000 The shares issued to CAPREIT LP prior to the Initial Offering were issued at par. a) New shares issued on Capital Raise Shares Issued Number Price per Share Gross Transaction Proceeds Costs Net Proceeds €€’000€’000€’000 26 March 2015 215,000,000 1.00 215,000 10,896 204,104 Total 215,000,000 215,000 10,896 204,104 Gross Transaction Proceeds Costs Net Proceeds b) New shares issued on Initial Offering Shares Issued Number Price per Share €€’000€’000€’000 16 April 2014 200,000,000 1.00 200,000 7,626 192,374 Total 200,000,000 200,000 7,626 192,374 86 Irish Residential Properties REIT plc Annual Report 2015 Note 12 Financial Instruments, Investment Properties and Risk Management a) Fair value of financial instruments and investment properties The Group classifies and discloses the fair value for each class of financial instrument based on the fair value hierarchy in accordance with IFRS 13. The fair value hierarchy distinguishes between market value data obtained from independent sources and the Group’s own assumptions about market value. The hierarchy levels are defined below: Level 1 – Inputs based on quoted prices in active markets for identical assets or liabilities; Level 2 – Inputs based on factors other than quoted prices included in Level 1 and may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals; and Level 3 – Inputs which are unobservable for the asset or liability, and are typically based on the Group’s own assumptions, as there is little, if any, related market activity. The Group’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgement, and considers factors specific to the asset or liability. The following table presents the Group’s estimates of the fair value on a recurring basis based on information available as at 31 December 2015, aggregated by the level in the fair value hierarchy within which those measurements fall. These estimates are not necessarily indicative of the amounts the Group could ultimately realise. Level 1 Quoted prices in active markets for identical assets and liabilities Recurring Measurements – Assets Investment properties Level 2 Level 3 Significant other observable inputs €’000 Significant unobservable inputs €’000 – Total €’000 – €’000 472,230 (1) 472,230 (1) Fair values for investment properties are calculated using the income approach / yield methodology method, which results in these measurements being classified as Level 3 in the fair value hierarchy. See note 5 for detailed information on the valuation methodologies and fair value reconciliation. b) Risk management The main risks arising from the Group’s financial instruments are market risk, interest rate risk, liquidity and credit risks. The Group’s approach to managing these risks is summarised as follows: Market risk Market risk is the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk reflects interest rate risk, currency risk and other price risks. The Group’s financial assets currently comprise short-term bank deposits and trade receivables. The short-term bank deposits are used to invest cash while awaiting suitable investment properties for investment. These are denominated in euros. Therefore, exposure to market risk in relation to these is limited to interest rate risk. The Group’s exposure to interest rates as at 31 December 2015 is limited to €3.6 million of earnings from uninvested funds. Interest rate risk As at 31 December 2015, I-RES’ Credit Facility was drawn for €41.5 million. Interest on this Credit Facility was paid at a rate of 2.5% per annum plus the one-month or three-month EURIBOR rate (at the option of I-RES). For the year ended 31 December 2015, a 100 basis point change in interest rates would have the following effect: EURIBOR rate debt (1) EURIBOR rate debt Change in interest rates Basis Points Increase (decrease) in net income 2015 €’000 +100 –100 (415) 415 (1) Based on the fixed margin of 2.5% plus the one-month EURIBOR rate as at 4 January 2016 of –0.210% Annual Report 2015 Irish Residential Properties REIT plc 87 Notes to Financial Statements (cont’d) Liquidity risk Liquidity risk is the risk that the Group may encounter difficulties in accessing capital markets and refinancing its financial obligations as they come due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group monitors the level of expected cash inflows on trade and other receivables, together with expected cash outflows on trade and other payables and capital commitments. As at 31 December 2015 6 months or less €’000 6 to 12 months €’000 1 to 2 years €’000 2 to 5 years €’000 More than 5 years €’000 Bank indebtedness Bank indebtedness interest (1) Other liabilities Security deposits – 41,529 481 122 6,960 – 2,100 – – – – – – – – – – – – 9,541 – – – 41,651 (1) Based on current in-place interest rate for the remaining term to maturity. The carrying value of bank indebtedness and trade and other payables (other liabilities) is approximate to their fair value. Credit risk Credit risk is the risk that: (i) counterparties to contractual financial obligations will default; or (ii) the possibility that the Group’s tenants may experience financial difficulty and be unable to meet their rental obligations. The Group monitors its risk exposure regarding obligations with counterparties through the regular assessment of counterparties’ credit positions and will not be exposed to the creditworthiness or solvency of any one counterparty. The Group mitigates the risk of credit loss with respect to tenants by evaluating the creditworthiness of new tenants, obtaining security deposits wherever permitted by legislation, and geographically diversifying its portfolio. The Group monitors its collection experience on a monthly basis and ensures that a stringent policy is adopted to provide for all past due amounts. All residential accounts receivable balances exceeding 30 days are written off to bad debt expense and recognised in the consolidated statement of profit and loss and other comprehensive income. Subsequent recoveries of amounts previously written off are credited in the consolidated statement of profit and loss and other comprehensive income. Cash and cash equivalents are held with major Irish and European institutions. The Board has established a cash management 88 Irish Residential Properties REIT plc policy for these funds, which it monitors regularly. This policy has investment thresholds, with a maximum limit of 20% of the overall gross assets, with individual institutions to avoid concentration of risk with any one counterparty. The Group has also engaged the services of a depository to ensure the security of the cash assets. Capital management The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, in order to provide returns for shareholders and benefits for other stakeholders, and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, I-RES