European Residential REIT T.ERE.UN

TD

[retiredcf]

European Residential REIT

(ERE.UN-T) C$3.04

Strong Fundamentals Should Drive Mid-Single Digit SPNOI Growth Event

Forecast update. For our initial thoughts, click here. Impact: NEUTRAL

Favourable (at the margin) Regulatory Update. Although there are still no firm details, proposed changes to benefit mid-market renters now appear to top out at €1,000/month level (187 points) vs. the previous €1,000-1,250 (187-215 points). At most, this lower level would impact ~20% of the REIT's liberalized suites (12-13% of overall suites) and only on turnover (currently ~12-13% annually), and therefore have only a minor impact on revenue growth beginning in 2024. More importantly, pending legislation will fix liberalized suite maximum increases to the lessor of CPI +1% or Dutch annual wage inflation +1%. Management estimates wage inflation will end 2022 at ~3%. Regulated suites will likely follow similar guidelines (less the +1%) which suggests 2023 July increases could average 3.5-4.0%, up from the 2.95% average in 2022.

Solid Dutch Apartment Rental Fundamentals should lead to continued mid- single digit SPNOI growth. ERES continues to generate solid uplifts on turnover (+17.7% in Q3) and we expect this momentum to carry forward into 2023. Combined with expected increases in allowable renewals in 2023, we believe the REIT can generate ~5% AMR growth on its existing portfolio through 2023, nicely above the 3-4% longer-term target.

ERES expects to generate low-to-mid 80% NOI margins going forward (excluding service charges). Management pointed to Q3/22 being a more normalized run rate compared to prior quarters as a result of lower R&M charges, and should also benefit from the upcoming abolishment to the landlord levy tax on January 1, 2023. With minimal exposure to inflation on the cost side (tenants pay utilities, property management is set as a percentage of revenue), expected ~3.5-4.0% allowable increases on renewals and 15-20% increases on turnover translates into same property NOI growth in the 4-5% range for 2023/24.

Forecast. Our 2022/23/24 AFFO/unit estimates decline (-0.7%/-5.9%/-6.1%) reflecting a combination of a slower acquisition market, higher interest costs and higher cash taxes. We expect 2022-24 average AFFO/unit growth of 4.5%. Our NAV decreases 7.5% to €3.70 (16bps higher cap rate). Our CAD NAV declines 3.8% to $5.00.

TD Investment Conclusion

We are maintaining our BUY rating and $5.00 target price.