European Residential REIT T.ERE.UN

RBC

[retiredcf]

November 7, 2022

European Residential REIT
Q3 In Line; 2023 renewal rate increase set at lower of inflation or wage growth + 1%

TSX: ERE.UN | CAD 3.00 | Outperform | Price Target CAD 5.25

Sentiment: Neutral

Our view: European Residential REIT (“ERES”) reported FFO/unit of €0.044, +13% y/y, vs. RBC/consensus of €0.044/€0.043. The quarter itself was uneventful but solid with SP NOI growth of +6.8%. All eyes on regulatory front – nothing new on mid-market rent control; Our initial read is that 2023 renewal rate increase on liberalized suites will not be as high as inflation but could end up being same or slightly better than 2022.

Key points:

• Resi SP NOI growth: +6.8% (SP-Rev +6.4%; SP-Exp +4.9%)

• Resi SP-AMR: €974, +5.2% y/y

• Resi SP-Occupancy: 97.8%, -70bps y/y, driven primarily by suites undergoing renovation

• SP NOI margin: 78.3%, +30 bps y/y.

• Lease spreads:

   Turnover spreads: +18% vs. Q2/22 +22%, Q1/22 +21% , Q4/21 +19%, Q3/21 +16% (3.3% of suites turned in the Q or ~13% annualized)

   Renewal spreads: Indexation effective July 1, 2022, was 2.95%.

• Capital allocation: Muted activity this quarter

• Leverage: D/GBV 48.7%, -10 bps q/q.

• Reported NAV €4.26, flat q/q, based on cap rate of 3.65% (+4bps q/q).

• Regulatory Watch: New this quarter – Based on draft legislation, liberalized suites (64% of portfolio) will see renewal rate

  increase from Jan 1, 2023, to Apr 30, 2024, capped at lower of 1) CPI + 1% or 2) annual wage development + 1%. In 2022, it was CPI + 1% or 3.3%. Given high inflation, the renewal rate is being effectively capped at wage growth + 1%, likely the lower number. October wage growth was 3.5%, but the annual wage growth will be calculated at year-end and it is looking like that it may end up being same or slightly better than 2022 of 3.3%. Nothing new reported on the Dutch government expanding rent control to the ‘mid-market’ sector.