may issue new shares or consider the sale of assets to reduce debt. I-RES, through the Irish REIT regime, is restricted in its use of capital to making investments in real property in Ireland. I-RES intends to make distributions if results of operations and cash flows permit in the future. The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. At 31 December 2015, capital consists of equity and debt, with the loan to value of 8.6%. I-RES seeks to use gearing to enhance shareholder returns over the long term. The level of gearing is monitored carefully by the Board in light of the cost of borrowing and I-RES may seek to use hedging where considered appropriate to mitigate interest rate risk. Given the stability of the multi-unit residential sector, 45% gearing is currently considered prudent by the Board. Annual Report 2015 The Board monitors the return on capital as well as the level of dividends paid to ordinary shareholders. Subject to distributable reserves, it is the policy of I-RES to distribute at least 85% of the Property Income of its Property Rental Business for each accounting period. Note 13 Taxation I-RES was incorporated on 2 July 2013 and was liable for corporate taxes up to 31 March 2014, following which it elected for REIT status. I-RES paid corporate taxes of €946,000 relating to the period from 2 July 2013 to 31 December 2014. I-RES elected for REIT status on 31 March 2014. As a result, from this date the Group is exempt from paying Irish corporation tax on the profits and gains from qualifying rental business in Ireland provided it meets certain conditions. Instead, dividends paid to shareholders in respect of the Property Rental Business are treated for Irish tax purposes as income in the hands of shareholders. Corporation tax is still payable in the normal way in respect of income and gains from any residual business (generally including any property trading business) not included in the Property Rental Business. I-RES is also liable to pay other taxes such as VAT, stamp duty, land tax, local property tax and payroll taxes in the normal way. Note 14 Dividends Under the Irish REIT regime, subject to having sufficient distributable reserves, I-RES is required to distribute to shareholders at least 85% of the Property Income of its Property Rental Business for each accounting period, provided it has sufficient distributable reserves. The Directors paid a maiden dividend of €969,600 (0.48 cents per share) in the form of an interim dividend on 31 March 2015 to shareholders on record as at 20 February 2015, and paid a second interim dividend of €833,609 (0.20 cents per share) on 4 September 2015 to shareholders on record as at 21 August 2015, relating to the I-RES accounting period from 31 March 2014 to 31 December 2014. See note 21 for dividends declared after 31 December 2015. 2015 €’000 Profit for the period Less: net movement in fair value of investment properties Add back: share-based compensation expense Property income of the Property Rental Business Dividend payout ratio Dividends payable 2014 €’000 30,822 6,330 (18,639) (5,101) 979 574 13,162 1,803 99.80%100% 13,136 1,803 Within the Irish REIT regime, for corporation tax purposes the Property Rental Business is treated as a separate business from the residual business. A loss incurred by the Property Rental Business cannot be set off against profits of the residual business. An Irish REIT is required, subject to having sufficient distributable reserve, to distribute to its shareholders (by way of dividend), on or before the filing date for its tax return for the accounting period in question, at least 85% of the Property Income of the Property Rental Business arising in each accounting period. Failure to meet this requirement would result in a tax charge calculated by reference to the extent of the shortfall in the dividend paid. A dividend paid by an Irish REIT from its Property Rental Business is referred to as a property income distribution. Any normal dividend paid from the residual business by the Irish REIT is referred to as a non-property income distribution dividend. The Directors confirm that the Group has remained in compliance with the Irish REIT regime up to and including the date of this Report. Annual Report 2015 Irish Residential Properties REIT plc 89 Notes to Financial Statements (cont’d) Note 15 Issuance of shares Breakdown of operating income items related to financing and investing activities For the Period Supplemental Cash Flow Information For the Period 1 January 2015 to 2 July 2013 (date 31 December 2015 of incorporation) to 31 December 2014 €’000€’000 Financing costs on credit facility (1) 1,495 974 Interest on intercompany loan –1,464 Investment income received – (23) 1,495 2,415 (1) For the Period 1 January 2015 to 2 July 2013 (date 31 December 2015 of incorporation) to 31 December 2014 €’000€’000 Financing costs on credit facility as per the consolidated statement of profit and loss and other comprehensive income Less: amortisation of arrangement fee 1,865 1,147 (370) (173) 1,495 974 Changes in operating assets and liabilities For the Period 1 January 2015 to 2 July 2013 (date 31 December 2015 of incorporation) to 31 December 2014 €’000€’000 Prepaid expenses Other receivables Deposits and other assets Accounts payable and other liabilities Security deposits Changes in operating assets and liabilities 90 (15) (435) (7,040) (288) (654) (1,062) 2,049 581 4,911 1,519 (4,860) 4,426 Irish Residential Properties REIT plc 1 January 2015 to 1 December 2015 1 April 2014 to 31 December 2014 €’000€’000 Issuance of shares Issuance costs 215,000 (10,896) 200,040 (7,626) Net proceeds 204,104 192,414 Note 16 Related Party Transactions CAPREIT LP has an indirect 15.7% beneficial interest in I-RES and has determined that it has significant influence over I-RES. The beneficial interest is held through a qualifying investor alternative investment fund, Irish Residential Properties Fund, CAPREIT LP’s wholly-owned subsidiary. In addition, effective 11 April 2014, CAPREIT LP’s wholly-owned subsidiary, IRES Fund Management Limited (“IRES Fund Management”), entered into an agreement to perform certain property and asset management services for the Group. As per the agreement, I-RES pays 3.0% per annum of its gross rental income as property management fees and 0.5% per annum of its net asset value as asset management fees net of fixed fees paid to the third-party regulated fund manager for I-RES. IRES Fund Management has a lease for office space with I-RES. The rental income for the office space for the year ended 31 December 2015 was €37,000 (€12,000 as at 31 December 2014). The lease expires on 1 March 2020. Minimum annual rental payments from IRES Fund Management for the next three years are as follows: Minimum annual rent payments