European Residential REIT T.ERE.UN

Scotia comments after conference

[incomedreamer11]

Downgrading to Sector Perform

OUR TAKE: Negative. We are downgrading ERE to SP (from SO) and target reduced to $3.00 (-$0.50). Our NAVPU is reduced to $3.50 (-$0.35). Reasons for downgrade:

1. Lack of positive catalysts in the near-term: In late December 2023, ERE announced that the strategic review was concluded with no transaction due to a wide gap between buyers and sellers expectation (see our note titled “A Deal and A No Deal”). At the time, we mentioned, this was not the ideal outcome for unitholders and therefore we expected ERE unit price to trade sideways in the near-term. ERE is now pursuing a one-by-one asset sales method which we believe is likely to take much longer to surface value.
2. Lack of FFOPU growth due to higher interest burden: We expect flat y/y FFOPU growth in 2024 & 2025. 29% of total debt due in 2024/25 and cost of debt ~200-250bp higher than expiring rate.
3. Lots of discounted valuation on the table - no rush to gain exposure to European multi-family: ERE at 5.8% implied cap, 11.3x 2024 AFFO multiple vs U.S. multi-family (BSR REIT) at 6.6% implied cap & 12.4x AFFO. CDN multi-family has pulled back recently on amendments to the temporary immigration program and is now trading at 5.2% implied cap & 19.9x AFFO.

KEY POINTS

Recent rating changes on ERE: We downgraded ERE to SP (from SO) in May 2023 due to lack of FFOPU growth and European residential names trading at big valuation discount. Link to our note. More recently, we upgraded ERE to SO (from SP) in November 2023 on hopes of a positive outcome from a strategic review which was ongoing at the time. Link to our note. We are now back to square one, i.e. searching for earnings growth as potential M&A is perhaps out of the window. CAPREIT (covered by our colleague Mario Saric) still owns 65.1% equity stake in ERE.

Strong operational performance but balance sheet and rate environment keeps us on the sidelines: ERE’s leverage is a bit elevated with Net Debt/EBITDA at 14.5x (vs sector at 9.2x) and D/GBV at 57.3% (vs sector at 45.1%) - Exhibit 3. 29% of total debt is due in 2024 and 2025 which is again on the higher side - Exhibit 4. As a result of higher debt maturities, we expect flat FFOPU growth in 2024 (Exhibit 2) and 2025.

Valuation discount persists: ERES is now trading at a 32% discount to Scotia NAV (excluding DTL). High leverage, regulatory uncertainty, and external management structure have led to a sizable valuation discount. See Exhibit 1 for valuation comparison between European, U.S. and Canadian multi-family.

[Panic54321]

Hard to trust analyst... they we're positive last quarter... nothing really changed ( except for an increase in asset sales expected !)  over current value.. not sure how you can go from a positive rating last quarter , to negitive when nothing's really changed.     ( other then the share price ) and if investors hadn't noticed over the years, all