On a positive note ...the REIT’s Q2 FFO is $0.22/Unit, well ahead of forecast. The cumulative FFO as at June 30, 2023 is $0.36 per Unit, approaching the value of annual distributions to Unitholders of $0.41 per Unit.
Letter to Unitholders
Our Q2 results reflect the advantage of the management team’s real estate experience.We are operating in a year of repositioning three assets which would normally have a significant detrimental impact on FFO. In Q2, the team successfully negotiated a EUR€1.5 million financial settlement from the departing Arcueil tenant in lieu of the requirementto restore the premises to original condition.This payment, cash-in in July,is almost equivalent to the quarterly rent for the entire building thatis being vacated.As a result of this achievement, the REIT’s Q2 FFO is $0.22/Unit, well ahead of forecast. The cumulative FFO as at June 30, 2023 is $0.36 per Unit, approaching the value of annual distributions to Unitholders of $0.41 per Unit. I have commented in the past on the strength of our team. This EUR€1.5 million income underscores my pointthat the most capable asset managers know how to draft leases and reward the interests of the property owners well into the future.
In the period since the onset of COVID, the REIT has been subject to the global office trend of reduced square footage leases for some tenants at the time of renewal. The impact of this has been offset by increases to net rents from the contractual cost of living increases for most of our properties, longer lease terms and our ability to re-lease the remaining space to new tenants. The occupancy rate for the 10 properties that are not part of the repositioning / disposition strategy is currently 89.8%. Management is implementing plans to upgrade office space when leased space turns over as new tenants are seeking office space that is modern, flexible and more environmentally sustainable
Despite 2023 economic headwinds, the netasset value of the REIT’s properties has remained within 1% of the net asset value as at December 31, 2022.The principal reasons forthis are the indexed rents and strong performance in the core properties. At the end of Q1 we had a cash balance arising from the closing of the Courbevoie property. Management put some of that cash to work in Q2 by repaying the Bad Homburg mortgage which had expired. In due course and when investment opportunities are favourable, we will be able to leverage this property and use the cash once again for further reinvestment. Management continues to develop plans or the Sabliere, Baldi and Arcueil properties which are slated to be repositioned. Once these plans are solidified, I will share them with you. Those of us who have been in the office real estate sector over a number of decades, understand that, in this period of macroeconomic turbulence, there is always the capacity to extract value from existing high-quality properties and explore opportunities to acquire new ones. We appreciate your confidence in us. Stphane Amine President of Inovalis Real Estate Investment Trust