from IRES Fund Management Annual Report 2015 2016 €’000 2017 €’000 52 52 2018 €’000 52 On 28 October 2015, IRES Fund Management became authorised by the Central Bank as an alternative investment fund manager under the European Union (Alternative Investment Fund Managers) Regulations, 2013 (the “AIFM Regulations”). On 1 November 2015, IRES Fund Management was appointed by the Company as its alternative investment fund manager in accordance with the AIFM Regulations and replaced the thirdparty regulated fund manager. On this date, the investment management agreement between IRES Fund Management and I-RES (“Investment Management Agreement”) came into effect, pursuant to which I-RES pays 3.0% per annum of its gross rental income as property management fees and 0.5% per annum of its net asset value as asset management fees to IRES Fund Management. The Investment Management Agreement governs the provision of portfolio management, risk management and other related services to the Company by the Investment Manager. It has an initial term of five years, unless it is duly terminated pursuant to a provision of the Investment Management Agreement, and thereafter shall continue in force for consecutive five-year periods. In addition, Mr Ehrlich will be entitled to participate in the LTIP and, under his employment contract, he is entitled to be granted options in respect of 3% of the number of shares issued by the Company pursuant to an equity offering. On 26 March 2015, Mr Ehrlich and Mr Schwartz were granted a further 6,450,000 and 1,075,000 options, respectively, pursuant to I-RES’ Capital Raise. On 16 April 2014, Mr Ehrlich and Mr Schwartz were granted 6,060,000 and 2,020,000 options, respectively, pursuant to I-RES’ Initial Offering. For the year ended 31 December 2015, I-RES incurred €1.9 million in asset management fees. In addition, €0.9 million in property management fees were incurred and recorded under operating expenses. For the period from 2 July 2013 to 31 December 2014, €0.7 million in asset management fees and €0.3 million in property management fees were recorded. Total expenses, which is comprised of remuneration of the Directors, is €200,000 for the year ended 31 December 2015, and €151,000 for the period from 2 July 2013 to December 2014, excluding expenses related to David Ehrlich, CEO and Director. The Directors were appointed to I-RES on 31 March 2014. No loans or quasi-loans were made to the Directors in either period. The amount payable to CAPREIT LP (including I-RES Fund Management), totalling €3.5 million as at 31 December 2015 (€1.7 million as at 31 December 2014), related to asset management fees, property management fees, payroll-related costs and other miscellaneous expenses incurred by CAPREIT LP on behalf of the Group. All charges from CAPREIT LP are at an arm’s length basis. Owner management companies not consolidated As a result of the acquisition by the Group of apartments in certain multi-unit residential properties, the Group holds voting rights in the relevant owner management companies associated with those developments. Where the Group holds the majority of those voting rights, this entitles it, inter alia, to control the composition of such owner management companies’ boards of directors. However, as each of those owner management companies is incorporated as a company limited by guarantee to not having share capital solely for the purpose of owning the common areas in those multi-unit developments, they are not intended to trade for gain. For these reasons, I-RES does not consider these owner management companies to be material for consolidation, either individually or collectively. I-RES has considered the latest available financial statements of these owner management companies in making this assessment. David Ehrlich is the CEO and a Director of I-RES’ Board. He is also a trustee of CAPREIT. Thomas Schwartz is a Director (nonexecutive) of I-RES’ Board. He is also a trustee of CAPREIT and a trustee or director of each of CAPREIT’s subsidiaries, including IRES Fund Management. He is also the President and CEO of CAPREIT and each of its Canadian subsidiaries. Certain trustees and employees of CAPREIT and its affiliates were granted options of I-RES in the Initial Offering and the Capital Raise. The only executive member of the Board is David Ehrlich, CEO, who was appointed as the CEO of I-RES on 16 April 2014; all other members are non-executive directors. Mr Ehrlich’s total remuneration for the period from 1 January 2015 to 31 December 2015 was €753,000 (C$1million). Mr Ehrlich’s total remuneration for the period from 2 July 2013 to 31 December 2014 was €642,000 (C$931,000), of which C$233,000 was paid for professional services provided to I-RES in connection with the Initial Offering prior to his appointment as CEO, and such costs have been included in the issuance costs. Annual Report 2015 Irish Residential Properties REIT plc 91 Notes to Financial Statements (cont’d) Details of the owner management companies in which the Group had an interest during the year ended 31 December 2015, along with the relevant service fees paid by I-RES to them, are as follows: Development Owner Management Entity Registered Official Address Managed Percentage of Voting Rights Held % of total Service Fees Incurred in the Period €’000 Payable by I-RES €’000 Majority voting rights held Priorsgate Estate Management Company Limited Unit 4B Lazer Lane, Grand Canal Square, Dublin 2 Priorsgate 52.40 141.52 11.79 GC Square (Residential) Management Company Limited Unit 4B Lazer Lane, Grand Canal Square, Dublin 2 Marker Residences 80.00 196.72 – Lansdowne Valley Management Limited Unit 4B Lazer Lane, Grand Canal Square, Dublin 2 Lansdowne 78.60 439.60 – Charlestown Apartments Management Company Limited Unit 4B Lazer Lane, Grand Canal Square, Dublin 2 Charlestown 82.46 410.01 34.17 Bakers Yard Management Company Limited Ulysses House, Foley Street, Dublin 1 Bakers Yard 66.19 124.89 10.41 Rockbrook Grande Central Management Company Limited Unit 4B Lazer Lane, Grand Canal Square, Dublin 2 Grande Central 76.92 290.64 – Rockbrook South Central Management Company Limited Unit 4B Lazer Lane, Grand Canal Square, Dublin 2 South Central 83.84 328.52 – Rockbrook Estate Management Company Limited Unit 4B Lazer Lane, Grand Canal Square, Dublin 2 Rockbrook Commercial 64.29 (1) 45.00 – Other BSQ Management Company Limited 5th Floor, St. Stephen’s Beacon South Green House, Earlsfort Quarter Terrace, St. Stephen’s Green, Dublin 2 11.28 516.59 37.93 GC Square Management Company Limited 39 Lower Leeson Street, Dublin 2 1.51 – Marker Commercial 48.00 (1) (1) Includes voting rights controlled directly and indirectly. All of these owner management companies are incorporated in Ireland and are property management companies. As noted above, as at 31 December 