European Residential REIT EREUF

TD comments

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THE TD COWEN INSIGHT
Dutch apartment market fundamentals remain strong with ~10% SPNOI growth in Q1. Management is also accelerating its individual unit sales program into a strong housing market. We continue to view this portfolio as highly desirable/saleable in a more constructive financing environment. With its well covered 7.5% cash yield, we believe investors are being well paid to wait for an improved valuation.

Impact: NEUTRAL

Q1/24 results. FFO/unit of €0.039 was largely in line with our estimate/consensus at €0.040. Puts and takes included a slight NOI miss (11% miss on commercial NOI which is only 10% of total) partially offset by lower G&A and interest costs. The commercial NOI miss was due to a rent rolldown on a renewal for a government tenant at a single-tenant office property in Belgium.

Fundamentals Remain Strong. While turnover rental rate growth moderated to 15.6% from the ~20% pace seen since Q1/23 we note the decrease largely relates to a shift in strategy on the back of strong residential fundamentals. ERES is spending less on renovations when units turn and relying more on market rent growth for the uplift (Q1 capex was down nicely). Looking ahead, we note mgmt. has served tenant notices to 96% of the portfolio for the annual indexation increases commencing on July 1, 2024. The weighted average rental increase is 5.3% (vs. 4.0% in 2023).

Individual Unit Sales Accelerate. ERES sold 24 individual units in Q1 for €7.6mm and an additional 42 units post Q1 for €10.8mm, which compares to the 14 unit sales between Q2/23-Q4/23 (€5.1mm). Total suites sold to date now total 80 (€23.5mm or €293,750/ unit). Management noted that thus far unit sales have been at double-digit uplifts to IFRS fair values and that around half are sold to existing tenants while the remainder are vacant units sold to third-parties (at attractive pricing to ensure a quick takeout). We forecast an additional 118 unit sales in 2024 and 200 in 2025. Open to Selling Properties. Management alluded to also being open to property dispositions (i.e. sale of an entire residential building) but noted that activity levels remain low. That said, the outlook from brokers/peers appears positive and management expects activity to pick up once interest rates start to trend lower.

Forecast Update. Our 2024/2025 AFFO/unit estimates decline 2%/5% on lower commercial NOI to reflect the aforementioned lease renewal and slightly lower residential NOI due to higher disposition assumptions (assuming ~50 unit sales/qrt versus 30 units previously). Our NAV is unchanged at €2.90 (CAD NAV estimate $4.20).Forecast We expect continued strong fundamentals from the Dutch rental market as new supply is not keeping up with demand. Our forecast has 6.9% and 5.6% residential SPNOI growth for 2024 and 2025. We assume an additional €44mm in dispositions in 2024 (Q2/24-Q4/24) and €55mm of dispositions in 2025 (all individual unit sales).