CIBC comments after conferenceERE reported an in-line quarter highlighting the tight rental market in the Netherlands. Much like Canada, the REIT continues to benefit from an environment where a chronic undersupply of affordable housing naturally drives up monthly rents, limited only by regulatory regimes. With the maximum rental guidance beginning n July 2024 for regulated and liberalized suites announced to be 5.8% and 6.8%, respectively, we suspect ERE’s growth to land on the upper end, if not well above, of its 3%-5% target, and focus on suite conversion and turnover to drive higher growth. Additionally, while the results of the previously announced strategic review have come to a close, we remain of the opinion that we can not summarily dismiss the possibility of a larger event should the European bond market shift towards a more accommodative stance (i.e., rates go lower). As such, we remain Outperformer rated, increasing our NAV to €2.50 (from €2.35) while leaving our price target unchanged, implying a modest discount to our F/X-adjusted NAV.
Key Points Earning Results: ERE reported Q4/23 diluted FFO per unit of €0.04 (€0.16 FY23) in line with our estimates. FFO per unit was down ~4.7% Y/Y, largely due to increases in interest and other financing costs, and partially offset by positive increases in SPNOI.
Balance Sheet And Liquidity: ERE continues to maintain a strong balance sheet, reporting D/GBV of 57.6%, up from 51% last year. While leverage increased on a year-over-year basis, we note that it was a result of a 74 bps increase in the REIT’s utilized cap rate, opposed to a result stemming from an increased debt load. Credit metrics also remain well within its covenant and internal requirements, with a DSCR of 2.4x (vs. 1.35x minimum) and interest coverage ratio of 2.9x (vs. 1.5x minimum). Total liquidity at year-end was ~€29MM and IFRS NAV per unit was €2.90.
Debt Rolls: ERE has ~€79MM in mortgages maturing in 2024, representing ~9% of the REITs total debt stack at a weighted average interest rate of 1.39%. While the REIT’s 2024 refinancing risk may be limited given the limited exposure, we note that ~25% of the ERE’s debt stack is set to mature in 2025 at ~1.87% (vs. 4%+ renewal rates), which suggests that should the European debt market remain elevated for the longer term, the REIT may continue to see increased interest expenses in the coming years (to which we note the REIT is actively looking to pay down, ultimately reducing overall refinancing risk).
Distribution Sustainability: The REIT reported a AFFO payout ratio of ~82.3% off a €0.12 annual distribution, and in line with its long-term payout target of 80%-90%. With a yield of ~7.4%, the REIT remains one of the highest yielding residential REITs within our coverage universe (vs. ~3% peer group) and continues to be an attractive investment for income-oriented investors.