European Residential REIT
Mostly a heads-down-and-operate Q; judiciously thinking about growth initiatives
Our view: European Residential REIT's ("ERES") Q2/20 earnings were in- line with expectations. Notwithstanding solid SP AMR and occupancy stats, organic NOI growth was -1.8%. We see this weak “comp” as transitional, and we believe a return to 2-3% SPNOI growth over the NTM could be a catalyst for the units. Increasing our price target by $0.25 to $5.50 due to FX, we reiterate our Outperform rating on ERES's units.
Key points:
Results recap – As outlined in yesterday’s First Glance note and discussed herein in more detail, FFO/unit of €0.033 was in-line (+2%) with our €0.033E, -14% YoY (€0.039 in Q2/19) and +1% QoQ (€0.033 in Q1/20). In the context of a “COVID quarter” operating stats such as SP AMR (€896, +4.9% YoY), SP occupancy (98.9%, +110 bps YoY) and rent growth on suite turnovers (+€98 or +11.6% on 3.4% of total portfolio) were strong. We believe several unique factors suppressed SP NOI growth to -1.8%.
Solid financial position; taking a judicious approach to capital deployment – In light of the global health crisis and the economic fallout, Q2 was mostly a heads-down-and-operate quarter. Early in Q2 (Apr-24), ERES funded the two-tranche, €63MM Kameleon mortgage (6.1Y; 1.58% WAIR) which was a key factor in recharging liquidity to a sizable €141MM (€41MM of cash + the full €100MM on two RCFs). ERES notes that H1 multi-res property transaction activity in the Netherlands was >€1B (nearly 6,000 suites). With no acquisitions in Q2, ERES will acquire a 120 suite, €20MM “tuck-in” on Sept-1. Overall, it remains very judicious in its approach to liquidity deployment, in light of continued global COVID risks and the wide discount to NAV inherent in its unit price (more below).
Forecasts little changed – Our 2020E-21E FFO/unit estimates are tweaked by no more than +2%/-1%. See Exhibit 10 and Appendix I herein. Tweaks to our current (€3.15) and FTM NAVPU are of the same insignificance.
Valuation discount is unwarranted (an investor opportunity) in our view; improved SPNOI growth could be a catalyst – ERE’s units are currently trading at a 17% discount to NAV. The valuation reading is little-changed since our most recent (May 12) update (18% discount to NAV), and lags gains of the European peers (12% NAV discount in May; now at NAV- parity). We see ERES’ wide discount as unwarranted. We believe ERES can deliver FTM SPNOI growth of 2-3% and we think this (or investor confidence therein) could be a valuation catalyst for the units.
Price target tweaked higher on FX; Outperform rating reiterated – Our one-year price target of €3.50 (unchanged) now rounds to $5.50 (+$0.25) on a stronger Euro/CAD FX rate since our mid-May update. We see compelling absolute and risk-weighted total return potential in ERE’s units and we reiterate our Outperform rating.