Bullboard - Stock Discussion Forum European Residential REIT T.ERE.UN

Alternate Symbol(s): EREUF

European Residential REIT is a Canada-based open-ended real estate investment trust. The Company’s objectives are to maintain strong financial management with a conservative approach to its capital structure, leverage and coverage ratios to provide Unitholders with long-term, stable and growing cash distributions and maintain a focus on maximizing occupancy and responsibly growing occupied AMR... see more

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TSX:ERE.UN - Post Discussion

European Residential REIT > TD Upgrade

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Post by retiredcf on Feb 22, 2022 8:13am

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European Residential REIT

(ERE.UN-V) C$4.40

Well Positioned for Another Year of Strong Growth in 2022

Event

Forecast update. For our initial thoughts on the quarter click here.

Impact: POSITIVE

ERES delivered a standout performance in Q4, with a strong beat on FFO/ unit, a record for rent increases on turnover and a 9% distribution increase, which was well ahead of our 4% forecast. The impressive +17% y/y FFO/unit growth was accomplished despite the 0% allowable rent increase for regulated suite renewals and the broader impact of COVID-19. Looking ahead, we expect another strong result in 2022. Management anticipates that it will be above the top-end of its 3-4% revenue growth target, predicated on 2.3% allowable increases on regulated suite renewals, 3.3% on liberalized renewals, and accelerating market rents, which should benefit AMR uplifts on turnover and suite conversions. We note turnovers are expected to remain in line with historical levels of ~13% and increases on turnover are expected to remain in the high-teens.

On the cost side, we believe the REIT is well-insulated from the impact of inflation, as the majority of the utility costs are borne by tenants, it has zero exposure to wage inflation (ERES has no direct employees), and property management fees are fixed as a percentage of revenues. In addition, lower expected landlord levies in 2022 (and potential elimination in 2023) should add a further 100bps of margin expansion through 2023. Our forecast has 5.5% SPNOI growth in 2022 and 12% average AFFO growth in 2022/23.

Acquisition activity picked up substantially in Q4/21 and Q1/22, with over €180 million of acquisitions aggregating 608 suites closed or under contract. With its current balance sheet capacity and access to the CAPREIT pipeline agreement, we estimate the REIT has ~€350mm of acquisition capacity pro forma the Q1/22 transactions.

Attractive Valuation. ERES currently trades at a 24% discount to our revised €4.00 NAV/unit estimate (+14% on higher NOI assumptions/lower cap rate).

TD Investment Conclusion

We continue to like ERES' combination of strong internal growth potential in a supply constrained market, as well as its ability to grow externally through acquisitions. With a 40% total return to our revised C$6.00 target price, we are maintaining our BUY recommendation

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