TSX:ERE.UN - Post by User
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retiredcfon Feb 22, 2022 8:32am
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Post# 34449463
RBC Upgrade
RBC UpgradeTheir upside scenario target is now $7.75. GLTA
February 20, 2022
European Residential REIT
Outsized discount yet enhanced outlook
Our view: ERES posted a strong quarter, a 9% distribution boost, and presented a 2022 outlook that looks even better than last year. The key message from management was that ERES provides a unique combination of being inflation protected in both revenues and expenses. Hard to disagree. We are raising our target to $6.00 from $5.75. Maintain Outperform.
Key points:
Operating performance: Q4 SP NOI +6% y/y (SP-Rev +4.8%; SP-Exp +0.7%); Resi SP-Occupancy: 98.7%, +40bps y/y- most of the small amount of vacant space is for renovation. NOI margin: 78.3% +90 bps y/y. Lease spreads: +19% on turnover vs +16.3% in Q3 (3.0% turning or ~12% annualized). The continued acceleration in leasing spreads is reflective of the continuing housing shortage.
A shelter from inflation in both revenue and expense: This was a key message from management and indeed, ERES provides a unique combination of being inflation-protected on both counts.
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The portfolio is effectively a ‘net lease’ business (utility cost, appliance costs are borne by tenants while management expenses are external to the REIT as a fixed percentage).
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This quarter, some good news on indexation front. Higher indexation for middle high and high income households implies (simplistically) that ERES would be able to grow rent renewals on regulated suites by ~2.3%. Moreover, renewals on liberalized suites are now indexed at 3.3% (CPI + 1%). And with turnover spreads in the mid-to-high teens (19% in Q4, 16% in 2021), revenue can grow 5% in 2022. With an NOI margin guide of 76-79%, 2022 SP NOI growth of 5%+ is plausible, if not conservative.
Regulatory regime: We do not expect buy-to-let restrictions on vacant units/homes legislated by the federal government in January 2022 to have an impact on ERES’ acquisition program or current portfolio.
Capital allocation: Acquired €122m in Q4 and a further €64m post quarter. Cap rates on more recent acquisitions have ranged between 2.9% and 3.8%, more weighted to liberalized suites. Debt financings are in the low 1%. D/GBV was 46.8%, increasing to ~48.6% post quarter. Healthy positive investing spread is still achievable and although the REIT can still out-earn its cost of capital at the current unit price, the REIT expressed unwillingness to raise equity at a large NAV discount.
Increasing estimates: 2022 FFOPU estimate is increased to €0.18 from €0.16; our 2023E FFOPU to €0.19 from €0.16. Our NAVPU increases by 7% to €4.00 from €3.75 on the back of higher SP-NOI, with our 1Y forward NAVPU of €4.35 implying growth of 9%.
Maintain Outperform rating: Outsized NAV discount does not match up with growth profile and tight housing fundamental backdrop. Our target of $6.00 is based on parity to one year hence NAV. ERES provides an opportunity to own an inflation-protected “net lease” business in the multi- res space at favourable pricing in our view.