2015, €94,300 is payable by the Group to the owner management companies. No amounts were owing between the Group and any of the owner management companies at 31 December 2014. Pursuant to a management agreement between IRES Fund Management and GC Square (Residential) Management Company Limited, commencing 11 March 2015, IRES Fund Management became the managing agent for the Marker 92 Irish Residential Properties REIT plc Residences. For the year ended 31 December 2015, I-RES has incurred management agent expense for the Marker Residences in the amount of €19,000. Pursuant to a management agreement between IRES Fund Management and GC Square Management Company Limited, commencing 11 August 2015, IRES Fund Management became the managing agent for the Marker Commercial. For the year ended 31 December 2015, I-RES has incurred management agent expense for the Marker Commercial in the amount of €1,200. Annual Report 2015 Pipeline agreement CAPREIT LP entered into an agreement (the “Pipeline Agreement”) dated 21 November 2014 (as amended on 9 February 2015 with effect from 21 November 2014) with I-RES to make available up to €150.0 million for a period of up to one year to acquire properties in Ireland, and to subsequently permit I-RES to acquire such properties from CAPREIT LP, subject, among other things, to shareholder approval once I-RES has sourced additional funding to do so. CAPREIT LP’s obligation to make available up to €150.0 million terminates on the earlier of: (i) the completion of a Capital Raise by I-RES, and (ii) one year from the date of the Pipeline Agreement (or such later date as may be agreed in writing by the parties). The Pipeline Agreement was amended on 9 February 2015, with effect from 21 November 2014, to remove the proposed 2.5-year extension to be made to the investment management agreement between I-RES and IRES Fund Management, and related services agreement among I-RES, CAPREIT LP and IRES Fund Management, and to include an underwriting fee of 1% of the purchase price of each property investment acquired under the Pipeline Agreement as part of the purchase price payable by I-RES to CAPREIT LP for each such property investment. The Pipeline Agreement was approved by shareholders on 25 March 2015. The €150.0 million facility commitment provided by CAPREIT LP to I-RES under the Pipeline Agreement terminated on 26 March 2015 on completion of I-RES’ Capital Raise. Note 17 Contingencies The Group is not aware of any contingent liabilities that should be disclosed in these financial statements. Note 18 Earnings per Share Earnings per share amounts are calculated by dividing profit for the reporting period attributable to ordinary shareholders of I-RES by the weighted average number of ordinary shares outstanding during the reporting period. For the Period 1 January 2015 to 31 December 2015 Profit attributable to shareholders of I-RES (€’000) 30,822 Basic weighted average number of shares 367,520,548 Diluted weighted average number of shares (1) 370,548,189 2 July 2013 (date of incorporation) to 31 December 2014 7,930 95,510,684 95,590,610 Basic Earnings per share (cents) 8.4 8.3 Diluted Earnings per share (cents) 8.3 8.3 (1) Diluted weighted average number of shares includes the additional shares resulting from dilution of the long-term incentive plan options as of the reporting period date. EPRA issued Best Practices Recommendations most recently in August 2011 and additional guidance in December 2014, which gives guidelines for performance matters. Annual Report 2015 Irish Residential Properties REIT plc 93 Notes to Financial Statements (cont’d) EPRA Earnings represents the earnings from the core operational activities (recurring items for I-RES). It is intended to provide an indicator of the underlying performance of the property portfolio and therefore excludes all components not relevant to the underlying and recurring performance of the portfolio, including any revaluation results and results from the sale of properties. EPRA Earnings per Share amounts are calculated by dividing EPRA Earnings for the reporting period attributable to shareholders of I-RES by the weighted average number of ordinary shares outstanding during the reporting period. For the Period 1 January 2015 to 31 December 2015 Earnings per IFRS income statement (€’000) 2 July 2013 (date of incorporation) to 31 December 2014 30,822 7,930 Adjustments to calculate EPRA Earnings, exclude: Changes in fair value on investment properties (€’000) Tax on profits or losses on disposals (€’000) (18,639) (7,364) – 946 1,512 EPRA issued Best Practices Recommendations most recently in August 2011 and additional guidance in December 2014, which gives guidelines for performance matters. EPRA NAV measures the fair value of net assets on an ongoing, long-term basis in accordance with guidelines issued by EPRA. EPRA NAV excludes the net marked-to-market to the value of financial instruments used for hedging purposes and where a company has the intention to keep the hedge position until the end of the contractual duration, and deferred tax in respect of any difference between the fair value and the book value of the investment properties. 367,520,548 95,510,684 95,590,610 2014 Basic NAV 104.3 99.5 104.3 99.5 Diluted NAV EPRA Basic Earnings per share (cents) 3.3 1.6 EPRA Diluted Earnings per share (cents) 3.3 1.6 Irish Residential Properties REIT plc 2015 Net assets (€’000) 435,020 200,918 EPRA net assets (€’000)435,020 200,918 Number of shares outstanding 417,000,000 202,000,000 Diluted number of shares outstanding 420,396,755 202,169,109 Net Asset Value per share (cents) EPRA Net Asset Value per share (cents) Diluted weighted average number of shares 370,548,189 94 Net Asset Value per Share As at 31 December EPRA Earnings (€’000)12,183 Basic weighted average number of shares Note 19 Net Asset Value per share (cents) EPRA Net Asset Value per share (cents) Annual Report 2015 103.5 99.4 103.5 99.4 Note 20 Directors’ Remuneration, Employee Costs and Auditor Remuneration Note 21 For the Period On 14 January 2016, the Company signed a new revolving and accordion credit facility for up to €250 million, which can be extended to €350 million subject to certain terms and conditions (the “New Revolving Credit Facility”). 