European Residential REIT
(ERE.UN-V) C$4.25
Solid Q4 Results; Potential Regulatory Changes on the Horizon
Event
Forecast update. For operational highlights, click here.
Impact: NEUTRAL
ERES reported another solid quarter with its residential portfolio delivering 5.3% SPNOI growth, strong rental increases on turnover (+12.2%), stabilized AMR growth across all regions, and a 90bps increase in stabilized occupancy to 98.8%. The stabilized NOI margin increased 250bps y/y to 75.3% as revenue growth was compounded by a 7.3% decline in operating costs (timing related). Additionally, despite a slow start to the year on the acquisition front, ERES acquired 415 suites for €80.9 million between September 1 and year-end. The REIT also announced a 5% distribution increase, underscoring management's confidence in the stability and growth in the portfolio.
Rent Increases Set for 2021 Regulated Suite Renewals. The Dutch government recently announced that the allowable rent increase for regulated suites will be set at 0% for 2021 owing largely to the pandemic. We note that this does not apply to turnovers, conversions, or liberalized suites. Despite this, management believes it will still be able to generate ~2%+ rent growth on renewals in 2021 (2020: +2.4%), inclusive of liberalized renewals, and 3%-4% top line growth overall (TDS 2021F: 3.25%). While 2021 increases will not be applied, they are still calculated, suggesting a potential revenue catch-up in 2022. On the positive side, the government created a €200 million landlord levy tax relief fund, which could benefit ERES on operating costs.
Looking ahead, we believe there could be some regulatory headwinds around the conversion to/operation of liberalized suites, including a potential rent cap on renewals (likely inflation + a small percentage). However, timing of such changes remains uncertain as parliament has been suspended prior to the March 17 election. We do not believe the changes (as proposed) would have a material impact on rental rate growth.
Forecast. Our AFFO/unit estimates decline 2.5%, largely on lower revenue assumptions. However, we still expect 10% annual AFFO/unit growth through 2022. Our €3.20 NAV/unit estimate (C$4.90) is unchanged.
TD Investment Conclusion
ERES' earnings should continue to be relatively well insulated from COVID-19 due to a combination of strong underlying fundamentals and government assistance programs. We are maintaining our BUY recommendation and C$5.50 target price.