Post by
incomedreamer11 on Feb 20, 2023 11:07am
CIBC comment
Our Conclusion
ERE delivered another in-line quarter, featuring strong organic growth across all of its sub-markets.While the regulatory overhang surrounding the “Housing Evaluation System” does continue to provide headwinds (or perhaps more correctly misguided investor confusion), the overall fundamentals in the Netherlands provides a conducive backdrop for ERE. The housing shortage for instance, in the Dutch market continues to drive rents upwards, with rising construction costs and labor shortages further limiting supply (something we here in the great white north ought be familiar with). Indeed, average monthly rents in the quarter increased 5.4%, well above the REIT’s targeted 3%-4%, a trend we believe will continue through 2023. With a business model that is largely inflation-protected, and regulatory guidance that is materially higher than 2022, we believe ERE can continue to drive accretive NAV and FFO growth and successfully navigate through a regulatory system that is constantly evolving.
We maintain our Outperformer rating and our forward EUR-denominated NAV of €3.40, while increasing our price target to C$4.50 (from C$4.25), implying parity to our F/X adjusted NAV.
Key Points Earnings Results:Q4/22 diluted FFO per unit was €0.04, in line with both our and consensus estimates. We note that the REIT recorded a ~€94MM loss on investment properties in the quarter as a result of a ~23 bps increase in the REIT’s utilized cap rate, as well as a ~€15MM gain on fair value of Class B LP units.
Debt Rolls:The REIT has ~€60MM of mortgages maturing in 2023 (at an effective rate of 1.08%), representing ~7% of its total debt. We believe refinancing risk may pose a more intermediate headwind for the broader REIT universe and may serve to temper FFO/unit growth in the near term, given the rapid backup in rates by the ECB. We believe refinancing rates to be in the mid-4% range.
Balance Sheet: D/GBV was 51%, a decrease from 46.8% in Q4/21, with an IFRS value of €3.87, reflecting a 3.88% total portfolio cap rate. Additionally, the REIT had ~€21.4MM (as measured by undrawn facilities + current cash), and announced the increase in its annual dividend to €0.12 (+9%).
Regulatory Environment: The Dutch government passed legislation indicating the maximum indexation for the period of July 1, 2023 to June 30, 2024 to be 3.1% for regulated suites, and 4.1% for liberalized suites. Additionally, effective January 1, 2023, the Dutch government abolished the landlord levy tax, which should permanently lower property operating costs on certain suites in ERE’s regulated portfolio.
Subsequent Events: On January 24, 2023, the REIT amended its Revolving Credit Facility, increasing its limit to €125MM (+€25MM) for three years.
Company Profile European Residential REIT owns and manages multi-family suites across the Netherlands and a relatively small portfolio of commercial properties. CAPREIT has a majority ownership interest in the REIT.
Investment Thesis 1) Favourable Fundamentals Underpin Dutch Rental Market: The Netherlands faces a severe housing shortage, which should support both rental growth and occupancy levels. 2) Accretive Acquisition Spreads: Acquisition spreads are wider in the Netherlands than in Canada, making a growth-throughacquisition strategy relatively more attractive.
Price Target (Base Case): C$4.50 Our price target is based on NAV parity to our Canadianequivalent net asset value (NAV) estimate of $4.50.
Upside Scenario: C$6.50 We assume that NOI is 2.5% above our base case expectations, cap rates are 25 bps lower, and units trade at a 10% premium to NAV.
Downside Scenario: C$2.00 We assume a stagflationary environment with an additional 5.0% reduction in NOI, as a result of a 100 bp reduction in occupancy and NOI margin compression of 160 bps