1 January 2015 to 31 December 2015 €’000 Subsequent Events 2 July 2013 to 31 December 2014 €’000 Directors’ remuneration Short-term employee benefits (1) 953 793 Post-employment benefits –– Other long-term benefits (2) 47 34 Share-based payments 527 270 Termination benefits – – Total (3) 1,527 1,097 (1) Included in this amount are Directors’ fees, the CEO’s salary and amounts paid to David Ehrlich prior to his appointment as CEO, for professional services provided to I-RES in connection with the Initial Offering. Such costs have been included in the issuance costs. (2) Included in this amount is pay-related social insurance paid for the Directors and Canadian pension plan, employment insurance, medical benefits, and employer health taxes paid for the CEO. (3) None of these costs have been capitalised except as noted above in note 1. For the Period 1 January 2015 to 31 December 2015 €’000 Employment costs (1) Salaries and bonus Social insurance costs Pension costs Share-based payments Termination benefits Other (2) Total (3) 2 July 2013 to 31 December 2014 €’000 753 489 25 18 –– 424203 –– – 153 1,202 On 15 January 2016, the Company acquired 442 apartments, 18,344 sq. m. (197,460 sq. ft.) of commercial space and associated underground car parking at Tallaght Cross West located in Tallaght, Dublin 24 for a total purchase price of €83 million (including VAT but excluding other transaction costs) funded mainly by the New Revolving Credit Facility. On 9 February 2016, the Directors declared an interim dividend of €13.1 million for the 2015 accounting period, to be paid on 21 March 2016 to shareholders on record as of 19 February 2016 (3.15 cents per share). Note 22 Approval of Consolidated Financial Statements These audited Financial Statements were approved by the Board on 21 March 2016. 863 (1) David Ehrlich is the only permanent employee of I-RES. (2) Paid to David Ehrlich prior to his appointment as CEO, for professional services provided to I-RES in connection with the Initial Offering. Such costs have been included in the issuance costs. (3) None of these costs have been capitalised except as noted above in note 2. For the Period 1 January 2015 to 31 December 2015 €’000 2 July 2013 to 31 December 2014 €’000 Auditor remuneration (including expenses) Audit of the group accounts Other assurance services Tax advisory services Other non-audit services (1) 104 19 388 304 80 49 421 243 Total 815 793 (1) Included in other non-audit services are services provided in relation to the share issuance at the Initial Offering. This amount has been charged to the share premium account as part of the cost of share issuances. Annual Report 2015 Irish Residential Properties REIT plc 95 Company Statement of Financial Position as at 31 December 2015 Note 2015 €’000 2014 €’000 (iii) (v) 380,050 873 322 323,580 – 618 381,245 324,198 (iv) (v) 91,368 9,352 2,136 102,856 8,150 484,101 332,348 – – 125,000 125,000 41,529 6,525 1,749 – 4,911 1,519 Assets Non-Current Assets Investment properties Investment in subsidiary Other non-current assets Current Assets Loan advances to the subsidiary Other current assets Cash and cash equivalents Total Assets – 2,004 6,146 Liabilities Non-Current Liabilities Non-current portion of bank indebtedness Current Liabilities Current portion of bank indebtedness (viii) Accounts payable and accrued liabilities (vi) Security deposits 49,803 6,430 49,803 131,430 (x) (x) 41,700 354,978 1,553 36,067 20,200 172,374 574 7,770 Total Shareholders’ Equity 434,298 200,918 Total Shareholders’ Equity and Liabilities 484,101 332,348 Total Liabilities Shareholders’ Equity Share capital Share premium Other reserve Retained earnings The accompanying notes form an integral part of these financial statements. Colm Ó Nualláin David Ehrlich Chairman Executive Director 96 Irish Residential Properties REIT plc Annual Report 2015 Company Statement of Changes in Equity for the year ended 31 December 2015 Note Share Share Retained Other Capital Premium Earnings Reserve €’000 €’000 €’000 €’000 Shareholders’ Equity at 1 January 2015 Total comprehensive income for the period Profit for the period 20,200 172,374 7,770 574 200,918 – – 30,100 – 30,100 Total comprehensive income for the period – – 30,100 – 30,100 Total €’000 Transactions with owners, recognised directly in equity Issue of ordinary shares for cash Share issue costs Long-term incentive plan (ix) (ix) (viii) 21,500 – – 193,500 (10,896) – – – – – – 979 215,000 (10,896) 979 Transactions with owners, recognised directly in equity 21,500 182,604 – 979 205,083 Dividends of ordinary shares Dividends paid (vii) – – (1,803) – (1,803) Dividends of ordinary shares – – (1,803) – (1,803) Shareholders’ Equity at 31 December 2015 41,700 354,978 36,067 Note 1,553 434,298 Share Share Retained Other Capital Premium Earnings Reserve €’000 €’000 €’000 €’000 Total €’000 Shareholders’ Equity at 2 July 2013 Total comprehensive income for the period Profit for the period – – 7,930 – 7,930 Total comprehensive income for the period – – 7,930 – 7,930 (ix) (ix) (ix) (viii) 20,040 – 160 – 180,000 (7,626) – – – – (160) – – – – 574 200,040 (7,626) – 574 Transactions with owners, recognised directly in equity 20,200 172,374 (160) 574 192,988 Shareholders’ Equity at 31 December 2014 20,200 172,374 7,770 574 200,918 Transactions with owners, recognised directly in equity Issue of ordinary shares for cash Share issue costs Capitalisation of bonus shares (1) Long-term incentive plan – – – – – (1) €1.6 million of the retained earnings as at 30 June 2014 arose prior to the Company registering as an Irish REIT, with effect from 31 March 2014. €160,000 was transferred to ordinary share capital, being the total par value of the bonus issue of 1,600,000 ordinary shares on 11 April 2014 (see note 11). The €1.6 million has been designated as an undistributable reserve within the meaning of the Companies Act, 2014. The accompanying notes form an integral part of these financial statements. Annual Report 2015 Irish Residential Properties REIT plc 97 Company Statement of Cash Flows for the year ended 31 December 2015 1 January 2015 to 31 December 2015 Note €’000 2 July 2013 (date of incorporation) to 31 December 2014 €’000 CASH FLOWS FROM OPERATING ACTIVITIES: Operating Activities Profit before taxes Items related to operating activities not affecting cash: Fair value adjustment – investment properties Depreciation of property, plant and equipment Amortisation of other financing costs Share-based compensation expense Straight-line rent adjustment Taxes paid Operating income items related to financing and investing activities Changes in operating assets and liabilities 30,100 8,876 (17,514) 13 370 979 (114) (7,364) 11 173 574 (73) 13,834 – 2,197 (946) (xiv) (xiv) Net Cash Generated from Operating Activities (1,837) 2,415 (5,504)4,426 6,493 8,092 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of investment properties Investment in subsidiary Investment property enhancement expenditure Purchase of property, plant and equipment Investment income (34,877) (315,684) (873) – (3,965) (459) –(58) –23 Net Cash Used in Investing Activities (39,715) (316,178) CASH FLOWS FROM FINANCING ACTIVITIES Interest income from subsidiary Loan advances to subsidiary Repayment of loan advances from subsidiary Interest receivable from subsidiary Intercompany loan advanced Intercompany loan repaid on maturity Arrangement fee on credit facility Bank indebtedness Interest paid on bank indebtedness Interest paid on intercompany loan Net proceeds on issuance of shares Dividends paid to shareholders (xiv) Net Cash Generated from Financing Activities Changes in Cash and Cash Equivalents during the Period Cash and Cash Equivalents, Beginning of the Period Cash and Cash Equivalents, End of the Period The accompanying notes form an integral part of these financial statements. 