European Residential REIT T.ERE.UN

TD comment on update

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Event    This morning, ERES announced the initiation of a strategic review. The announcement follows media reports this week which indicated that ERES has engaged CBRE to sell its €1.68 billion Dutch residential property portfolio.

Impact: POTENTIALLY POSITIVE

Our Take: The announcement of a formal strategic review is not surprising and is consistent with the comments/tone CEO Mark Kenney had on the Q1 call, saying he is "...fully dedicated as the CEO of ERES to maximize value for unitholders using any means available to me..." This is not a distressed portfolio/sale, as such there is no certainty any transaction will get done. Dutch multi-residential fundamentals remain robust due to limited supply and strong rental demand with ERES generating +5.3% SPNOI in Q1/23.

We believe there are two main options being explored - a sale of the 35% minority stake not owned by CAPREIT with CAPREIT continuing to manage the portfolio, or a sale of the entire REIT. We do not view the first as likely near term. Under Dutch law, the sale of more than 33% of an asset/portfolio triggers the 10.4% land transfer tax. From a CAPREIT perspective, we believe the minimum acceptable pricing to sell the entire portfolio would likely be a 10%-15% discount to ERE.un's $4.92 IFRS value (as of Q1/23), which is ballpark where CAR.un units currently trade. That said, with little to no multi-residential transaction activity in recent months, we believe the timing and value potentially attained from any portfolio transaction is highly uncertain. Should neither of these pan out, we believe management will continue to sell individual suites on a one-off basis, winding down the portfolio over time. The majority of suites are individually titled and given the tight housing supply/demand dynamics in the Netherlands, the REIT is able to sell assets well above per suite IFRS values.

Valuation: ERES currently trades at a 14.2x 2023F AFFO/unit, which compares with its European and Canadian peers at 10.8x and 21.2x, respectively. On a P/NAV basis, ERES trades at a 42% discount to our C$5.00 NAV/unit versus its European/ Canadian peers at 33%/26% discounts.