Scotia comments Property Tour Takeaways – European Residential REIT (ERE.UN)
ERES hosted property tour in the Netherlands on Sep 12 and Sep 13. The property tour was mainly attended by sell-side analysts and select buy-side analysts. Several members of the management team were present including Phillip Burns (CEO of ERES), Mark Kenney (CEO of CAPREIT), Stephen Co (CFO of CAPREIT and former CFO of ERES), Jenny Chou (recently appointed CFO of ERES), Karim Farouk (COO of ERES) and Nicole Dolan (Investor Relations).
Overall, we came back impressed with the portfolio quality and management strategy. We visited the portfolio in 2019 as well (at the time of RTO) and clearly notice that the Management Platform has since grown meaningfully. The ERES local office has 65 professionals on the ground and fully responsible for asset management, property management, accounting, finance, legal etc. The only function which is external currently is the leasing department which is done through external brokers. We think over time that function will also be internally managed.
Cushman & Wakefield (C&W) also made a presentation on the Dutch residential market and provided an update on the broader European real estate transaction market. As per C&W, the residential cap rates are expected to expand by 5 bp for Core product and up to 50 bp for Value-add residential product.
We note that ERES is trading at an implied cap rate of 4.6%, implying cap rate expansion of 80 bp. Clearly, a lot of negative news is already reflected in the unit price. We reiterate our SO rating and $5.00 target price. We are making no changes to our target or estimates in this note.
Limited impact of rising power costs, and rental spreads continue to remain strong in September: We highlight that in the Netherlands, utility costs are fully charged back to the tenants, and they are responsible for those costs. In fact, expenses related to common areas in the property are also charged-back to the tenant. This is unlike the Canadian multi-residential market where the landlord has to bear most of these expenses. Also, we highlight that rental growth continues to be strong – even in September, rental growth has not slowed down and ERE is able to charge double-digit rental spreads on expiring rent (in case of liberalized and in case of conversion from regulated to liberalized).