98 Irish Residential Properties REIT plc Annual Report 2015 3,332 – (89,730) – 1,694 – (3,332) – –45,000 – (45,000) (87) (744) (83,471) 125,000 (1,495) (974) – (1,464) 204,104 192,414 (1,803)– 29,212 314,232 (4,010) 6,146 6,146 – 2,136 6,146 Notes to Company Financial Statements as at 31 December 2015 Note (i) Note (ii) Significant Accounting Policies Critical Accounting Estimates, Assumptions and Judgements These Company financial statements have been prepared in accordance with IFRS as adopted by the EU, IFRIC interpretations and those parts of the Irish Companies Act, 2014, applicable to companies reporting under IFRS. The Company has availed of the exemption to present an individual statement of profit and loss and other comprehensive income provided in the Companies Act, 2014. For further information on critical accounting estimates, assumptions and judgements, refer to note 3 of the consolidated financial statements. Note (iii) Investment Properties The financial statements of the Company are prepared on a going concern basis and under the historical cost convention, as modified by the revaluation of investment properties at fair value through profit or loss. The financial statements of the Company have been presented in euros, which is the Company’s functional currency. For further information on investment properties, refer to note 5 of the consolidated financial statements. For the Company, a 1% increase in the Equivalent Capitalisation Rate would have an impact of a €64.7 million reduction in fair value whilst a 1% decrease in the Equivalent Capitalisation Rate would result in a fair value increase of €99.1 million. The significant accounting policies of the Company are the same as those of the Group, which are set out in note 2 of the consolidated financial statements. A summary of the Equivalent Capitalisation Rates and ranges along with the fair value of the total portfolio of the Company as at 31 December 2015 and 2014 is presented below: As at 31 December 2015 Weighted Type of Interest Fair Value WA NRI(1) Rate Type (3) Max. Min.Average €’000 €’000 % % % Investment properties Development land (2) 373,700 6,350 2,320 Total fair value 380,050 Equivalent Capitalisation Rate 7.14 3.52 5.04 (1) Weighted average (“WA”) net rental income (“NRI”). (2) Development land is fair valued based on the value of the undeveloped site per acre. (3) The Equivalent Capitalisation Rate disclosed above is based on the Stabilised NRI divided by the fair value of the investment property. As at 31 December 2014 Weighted Type of Interest Fair Value WA NRI(1) Rate Type (3) Max. Min.Average €’000 €’000 % % % Investment properties Development land (2) Total fair value 316,580 7,000 323,580 2,361 Equivalent Capitalisation Rate 6.95 4.56 5.22 (1) Weighted average (“WA”) net rental income (“NRI”). (2) Development land is fair valued based on the value of the undeveloped site per acre. (3) The Equivalent Capitalisation Rate disclosed above is based on the Stabilised NRI divided by the fair value of the investment property. Annual Report 2015 Irish Residential Properties REIT plc 99 Notes to Company Financial Statements (cont’d) The following table summarises the changes in the investment properties portfolio during the periods: Note (v) For the Period 1 January 2015 2 July 2013 (date to 31 December 2015 of incorporation) to 31 December 2014 €’000€’000 As at 31 December Balance at the beginning of the period 323,580 – Additions: Acquisitions 34,877 315,684 Property capital investments 3,965 459 Capitalised leasing costs (1) 114 73 Unrealised fair value gain adjustments 17,514 7,364 Other Assets 2015 €’000 2014 €’000 Other Non-Current Assets Property, plant and equipment (1): At cost Accumulated amortisation 58 58 (24)(11) 34 47 288 571 Net property, plant and equipment Deferred loan costs, net (2) Total 322 618 Other Current Assets Prepaid expenses Other receivables Deposits (3) 282 288 968 654 8,102 1,062 (1) Comprised of straight-line rent. Total 9,352 2,004 The carrying value for the Company of €380.1 million for the investment properties at 31 December 2015 (€323.6 million at 31 December 2014) was based on an external valuation carried out as at that date. The valuations were prepared in accordance with the RICS Valuation – Professional Standards, January 2014 (Red Book). (1) Consists of head office fixtures and fittings and information technology hardware. (2) Includes deferred loan costs related to the Credit Facility (as defined in note 9 of the consolidated financial statements for the Group), net of accumulated amortisation of €543,000 as at 31 December 2015 and €173,000 as at 31 December 2014. (3) Includes €7.4 million paid as a deposit on an acquisition that closed subsequent to the 2015 year end. Note (iv) Note (vi) Balance at the end of the period 380,050 323,580 Loan Advances to the Subsidiary Accounts Payable and Accrued Liabilities 2015 €’000 Balance at the beginning of the period 2014 €’000 – – 3,332 – Interest receivable Receivable for the acquisition, net of repayments 88,036 – Balance at the end of the period 91,368 – During 2015, the Company acquired the entire issued share capital of IRES Residential Properties Limited and provided the finance to IRES Residential Properties Limited to repay the loan on the Rockbrook Portfolio to CAPREIT LP. The total amount in aggregate receivable from its subsidiary amounted to €91 million as at 31 December 2015, net of repayments. This receivable is interest bearing and repayable on demand. As this receivable is repayable on demand, its carrying value is considered to be materially in line with its fair value. 100 Irish Residential Properties REIT plc As at 31 December 2015 €’000 2014 €’000 Accounts Payable and Accrued Liabilities Rent deposits and early payments 831 Trade creditors 331 Accruals 5,084 Value added tax 279 787 32 3,750 342 Total 4,911 Annual Report 2015 6,525 Note (vii) Note (x) For further information on the intercompany loan, refer to note 8 of the consolidated financial statements. For further information on shareholders’ equity, refer to note 11 of the consolidated financial statements. Note (viii) Note (xi) Intercompany Loan Shareholders’ Equity Credit Facility Financial Instruments, Investment Properties and Risk Management For further information on the Credit Facility, refer to note 9 of the consolidated financial statements. Note (ix) Share-based Compensation For further information on share-based compensation, refer to note 10 of the consolidated financial statements. Level 1 Quoted prices in active markets for identical assets and liabilities Recurring Measurements – Assets Investment properties a) Fair value of financial instruments and investment properties For further information on the fair value of financial instruments and investment properties, refer to note 12 (a) of the consolidated financial statements. The following table presents the Company’s estimates of the fair value on a recurring basis based on information available as at 31 December 2015, and aggregated by the level in the fair value hierarchy within which those measurements fall. These estimates are not necessarily indicative of the amounts the Company could ultimately realise. Level 2 €’000 Level 3 Significant other observable inputs Significant unobservable inputs €’000 – Total €’000 €’000 – 380,050 (1) 380,050 (1) Fair values for investment properties are calculated using the income approach / yield methodology method, which results in these measurements being classified as Level 3 in the fair value hierarchy. See note 5 of the consolidated financial statements for detailed information on the valuation methodologies and fair value reconciliation. b) Risk management For further information on risk management, refer to note 12 (b) of the consolidated financial statements. The Company’s exposure to interest rates as at 31 December 2015 is limited to €2.1 million of earnings from uninvested funds. As at 31 December 2015 6 months or less €’000 6 to 12 months €’000 1 to 2 years €’000 2 to 5 years €’000 More than 5 years €’000 Bank indebtedness Bank indebtedness interest (1) Other liabilities Security deposits – 481 6,525 1,749 41,529 122 – – – – – – – – – – – – – – 8,755 41,651 – – – (1) Based on current in-place interest rate for the remaining term to maturity. Annual Report 2015 Irish Residential Properties REIT plc 101 Notes to Company Financial Statements (cont’d) Note (xii) Changes in operating assets and liabilities For further information on taxation, refer to note 13 of the consolidated financial statements. For the Period Taxation Note (xiii) Dividends For further information on dividends, refer to note 14 of the consolidated financial statements. Note (xiv) Supplemental Cash Flow Information 1 January 2015 to 31 December 2015 €’000 2 July 2013 (date of incorporation) to 31 December 2014 €’000 Financing costs on credit facility (1) Interest from loan advance to subsidiary Interest on intercompany loan Investment income received 1,495 974 (3,332) – – – 1,464 (23) (1,837) 2,415 (1) For the Period 1 January 2015 to 2 July 2013 (date 31 December 2015 of incorporation) to 31 December 2014 €’000€’000 Financing costs on credit facility as per the consolidated statement of profit and loss and other comprehensive income Less: amortisation of arrangement fee 1,864 1,147 (370) (173) 1,495 974 102 Irish Residential Properties REIT plc 2 July 2013 (date of incorporation) to 31 December 2014 €’000 5 (314) (7,040) (288) (654) (1,062) Prepaid expenses Other receivables Deposits and other assets Accounts payable and other liabilities Corporate taxes payable Security deposits Changes in operating assets and liabilities 1,615 4,911 –– 230 1,519 (5,504) 4,426 1 January 2015 to 31 December 2015 €’000 1 April 2014 to 31 December 2014 €’000 Issuance of shares Issuance costs 215,000 (10,896) 200,040 (7,626) Net proceeds 204,104 192,414 Issuance of shares Breakdown of operating income items related to financing and investing activities For the Period 1 January 2015 to 31 December 2015 €’000 For the Period Note (xv) Statement of Profit and Loss and Other Comprehensive Income The Company has availed of the exemption to present an individual statement of profit and loss and other comprehensive income provided in the Companies Act, 2014. The Company’s profit for the year ended 31 December 2015 is €30.1 million (for the period ended 31 December 2014 – €7.9 million). Annual Report 2015 Note (xvi) Note (xviii) The Company during 2015 financed the purchase of the Rockbrook Portfolio on behalf of its subsidiary, IRES Residential Properties Limited. The total amount in aggregate receivable from its subsidiary amounted to €91 million as at 31 December 2015, net of repayments. This receivable is interest bearing and repayable on demand. For further information on earnings per share, refer to note 18 of the consolidated financial statements. Related Party Transactions Earnings per Share For the Period 1 January 2015 to 31 December 2015 Contingencies Profit attributable to shareholders of I-RES (€’000) 30,100 Basic weighted average number of shares 367,520,548 Diluted weighted average number of shares 370,548,189 The Company is not aware of any contingent liabilities that should be disclosed in these financial statements. Basic Earnings per share (cents) For further information on related party transactions, refer to note 16 of the consolidated financial statements. Note (xvii) 2 July 2013 (date of incorporation) to 31 December 2014 7,930 95,510,684 95,590,610 8.2 8.3 Diluted Earnings per share (cents)8.1 8.3 For further information on EPRA Earnings per share, refer to note 18 of the consolidated financial statements. For the Period 1 January 2015 to 31 December 2015 Earnings per IFRS income statement (€’000) Adjustments to calculate EPRA Earnings, exclude: Changes in fair value on investment properties (€’000) Tax on profits or losses on disposals (€’000) EPRA Earnings (€’000) 30,100 2 July 2013 (date of incorporation) to 31 December 2014 7,930 (17,514) (7,364) – 946 12,586 1,512 Basic weighted average number of shares 367,520,548 Diluted weighted average number of shares 370,548,189 95,510,684 95,590,610 EPRA Basic Earnings per share (cents) 3.4 1.6 EPRA Diluted Earnings per share (cents) 3.4 1.6 Annual Report 2015 Irish Residential Properties REIT plc 103 Notes to Financial Statements (cont’d) Note (xix) Note (xx) Net Asset Value per Share Directors’ Remuneration, Employee Costs and Auditor Remuneration For further information on net asset value per share, refer to note 19 of the consolidated financial statements. As at 31 December 2015 2014 Net assets (€’000) 435,020 200,918 EPRA net assets (€’000) 435,020 200,918 Number of shares outstanding Diluted number of shares outstanding 417,000,000 202,000,000 420,396,755 202,169,109 Basic NAV Net Asset Value per share (cents) EPRA Net Asset Value per share (cents) 104.3 104.3 99.5 99.5 Diluted NAV Net Asset Value per share (cents) EPRA Net Asset Value per share (cents) 103.5 103.5 99.4 99.4 104 Irish Residential Properties REIT plc For further information on directors’ remuneration, employee costs and auditor remuneration, refer to note 20 of the consolidated financial statements. Note (xxi) Subsequent Events For further information on subsequent events, refer to note 21 of the consolidated financial statements. Annual Report 2015 Glossary of Terms The following explanations are not intended as technical definitions, but rather are intended to assist the reader in understanding terms used in this Report. “Basic Net Asset Value” or “Basic NAV” Calculated as the value of the Company’s assets less the value of its liabilities measured in accordance with IFRS. “Aggregate Income” As defined in section 705A of the Taxes Consolidation Act, 1997. “Capitalisation Rates” The rate of returns on a property investment based on current and marketderived future revenue streams that such property investment will generate. “Average Monthly Rent (AMR)” Actual residential rents, net of vacancies, divided by the total number of apartments owned in the property. “Basic Earnings per share (Basic EPS)” Calculated by dividing the profit for the reporting period attributable to ordinary shareholders of the Company in accordance with IFRS by the weighted average number of ordinary shares outstanding during the reporting period. “Basic EPRA EPS” Calculated by dividing EPRA Earnings for the reporting period attributable to shareholders of the Company by the weighted average number of ordinary shares outstanding during the reporting period. EPRA Earnings represents the earnings from the core operational activities (recurring items for the Company). It is intended to provide an indicator of the underlying performance of the property portfolio and therefore excludes all components not relevant to the underlying and recurring performance of the portfolio, including any revaluation results and results from the sale of properties. “Cap Rate” The rate of return on a property investment based on the expected income that such property investment will generate. “Companies Act, 2014” The Irish Companies Act, 2014 “Diluted Earnings per share (Diluted EPS)” Calculated by dividing profit for the reporting period attributable to shareholders by the diluted weighted average number of ordinary shares outstanding during the reporting period. “Diluted EPRA NAV per share” Calculated by dividing EPRA NAV by the diluted weighted average number of ordinary shares outstanding during the reporting period. “Diluted weighted average number of shares” Includes the additional shares resulting from dilution of the long-term incentive plan options as of the reporting period date. “EPRA” The European Public Real Estate Association. Annual Report 2015 “EPRA NAV” Measures the fair value of net assets on an ongoing, long-term basis in accordance with guidelines issued by EPRA. The EPRA NAV excludes the net marked-to-market to the value of financial instruments used for hedging purposes and where a company has the intention to keep the hedge position until the end of the contractual duration, and deferred tax in respect of any difference between the fair value and the book value of the investment properties. “Equivalent Capitalisation Rate” The Equivalent Capitalisation Rate is calculated as the Stabilised NRI divided by the fair value of the investment property. “Group Total Gearing” Calculated by dividing bank indebtedness by total assets. “Gross Yield” Calculated as the annualised residential and commercial rents passing as at the stated date, divided by the aggregate purchase price of the total portfolio (including VAT but excluding other acquisition costs) as at the date of acquisition, or divided by the fair market value as at the reporting date. “Pro-forma NAV per share” Calculated as NAV excluding one-off acquisition expenses incurred in relation to all property purchases subsequent to 31 December 2014. The pro-forma NAV per share has been calculated based on the number of ordinary shares outstanding as at 31 December 2015. Irish Residential Properties REIT plc 105 Glossary of Terms (cont’d) “Property Income” As defined in section 705A of the Taxes Consolidation Act, 1997. It means in relation to a company or group, the Property Profits of the company or group, as the case may be, calculated using accounting principles, as: (a) reduced by the Property Net Gains of the company or group, as the case may be, where Property Net Gains arise, or (b) increased by the Property Net Losses of the company or group, as the case may be, where Property Net Losses arise. “Property Net Gains” As defined in section 705A of the Taxes Consolidation Act, 1997. “Property Rental Business” As defined in section 705A of the Taxes Consolidation Act, 1997. “Property Net Losses” As defined in section 705A of the Taxes Consolidation Act, 1997. “Sq. ft.” Square feet “Property Profits” As defined in section 705A of the Taxes Consolidation Act, 1997. 106 Irish Residential Properties REIT plc Annual Report 2015 “Sq. m.” Square metres “Stabilised NRI” Measured as property revenue less property operating expenses adjusted for market-based assumptions such as longterm vacancy rates, management fees, repairs and maintenance. Forward-Looking Statements This Report may contain forward-looking statements, which are subject to risks and uncertainties because they relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of I-RES or the industry in which it operates to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements referred to in this paragraph speak only as at the date of this Report. I-RES does not undertake any obligation to release publicly any revision or updates to these forward-looking statements to reflect future events, circumstances, unanticipated events, new information or otherwise except as required by law or by any appropriate regulatory authority. Shareholder Information Head Office Unit 4B Lazer Lane, Grand Canal Square, Dublin 2, Ireland Tel: +353 (0)1 518 0300 Investor Information Analysts, shareholders and others seeking financial data should visit I-RES’ website at www.iresreit.ie or contact: website: www.iresreit.ie David Ehrlich Chief Executive Officer Tel: +1 416 861-2467 Fax: +1 416 861-9209 E-mail: [email protected] Officers David Ehrlich Chief Executive Officer Colm Ó Nualláin Chairman Corporate Secretary Elise Lenser Tel: +1 416 861-9404 Fax: +1 416 861-9209 E-mail: [email protected] Registrar and Transfer Agent Computershare Investor Services (Ireland) Limited Heron House Corrig Road Sandyford Industrial Estate Dublin 18, Ireland Tel: +353 (0)1 447 5566 Auditor PricewaterhouseCoopers One Spencer Dock North Wall Quay Dublin 1, Ireland Legal Counsel Mason Hayes & Curran South Bank House Barrow Street Dublin 4, Ireland Stock Exchange Listing Shares of I-RES are listed on the Irish Stock Exchange under the trading symbol “IRES.” Irish Residential Properties REIT plc Unit 4B Lazer Lane Grand Canal Square Dublin 2, Ireland www.iresreit.ie